Lotte Insurance Faces Triple Hardships After Acquisition by JKL Partners (Comprehensive)

Net Loss of 16.6 Billion Last Year... Two Consecutive Years of Deficit
Increased Sales of No-Refund and Low-Surrender Value Insurance but Decreased Profitability

[Asia Economy Reporter Oh Hyung-gil] ‘Two consecutive years of losses, negative evaluation of insurance payment capability, sudden resignation of the CEO’

This is the recent management report card received by Lotte Insurance. Since being acquired by the private equity fund JKL Partners in 2019, the company has been experiencing a decline in soundness due to poor business performance, and its leadership is also facing a crisis. There are even signs that financial authorities are moving to strengthen supervision over Lotte Insurance.

According to the insurance industry on the 18th, Lotte Insurance recorded a net loss of 16.6 billion KRW last year, continuing its deficit from the previous year. This is in stark contrast to the recovery in performance seen in major non-life insurers after COVID-19.

The biggest cause of the loss was the failure of overseas alternative investments. Asset impairment losses of 159 billion KRW occurred in aircraft and overseas real estate, amounting to nearly 17% of the company’s equity capital.

Even insurance premium income is declining. Last year’s sales were 2.2344 trillion KRW, down 8.4% from 2.4405 trillion KRW the previous year. Although the company attempted to change its insurance product portfolio by reducing automobile insurance and savings-type insurance and increasing long-term protection insurance, this instead eroded its performance.

The insurance industry believes that Lotte Insurance’s aggressive increase in sales of no-surrender and low-surrender value insurance to boost revenue has caused side effects. It is known that until the first half of last year, Lotte Insurance held a market share exceeding 20% in the entire no-surrender product market.

No-surrender and low-surrender value insurance products have lower premiums than regular products but do not pay or pay very little surrender refunds upon cancellation. If customers cancel their insurance within the contract period, the insurer does not have to refund the premiums, allowing the insurer to avoid accumulating reserves accordingly.

In particular, Lotte Insurance calculated the surrender refunds of no-surrender and low-surrender value insurance as none or minimal last year to increase available capital but corrected this calculation earlier this year. As a result, the solvency margin ratio (RBC ratio) as of the third quarter of last year dropped significantly from 192.9% to 169.4%, a decrease of 14.3 percentage points. This barely exceeds the financial authorities’ recommended standard of 150%.

CEO Replacement Due to Deteriorating Performance... Authorities Strengthen Monitoring

In this situation, Korea Credit Rating downgraded Lotte Insurance’s insurance payment capability credit rating from ‘A Stable’ to ‘A Negative’ last month.

Korea Credit Rating analyzed, "Lotte Insurance has maintained a high-yield, high-risk asset management tendency to grow the retirement pension sector’s scale," adding, "Although it is shifting to conservative asset management after the change of major shareholders, it seems difficult to resolve the burden of non-performing investments in the short term."

The worsening business performance led to a CEO replacement. Choi Won-jin, a former JKL Partners member and CEO of Lotte Insurance, suddenly resigned six months before his term ended, and Lee Myung-jae, former CEO of Allianz Life, was appointed as the new CEO. The industry interprets that CEO Choi’s reckless management, despite having no insurance experience, ultimately caused failure.

Lotte Insurance is also preparing to sell its Namdaemun headquarters building. The company is currently negotiating a sale worth 200 billion KRW with Capstone Asset Management, the preferred bidder. The sale of the headquarters is expected to somewhat improve the lowered RBC ratio.

Financial authorities are also reportedly strengthening monitoring of the increase in no-surrender insurance sales and the RBC ratio at Lotte Insurance. A financial authority official explained, "We are comprehensively examining whether the increase in no-surrender insurance sales could cause consumer harm."

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