Lotte Non-Life Insurance Co. Ltd., a unit of South Korea’s retail giant Lotte Group, is looking to US infrastructure and private debt markets in Europe and the US as alternatives to fixed-income assets, while staying cautious about overseas real estate and private equity investments on fears of a decrease in its risk-based capital ratio, said its Chief Investment Officer Sang-hee Lee.
Of overseas alternative investments, aircraft financing takes the biggest share, worth about 600 billion to 700 billion won ($520 million to $606 million). But most of them are in the form of loans extended to the world’s top 10 airlines, including Singapore Airlines and Etihad Airways, a flag carrier of the United Arab Emirates, indicating Lotte’s high risk aversion.
“With long-term bonds, which are traditional assets of insurance companies, showing little signs of going up, we are looking to SOC investment as an alternative,” Lee told the Korea Economic Daily in a recent interview. “(But) we are doing conservative investments to avoid principal losses.”
Lotte Non-Life had invested $100 million in principal-protected debt issued by Kohlberg Kravis Roberts (KKR) & Co. last year, and the office building in Australia in which it has invested guaranteed a gradual rent increase in line with inflation.
Lee took office in late 2014 as CIO of Lotte Non-Life which manages 10.3 trillion won in assets. Previously, he had led the New York investment office of Samsung Life Insurance Co. Ltd.
Since his installation, the proportion of alternative investments at the insurer has doubled to about 30%, with that of overseas assets quadrupling to around 20%.
Following are Q&As with Lee.
Q: On total assets under management and asset allocation
A: At the end of 2016, general accounts were 5.6 trillion won and retirement pension accounts were 4.7 trillion won. Since we began managing retirement pension accounts of the affiliated companies under the Lotte Group, the pace of asset growth has been accelerating in the retirement pension accounts. General accounts are growing by 650 billion to 700 billion won a year.
Our assets consist of fixed incomes for 25 to 30%, lending for 20% and alternative investments for 30 to 40%.
Q: On asset duration
A: Our risk-based capital ratio now stands at 140 to 150%, after we issued hybrid bonds last year. We need to extend asset durations to prepare for the introduction of a new international insurance accounting rule (IFRS 17), but we are not in such a hurry to do so, when compared with other non-life insurance companies which focus on auto insurance.
Q: On US and offshore infrastructure investments
A: Most of key US infrastructure facilities such as roads, harbors and bridges were built in the 1920s and 1930s. It should have been rebuilt earlier. As US President Donald Trump seems determined to invest as much in infrastructure as possible, even by selling bonds, it is a right time to invest there.
Q: On alternative investments
A: Aircraft funds and senior debts make up the bulk of our alternative investments, worth about 600 billion won to 700 billion won. Regarding aircraft funds, we invested in them via loans to the world’s top 10 airlines. Our principle is to invest in low-risk products.
Q: On other alternative assets
A: Beneficiary certificates, foreign currency-denominated securities and structured notes are also included in our alternative investment portfolios. We apply very conservative valuations on them.
In the case of our investments in Australian real estate, they are leased under a long-term contract to an Australian government institution, or a company which S&P and Moody’s rate as AA or above. They are stable assets because rents will increase 2.5 to 3% a year in line with inflation, according to the contracts.
Q: On the proportion of overseas investments
A: In our guidelines, overseas investments are capped to 30% for general accounts and 20% for retirement pension accounts. Currently, they account for slightly over 20% for general accounts and 17 to 18% for retirement pension accounts.
Q: On real estate investments in the US and Europe
A: We made some real estate investments in continent Europe (last year). Since the Brexit decision, we have refrained from investing in the UK. By and large, we were slow in investing in Europe recently. We also have not deployed money to US (real estate) since the second half of last year.
Equity investment, which applies 12% risk coefficients, will weigh on the risk-based capital ratio.
Q: How about mezzanine investment?
A: Mezzanine debts apply 6% coefficients, compared with 3% for senior debts. We can make a strategic decision, depending on the loan-to-value ratio.
Q: On your investment in debts issued by KKR
A: We put $100 million into them on the belief that it will deliver stable risk-adjusted returns. It was designed to guarantee at least a 3.5% return by reinsurance companies, even if it fails to reach a target return. They are also rated AA, which means low risk coefficiencts. The fact that co-investors are big US insurance companies including MassMutual is another beauty of the investment.
We are now looking at private debt fund markets in Europe and the US.
Q: On private debt markets in Europe
A: It is heating up. The challenge (of investing in European private debt markets) is that it is difficult to treat the European Union as a single market. Taking private debt funds as an example, conditions and legal risks of corporate lending vary by country. We need to entrust money to management firms which have a branch in each country and have high-level understanding of their lending market.
Q: This year’s target return?
A: It is slightly lower than last year’s 4.4%.
By Daehun Kim and Chang Jae Yoo
<Edited by Yeonhee Kim>