Major South Korean life and non-life insurers' earnings are likely to remain under pressure as a combination an economic slowdown and the lingering low interest-rate environment impacts their investment returns and insurance operations.

That situation is likely to motivate them to keep increasing their offshore investments, say industry watchers. 

On August 26, Korea’s Financial Supervisory Service (FSS) released Korean life insurers’ preliminary earnings results for the first half of 2019. The financial regulator noted that insurers’ net profit and premium income were down by 32.4% and 1%, respectively, from a year ago. This reflects lower earnings from both insurance operations and investments, as customers shift product preferences and lower interest rates took their toll.

Siew Wai Wan

According to Siew Wai Wan, senior director for insurance ratings at Fitch Ratings, the major Korean insurers have sought to optimise their investment portfolios under the difficult market environment.

However, domestic fixed-income instruments remain the largest part of the overall portfolio, and yields in the country remain very low. The 10-year Korean government bond, for example, offered a yield of 1.27% percent on Friday (August 30), according to over-the-counter interbank yield quotes. 

“Insurers have increasingly increased the allocation to higher-yielding assets over the years, such as overseas securities, loans, and alternative investments, in a bid to enhance absolute returns,” Wan told AsianInvestor. “These higher yielding investments have helped relieve the pressure to some extent, yet the investment risks entailed are different.”

Fitch research shows that Korean life insurers increased their overseas allocations from 8% in 2015 to 14% in 2018. For non-life insurers, the increase was from 10% in 2015 to 13% in 2018.

To enhance returns, Korean life insurance companies had, as of May, increased overseas bond investments by 11.3% since the beginning of the year. In total they held a combined total of W108.9 trillion, according to one Seoul-based adviser familiar with Korean insurers’ investment activities.

Hanwha Life is leading the pack with W26.7 trillion in overseas bond investments. Kyobo Life follows with W18.3 trillion, while Samsung Life and NH Life have W17.2 trillion and W 13.5 trillion, respectively.

“Having overseas bonds won’t be the solution on its own because Clause 107 of Insurance Act limits overseas investments (to a maximum of 30% for general accounts and 20% for special accounts). The FSC (Financial Supervisory Commission) announced to abolish this rule back in 2015 but the bill hasn’t been passed at the National Assembly,” the adviser told AsianInvestor.

The largest life insurance companies in Korea are Samsung, Hanwha Life and Kyobo Life.

Another rating agency, Moody’s, said in a comment that the main driver of weak earnings among Korean life insurers came from insurance operating results. The experiened a net industry loss of W2.2 trillion, compared with a profit of W192 billion a year ago.

Insurers' combined investment operating profit also declined year-on-year by 5.1% in first-half 2019, but the real drop was less substantial. Their combined profits for the first-half of 2018 were inflated by a large one-off gain when Samsung Life sold Samsung Electronics shares for W1.09 trillion.

“Excluding this extraordinary item, the overall investment operating profit would have been flat despite the decline in interest rates over this period. However, declining interest rates will continue to pressure insurers' earnings in the second half of 2019,” wrote Young Kim, analyst, and Sally Yim, associate managing director, at the financial institutions group at Moody's Investors Service in the comment.

BIGGER POOL NEEDED

Another impact on the life insurers’ bottom line was their efforts to build positions in equities, which suffered a bout of market volatility.

Fith noted that Hanwha Life's net profit fell by 62% to W93 billion in the first half, mainly due to an impairment loss arising from the market fluctuations. Insurers that were less affected included Samsung Life, whose net profit rose by 9% year on year in first half of this year (excluding the Samsung Electronics share sale), and Kyobo Life, which saw net profit increase by 16%.

For Korea’s life insurers, the coming months don’t look any easier. The country’s economy is being impacted by the US-China trade war and a disagreement with Japan. That has led to concerns over whether the situation in the domestic markets will improve and may force Korean insurers to look abroad to source investments. Notably, the country’s pension funds have begun look abroad for profitable investment opportunities.

“Overseas investments offer both diversification and yield pick-ups,” Wan said. “Overseas markets like the US, for example, offer a larger pool of longer-dated bonds with superior liquidity in the secondary market.”

He noted that Korean life and non-life insurers’ overseas investments respectively increased to about 15% and 14% of their investment portfolios at the end of March, versus 8% and 10% three years ago. The companies primarily invest in fixed-income securities in US dollars or euros.

The total investment assets of Korean life insurers amounted to W687 trillion at end-2018. Domestic fixed-income securities accounted for about 49% of their invested portfolios in 2018, down from 57% three years ago as the companies invested more in loans, overseas investments, and alternative investments.