A rare situation has arisen where Lotte Insurance has directly opposed the Financial Supervisory Service (FSS), which denied the early repayment (call option) of subordinated bonds. However, projections in the insurance industry suggest that Lotte Insurance will eventually have no choice but to fulfill the FSS's requirement for capital increase, as there is no sharp method to finalize early repayment unless the FSS grants approval.
On 8th, after Lotte Insurance announced its intention to initiate early repayment procedures regardless of the FSS's approval, the FSS held a briefing expressing regret towards Lotte Insurance. Lee Se-hoon, the chief deputy commissioner of the FSS, noted at the briefing, "We cannot help but have tremendous concerns regarding the company's plan," and even mentioned the possibility of sanctions against Lotte Insurance.
The FSS concluded that Lotte Insurance did not meet the conditions for early repayment under insurance business supervision regulations. Under the regulations, an insurance company can initiate early repayment only when its capital adequacy ratio (KIX) is over 150%. Although Lotte Insurance's KIX was 154.6% at the end of last year, it fell below 150% as of March. The exact figure was not disclosed.
The FSS stated that Lotte Insurance's KIX "significantly falls short"; however, Lotte Insurance clarified that it "slightly complies."
Lotte Insurance attempted to issue new subordinated bonds in February for early repayment, but pointed out that the FSS suddenly strengthened the issuance conditions. In response, the FSS rebuffed that Lotte Insurance did not adequately disclose important financial figures and investment risk factors in the securities registration statement.
◇ Lotte Insurance has protested, but it has no specific solution
The FSS has demanded that Lotte Insurance increase its capital. If Lotte Insurance increases its capital through refinancing or capital increases, its KIX will rise, allowing it to meet the requirements for early repayment. Lotte Insurance maintains that it is investing its own capital for early repayment and that there are no issues regarding customer protection; however, this deputy commissioner sharply remarked, "This is the first time I have heard such a statement in my career in the financial sector."
It is anticipated that early repayment will be impossible unless Lotte Insurance first increases its capital. The controversial subordinated bond was sold to numerous individual and corporate investors through a public offering. There is no capacity to conduct separate discussions regarding early repayment. Crucially, the Korea Securities Depository also rejected early repayment based on the FSS's disapproval.
The remaining means for Lotte Insurance to increase its capital are private subordinated bonds targeted at institutional investors. The new capital securities can be converted into equity, posing a risk of dilution to the major shareholder JKL Partners. The capital increase eventually requires JKL Partners to provide additional funds, making it a difficult decision. Lotte Insurance is reported to be pushing for the issuance of private subordinated bonds. A Lotte Insurance official stated, "We have initiated the call option process as part of investor protection," adding that "specific matters have not yet been finalized."
Not repaying early is almost impossible. Given that Lotte Insurance has declared its intention to proceed with early repayment, reversing this decision is expected to have a significant impact on the market. A decline in credibility will lead to indirect disadvantages in future subordinated bond issuance as well. Although subordinated bonds typically have a long maturity of 10 years, it has been a long-standing market practice to conduct early repayments within 3 to 5 years.
◇ “This is possible because of private equity funds”
Even before the non-approval of early repayment, Lotte Insurance had conflicts with financial authorities. A prominent instance is the year-end settlement that took place at the end of last year. Lotte Insurance chose the exception model instead of the principle model proposed by the financial authorities, making it the only insurance company to do so. This exception model is more favorable in terms of performance and financial soundness indicators. The FSS warning against choosing the exception model, stating, "Do not commit the error of choosing the exception model," did not resonate.
There are evaluations in the insurance industry that the major shareholder of Lotte Insurance, being a private equity fund, enabled such a decision. It is rare for insurance companies to not follow the financial authority's decision or to openly oppose it. An industry official remarked, "It is difficult to find a company that would go against the financial authorities' will when operating in the financial sector for a long time," suggesting that Lotte Insurance appears to have decided that it would rather fight than suffer losses due to difficulties in selling the company.
In fact, the decrease in Lotte Insurance's net profit and the deterioration of its financial soundness were mainly caused by increased regulations from financial authorities. Lotte Insurance aggressively sold low-recovery products that returned less in insurance money upon contract termination, leading to a sharp decline in net profit due to the financial authorities' directive to conservatively estimate the termination rate. Last year, Lotte Insurance's net profit decreased by 91% to 27.2 billion won from 301.6 billion won the previous year.
As a result of this situation, a skeptical view of private equity funds operating and controlling financial companies is expected to resurface. This deputy commissioner stated, "Private equity funds tend to maximize short-term shareholder interests," adding that "discussions will be held to review the issues concerning private equity funds alongside the MBK Partners matter."
MG Non-Life Insurance, which was sold to the private equity firm JC Partners less than two years ago, has been designated as a financial company in distress in 2022 and is at a crossroads of liquidation and contract transfers. At that time, JC Partners submitted a capital increase plan to the financial authorities, but it was not implemented.