Overview of Business Environment

In 2022, insurance market growth in Korea was stronger than anticipated primarily thanks to a steep increase in premiums for retirement annuities. The latest market data showed that the life insurance market gained growth momentum on the back of savings insurance as well as retirement annuities. The non-life market also grew robustly, with solid growth seen across all lines of business, particularly in retirement annuities and general P&C insurance.

Insurance companies in Korea also reported excellent bottom-line results for the year, driven mainly by the non-life sector. Backed by improvements in both underwriting and investment results, non-life insurers performed strongly, and their underwriting losses narrowed thanks to a drop in loss ratios of long-term insurance, including medical expense insurance losses, amid a relatively benign claim environment and an increase in new long-term business. Life insurers also reported an improvement in underwriting performance amid a decline in guaranteed reserves following interest rate rises, but their net income diminished as their investment income shrank due to a reduction in both gains on disposition of financial assets and mark-to-market gains.

Meanwhile, insurers in Korea have been going all out to successfully embrace new accounting and solvency regimes. Over the last few years, solvency capital management has remained one of the biggest challenges for the insurance industry in Korea, due in no small part to the implementation of IFRS 17 in 2023 along with a new risk-based capital (RBC) regime called the Korean Insurance Capital Standards (K-ICS). Insurers have been exploring various options to boost their RBC ratios, such as issuing subordinated bonds and hybrid capital securities and making use of reinsurance and coinsurance.

Highlights of Business Results

In 2022, Korean Re reported strong business results in terms of both top-line and bottom-line growth. Our gross written premiums soared by 16.4% to KRW 9,878.6 billion, and net written premiums jumped by 21.1% to KRW 7,337.6 billion. We also achieved KRW 157.9 billion in after-tax net income, up KRW 4.6 billion from the previous year.

Our underwriting profitability slightly improved in 2022, generating a combined ratio of 100.7%, down 0.2%p from a year earlier. We saw our underwriting losses narrow to KRW 50.2 billion as we continued to readjust our business portfolio and maintain underwriting discipline. When COVID-19 losses are excluded, our underwriting performance improved to a profit of KRW 10.5 billion, while our net income rose to KRW 203.9 billion.

Domestically, our technical results improved in spite of the increased frequency and severity of large commercial losses and higher natural disaster losses, including heavy rain in August and Typhoon Hinnamnor. There was also an improvement in underwriting results for domestic personal lines of business, mostly driven by medical expense insurance. However, we continued to experience a setback in our overseas business amid the ongoing impact from COVID-19 and natural catastrophe losses. We are proud to deliver a strong investment performance in the face of a volatile investment environment. Indeed, we achieved solid investment results on the back of a significant growth in invested assets following coinsurance transactions and fixed-income gains in the wake of interest rate hikes. The total value of our assets continued to grow in step with our business growth. We reported KRW 14,978.1 billion in total assets as of the end of 2022, up KRW 1,862.4 billion. There was a substantial rise of KRW 1,348.7 billion in invested assets, which totaled KRW 8,534.7 billion. Moreover, we maintained our capital position at a stable level, with total shareholders’ equity increasing to KRW 2,819.5 billion as of late December 2022.

Analysis of Business Results

Premium Growth

In 2022, Korean Re achieved double-digit growth in gross written premiums on the back of new coinsurance transactions. We wrote gross premiums of KRW 9,878.6 billion in 2022, up 16.4% from the previous year. It was encouraging to see our book of business grow strongly both at home and abroad. Our domestic business generated KRW 7,257.1 billion in gross written premiums, up 16.1% from the prior year. Excluding coinsurance business, the growth rate would slow to 3.2%, with long-term and property lines of business boosting our domestic business growth. There was a sharp recovery in overseas business, with premiums surging by 17.2% to KRW 2,621.5 billion. This notable turnaround was backed by global market hardening, which is likely to continue for the time being in conjunction with a shortage of reinsurance capacity. Alongside gross premium growth, our net written premiums rose by 21.1% to KRW 7,337.6 billion in 2022. As we held on to our selective retention of profitable business, the overall retention rate went up to 74.3% from 71.4%.

