This article was published on June 18, 2025, at 5:38 p.m. on the ChosunBiz MoneyMove site.
Lotte Insurance has drawn industry attention for not taking substantial measures after being blocked by financial authorities from redeeming a $900 million subordinated bond. The Financial Supervisory Service (FSS) stated that Lotte Insurance must maintain a solvency ratio (K-ICS) of over 150%, preventing the exercise of Lotte Insurance's call option. To resolve this issue, capital increase through a paid-in capital increase is practically the only solution for Lotte Insurance, yet it has not presented any significant measures for over a month.
Industry experts believe that it may be better for Lotte Insurance to observe the situation rather than hastily execute a paid-in capital increase given the possibility that the guideline, which served as the basis for the FSS blocking the call option, may be relaxed. Lotte Insurance has maintained the position that the principles presented by financial authorities violate international accounting standards.
The situation surrounding Lotte Insurance could change depending on who becomes the next head of the financial authorities, especially since Lee Bok-hyeon, who adhered to the principles, resigned on the 5th and the previous case of accounting fraud allegations against Samsung Biologics, which originated from similar interpretations of international accounting standards, has ended in a loss for prosecutors. The person who led the investigation at that time was also the former head.
◇ As the financial authorities presented guidelines, Lotte Insurance's K-ICS took a plunge.
According to the investment banking (IB) industry on the 18th, Lotte Insurance is reportedly considering various measures related to follow-up actions after the blocking of the call option. An industry source noted, “Since financial authorities have not taken timely corrective measures against Lotte Insurance, it is not yet the stage to decide on a paid-in capital increase,” adding, “I understand that JKL Partners, Lotte Insurance's major shareholder, is still discussing improvement measures with the authorities.”
Lotte Insurance planned to exercise its call option on subordinated bonds worth $900 million last month, but the FSS intervened, stating that exercising the call option would lower the K-ICS ratio below 150%. The former head expressed strong regret over Lotte Insurance's attempt to redeem subordinated bonds, warning that “appropriate measures will be taken as soon as the evaluation of the financial situation is finalized.”
To meet the financial authorities' standards, Lotte Insurance has no choice but to proceed with a paid-in capital increase. Lotte Insurance's K-ICS ratio was 154.6% at the end of 2023, but it dropped to 119.9% in the first quarter of this year. If the ‘principle model’ is applied instead of the existing ‘exception model’ (a method calculated according to the standard risk measurement formula announced by the FSS), the K-ICS ratio would plummet to 82.8%. To address this situation, capital expansion is essential, but as subordinated bonds and hybrid capital securities are considered supplementary capital rather than core capital, a paid-in capital increase is inevitable.
The reason Lotte Insurance is not taking any substantial actions even in this situation is interpreted as being due to the vacant position of the head of financial authorities. An IB industry source commented, “If the head of financial authorities changes and the guidelines revert back, proceeding with a paid-in capital increase now would be an unnecessary action for Lotte Insurance,” suggesting, “For now, observing the situation would be the best course of action.”
Lotte Insurance has maintained its position that the FSS sanctions contradict international accounting standards (IFRS 17). A notable example is the guideline related to the termination rate of non-life and low-surrender products. Since the introduction of IFRS 17 in 2022, insurance companies have independently established the actuarial assumptions needed for estimating cash flows from contracts and calculating contract service margins (CSM). If insurance companies set high termination rate assumptions, it creates an image of a low probability of insurance payouts, which can lead to an expansion of CSM and improvement of financial situations.
However, with the issuance of guidelines by financial authorities last November, insurance companies are now required to formalize their estimates of termination rates for non-life and low-surrender products using specific methodologies such as ‘log-linear models.’
This has inflicted a severe blow to Lotte Insurance. Lotte Insurance has had a high proportion of non-life and low-surrender products, and since its K-ICS ratio is lower compared to competitors, this change in actuarial assumptions has resulted in a double blow of additional declines in the K-ICS ratio and a reduction in CSM. Lotte Insurance has reportedly maintained its position that the financial authorities' arbitrary changes to international accounting standards are illegal.
◇ Similar to the Samsung Biologics case prosecuted by Lee Bok-hyeon.
The industry is paying attention to the fact that in the past Samsung Biologics won in a case of accounting fraud allegations because they interpreted IFRS more literally. Since Lotte Insurance has also applied the exception model by interpreting IFRS literally, it is believed that if the financial authorities engage in a substantial debate, Lotte Insurance may have the advantage.
The allegations of accounting fraud against Samsung Biologics arose in 2015 when the company reported a net profit of $1.9 billion. At that time, Samsung Biologics recorded approximately $4.5 billion in profit by changing Samsung Bioepis from a subsidiary to an associated company, and whether this accounting treatment met the ‘loss of control’ requirements discussed in IFRS 10 was the key issue of the case.
At that time, Samsung argued that since Biogen held a call option on Samsung Bioepis, control was lost according to IFRS 10 standards, thereby lawfully changing their accounting treatment. This was the result of a literal and formal interpretation of the loss of control requirements.
The individual who led the prosecutor's investigation in this case was the former head Lee Bok-hyeon. He was serving as the head of the economic crime division at the Seoul Central District Prosecutor's Office at the time. The case is concluding with a complete victory for Samsung. In a criminal case prosecuted by him, Lee Jae-yong, chairman of Samsung Electronics, received a not guilty verdict from the Seoul High Court in February. The second trial of the lawsuit against the financial authorities' sanctions also concluded with a victory for Samsung on the 11th.
In the Lotte Insurance dispute, the party that interpreted IFRS more literally is Lotte Insurance. IFRS 17 stipulates that insurance companies must choose one of three methods: ‘full retrospective method,’ ‘modified retrospective method,’ or ‘fair value approach.’ If it is impossible to apply the full retrospective method, one of the modified retrospective method or fair value approach must be applied. The fair value approach referred to here is precisely the exception model.