Financial Supervisory Service Blocks Lotte Insurance’s Early Bond Redemption, Stirring Market Unease
South Korea’s insurance sector is facing mounting pressure following the Financial Supervisory Service’s (FSS) decision to block the early redemption of subordinated bonds issued by Lotte Insurance. The move has amplified market concerns over stricter capital regulations, with rising interest rates on subordinated bonds casting uncertainty on insurers’ refinancing capabilities.
As of May 11, industry data indicates that five insurance companies, including Lotte Insurance, are approaching call options on subordinated bonds totaling 5.9 billion won this year. These firms are now under scrutiny as their solvency ratios hover around the regulatory threshold.
Fubon Hyundai Life Insurance is scheduled to redeem 150 million won and 500 million won worth of bonds in June and September, respectively. Heungkuk Fire & Marine Insurance (400 million won in July), Shinhan Life Insurance (300 billion won in August), and Meritz Fire & Marine Insurance (105 billion won in November) also face looming call option dates.
The core issue stems from rising trading yields on these instruments. On May 9, Lotte Insurance’s 8th subordinated bond traded up to 0.73 percentage points higher than valuations by private bond rating agencies. Similar upward trends were observed with Fubon Hyundai Life’s 20th subordinated bond, which rose by 0.7 to 0.9 percentage points, and KDB Life Insurance’s 12th bond, which climbed by approximately 0.4 percentage points.
These companies share a common vulnerability: relatively low capital adequacy ratios under the Korean Insurance Capital Standard (K-ICS). Following the application of transitional measures at the end of 2024, Lotte Insurance posted a K-ICS ratio of 154.59%, while Fubon Hyundai Life, KDB Life Insurance, and Hyundai Marine & Fire Insurance recorded ratios of 157.3%, 158.24%, and 157%, respectively—only marginally above the FSS’s 150% guideline.
Industry voices are critical of the FSS’s stringent stance. Despite acknowledging the necessity of maintaining a 150% K-ICS ratio post-redemption, experts argue that the regulator is fueling market instability. Of the 900 million won in Lotte Insurance’s disputed bonds, 676 million won are held by individual investors. One senior financial sector official noted, “Blocking issuance due to a mere 0.5 percentage point shortfall signals excessive regulatory rigidity. Insurers with lower K-ICS ratios will struggle with higher interest rates and limited refinancing options.”
The FSS justified its position, citing that Lotte Insurance’s K-ICS ratio had fallen below the threshold as of the end of March, thus disqualifying it from early bond redemption. The agency also confirmed that Lotte failed to attract demand for a planned refinancing bond issuance.
Criticism intensified over what some see as regulatory overreach. “The FSS’s suggestion of possible corrective action—typically the domain of the Financial Services Commission—could be construed as exceeding its authority,” said another financial industry official. “Publicly confirming a failed refinancing effort only deters future investors.”
Some industry observers believe the FSS’s actions have tarnished Lotte Insurance’s credibility. “The Commission has remained silent, while Lotte, which employs a unique capital model, appears to be singled out,” said an insurance executive, suggesting the company is being penalized for its unconventional approach.
Looking ahead, the outlook for insurance capital management remains uncertain. With the upcoming introduction of the basic capital K-ICS ratio in the second half of the year, alternative capital-raising avenues may narrow significantly. “Once the new rules exclude metrics like the Contract Service Margin (CSM) from capital adequacy calculations, maintaining K-ICS compliance will become even more difficult,” an insurance industry analyst warned.
Related topic:
Insurance Rates Decline Across Major Lines in Pacific Region, According to New Report
Fine Art Insurance Market Poised to Reach $838.4 Billion by 2034, Driven by Growing Demand in APAC
Talanx Group Reports $683M Net Income for Q1, Surpassing Expectations
