Lotte Insurance Sale in Jeopardy... Trillion-Won Deal Unlikely

Concerns Over Winner's Curse Amid Profitability and Soundness Challenges

Some Highlight the Appeal of the Business Portfolio

Uncertainty surrounding the sale of Lotte Insurance is growing. The exclusive negotiations with Shinhan Financial Group have effectively been suspended, increasing the possibility of a public sale, and there is also a significant gap between the price expectations of buyers and sellers. The investment banking (IB) and insurance industries are valuing a reasonable purchase price for Lotte Insurance at around 700 billion won, leading to speculation that a trillion-won-level deal—initially hoped for by majority shareholder JKL Partners—will be difficult to achieve. If this price gap cannot be narrowed, there is also a possibility that the sale process will drag on.

Lotte Insurance Headquarters, Jung-gu, Seoul. Lotte Insurance

According to the financial sector on August 7, exclusive negotiations between Lotte Insurance and Shinhan Financial Group did not result in an agreement and have effectively come to an end. While there is market speculation that Shinhan Financial Group could still reconsider an acquisition during a potential public sale process, Korea Investment Holdings (also known as Korea Financial Holdings) is also being discussed as a potential bidder.

Shinhan Financial Group has yet to clarify whether it will withdraw from the acquisition battle for Lotte Insurance or its desired purchase price. A representative from Shinhan Financial Group responded to an inquiry about the company’s intentions by saying, "We plan to pursue any merger or acquisition (M&A) only if it clearly improves our return on equity (ROE)." Jung-hoon Jang, Chief Financial Officer (CFO) and Senior Vice President of Shinhan Financial Group, also stated on the second-quarter earnings conference call on July 23, "We will naturally maintain a stable Common Equity Tier 1 (CET1) ratio, and will only conduct M&A if we are confident that earnings per share (EPS) or ROE will improve within that available range."

In the insurance industry, there is a view that Shinhan Financial Group’s stance does not necessarily mean a complete withdrawal from the acquisition race. However, the prevailing industry opinion is that even if Shinhan Financial Group or Korea Investment Holdings emerge as the ultimate acquirer, the deal price is likely to fall short of not only the approximately 2 trillion won sought by JKL Partners but also the 1 trillion won figure that was most recently discussed at the negotiating table.

IB and insurance sector insiders estimate a reasonable purchase price for Lotte Insurance at around 700 billion won. It is analyzed that prospective buyers are likely to set the price conservatively, taking into account Lotte Insurance’s profitability, financial soundness, and the possibility of needing to inject additional capital after the acquisition. They are wary of the so-called “winner’s curse,” in which an acquirer pays an excessively high price during a competitive bidding process and then struggles with financial burdens or management difficulties.

Some are concerned that a decline in Lotte Insurance’s corporate value could lower the valuation standards for insurance company deals in general. If Lotte Insurance’s market value, which was estimated to be in the 2 trillion won range two years ago, drops to several hundreds of billions of won in a short period, it could negatively affect the valuation of other insurance companies as well.

The company’s recent profitability is also weighing on price negotiations. In the first quarter, Lotte Insurance recorded a net loss of 19.8 billion won, swinging to a loss from a net profit of 11.3 billion won in the same period a year earlier. During this period, the loss ratio for auto insurance rose by 8 percentage points, and the loss ratio for long-term insurance increased by 4.8 percentage points—raising concerns about worsening profitability. The loss ratio refers to the proportion of insurance payments made by an insurance company relative to the premiums collected; the higher the figure, the more profitability has deteriorated.

Financial soundness indicators have improved. Lotte Insurance’s new risk-based capital system (K-ICS) ratio rose by 44.5 percentage points—from 119.9 percent at the end of the first quarter last year to 164.4 percent at the end of this year’s first quarter. However, despite such improvements, the insurance industry believes buyers may still need to inject additional capital post-acquisition to maintain stable financial soundness, which could be a burden for potential acquirers.

Market watchers are focusing on whether JKL Partners will accept a certain level of price reduction and push forward with a public sale. The sales processes of other insurers, including KDB Life Insurance and Yebyeol Insurance, are also gaining momentum, potentially intensifying competition among bidders.

Particularly, as the main bidding for KDB Life Insurance is scheduled for today, the increase in competing assets is likely to put JKL Partners and Lotte Insurance in a difficult position. There is also a variable in that Korea Investment Holdings is actively participating in other insurance acquisition contests. If Korea Investment Holdings shifts its focus to other assets, Lotte Insurance could lose one of its key potential bidders, further weakening its bargaining position.

An executive in the non-life insurance sector commented, “In terms of key fundamentals for evaluating an insurance company—such as the productivity of contracted financial planners (FPs), net income, and the loss ratio—Lotte Insurance is considered to fall short of industry averages.” He added, “The fact that Shinhan Financial Group is remaining cautious even at a price below 1 trillion won shows that the burden of continuously injecting additional capital to manage financial soundness is diminishing the appeal of acquiring Lotte Insurance.”

Nevertheless, some believe that Lotte Insurance’s business portfolio remains attractive. A life insurance industry insider said, “Since non-life insurance companies generally have more room for expanding product sales and business operations than life insurance companies, Lotte Insurance is still an appealing asset. For financial holding groups, diversifying non-banking business and leveraging Lotte Insurance’s existing customer base for a swift entry into the non-life market means they are unlikely to give up easily on this acquisition.”

This content was produced with the assistance of AI translation services.