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Kyobo Life looks to invest in ESG bonds; calls for easing rules 

By Nov 15, 2020 (Gmt+09:00)

South Korea’s Kyobo Life Insurance Co. is planning to invest several hundreds of millions of dollars in environmental, social and governance (ESG)-themed bond funds around next year, in what would be its first investment in ESG assets, said its Chief Investment Officer Lee Jong-tae.

The country’s third-largest life insurer has already completed its first-round screening of asset managers to invest in ESG assets. It has over 110 trillion won ($99 billion) in assets under management as of the end of August.

“ESG-related companies tend to post high growth and their credit spreads are tightening more quickly than other corporate bonds. The same goes for stocks. They have high growth potential and good physical strength,” Lee told The Korea Economic Daily in a recent interview.
Kyobo Life Insurance CIO Lee Jong-tae
Kyobo Life Insurance CIO Lee Jong-tae

For alternative investments, Kyobo focuses on government-sponsored infrastructure projects such as renewable energy facilities as an alternative to fixed income investments with near-zero yields. But Kyobo is unlikely to invest actively in equity tranches of infrastructure deals, given the new regulations.

“We need to shore up our returns by increasing overseas and alternative investments which, however, are kept in check by regulations over financial soundness and foreign exchange position limits,” he said. He referred to the Korean Insurance Capital Standard (K-ICS) and IFRS 17 regulations, which are set to be introduced in 2022 and 2023, respectively.

Under the IFRS 17, insurance companies need to set aside 49% of their equity capital as a provision against private equity investment.

“Regulations need to be loosened, in particular regarding forex position limits, which are set at 20% of our risk-based capital, compared to 50% for banks. We hope the restrictions are modified to match the levels of banks. If so, we will have room to boost overseas investment to up to 30 to 40% of our risk-based capital.”

Regarding stock markets, Lee saw more room for liquidity-driven gains through the first half of next year.

The following is a transcript of the interview:

Kyobo Life’s asset management goals and hurdles:

“Kyobo Life Insurance’s asset management goal is producing stable income over the long term for our long-term liabilities insurance.”

“Our AUM slightly topped 110 trillion won as of the end of August, dividing into 90 trillion won in the ordinary account and 20 trillion won in the special account. The ordinary account consists of fixed income at 46 trillion won, alternative investments at 23 trillion won and equities at 1 trillion won. Real estate accounts for the remaining 20 trillion won.”

“The biggest challenges are low interest rates and tightening regulations on equity capital such as K-ICS and IFRS17. To get over such issues, we are looking to overseas investment. But strict regulations on our foreign investment, in particular, tight forex position limits, are weighing us down, because the regulatory authorities do not want to see foreign exchange-caused risks increasing. So they are unwilling to lift the restrictions.”

On asset allocation:

“We follow our medium- to long-term investment plan which covers more than three years. During the asset allocation process, we continue to change our risk/return profile.”

“For equities, excluding our shares in affiliates, which we hold for management purposes, our stock portfolio is only 1 trillion won, or 1% of our assets under management.

▲ On Kyobo’s response to tumbling stock markets in the wake of COVID-19 outbreak in H1:

“We increased our investment limit after consultation with our chief risk officer and made additional investment to take advantage of market volatility. By expanding stock investment, we made handsome profits from both domestic and foreign markets.”

On concerns over long-term bond supply:

“Thanks to aggressive fiscal policies, government bond issues for budget deficit financing increased slightly. That eased supply shortages at the long end of the curve, but super-long bonds remain in short supply because of heavy demand from insurance companies.”

On overseas bond investment:

"We invest mainly in super-long bonds in the US and Europe such as government bonds in France and Belgium. We had increased bets on Belgium bonds when their prices fell to attractive levels relative to risk. When yields on some of those bonds decline to near zero, we switch to other debt.”

▲ Can you invest in negative-yielding bonds? 

“We don’t invest in negative-yielding treasuries. In the US, we buy provincial bonds, bonds guaranteed by the government-owned Ginnie Mae, or bonds generating a long-term cash flow. But we prefer domestic bonds, if investment conditions are similar between domestic and foreign markets, because of currency hedging. There is market talk that currency risk will be more thoroughly monitored under K-ICS.”

On alternative investment breakdown:

“Infrastructure and renewable energy account for 38% and 25%, respectively, with real estate at 34%. For domestic investment of 17 trillion won, infrastructure and real estate financing are 44% and 35%, respectively. In overseas investment, real estate financing makes up 32%, with infrastructure at 16%.”

“In the past, we invested a lot in infrastructure, but now real estate financing takes a bigger portion. We have increased investment in renewable energy in the past three to four years. Previously, renewable energy projects were too small for institutional investors to participate in."

