[Financial Microscope] Insurance Companies’ Capital Securities Issuance Reaches 9 Trillion Won... What’s Behind Another All-Time High This Year

Insurance Companies Issue 8.837 Trillion Won in Hybrid Securities, Surpassing Last Year's Total
Hanwha Life Issues 2 Trillion Won and DB Insurance 1.67 Trillion Won Ahead of Major Deals
Hybrid Securities Alone Have Limitations... Need for Risk Diver

Insurance companies have issued approximately 9 trillion won in capital securities this year, surpassing last year's all-time record. This surge is attributed to heightened efforts to manage financial soundness, prompted by interest rate cuts and accounting-related regulations. Experts advise that relying solely on capital securities for financial soundness has its limitations and recommend adopting strategies to diversify risks.

Capital Securities Issuance Surpasses 9 Trillion Won... All-Time High

According to the Korea Securities Depository and the Financial Supervisory Service as of November 4, domestic insurance companies have issued 8.837 trillion won in capital securities (including subordinated foreign currency bonds) so far this year. This not only marks the highest amount ever but also exceeds last year’s total issuance of 8.665 trillion won. Including Heungkuk Life Insurance’s planned issuance of 200 billion won in subordinated bonds later this month, the total capital securities issued by insurance companies this year will exceed 9 trillion won.

Capital securities refer to debt securities such as hybrid capital securities and subordinated bonds that are recognized as equity capital under accounting standards. With the adoption of International Financial Reporting Standards 17 (IFRS 17) in 2023, the capital adequacy ratio (K-ICS) has gained importance as a key financial soundness indicator, leading to a sharp increase in capital securities issuance by insurers. The amount issued, which stood at 3.2 trillion won in 2023, has nearly tripled this year.

The average coupon rate for capital securities issued by insurance companies this year is 4.41%. Applying this rate to the total issuance, annual interest payments amount to approximately 400 billion won. However, due to declining market interest rates, the coupon rate in the second half of the year (3.75%) has decreased compared to the first half (4.66%).

Hanwha Life and DB Insurance Issue Large-Scale Capital Securities Ahead of 'Big Deals'... K-ICS Stabilization

Hanwha Life has issued the largest amount of capital securities among insurers this year. In March, Hanwha Life issued 600 billion won in subordinated bonds, followed by 1 billion dollars (approximately 1.43 trillion won) in subordinated foreign currency bonds in June. Hanwha Life also led the industry last year with 1.9 trillion won in capital securities issuance. As a result of these successive issuances, Hanwha Life’s K-ICS in the first half of the year reached 160.6%, exceeding the financial authorities’ recommended level of 130%. In July, Hanwha Life also completed the acquisition of a 75% stake in US securities firm Velocity.

DB Insurance issued 1.667 trillion won in capital securities domestically this year, raising over 800 billion won in both the first and second halves. Notably, in the second half, DB Insurance became the first in the industry to issue 867 billion won worth of 'core capital hybrid securities' without a step-up condition, with a maturity of 30 years. DB Insurance’s K-ICS for the first half of the year stood at 213.3%. After this large-scale capital raising, DB Insurance signed a contract to acquire a stake in US auto insurer Fortegra for 1.65 billion dollars (about 2.3 trillion won).

Dongyang Life, which became a subsidiary of Woori Financial Group in July, has also been aggressively issuing capital securities this year. In May, the company issued 500 million dollars (about 700 billion won) in foreign currency bonds, followed by 200 billion won in subordinated bonds just yesterday. The coupon rate for Dongyang Life’s subordinated bonds issued yesterday was 3.65%, the lowest among subordinated bonds issued by insurers this year. As of November 3, this offers an investment appeal of about 0.767 percentage points compared to the 5-year government bond yield (2.883%). Based on recently announced third-quarter results, Dongyang Life’s K-ICS stands at 172.7%.

"Reduce Reliance on Capital Securities and Diversify Risks"

Insurance companies are issuing large amounts of capital securities because, compared to other methods, it is a relatively easy way to boost their K-ICS. With market interest rates declining for an extended period, some insurers are also redeeming previously issued high-interest capital securities early and refinancing at lower rates.

However, financial authorities are not in favor of insurers excessively relying on capital securities to improve their financial soundness indicators. This is because capital securities are considered supplementary capital, which has a lower loss-absorbing capacity than core capital. For this reason, authorities have announced plans to introduce a 'core capital K-ICS' regulation, emphasizing the strength of core capital within the year.

Nevertheless, financial authorities are also preparing measures to help insurers manage liabilities and enhance financial soundness through other means. For example, the implementation of the '30-year ultimate observation maturity' has been postponed. Initially scheduled for phased implementation by 2027, it has now been delayed to 2035. This change is expected to ease the burden of liability discount rates for insurers due to interest rate fluctuations, positively impacting K-ICS management. Additionally, the recently introduced delegated asset-retention reinsurance is expected to help improve insurers’ financial soundness. Unlike traditional reinsurance, which only transfers risk premiums to reinsurers, delegated asset-retention reinsurance allows insurers to transfer not only insurance risk but also other risks such as interest rate risk to reinsurers.

No Geonyeop, Head of Financial System Research at the Korea Insurance Research Institute, stated, "The insurance industry is expected to deteriorate in order of soundness, profitability, and growth next year," adding, "It is essential for insurers to proactively manage their liabilities by considering capital burdens from the product development and sales stages, utilizing contract transfers to improve financial soundness and diversify risks."