Korean life insurers rush to issue hybrid securities to bolster capital

2018.03.06 16:14:00 | 2018.03.06 16:14:26

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South Korean life insurance firms are rushing to issue hybrid securities to bump up their capital ahead of the implementation of new global accounting and stricter local capital standards for insurers in 2021.

According to insurance industry sources on Monday, Hanwha Life Insurance Co.’s board of directors approved the company’s plan to issue $1 billion worth hybrid securities - a financial security that combines both debt and equity characteristics - abroad. The proceeds from the sale are expected to help the company boost capital as the hybrid bond is recognized as capital on a financial statement.

The issuance of hybrid securities is also expected to improve its ratio of risk-based capital (RBC), the minimum capital financial institutions must hold to protect investors and clients. The higher the ratio, the more financially stable the insurer is. Hanwha Life Insurance expects the new issues would bring up its RBC ratio by more than 20 percentage points.

The latest issuance follows the company’s sale of 500 billion won ($464.9 million) worth hybrid securities at home last year for beefing up the capital requirement.

But Hanwha Life Insurance is not the only Korean insurer tapping into the structured finance product. Demand for hybrid securities among local insurers is on the rise ahead of the introduction of IFRS17 and K-ICS accounting and capital standards for insurers that will take effect in 2021. IFRS17 is a new global insurance accounting rule that evaluates liabilities based on market value, and K-ICS is a new local enhanced insurance capital standard that supervises RBC ratio.

Earlier this year, Hyundai Life Insurance Co. issued 60 billion won worth of hybrid securities to its largest shareholder Hyundai Commercial Inc. Before that, it already had issued hybrid securities worth 40 billion won in November and junior bonds worth 60 billion won in December to raise its RBC ratio to 176 percent or above financial authorities’ 150 percent recommendation. The company explained that it launched another round of recapitalization to avoid the risk of its RBC ratio falling before upcoming new rights offering.

It is preparing to issue new shares worth 300 billion won to its largest shareholders - Hyundai Mobis and Hyundai Commercial who have combined 50.65 percent stake in the life insurer and Taiwan’s Fubon Life Insurance who has 48.62 percent stake. Once it completes the new rights offering as planned, it would not need to worry about the RBC level for a while, said a Hyundai Life Insurance official.

By Kim Tae-sung and Cho Jeehyun

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