Insurance companies in Korea are receiving beneficial treatment for ‘qualified offshore infrastructure investments’ this year despite tighter financial solvency requirements.
These risk-averse institutions are therefore looking favourably at offshore infrastructure financing as an alternative to their traditional fixed-income exposures.
“Institutions are very comfortable with the risks but not happy with the returns [from traditional fixed-income products],” says Niklas Amundsson, a Hong Kong-based managing director of Monument Group, a Boston-headquartered placement agent.
The special treatment on the ‘qualified offshore social-overhead capital (SOC) financing’ entails a 50-percentage point reduction on the capital charge against risks that insurers are taking on their new infrastructure commitments, according to the enforcement rules on the supervision of insurance businesses.
The enforcement rules include a calculation method of risk-based capital ratio that applies to all Korea-domiciled insurance companies.
The regulator charges less of a capital penalty on ‘qualified offshore SOC financing’, in the form of a reduction on a risk charge coefficient, which applies to the risk-based capital ratio calculation method, says Sung-Jun Eom, a Seoul-based senior officer at the Insurance Compliance Examination Department of the Financial Supervisory Service, adding that the enforcement rule was revised in June 2017, with immediate effect.
Jun Kim, a Seoul-based director of the asset management division at Mirae Asset Life Insurance, tells PDI that ‘AA-rated’ infrastructure loans can get half of the current credit risk charge of 3 percent if they are considered as ‘qualified SOC financing’.
“The capital charge can be down to zero percent,” he says, given that an availability payment based on [a developer’s] operating cash flows is guaranteed by a state or central government; or a full redemption on the principal and interest is available as an early termination payment.
Mirae plans to increase the amount it invests in infrastructure this year by gaining further exposure to senior secured loans with credit ratings of BBB- and above, he adds.
He is positive about European infrastructure debt investment opportunities as foreign currency hedging premiums for euros and other European currencies have been an additional source of returns, ranging from 170 to 200 basis points.
Amundsson tells PDI that traditional fixed-income-type capital will most likely flow into other, lower-returning, more-yielding strategies as institutional investors lower the risks they are taking, referring to infrastructure investments across the OECD-countries with lower risk profiles.
These investors are very comfortable with the lower risk profiles in alternatives, he adds, “because you are dipping your toe in the water” by making a maiden investment in lower-risk and lower-returning strategies.
He thinks that the cash-yielding component of infrastructure investments is also important as institutions want to avoid a deep J-curve effect.
The rising level of interest in infrastructure is unlikely to dissipate any time soon as the insurance industry is required to have a better financial solvency status and this shift will be taken into consideration by investors.
Infrastructure equity is also a beneficiary of the treatment, with a reduced-risk charge of 6 percent, compared with a 12-percent charge for a non-qualified infrastructure investment, according to Kim.
Consequently, Korean insurers are also participating in infrastructure equity investments via blind funds or on a project basis, he adds.