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Roadshows for a W1.1 trillion to W1.3 trillion ($987 million to $1.17 billion) flotation of ING Life Korea begin in Hong Kong this Thursday, marking the first time a private equity company has used an initial public offering to begin its exit process in Korea.
The insurer’s owner, MBK Partners and its co-founder, Michael Kim, have long held a reputation for innovation in the Korean financial services sector.
Yet in this instance, it is a case of innovation born out of failure. MBK first attempted to offload Korea's sixth largest life insurer by assets through a W3 trillion trade sale last year.
The proposed M&A deal fell foul of deteriorating diplomatic relations between China and South Korea, after the latter agreed to deploy America's anti-ballistic missile shield known as THAAD. The three remaining Chinese buyers then pulled out.
If the IPO is successful, MBK could net a higher profit than it would have through a trade sale, as ING Life Korea has been valued at W2.689 trillion to W3.17 trillion on the back of a 40.9% stake sale.
Based on a rough back-of-the-envelope calculation, the PE group stands to reap W849 billion to W1.33 trillion compared to its original W1.84 trillion purchase cost, which was finalised in December 2013 (ING Verzekeningen holds a residual 10% stake, which it received for W120 billion as part of the original M&A deal).
On the surface, the IPO's timing is not without its own difficulties given the recent performance of the Korean life insurance sector. The latter has been out of favour with investors for well over a year and currently attracts very little active coverage from international analysts.
The whole life insurance sector is trading below embedded value (EV) because of a very Korea-specific problem relating to legacy guaranteed-products.
These continue to pay out high interest rates at a time of prolonged low government interest rates and have killed sector profitability. And unlike many other countries, Korean interest rates remain on a downward trajectory, pointing to further balance sheet pressures.
Premium valuation?
Fund managers say ING Life is being pitched as a company which deserves a premium valuation because it does not have the same problem with high interest rate guarantee products as its peers. At the end of 2016, they amounted to 10% of its assets compared to a 23.5% industry average.
This enabled ING Life to report a positive investment spread in 2016 (0.1%) compared to negative spreads for the rest of the industry, including -0.3% for Samsung Life and -0.6% Hanwha Life.
Syndicate analysts suggest this is the main reason why ING Life Korea should trade flat or through Samsung on a fair value basis, even though the latter has the brand name and an asset base almost 10 times larger.
After factoring in an IPO discount, ING is being pitched on a 2016 EV range of 0.5 to 0.65 times. This means that even if it prices at the top of the range, it will still come at a discount to Samsung Life, which is trading at 0.7 times.
Key will be whether MBK can push the IPO price through the country’s second largest insurer, Hanwha, which is currently trading around 0.58 times. Smaller listed peers such as Tongyang Life and Mirae Asset Life are currently trading around 0.52 times and 0.45 times respectively.
Capital cushion
In recent years, Korean life insurance companies have tried to maintain their profitability through cost cutting exercises. However, investors are well aware this may come unstuck over the coming years as the sector starts to implement the global Solvency II and IFRS17 accounting standards.
This will force local insurers to immediately recognise expected losses as a liability on their balance sheets and make their calculations using low discount rates similar to the market interest rates.
Specialists told FinanceAsia the speed and extent of the changes are still being discussed by the Korean regulator, throwing a pall of uncertainty over the sector’s future profitability.
“It’s a bit of a catch 22,” said one. “Companies don’t want to raise new capital because they’re trading below embedded value, but until they raise new capital they can’t grow their businesses. The regulator is caught in the middle, unsure what to do.”
This was borne out during Samsung Life’s most recent earnings call. According to local analysts, the company hinted that it could not guarantee future investor returns because of ongoing regulatory uncertainty. By contrast, syndicate analysts have told investors that ING Life Korea is fully capitalised even on a full Solvency II and IFRS 17 basis.
