"Protect Financial Soundness"... Insurers Rush to Issue Subordinated Bonds Again This Year (Comprehensive)

Mirae Asset Life Issues 300 Billion Subordinated Bonds
Hyundai Marine & Fire Confirms 350 Billion Increase Next Month

[Asia Economy Reporter Oh Hyung-gil] The scale of capital increases by insurance companies has already exceeded 2 trillion won this year. With many companies recently experiencing a decline in financial soundness, the number of insurers undertaking capital increases is expected to rise significantly in the second half of the year.

In the market, it is interpreted that the implementation of the new International Financial Reporting Standards (IFRS17) and the new solvency regime (K-ICS) in 2023 has made proactive financial soundness management more important, while systems introduced by financial authorities, such as co-reinsurance, have not functioned effectively. There is also speculation that insurers intend to raise funds at a low cost before interest rates rise again.

According to the insurance industry on the 29th, Mirae Asset Life Insurance will issue 300 billion won worth of subordinated bonds today, with Samsung Securities and Hana Financial Investment as lead underwriters. The initial plan was for 150 billion won, but the amount was doubled.

A representative from Mirae Asset Life Insurance explained, "Being the first in the industry to receive ESG (Environmental, Social, and Governance) certification was a key factor," adding, "Investment institutions such as pension funds have increased demand for ESG investments, and investors showed great interest in ESG bonds, leading to the decision to increase the issuance."

The funds will be used entirely for operating capital and to raise the Risk-Based Capital (RBC) ratio. Mirae Asset Life Insurance's RBC ratio stood at 224.7% at the end of last year, down 17.6 percentage points from the previous year. The company expects this capital increase to improve the ratio to 252.7%.

[Image source=Yonhap News]

Why the rush for subordinated bonds... Lack of suitable financial soundness management measures

Hyundai Marine & Fire Insurance is also issuing subordinated bonds for the first time in four years.

On the previous day, Hyundai Marine & Fire Insurance announced that it finalized the issuance size at 350 billion won, increasing it by 100 billion won from the initially planned 250 billion won. Hyundai Marine & Fire Insurance is also aiming to raise its RBC ratio, which is expected to increase from 190.1% at the end of last year to 201.7%, up 11.6 percentage points, once the bond issuance is completed as planned.

Meritz Fire & Marine Insurance successfully issued 210 billion won worth of subordinated bonds on the 12th. KB Insurance, which is considering issuing 200 billion won worth of subordinated bonds within the first half of the year, plans to raise a total of 800 billion won in capital by the second half. KB Insurance's RBC ratio deteriorated by 12.7 percentage points from 188.5% in 2019 to 175.8% last year.

Fubon Hyundai Life Insurance also plans to complete a capital increase of 600 billion won as early as the first half of the year.

The main reason insurers are rushing to increase capital is the impact of IFRS17. With the implementation of IFRS17, all interest payable to policyholders is calculated as liabilities, making a decline in the RBC ratio inevitable. Under the Insurance Business Act, insurers must maintain an RBC ratio of at least 100%, and financial authorities recommend maintaining it above 150%.

In the recent low-interest-rate environment, bond issuance has become more attractive. When interest rates rise, the yield on invested assets increases, boosting investment income, but the value of bonds falls, reducing bond valuation gains and thus available capital. Issuing bonds at higher interest rates also increases funding costs.

There are also limited alternatives to capital increases for managing financial soundness. In June last year, financial authorities revised and implemented insurance supervision regulations to allow ceding of risk premiums and savings premiums to reinsurers. This enables sharing of interest rate risk with reinsurers, reducing liability burdens, but so far, only ABL Life and RGA Reinsurance have utilized this.

An industry insider explained, "Co-reinsurance is burdensome not only because of cost but also because insurers must disclose all their risks," adding, "Subordinated bond issuance is preferred as it can be completed relatively quickly."

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