A fire sale of life insurance operations in South Korea byAllianz Grouphighlights a gloomy outlook for the industry in the country, which has been hitby a prolonged period of low interest rates to become a burden for Europeaninsurers facing tougher capital requirements in their home region.
After spending more than US$1 billion in Allianz LifeInsurance Co. Ltd. since a 1999 takeover, the Munich-based group April 6 that it agreed tosell the South Korean unit, along with Allianz Global Investors Korea, toChinese company Anbang InsuranceGroup Co. for just about US$3 million.
The insurance business had more than US$14 billion in totalassets as of Dec. 31, 2015, the 11th-largest amount in the local sector, andabout US$865 million in equity. The unit had 206 branches across South Koreaand more than 1,110 full-time staff as of the end of January.
The low price shows how eager Allianz has been to exit SouthKorea. The company said it made the decision after weighing implications ofSolvency II, which came into effect in EU countries Jan. 1, against thedifficulties of doing business in South Korea due to low rates. The new rulesset risk-based capital requirements for European companies to ensure they havebuffers in times of distress.
"Within the new European regulatory framework, Allianzis subject to EU Solvency II requirements, which increases capital requirementsfor life insurers operating in a prolonged low interest-rate environment likeSouth Korea," May Kek, an Allianz spokeswoman for Asia-Pacific, said in anemail in response to queries. The agreement with Anbang "offers to bestsolution for our shareholders, employees and customers."
Among other European insurers with operations in SouthKorea, London-based PrudentialPlc, according to reports, is also looking to sell its way out ofthe country.
Interest rates in South Korea have been declining, withfalls accelerating in the past two years amid intensifying monetary easing. Thecentral bank's policy rate is currently at an all-time low.
For Allianz, South Korea has long been a "bottomlesspit," a former executive was cited as saying in an April 7 Chosun Ilbo report.
Allianz entered South Korea in 1999 by purchasing a locallife insurer and in almost half the following years, the group made losses inthe country. The troubles stem from high fixed-rate products sold before andafter the acquisition, which have created negative margins totaling 150 billionSouth Korean won each year, according to the Chosun Ilbo report.
Allianz Life Insurance, the South Korean business, posted anet loss of 87.4 billion won for 2015, with its risk-based capital ratio downto 183.58% as of Dec. 31, 2015, from 199.49% a year earlier.
"The problem is that the overall situation in theindustry is not that different from the situation at Allianz," YoonTae-ho, a senior analyst covering South Korean insurers at Korea Investment& Securities, said in an interview.
Policies that pay guaranteed rates accounted for 43.3% ofall outstanding life insurance products at 25 South Korean insurers as of June30, 2015, according to the Financial Supervisory Service. At that time, morethan 70% of fixed-rate schemes were paying rates exceeding the 4% range.
Running an insurer in South Korea may become even tougher,with the International Financial Reporting Standard 4, or IFRS 4, Phase II, setfor implementation in 2020.
Under the new accounting rules, insurers will be required to periodicallydiscount reserves for obligations to policyholders based on prevailing interestrates, as opposed to the current practice of using rates fixed at the inceptionof contracts; the lower interest rates are now, the more funds insurers need toset aside to cover liabilities to customers at maturity. When interest ratesare historically low, IFRS 4 Phase II reduces capital insurers hold to meetrequirements.
When the standard is adopted, South Korean life insurerstogether will have about 42 trillion won of new debt on their books, withequity capital shrinking to 17 trillion won from 59 trillion won, based on Dec.31, 2014, data, according to a research report by Jung Do-jin, an accountingprofessor at Chung-ang University in Seoul.
Risk-based capital ratios at South Korean insurers havealready been falling since mid-2014.
As challenges mount for insurers, some analysts say inaddition to Prudential, companies such as Chubb Ltd. and BNP Paribas Cardif could follow in the footsteps ofAllianz.
But selling South Korean businesses may not be so easy forthem, as insurers crowd the deal market while potential buyers dwindle. Apartfrom Prudential's PCA Life Insurance, ING Life Insurance Korea Ltd., owned by a South Koreanprivate equity firm, and KDB LifeInsurance Co. Ltd., a unit of Korea Development Bank, are for .
"Maybe except for the Chinese, who would want to injectlarge amounts of money into an industry that has such a grim outlook?"Yoon said.
As of April 15, US$1was equivalent to 1,146.80 South Korean won.