Samsung Life Insurance, South Korea's largest insurer, will continue to sell its international assets as it reduces its risk, says Koo Sung-hoon, head of credit risk management.
In mid-2007, the firm had over $10 billion of overseas assets. Today that figure stands at $7 billion. Once the credit crisis began to take hold in the United States, Samsung Life reduced exposures to corporate debt, initially selling subprime mortgage-backed securities and residential mortgage-backed securities. As the crisis deepened in 2008, Samsung also began to sell financial and industrial credit.
Koo says this process is not yet finished, estimating the insurer may sell another $1 billion worth of overseas assets over the coming months. "We see systemic risk in US and European financial and real sectors," he explains.
This is intended to ensure Samsung Life maintains sufficient capital to meet Bank of International Settlement standards. So far the company has not needed to raise additional capital. Koo says the company is in a relatively strong position compared to other Korean institutions, and it has been steadily winning market share from foreign insurance companies and weaker domestic rivals. Samsung Life has adjusted its book of business towards floating-rate products, away from expensive fixed-rate policies.
In the current environment, domestic fixed income has far more appeal than foreign bonds. The weakness of the Korean won means yields on foreign bonds have turned negative. Although the sale of US and European credit has forced Samsung Life to realise losses, it has earned capital gains from buying local stocks and bonds.
The company is still developing a longer-term strategy for international investments. The deepening of the domestic bond market now means Korean treasuries can satisfy its need for long-duration assets. The main driver for overseas investment was until recently the search for duration, but Samsung Life's liabilities are no longer problematic. Therefore, in future, the purpose of international investing will be to earn a higher return.
The firm is using 2009 to establish new investing guidelines and retool its team, including the possible hiring of more experienced professionals.
Koo is not impressed by the argument that now is the time for institutional investors to buy high-quality global corporate credit. "In the US, and in Korea, the markets no longer work," he says. "Risk and return can't be measured. Historical data is not helpful. Pricing has lost its meaning."
It will take at least a year before he is ready to sanction new risk-taking in the portfolio, once companies and banks have gone through capital restructurings, and once Korean policyholders stop cancelling contracts. He also wants to see stability in the macro economy, in areas such as FX and interest rates.
At some point, however, Samsung Life will have to take new risk with its assets, because its investment team is mandated to earn a return that exceeds liabilities. As more of its business brings floating-rate liabilities, the investment team needs to be prepared to earn a margin in all market conditions.
Also, Samsung Life intends to work more with external fund managers once it decides to raise its investment profile. Although its first port of call is its affiliate manager, Samsung Investment Trust Management, the life insurer will also expand the number of third-party managers on its roster, for international active strategies. It also intends to focus more on active strategies rather than passive, given its newfound emphasis on higher returns.
Although Koo is sceptical about alternative investments -- the firm stopped buying hedge-fund and private-equity exposures as early as 2005, in order to reduce volatility on the corporate balance sheet -- he is keen to see more structured products. Although the insurer has been burned by CDO exposures, and many banks are now suffering from having sold "Kikos" (knock-in/knock-out) currency hedges to Korean companies that are now far out of the money, Koo says transparent products with protection are still necessary.
"We're now buying structured bonds on corporate loans," he says. The underlying is an actual loan, not a credit-default swap, he says, underlining the point that these are transparent products. He says this sort of structuring will play an important role in sharing risk as companies inevitably restructure.