"But under the current government, the scale of renewable energy projects became bigger. For solar energy projects, construction companies of big conglomerates get involved and companies such as Samsung SDI provide energy storage facilities, so we can invest in them. Either overseas or domestic, it would be good to invest in the areas in which governments focus.”

"Previously, for infrastructure, there were plenty of investment opportunities from privately-owned highways, tunnels, sewers and military barracks. But there are not as many such investment opportunities now.”

“At home, we recently invested in cold storage facilities in Yongin and Icheon, Geyonggi Province. We have not invested in the domestic commercial real estate market since the coronavirus broke out, but lent to logistics warehouses and housing redevelopment projects.”

On overseas alternative investment:

“In Europe, we invest in renewable energy and commercial real estate. Some investments were hit by COVID-19, but our senior loan investments are doing well. Equity investors may need to take the hit."

“Under the K-ICS, high-risk charges (49%) are applied to equity investmentx like equity investment in unlisted companies. Thus, insurance companies cannot actively invest in equity tranches.”

On Kyobo Life’s property holdings in major cities in Korea:

“Our buildings we use as our offices are worth 2 trillion won. We have slimmed down our real estate portfolio. The two office towers in Seoul alone are worth more than 1 trillion won. We have one or two office buildings in major hub cities across the country, which are used by our company and rented. In consideration of our corporate image, we are trying to keep them in good condition. Even when we sell them, we attach the condition that the buyer should not rent to unknown tenants. Because of their locations in key areas, they have almost no vacancies.”

How would you seek alpha in a heavily-regulated environment, given RBC and K-ICS?

“We cannot help but invest in alternatives and overseas assets generating high risk-adjusted returns. As we did early this year, we need to react aggressively when market volatility comes to improve returns."

"Additionally, we will pursue income-gain equity investment to secure a steady stream of cash flow so that we can secure cash to return to policyholders. Given the low liquidity of alternative assets, we need to keep their portion within certain limits. It is hard to say we will do something new (about alternative investments) on a large scale.”

On overseas investment:

“Regulations need to be loosened, in particular regarding forex position limits,  which are set at 20% of our risk-based capital, compared to 50% for banks. We hope the restrictions are modified to match bank levels. If so, we will have room to boost overseas investment to up to 30 to 40% of risk-based capital.”

"The regulatory authorities are guiding us to invest in super-long bonds to meet (asset/liability) durations, but a sudden drop in interest rates can lead to high volatility of our foreign exchange assets. Giving more room (to forex position limits) will be in line with the authorities’ regulatory goals.”

On plan to boost ESG-themed investment:

“We are planning to invest hundreds of billions of won in ESG-themed fixed-income assets next year. Overseas ESG bonds, in particular from Europe, are being much-touted. General managers begin to include ESG investment in their track record.”

“We have completed the first-round screening of GPs to outsource ESG-themed investment in bonds, in our pilot project. That will be our first investment categorized as ESG investment. The detailed investment size has not yet been determined. Previously, we had made investments, called socially responsible investing, but we had not categorized them.”

On reason to decide on ESG investment:

“Bonds categorized as ESG investments have generated higher returns in general. We had invested in ESG-themed equity funds. They also produced slightly higher returns than our average returns.”

“ESG-related companies tend to post high growth and their credit spreads are tightening more quickly than other corporate bonds. The same goes for stocks. They have high growth potential and good physical strength.”

On stock market outlook and your view on overvaluation concern:

“The current stock markets could be seen as overvalued because they skyrocketed after a plunge. Domestic stock markets are heavily weighted towards BBIG (bio, battery, internet and game), sparking concerns of overvaluation."

"But it was liquidity that drove the market higher. I think there is room for additional gains. When the economy returns to normalcy next year, stock markets will gradually rise, rather than undergoing a correction as a whole. Stock markets may do well through the first half of next year."

How long do you expect global low interest rate trends to last?

“The low interest rate environment is unlikely to change. The high interest rate era we have experienced will never come back. But there is some room for interest rates to rise."

"If a COVID-19 vaccine is developed, inflation expectations will rise and push interest rates higher. But the US Fed and ECB are unlikely to raise interest rates sharply. They cannot taper their quantitative easing programs suddenly. Interest rate increases, if any, will be capped at pre-COVID 19 levels.”

On Kyobo Life’s human resources for investment division:

"Our investment division has about 100 employees. They rotate every five years within one asset class such as alternative investment, or shifting from the ordinary account management into the special account management. When we hire people, we look at their asset allocation strategy, investment proposals and knowledge about risk regulations.”  

“For overseas alternative investments, we hire junior employees and offer on-the-job training, or training programs to about 10 of them every year. In the future, we may send junior employees to our overseas units for a period of three to six months. In Manhattan, we have a fixed-income investment unit with five to six employees. We are also considering setting up a currency-hedging team composed of five to six people." 

Write to Sang-eun Lucia Lee and Ri-ahn Kim at

Yeonhee Kim edited this article.

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