Due to the intervention of the Financial Supervisory Service, the call option (early redemption) for Lotte Insurance's subordinated bonds has been postponed, raising concerns in the insurance industry regarding the tightening of the funding market. With approximately 1 trillion won worth of capital securities call options maturing in the second half of the year, some small to medium-sized companies with weak capital soundness are expected to face difficulties in funding. The demand forecast for Shinhan Life Insurance's subordinated bonds on the 27th is expected to be the first test stage for the funding of insurance companies following the Lotte Insurance incident.
According to the insurance industry on the 26th, Shinhan Life will conduct a demand forecast for the issuance of subordinated bonds (AA+) on the 27th. The total size is 300 billion won, with a desired interest rate range of 3.3% to 3.9%. The target issuance date is the 5th of next month.
Following the postponement of the call option for Lotte Insurance's subordinated bonds, this marks the first issuance of capital securities by an insurance company, drawing industry attention. The fact that what was previously taken for granted regarding the exercise of call options could be postponed due to regulatory intervention, coupled with the strengthening of capital regulations for insurance companies, raises concerns about the tightening of funding in the insurance sector.
The aftereffects of the Lotte Insurance incident are already affecting the bond market. Following the postponement of the call option for Lotte Insurance, the distribution interest rates for subordinated bonds from small to medium-sized insurance companies like Fubon Hyundai Life and KDB Life have surged. In the bond market, rising interest rates imply falling prices.
CJ CGV conducted a demand forecast for the issuance of a new capital securities, the first since the Lotte Insurance incident, but recorded some unsold portions.
The market expects Shinhan Life's subordinated bonds to meet the target amount. As a subsidiary of Shinhan Financial Group with a high credit rating of 'AA+' and excellent capital soundness, it is seen favorably. However, whether the demand forecast will be successful is the key issue.
Shinhan Life plans to increase its limit to a maximum of 500 billion won based on the results of the demand forecast. If significant investments are not gathered for the issuance of subordinated bonds from high-quality insurance companies like Shinhan Life, small to medium-sized companies will inevitably struggle with funding.
By the end of next year, the insurance companies will have capital securities with maturing call options amounting to 3.8 trillion won, including subordinated bonds worth 2.5386 trillion won and new capital securities worth 1.2682 trillion won. Among these, 994 billion won must exercise their call options in the latter half of this year.
The insurance industry believes that the Lotte Insurance incident will be a temporary phenomenon. However, some insurance companies that barely meet or fall short of the Financial Supervisory Service's capital soundness regulations are considering the possibility that they may not be able to exercise their call options due to the intervention of the Financial Supervisory Service.
An industry insider noted, "Concerns have grown that the exercise of call options, which was previously taken for granted, may be postponed as seen in the Lotte Insurance case," adding, "There are already discussions in the market regarding the names of insurance companies that are expected to find it difficult to exercise their call options or endure high interest rates."