이 기사는 2021년 10월 20일 08시07분 thebell에 표출된 기사입니다

South Korean insurance companies are struggling to raise funds through a perpetual bond and subordinated bond issuance amid rising market interest rate and frozen investor sentiment.

The issuance market for won-denominated perpetual and subordinated bonds by domestic insurance companies has frozen due to an increase in the market interest rate. The issuance of those bonds, which are highly sensitive to interest rate movement, is also getting difficult due to weakened investor sentiment and narrow investor base.

The problem is that insurers have to raise capital ahead of the introduction of IFRS 17, a new set of global accounting standards set to be introduced in 2023. The IFRS 17 calculates insurance contract liabilities according to market value instead of book value. Under these rules, insurers need to secure a greater amount of capital to meet financial soundness standards.

Meanwhile, the financing burden is increasing due to a rise in interest rates. In September, Kyobo Life Insurance sold a 470 billion won ($397 million) perpetual bond at a rate of only 3.72%. But the funding cost is increasing amid prospects that the key interest rate will continue to rise steadily until next year.

“The spread between financial holding companies’ perpetual bonds and those of insurance companies has widened by about 60 basis points, and the market interest rate itself has also rebounded,” said an industry source. “The burden is heavy given that even major insurers have to pay 4% or more for funding costs.”

Another hurdle is that there are limited investors at home for perpetual and subordinated bonds issued by insurance companies. The market size for bonds sold by insurers has long been small as its investor base has been limited to mutual aid associations and retail investors. The weakening investor sentiment has made insurers even harder to secure demand for their perpetual and subordinated bonds.

Insurers have halted their bond issuance since last month when Kyobo Life issued perpetual bonds worth 470 billion won and Fubon Hyundai Life Insurance and Heungkuk Fire ＆ Marine Insurance sold subordinated bonds worth 95 billion won and 20 billion won, respectively.

Against this backdrop, insurance companies are starting to tap global bond markets amid heightened volatility in the Korean bond market especially after the Bank of Korea reinforced its signals of a key rate hike in November.

Tongyang Life Insurance sold a $300 million perpetual bond in September 2020 after insurance companies' issuance of Korean papers has slowed for a few years due to unfavorable foreign currency funding conditions.

Insurers may benefit from selling dollar-denominated bonds amid rising domestic market interest rate. The global bond market also has a greater demand for perpetual and subordinated bonds sold by insurance companies than here.

Hanwha Life Insurance is preparing to sell a foreign currency-denominated subordinated bond early next month. Large domestic insurance companies like Hanwha Life have relatively higher global credit ratings compared to their Asian peers, which is also a plus. (Reporting by Hye-rim Pi)