New Capital Securities Risk Hits Legoland... Financial Authorities Say "Heungkuk Life Insurance, Rational Choice" (Comprehensive)

Heungkuk Life Insurance Decides Not to Exercise $500 Million New Capital Securities Call Option
First Non-Exercise of New Capital Securities in 13 Years Since 2009 Woori Bank
Financial Authorities Acknowledge Heungkuk Life Insurance Call Option

[Asia Economy Reporter Ji Yeon-jin] Heungkuk Life Insurance has decided not to exercise the call option on the $500 million hybrid capital securities scheduled for the 9th of this month, raising concerns that investment sentiment, already weakened by the Gangwon-do Legoland incident, could deteriorate further.

According to the financial investment industry on the 2nd, Heungkuk Life Insurance decided not to exercise the call option on the $500 million dollar-denominated hybrid capital securities issued in 2017. The call option exercise date is the upcoming 9th.

Hybrid capital securities are perpetual bonds issued by financial companies to meet the Basel III capital adequacy ratio (BIS) regulations. Typically, after about five years, the issuer has the option to repurchase these bonds under a call option condition. This non-exercise of the call option by Heungkuk Life Insurance marks the first failure of early redemption of hybrid capital securities by a domestic financial institution in 13 years since Woori Bank’s subordinated bonds in 2009, reflecting the realization of extension risk, an investment risk associated with hybrid capital securities.

Heungkuk Life Insurance initially planned to raise redemption funds through the issuance of dollar-denominated hybrid capital securities, but due to the rapidly deteriorating funding market environment caused by the Legoland incident, it faced difficulties in raising funds and decided not to repay the existing bonds. Choi Sung-jong, a researcher at NH Investment & Securities, said, "Not exercising early redemption does not mean default, but it increases reputational risk," adding, "Investors who regarded the first call option exercise date as the effective maturity may lose trust." He further noted that since all domestic financial institutions have conducted early redemption at the first call option exercise date since Woori Bank in 2009, bond prices may fall and future investment demand may shrink.

However, financial authorities rebutted that Heungkuk Life Insurance’s decision not to early redeem the hybrid capital securities was a reasonable choice. The Financial Services Commission (FSC) stated in a released document, "The FSC, Ministry of Economy and Finance, and Financial Supervisory Service were already aware of the schedule and plans related to Heungkuk Life Insurance’s early redemption rights and have maintained continuous communication," adding, "Heungkuk Life Insurance needed to comprehensively consider the impact of not exercising the early redemption rights, the funding situation for early redemption, and conditions for refinancing overseas bonds, and judged that negotiating and adjusting conditions according to the agreements made at the time of bond issuance was a reasonable choice."

As of the end of June this year, Heungkuk Life Insurance’s Risk-Based Capital (RBC) ratio stood at 157.8%, which is relatively low among life insurers. The RBC ratio is an indicator of an insurer’s financial soundness, representing the ratio of funds available to pay insurance claims if a large number of claims are made simultaneously. Under the Insurance Business Act, it must exceed 100%, with a recommended level of 150% or higher.

Nonetheless, the industry views the company as holding a favorable position within the insurance sector, and considering gradual profitability improvements, the possibility of a credit crisis is limited. The FSC also stated, "Heungkuk Life Insurance’s profitability and management performance are sound, and there are no issues with paying insurance claims to policyholders," adding, "Therefore, Heungkuk Life Insurance itself is not in default, and continuous communication with institutional investors is ongoing."

However, the securities industry expresses concerns that this could further weaken the foreign currency bonds (KP bonds) issued by domestic companies.

Regarding the KP credit spread, which evaluates the credit risk of foreign currency bonds, investment sentiment has weakened since the declaration of default on asset-backed commercial paper (CP) related to the Gangwon-do Legoland project, and spreads have widened due to concerns over corporate earnings. The KP bond maturities scheduled for next year amount to $25 billion, a 22% increase from this year, indicating heightened refinancing concerns for dollar bonds. Researcher Choi said, "Considering the contraction in KP investment demand from domestic and foreign investors, KP bonds are expected to show a structural weakness for the time being, so a conservative approach is necessary."

Meanwhile, Kim Joo-hyun, chairman of the Financial Services Commission, met with the heads of the five major financial holding companies the day before and requested liquidity supply to stabilize the financial market, with commercial banks agreeing to provide 95 trillion won in funds. On the same day, Lee Bok-hyun, governor of the Financial Supervisory Service, gathered representatives from major banks, securities firms, and capital companies to request cooperation regarding the government’s announced market stabilization measures.

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