South Korean insurances companies hasten to leverage against likely losses in their bond investments on concerns over price falls from market yields tracking higher U.S. interest rates at a time they face tougher capital regulation.
Korean insurers have about 478 trillion won ($22 billion) invested in bonds placed in the category to sell before maturity as of September 30, 2016, according to Financial Supervisory Service and industry sources on Thursday.
Insurers spread out their premium funds in bonds that must be held until maturity or sold periodically. In recent years of ultra-low interest rate environment, they shifted bonds to the category that can be sold before maturity which comes under periodical evaluation at par value with market yields. At a time of rising interest rates, their holdings would lose value when reflecting the price falls, and the companies would have to book the losses in their income statement.
Industry watchers estimate a rise of 50 basis points in bond yields could translate into losses of nearly 10 trillion won for the institutional players.
Hanwha Life Insurance has 15.7 trillion won in such bonds and ING Life Insurance Korea 4.6 trillion. Non-life players also have shifted their bonds to the category.
They cannot afford losses in their balance sheet as they face tougher guidelines under the International Financial Reporting Standards (IFRS) 17, a new global insurance standard which will take effect in 2021.
By Kim Tae-sung
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