Lotte Insurance (000400.KS) has been improving its asset soundness by halting new alternative investments for nearly five years. The company has been preemptively disposing of high-risk assets such as aircraft and overseas real estate while increasing the share of safe assets including bonds. The market assesses that Lotte Insurance’s overhaul is gaining momentum.
According to financial industry sources Tuesday, Lotte Insurance has not executed a single new alternative investment since 2021. Instead, it has continued to reduce its existing alternative investment assets, focusing on stabilizing its asset portfolio.
In fact, Lotte Insurance’s balance of alternative investment beneficiary certificates fell from 4.1019 trillion won in 2021 to 2.7947 trillion won at the end of last year. Its share of total managed assets also declined from 23.8% to 20.6%. By contrast, the share of bonds expanded from 33.5% to 52.8%. The scale of alternative investments reduced over 20 quarters reached 1.607 trillion won.
The company is also accelerating its disposal of high-risk assets. Since 2023, Lotte Insurance has sold or recovered 31 high-risk investment assets worth about 700 billion won. Notably, it sold the entire 100 billion won in senior secured loan claims from a bridge loan for ‘The Palace 73,’ a luxury residential facility in Banpo-dong, Seoul.
“It was an asset that we disposed of preemptively in consideration of risks from changes in the business environment, even though interest was being paid normally,” a Lotte Insurance official said. “We recovered it without loss at a level exceeding our target internal rate of return.”
Alternative investments are classified as an asset class that increases insurers’ capital burden due to relatively high volatility and long recovery periods. The strategy of halting new investments and reducing existing assets has the effect of lowering the required capital burden when calculating the Korean Insurance Capital Standard (K-ICS) ratio. Lotte Insurance is also expanding the share of safe assets such as HUG guarantee-backed loans and bonds, and operates a dedicated organization for post-management of overseas beneficiary certificates.
This has led to improvements in soundness indicators. As of the end of March this year, Lotte Insurance’s K-ICS ratio after transitional measures stood at 164.4%, exceeding the financial authorities’ recommended level of 130%. The K-ICS ratio, which had fallen to 119.9% in the first quarter of last year, improved to 159.3% at the end of last year and has continued its upward trend this year.
Lotte Insurance is currently implementing the management improvement plan it submitted to financial authorities. The industry views that the reduction of alternative investments and the disposal of high-risk assets will not only improve capital soundness but also lower the due diligence burden for potential buyers during the upcoming sale process. “Lotte Insurance has focused on reducing risky assets rather than expanding its scale over the past few years,” an insurance industry official said. “If asset soundness improves along with the implementation of the management improvement plan, it could also work positively for the sale process.”