Korean insurers avoid PE funds as they confront new insurance capital standards

Ability to comply with the new capital standards will shape Korean insurers’ preferences on alternative assets and deal structures.

Korean insurance companies are facing a tighter regulatory environment with new risk-based capital rules, known as K-Insurance Capital Standards (K-ICS), along with global accounting standards on insurance contracts.

The new burden will affect their preferences on vehicles and capital structures when committing to alternative assets.

Before the full adoption of IFRS 17, which is scheduled for 2021, insurance companies will be less inclined to allocate their assets to commingled funds and make equity commitments due to the tighter assessment methods on required capital.

“[Real estate] equity investments are not desirable given the tight guideline on RBC ratios in Korea,” Young San Choi, head of global alternative investment at NH Life Insurance told industry participants at a panel discussion at the PERE 2017 Seoul Investor Forum held on November 30.

Investing in collective investment entities via commingled funds will be considered as equity-type investments. A local watchdog will ‘look through’ the structure of each commitment to alternative assets to reflect associated risk factors, according to the first draft of public consultation for K-ICS published by the Financial Supervisory Service in March.

“Under the current risk-based capital scheme, insurance companies will be charged up to 49 percent of capital burden given [market] risks they are taking when committing to commingled funds for exposures to alternative assets,” the department of insurance compliance examination at the FSS confirmed to sister publication Private Debt Investor, adding that the regulator plans to release the latest guideline for K-ICS to the public in April 2018 at the latest.

The FSS has also suggested in the report that managers and their investors can reduce the credit risk burden by providing cash and other qualified collateral.

Despite the capital buffer to be applied to investing in risky assets including alternatives, Korean insurers are looking to illiquid debt commitments as they pursue higher yielding assets to ease negative interest margin issues amid the low rate environment.

“Given the prevailing low market interest rates even though they have slightly rebounded this year, it is still too low for us to invest only in public markets,” a manager at a strategic planning team at a domestic insurance firm told PDI yesterday, requesting anonymity.

Samsung Life Insurance, the biggest life insurance company in Korea with $188.5 billion in assets under management as of end-September, also mentioned a way to mitigate negative interest margins during a third-quarter earnings call.

“For new investments, Samsung Life has been investing in higher yielding loans and foreign currency-denominated bonds with a view to mitigation of the negative interest burden and [portfolio] diversification across regions including overseas infrastructure assets,” Dae-hwan Kim, chief financial officer at Samsung Life said during the call on November 9.

“This year we were focused on filling the duration gap by investing in public markets,” the chief financial officer at Samsung Life noted, adding that it is targeting project financing and loans to infrastructure projects to pursue interest income from bonds and loans.

Among those Korean insurers that are looking at alternative assets and offshore assets despite the tightening regulatory requirements, effective in 2021, include Kyobo Life insurance and Hanwha Asset Management, which manages the global alternative investments of Hanwha Life Insurance.

Kyobo Life insurance, with $87.7 billion in total assets, plans to commit $400 million to offshore real estate strategies in 2018 in pursuit of higher yielding debt-type assets, Boseok Kim, general manager at the alternative investment team at the insurance firm, told PDI.

“Specifically, we are looking at bespoke-notes and mezzanine debt for assets in North America as [real estate] equity pricing has been higher than that of Europe or elsewhere,” he said, adding that Kyobo Life has been allocating capital in the region via debt commitments only since 2015.

“Within private funds, less holding of preferred equity would be desirable because preferred equity will be considered as pure equity, which has no duration but the highest capital charge per the new RBC rules,” Kim noted.

“We also plan to look at investment opportunities on a project basis, but also consider ‘semi-blind fund structures’ to avoid the highest capital charge of 49 percent to [debt-type] blind funds,” he added.

Hanwha Asset Management, which oversees the global alternative investment activities of the $95.8 billion Hanwha Life Insurance, plans to commit to customised vehicles for offshore private investments, including real estate strategies, Joo Il Kim, vice president at the liability driven investment team in the alternative investment division at Hanwha Asset Management, told industry participants at the PERE 2017 Seoul Investor Forum held on November 30.

“We plan to identify target regions and sectors first and then find alternative managers to customise vehicles based on our needs for meeting the regulatory requirements,” Kim added.

The new guidelines will pressure Korean insurers and their alternative asset managers to assess credit risks of investee companies, capital structures and project market risks associated with interest rates, given the mark-to-market valuation method on insurance liability.

“Our approach to offshore alternative investments is to target yield-generating assets with long-term investment periods and fixed-interest rates, considering the maximum duration of insurance liability in Korea is to be extended to 30 years by the end of 2018 and given our current exposure to high guarantee rates from saving-type insurance contracts sold years ago and interest risk-adverseness on market fluctuations,” Boseok Kim, general manager at alternative investment team at Kyobo Life insurance, told PDI.

Ability to comply with the new regulatory environment will not only shape the landscape of Korean insurance industry, but also outline which alternative asset managers have a competitive edge.