Korea Ratings: Decline in Capital Adequacy at Lotte Insurance Seen as Negative for Credit Rating

Korea Ratings stated on May 9 that a decline in capital adequacy poses a more negative impact on Lotte Insurance's credit rating than the early redemption (call option) exercise itself.

According to insurance industry supervision regulations, subordinated bonds issued by insurers can only be redeemed early if the risk-based capital (RBC) ratio remains at 150% or higher after redemption. If the RBC ratio falls below 150%, the insurer must submit alternative funding plans, such as refinancing or capital increase, to the supervisory authorities. Early redemption is only possible after prior approval and completion of alternative funding arrangements.

Korea Ratings explained, "As of the end of last year, Lotte Insurance's RBC ratio was already close to 150%, and it is estimated that redeeming the subordinated bonds would cause the ratio to fall below 150%. Therefore, the company did not meet the requirements for early redemption. The supervisory authorities appear to have withheld prior approval for the call option exercise, considering the failure to meet early redemption requirements and concerns over financial soundness."

The agency added, "This postponement of early redemption could weaken Lotte Insurance's access to the capital markets due to a decline in credibility. However, considering the early redemption schedule for the remaining capital securities, Lotte Insurance still has some time to restore market confidence."

However, Korea Ratings assessed that the deterioration in capital adequacy would be a greater burden on the company's credit rating than the direct impact of the early redemption delay. According to Korea Ratings, as of the end of last year, Lotte Insurance's RBC ratio was 125.8% before transitional measures and 154.6% after transitional measures.

Due to regulatory tightening and falling market interest rates, the RBC ratio declined by 49.0 percentage points and 58.6 percentage points, respectively, compared to the end of the previous year. In addition, in 2024, Lotte Insurance applied an exception model instead of the standard model for the lapse rate of non-cancellable and low-cancellation insurance, as suggested by the supervisory authorities. Korea Ratings noted that applying the standard model would have resulted in an even lower RBC ratio.

Korea Ratings emphasized, "Downward pressure on capital adequacy is expected to persist going forward. The strengthening of the RBC system is scheduled through 2027, and if market interest rates decline further, capital adequacy could deteriorate even more compared to the current level."

The agency also stated, "This year, regulatory changes such as the reduction of the long-term leading interest rate and the introduction of a new core capital RBC ratio indicator are planned. Considering the possibility of capital expansion and the composition of available capital, the current level of capital adequacy at Lotte Insurance remains a burden on its credit rating."

Korea Ratings concluded, "We will closely monitor Lotte Insurance's capital ratio management compared to its peers and reflect this in the credit rating. As this early redemption delay could increase market volatility, we will also thoroughly examine the overall capital raising environment and capital adequacy management across the insurance sector."

This content was produced with the assistance of AI translation services.