FSS Expresses Serious Concerns Over Lotte Insurance's Call Option on Subordinated Bonds
Risk-Based Capital Ratio Could Drop Below 150% if Call Option Is Exercised
Potential Threats to Policyholder Protection and Possible Violation of Relevant Regulations
The Financial Supervisory Service (FSS) has strongly criticized Lotte Insurance for pushing ahead with the exercise of a call option for early redemption of 90 billion won worth of subordinated bonds.
Sehun Lee, Senior Deputy Governor of the FSS, held a briefing at the FSS headquarters in Yeouido, Seoul, on the afternoon of May 8 and stated, "It is deeply regrettable that Lotte Insurance is unilaterally pursuing early redemption without communicating with the authorities or the market."
Lotte Insurance announced earlier that morning that it had definitively decided to exercise the call option on the 90 billion won subordinated bonds issued on May 7, 2020, and had officially begun the redemption process.
The FSS warned that if Lotte Insurance exercises the call option, its risk-based capital ratio (K-ICS) would fall well below the required standard, raising concerns about its financial soundness. According to the FSS, Lotte Insurance's risk-based capital ratio at the end of last year was 154.6%. However, according to the early redemption report submitted by the company, this ratio had dropped significantly by the end of March, falling well below 150%. The FSS also pointed out that regulatory approval is required for early redemption of subordinated bonds, but Lotte Insurance has not met the requirements stipulated in the Insurance Business Supervision Regulations.
Lotte Insurance has argued that since the redemption will be made using funds from its general account, which are company-owned funds, there will be no impact on policyholder assets or on policyholder protection.
However, the FSS maintains that in a situation where financial soundness has deteriorated, prioritizing the redemption of subordinated bonds using general account assets?funded by policyholder premiums?could jeopardize policyholder protection and constitute a violation of relevant regulations. Sehun Lee commented, "General account funds are held to cover potential issues with customer money, and using them for subordinated bond redemption is difficult to understand from the perspective of a financial professional."
Sehun Lee further stated, "If Lotte Insurance pushes ahead with the exercise of the call option, it could face not only financial soundness issues but also difficulties in maintaining adequate capital and operating as a financial institution in the future. This is an unprecedented situation, and the authorities are also perplexed."
He added, "We have serious concerns about whether Lotte Insurance can restore the proper financial requirements necessary to protect policyholders and creditors. As soon as the assessment of Lotte Insurance's financial condition is finalized, we will promptly take appropriate measures in response." He also emphasized, "Regardless of whether sanctions are imposed on Lotte Insurance, we are deeply concerned about early redemption that further weakens already fragile financial soundness."
Bokhyun Lee, Governor of the FSS, also stated earlier that morning, "We have serious concerns about Lotte Insurance unilaterally pursuing early redemption despite failing to meet the requirements due to a decline in its risk-based capital ratio." He stressed, "We will take strict measures as required by law and ensure the stability of the financial market to prevent the spread of unfounded anxiety."
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