SEOUL, Dec. 26 (Korea Bizwire) – Major insurance companies in South Korea are increasing their capital to prepare for new accounting rules set to take effect next year and more U.S. rate hikes, industry sources said Monday.
Local insurance companies are estimated to expand their capital by a combined 1.41 trillion won (US$1.17 billion) this year through rights offerings or bond sales, according to the sources.
Allianz Life Insurance Korea received a capital injection of 50 billion won from its parent Allianz Group of Germany by issuing new shares in November ahead of the conclusion of its sale to a Chinese investor.
After signing $3 million deal to take over Allianz Life Insurance Korea in April, China’s Anbang Insurance Group requested South Korea’s financial regulator in August to give the green light to the purchase.
Last month, the board of Allianz Life Insurance Korea decided on a rights offering of 187 billion won, which means the company may raise more capital down the road.
But a company official said specifics have yet to be determined. “The company has yet to decide whether to raise more capital, or when and how much it should conduct a rights offering.”
Last month, Tongyang Life Insurance Co. decided to receive a capital injection of 625 billion won from its parent Anbang Insurance Group within this year. A Tongyang official said the capital increase may be actually carried out next year because it requires approval from South Korea’s financial regulator.
Last year, Anbang Insurance Group bought a controlling 63 percent stake in Tongyang Life Insurance from Vogo Fund, a local private equity fund, for 1.1 trillion won, in line with a strategy to bolster its presence in Asia’s fourth-largest economy.
Including Tongyang’s rights offering, local life insurers’ capital expansion is estimated at 763 billion won this year, with nonlife insurance companies also expected to bolster their capital by a combined 646.4 billion won.
Insurers’ rush to raise capital comes as a new global accounting regulation on the insurance industry is slated to go into effect in the coming year.
Under the rule, dubbed the International Financial Reporting Standards (IFRS) 4 Phase II, insurers’ liabilities will be assessed on the basis of their market value, instead of book value. It’s intended to enable a much “fairer” assessment on insurers’ ability to withstand stress and to have more capital bases and reserves to cover potential losses.
Market watchers also said that insurance companies appear to be bracing for more U.S. interest rate increases next year following the Fed’s rate hike this month.
“A surge in interest rates could rapidly sap the ratio of insurers’ risk-based capital, requiring them to prop up capital,” said a researcher at the Korea Insurance Research Institute. Risk-based capital refers to the minimum required liquid reserves for a financial institution.
“The possibility cannot be ruled out that some insurers may suffer worsening financial heath due to the inability to raise more capital.”
Market watchers forecast major insurance companies to continue their capital expansion next year, with No. 2 industry player Hanwha Life Insurance Co. planning to secure 500 billion won through a debt sale in the first quarter.