According to Business Korea, the Financial Supervisory Service (FSS) has suspended Lotte Insurance‘s early redemption of subordinated bonds, sparking a strong reaction in the insurance industry.
As the insurance company’s solvency ratio (K-ICS) nears the 150% threshold set by authorities, the increasing interest rates on subordinated bonds have raised concerns over the feasibility of refinancing in the future. The market is worried that the swift capital regulation measures by authorities, along with their focus on certain companies, are intensifying market uncertainty.
As of May 11, industry sources revealed that, in addition to Lotte Insurance, five other insurance companies might face the risk of exercising call options on subordinated bonds worth a total of 59 billion Korean Won (approximately 45 million USD) this year.
Fubon Hyundai Life Insurance plans to exercise its call options on subordinated bonds worth 150 million Korean Won next month, and another 500 million Korean Won in September. Similarly, Heungkuk Fire & Marine Insurance (400 million Korean Won in July), Shinhan Life Insurance (300 million Korean Won in August), and Meritz Fire & Marine Insurance (1.05 billion Korean Won in November) are approaching the expiry dates for their respective call options.
The issue stems from the volatility in the interest rates of these insurance companies’ subordinated bonds.
On May 9, Lotte Insurance’s eighth series subordinated bonds saw a trading yield 0.73 percentage points higher than the yield estimated by private bond rating agencies. Similarly, Fubon Hyundai Life Insurance recently experienced a 0.7 to 0.9 percentage point increase in bond yields, while KDB Life Insurance saw a rise of about 0.4 percentage points.
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