Distress signals are emerging in high-risk overseas alternative investments such as foreign real estate and private credit held by Korean insurers, but the complexity of the investment structures makes them difficult to identify quickly, according to an analysis. The assessment found that any deterioration could weigh on profitability, even if it has little impact on capital adequacy.
Korean insurers’ exposure to high-risk overseas alternative investments totaled 35 billion dollars as of the end of last year, according to S&P Global Ratings, the global credit rating agency, on Tuesday. Of this, overseas real estate funds accounted for 21 billion dollars (about 31 trillion won), while overseas private credit funds made up 14 billion dollars.
Insurers began aggressively expanding overseas alternative investments during the ultra-low interest rate period immediately following the 2020 pandemic. In advanced economies such as the United States and Europe, alternative investments are conducted on a limited basis, mainly by life insurers. In Korea, by contrast, even property and casualty insurers aggressively expanded alternative investments based on long-term insurance products. As a result, the share of alternative investments in Korean insurers’ assets rose from 15% in 2015 to 21% as of the end of last year.
S&P pointed out that signs of distress have recently been detected in the overseas real estate funds held by Korean insurers. Most of the underlying assets are secured by commercial real estate in North America and Europe, where collateral values are declining due to the spread of remote work and prolonged high interest rates. In fact, valuation losses have already appeared in some funds.
Overseas private credit is not reassuring either. The private credit funds held by Korean insurers are mainly composed of senior direct loans to mid-sized U.S. companies. Losses have not yet materialized. However, there are concerns that distress could spread to private credit funds as well if artificial intelligence (AI) erodes the revenue of software companies.
The bigger problem is the difficulty of detecting distress in these high-risk overseas alternative investments in a timely manner. Because many Korean insurers invest through feeder funds, which invest by passing through other funds, information asymmetry arises in the multilayered structure. Since it is difficult to immediately verify information on the underlying assets, insurers are structurally bound to recognize problems only belatedly when they erupt.
S&P forecast that Korean insurers will reduce their share of alternative investments going forward. This is because expected risk-adjusted returns on overseas alternative investments are falling, while domestic bond yields are rising sharply. On the 23rd of this month, the 10-year government bond yield stood at 4.2%, up 1.3 percentage points over the past year. “Korean insurers will continue to strengthen their risk management for overseas alternative investments,” said Emily Yi, an analyst at S&P.