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By Jhoo Dong-chan
The nation's insurers are rushing to issue corporate bonds to secure enough cash reserves at the same time as an international standards setting body has proposed deferring the introduction of International Financial Reporting Standard (IFRS) 17 by another year to 2022. According to the insurance sector, the nation's life and non-life insurers have issued a total of 580 billion won ($491.7 million) worth of bonds this year. Of them, Meritz Fire & Marine secured 250 billion won by issuing 10-year subordinated bonds in May.
DB and Tong Yang Life also issued 30 billion won and 200 billion worth of bonds, respectively, this year.
Insurers' rush to corporate bonds is expected to continue as Hanwha and KDB Life have recently decided to issue 500 billion won and 240 billion won worth of hybrid securities in the second half.
The IFRS 17, a new set of global accounting standards for insurers replacing the current IFRS 4, will require insurers to measure the liabilities of their insurance contracts by market, not book value. It was originally scheduled to be introduced in January 2021, but last November the introduction was postponed a year to January 2022.
The International Accounting Standards Board (IASB), whose accounting rules are used in more than 140 countries, proposed another delay to January 2022, citing "a necessity for an additional period of time."
The move is also expected to provide an additional period for Korea's life and non-life insurers to secure enough cash reserves since the financial authorities have also planned to introduce the "K-Insurance Capital Standard," the nation's own new insurance liability market valuation system, at the same time as the IFRS 17.
The nation's seven insurers ― DB, NH, DGB Life, Lotte, KB, Hanwha General and NH Nonghyup Property & Casualty Insurance ― are currently experiencing difficulties in satisfying the industry standard of a 200 percent risk-based capital (RBC) ratio.
The RBC ratio requirement refers to a rule that establishes the minimum regulatory capital for a financial institution. The Financial Supervisory Service also recommends domestic insurers to maintain above the 150 percent level.
"A number of the nation's insurers, especially smaller ones, have liquidated their assets to secure the necessary capital to meet the IFRS 17," said a local non-life insurance firm official who requested anonymity.
Industry observers said this is the ideal time for them to issue corporate bonds, specifically perpetual bonds if possible, to secure necessary capital before the implementation of the IFRS 17.
"Due to the global financial trend favoring less risky assets amid the prolonged trade dispute between the U.S. and China, an increasing number of investors are eyeing corporate bonds at the moment," said the official.
"The Fed's dovish stance is another factor behind firm's rush to issuing corporate bonds with lower interest rates. Of these bonds, perpetual bonds, or hybrid securities, are a favorable option."
KDB and Hanwha Life have recently issued subordinated bonds with an interest rate of 4.1 percent and 3.69 percent, respectively. Meritz Fire & Marine Insurance also issued a 3.4 percent subordinated bond in May.