499 Billion... 379.9 Billion... Insurance Companies' Subordinated Bond Interest Rate Increase is a Burden (Comprehensive)

Low Interest Rates Drive Demand Amid Earnings Improvement
Signs of Rate Hike... "Concerns Over Interest Burden"

DB Insurance

[Asia Economy Reporter Oh Hyung-gil] Insurance companies are continuously increasing the issuance scale of subordinated bonds through successful demand forecasts. This is due to the relatively high interest rates on insurance companies' subordinated bonds in a low-interest-rate environment, coupled with improved performance attracting strong demand.

According to the insurance industry on the 11th, DB Insurance successfully issued subordinated bonds worth 499 billion KRW the day before. Initially planned to issue 300 billion KRW, the issuance scale was increased after demand forecasts attracted 688 billion KRW, more than twice the original amount, drawing attention.

DB Insurance plans to use this to improve financial soundness. The solvency ratio (RBC), which was 195.2% at the end of March, is expected to increase to 209.3%.

Most insurance companies that issued subordinated bonds this year have also succeeded in increasing the issuance scale beyond their targets.

In last month's demand forecast conducted by KB Insurance, purchase orders worth 459 billion KRW were received, increasing the issuance scale from 200 billion KRW to 379 billion KRW. KB Insurance had previously announced plans to issue subordinated bonds worth up to 800 billion KRW divided between the first and second halves of this year.

[Image source=Yonhap News]

Accelerated Steps to Secure Financial Soundness Ahead of IFRS17

Mirae Asset Life also received ESG (Environmental, Social, and Governance) certification and secured orders worth 414 billion KRW, more than twice the planned issuance amount, increasing the issuance scale from 150 billion KRW to 300 billion KRW through demand forecasting.

Hyundai Marine & Fire Insurance conducted demand forecasting for 250 billion KRW but received demand worth 425 billion KRW, leading to the issuance of subordinated bonds worth 350 billion KRW.

Meritz Fire & Marine Insurance, which aimed to raise capital worth 200 billion KRW, succeeded in issuing subordinated bonds worth 210 billion KRW after additional subscriptions increased the amount by 10 billion KRW.

Insurance companies are steadily raising their RBC ratios through subordinated bond issuance ahead of the introduction of the new international accounting standard (IFRS17) in 2023. Under IFRS17, the duration of insurance liabilities will extend from the current 30 years to 50 years, and as liability duration increases, most insurance companies' RBC is expected to decline.

Subordinated bonds are recognized as supplementary capital within 50% of equity capital, and if the remaining maturity is within 5 years, the capital recognition amount is reduced by 20% annually. If issued with a 10-year maturity, the entire amount can be recognized as capital for the next 5 years.

Financial authorities recommend and manage insurance companies to maintain an RBC ratio above 150%, but with the implementation of IFRS17, they will need to secure an RBC ratio of at least 180-190% according to accounting standards.

However, there are concerns that recent signs of rising interest rates may increase interest burdens due to subordinated bonds issued by insurance companies.

Researcher Noh Geon-yeop of the Korea Insurance Research Institute said, "Expanding the issuance of capital securities such as hybrid capital securities and subordinated bonds to defend against a decline in the solvency ratio will lead to higher interest expenses due to rising interest rates, reducing profits," adding, "To mitigate the negative impact of rising interest rates, fundamental capital management through liability restructuring is necessary."

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