KB Insurance and other Korean insurers are increasingly eyeing private equity and debt investments rather than equities due to market and regulatory changes.
“Instead of listed equity we are looking for private equity or alternative types of equity,” Han Seung-chul, senior executive managing director at KB Asset Management’s LDI (liability-driven investment) division, told delegates at AsianInvestor’s 15th Institutional Investment Forum Korea in Seoul in late June.
At KB Asset Management (KB AM), Han oversees asset management for KB Group’s insurance companies like KB Insurance, managing a portfolio with around W60 trillion ($47.4 billion) in assets under management.
He emphasised that KB AM won't stop investing in equity, and will continue to look at opportunistic investments when feasible.
“But we are trying to downgrade it for now, because we are expecting some adjustments in the equity market in the second half of this year,” Han said.
Most Korean insurance companies drastically increased their fixed income portion in the first half of 2022. They believed market prospects were good and it also helped with their asset-liability management.
“Insurance companies really hate volatility in income. It is difficult for insurance companies to manage equity on a long-term basis, and it is now purely seen as a short-term asset,” Han said.
Korean insurance companies used to generate strong profits and were cash-rich in the past.
But that period is ending, and life insurance companies in particular are starting to experience a deterioration in their profitability, he explained.
With liability insurance “barely breaking even”, liquidity management has turned into a very important issue for insurance companies - and makes the investing landscape more complex.
Additionally, both the International Financial Reporting Standards 17 (IFRS 17) and Korean Insurance Capital Standard (K-ICS) came into effect on January 1, 2023.
The changes they engendered -- including mark-to market across asset types -- have directly impacted insurers’ investment preferences.
“Insurance companies will have no chance but to continue to look for continued investment increase in debt and fixed income. Equity for insurance companies’ perspective is an opportunistic asset,” Han said.
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After the run of rising interest rates and market volatility, Han remains concerned about their impact on private equity assets. He is not convinced the situation has been resolved.
“But our concerns on inflation has changed, and due to the bankruptcy of SVB (Silicon Valley Bank), the liquidity injection by the Fed also impacted the market. So I think the real impact will be seen at the latter half of this year or next year,” Han said.
KB AM will continue to carry a general vintage-focused portfolio within private equity for the group insurance companies, allocating capital to funds each year.
Currently, KB AM sees opportunities in venture capital -- an asset class it held back from in the first half of 2023 because of the SVB (Silicon Valley Bank) collapse.
“As the situation is resolved, we believe that there will be some growth in the new economy, especially led by artificial intelligence, so we are going to invest more in that area,” Han said.
The biggest concern now is that all investment plans are based on the assumption that economies around the world will escape a hard landing albeit still face a higher interest rate environment.
“But I am not sure whether we can really avoid a hard landing given the market situation. Even though we say inflation has peaked or interest rates have peaked, we really must watch closely to see that the inflation and interest rates will remain stable,” Han said.