Hanwha Life commits $400 mn to KKR’s new Asia buyout fund

Hanwha Life Insurance Co. Ltd., South Korea’s second-biggest life insurer, has committed around $400 million to KKR & Co.’s new Asia buyout fund that has recently wrapped up its fundraising of a record $12 billion, according to the company and insurance industry sources on August 25.

The new buyout fund is the fourth of its kind for the US private equity firm and the biggest Asia-focused private equity fund in the world.

A Hanwha source said that its capital commitment to the blind-pool fund was a strategic and timely decision. KKR will likely take advantage of low valuations of companies hobbled by COVID-19, as well as cheap borrowing costs.

Hanwha expects its participation to create a co-investment opportunity with KKR, adding that the commitment makes tactical sense.

But its decision to commit to the buyout fund has puzzled a few insurance industry watchers, given its weak financial condition.

Currently, private equity investments are categorized as the riskiest for insurance companies, compared to government bonds and other asset types. Thus, insurance firms are required to apply a risk coefficient as high as 12% to calculate the capital needed to be put aside against possible losses from private equity investments.

Under the IFRS 17 accounting standard effective from 2023, the risk coefficient for private equity deals will jump to 49%. It means Hanwha Life may need to set aside $196 million in capital to cover risk from its $400 million commitment to KKR after a capital call is made.

Before a capital call, the risk coefficient will be 24.5%; still higher than those for other asset classes, reducing room for Hanwha Life to make other investments.

IMPRUDENT DECISION?

An insurance industry source criticized Hanwha’s participation in the KKR buyout fund.

“Regulatory authorities have been delaying the introduction of several rules in consideration of Hanwha Life’s (financial) condition,” the source told the Korean Investors. “They are even considering applying the previous discount rate for the liability adequacy test of insurance companies. Hanwha’s investment in the fund puts such efforts to shame.”

The recent cut in the discount rate used to assess insurers’ liabilities is expected to increase their evaluated liabilities, eating into their equity capital.

Hanwha’s risk-based capital ratio (RBC) of 235% is among the lowest for life insurers in the country. Under the stricter 2023 accounting standards, its RBC should decline further.

Of 146 trillion won ($123 billion) making up Hanwha's assets, liabilities account for 131 trillion won. Last year, it posted 222.7 billion won in operating profits and 162.7 billion in net profits against revenues of 13.7 trillion won. It controlled 12.9% of the country's life insurance market as of the end of May, after Samsung Life Insurance’s 22.9% share.

The Hanwha source said that its participation in the KKR fund was part of an effort to increase exposure to high-yielding alternative investments in the prolonged low-interest environment. He added that the US investment firm, with its strong track record, is expected to control the risk using its advanced target selection and monitoring processes.

It is unknown yet whether other Korean insurance firms have committed capital to KKR's fourth Asia buyout fund.

Write to Sang-eun Lucia Lee at selee@hankyung.com