The Korea Development Bank (KDB) will sell its stake in KDB Life Insurance Co. as well as increase capital in 2020 after stabilizing the company. However, it is uncertain that KDB Life Insurance can turn from an ugly duckling into an attractive investment by improving its financial soundness and reorganizing its portfolio based on term insurance over the next two years.
According to investment banking industry sources on March 27, the KDB believes that it needs to inject an additional 200 billion won (US$186.22 million) of capital into KDB Life Insurance according to the new international accounting standard for insurance contracts, or IFRS 17, to be introduced effective January 1, 2021, and will sell the company on the condition that a buyer participates in that worth of paid-in capital increase.
The KDB currently holds an 85 percent stake of KDB Life Insurance through KDB Consus Value Ltd. with 60.3 percent and KDB Consus Value Private Equity Fund with 24.7 percent. The bank will partially sell its stake in KDB Life Insurance.
As KDB Life Insurance is suffering from financial difficulties now, it needs a new capital injection immediately. The risk-based capital (RBC) ratio of KDB Life Insurance stood at 108.5 percent as of December last year, one of the lowest in the industry. The figure was just above 100 percent of the baseline that financial authorities order corrective measures, such as recommendations for operation improvement. Accordingly, the KDB carried out 300 billion won (US$279.59 million) worth of the capital increase at the end of January.
With the latest capital increase, the RBC ratio of KDB Life Insurance is estimated at 171 percent, according to the Korea Ratings. In addition, KDB Life Insurance is planning to improve its RBC ratio further by issuing hybrid bonds worth 500 billion won (US$465.98 million) in total. The company has decided to put 300 billion won (US$279.59 million) worth of them on the market first. Foreign-based Nomura Securities Co. and UBS Securities Co. will manage issuance. The market shows a positive response as there is an abundance of liquidity.
Lee Dong-geol, chairman of the KDB, recently said, “We will not sell KDB Life Insurance for at least two years and stabilize the company first.” Accordingly, the KDB is expected to sell KDB Life Insurance around in 2020 when the IFRS17 takes effect.
The KDB expects that new CEO Jeong Jae-wook who took office on February 21 will accelerate the management normalization by aggressively selling mainly term insurance products in order to improve its asset portfolios that focused on low-margin deposit insurances.
However, market experts say KDB Life Insurance is less likely to turn over a new leaf because it is hard to reorganize an asset portfolio and improve a financial soundness in two years. Therefore, there is also a big difference between the prices that KDB Life Insurance wants and the market expects. The market estimates the sale price of KDB Life Insurance at some 600 billion won (US$559.18 million), while the KDB expects to sell the company for 800 billion to 900 billion won (US$745.57 million to 838.77 million).
The KDB raised 650 billion won (US$605.78 million) of funds in 2010 when it bought Kumho Life Insurance, now KDB Life Insurance, and has invested 850 billion won (US$791.43 million) in the company so far by carrying out a series of paid-in capital increases and capital reductions without refund. An official from the KDB said, “An additional injection of 300 billion won (US$279.59 million) should be included in the sale price of KDB Life Insurance. However, it has become harder to sell the company as the life insurance market conditions have deteriorated, including the rise in interest rates.