[Insurance Companies Survival Cliff - China] Selling Prime Assets... Eliminated Company Dinners and Business Trips

Measures to Cover Losses
Disposal of Bonds and Real Estate

Eliminating Company Dinners and Minimizing Business Trips
Reducing Organizational Size to Cut Costs

[Asia Economy Reporter Oh Hyung-gil] Domestic life and non-life insurance companies are selling off prime assets to cover losses caused by low interest rates. Their desperate mindset is evident as they are willing to part with everything profitable, from their reserves to even putting houses on the market, as a temporary measure.

Although they have sold large volumes of high-quality assets, the worsening business environment and sharply decreased earnings due to low interest rates have plunged them into a deep slump. While some criticize the sale of assets that should have been held until maturity to collect interest as a stopgap that increases future burdens, it is seen as an unavoidable choice for insurers who must first put out the urgent fire.

They have tightened their belts even more. To cut costs, business trips have been minimized and company dinners eliminated. This reality shows how seriously insurance companies, which should be a safety net for the public, are currently facing a crisis.

◆ "Sell everything that makes money" = Life and non-life insurers sold about 1.5 trillion won worth of high-interest quality bonds in the first quarter of this year. This is more than double the 700 billion won sold in the same period last year. The reason for hastily disposing of assets prepared to secure long-term profitability is proof of how critical the current situation is.

The scale of real estate assets also shrank by 12.5%, from 20.8062 trillion won in 2015 to 18.1903 trillion won at the end of last year. This is a desperate measure to reduce financial burdens and secure cash liquidity in response to sluggish business conditions ahead of the introduction of new international accounting standards (IFRS17) and the new solvency regime (K-ICS) in 2022.

Major companies are also under pressure. Samsung Life Insurance defended its earnings by selling bonds and real estate in the first quarter, reducing the increase in secondary losses and variable guarantee losses. It sold about 395 billion won worth of bonds and real estate to cover losses. Hanwha Life Insurance also earned 310 billion won in sales profits through replacement trading of dollar bonds. It offset operating losses of 303 billion won in the insurance sector and posted a first-quarter net profit of 47.8 billion won (separate basis).

Non-life insurers face relatively less burden from interest rate cuts compared to life insurers, but their low proportion of safe assets is considered a risk factor. Some companies with large alternative investments are facing potential asset impairment risks.

According to Korea Credit Rating, Lotte Non-Life Insurance and Heungkuk Fire & Marine Insurance have investment ratios in aircraft, hotels, and ships amounting to 100% and 52% of their equity capital, respectively. About 77% of Lotte Non-Life's aircraft investments are subordinated, and 67.2% of Heungkuk Fire & Marine's investments fall into this category. There are concerns that prolonged declines in air travel demand will inevitably lead to asset value impairments.

Real estate sales are also active. Hyundai Marine & Fire Insurance is in the process of selling its Gangnam Center. More than ten bidders reportedly participated in the main bid held last month. The estimated sale price is between 350 billion and 370 billion won. Shinhan Life Insurance's L Tower has also entered the sales process and is preparing for bidding.

After the introduction of IFRS17 and K-ICS, real estate becomes a burden for insurers. This is because they must set aside more reserves than currently for holding real estate. Under the current Risk-Based Capital (RBC) ratio, the risk factor for real estate is 6% for business use and 9% for investment use. With the introduction of K-ICS, the real estate risk factor will increase to 25%. The more real estate they hold, the greater the capital expansion burden.

A non-life insurance industry official said, "More insurers may sell real estate in the future," adding, "Since securing cash is absolutely advantageous compared to assets, the atmosphere is that whatever can be sold should be sold."

◆ Reducing activity expenses, eliminating company dinners... Insurance premium hikes are also imminent = Insurers who have already started cost-cutting are tightening their belts even more. Samsung Life Insurance reduced expenses such as business expenses, executive expenses, and event costs by 30% this year. Executive expenses were cut by up to 50% depending on the position and type of work. Hanwha Life Insurance also drastically reduced executive activity expenses and almost eliminated group dinners held with sales branches.

The biggest annual event to encourage sales organizations and agents who achieved excellent results, the Year-End Awards, was also significantly scaled down. Shinhan Life, Mirae Asset Life, and DB Insurance held the awards via internal broadcasts or online streaming. Hanwha Life replaced it with a dinner, while Kyobo Life, Samsung Fire & Marine Insurance, and KB Insurance canceled the event entirely.

A non-life insurance industry official said, "While practicing 'social distancing' to prevent the spread of COVID-19, we have achieved a twofold effect by also reducing costs," but added, "Many agents regret the loss of events that were held to boost morale."

Organizations have also been downsized to cut costs. The number of sales offices of 23 domestic life insurers in the first quarter was 2,978, down about 200 from 3,176 in the same period last year due to consolidations. Non-life insurers such as Samsung Fire & Marine, Hyundai Marine & Fire, Lotte Non-Life, and Hanwha Non-Life also carried out large-scale organizational restructuring, including department mergers and new establishments.

The problem is that the crisis faced by insurers is likely to be passed on to consumers as a burden. In fact, insurance premiums are expected to rise as early as the second half of the year.

Insurers determine the expected interest rate to calculate the premiums customers must pay. When the expected interest rate rises, premiums decrease; when it falls, premiums increase. Major insurers such as Samsung and Hanwha lowered their expected interest rates in April, but there is a possibility of further reductions within the year due to interest rate cuts.

A life insurance industry official said, "We cannot lower the expected interest rate further in the first half," but added, "Since interest rates have dropped to historically low levels, we will monitor the situation in the second half and decide whether to lower it."