Korean Re’s Business Results for the First Quarter of 2023
Korean Re has released its business results for the first quarter of 2023 based on the new accounting standards, IFRS 17 and IFRS 9, for the first time. Comparative figures from the previous year may not be fully comparable with the Q1 2023 figures disclosed in accordance with both IFRS 17 and IFRS 9 because the Q1 2022 figures for the insurance business are presented on the basis of IFRS 17 while the corresponding figures for the investment business are still based on IAS 39.
There are three options that a company can take regarding how it would transition to IFRS 17, which are the full retrospective approach, modified retrospective approach and fair value approach. We adopted the modified retrospective approach for general insurance and the fair value approach for life and long-term insurance. We also used the Premium Allocation Approach (PAA) for general insurance and the Building Block Approach (BBA) for life and long-term insurance.
For the first three months of 2023, Korean Re reported KRW 126.3 billion in net income, with a technical result of KRW 98.2 billion. Although we were hit by fire losses at Hankook Tire and the Turkish earthquake, there was a significant improvement in the business performance of life and long-term insurance as well as some commercial lines of business.
We generated an investment income of KRW 64.4 billion. There was an increase of KRW 22.9 billion in evaluation gains due to a new approach to the classification of financial assets under IFRS 9. It is also worth noting that under IFRS 17, foreign currency exchange gains and losses on insurance contract liabilities are reclassified from the insurance profit and loss (P&L) to insurance finance income & expenses, which is a sub-item of the investment P&L.
Insurance revenue amounted to KRW 1,486.6 billion in the first quarter of 2023 compared to KRW 1,460.2 billion from a year earlier. One of the major changes in the income statement based on IFRS 17 is the recognition of revenue on an accrual basis not on a cash basis, which allows revenue to reflect the services provided and exclude deposits. Non-distinct investment components are excluded from the insurance P&L.
There are also changes in accounting for reinsurance commissions. Fixed reinsurance commission whose amount is determined regardless of whether or not an insured event occurs is deducted from insurance revenue, resulting in a reduced appearance of the revenue volume. Previously it was treated as a business expense for the current period under IFRS 4. Variable reinsurance commission was also treated in the same way under IFRS 4, but it is now recognized as part of claims under IFRS 17. Both business expenses and claims are recognized in profit or loss, so there is only a classification impact with no effect on net income.
The Contractual Service Margin (CSM) is a new liability that reflects future profits. As it is released into earnings as insurance contracts are fulfilled as expected, the CSM is an important indicator of insurance business results. CSM movement analysis will be one of the key aspects of understanding how well a (re)insurance company is and will be performing. CSM balance is positive by its nature and is expected to amortize into profit over time.
Our CSM slightly increased to KRW 1.04 trillion as of the end of 2022 from KRW 1.02 trillion at the transition date. The release of the CSM amounted to about KRW 195.7 billion, and the CSM for new business was KRW 279 billion. The CSM amount is estimated to stay around KRW 1 trillion and show a slightly increasing trend in the medium to long term. The amount of CSM amortization for the first quarter of 2023 was KRW 39 billion, with a new business CSM of KRW 106 billion.