Insurance Companies with Falling RBC Ratios Again... Capital Expansion Faces Challenges Amid Market Downturn

A banner related to loans is displayed at a bank in downtown Seoul. [Image source=Yonhap News]

[Asia Economy Reporter Changhwan Lee] As interest rates continue to rise, insurance companies' RBC (Risk-Based Capital) ratios for the third quarter have fallen again. Although additional capital expansion is necessary, the financial market has frozen due to the interest rate hike and the Legoland incident, putting insurance companies' fundraising plans in jeopardy.

According to the insurance industry on the 1st, the RBC ratios of insurance companies that have announced their third-quarter results so far, such as Hanwha Life, NH Nonghyup Life, and DGB Life, have declined.

Hanwha Life's third-quarter RBC ratio was 157%, down 10.6 percentage points (p) from 167.6% recorded in the previous quarter. NH Nonghyup Life's third-quarter RBC ratio also plunged 78 p from 185% in the previous quarter to 107%, and DGB Life's RBC ratio fell 52.7 p from 165.8% in the second quarter to 113.1% in the third quarter.

The RBC ratio, which divides available capital by required capital, is an indicator that measures the financial soundness of an insurance company. If it is below 100%, it means that the insurer cannot pay 100% of the insurance claims if policyholders request insurance payments all at once. Therefore, the Insurance Business Act stipulates that it must be maintained above 100%. Financial authorities usually recommend maintaining it above 150%.

The decline in insurance companies' RBC ratios is due to a significant rise in bond yields in the third quarter, which increased the valuation losses on held bonds. The 10-year government bond yield surged to a recent 10-year high from 2.26% at the end of last year to 4.08% at the end of September. As a result, valuation losses on held bonds increased, reducing capital and lowering the RBC ratio.

Insurance companies need to raise their RBC ratios and are working on capital expansion for the newly introduced accounting standard (IFRS17) next year, but the short-term financial market instability caused by the sharp interest rate hike and the Legoland incident makes it difficult.

In the case of Hanwha Life, it postponed the issuance of $750 million (about 1.06 trillion KRW) in hybrid capital securities decided in September due to the heavy burden from the sharp rise in interest rates. Hanwha Life plans to decide on re-pursuing the issuance based on interest rate trends. A Hanwha Life official said, "The issuance of hybrid capital securities will be decided according to market conditions."

Heungkuk Life also tried to issue 40 billion KRW in subordinated bonds in September, but no institutional investors participated. Institutional investor participation was also low in Hanwha General Insurance's issuance of hybrid capital securities in September. Heungkuk Life and Hanwha General Insurance are insurance companies with relatively low RBC ratios.

Despite the difficulties in the financial market, they are likely to pursue additional capital expansion in the fourth quarter. NH Nonghyup Life is also considering capital expansion. NH Nonghyup Life expanded capital by issuing paid-in capital increases and hybrid capital securities to its parent company, Nonghyup Holdings, in the second and third quarters.

An NH Nonghyup Life official said, "We plan to implement an emergency management plan, including stringent tightening operations, while closely monitoring market conditions," adding, "If necessary, we will consider additional capital expansion in the fourth quarter."

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