Invest1 publisher2 min readPublished
Rising required capital drove nine of the ten points off MG's insurance solvency ratio
The mutual insurance arm of the Korean Federation of Community Credit Cooperatives ended June at 173.96%, just under 24 points above the level regulators recommend. Required capital rose 5.3%, and securities are marked to a 111.1 billion won loss.
The Investor · Invest desk
What happened
- The mutual insurance business run by the Korean Federation of Community Credit Cooperatives ended June with a solvency ratio of 173.96%, down 10.12 percentage points from 184.08% a year earlier.
- Valuation on the book's available-for-sale securities swung to a loss of 111.1 billion won in the first half from a gain of 117.9 billion won in the same period last year.
- Net profit at the mutual insurance business rose 32.3% to 100 billion won in the first half, from 75.6 billion won a year earlier.
Compiled by The InvestorSomething wrong?How this is made
Why it matters
- constraint Additional risk exposure at the mutual insurance book now has to be funded from somewhere, because required capital grew 47.8 billion won in a year that available capital shrank.
- decision The sector's stated policy of spending surplus capital on growth is a narrower choice at the federation, with 23.96 points above the recommendation, than at the credit unions with 167.1.
- contradiction Profit and solvency moved in opposite directions, so the securities book is the variable pressing on this ratio.
Hold available solvency capital at its end-June level of 1.6485 trillion won and give the book the required capital it carried a year earlier, 899.8 billion won. The ratio comes out at 183.2%, less than a point below where it started [2]. The other 9.25 points came from the denominator [2]. Required capital rose 5.3% over the year; available capital slipped 0.5% [1][6].
Required capital of 947.6 billion won puts the 150% recommendation at 1,421.4 billion won of available capital. That leaves the book 227.1 billion won of capital loss, 13.8% of what it holds, to absorb before it touches that line [3]. The year-over-year swing in available-for-sale valuation was 229.0 billion won, from a 117.9 billion won gain to a 111.1 billion won loss [5]. That swing is marginally larger than the headroom. Only part of it reached available capital, which fell 8 billion won over the year, while half-year net profit added 100 billion won [3][7]. en.sedaily reported the figures on the 20th, citing financial industry sources, and did not break out the available capital line [1].
Steeper declines showed up elsewhere in mutual finance. Credit unions gave up 25.0 points, to 317.1% from 342.1%, and fisheries cooperatives 5.0 points, to 226.9% [8][9]. Relative to where each started, that is a 7.3% fall at the credit unions against 5.5% at MG [8]. The cushion above 150% is 167.1 points at the credit unions, 76.9 at fisheries and 23.96 at MG [7].
"An excessively high ratio can undermine asset efficiency, so we are using surplus capital to grow the mutual insurance business and improve profitability, within a range that secures financial soundness," an official in the mutual finance sector said [10]. At the federation, "Valuation losses on securities driven by market swings and an increase in risk exposure weighed on the solvency ratio," an official said [5].
Required capital growing at 47.8 billion won a year reaches 1,099.0 billion won, the level that puts the ratio at 150% with available capital unchanged, in a little over three years [4]. Set against that, holding 173.96% while required capital grows 47.8 billion won costs 83.2 billion won of available capital, and the book earned 100 billion won in six months [9]. In my view earnings cover the growth in required capital, and the securities marks decide the ratio from here. Available capital is the line that would settle it. If it rises at the December half while required capital keeps growing 5% a year, the valuation loss was a rate cycle.
What to watch
- An available solvency capital figure above 1.6485 trillion won at the December half, showing the valuation loss reversing.
- Any regulator statement on the 150% recommendation as it applies to mutual finance insurers.
- Whether the federation discloses the composition of its available-for-sale securities book.