Losses in overseas alternative investments have been cited as the main reason that several South Korean insurance companies recorded poor performances last year.
Mirae Asset Life Insurance and KB Insurance saw their operating profits drop sharply, while Lotte Insurance remained in the red with an operating loss of more than 20.8 billion won, according to its recent filing with the government regulator, the Financial Supervisory Service (FSS).
In contrast, major life and non-life insurers enjoyed a double-digit increase in their operating or net profits from 2019 due to higher insurance sales and improvement in their loss ratios.
The poor performances of the three insurance firms was mainly attributed to huge losses in their alternative investments, especially overseas alternative investments.
Mirae Asset Life Insurance captured a share of more than 50% in the variable insurance market, but its operating profit shrank 17.7% from 2019 as the valuation of its overseas assets plummeted, including fund investments in Brazilian real estate.
KB Insurance had to see a net profit decrease of 30% to strengthen its loss reserves on investments in the U.S. hotel business. Lotte Insurance recorded a loss of 20.8 billion won in operating profit as investment income fell by 181.6 billion won, even though it was able to save 220 billion won more than in 2019 by improving its loss ratio and saving operation costs. The company’s investments in aircraft and hotel sectors were severely hit by the Covid-19 pandemic.
Even before the pandemic, South Korea’s insurance companies hastily expanded overseas alternative investments to find out new revenue streams amid a low interest rate environment. The total exposure of 10 South Korean insurers to overseas alternative investment increased by around 50% from 10.5 trillion won at the end of 2017 to 15.4 trillion won in mid-2019. With the exposure increasing rapidly in such a short period of time, some experts had already warned of investment risks.
“Insurance companies make it a rule to invest in low-risk alternative assets, but the pandemic dealt a blow to investments in hotel and aircraft businesses, which were usually considered safer than other types of assets,” said an industry researcher.
Insurers had made 70.4 trillion won in overseas alternative investment by the end of September 2020, or 6.5% of the total assets of 36 insurers that invest in overseas alternative assets, according to data released by FSS on Monday (February 22).
Investments had been profitable until September, with total returns reaching 2 trillion won, but losses began to mount in the wake of the Covid-19 outbreak, the FSS said.
The insurers have recorded a combined loss of 194.4 billion won from some of their alternative investments due to Covid-19, and losses could continue to grow, it added.
Real estate-related investment accounted for 24.1 trillion won of the alternative investments, with 20 trillion won in SOC and 9.3 trillion won in corporate acquisition and restructuring-related investment. The investment targets were 10.9 trillion won (15.5%) in offices, 8.5 trillion won (12.1%) in power generation and energy, 4.9 trillion won (7.0%) in aircraft and ships and 4.9 trillion won (7.0%) in acquisition financing such as private equity funds.
The investments were mainly made in advanced countries, including 26.8 trillion won (38.1%) in the U.S., 6.5 trillion won (9.2%) in England, 2.7 trillion won (3.8%) in France and 6.8 trillion won (9.7%) in other European countries.
U.S offices, hotels and other facilities accounted for 63.4% of overseas real estate investments, worth 24.1 trillion won. (Reporting by Capital Connect staff)