On Oct. 31, the financial sector revealed that Hyundai Marine & Fire Insurance plans to issue subordinated bonds on Nov. 4. This decision follows a successful demand forecast on Oct. 24, where the company received orders worth 797 billion won (approximately $577 million), significantly surpassing its initial target of 250 billion won. Consequently, Hyundai Marine & Fire Insurance decided to increase the issuance to 400 billion won. The interest rate for these bonds was set between 3.7% and 4.4%, with the final rate determined at 4.17%.
Lotte Insurance is also set to conduct a demand forecast on Nov. 1 for the issuance of subordinated bonds worth 150 billion won. The interest rate for these bonds is expected to be between 5.7% and 6.2%. Although this is slightly lower than the 6.3% interest rate issued by Heungkuk Fire & Marine Insurance last month, it remains highly attractive to investors.
On the same day, Kyobo Life Insurance will conduct a demand forecast for hybrid capital securities, aiming to raise 300 billion won. The interest rate for these securities is expected to be in the mid-4% range, with the possibility of increasing the issuance to a maximum of 600 billion won.
This year, insurance companies have expanded the issuance of subordinated bonds and hybrid capital securities, surpassing 3 trillion won in capital securities issued. The decline in interest rates has heightened concerns about the asset soundness of these companies. Market opinions are divided on the successive issuance of capital securities by insurance companies, with some viewing it as an investment opportunity and others fearing it could lead to a ‘second Hong Kong equity-linked securities (ELS) crisis.’
The primary reason for the issuance of capital securities by insurance companies is to defend their risk-based capital ratio (K-ICS) as their insurance liabilities increase and soundness decreases due to falling interest rates. The risk-based capital ratio is a measure of capital soundness, calculated by dividing available capital by required capital. When interest rates fall, the present value of insurance liabilities can exceed the present value of assets.
Seo Ji-yong, a professor of business administration at Sangmyung University, explained, “The financial authorities’ recommended risk-based capital ratio is around 150%. To maintain a level above this, the issuance of capital securities is necessary, and subordinated bonds or hybrid capital securities are recognized as supplementary capital in accounting.”
The trend of issuing capital securities by insurance companies is expected to continue. In addition to the downward trend in interest rates, discussions on the lapse rate assumptions for non-surrender and low-surrender value insurance at the Insurance Reform Committee have increased the likelihood of a decrease in the risk-based capital ratio. A decline in the risk-based capital ratio can lead to various sanctions by financial authorities, a downgrade in the credit rating of insurance companies, and restrictions on dividends, making countermeasures urgent.
Considering the falling interest rates, some analysts believe this situation presents an opportunity for individual investors. An investment banking (IB) industry official stated, “Since 2022, individual investors’ bond investments have been activated, and interest in financial bonds, such as those issued by insurance companies with relatively high interest rates, has increased. The merit of credit compared to falling interest rates has influenced investment decisions.”
As insurance companies continue to navigate the challenges posed by falling interest rates and the need to maintain their financial stability, the issuance of capital securities remains a critical strategy. Investors and market observers will be closely monitoring the outcomes of the upcoming demand forecasts and the broader implications for the financial sector.
