Bad news is piling up as the credit ratings of bonds issued by Lotte Non-Life Insurance are downgraded.
According to the financial sector on Feb. 10, Korea Ratings lowered the credit rating of Lotte Non-Life Insurance's subordinated bonds to A- from BBB+, and its hybrid capital securities to BBB from BBB+. If the credit rating of the hybrid capital securities falls one more notch, it will become "junk grade," which is non-investment grade.
The downgrade stems from a dispute between the financial authorities and Lotte Non-Life Insurance. The Financial Services Commission resolved to issue a management improvement recommendation, the lowest level among prompt corrective actions, to Lotte Non-Life Insurance. Lotte Non-Life Insurance objected and filed for an injunction to suspend the effect of the recommendation, but it was rejected. Lotte Non-Life Insurance later submitted a management improvement plan, but the financial authorities did not approve it, saying the feasibility was low, and ordered the company to implement a higher-level management improvement requirement.
Korea Ratings noted, "At the management improvement requirement stage, plans may be required for branch closures, consolidations, or restrictions on new openings; replacement of executives; and partial suspension of insurance operations," adding, "If improvement efforts are deemed insufficient, the possibility cannot be ruled out that this could lead to a management improvement order, the highest level of prompt corrective action."
Lotte Non-Life Insurance's decision to delay the early redemption (call option) of its subordinated bonds also weighed on the downgrade. Lotte Non-Life Insurance had planned to redeem subordinated bonds issued in May 2020 early in May last year. Although subordinated bonds are issued with 10-year maturities, it is customary in the market to redeem them early five years after issuance. However, the financial authorities did not allow this, resulting in a failed early redemption.