Lotte Insurance Switching Back to Growth... Aiming for a Rebound This Year

Turned to Deficit Again After One Year of Surplus
Impact of Increased Long-Term Guaranteed Sales and Financial Asset Losses
Performance Expected to Improve This Year with IFRS17 Adoption

[Asia Economy Reporter Minwoo Lee] Lotte Insurance recorded a loss last year. Nevertheless, as sales of long-term protection insurance, which is advantageous under the new International Financial Reporting Standard (IFRS 17), increased, the company plans to improve profitability starting this year.

According to the Financial Supervisory Service's electronic disclosure on the 17th, Lotte Insurance posted an operating loss of 76.1 billion KRW and a net loss of 62.8 billion KRW last year. This represents a sharp decline compared to the previous year (operating profit of 129.4 billion KRW, net profit of 119.9 billion KRW). After the major shareholder, private equity fund JKL Partners, acquired the company in 2019, Lotte Insurance returned to a loss just one year after posting its first profit in 2021.

This is attributed to increased sales expenses for long-term protection insurance and significant bond losses due to a rapid rise in interest rates. A Lotte Insurance official explained, "Last year, to secure Contractual Service Margin (CSM), which is favorable under IFRS 17, we increased sales of long-term protection insurance, which raised costs, and there was some recognition of losses on financial assets due to the sharp rise in interest rates. Excluding these one-time factors, operating profit last year would have been around 180 billion KRW."

However, the company emphasized that performance will improve starting this year with the introduction of IFRS 17. Under IFRS 17, with the introduction of CSM, insurance premiums and expected profits are recognized annually as insurance operating profit. The more CSM is secured, the more profits continue in the long term. Accordingly, the company is also changing its insurance service (product) composition, focusing on long-term protection insurance.

In fact, Lotte Insurance's gross written premiums for long-term protection insurance increased by 8.2%, from 1.7255 trillion KRW in 2021 to 1.8669 trillion KRW last year. The proportion of long-term protection insurance in total gross written premiums also rose from 76% in 2021 to 80% in 2022. Along with this, the initial monthly premiums paid by new policyholders, called 'new monthly premium sales,' increased by 24.7% to 28.3 billion KRW compared to the previous year. Overall gross written premiums also rose by 2.6% to 2.3292 trillion KRW last year.

The increase in sales expenses was also explained as preparation for this year. Lotte Insurance's total sales expenses last year were 361.4 billion KRW, an increase of 100.9 billion KRW from the previous year. A Lotte Insurance representative said, "We used sales expenses to strengthen the competitiveness of sales channels to build an insurance portfolio optimized for IFRS 17," adding, "Through this, we expanded the exclusive sales force to about 2,500 people last year."

Starting this year, with the application of IFRS 17, business expenses will not be recognized all at once but will be allocated over the insurance contract period. This means the impact of sales expenses on short-term performance will be significantly reduced. It is also expected that the temporary and one-time loss recognition on some bond assets will normalize as the sharply declined market interest rates recover.

Additionally, the temporary and one-time loss recognition on some bond assets was due to the rapid rise in market interest rates, and it is anticipated that most of the valuation losses will be recovered once the bond market stabilizes. Most of these bonds guarantee the principal if held until maturity.

Lotte Insurance plans to increase its net assets to 1.5 trillion KRW under the new accounting standards by the end of this year. Last year's net assets were 449.7 billion KRW. A Lotte Insurance official stated, "Following our mid- to long-term plan, we will steadily increase CSM to establish a stable profit expansion base and continuously improve profitability and soundness."

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