Lotte Insurance Receives 'Management Improvement Recommendation'... Sale Process Faces Setbacks (Comprehensive)

FSC Issues "Management Improvement Recommendation" for Lotte Insurance at November 5 Meeting
Lotte Insurance Protests: "Prompt Corrective Action Based on Non-Quantitative Evaluation Is Unjust"
Lotte Insurance Labor Union: "We Will Respond with Prote

Lotte Insurance, a mid-sized non-life insurance company, has received a "management improvement recommendation," which is a prompt corrective action from the financial authorities. Both the management and labor union of Lotte Insurance are protesting this decision, considering legal action and planning demonstrations. The sale process of Lotte Insurance is also expected to face some setbacks as a result.

On November 5, the Financial Services Commission held a regular meeting and imposed the management improvement recommendation, which is the lowest level of prompt corrective action, on Lotte Insurance. Prompt corrective action is an administrative measure by which financial authorities require financial institutions with deteriorating soundness to improve their management. When a financial institution receives a management improvement recommendation, it must take actions such as disposing of non-performing assets, raising additional capital, or restricting business expenses.

Lotte Insurance Headquarters. Lotte Insurance

Previously, the Financial Supervisory Service conducted a regular inspection of Lotte Insurance in December last year and a special inspection in February this year. Focusing on Lotte Insurance's financial soundness, the Financial Supervisory Service assigned the company a comprehensive rating of grade 3 (average) and a provisional capital adequacy rating of grade 4 (vulnerable) through the Management Status Assessment (RAAS) in May. These results were delivered to the Financial Services Commission in the same month. Subsequently, Lotte Insurance submitted a capital increase plan to the financial authorities, but it was reportedly rejected due to the lack of specific capital-raising measures. As a result, the Financial Services Commission decided to issue the management improvement recommendation. An official from the commission explained, "It was not sufficiently confirmed that the reasons for prompt corrective action could be resolved in a short period of time," adding, "At the end of 2020, Lotte Insurance received a comprehensive grade 4 in the management status assessment and was granted a one-time deferral of prompt corrective action in September 2021."

This action by the financial authorities is unusual because a significant portion of the capital adequacy assessment was based on non-quantitative evaluation. The capital adequacy assessment consists of 60% quantitative and 40% non-quantitative evaluation. As of the end of June last year, Lotte Insurance's quantitative capital adequacy rating was grade 3. However, the Financial Supervisory Service assigned a grade 4 in the non-quantitative evaluation, citing reasons such as the deferral of the Own Risk and Solvency Assessment (ORSA) system, which lowered the overall capital adequacy rating to grade 4. This is the first time since 2005, when Ssangyong Fire & Marine Insurance was sanctioned, that prompt corrective action has been taken against a financial institution based on non-quantitative evaluation.

Lotte Insurance claims that the financial authorities' action is unfair. The company argues that, despite having met most quantitative indicators such as recent profit growth and improved solvency ratio (K-ICS), it is unreasonable for prompt corrective action to be imposed based on the authorities' subjective non-quantitative evaluation. Lotte Insurance's cumulative net profit for the third quarter was 99 billion won, a 42% increase compared to the same period last year. Its K-ICS (based on the exception model) stood at 141.6%, exceeding the financial authorities' recommended level of 130%. A representative from Lotte Insurance stated, "The deferral of ORSA implementation, cited by the authorities as the basis for the grade 4 rating, was carried out through a legitimate board resolution in accordance with the Enforcement Rules of the Insurance Business Supervision Regulations," adding, "It is potentially illegal to impose sanctions based on the management status assessment manual, which is an internal regulation, when the deferral of ORSA implementation was decided in accordance with higher-level laws."

However, the financial authorities stated that not only non-quantitative indicators but also quantitative indicators showed multiple problems for Lotte Insurance. Lee Dongyeop, Director of the Insurance Division at the Financial Services Commission, explained, "As of the end of June, the average basic capital K-ICS ratio for the non-life insurance industry was 106.8%, but for Lotte Insurance it was minus 12.9%," adding, "In addition, there were many soundness indicators, such as the proportion of non-surrender and low-surrender insurance and alternative investments, that were lower than the industry average."

The financial authorities also pointed out that Lotte Insurance had already received a one-time deferral of prompt corrective action in September 2021. Director Lee said, "In 2021, Lotte Insurance was granted a deferral of prompt corrective action and even held meetings with major shareholders, but the same issues are recurring four years later," adding, "We determined that Lotte Insurance should come under the supervision of the Insurance Business Act and the Act on the Structural Improvement of the Financial Industry and follow the improvement procedures."

The Lotte Insurance labor union announced its intention to fight and file lawsuits against the financial authorities. The union plans to hold a protest in front of the Financial Supervisory Service on November 6 and in front of the Financial Services Commission on November 7. The company is also considering various options, including administrative litigation. Kim Jeungjoo, head of the Lotte Insurance labor union, stated, "This is the kind of oppression of insurance companies seen only in underdeveloped countries," adding, "The company must challenge the illegality and unfairness of the Financial Supervisory Service and the Financial Services Commission through administrative litigation."

As a result of this action by the financial authorities, the sale of Lotte Insurance is also expected to face some obstacles. Korea Investment Holdings has been conducting due diligence for the acquisition of Lotte Insurance since August and is currently considering the price. If the management improvement recommendation negatively impacts Lotte Insurance's external reputation and business capabilities, price negotiations and other processes may not proceed quickly. A representative from Lotte Insurance said, "We plan to review a variety of response measures moving forward," adding, "We will faithfully fulfill our core roles as an insurance company, including normal business operations, sales activities for customers, and compensation and insurance payments."