Fitch Ratings believes that its portfolio of Korean insurers can withstand reduced valuations on their overseas commercial real estate (CRE) and other real-estate exposures without major adverse ratings consequences in the short term.
Korean insurers face potential impairment losses related to their CRE exposure as a result of drivers such as higher interest rates and shifts in work and consumption patterns in the wake of the COVID-19 pandemic. That said, Fitch expects CRE-related losses to have a relatively limited impact on their profitability. The global credit rating agency believes a steady increase in the release of contractual service margins (CSMs), driven by sound underwriting performance, will continue to support Korean insurers’ profitability, despite any impact from volatility in insurers’ investment returns, including CRE-related impairment losses.
Insurers’ overseas CRE exposure at end-September 2023 amounted to KRW31.9tn ($23bn) ,according to the Financial Supervisory Service (FSS). This represented the highest exposure by value among Korean financial institutions. The exposure is equivalent to about 3% of the sector’s total invested assets and approximately 12% of insurers’ total shareholder equity, including CSMs net of tax as a part of equity capital.
Solvency ratios
Additionally, Fitch expects the impact on insurers’ solvency ratios and capitalisation to remain small, given the relatively low levels of portfolio exposure relative to their total invested assets. In a scenario of severe deterioration of overseas CRE markets, Fitch expects the sector’s overall Korean Insurance Capital Standard (K-ICS) ratio to decline by only mid-single-digit percentage points. That said, the exact impact will vary from company to company based on their investment appetites and strategies, as well as their risk-management strategies.
High-quality fixed-income securities comprise the largest share of insurers’ asset portfolios, accounting for around 60% of assets invested in 2023. However, many Korean insurers increased the share of risky assets in their investment portfolios from 2019, notably in the form of beneficiary certificates, amid the low interest rates at that time. These investments offered increased yield and portfolio diversity, but are less liquid than listed equities and conventional bonds.
The majority of insurers’ overseas CRE exposure is indirect, via alternative investments in such beneficiary certificates, which insurers usually invest in via so-called “funds of funds”. Korean insurers have only limited direct exposure to CRE, apart from real-estate assets held for their own use.
Geographical distribution
According to the FSS, Korean insurers’ overseas CRE exposure at end-September 2023 was concentrated in North America (64.2% of the total), with Europe (14.2%), Asia (4.2%), and other regions (17.6%, including Oceania) accounting for much smaller shares. There was a high concentration of exposure to office assets within CRE exposure, a segment that has suffered a significant post-pandemic value decline in several countries. Moreover, a relatively high proportion of overseas CRE assets were in the form of mezzanine and sub-tranches, which could be more fragile under the severe deterioration of credit conditions that is occurring in many overseas CRE markets.
Most of the insurers recognised part of their CRE-related impairment losses in 2023, after a decline in the market value of these assets. Korean insurers’ sound capitalisation levels will provide an important buffer in the event of a more severe CRE downturn. We believe strong capitalisation will continue to give Fitch-rated Korean insurers the headroom to absorb shocks from CRE impairment losses, given the scale of their exposure to CRE.
