As Korean life insurers diversify into alternative assets in the hunt for higher yields, new local regulations mean they must select asset classes and locations more carefully. This is encouraging them to choose overseas private debt.
In a sign of the popularity of foreign deals with these firms, Samsung Life Insurance, the country’s largest, announced on May 27 it would spend $90 million to acquire a 25% stake in Savills Investment Management (Savills IM), the investment arm of the UK-based real estate adviser Savills.
Samsung Life, which has $233.4 billion of assets under management (AUM), will commit a total of $1 billion to Savills IM over the next four years in a bid to execute successful debt and equity strategies that include investing in its existing products and seed capital for new funds, which target Asia Pacific and Europe, according to the press release announcing the deal.
Private debt carries lower risk than private equity and can generate a similar level of return if counting the higher risk charges under the K-ICS (Korean Insurance Capital Standard), to be implemented from 2023, an investment executive of a mid-sized Korean life insurer, DGB Life, told AsianInvestor.
K-ICS is a new insurance liability market valuation standard that will raise capital requirements for life insurers’ assets and liabilities.
DGB Life, with AUM of $6 billion, is planning to increase what it allocates to alternatives this year from 7% to between 8% and 10%. Now, 80% of its money is in fixed income, with 10% in public equities.
In general, the company favours private debt in Europe and the United States, considering their higher quality and lower risks, the executive said.
The length of the investment period is also vital to the life insurer, which is trying to extend asset duration to match the increasing average life of their liabilities. Asset quality is more important than macroeconomic conditions when looking at alternative investment products, because they can take five to 10 years, or more, to mature, he added.
DGB Life favours private debt of e-commerce companies and those with dominant market positions over high-growth tech companies. It is also trying to find government infrastructure projects of a high quality in social sectors, including distressed debt, because of their low default rates and volatility.
The company normally spends between $100 and $200 million on new alternative investments each year. However, since January, the limited supply because of the pandemic meant it has struggled to secure good deals overseas. As a result, it is considering partnering with external managers to execute deals rather than trying to do so internally without any mandates.
According to Fitch Ratings’s latest report on Korean insurers in late March, KDB Life Insurance is also exploring alternative investment opportunities such as real estate, infrastructure and policy loans, which fall into its risk appetite for supporting investment yields.
Lower capital charges compared to more equity-like asset classes, while still providing reasonable yield, is the reason why insurers should consider private debt, according to Jaijit Kumar, head of Asia insurance solutions at Invesco.
“While we are seeing interest rates move higher over the past few months, they are still at fairly low levels from a historical perspective. So the interest in alternative asset classes is likely to continue,” Kumar said.
“The general level of risk charges associated (where applicable) with such asset classes, while relatively high, is not something that we feel makes these asset classes completely unattractive. Rather, the expected return associated with these asset types is often correspondingly high, making the risk-to-reward ratio still reasonable,” he said.
However, investors still need to weigh the levels of expected yields against the risk and capital charges when choosing between different asset classes, he added.
Investors should also pay attention to the effective management of investment mandates, the availability of alternative assets locally, and the capability to invest overseas considering currency hedging challenges, Kumar stressed.
The good returns generated from private debt assets in North America was a popular topic with asset owners and fund houses at AsianInvestor’s Asian Investment Summit this week.
"The fact that private debt investments are increasing is a sign that investors are back on track after the pandemic,” said Bev Durston, managing director of Edgehaven, an alternatives adviser in the UK. “Compared with Asia, we see more opportunities in US structured credit,” Durston told AsianInvestor.
However, Claire Lee, a senior analyst for insurance at Fitch Ratings, said Korean life insurers will still be cautious about new alternative investment overseas in the short term because of fluctuations in the macroeconomy and the pandemic, which has yet to be brought under control in many countries.
She noted that while some Fitch-rated life insurers with large exposure to overseas alternatives had suffered big impairment losses in 2020, the high investment yields and long duration mean some alternative assets will remain attractive to them.
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