June 26, 2017 / 2:35 AM / 7 months ago

REFILE-Korean insurers expected to step up capital raising

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By Frances Yoon

HONG KONG, June 26 (IFR) - Kyobo Life Insurance is planning to issue hybrid capital securities in its first visit to the US dollar bond market, potentially setting a template for other Korean insurers looking to comply with stricter rules.

The South Korean lifer has mandated JP Morgan, Citigroup, Nomura and UBS as joint bookrunners for the subordinated capital securities and is eyeing an issue size of around $500 million next month.

The move comes as Korea prepares to adopt international accounting standards and stricter domestic solvency rules that will require insurers to boost their capital reserves.

South Korea will implement International Financial Reporting Standard (IFRS) 17 Insurance Contracts, which require insurers to report liabilities on a mark-to-market basis rather than book value, resulting in a larger amount of recorded liabilities.

“Under IFRS, Korean insurers need to increase their reserves quite substantially, so liabilities will increase and their capital or equity will decrease,” said Stella Ng, an analyst at Moody‘s. “Quite a few insurers are planning to restore capital or strengthen their positions before IFRS becomes effective in 2021.”

The standard is expected to put pressure on Korean insurers and force them to use market-consistent discount rates to evaluate their liabilities. These rates will be much lower than the 6 percent or more that the top three insurers currently use to calculate liabilities.

Korean lifers have about 535 trillion won ($468 billion) of liabilities that will be affected by IFRS17, according to estimates from the Korean Insurance Research Institute.

This amount could increase by 23-33 trillion won if IFRS is implemented, said a Bank of Korea report in December.

The implementation of IFRS17 comes as Korean financial regulators are also setting up stricter solvency rules for insurers, such as raising requirements on risk-based capital ratios.

Moody’s Ng said hybrid issuance is expected to be a key channel to replenish capital due to its more favourable regulatory treatment over subordinated debt. Hybrid coupon payments are also paid as dividends and do not have an earnings impact on insurers’ profit and loss statements, she said.

Bankers said several Korean insurers were discussing the possibility of obtaining international credit ratings to access the more liquid global capital markets.

A source working on the deal said Kyobo’s transaction would be an attractive investment relative to bank Additional Tier 1 securities, since the deal will not be subject to domestic bank rules that restrict a bank from using annual profits for coupon payments.

The 144A/Reg S securities are expected to be rated A3/A– (Moody‘s/Fitch). Kyobo’s investor meetings in the US, Europe and Asia begin today until July 7. (Reporting by Frances Yoon; Editing by Vincent Baby)

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