KDB Life, Lotte Insurance, Yebyeol Insurance Successively Up for Sale... Capital Emerges as Main Barrier to M&A

Three-way Race in Final Bidding for KDB Life Insurance...
Lotte Insurance and Yebyeol Insurance Sales Also Accelerate

Capital Burden After Acquisition to Outweigh Purchase Price Ahead of New Basic Capital Regulations

Trillion-won Capital Injection Needed for KDB Life Insurance and Lotte Insurance

As significant insurers such as KDB Life Insurance, Lotte Insurance, and Yebyeol Insurance are consecutively put up for sale, financial institutions face increasingly complex calculations regarding potential acquisitions. Due to the introduction of the new basic capital risk-based capital system (K-ICS) regulation, which will take effect next year, the capital burden required after acquisition might surpass the initial purchase price. As a result, whether an acquirer has the capacity to inject additional capital going forward has emerged as a critical factor determining the viability of each deal.

According to the financial sector on August 11, three groups—Hanwha Life Insurance, Heungkuk Life Insurance, and Korea Investment Holdings—submitted final acquisition proposals for KDB Life Insurance. Samsung Life Insurance and Kyobo Life Insurance, which had participated in the preliminary bidding, did not join the main bidding round. This marks the seventh attempt by Korea Development Bank to sell KDB Life Insurance. As for Lotte Insurance, after the exclusive negotiation between its largest shareholder JKL Partners and Shinhan Financial Group fell through, the sale process has resumed. Following the failed exclusive talks with Shinhan Financial Group due to disagreements over price and other terms, JKL Partners is now preparing an open competitive sale. The sale of Yebyeol Insurance is a step ahead. Last month, Korea Deposit Insurance Corporation selected OK Next, a subsidiary of OK Financial Group, as the preferred bidder.

However, analysts point out that the biggest variable in finalizing these deals is not the purchase price, but the post-acquisition capital injection costs. Because of the capital regulations set to take effect next year, it is possible that the amount of capital required after purchasing an insurer could exceed the acquisition price itself. Earlier this year, the Financial Services Commission announced a policy requiring insurance companies to maintain a minimum K-ICS basic capital ratio of 50% starting in 2027. Under this regime, insurers whose basic capital ratio falls between 0% and 50% would face management improvement recommendations, while those with ratios below 0% would be subject to improvement requirements. Thus, potential buyers must consider not only the acquisition cost but also the additional capital required to meet these regulatory standards.

For instance, the enterprise value of KDB Life Insurance is estimated at around 500 billion to 600 billion won. However, as of the first quarter of this year, the company's basic capital stood at -356.7 billion won. Its K-ICS basic capital ratio for the first quarter was -25.2%. Based on this, the required capital is calculated at approximately 1.4155 trillion won. If the required capital remains at current levels, the basic capital must be raised to about 707.7 billion won to achieve a 50% K-ICS basic capital ratio. This means an additional capital injection of around 1.065 trillion won would be needed, potentially exceeding the company's market value as assessed by investors.

Lotte Insurance faces a similar situation. At the end of the first quarter, its basic capital was -350.9 billion won. Based on the current required capital of 2.0432 trillion won, it is estimated that an additional 1.4 trillion won would need to be injected in order to meet the K-ICS ratio. Considering that the acquisition price of existing shares being discussed is around 1 trillion won, the total capital burden for the acquirer could exceed 2 trillion won.

Capital injection is also the biggest post-sale challenge for Yebyeol Insurance. OK Financial Group has reportedly proposed injecting a total of 400 billion won over the next three years after acquiring Yebyeol Insurance. However, in order to raise the K-ICS ratio to the regulatory standard of 130% or higher by the end of this year, as per the actuarial supervision modernization plan announced by financial authorities at the beginning of the year, it is estimated that at least an additional 500 billion won will be required.

This does not mean that all insurers must immediately meet the regulatory ratio once the regime is implemented next year. The financial authorities have allowed a nine-year grace period until the end of 2035. However, since capital must be gradually increased during this period, the capital burden on acquirers will inevitably continue for an extended time.

In particular, Korea Investment Holdings, which is vying for several insurers, faces even greater pressure regarding capital expansion. As of the end of March, its double leverage ratio stood at 121.96%, close to the supervisory recommendation of 130%. The double leverage ratio measures the extent to which a financial holding company has invested in its subsidiaries compared to its own equity. A higher ratio means less room to inject additional capital, so the burden on the holding company can grow significantly if substantial capital needs to be injected after an insurance company acquisition.

An insurance industry representative said, "Anyone considering an acquisition needs to carefully assess not only the acquisition price of existing shares but also the additional post-acquisition capital requirements and the resulting profitability. Ultimately, finding a buyer with sufficient capital capacity will be the most important factor in the upcoming insurance mergers and acquisitions (M&A) market."

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