Insurance Companies' Real Estate PF Loans Near 40 Trillion Won... Warning Signs Ignored (Comprehensive)

Authorities Warn on Alternative Investment Risk Management, Yet Investments Surge
Loan Bond Annual Growth Rate Hits Three Times Total Loans

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] Warning signals continue for insurance companies turning to real estate as an alternative investment to increase asset management returns amid low interest rates. Unlike other secondary financial sectors, there is no cap on real estate project financing (PF) loans, so proactive management is necessary.

According to financial authorities on the 12th, the outstanding balance of insurance companies' real estate PF loan receivables stood at 39 trillion won as of the end of June, an increase of 5.4 trillion won (16.0%) compared to the same period last year. The average annual growth rate over the past three years was also 15.7%, more than three times the overall loan average annual growth rate (4.3%).

Real estate PF loans, which provide loans secured by cash flow from real estate projects, apply a risk factor twice as high as traditional bonds when calculating the solvency (RBC) ratio. This means it is a risky investment with volatility depending on the real estate market conditions.

Although the delinquency rate (0.11%) and non-performing loan ratio (0.07%) remain stable for now, a downturn in the real estate market is expected to significantly impact the soundness of insurance companies.

Unlike savings banks, securities firms, and other secondary financial sectors, insurance companies have no limit on real estate PF loans. As of the end of March, the total outstanding real estate PF loans of insurance companies were about 27.8% of their own capital, approaching the maximum limit for securities firms (30% of own capital).

Alternative Investment Risks Expand if Real Estate Bubble Bursts

The Financial Supervisory Service has recently ordered risk management for insurance companies' alternative investments, especially focusing on small and medium-sized firms with relatively limited capital capacity. In September, management attention measures were issued to Hana Life and ABL Life, urging them to strengthen investment risk assessments.

Hana Life was found not to have set detailed limits considering the types of alternative investment products and business methods, and had not conducted stress tests on assets with high default risk due to COVID-19 spread, such as hotels and officetels.

ABL Life was also found to be concentrated in relatively high-risk assets such as overseas real estate, mezzanine and subordinated loans, equity, and social overhead capital (SOC) investments with business operator risk-sharing methods. It was pointed out that controls over the asset management department’s investment risk limit operations need to be further strengthened.

Despite regulatory orders, real estate-related investments are expected to continue increasing. In fact, more insurance companies are hiring real estate finance experts. Samsung Fire & Marine Insurance is recruiting experienced professionals in real estate finance, alternative screening, and credit screening fields until the 17th. Hyundai Marine & Fire Insurance is also hiring experienced personnel for domestic and overseas real estate-related loans such as project financing (PF) and equity investment deal sourcing.

Senior Research Fellow Lee Seok-ho of the Korea Institute of Finance said, "Some small and medium-sized insurance companies show relatively high delinquency and non-performing loan ratios," adding, "If the real estate market becomes unstable, potential risk factors could materialize."

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