[1mm Finance Talk] Insurers Move to Strengthen Core Capital... Approaches Differ for Large and Small Firms

Large Insurers Move to Strengthen Core Capital
DB Insurance to Issue KRW 500 Billion in Core Capital Hybrid Securities
Fubon Hyundai Life Plans KRW 700 Billion Paid-in Capital Increase
Preemptive Response to Announced Stricter 'Core Capital

From last year through the first half of this year, insurance companies that had primarily raised funds through subordinated bonds and other supplementary capital are now moving to strengthen their core capital in the second half of the year. This shift is seen as a preemptive response to the financial authorities’ announcement of stricter regulations on the core capital solvency ratio (K-ICS, KICS). However, there are expected to be differences in capital-raising methods between large insurers with strong retained earnings and small- to mid-sized insurers without such reserves.

According to the financial sector on August 21, DB Insurance will issue new hybrid securities classified as core capital worth 500 billion KRW on September 1. The securities will have a 30-year maturity with an early redemption (call option) available after five years. Depending on demand forecasts, the issuance amount could be increased to as much as 1 trillion KRW. The previous day, DB Insurance received an AA (Stable) rating from Korea Ratings and NICE Investors Service, laying the groundwork for successful demand forecasting.

The new hybrid securities issued by DB Insurance are the first among insurers to be classified as core capital without a step-up clause. A step-up is a mechanism that increases the interest rate above a certain level if the issuer does not exercise the call option, thereby encouraging early redemption. Under the KICS regime, securities with a step-up are classified as supplementary capital, while those without are classified as core capital.

Until now, insurers have raised their KICS ratios by issuing subordinated bonds or hybrid securities with step-up clauses, thereby increasing their supplementary capital. According to statistics from the Korea Securities Depository, as of the first half of this year, domestic insurers issued 5.225 trillion KRW in subordinated bonds. This figure exceeds 60% of last year’s record-high total issuance of 8.655 trillion KRW. However, there has been criticism that these capital securities are essentially liabilities rather than true capital from an accounting perspective, thereby lowering the quality of insurers’ capital. In response, the financial authorities announced plans to evaluate insurers’ financial soundness based on core capital rather than supplementary capital and signaled the introduction of a “core capital KICS.” This is the background for DB Insurance’s move to strengthen its core capital. As of the first quarter, DB Insurance’s core capital KICS stood at 74%.

Fubon Hyundai Life is also working to strengthen its core capital through a paid-in capital increase. On August 18, the company’s board of directors resolved to carry out a paid-in capital increase of 700 billion KRW within the year. As of the first quarter, Fubon Hyundai’s core capital KICS was 36.6%, the lowest in the industry. With the regulatory guideline for core capital KICS expected to be set at 50-70%, the company appears to be taking steps to shore up its ratio. A Fubon Hyundai official explained, “This capital increase was undertaken to address expanding financial market risks, meet strengthened capital management requirements, and reinforce our financial structure for sustainable business growth.”

Other insurers are also expected to move to strengthen their core capital KICS through new hybrid securities or paid-in capital increases. However, the issuance of new hybrid securities classified as core capital is likely to be limited to large insurers like DB Insurance. This is because, under the Commercial Act, interest on such securities can only be paid within the limit of distributable retained earnings. In the current environment, where retained earnings have been reduced due to the accumulation of surrender value reserves, only large insurers with ample distributable profits can afford to pay interest. Paid-in capital increases are also likely to be concentrated among insurers affiliated with financial holding companies whose major shareholders have sufficient financial resources. Other insurers are expected to undergo restructuring through mergers and acquisitions (M&A).