Throughout the year, we placed a strategic focus on strengthening our business portfolios and improving our long-term profitability. In this regard, we restricted the growth of loss-making domestic personal lines of business, including the life and health business. We also reduced our participation in poorly performing accounts in commercial lines of business, such as mobile phones and personal accidents.

Amid these moves to improve the strength of our portfolios, we were able to grow our domestic premium volume in many lines of business. In particular, we achieved strong double-digit growth in engineering and marine. Hull premiums grew by 16.3% year on year to KRW 205.2 billion. This growth was in part driven by the introduction of several LNG-fueled vessels and container vessels to large fleets. The volume of cargo premiums soared by 29.2% to KRW 92.6 billion due to an increase in the prices of raw materials and the recovery from the economic downturn caused by COVID 19. We also sustained a favorable growth trend in most lines of domestic property insurance in 2022 thanks to the current upward pricing cycle and increasing dependency of primary insurers on reinsurance.

Korean Re made great headway in overseas business growth, propelled by an uptick in premium rates. Price increases gained momentum through the various renewal seasons due to high natural catastrophe claims. In 2022, our international treaty business written by the head office recorded a 16.8% increase in gross written premiums, totaling KRW 1,078.1 billion. We achieved our target premium volume by securing solid market growth in various regions, including the Middle East, the Americas, and East Asia, demonstrating a well-balanced and steady expansion.

Our international facultative business continued to deliver robust premium growth, driven by a continuously favorable rating environment. In particular, we saw our international property facultative business grow robustly for several years in a row. Our international marine and energy business also achieved strong growth in 2022, with gross written premiums increasing by 11.7% to KRW 53.3 billion. As part of an initiative to embrace the carbon-neutral movement in our business, we expanded our portfolio to include risks related to wind turbine installation vessels and offshore windfarms.

Korean Re’s global business expansion was also supported by remarkable business growth at our overseas offices, including Korean Reinsurance Switzerland AG (KRSA) as well as branches in Shanghai, Dubai, and Singapore.

Through active portfolio management, we continued to diversify our global business portfolio, with Europe and the Americas taking up a greater share of the total business. A geographical breakdown of our gross written premiums shows that the American and European markets accounted for 26.5% and 28.4%, respectively, of the entire overseas business portfolio in 2022. Their combined share reached 54.9% in 2022 compared to 42.2% in 2019. It is also noteworthy that the share of Asia declined by 1.6%p to 42.1% in 2022 compared to the previous year as a result of our portfolio adjustment, which was intended to improve overall business results.

Volume of Premiums

(Units: KRW billion, USD million)

* YoY change is based on the value in KRW.

Breakdown of Gross Written Premiums

(Units: KRW billion, USD million)

* YoY change is based on the value in KRW.
1 Domestic property includes nuclear insurance.
2 Overseas operations include KRUL, KRSA, and branches in Singapore, Labuan, Dubai, and Shanghai.
3 Individual figures may not add up to the total shown due to rounding.

Gross Written Premiums: Domestic vs. Overseas

(Units: KRW billion, USD million)

* YoY change is based on the value in KRW.

 Overseas Business Portfolio by Region in 2022

(Units: %)

* Others include retrocession and multi-territory accounts.

Domestic Premium Income Portfolio by Line of Business

(Units: %)

Overseas Premium Income Portfolio by Line of Business

(Units: %)

* Property includes engineering, nuclear, and agriculture.

Underwriting Performance

Our underwriting profitability modestly improved in 2022, with the combined ratio decreasing by 0.2%p to 100.7%. We saw our underwriting losses narrow to KRW 50.2 billion as we continued to readjust our business portfolio and maintain underwriting discipline. Our underwriting performance, excluding COVID-19 losses, actually improved with a profit of KRW 10.5 billion.

Despite our best efforts to tighten underwriting guidelines and improve the business portfolio, we reported weaker underwriting results for our overseas business due to COVID-19 losses and elevated natural catastrophe claims, pushing the combined ratio up by 3.0%p to 106.6%. When the losses from COVID-19 were excluded, the combined ratio for our overseas business would have fallen to 103.6%, up 3.0%p from the previous year.

Domestically, we made progress in underwriting profitability. For domestic commercial lines of business, we delivered a combined ratio of 90.2%, down 1.7%p from the previous year, in spite of the impact from natural disasters, including heavy rain in August and Typhoon Hinnamnor. This higher underwriting profitability was driven by favorable pricing trends in most commercial lines of business.

