Lotte Insurance's value rises with long-term care expansion

When South Korean private equity firm JKL Partners acquired a 77% stake in Lotte Insurance Co. for about 730 billion won ($546.3 million) in 2019, market watchers were skeptical that the PE manager’s first investment in a financial firm would be a success.

Last year, the insurer swung back to the black with 397.3 billion won in operating profit and 302.4 billion won in net profit, posting record-high earnings.

The highest performance since its inception in 1946 came after years of JKL’s efforts to improve the insurer’s fundamentals and financial indicators, market watchers say.

FOCUS ON LONG-TERM INSURANCE

Since the acquisition, JKL has placed a priority on expanding Lotte’s long-term insurance plan to grow the company’s insurance business. Focused on critical illnesses, injuries and accidents, the long-term plans require customers to pay higher premiums than short-term savings plans.

This strategy raised Lotte’s contractual service margin (CSM), which represents the expected profit for providing insurance contract services. CSM is a key indicator for International Financial Reporting Standard (IFRS) 17, the standard that Korean insurers introduced last year.

The ratio of Lotte’s long-term insurance plans leaped to 86.2% of all plans last year from 52.6% in 2019. The company’s CSM reached 2.4 trillion won at the end of 2023, up 42.9% from March 2023.

To boost sales of its long-term insurance plans, JKL also increased the number of exclusive agents for Lotte to more than 3,000 in 2023 from 1,200 in 2019. Lotte plans to further raise that number to 10,000 in the near future.

In addition, the insurer has differentiated itself with a special plan that covers cancer diagnosis up to eight times. Conventional plans typically cover only the first diagnosis.

PROFESSIONALS FOR STABLE GROWTH 

JKL has hired finance experts and former government officials as Lotte’s CEO and inside directors to swiftly respond to the changing environments of the insurance businesses.

In 2020, the PE firm tapped Choi Wonjin, its partner and a former official at the Ministry of Finance and Economy, as the new chief executive of Lotte. It also tapped Park Byung-won, ex-chairman of the Korea Federation of Banks, and Shin Jeyoon, ex-vice chairman of the Financial Services Commission, as inside directors of Lotte.

Lotte’s current CEO, Lee Eun-ho, who took office in March 2022, has been setting up strategies for government regulations with JKL since the acquisition.

“Increasing the value of a financial firm is not a simple matter. In the US, there are private equity managers such as J.C. Flowers & Co. that specialize in investments in the financial services sector,” said Choi. “Lotte has focused on long-term insurance plans rather than short-term profits to achieve steady growth,” he added.

IMPROVED FINANCIAL METRICS

To enhance the stability of its asset management, Lotte rebalanced its portfolio toward safe assets such as bonds while cutting exposure to aircraft and hotels. The proportion of bonds increased to 38% of total assets as of the end of September from 22.7% at the end of 2020.

Lotte’s K-ICS ratio, a key measure of a Korean insurer's financial soundness, was 208.4% as of the end of September, far surpassing the 150% recommended by the authorities.

JKL is accelerating the sale process of Lotte. JP Morgan Chase & Co., the lead manager, is set to send investment memorandums to local financial services firms this month.  

Lotte's share price has risen to about 2,900 won from 1,300 won a year ago amid expectations of the sale and the company’s improved earnings.

Write to Hyun-Ju Jang at blacksea@hankyung.com
Jihyun Kim edited this article.