FSS: "Lotte Insurance's Call Option Exercise Violates Regulations, Measures to Follow"

FSS Expresses Serious Concerns Over Lotte Insurance's Call Option on Subordinated Bonds
Capital Adequacy Ratio to Fall Below 150% If Call Option Is Exercised
Potential Issues for Policyholder Protection and Violation of Relevant Regulations

The Financial Supervisory Service (FSS) has strongly criticized Lotte Insurance for exercising the call option for early redemption of its subordinated bonds.

On May 8, the FSS released an explanatory statement, saying, "We deeply regret that Lotte Insurance is unilaterally pursuing early redemption without any communication with the authorities or the market."

Lotte Insurance explained earlier that morning that it had definitively decided to exercise the call option on 90 billion won worth of subordinated bonds issued on May 7, 2020, and had officially begun the redemption process.

However, the FSS warned that if Lotte Insurance exercises the call option, its capital adequacy ratio (K-ICS) would fall significantly below the required standard, raising concerns about its financial soundness. According to the FSS, Lotte Insurance's K-ICS at the end of last year was 154.6%, but as stated in the early redemption report submitted by the company, the ratio had dropped significantly by the end of March, falling well below 150%.

Furthermore, the FSS stated that approval from the FSS is required for early redemption of subordinated bonds, but Lotte Insurance did not meet the requirements stipulated in the Insurance Business Supervision Regulations.

Lotte Insurance claims that since the redemption will be made with general account funds, which are the company's own funds, there will be no impact on policyholder assets and no issue with policyholder protection. However, the FSS maintains that redeeming subordinated bonds first using general account assets, which are operated with policyholder premiums, in a situation where financial soundness has deteriorated, could pose problems for policyholder protection and would violate relevant regulations.

The FSS stated, "We have serious concerns about whether Lotte Insurance will be able to restore the appropriate financial requirements necessary to protect policyholders and creditors," and emphasized, "We plan to take prompt and corresponding measures as soon as the evaluation of Lotte Insurance's financial condition is finalized."

On the same morning, FSS Governor Lee Bokhyun also said, "We have serious concerns about Lotte Insurance unilaterally pursuing early redemption despite not meeting the requirements due to a decline in the capital adequacy ratio."

He emphasized, "We will strictly take necessary measures in accordance with the law, while also doing our utmost to ensure financial market stability in response to the potential spread of unfounded anxieties."