Following the so-called subordinated bond early redemption initiative, a credit rating agency has assessed that Lotte Insurance's capital management burden is expected to increase further.
On May 8, Korea Ratings stated in a report, "Lotte Insurance does not have any additional call dates coming up in 2025," but added, "Due to a deterioration in its reputation in the market, it will be difficult for the company to raise capital by issuing new capital securities." Among the already issued capital securities, the next call dates are for 46 billion won in December 2026 and 140 billion won in September 2027.
Korea Ratings pointed out, "Institutional tightening, such as stricter discount rate calculation standards, continues, and with the gradual expiration of transitional measures, there is an ongoing burden of routine capital management. If alternative capital-raising measures are not secured, the K-ICS (Korean Insurance Capital Standard) ratio will continue to decline."
The financial authorities also cited the K-ICS ratio as the issue in this early redemption attempt. According to the Financial Supervisory Service, the exercise of subordinated bond call options requires a K-ICS ratio above 150%, but as of the end of March, Lotte Insurance fell short of this requirement.
Korea Ratings predicted that this incident would inevitably have a negative impact on Lotte Insurance's credibility in the bond market. Additionally, the agency anticipated that this situation would adversely affect investor demand for capital securities issued by other insurers as well.
Korea Ratings noted, "In November 2022, Heungkuk Life Insurance postponed the exercise of a call option on foreign currency hybrid capital securities due to a sharp rise in interest rates and worsening supply-demand conditions in the bond market. However, this is the first time that early redemption has been delayed due to the financial authorities' rejection of approval for failing to meet requirements." The agency added, "This incident has reinforced the importance of not only securing funding and managing liquidity, but also maintaining stable financial soundness, including the K-ICS ratio."
The agency further stated, "Issuers with low K-ICS ratios may face worsening issuance conditions. If a company does not maintain a sufficient buffer to meet early redemption requirements, it may fail to issue the targeted amount due to weak investor demand or be forced to bear higher interest rates."
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