Insurance Companies' Capital Expansion Quiet During COVID-19... The Wave Continues in the Second Half

[Asia Economy Reporter Oh Hyung-gil] Domestic insurance companies are undertaking capital expansion efforts through the issuance of subordinated bonds. This is interpreted as a result of a significant contraction in the funding market due to negative credit rating assessments from credit rating agencies, citing the impact of the novel coronavirus disease (COVID-19) and worsening business conditions.

There is also a forecast that insurance companies will continue to pursue capital expansion in the second half of the year in line with the introduction of the new international accounting standard (IFRS17), which evaluates insurance liabilities at market value.

According to the insurance industry on the 29th, Heungkuk Fire & Marine Insurance held a board meeting on the 25th and decided to issue subordinated bonds worth 40 billion KRW. The scheduled date is July 30. Heungkuk Fire & Marine Insurance plans to determine the final issuance interest rate based on the results of demand forecasting.

Subordinated bonds refer to bonds that can be repaid only after all debts to other creditors have been settled in the event of the issuing institution's bankruptcy. Typically, insurance companies use subordinated bonds along with hybrid capital securities as a means of capital expansion.

Earlier, Lotte Insurance and Fubon Hyundai Life Insurance also succeeded in issuing subordinated bonds. Fubon Hyundai Life Insurance issued subordinated bonds worth 15 billion KRW in a private placement format on the 24th. The bonds have a 10-year maturity with an annual interest rate of 4.3%.

This is interpreted as a proactive move to strengthen capital soundness in response to the increasing reflection ratio of retirement pension risk. Since 2018, financial authorities have been gradually reflecting the retirement pension market and credit risk amounts in the solvency (RBC) ratio to mitigate the impact of IFRS17 and the new solvency regime (K-ICS).

At the end of this month, the ratio reflecting the risk of principal-guaranteed retirement pensions in required capital will be raised from the existing 70% to 100%. As required capital increases, the RBC ratio, which is calculated by dividing available capital by required capital, will decrease. Fubon Hyundai Life Insurance also issued subordinated bonds worth 150 billion KRW twice between September and October last year.

Lotte Insurance, which has a large retirement pension scale, issued subordinated bonds worth 80 billion KRW and 90 billion KRW in December last year and April this year, respectively. As of the end of March, the retirement pension assets of Fubon Hyundai Life Insurance and Lotte Insurance stood at 7.8844 trillion KRW and 7.6263 trillion KRW, ranking high in the life insurance industry.

There is also interest in whether the capital expansion of the insurance industry, which slowed down in the first half due to COVID-19, will pick up in the second half. Earlier this year, Tongyang Life Insurance planned to issue overseas hybrid capital securities worth 300 million USD (approximately 360 billion KRW).

Shinhan Life Insurance also decided to issue hybrid capital securities worth 300 billion KRW in March, but both companies have postponed the issuance to the second half due to the aftereffects of COVID-19.

With the IFRS17 implementation date postponed to 2023, insurance companies have gained more time for capital expansion. However, the total amount of subordinated bonds maturing by 2022 is estimated at 857 billion KRW, indicating a long way to go.

A life insurance industry official said, "Although insurance companies issue subordinated bonds or hybrid capital securities, the key to success ultimately lies in whether the market can absorb the volume," adding, "We plan to decide the timing while monitoring market stability in the second half."

This content was produced with the assistance of AI translation services.