Subordinated bond issuance by insurers plunges from 22 deals to 2 in two years

Subordinated bond issuance by South Korean insurers has fallen to roughly one-tenth of its level two years ago, as an upcoming regulatory change strips away much of the incentive to issue such debt.

Only two subordinated bond deals have been completed or are planned in the insurance sector this year: Heungkuk Fire & Marine Insurance's 100 billion won ($74.8 million) issuance in March and Hanwha Life Insurance's planned issuance of up to 800 billion won later this month. That compares with 22 deals worth 6.62 trillion won in 2024 and 16 deals worth 5.2 trillion won in 2025 — a sharp drop over two years. Some insurers, including Hyundai Marine & Fire Insurance and KB Insurance, repaid existing subordinated bonds without refinancing, at 350 billion won and 379 billion won respectively.

The pullback reflects a regulation set to take effect in January: the core-capital K-ICS (Korea Insurance Capital Standard) solvency ratio requirement. The ratio divides core capital — funds such as paid-in capital and retained earnings that can absorb losses immediately — by required capital. The Financial Services Commission has set a minimum threshold of 50 percent, with prompt corrective action triggered for any insurer that falls short. Because subordinated bonds are borrowed money, they are classified as supplementary capital and do not improve the core-capital ratio. That leaves insurers with little reason to bear the cost of issuing them.

Against that backdrop, Hanwha Life Insurance conducted a book-building process Tuesday and plans to issue 400 billion won in subordinated bonds on Nov. 11. Depending on demand, the deal size could be increased to as much as 800 billion won. The bonds carry a 10-year maturity with a call option exercisable by the company after five years. The indicative coupon range is 4.80 to 5.30 percent per annum.

The issuance is aimed at managing Hanwha Life's overall K-ICS ratio. According to a securities registration statement filed Friday, the company's K-ICS ratio stood at an estimated 165.2 percent at the end of September, down from 168.0 percent at the end of June. While that exceeds both the regulatory floor of 100 percent and the recommended level of 130 percent, it trails the life insurance industry average of 193.0 percent as of end-June, measured before transitional measures. Direct comparisons with the industry average are difficult, however, because the ratio varies by each company's asset and liability structure. Hanwha Life estimates that issuing 400 billion won in subordinated bonds would lift its K-ICS ratio to 167.8 percent, while an 800 billion won issuance would push it to 170.5 percent.

Hanwha Life has also been expanding its business, agreeing in September to acquire a 50.54 percent stake in Acuon Capital for 440 billion won. The company described the subordinated bond issuance as "purely a refinancing transaction." Industry officials note that subordinated bonds are frequently issued for refinancing purposes — to prepare for the early redemption of existing capital securities.

Because subordinated bonds add only to supplementary capital, managing the core-capital ratio remains a separate challenge. Hanwha Life acknowledged as much in its securities filing, stating that "supplementary capital raised through subordinated bond issuance alone does not substitute for addressing the core-capital standard." The company also noted that deploying the proceeds would increase required capital, meaning the actual improvement in the K-ICS ratio could fall short of current estimates.

Improving the core-capital ratio requires either growing the numerator — core capital — or shrinking the denominator — required capital. The industry is pursuing both approaches. "Options for building core capital include rights offerings and hybrid securities issuances, while required capital can be reduced through co-reinsurance arrangements and asset-liability management," one insurance industry official said. "Since transitional measures will be phased in through the end of 2035, insurers will improve their capital quality in step with that schedule."

Calls for regulatory reform are also growing. The most prominent demand is for the contractual service margin, or CSM, to be recognized as core capital. The CSM represents the expected future profit embedded in policies an insurer has already sold. Europe's Solvency II regime allows a portion of such future profits to count as core capital, whereas K-ICS takes a more restrictive approach. The industry has been lobbying regulators to adopt a similar treatment.

There are also calls to revisit the rules governing the surrender value reserve. This reserve requires insurers to set aside, within retained earnings, the difference between the surrender value owed to a customer who cancels a policy and the insurance liability recognized on the balance sheet, when the former exceeds the latter. Because the reserve cannot be used for dividends, a larger reserve directly reduces distributable profit. The industry argues that the accumulation burden is constraining shareholder returns and that the standards should be rationalized.