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KDB Life faces capital erosion, raising risk of troubled financial institution designation
KDB Life Insurance headquarters in Seoul / Courtesy of KDB Life Insurance
By Jun Ji-hye
KDB Life Insurance, a subsidiary of state-run Korea Development Bank (KDB), fell into a state of complete capital erosion as of March, raising the possibility that it may be designated a troubled financial institution, industry officials said Tuesday.
Such a designation could carry significant consequences, considering that KDB Life held insurance liabilities, including future payouts to policyholders, totaling about 17 trillion won ($12.4 billion) as of March. This amount is more than four times the 4 trillion won in liabilities held by MG Non-Life Insurance, which was designated as a troubled financial institution in 2022 and is now being phased out of the market.
If KDB Life is classified as a troubled financial firm, the impact on its policyholders is expected to far exceed that of MG Non-Life.
The state-run bank said it plans to normalize and eventually sell its insurance subsidiary, but doing so is expected to require an enormous injection of capital. Given that the bank is funded by taxpayers, the plan is likely to draw criticism for using public funds to sustain a failing financial institution.
According to KDB Life’s latest quarterly filing, the insurer had total assets of 17.85 trillion won and total liabilities of 17.99 trillion won, leaving it with negative equity of 134.8 billion won.
The firm's capital adequacy has plunged far below acceptable levels, with a capital erosion rate of 127 percent, meaning its liabilities exceed assets by a wide margin.
KDB Life stressed that its capital erosion does not indicate any issues with liquidity or its ability to pay out insurance claims.
A company official noted that the negative capital figure stems from accounting adjustments tied to the adoption of the International Financial Reporting Standard 17, a set of new global accounting standards, in 2023.
"Under the new framework, insurance contracts are measured at market value. As market interest rates declined and regulators further lowered the discount rate used to assess insurance liabilities, the resulting valuation losses were reflected in our capital figures, leading to what appears to be capital erosion," the official explained. "However, this is purely an accounting outcome and does not suggest we are unable to meet policyholder obligations."
The KDB has long faced criticism for sustaining the struggling financial firm with public funds.
The controversy dates back to 2010, when the bank took over Kumho Life Insurance, the predecessor of KDB Life, as part of the restructuring of the financially troubled Kumho Asiana Group. At the time, the acquisition was widely viewed as a preferential deal financed by taxpayer money.
Since 2014, the bank has tried six times to sell the insurer, but all attempts have been unsuccessful.
Criticism is likely to continue, as market expectations suggest that around 1 trillion won more will be needed to stabilize the insurer, on top of the approximately 1.5 trillion won already invested by the state-run bank.
The bank stated that it plans to undertake capital expansion measures, including a rights offering, within this year to normalize the insurer.
"We are planning to discuss a rights offering within this year, although the specific amount has not yet been finalized," a bank official said.