[Interview] Mirae Asset Life eyes US power plants, buildings to boost overseas investment

(This is the first in a series of interviews with CIOs of South Korea’s leading insurance companies in 2017.)

Mirae Asset Life Insurance Co. Ltd., the unit of South Korean asset manager Mirae Asset Global Investments Co. Ltd., will target assets with a longer duration such as infrastructure funds, commercial buildings and investment-grade US corporate bonds, as it is preparing for the IFRS 17, a new insurance accounting standard, which will come into force in 2021, its chief investment officer said.

The insurer plans to lift the proportion of overseas investments to 40% from the current 25% within the next two to three years, and put about 350 billion won ($306 million) in fresh investment in overseas alternative asset this year.

“We are closely looking at power plants in the eastern parts of the US where power demand is huge and landmark buildings in major US cities,” Jae-sik Kim, vice president and head of Mirae Asset Life’s asset management, told the Korea Economic Daily in a recent interview.

Mirae Asset Life manages 28 trillion won in assets, and is the sixth-largest South Korean life insurance company.

Following are Q&As with Kim.



Q: What would be the most attractive investment targets this year?

A: The most urgent task of insurance companies is to find long-term, low-risk assets producing stable incomes. We will continue to expand investments in investment-grade US corporate bonds and long-term infrastructure funds.

Q: What is the merit of US corporate bonds?

A: There are plenty of investment-grade corporate bonds in the US which insurance companies can invest in. US corporate bond yields are higher than those of South Korean bonds.

Yield curves in South Korea, Japan and Taiwan are flattened because insurance companies rushed to buy longer-dated bonds for duration matching, regardless of yields. The yield difference in South Korea is only 20 to 30 basis points regardless of credit ratings. But the yields between 10-year and 30-year US bonds differ by 80 to 90 basis points, so do credit premiums. In other words, we can earn 100 to 150 basis points more from US corporate bonds, compared with investments in domestic bonds.

Q: Any impact of IFRS17 and Solvency II on asset management?

A: When the new regulations are introduced, the most important thing will be to find assets with a longer duration and to match them to liabilities. The key to asset management of insurance companies is to find assets which have a minimum capital requirement and offer high yields.

The only way to cope with the IFRS 17 and to push returns higher is to expand overseas investment.

Q: Overseas investment plans?

A: This year, the regulatory authorities will likely remove restrictions on overseas investments capped at 30% of assets under management. This would give a big leg up to insurance companies desperate to expand overseas investments.

Under such circumstances, Mirae Asset Life will have little difficulty in increasing the proportion of overseas investments to 40% within the next two to three years from the current 25%. Since I took this position (in 2013), the share of overseas investment has increased to 25% from around 5%. Overseas investments improve the rate of return by approximately 2% points, compared with domestic investments. Life insurance companies in Japan and Taiwan had also found solutions to low interest rates by expanding overseas investments.

Q: Composition of overseas investment portfolio?

A: Currently, we focus on alternative assets such as blue-chip, long-term bonds and mid- to long-term infrastructure (funds).

Q: How to expand alternative investments?

A: Our alternative investment portfolio consists of assets seeking high yields with little regard to durations. In 2017, we will secure alternative assets which have a longer duration and produce stable incomes, lifting the yield to maturity of our entire portfolio and extending durations at the same time.

Q: Any difficulty in expanding overseas investments?

A: Currency-hedging expenses are the problem. Although regulations will be changed to recognize the durations of unhedged asset, currency risks remain in place. Regulations need to be improved further so that assets, if hedged against currency risks for three months, can be recognized to be fully hedged.

For overseas equity investment, the key is how much capital will need to be set aside under new solvency rules.

Q: Reasons for not being aggressive in investment in Europe?

A: Europe is safe, but hardly produces a good return. We just make senior and mezzanine lending selectively in Germany and so on. It is difficult to make extra returns from underlying assets. Although there are currency premiums, they are limited.

In contrast, high-yielding assets are available in the US on a steady basis because of the size of its economy.

Q: On real estate funds

A: Our joint investments with sister companies through real estate funds all seem successful. Four Seasons Hotel in Sydney, Australia, has doubled in valuation in three years and produces dividend incomes of 6 to 7% There is a potential buyer, but we are holding it on expectations there would be a better opportunity.

Fairmont Orchid hotel in Hawaii’s Big Island and Fairmont San Francisco hotel are also producing decent returns.

(Note: Mirae Asset Global Investments bought Four Seasons Hotel in Sydney for 380 billion won in 2013; acquired the Fairmont Orchid in a deal worth 240 billion won in 2015; bought Fairmont San Francisco Hotel for 520 billion won in 2015; and purchased Hyatt Regency Waikiki Beach Resort and Spa for $780 million in 2016.)

Q: Any plans to expand stocks and equity investment?

A: We will limit equity investments in offshore real estate to 5%. It is because we cannot help but limit the proportion of investment in risk-weighted assets. Given that most of domestic insurance companies cannot cover the interests accrued on liabilities, stock investment is a non-sense. We do not make direct investment in stocks, but use ELS (equity-linked securities) in a limited manner.

By JiHoon Lee and Sang-hun Lee
lizi@hankyung.com