There was also an improvement in underwriting results for our domestic personal lines of business, with the combined ratio dropping by 1.6%p to 100.3%, thanks to our withdrawal from poorly performing accounts and declining loss ratios of medical expense insurance.

Building on the progress we made in 2022, we look forward to further strengthening our underwriting performance in the years to come. The market has been responding to increasing claims costs by correcting prices and restricting terms and conditions. In step with these market movements, we will continue to exercise strong underwriting discipline to improve our technical profitability. Favorable pricing movements, coupled with our strictly disciplined approach to underwriting, will position our business to generate solid results going forward.

Combined Ratio

✽ Excluding foreign currency evaluation effects

Underwriting Results¹

(Units: KRW billion, USD million)

*YoY change is based on the value in KRW.
1 Underwriting results exclude foreign exchange effects.
2 The combined ratio is calculated as follows: Combined ratio = (incurred losses + net operating expenses)/earned premiums

Investment Performance

Our underwriting deficit was softened by gains on the investment portfolio in 2022. Backed by a significant increase in our invested assets and portfolio diversification, we delivered robust investment results, with an investment yield of 3.5%. Our investment profit improved to KRW 263.6 billion, excluding gains and/or losses from foreign exchange hedging for insurance liabilities, compared to KRW 244.9 billion in the prior year.

The current rising interest rate environment has altered the investment landscape, boosting returns on our new investments, especially in fixed-income assets. We are seeking various methods to capitalize on this high interest rates period, such as contracting bond forward derivatives to maintain a high level of profit and pursue an asset liability management simultaneously.

Moving into 2023, we will strive to build portfolios that are fundamentally sound and resilient against a potential increase in market uncertainties. Our asset management strategy will be focused on mitigating potential market uncertainties while maintaining our investment income. We will achieve this goal by making a meaningful reduction in the risks associated with our investment portfolio. More specifically, we intend to increase the weight of Treasury bonds in our portfolio while decreasing the relative importance of corporate bonds and alternative investments.

We will also respond proactively to major regulatory changes to ensure stable investment results, building on the strength of our investment assets. We will also continue to seek out new investment opportunities and strategies to maximize overall profitability throughout the year.

Investment Income

(Unit: KRW billion)

Investment Yield

(Units: %)

✽ Gains and/or losses from foreign exchange hedging for insurance liabilities have been excluded.

Dividend and Stock Price Performance

Distributions to Shareholders

Korean Re has a long history of returning value to shareholders based on its consistent dividend policy to offer attractive and sustainable returns to shareholders. Its total dividend payout amounted to KRW 52.8 billion in 2022. The payout ratio slightly decreased to 33.4% in 2022, with a dividend yield of 5.9% and a dividend per share of KRW 430, one of its highest levels in history. This dividend performance came after the bonus issue announced in November 2022. The dividend payout ratio and bonus issue will continue to remain at a similar level under the new financial reporting regime.

Dividend Performance

Stock Price Performance

The Korean stock market got off to a strong start on January 3, 2022, with Korea Composite Stock Price Index (KOSPI) hitting a yearly-high of 3,010.77 on the very first trading day for the year. Afterward, KOSPI continued its bearish run throughout the year as the stock market struggled against a combination of negative factors, such as China’s zero COVID policy, the Russia-Ukraine war, the risk of stagflation, and the acceleration of monetary tightening following interest rate hikes by the U.S. Fed. KOSPI closed the year at 2,236.40 on December 29.

Despite KOSPI’s downward trend, KOSPI Insurance remained resilient and saw its market capitalization increase, demonstrating that insurance stocks are defensive stocks that show stable performances regardless of the state of the overall stock market. At the end of 2022, KOSPI Insurance closed 8.8% higher than a year earlier, while KOSPI was down 25.2%. The market capitalization of life and non-life insurers rose by 4% and 12%, respectively.

In line with KOSPI Insurance, Korean Re stocks also performed relatively stronger toward the end of 2022, with the year-end closing price increasing by 3.4% to KRW 6,810 per share (KRW 8,172 per share if it were not for a bonus issue). After remaining mostly lackluster until October, they started to rebound in the third quarter of the year and gained further momentum on the news of the bonus issue.

