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[ASK 2018 SUMMIT] Korea Post seeks alternative long-term assets

May 31, 2018 (Gmt+09:00)

Korea Post’s insurance unit is looking for new alternative long-duration assets to meet demand for long-term stable yields, because the recent rush into long-dated fixed incomes by institutional investors pulled their yields too lower, said its chief executive.

Fixed-income products make up 60% of Korea Post’s total assets of 124 trillion won ($115 billion): 70 trillion won from savings accounts and 54 trillion won from insurance policies.

It aims to boost the share of alternatives to 10% by 2020 from the current 6%.

Hyunjoon Shin, Korea Post Insurance bureau's CEO
Hyunjoon Shin, Korea Post Insurance bureau's CEO

“Long-term investors such as pension funds and life insurance companies have been competitively increasing investment in long-term bonds to meet a regulatory demand related to maturity matching of assets and liabilities,” Hyunjoon Shin, CEO of Korea Post’s insurance arm, said in a keynote speech for the ASK 2018 Global Hedge Fund & Multi-Asset Summit on May 30.

“Those investors made a significant sacrifice for investment returns and net profits to extend asset durations. It might be argued whether it was truly worth doing so.”

He referred to the new accounting standard IFRS 17 to be introduced in 2021, under which insurers need to extend asset durations.

Shin, a former regulatory official, added that yields on long-term bonds, hovering at 2-3%, were seen too low, even considering economic and market conditions.

“Assuming that there exists heavy market demand for long-term durations, it will be important to renovate the alternative markets and develop bond-like alternative investment products which can minimize market distortions and effectively meet such a demand.”

In search of longer-dated assets, South Korean insurance companies have been piling into infrastructure and real estate assets in developed countries which also help lower capital charges required to set aside against future losses.

Further, rising interest rates and increased volatility in equities markets may mean lower returns from traditional assets, increasing the need for alternative assets to bolster returns, Shin said.

“My concern is that we might have been able to make profits easily by investing continuously in the same sectors without developing new investment products, thanks to abundant liquidity. We need to think about how those investments will turn out after liquidity ebbs away,” he added.

Yeonhee Kim edited this article

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