According to financial industry and investment banking (IB) industry sources on March 11, KB Financial Group has joined a takeover battle for ING Life Insurance Korea and is to have a second leg with Shinhan Financial Group that recently started due diligence on the firm for a possible acquisition. Some market watchers said it can cause excessive competition since the ranking of leading financial groups can change depending on who is a new owner of ING Life Korea, which ranks sixth in terms of asset.
Earlier Shinhan Financial started conducting due diligence from February in order to review the company’s management indicators and calculate a reasonable price for the acquisition. Shinhan Financial has believed that it needs to strengthen its competitiveness in the insurance industry and sought to seek merger and acquisition (M&A) with other insurance firms from last year. When the group acquires ING Life Korea and merges with its subsidiary Shinhan Life Insurance, its capital can increase to 60 trillion won (US$56.01 billion) and take rank with NH Nonghyup Life Insurance, which is the fourth largest firm with capital of 63 trillion won (US$58.81 billion), joining the ranks of big players in the industry. In short, Shinhan Financial will be able to compete with NH Nonghyup Life, which ranks fourth in the industry in terms of capital after Samsung Life Insurance with 254 trillion won (US$237.12 billion), Hanwha Life Insurance with 109 trillion won (US$101.76 billion) and Kyobo Life Insurance with 95 trillion won (US$88.69 billion). Recently, Mirae Asset Life Insurance also jumped up to be the fifth biggest insurer in the nation as it completed its acquisition and integration with PCA Life Insurance.
Meanwhile, KB Financial negotiated with MBK Partners, the nation’s largest private equity firm, to acquire ING Life Korea last year. However, the two failed to reach an agreement as the group said it would not pay more than 2.2 trillion won (US$2.05 billion) for a 100 percent stake in ING Life Korea. KB Financial has started renegotiating with MBK Partners again from the end of last month as Shinhan Financial has sought to acquire ING Life Korea. MBK Partners, the largest shareholder of ING Life Korea, is opening data room for ING Life Korea and proceeding with a limited competitive bidding through its financial advisor, Morgan Stanley.
An official from the IB industry said, “KB Financial considers buying ING Life Korea into pieces in the form of a block deal or paying money conditionally through options after the acquisition rather than paying 3 trillion won (US$2.8 billion) of the sale to MBK Partners at once. MBK Partners is less likely to ignore the request of KB Financial because the private equity firm now has no reason to delay the sale due to the expiration of its right of trademark use for ING Life Korea from ING Group this year.”
ING Life Korea is considered the soundest insurer in terms of IFRS 17 and K-Insurance Capital Standard (ICS). When Shinhan Financial or KB Financial acquire the company, the ranking of the nation’s financial holding companies can change. The risk-based capital (RBC) ratio of ING Life Korea reaches 500% even with IFRS 17 applied. A risk-based capital (RBC) ratio is a key indicator of insurance firms’ financial soundness. The figure of most domestic insurers is at the 200 to 300 percent level. There are even insurance firms with less than 150 percent, a minimum ratio recommended by the Financial Supervisory Service (FSS).
The financial industry expects that it will encourage additional M&As in the insurance industry who will be the final winner in acquiring ING Life Korea. MG Non-life Insurance and KDB Life Insurance whose RBC ratios fall short of 150 percent will also need to find a new owner if their major shareholders don’t raise additional capital. In fact, creditors of MG Non-life sent a letter of intent (LOI) to potential buyers through Samil PricewaterhouseCoopers as its financial advisor on the same day.
Since KDB Life posted 76 billion won (US$70.95 million) in net loss last year, suffering losses, the insurer can be sold any time. Its major shareholder, Korean Development Bank, acquired the firm for 650 billion won (US$606.8 million) in 2010 and recently recapitalized 300 billion won (US$280.06 million) so the bank is reluctant to inject additional capital.
Hyundai Life is in a similar situation. The insurer let go of 150 employees through a voluntary retirement last year and is seeking to sell Hyundai Card building in Yeouido in order to resolve the long-standing financial crisis and prepare for IFRS 17. The industry says its largest shareholder Hyundai Motor can sell Hyundai Life to Taiwan’s Fubon Life Insurance, the second largest shareholder which holds a 48.6 percent stake in the firm.
As Lotte Hotel Busan has become the second biggest shareholder of Lotte Insurance, recent rumors about the sale of Lotte Insurance will disappear for a while. However, controversy over the sale of Lotte Insurance will still remain as Hotel Lotte, which is at the peak of the governance structure of Lotte Group in South Korea, is seeking to list on the stock market.
In addition, Tongyang Life Insurance and ABL Life Insurance, which were acquired by China’s Anbang Insurance, can be sold as the Chinese government has recently decided to run Anbang Insurance. An official from Tongyang Life said, “The Chinese government hasn’t made any effort to sell Anbang Insurance’s subsidiaries in South Korea – Tongyang Life and ABL Life Insurance – yet.” However, there are still rumors about the sale in the market.