On the 8th, the Financial Supervisory Service announced that Lotte Insurance did not meet the current insurance industry supervision regulations, resulting in the disapproval of early redemption (call option) for 90 billion won subordinated bonds. According to regulations, early redemption is permitted when the solvency ratio (KICS) of an insurance company exceeds 150%.
The FSS noted that "subordinated bonds must be usable for loss absorption to protect policyholders and general creditors in case of deterioration in the insurer's financial situation, and strict conditions must be met for early redemption ahead of other bonds."
According to the FSS, Lotte Insurance's KICS as of the end of March did not exceed 150%. It dropped from 154.6% at the end of last year, failing to meet the early redemption requirements. If an unfavorable standard model for Lotte Insurance were applied, the KICS at the end of last year would be around 127.4%.
As a result, Lotte Insurance currently must issue refinancing if it wishes to exercise the call option. However, this situation is also not easy. The FSS stated, "The company also attempted to issue refinancing but has not been able to attract the necessary investment demand for the issuance conditions."
Previously, Lotte Insurance planned to issue new subordinated bonds in February to repay existing subordinated bonds. However, the FSS disapproved the issuance once, citing that Lotte Insurance omitted key information that would influence investment decisions. It stated that while the internal figures for last year's provisional settlement were calculated, Lotte Insurance submitted the securities registration form using only the figures from the third quarter of last year and announced provisional results on February 13, one day after the planned issuance date of the subordinated bonds. The announcement revealed that Lotte Insurance's net profit for last year was 27.2 billion won, a 91% decrease from the previous year (301.6 billion won).
The FSS also pointed out that Lotte Insurance reported only favorable exceptional models related to the cancellation rate of non-minimum or low-guarantee insurance in the securities registration form and failed to mention the risk of the expiration of rights occurring in the major shareholder acquisition agreement. The FSS instructed the company to disclose investment risks; however, Lotte Insurance voluntarily withdrew the securities registration form.
Despite the FSS's disapproval, Lotte Insurance plans to exercise the call option. They assert that even if the KICS ratio is below 150%, it is possible to exercise the call option if four exceptional conditions are met, including issuing more than the previously issued amount through capital procurement with strong capital characteristics, such as capital increase, before redemption.
Lotte Insurance plans to proceed with early redemption using the company's own capital without issuing refinancing. Lotte Insurance claims that since the early redemption is conducted with general account funds, there is no impact on policyholder assets, and there are no issues with policyholder protection.
In response, the FSS expressed, "We are very regretful that Lotte Insurance is unilaterally pursuing early redemption without communicating with the authorities and the market," and added, "We have serious concerns about whether adequate financial requirements necessary to protect policyholders and creditors can be restored." It further stated, "We plan to promptly take corresponding measures as soon as the evaluation results of Lotte Insurance's financial situation are finalized."