Shinhan's Lotte Insurance deal faces profitability, capital hurdles
Lotte Insurance headquarters in central Seoul / Yonhap
Shinhan Financial Group is seeking to bolster its nonbank operations by acquiring Lotte Insurance, but analysts cautioned Thursday that a meaningful contribution to group earnings may take time, as the insurer could require substantial additional capital to strengthen its financial position.
Concerns over the cost of the deal weighed on Shinhan shares, which plunged 4.31 percent Wednesday following Tuesday’s announcement and fell a further 0.84 percent Thursday.
The group agreed Tuesday to purchase a 77.04 percent stake in Lotte Insurance from private equity firm JKL Partners for 693.3 billion won ($514.6 million). After securing regulatory approval, it plans to acquire the remaining shares and eventually merge the insurer with its existing subsidiary, Shinhan EZ General Insurance.
Lotte Insurance has 14 trillion won in assets and 3.34 million customers, giving Shinhan a substantially larger foothold in non-life insurance. The financial group aims to raise annual profit from the business to at least 120 billion won within three years.
But market analysts warned that the insurer’s weak earnings and deteriorating financial soundness could make that expansion costly.
Lotte Insurance swung to a net loss of 18.5 billion won in the first half as investment losses of 78.5 billion won outweighed an insurance service profit of 53.7 billion won.
Its solvency ratio, which measures an insurer’s financial ability to cover its liabilities and risks, stood at 129.7 percent at the end of June, below the regulator’s recommended threshold of 130 percent. Its basic capital ratio under the Korean Insurance Capital Standard (K-ICS) was even weaker at negative 5.4 percent.
The pressure is likely to grow as capital rules tighten. Under a phased regulatory framework, insurers must raise their basic capital K-ICS ratios to at least 50 percent of required capital by 2035. Lotte Insurance will need to strengthen its capital base substantially to meet the target, either by raising fresh capital or generating enough earnings to build up reserves.
“In a mature market already dominated by a handful of players, Shinhan is buying an insurer that, even if its turnaround goes to plan, may not be in a position to pay dividends through 2035,” said Jung Jun-sup, an analyst at NH Investment & Securities.
“The real test is whether Lotte Insurance can generate enough profit to justify the capital invested. The market will need to see a recovery in the insurer’s earnings and a meaningful improvement in Shinhan’s return on equity within the next two to three years to view the deal as a sound use of capital.”