Insurance Companies Busily Expanding Capital... Subordinated Bond Issuance 'Rally'

Subordinated Bond Issuance Reaches 500 Billion Won Last Month
Hanwha Life's Demand Forecast Successful the Day Before
Both Insurers and Investors Prefer Subordinated Bonds
Ongoing Efforts to Ensure Soundness Under New Accounting Standards Expected

Insurance companies are bolstering their capital by consecutively issuing subordinated bonds. This is interpreted as a decision to strengthen soundness under the new accounting standards, as the cold spell in the bond market begins to ease. As the market perceives the interest rates as attractive, it is expected that subordinated bond issuance will continue for the time being.

According to the industry on the 26th, Lotte Insurance plans to issue subordinated bonds worth 60 billion KRW on the same day. After 60 billion KRW worth of purchase orders flooded in during the demand forecast for 40 billion KRW on the 21st, the issuance was increased by 50%. Hanwha Life also conducted a demand forecast for subordinated bonds worth 300 billion KRW the day before, receiving purchase orders of about 330 billion KRW. Hanwha Life plans to recruit additional investors and increase the issuance size up to 500 billion KRW.

Earlier last month, a rally in subordinated bond issuance continued. Shinhan Life (300 billion KRW), Fubon Hyundai Life (98 billion KRW), and KDB Life (90 billion KRW) issued subordinated bonds in the public market, and Lotte Insurance also succeeded in issuing 10 billion KRW worth of subordinated bonds in the private market. Thirty percent of this year’s issuance amount was concentrated last month. Assuming Hanwha Life issues the maximum amount, the issuance scale of subordinated bonds from the beginning of this year to July is expected to exceed 80% of last year’s total issuance.

The popularity of subordinated bonds is primarily attributed to the interest rates. Compared to hybrid capital securities, the funding cost is lower, reducing expenses for insurance companies, while investors find insurance company subordinated bonds more attractive because they offer higher interest rates than government bonds or corporate bonds of the same maturity. Early redemption is also carried out stably. Considering that insurance companies prioritize reputational risk and that the limit for recognition as capital decreases after five years, insurance companies have strong incentives for early redemption of subordinated bonds. Last month, Lotte Insurance also made an early redemption of 60 billion KRW worth of its ‘6th Private Placement Subordinated Bonds’ issued in June 2018.

The need to secure soundness in preparation for the newly introduced accounting standard IFRS17 this year is also cited as a factor favoring subordinated bonds. Since 19 insurance companies have applied for a grace period to defer the application of the new solvency indicator, the new Solvency Capital Requirement Ratio (K-ICS), efforts to expand capital are expected to continue for the time being. An insurance company official explained, "There is a mood among insurance companies to secure soundness in advance as much as possible," adding, "The market also judges subordinated bonds to be more stable than CoCo bonds or hybrid capital securities, so they are gaining popularity and everyone seems to be rushing to issue them."

This trend is expected to continue for the time being. Choi Sung-jong, a researcher at NH Investment & Securities, said, "The aggressive tightening that has continued since last year is coming to an end, and a downward stabilization attempt of government bond yields is expected," adding, "In this situation, interest in insurance company subordinated bonds, which can secure high interest rates, will continue."

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