'Deferred Corrective Action' Lotte Insurance · 'Disapproval of Management Improvement Plan' MG Insurance

Urgent Need to Address Management Risk Renewal Challenges

[Asia Economy Reporter Oh Hyung-gil] Lotte Insurance and MG Insurance have turned on red lights due to recurring management risks. Lotte Insurance breathed a sigh of relief after receiving a grace period for corrective measures from financial authorities, but it now faces the challenge of management reform. MG Insurance is also required to resubmit its management improvement plan by the end of this month.

According to financial authorities and the insurance industry on the 6th, the Financial Services Commission recently decided at a regular meeting to grant a grace period for corrective measures against Lotte Insurance.

Lotte Insurance received an overall rating of Grade 4 (vulnerable) in this year's Risk Assessment and Analysis System (RAAS), dropping one level from last year. According to the Insurance Business Supervision Regulations, an overall rating of Grade 4 or below triggers the second stage of corrective measures, called ‘Management Improvement Request.’

A financial authority official explained, "The grace period decision means the government does not yet consider it necessary to enforce mandatory measures," adding, "Instead of immediate action, it urges insurers to voluntarily implement improvement efforts within a set period."

Lotte Insurance faced issues in risk rate management, including reckless alternative investments. In the fourth quarter of last year, impairment losses amounting to 150 billion KRW occurred related to aircraft, overseas real estate, and social overhead capital (SOC) investment assets.

As of the end of 2020, Lotte Insurance's aircraft investment amounted to approximately 850 billion KRW, and overseas real estate and SOC investments totaled about 1.9 trillion KRW, accounting for 5% and 12% of total assets, respectively. During the same period, the return on invested assets was only 1.6%. Consequently, Korea Credit Rating and Korea Ratings downgraded Lotte Insurance's rating outlook from ‘stable’ to ‘negative’ earlier this year.

Lotte Insurance is undertaking management reform by selling its headquarters building for 224 billion KRW and replacing its Chief Investment Officer (CIO) and head of the financial investment group. The solvency capital ratio (RBC) increased from 162% at the end of last year to 194% at the end of June.

MG Insurance, whose management improvement plan submitted at the end of last month was rejected, must urgently resolve its capital shortfall. MG Insurance also received a Grade 4 rating in RAAS, prompting financial authorities to demand a management improvement plan.

As MG Insurance's financial soundness deteriorated, its RBC ratio dropped from 105.5% at the end of March to 97% at the end of June this year. Major shareholder JC Partners announced plans for a 150 billion KRW paid-in capital increase, but the plan, which was supposed to be completed by last month, has not been fulfilled. Financial authorities have instructed MG Insurance to resubmit its management improvement plan by the end of this month.

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