Hanwha Life Insurance and Meritz Fire & Marine Insurance's Held-to-Maturity Assets '0 Won'... "Maintained Soundness but..."

Reclassification of Marketable Securities, Asset Expansion Effect

Limited Response Due to 3-Year Restriction on Changes

[Asia Economy Reporter Oh Hyung-gil] Hanwha General Insurance, designated as a management control target earlier this year, has confirmed that it has cleared all held-to-maturity assets through asset reclassification. Meritz Fire & Marine Insurance has also maintained its held-to-maturity assets at 'zero won' since 2016.

This strategy contrasts with other non-life insurers, which have slightly increased their held-to-maturity assets. While it is evaluated that they chose to reduce held-to-maturity assets to maintain financial soundness during the period of declining interest rates, there are concerns that if low interest rates persist long-term, such asset reclassification could backfire like a 'boomerang.'

According to the non-life insurance industry on the 12th, Hanwha General Insurance reclassified all 3.8421 trillion won of held-to-maturity assets as of the end of last year into available-for-sale assets in the first quarter. Available-for-sale assets nearly doubled from 5.5261 trillion won at the end of last year to 10.1541 trillion won in the first quarter.

Insurance companies invest premiums received from customers in bonds or stocks and classify assets into those held to maturity (held-to-maturity assets) and those to be sold before maturity (available-for-sale assets).

When financial assets are classified as held-to-maturity, only the book value and interest are reflected, but if classified as available-for-sale, valuation gains or losses due to interest rate fluctuations are added. In a low-interest-rate environment, reclassifying assets into the available-for-sale account can generate bond valuation gains, resulting in a capital expansion effect.

When capital increases, an increase in the Risk-Based Capital (RBC) ratio can be expected. Hanwha General Insurance's RBC ratio in the first quarter was 235.5%, and with the increase in available-for-sale assets, it was able to raise the RBC by 42.9 percentage points compared to the same period last year.

A Hanwha General Insurance official explained, "We implemented bond reclassification to expand the proportion of interest-bearing assets and extend asset duration to improve the interest rate risk ratio in preparation for the implementation of the new International Financial Reporting Standards (IFRS 17) in 2023."

Within the insurance industry, there is talk that, amid being designated as a management control target by financial authorities, increasing insurance underwriting losses, and prolonged zero interest rates, this was the last card played to maintain financial soundness.

Meritz Fire & Marine Insurance has also held no held-to-maturity assets for nearly five years. Meanwhile, available-for-sale assets have grown from 5.8329 trillion won in 2015 to 13.2023 trillion won in the first quarter of this year. They have supplemented poor performance not only through asset reclassification but also by selling major assets such as bonds.

The problem is the concern that proactive capital expansion through asset reclassification may become a burden in the future. Financial authorities restrict insurers from changing financial asset account classifications for three years after reclassification. If zero interest rates persist or interest rates fall further, response options will inevitably be limited.

An insurance industry official said, "While asset reclassification is the insurer's choice, if low interest rates persist or additional rate cuts occur, available measures will inevitably become insufficient, potentially causing delays in responding to the implementation of IFRS 17 in 2023."

This content was produced with the assistance of AI translation services.