Four Companies on Short List
Goldman Sachs selected KB Financial Group, MBK Partners, Hahn & Company and IMM Private Equity as qualified candidates for the acquisition of Prudential Life Insurance Company on Jan. 23. MBK Partners, Hahn & Company and IMM Private Equity are the three largest private equity funds in South Korea. With the price of the life insurance company drawing much attention, it is anticipating a price of approximately three trillion won. However, its liabilities are likely to increase a lot under IFRS 17 scheduled to become effective in 2022.
The current price estimate is about two trillion won. In most cases of M&A in the industry, enterprise value calculation is based on the price-to-book ratio (PBR). In the third quarter of last year, Prudential Life Insurance Company’s net assets totaled 3,126.7 billion won. The price can reach as high as 3.34 trillion won if a PBR of 1.1 is applied. Prudential Financial U.S.A., the seller, is anticipating a price of about 3.2 trillion won.
Still, the price can be lowered in that Orange Life Insurance, which was sold to Shinhan Financial Group by MBK Partners in 2018, currently has a PBR of 0.59. The price based on that PBR is approximately 1,845 billion won. Considering control premium and so on, the final price is likely to be around two trillion won.
In short, it is the PBR that holds the key. At present, the PBRs of life insurance companies in the South Korean market are very low. For example, that of Samsung Life Insurance, the largest in the market, is 0.46 and that of Hanwha Life Insurance is 0.16.
Although Prudential Life’s financial soundness and profitability surpass those of the South Korean companies, its current capital adequacy level is unlikely to be maintained under IFRS 17. In the third quarter of 2019, Prudential Life’s risk-based capital (RBC) ratio amounted to 515.04 percent, the highest in the market. The ratio is predicted to drop once the Korean Insurance Capital Standard (K-ICS) for market price-based liabilities valuation is implemented in 2022.
“Prudential provides a number of insurance products guaranteeing high interest rates, which means its liabilities can soar after the market price-based valuation, and the ratio can drop faster than expected in that low interest rates are likely to continue for a while,” said an investment banker, adding, “Although the current ratio exceeds 500 percent, it will drop under the K-ICS, and then the price of the company will be affected.”