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Alternative investments

Korean insurers may write down $1.1 bn in global alternatives

Feb 23, 2021 (Gmt+09:00)

The Drew Las Vegas (Courtesy of JW Marriott)

South Korea’s 36 insurance companies have invested a combined 70 trillion won ($63 billion) in overseas alternative investments as of the end of September last year, of which they may need to write down 1.27 trillion won ($1.1 billion) worth of assets because of loan defaults or suspended projects, the country’s top financial regulator said.

The insurers, including Mirae Asset Life Insurance Co. and KB Insurance Co., have already booked 194.4 billion won in losses from their global alternatives portfolios, mostly stemming from real estate and aircraft funds, as of the end of last September, the regulatory Financial Supervisory Service (FSS)  said on Feb. 23. 

Additionally, domestic insurers are likely to incur losses from 272.1 billion won in overseas alternatives due to borrowers' defaults and delayed or suspended projects. Another 1.0 trillion won investment in global alternatives is at risk of  undermined value due to a drop in interest rates, debt rollovers or rent cuts.

“Insurance companies need to apply strict valuation methods on alternative assets and need to bolster capital in a preemptive manner to cushion the impact of their possible losses,” FSS said in a statement. “We will monitor on a monthly basis insurance companies with high exposure to alternative assets but a weak internal control system.”

The regulatory body will draw up guidelines during the first half of this year, under which it will specify the procedures on conducting onsite due diligence and on verifying the legal rights and duties of collateral.

Of the 70 trillion won in the insurers' overseas alternative investments, 48.1 trillion won, or 68.3% of the outstanding assets, will expire after 2030. 

“But 4.4 trillion won worth of the alternatives are expiring this year, of which 2 trillion won relates to real estate, signaling their exit risk when the real estate market deteriorates," FSS said.

Graphics by Jerry Lee

Overseas alternatives by Korean insurers represent 6.5% of their total assets of 1,087 trillion won as of the end of September 2020. They invested mainly through funds, instead of making direct investments. Real estate made up a big chunk, with the US accounting for 63.4% of their overseas real estate investments at 15.3 trillion won.

They earned interest and dividend incomes of 2 trillion won from the overseas alternative portfolio between January and September of last year. But they could suffer additional investment losses from late last year in an extended economic slowdown caused by the global pandemic, the regulator said.

Further, Korean insurers' high exposure to mezzanine and subordinated debt, relative to other domestic institutional investors, could further deteriorate their portfolios, according to an insurance industry source.

FSS said domestic insurance firms applied different valuations and estimations even on the same investment, and thus it will instruct them to set aside an appropriate amount against possible losses.

In 2020, their overseas investments sharply decreased to 6.6 trillion won in the wake of the coronavirus outbreak, compared with 14.6 trillion won in 2019, after peaking at 15.5 trillion won in 2018.

Last year, travel restrictions led to a double-digit increase in Korean insurers’ net profit. But Mirae Asset Life and KB Insurance suffered a drop in operating profit, with Lotte Non-Life Insurance Co. turning to a loss, dented by losses from overseas alternative investments.

The regulatory announcement came about a month after it found that South Korea’s 22 brokerage firms have classified a combined 7.5 trillion won ($6.9 billion), or 15.7%, of their cumulative overseas alternative investments as nonperforming or precautionary assets. 

Meanwhile, Korean investors in the Drew Las Vegas development project are poised to write off their 300 billion won ($271 million) investment in mezzanine funding for the stalled development project in Nevada, after its senior lenders decided to sell the security interest on their loans to a third party.

Write to Jong-Seo Park and Daehun Kim at cosmos@hankyung.com

Yeonhee Kim edited this article.

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