[1mm Financial Talk] 'Concerns of Insolvency' Real Estate Investment, Are Insurance Companies Also at Risk?

Concerns Over Poor Overseas Real Estate Investments in Second Half
Insurance Industry Says "No Major Issues"
Financial Authorities Also Enforcing Strict Oversight

Real estate investment defaults are being cited as a major risk factor for the financial sector in the second half of this year. There are concerns that the real estate project financing (PF) loan risks, primarily concentrated in securities firms, savings banks, and capital companies, could spread to insurance companies. In response, financial authorities and insurers maintain that although the scale of PF loans is large, the possibility of a decline in soundness is low because investments have been made in stable assets.

According to the status of real estate PF loans submitted by the Financial Supervisory Service to Rep. Yoon Chang-hyun of the People Power Party on the 25th, as of the end of last year, the outstanding balance of real estate PF loans in the insurance industry was 44.3 trillion won, the largest among all business sectors. This amount far exceeds those of securities (4.5 trillion won), savings banks (10.5 trillion won), specialized credit finance companies (26.8 trillion won), and banks (39 trillion won). This is the background for concerns that if a real estate PF loan crisis emerges in the second half of the year, the soundness of insurance companies could become a significant issue.

However, the industry and authorities hold the view that there is no major problem. They argue that the delinquency rate is low and most investments were made at stable stages, so the risk of default is not high. In fact, as of the first quarter of this year, the delinquency rate for PF loans in the insurance industry was 0.66%, the most stable level after banks, which have no delinquencies. This is significantly lower compared to securities (15.88%), specialized credit finance companies (4.20%), and savings banks (4.07%).

Although some insurers have been involved in lawsuits related to overseas alternative investments, the burden is not significant relative to the insurers' capital size. In 2018, Kyobo Life Insurance, along with two other financial companies, invested about 100 billion won in loan claims for the Union Station (US) train station in Washington DC, led by Dal All Asset Management. Due to a decrease in local users, the US subsidiary that signed the investment contract went bankrupt, and the US national railroad company Amtrak filed a lawsuit to forcibly acquire the station for 250 million dollars. However, this is not a large proportion compared to Kyobo Life Insurance's total assets of 122 trillion won (as of the end of the first quarter this year).

Kyobo Life Insurance stated, "We are currently responding through local and domestic asset managers and law firms," and added, "We believe there is no problem regarding the recovery of investment funds." A representative from Dal All Asset Management also said, "Two overseas institutions have recognized asset values of 700 billion won," and "Even when combining principal and interest, we expect no issues in recovering less than 500 billion won of investment funds." Additionally, Lotte Insurance is engaged in a damages lawsuit related to overseas alternative investments made with Meritz Securities in 2018, amounting to 56 billion won, but has since made almost no additional overseas alternative investments and is managing soundness.

An official from a major insurance company explained, "Long-term and stable asset management is a fundamental principle for insurers, so even when participating in overseas real estate or alternative investments, they enter at the most stable stage possible, even if the yield is somewhat low," adding, "Unlike securities firms that enter at the stage of drawing rosy blueprints for overseas real estate investments, insurers tend to enter when the building is almost completed and additional funds are being raised."

Korea Credit Rating also analyzed in a recent report, "Although the number of watchlist assets has increased due to recent delinquencies in some overseas real estate alternative investment assets, considering maturity and seniority, the possibility of a decline in soundness is low."

Financial authorities are also regularly monitoring the situation regarding insurers' overseas alternative investments. A Financial Supervisory Service official said, "We check the status of real estate PF every six months and conduct stress tests rigorously," adding, "Insurance company assets are not of a nature that can suddenly be withdrawn like bank demand deposits, so there is no concern like a bank 'mass withdrawal of deposits (bank run),' and loan loss provisions are conservatively set aside, making them relatively stable."

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