In 2015, the regulator asked industry players to apply a more stringent LAT (liability asset test) ratio to assess the full impact on capital cushions, known as the RBC ratio (risk-based capital), which currently has to stand at 150%.
ING Life reported that its cushion fell from 350% to 305%. However, the impact on its peers was far greater, with Samsung Life reporting a drop from 374% to 89% and Hanwha Life going from 304% to 39%. Tongyang reported a cushion of 129% and Mirae 178%.
Syndicate analysts have said that in the event of a further decrease in Korean interest rates, ING Life’s capital cushion should still remain strong — falling to 262% in the event of a further 100bp government rate cut.
If interest rates stay flat, the company will benefit from the most immediate regulatory change, which comes into force this June, when insurers have to change the way they measure interest rate risk and calculate liability duration.
“ING Life has always managed its balance sheet on an economic capital basis rather than optimising it based on the most current regulatory standards like the rest of the domestic industry,” said one specialist. “This means it was penalised under the old regime, but will be freed under the new.”
Dividend payout ratio
Using the new standards, ING Life’s RBC ratio should soar from 319% at the end of 2016 to 521%, enabling it to sustain high dividend payout ratios. While the company remains under MBK ownership — there is a one-year regulatory lock-up post IPO — it has committed to a 50% to 60% payout ratio, equating to an IPO dividend yield range of 5% to 7%.
Strong capitalisation should also enable the group to try and build market share at a time when competitors cannot, since they are focused instead on conserving capital.
In 2016, ING Life had an overall market share of rough 4% compared to Samsung Life’s 17% level, Hanwha’s 12%, Tongyang Life’s 11% and Kyobo Life’s 8%.
After MBK took over in 2013, one of its first steps was to re-build the group’s agency sales force, which expanded by 5% in 2016. Over the past couple of years, it has also concentrated on expanding the group’s bancassurance and brokerage distribution channels.
Bancassurance accounted for 0.82% in 2016 compared to 15.96% for banks and 81.42% for financial consultants.
In terms of profitability, analysts said investment spread accounted for 9%, mortality and morbidity products 39% and expenses and other sources the bulk on 52%. In 2016, net income amounted to W407 billion, up from W304.7 billion in 2015.
Peer review
Aside from the subdued sentiment towards the sector, the IPO also has a built-in share price overhang because MBK is likely to want to exit over the coming few years.
There is also the issue of its branding. The company will lose the rights to use the words “ING” after 2018 and while plenty of companies have been able to successfully reinvent themselves, not least AIG, which became AIA, there is still an intangible cost associated with the loss of such a well-known brand.
Meanwhile, ING Life’s comps are all under water on a one-year basis, with the exception of Mirae Daewoo Life Insurance.
Mirae closed Monday at W5,840 per share, up 24.26% on a one-year basis and 13.4% year-to-date. This is better than the Kospi over the same period, which is up 6.96% year-to-date and 11.77% on a one-year basis.
By contrast, the other three listed life insurers were all sanctioned in February for failing to pay out on suicide claims, with Samsung Life and Hanwha Life only getting their penalties cut after agreeing to reimburse clients.
Samsung Life closed Monday at W109,000 per share. It is down 3.11% year-to-date and 5.85% on a one-year basis, although it has shown signs of returning to a positive trajectory since the beginning of April.
Korea's second largest life insurer by assets, Hanwha Life, is similarly down 7.81% year-to-date and 9.06% on a one-year basis.
The worst affected has been Tongyang Life, which has fallen 10.1% over the past 12 months and 17.72% so far this year.
Deal terms
According to the deal’s preliminary term sheet, ING Life Korea is offering 33.5 million secondary shares on a range of W31,500 to W40,000 per share.
International roadshows will begin on April 6, with pricing scheduled for April 24. Settlement is scheduled for May 4 and listing on May 11.
The sponsors of the IPO are Morgan Stanley and Samsung Securities, with the bookrunners comprising Goldman Sachs, Mirae Asset Daewoo and KB Securities.
