Insurance Companies Increasing Foreign Currency Bonds... Exchange Rate Increase Risk

Foreign Currency Marketable Securities 103 Trillion
Increased by 2 Trillion Compared to End of Previous Year
Expansion of Currency Hedge Risk

[Asia Economy Reporter Oh Hyung-gil] Since the beginning of the year, the rapid rise in exchange rates has increased the foreign exchange risk for insurance companies. If exchange rate volatility continues to expand, the cost of raising overseas bonds will increase, and the burden will inevitably grow due to higher hedging costs for risk management.

According to the insurance industry on the 10th, the total amount of foreign currency securities, including overseas bonds, held by 23 domestic life insurance companies reached 103.3994 trillion won as of October last year. This is about 2 trillion won more than the 101.6563 trillion won at the end of the previous year. The amount of foreign currency securities held, which was 97 trillion won in 2018, increased to 107 trillion won in 2019, then bottomed out in 2020 and appears to be rebounding.

The company holding the largest amount of foreign currency securities is Samsung Life Insurance, which increased from 18.1627 trillion won at the end of 2020 to 20.9985 trillion won in October last year, an increase of 2.8358 trillion won in one year. During the same period, Hanwha Life Insurance and Kyobo Life Insurance reduced their overseas investment scale. Hanwha Life Insurance recorded 17.1763 trillion won, down 3.0623 trillion won, and Kyobo Life Insurance recorded 18.5141 trillion won, down 878.8 billion won.

However, with small and medium-sized life insurers increasing overseas investments, as of October last year, 16 out of the 23 life insurers held more than 1 trillion won in foreign currency securities.

They reduced the proportion of overseas investments until the first half of last year as domestic bond yields were better than those in the U.S. due to low interest rates, then increased investment scale as market interest rates rose.

When investing overseas, insurance companies manage short- and long-term hedge risks by entering into currency derivatives such as currency forwards or currency swap contracts to prevent losses caused by exchange rate fluctuations. When the dollar strengthens, derivative valuation losses occur, increasing hedging costs.

This year, as the U.S. Federal Reserve (Fed) hinted at early tightening, the won-dollar exchange rate surpassed the 1,200 won level for the first time in about 1 year and 5 months. In particular, expectations that the Fed will raise the benchmark interest rate for the first time in March this year after completing tapering (asset purchase reduction) have strengthened, leading to forecasts that the won-dollar exchange rate may rise further.

Furthermore, the cost of raising overseas bonds for insurance companies is expected to increase in response to capital regulations such as the new International Financial Reporting Standard (IFRS17) and the new solvency regime (K-ICS) introduced in 2023. Hanwha Life Insurance held a board meeting last month and decided to issue up to 1 billion dollars (about 1.18 trillion won) in overseas ESG subordinated bonds.

A life insurance company official said, "It is not yet at a level that requires a response to the exchange rate increase," but added, "We are responding with a strategy to minimize exposure to exchange rate volatility and are closely monitoring future developments."

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