South Korean life insurers' interest payment burden rising: report

Their financial performance is diverse but has decayed amidst the prolonged low interest rates.

The capital strength of rated South Korean life insurers may be partially supported by capital supplementary bonds in preparation for the upcoming Korean Insurance Capital Standard (K-ICS), but the interest payment burden has been rising, resulting in lower debt service capability and financial flexibility credit scores for some insurers.

In a peer review of life insurers in the country, Fitch Ratings reported the peer group’s financial performance as diverse but has generally decayed amidst the prolonged low interest rate environment. 

The insurers included in the peer review are Hanwha Life Insurance, Heungkuk Life Insurance, KDB Life Insurance, Kyobo Life Insurance, and Tong Yang Life Insurance.

This has pressured the insurers’ ratings, as it is a high-influence credit factor. Low interest rates compress investment yields and put greater pressure on reserves, the report said.

The rated life insurers have hiked their high-risk asset holdings, including alternative investments, to boost yield. They have also increased the proportion of long-term government bonds in their asset portfolio for asset-liability duration matching to reduce interest risk.

Mid-sized insurers, such as Heungkuk Life and KDB Life, are taking higher investment risks than rated peers, Fitch noted, with Hanwha Life and Kyobo Life at higher risk of a negative spread burden due to higher exposure to legacy businesses with guarantee rates of 6% or higher.