Moody’s issues a warning

Moody’s has warned the Bank of Korea’s (BOK) low interest rate could negatively effect the credit rating of Korean life insurance companies.

“When an interest rate is low, the ability of companies to generate investment returns is also lower,” Eric Yau, an analyst at Moody’s, said Tuesday in Seoul. “A low interest rate hinders them from generating high returns from their investments in various sectors, such as government bonds.”

Currently, Moody’s classifies Korea as a country with a “high” risk to profitability, the second highest of five risk levels.

Under the category, the profits of Korea’s many insurers can be expected to deteriorate if interest rates stay low for five years, according to Yau.

“For life insurers that have offered long-term guaranteed rates to policyholders, the low interest rate widens the gap between investment returns and the guaranteed yield,” he said. “If there are no other sources of profits, insurers would report net losses and therefore a decline in capital.”

So far, he said, Korean life insurance companies have been “conservative” in their investments.

Taiwanese companies invest 50 percent of their assets overseas, while 56 percent of the total investment from Korean life insurers is in fixed-income instruments, such as government bonds.

Because of the latest rate cut by the BOK to a record low 1.75 percent, local life insurers have lost money. According to the Financial Supervisory Service, the average guaranteed interest rate by life insurers was 4.9 percent as of June 2014.

Given that the BOK’s base rate is expected to remain low, Yau said Korean insurers could be more aggressive in their investments in the future, like the Taiwanese.

“Sustained low interest rate environments might push companies toward more aggressive strategies,” he said.

BY KIM HEE-JIN [kim.heejin@joongang.co.kr]