The Financial Supervisory Service (FSS) has suspended the early redemption of subordinated bonds by Lotte Insurance, creating significant ripples throughout the insurance industry, reported Business Korea.
As the solvency ratio (K-ICS) of insurers nears the 150% threshold set by authorities, interest rates on subordinated bonds are rising, raising doubts about the feasibility of future refinancing efforts. The market is expressing concerns that the authorities’ swift capital regulations and their focus on a particular company are contributing to growing market uncertainty.
As of May 11, sources in the financial sector report that, in addition to Lotte Insurance, five other insurers are facing the potential exercise of call options on subordinated bonds worth a total of KRW5.9bn ($4.5m) this year.
Fubon Hyundai Life Insurance is set to exercise call options on subordinated bonds amounting to KRW150m in the coming month, and KRW500m in September.
Similarly, Heungkuk Fire & Marine Insurance (KRW400m in July), Shinhan Life Insurance (KRW300m in August), and Meritz Fire & Marine Insurance (KRW105bn in November) are approaching their respective call option deadlines.
The problem stems from the volatility in interest rates on these insurers’ subordinated bonds.
On May 9, the trading yield of Lotte Insurance’s 8th subordinated bond was 0.73 percentage points higher than the rate estimated by private bond evaluation firms.
Similarly, Fubon Hyundai Life 20 (sub) recently experienced an increase of 0.7 to 0.9 percentage points, while KDB Life Insurance 12 (sub) saw a rise of approximately 0.4 percentage points.