South Korean insurers are looking to further diversify their investment portfolio into alternative assets in 2019 and preparing for the introduction of the Korean Insurance Capital Standard, or K-ICS, in 2022.

Life insurers Hanwha Life, Hyundai Marine & Fire, DB Insurance, Samsung Fire & Marine and Samsung Life – each discussed these investment priorities when presenting their respective results for 2018. The broad consensus is that it will be tough for them to hit their investment-return targets in 2019, making it all the more important for them to diversify their investments.

Samsung Fire & Marine, for instance, said in its presentation material that allocations to higher-yielding assets were a key way to increase both capital income from investments as well as corporate finance.

The insurer aims to raise its investment profits from W1.95 trillion ($1.74 billion) in 2018, which was itself a 12% increase on the W1.74 trillion it recorded for 2017.

To achieve this, Samsung Fire & Marine wants to increase new investments in domestic and overseas long-term bonds and cater to any duration gaps in existing investments, to strengthen its asset and liability management. The insurer said it would also look to increase investments in equity-type alternatives, specifically by expanding into real estate investments such as overseas office buildings.

It did not specify how much it could increase these investments as a percentage of its portfolio.

Total alternative investment (equities) rose from W386 billion by end-2017 to W870 billion by end-2018, while policyholder loans more than doubled year on year from W217 billion to W463 billion. Real estate assets made up 1.2% of the total investment portfolio of W66.7 trillion.

CONSIDERING CAPITAL REQUIREMENTS 

In addition to seeking diversification to raise returns, Korean insurers are also positioning themselves for a coming regulatory shift.

Andrew Shin, head of investments in Korea at advisory firm Willis Towers Watson, noted the country’s insurers are shifting investment in anticipation of the upcoming K-ICS regulation, which will oversee their risk-based capital (RBC). The country's Financial Supervisory Service (FSS) was meant to implement K-ICS in 2021 but has been postponed it to 2022.

While the insurers still have three years to prepare, Shin said the new rules are already on their minds when allocating assets.

“Each time I talked to insurance companies, they highlight that they need to be conscious of the RBC capital charge of the investments that they are considering,” Shin said. “Many are now very selective in equity-type investments [which tend to receive a higher capital charge than fixed income]. And anything that is exposed to mark-to-market risk, they are very conservative.”

Korea’s current RBC requirements were implemented in 2011 and require each insurance company to maintain surplus capital and legal reserves to protect customers from unexpected losses. Insurers subtract the insurance benefits they need to pay from this extra capital to find their RBC ratio; those with a higher number are regarded as being more financially stable.

Shin said if an insurer drops below the current RBC target of 150%, it will face monitoring by the FSS, along with warnings and demands that it improve its RBC level.

“In the eyes of the regulator, if an insurer falls below the RBC target that means that it is not doing its homework to make sure that it is solvent and liquid enough to be able to pay out the insurance money to its policyholders. Therefore, the insurer will become subject to more and more strict regulation and monitoring, and nobody wants that,” Shin said.

In its annual financial results call, Hyundai Marine & Fire Insurance pointed out the need for portfolio management to “pre-emptively respond to changes in accounting principles and implementation of K-ICS”. To obtain that in 2019, the insurer said it would seek to “diversify sectors and regions” and carry out intensive “monitoring to prevent distressed asset in advance”.

FOCUSING ON INFRA, EUROPE

While paying heed to regulatory requirements, Korean insurers are likely to add more alternative investments to their portfolio. Europe is one market they could look to.

“With the Korean yield curve being so flat, Korean insurers cannot really find enhanced yields elsewhere,” noted Shin.

The yield difference between 10-year and two-year South Korean government bond yields was approximately 17 basis points on Tuesday, roughly a third of what it was six months ago. The former is yielding around 2% compared with central bank rates at 1.75%.

“They used to look at the US, but with the current US dollar hedging cost rising [to 1% or more] the opportunity cost is too high for them,” Shin said. “I think they will continue to focus on private market assets, most likely cashflow-heavy types of credit or private debt opportunities.” 

The insurers are also looking out for infrastructure debt that enjoys a level of government guarantee, in large part because it is capital rules-friendly. Shin explained the new RBC rule reduces the capital that has to be set aside for such investments by 50% if they possess a government guarantee or a government is the direct source of the cash flow on the underlying asset. That has emboldened some insurers to invest directly into such projects, instead of using specialist funds.

“The insurers seem to prefer holding direct assets as opposed to through collective investment vehicles because many investment vehicles are subject to mark-to-market risk,” Shin said.

He noted that one example would be some insurers’ purchases of credit securities rather than holding through commingled fund vehicles. By holding the investments directly, the insurer can possibly amortise them without being exposed to mark-to-market fluctuations from quarter to quarter, Shin said.

Direct ownership also appears to line up with upcoming K-ICS rules that seek to enhance the transparency and foreseeability of assets by value.

For further insights into how Korean Institutional investors are further internationalising and diversifying their tactical and strategic portfolios, look out for AsianInvestor's 13th Institutional Investment Forum in Korea on April 10th