Market analysts remain highly positive about Korean Re’s stock performance for 2023, supporting the view that Korean Re stocks are undervalued with a price-to-book ratio of 0.4 at the end of 2022. They are optimistic that our stocks will deliver a robust performance on the back of reinsurance market hardening, which will help improve the underwriting profitability of our overseas business. Stable investment income generation based on invested asset growth and rising rates on bonds also gives investors and analysts reasons to stay optimistic about Korean Re. This positive prospect was further bolstered when Korean Re secured two coinsurance deals in January and November 2022, indicating that coinsurance is fueling new business growth for Korean Re.

Risk Management Report

Risk Management Framework

Our risk management framework upholds an efficient and effective risk management environment to support the achievement of the company’s business goals and strategies. The framework sets out how Korean Re defines, manages, monitors, and reports risks based on risk governance.

Objectives

Korean Re implements enterprise risk management initiatives to achieve a stable set of risk management objectives. The objectives are as follows:
• Establishing risk management infrastructure to achieve “Vision 2050”
• Continuously enhancing shareholder value
• Maintaining a high level of credibility with stakeholders, credit rating agencies, and supervisory agencies; and
• Diversifying insurance and investment portfolios, while also enhancing risk management with regard to overseas business growth

Strategic Risk Management

Korean Re’s business strategy is aligned with its risk management strategy and risk appetite. The Risk Appetite Framework provides the main direction to steer the company as it moves forward, and all risks are managed under this framework. Based on the capital plan and financial targets linked to our risk appetite, we establish business plans and operate the business in a stable manner by monitoring and evaluating business performance according to risk indicators.

Risk Appetite Framework

Korean Re’s risk appetite framework is an enterprise-wide risk management guideline made up of three important components: risk appetite, risk tolerance, and risk limit. Risk appetite defines the amount of risk we should accept in consideration of the company’s vision and business objectives. The risk appetite statement is as follows:

• Maintain the solvency ratio within an optimal rage (150%-200%)
• Focus on our comparable advantage businesses and achieve a target ROE
• Maintain a conservative risk management policy with risks being retained at a medium-low level considering our capital
• Improve capital efficiency by optimizing our insurance and investment portfolios
• Continue to improve our Risk Adjusted Return on Capital (RAROC)

Risk appetite plays a significant role in maintaining our risk profile within the boundaries defined by different objectives, such as profitability, solvency, growth, and liquidity. Risk appetite also provides a solid foundation for decision-making: strategic asset allocation, capital planning, portfolio management, and more. Risk tolerance represents a quantitative level of risk acceptance within the risk appetite and helps create macro guidelines for capital adequacy, liquidity, and concentration. The risk tolerance statement is as follows:

• Maintain the solvency ratio within a stable range (above 140%)
• Maintain a credit rating of “A” or above
• Annual natural catastrophe loss ≤ 10% of available capital
• Ability to meet day-to-day financial obligations (liquidity)

Risk limit describes the risk capacity constraints determined by capital and liquidity resources to ensure compliance with our risk appetite and risk tolerance.

Risk Appetite Framework

Capital Management

Korean Re’s capital is managed through a framework which provides a robust foundation for capital management. To ensure Korean Re’s sound capital management, we align our risk management strategy with our long-term business strategy. Strategic objectives are examined from the perspective of our risk management strategy to be certain if they are in accordance with our risk appetite, and the results are then reflected in our business plans. We also have a detailed capital management plan in place based on the levels of solvency ratio in order to maintain the optimal range of solvency. Korean Re’s capital management framework is comprised of three main modules: capital planning, business planning, and risk planning. Each module is structured to ensure full compliance with Korean Re’s risk appetite and tolerance.

Portfolio Optimization

Korean Re performs business planning by analyzing the risks and profitability of its businesses. We measure return on risk-adjusted capital (RORAC) for each line of our insurance business and investment asset portfolio through our own internal model. Based on this, the Strategic Planning office draws up plans for optimal portfolios and then finalizes annual plans that can achieve capital efficiency with respect to risk appetite and improve our RORAC.

