"Enhance Financial Soundness"... Insurance Companies Issue Subordinated Bonds and Hybrid Capital Securities

Recently, there has been a wave of capital expansion in the domestic insurance industry. Insurance companies are actively trying to enhance their financial soundness by issuing hybrid capital securities, subordinated bonds, and conducting paid-in capital increases. This is interpreted as an effort to raise the solvency ratio, a key indicator of an insurer's soundness, and to take preemptive measures against increasing economic uncertainties.

According to the Financial Supervisory Service on the 31st, the solvency situation has somewhat deteriorated as the required capital for insurers increased due to rising market risks such as equity risk. In the first quarter of this year, the solvency ratio of insurance companies was 223.6%, down 8.6 percentage points from 232.2% in the previous quarter. The solvency ratio is calculated by dividing available capital by required capital (the amount insurers must pay to policyholders). The minimum standard under the Insurance Business Act is 100%, and the supervisory authority recommends maintaining it above 150%.

In response, insurers are expanding their capital through various methods. Hyundai Marine & Fire Insurance successfully issued subordinated bonds worth 500 billion KRW last month. Kyobo Life Insurance also plans to issue subordinated bonds worth 700 billion KRW next month, marking about a year since May last year. Technically, subordinated bonds are liabilities, but since their maturity is typically 10 years, a portion is recognized as capital under the Insurance Business Act.

Additionally, following Hana Insurance, which issued hybrid capital securities worth 100 billion KRW in May, Hanwha Life Insurance issued 500 billion KRW of hybrid capital securities this month. Hybrid capital securities usually have maturities of 30 years or more and are sometimes called perpetual bonds. They are capital-type securities recognized as capital in accounting. They have conditions allowing conversion of principal into shares or write-offs if the issuer's financial condition deteriorates, thus exhibiting characteristics between bonds and stocks.

Hana Life Insurance, an affiliate of Hana Financial Group like Hana Insurance, also resolved a paid-in capital increase of 200 billion KRW through its board meeting on the 25th. Namgung Won, CEO of Hana Life Insurance, announced plans to improve financial soundness and secure a business foundation.

The active capital expansion by insurers is not merely a regulatory response but also signifies laying the groundwork for future growth. By securing sufficient capital, they can explore new business opportunities and prepare for unforeseen risks.

Seo Ji-yong, a professor in the Department of Business Administration at Sangmyung University, explained, "Capital expansion is mainly occurring among insurers who judged that funding was necessary for managing financial soundness. Although the supervisory authority's recommended solvency ratio is 150%, many insurers aim to maintain it above 200%. Given the expected interest rate volatility, required capital may increase, so they appear to be taking preemptive measures."