Exchange Rate Surpasses 1200 Won... Insurers Increasing Foreign Currency Bonds "Closely Monitoring Exchange Rate Fluctuations" (Comprehensive)

Foreign Currency Marketable Securities 103 Trillion
Increased by 2 Trillion from 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 holdings of foreign currency securities, including overseas bonds, by 23 domestic life insurance companies reached KRW 103.3994 trillion as of October last year. This is about KRW 2 trillion more than the KRW 101.6563 trillion at the end of the previous year.

The holdings of foreign currency securities, which stood at KRW 97 trillion in 2018, increased to KRW 107 trillion in 2019, then bottomed out in 2020 and are now showing signs of rebound.

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

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 KRW 1 trillion 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, but as market interest rates rose, they adopted a strategy to increase investment scale.

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 KRW-USD exchange rate surpassed the 1,200 won level for the first time in about 1 year and 5 months.

In particular, with growing expectations that the Fed will raise the benchmark interest rate for the first time in March this year after completing tapering (asset purchase reduction), there are forecasts that the KRW-USD exchange rate may rise further. Additionally, due to concerns over the new Omicron variant pandemic and other factors, the global dollar strength trend is expected to continue.

Due to the strong dollar, there are also concerns that the cost of raising overseas bonds for insurance companies to comply with new capital regulations such as the new International Financial Reporting Standards (IFRS17) and the new Solvency Regulation (K-ICS), which will be introduced in 2023, may increase.

Hanwha Life Insurance held a board meeting last month and decided to issue up to USD 1 billion (KRW 1.18 trillion) worth of overseas ESG subordinated bonds.

A life insurance industry 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 the situation going forward."

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