[Dfunding] DGB Saengmyeong Issues Subordinated Bonds to Improve RBC

[Asia Economy Reporter Lim Jeong-su] DGB Life Insurance has privately issued subordinated bonds worth 50 billion KRW. It is interpreted that the subordinated bonds were issued to improve the Risk-Based Capital (RBC) ratio, which is considered a measure of an insurer's financial soundness.

According to the investment banking (IB) industry on the 9th, DGB Life Insurance issued privately placed subordinated bonds worth 50 billion KRW on the 7th. The maturity is 10 years with an interest rate of 4.60%. The early redemption right (call option) can be exercised from 5 years after issuance.

The bond issuance was underwritten by its affiliate securities firm, DB Financial Investment. It is known that DB Financial Investment either purchased all the subordinated bonds and then sold or plans to sell them to investors.

DGB Life Insurance’s issuance of subordinated bonds is understood to be aimed at improving the RBC ratio. As of the end of December last year, DGB Life Insurance’s RBC ratio was 227.6%, down 46.7 percentage points from 274.3% at the end of September. Financial authorities recommend and manage insurance companies to maintain an RBC ratio above 150%.

The RBC ratio quantifies whether an insurer holds sufficient capital against the risks (risk assets; potential losses) incurred while managing insurance premiums. It is used as an indicator of an insurer’s financial soundness.

As the remaining maturities of previously issued subordinated bonds are gradually decreasing, DGB Life Insurance is in a situation where it is difficult to avoid a decline in RBC without capital expansion or additional subordinated bond issuance. DGB Life Insurance has maturities of 15 billion KRW in April next year, 40 billion KRW in July, and 20 billion KRW in September.

Subordinated bonds with more than 5 years remaining maturity can be recognized as 100% capital of the outstanding issuance amount. However, if the remaining maturity falls within 5 years, the proportion recognized as capital decreases by 20% per year. Subordinated bonds with less than 1 year remaining maturity are not recognized as capital.

DGB Life Insurance plans to continue capital expansion in preparation for the maturity of subordinated bonds and the implementation of the new International Financial Reporting Standards (IFRS 17) in 2023. Under the new accounting standards, insurance liabilities are measured at fair value, which increases the amount of capital required for insurers.

An IB industry official said, "To prepare for the new accounting standards, the issuance of subordinated bonds by insurance companies is increasing," adding, "DGB Life Insurance’s demand for capital expansion will continue to grow as its managed assets increase and the maturities of previously issued subordinated bonds shorten."