Hanwha Life Insurance Co. Ltd., which manages 100 trillion won ($87 billion) of assets, will chase senior secured debts of commercial buildings in developed countries which deliver annual returns of 3 to 4%, as it expects to boost alternative investment by a net 1.2 trillion won ($1 billion) this year, its chief investment officer said.
With the projected net growth in alternative investments, the South Korean insurer will allocate more than 3 trillion won of capital in 2017 to real estate, infrastructure and other alternative asset classes, mostly overseas, its CIO Hee-baek Kwon told the Korea Economic Daily in a recent interview.
Hanwha Life ramped up alternative investments by a net 1.4 trillion won in 2016, the biggest net increase among domestic insurers.
But its alternative assets are weighted toward overseas mezzanine and senior loans. It will remain cautious about PEFs, wary of risk capital requirements for equity investments, Kwon added.
Separately, Hanwha Life plans to buy an additional 8 trillion won ($ billion) worth of long-term offshore bonds, including US municipal bonds, supernational bonds and dollar-denominated debt issued by oil-producing countries in 2017, in an effort to lengthen asset duration ahead of the introduction of IFRS 17, an international financial reporting standard which applies market-based valuations on liabilities.
He was installed as CIO in late 2015, after heading asset management and risk management divisions at Hanwha Securities Co. Ltd. The insurance firm will transfer the alternative investment division to Hanwha Asset Management Co. Ltd., its wholly-owned unit, in the first half of this year.
The insurer’s average investment return last year was between 4.0 and 4.5%, broadly in line with that of local pension and savings funds.
Following are Q&As with Kwon.
Q: On your alternative investment last year
A: Including the reinvestment of matured assets, we executed 3.6 trillion won worth of alternative investments.
We are expecting alternative investments will increase by a net 1.2 trillion won this year.
Q: Your investment criteria and target return?
A: With too much money flooding into alternative investments, competition intensified, pulling returns lower. With a focus on overseas assets, we have invested primarily in senior and mezzanine debts, and invested in renewable energy infrastructure where the (parent) Hanwha Group has strength. We hardly invested in private equity funds.
Our targets are senior debts of commercial real estate in major cities in developed countries, producing returns of 3 to 4% a year. We are set to commit to a global real estate mezzanine fund of Blackstone.
Q: Your investment principles for offshore real estate?
A: We are targeting real estate with the share of secured debt below 60%. We take a close look at the composition of tenants and how stable the lease contracts are.
Q: Are you going to employ more aggressive strategy for asset management?
A: The insurance industry needs to overcome the reverse margin structure caused by the interest rate drops. I think we may need to put 1 to 2 trillion won into assets seeking absolute returns out of 100 trillion won (of Hanwha Life’s total assets).
Q: Do you invest in infrastructure and energy PEs?
A: We have not invested in PEFs so far, putting money into mezzanine and other debt (funds). Depending on the situation, we may commit to a private equity fund with a proven track record, but it is not easy because of high risky penalties (12%).
Q: On your view on European economy
A: The hard Brexit may shake the European Union. In consideration of the possible political fallouts in France, Germany and Italia, we will take a cautious approach.
Instead, the outlook for Japanese markets is not bad, assuming that the dollar will maintain its strong trend.
Q: You have boosted overseas investments substantially since taking on your current job.
A: Overseas investment is inevitable to diversify investments and find new revenue sources. We had raised the proportion of offshore bonds to 18% of total assets by the end of last year, from 11% in my first year in this job.
We will buy an additional 8 trillion won of offshore bonds and expand their portion to 26%. Under the current insurance business law, foreign investment is limited to 30% of total assets. We will push it to the limit.
Q: Would the proportion of domestic bonds be down, when that of offshore bonds is lifted?
A: We will not only reduce the proportion of domestic bonds, but also their absolute size. With the forthcoming adoption of IFRS 9 and IFRS 17, we need to extend asset duration as much as possible. We will sell domestic bonds near maturity, and buy long-term offshore bonds.
Q: What kinds of offshore bonds are you interested in?
A: We are considering investing in municipal bonds, supernational bonds and dollar-denominated bonds issued by oil producing countries to improve investment returns. Among corporate bonds, we need to buy not only AAA-rated, but also AA- and BBB-rated bonds, after screening those companies.
Q: It may be too risky for an insurance company to buy BBB-rated corporate bonds.
A: In the case of BBB-rated bonds, our principle is to buy short-dated ones for a limited amount. We plan to entrust a limited amount of money to global fixed-income managers to invest in BBB plus debts.
Q: On your overseas stock portfolios
A: We have had enough of the US in our portfolio. Now we are looking to emerging markets. Instead of making direct investment in a certain country, we will invest through ETFs which have a higher proportion of emerging markets.
By Daehun Kim and Dongwook Jwa
<Edited by Yeonhee Kim>