Korean insurers raising foreign, alts exposure amid new proposals

Newly proposed rules – due to take effect later this year – are set to help Korean insurers increase their overseas and alternatives exposure with a view to tackling falling returns.
Korean insurers raising foreign, alts exposure amid new proposals

Korean insurance firms are expected to further raise their overseas and alternative asset exposure as a result of plans by the local regulator to relax rules on allocations and lift ownership restrictions on investment subsidiaries.

It is hoped that such moves will help local insurance firms boost yields, which have been falling in recent years. “Insurers have no choice but to look for higher returns outside Korea,” said Yang Sung-Nak, chief representative for Korea at Standard Life Investments, based in Seoul.

In 2015, 25 Korean life insurers achieved an average 4% investment return and 30 property-and-casualty insurers made 3.79%, the lowest levels since 1991, noted Yang. “It is even difficult for them to meet the 4% [generally] required to pay for their liabilities.”

The Financial Services Commission (FSC) published the proposed changes for consultation on April 26, which are aimed at allowing domestic insurers to raise their foreign allocation and boost their competitiveness. The deadline for comment is June 4, after which the rules will be put for legal review and may take effect as early as August, an FSC spokesman told AsianInvestor. 

Notable changes include that Korean insurers will be allowed to buy bonds rated investment-grade by domestic rating agencies approved by local regulators – and just not those rated IG by international agencies such as Moody’s or Standard & Poor’s. Most Korean corporate bonds have three-year maturities, which is not long enough for insurance companies.

In addition, the FSC will no longer require insurers to obtain pre-approval by an investment committee to invest in foreign currency-denominated securities. The Korean regulator had said last October that it would take steps to lift current allocation limits – which are 30% in foreign investments, 6% in derivatives and 7% in a single issuer – by 2017. 

Moreover, insurance firms must currently meet certain criteria – a risk-based capital ratio of at least 150% and a liquidity ratio of at least 100% – to invest more than 15% of their equity into subsidiaries such as venture capital or private equity funds or real estate investment trusts. The FSC plans to lift these restrictions.

Stella Ng, assistant vice president at Moody’s, wrote in a report last week: “Asset allocation for Korean insurers in 2015 showed a noticeable increase in overseas investments, indicating their rising risk appetite against the backdrop of failing domestic rates.” 

But such moves will mean increased currency risks and operational challenges for smaller insurers, she added, as they do not currently have proper hedging arrangements in place. 

Indeed, many Korean insurers have been cautious about buying offshore assets since they suffered substantial losses on them as a result of the 2008 global financial crisis and pulled back to focus on domestic investments. But they have been tentatively returning to overseas markets.

According to the Korea Life Insurance Association (KLIA), 25 Korean insurers had 8% invested of their W573 trillion ($500 billion) in overseas securities at the end of 2015, up from 6% in 2014.

The most aggressive player in 2015 was Mirae Asset Life, doubling its foreign assets to $3 billion, 21% of its $14 billion invested portfolio. Hanwha Life, KDB Life, and Dongbu Insurance are other insurers that have significant overseas exposure, with 12%, 17% and 27% in 2015, respectively. Korea’s largest life insurer, Samsung Life, had a relatively small offshore exposure of 5.5% of its $157 billion in AUM at end-2015.

Hanwha Life, Korea’s second largest life insurer with total assets in $86 billion, was a first mover in allocating more to foreign assets. The firm has increased its exposure in foreign corporate debt, bond funds and high-dividend stocks for a higher yield. It has raised its weighting to both the UK and US markets. Hanwha, which won an institutional excellence award from AsianInvestor award late last year, did not respond to requests for more detail. 

As for specific types of assets they are looking at, US corporate bonds are more attractive than Korean credit, said Stephan van Vliet, Hong Kong-based head of insurance asset management at US firm PineBridge Investments. 

Korean corporate bonds have a five-year spread between credit and government bonds in a tight range of 20-50 basis points, and the supply of local 10-year bonds is limited. The central bank has kept the base interest rate at 1.5% since last June, after seven cuts from 3.25% in June 2011. The 10-year government bond yielded 1.8% on April 29, against US investment-grade yield of 3.23%. 

High-quality Korean corporate bonds yields 20-50 basis points more than local sovereign debt, noted van Vliet.

Large insurers are also looking at overseas real estate, private equity and multi-asset strategies, he added.  

Korean insurers’ moves reflect the broader trend for Asian insurers to look abroad for higher yield and stable income. Big Chinese and Taiwanese life companies are notable examples.

Taiwan’s Cathay Life has allocated 57% of its investment portfolio into overseas assets – 90% of which is in fixed income – and plans to raise that exposure further this year, focusing on securities and real estate. 

And Ping An Life, the mainland’s second largest insurers is looking to add external foreign managers and invest more in  local and foreign property, preferred shares, convertible bonds and high-dividend stocks in order to boost yields, as reported.

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