The rift between Lotte Insurance and the financial authorities is deepening. JKL Partners, the largest shareholder of Lotte Insurance, is pushing to sell the insurer and has pushed back whenever measures from the authorities that are unfavorable to the sale have emerged.
Lotte Insurance held an extraordinary board meeting on the 11th and decided to file for an injunction to suspend the effect of the Financial Services Commission (FSC)'s management improvement recommendation and to file an administrative suit to cancel the recommendation. A management improvement recommendation is a measure that urges management improvements at a financial company whose financial soundness falls below a certain standard. The FSC, citing insufficient capital adequacy in its management status assessment of Lotte Insurance, resolved to issue a management improvement recommendation, the lowest level among prompt corrective actions.
If the effect of the management improvement recommendation is not suspended, Lotte Insurance must submit within two months a management improvement plan that includes measures to enhance capital adequacy, such as asset sales and expense reductions. To raise capital in the short term, a paid-in capital increase is the fastest option, but for JKL Partners, which wants to sell Lotte Insurance at a high price, injecting additional funds is a burden. The insurance industry interprets JKL Partners' pushback as a reaction to a decision seen as unfavorable to a sale.
This is not the first time Lotte Insurance has defied the financial authorities. After criticism surfaced that insurers were inflating accounting profits, the financial authorities issued accounting guideline (principles model) in Nov. last year, but Lotte Insurance alone continues to apply the exception model.
The financial authorities warned, "Do not make the mistake of choosing the exception model," but Lotte Insurance did not accept it. If the principles model is applied, the solvency indicator, the risk-based capital ratio (K-ICS; Korean Insurance Capital Standard), declines. To lift K-ICS, capital must be increased.
Lotte Insurance also resisted a decision by the financial authorities when it came to the early redemption (call option) of subordinated bonds in May. Insurers typically issue 10-year subordinated bonds and redeem them by exercising the call option after five years, but the Financial Supervisory Service (FSS) objected, warning that early redemption of 90 billion won could negatively impact financial soundness. Lotte Insurance tried to push ahead with the early redemption despite the FSS's opposition but ultimately withdrew it.
JKL Partners bought a 77.04% equity stake in Lotte Insurance for 730 billion won in 2019. When Woori Financial Group reviewed acquiring Lotte Insurance in the first half of last year, JKL Partners demanded about 2 trillion won, but Woori Financial said it "will not pay an excessive price" and dropped the bid.
At the time, Lotte Insurance's market capitalization exceeded 1 trillion won, but as the new accounting standard (IFRS 17) and the financial authorities' soundness regulations converged, its soundness deteriorated and the share price fell sharply. Lotte Insurance's current market capitalization is around 570 billion won.