Shinhan Financial to Boost Nonbanking Business with Lotte Insurance Deal, Takes Aim at the 'Top Spot'

Integrate with Shinhan EZ General Insurance after making it a wholly owned subsidiary
Expand non-life insurance business... bolster a weak segment

Shinhan Financial Group has moved to strengthen its nonbanking businesses by signing an agreement to acquire Lotte Insurance. The plan is to expand its relatively weak non-life insurance business and reclaim the top spot in the financial sector. Attention is focused on whether the acquisition will help narrow the gap with KB Financial Group in nonbanking performance.

According to financial industry sources on October 14, Shinhan Financial signed a share purchase agreement (SPA) the previous day to acquire a 77.04% stake in Lotte Insurance held by private equity firm JKL Partners for 693.3 billion won.

Shinhan Financial and JKL Partners negotiated the sale of Lotte Insurance through July, but talks fell apart over disagreements on the acquisition price. JKL Partners later pursued an open sale process but failed to find a buyer. Negotiations reached a last-minute agreement as Shinhan Financial continued to pursue the acquisition. Lotte Insurance's total equity was valued at about 900 billion won in this deal, a little over one-third of the level implied by the asking price, which at one point was discussed in the mid-2 trillion won range.

With the acquisition, Shinhan Financial will strengthen its non-life insurance business, which has had a relatively limited presence compared with its banking, securities, and credit card businesses. The group already has Shinhan EZ General Insurance, but its assets total just 340.1 billion won. Lotte Insurance, by contrast, has assets of about 13.6 trillion won and approximately 3.34 million customers. Its insurance contract service margin (CSM) also stood at about 2.2 trillion won at the end of the first half of this year.

As the acquisition of a mid-sized non-life insurer expands its nonbanking business, attention is also turning to the possibility of reclaiming the top spot in the financial sector. KB Financial has held that position for three consecutive years, with KB Insurance serving as a major source of earnings in its nonbanking business. Shinhan Financial is also expected to strengthen its relatively weak non-life insurance business through the acquisition and improve its position in competition with KB Financial for nonbanking performance.

After obtaining approval from financial authorities and completing other required procedures, Shinhan Financial plans to acquire the remaining 22.96% stake, make Lotte Insurance a wholly owned subsidiary, and then merge it with Shinhan EZ General Insurance. Hotel Lotte holds about 5% of the remaining shares, while the rest is distributed among the employee stock ownership association, the company’s treasury shares, and minority shareholders. Industry sources expect Shinhan Financial to acquire additional shares through a tender offer or share exchange.

However, improving Lotte Insurance's financial soundness and providing additional capital remain challenges. “The challenge is to secure competitiveness in the market, not simply expand the scale of the business,” a financial industry source said. “The key question is whether the acquisition will lead to a tangible improvement in profitability.”

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