Heungkuk Life Call Option, the Second Legoland?..."Excessive Concerns Should Be Avoided"

[Asia Economy Reporter Changhwan Lee] Market concerns have emerged that the refusal by Heungkuk Life Insurance and DB Life Insurance to exercise the call options (early redemption rights) on their foreign currency hybrid capital securities could lead to a decline in the credibility of Korea's capital market. There is a risk that this could escalate into a second LegoLand-type incident.

However, the government views the financial strength of Korean insurers as robust, making the possibility of a chain reaction of insolvencies low. It also pointed out that excessive concerns could instead destabilize the financial market further. To reduce liquidity burdens on insurance companies, financial authorities have decided to temporarily ease liquidity evaluation standards, including raising liquidity evaluation grades by one level.

◆ Hanwha Life and KDB Life "Exercise Early Redemption Rights"

According to NICE Credit Rating on the 4th, domestic insurers issued a total of $2.2 billion worth of foreign currency hybrid capital securities in the overseas bond market during 2017-2018 to manage soundness. Hanwha Life issued the largest amount, $1 billion in foreign currency hybrid capital securities in 2018. KDB Life also issued $200 million in foreign currency hybrid capital securities in 2018.

The $500 million hybrid capital securities issued by Heungkuk Life in 2017, on which the call option was not exercised this time, and Kyobo Life also issued $500 million in foreign currency hybrid capital securities in the same year.

Kyobo Life completed redemption by refinancing $500 million worth of overseas hybrid capital securities in June, one month before the call option matured. Heungkuk Life also attempted to issue new foreign currency hybrid capital securities in September to exercise the call option but withdrew the issuance, unlike Kyobo Life.

Heungkuk Life judged that extending the securities rather than early redemption was more beneficial. Although the penalty would raise the current 4.475% interest rate to the 6% range annually upon extension, recent sharp interest rate hikes mean issuing new hybrid capital securities would require an interest rate around 12% annually. Heungkuk Life chose to avoid the high interest burden even at the cost of market credibility decline.

After Heungkuk Life decided not to exercise the call option, the price of the new capital securities dropped significantly. (Source: Korea Ratings)

Hanwha Life is scheduled to exercise its call option in April next year, and KDB Life's call option expires in May next year. Both companies plan to raise additional funds to exercise the call options. A Hanwha Life official said, "Since there is still time until the call option expiration next year, we will decide the funding method depending on market conditions."

◆ "Should be viewed differently from 13 years ago... Excessive concerns"

This is the first time in 13 years since Woori Bank in 2009 that a domestic financial company has not exercised a call option on hybrid capital securities. The financial authorities say the current situation, with rapidly rising interest rates, should be viewed differently from the interest rate decline period back then.

At that time, Woori Bank did not exercise the call option on $400 million worth of subordinated bonds due to difficult funding conditions when the exercise period arrived. Interest rates were lower than those of existing subordinated bonds, but temporary shocks prevented funding, leading to suspicions that "Korean financial companies might have problems." The credit default swap (CDS) premium on Woori Bank bonds surged, damaging reputation in the capital market and worsening investor sentiment toward Korean bonds.

However, this time, as it is a period of rising interest rates, Heungkuk Life made a favorable choice, and the financial authorities judge that it is unlikely to cause significant ripple effects in the capital market. They emphasize that Heungkuk Life's financial structure is sound, profitability is good, and there are no issues with insurance benefit payments to policyholders, so no chain problems will arise. They also pointed out that excessive concerns could further increase market instability.

A financial authority official said, "Heungkuk Life's management performance is sound, so no problems due to default will occur. We are continuously communicating and monitoring with financial companies, so excessive concerns are unnecessary."

The financial authorities also stated that DB Life's postponement of the call option exercise date for 30 billion KRW worth of hybrid capital securities from the scheduled date on the 13th to May next year "is a domestically issued case unrelated to overseas investors, and since the investors of these hybrid capital securities are few and the securities are not widely traded in the market, there is no impact on the bond secondary market."

◆ Temporary Relaxation of Liquidity Regulations for Insurers

On the 3rd, the Financial Services Commission and the Financial Supervisory Service met with the life insurance industry to discuss the recent bond market instability and the surge in demand for liquid assets due to increased cancellations of savings-type insurance policies amid rising deposit interest rates, deciding to temporarily ease liquidity regulations for insurers.

The financial authorities decided to temporarily relax liquidity evaluation standards until the end of the December evaluation to enable insurance companies to actively respond to capital calls from the Channel Fund. Accordingly, during the Risk Assessment of Insurance Companies (RAAS), the liquidity indicator evaluation grade will be raised by one level.

This follows the liquidity regulation easing measure on the 28th, which expanded the scope of recognized liquid assets. In a meeting with the non-life insurance industry, the financial authorities decided to include immediately cashable assets such as bonds with maturities over three months that can be traded in active markets, instead of only recognizing assets with maturities under three months as liquid assets.

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