Risk Governance

Korean Re has built a comprehensive framework for risk governance based on central oversight and controls of risks with clear accountability. This structure supports risk-based decision-making and oversight across all operations of our businesses. Risk governance defines the roles and responsibilities of the board of directors, committees, management structures, and related teams. It also involves the implementation of three lines of defense as part of the structure.

The Three Lines of Defense model that we implement demonstrates our risk governance, laying out the roles of business and oversight organizations in managing our risk profile. The first line of defense includes front-line managers and staff who are responsible for day-to-day risk management and decision-making (Overseas office staff are also a first line of defense). Their primary responsibility is to maintain an effective control environment and ensure that all activities are within our risk appetite. The second line of defense deals with setting risk policies and overseeing our risk management status. This involves the Risk Management Team, the Chief Risk Officer (CRO), the Risk Management Committee (RMC), the Risk Management Special Committee (RMSC), the Investment Deliberation Committee, and compliance functions, that is, the Compliance Team, the Compliance Officer, and the Internal Control Committee. The third line of defense provides independent assurance through an internal audit and validates the effectiveness of the first and second lines of defense in fulfilling their responsibilities and managing our risk profile.

Three Lines of Defense

Key Risks

We manage five key risks— insurance risk, financial risk (credit & market), liquidity risk, emerging risk, and operational risk (which includes strategy, reputation, regulation, and legal risks)—all of which are likely to have a significant impact on our financial results and/or operational viability. In doing so, we implement a series of procedures that include risk identification, measurement, control, analysis, and reporting.

With regard to insurance, market, and credit risks, we measure them on a regular basis using our internal model, which takes a value-at-risk approach through a stochastic simulation.

Insurance Risk

Korean Re defines insurance risk as the risk of unexpected financial losses arising from the inadequacy of premiums or reserves for natural catastrophe or non-catastrophe events, or from the unpredictability of biometric risks, such as the mortality rate.

We manage insurance risks in a consistent manner across the company by assessing and monitoring them in accordance with clearly defined underwriting guidelines. Furthermore, we utilize a natural catastrophe modeling program and an accumulation management system to effectively control catastrophe risk at the corporate level.

Market Risk

Korean Re defines market risk as the risk of losses arising from fluctuations of the value of assets and liabilities due to changes in relevant factors, such as interest rates, stock prices, and foreign exchange rates. We manage this risk in our day-to-day operations and, more specifically, hedge against foreign exchange risk using derivatives in order to keep our exposure at a safe level.

At the same time, we closely monitor global economic and financial market conditions and outlooks that can affect our investment performance in order to analyze their potential impact and come up with effective countermeasures.

Credit Risk

Our credit risk system focuses on any losses arising from the failure of the counterparty to a reinsurance contract to meet its contractual obligations or from deterioration in the credit quality of invested assets.

We conduct an analysis of potential losses before making any high-risk business decisions, including whether to write new business contracts or invest in derivatives. When necessary, these decisions are made through the review process of the Risk Management Special Committee and the Investment Deliberation Committee. Identifying any abnormal signs related to retained risks is also an essential element of our preemptive risk management system.

Liquidity Risk

We plan and manage our liquidity positions in order to deal with future claims payments and expenses as they arise. To this end, we set liquidity limits based on our future cash flow, and then monitor them regularly.

Operational Risk

Korean Re defines operational risk as the risk of potential losses arising from inadequate or failed internal processes or systems or human errors, and/or from external events. We have identified a set of operational risks that cover various business units and activities, including strategy, reputation, new product development, and claims management.

We manage these risks through effective policies and procedures that have a clear separation of duties, timely internal control, and reporting systems. Through the internal control system, operational risks are managed systemically based on our Code of Conduct and other internal regulations.

Emerging Risk

Emerging risk involves new threats, key risks, and/or evolving risks that may adversely affect our business. We select emerging risk candidates for every year, gather opinions from each team, and then consult with the Korean Re Research Institute of Insurance and Finance to determine the management targets for the emerging risks selected. A detailed analysis report is scheduled to be prepared and distributed by the institute in the first half of 2023. Based on the detailed analysis report, each team will establish management strategies for their respective risks.

The top emerging risks that we have selected for 2023 were as follows:

• Inflation Risk
• New Pandemic Risk
• Cyber Risk