Life Insurers' Operating Profits Decline... "Need to Consider Alternative Investments Like Infrastructure"

Samsung Life Insurance Yield 3.24%... Down 0.41 Percentage Points from Last Year
Insurance Companies' Yield Decline Continues for 10 Years... Sale of High-Interest Bonds
"Considering Increasing Corporate Bond Holdings Due to High Proportion of Government and Special Bonds"

Insurance Company Asset Management Return Rate Trends (Source: Korea Insurance Research Institute)

[Asia Economy Reporter Oh Hyung-gil] Insurance companies are enjoying windfall profits this year due to rising loss ratios amid the impact of the novel coronavirus disease (COVID-19), but their asset management is on a worsening path. A vicious cycle is repeating where financial assets are disposed of by giving up future profits to compensate for declining returns.

According to the insurance industry on the 19th, Samsung Life Insurance's quarterly report for the third quarter shows that its managed assets (as of the end of the period) amounted to 238.15 trillion won, with operating profits of 5.63 trillion won. The operating yield was 3.24%, down 0.41% from 3.65% in the same period last year. The annual operating yield, which reached 4.15% in 2018, also dropped significantly to 3.41% last year.

This year, Samsung Life recorded returns exceeding 10% in real estate and other areas, but the yield on securities such as bonds, which make up the majority (76.8%) of its assets, was only 2.95%. Loans yielded 3.89%. However, this was insufficient to raise the overall yield.

Samsung Life managed a portfolio with 74 trillion won (40%) in government and public bonds among securities, 33 trillion won (18%) in special bonds, 36 trillion won (19%) in stocks, 19 trillion won (10%) in overseas foreign currency securities, and 7 trillion won (4%) in corporate bonds. Compared to the end of last year, it increased overseas foreign currency securities while reducing the proportions of special bonds and stocks.

Hanwha Life also saw its asset management yield in the third quarter remain at 3.41%, down 0.04 percentage points from the end of last year. With managed assets approaching 100 trillion won, operating profits were only 2.71 trillion won.

Among the 'Big 3' life insurers, only Kyobo Life Insurance recorded an increase in yield by 0.19 percentage points from the end of last year to 3.95% (including non-operating assets). Medium-sized life insurers such as Tongyang Life (3.3% → 3.0%), Shinhan Life (3.5% → 3.3%), and Orange Life (3.57% → 3.49%) also had to endure declines in asset management yields.

The problem is that this decline in yields has continued over the past decade, but there are no immediate solutions. According to the Korea Insurance Research Institute, the average operating asset yield of life insurers has declined from 5.88% in 2010 to 3.50% last year.

If insurance companies fail to generate adequate returns from the premiums paid by consumers, there is a growing concern that they may not be able to pay promised insurance benefits on time, leading to social issues. This could become more serious in the domestic insurance structure where losses from insurance operations are offset by profits from investment operations.

Ultimately, insurance companies are defending their performance by selling high-interest bonds. A study shows that excluding gains from bond disposals from insurance companies' net profits last year, net profits for life insurers would plummet from 3.1 trillion won to 1.2 trillion won, and for non-life insurers from 2.2 trillion won to 300 billion won.

No Geon-yeop, a research fellow at the Korea Insurance Research Institute, suggested, "Compared to Europe, Korea has a higher proportion of government and special bonds and a lower proportion of financial and corporate bonds, so it is necessary to consider expanding the proportion of other assets such as corporate bonds." He also proposed, "Among alternative investments, infrastructure stocks such as roads and ports have a low financial risk coefficient and investment in them should be expanded."

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