What should KDB do with KDB Life?
KDB Life headquarters in Seoul / Courtesy of KDB Life
The uncertain fate of KDB Life Insurance has long presented a headache to its major shareholder, the Korea Development Bank (KDB).
The key problem for the state-run lender is that there are only two feasible paths regarding the future of the life insurer: either selling the firm at a price that would leave the KDB with handsome returns or keeping it under the wing of the KDB as an escalating liability.
The first option was probably what the KDB had in mind when it decided to acquire KDB Life during the restructuring of Kumho Group in 2010. Yet, the state-run bank's past six attempts to sell the life insurance firm have all ended in failure.
The second option of keeping it under the KDB is also problematic. It has already cost quite a money on the part of the KDB to improve the financial structure of the insurance company.
On top of over 1.2 trillion won ($868 million) worth of money granted to the life insurer, the KDB has recently decided to inject additional 299 billion won into KDB Life Insurance to improve its financial structure.
Earlier this week, the KDB released a public disclosure that it would invest 299 billion won in KDB Consus Value Private Equity Fund, a buyout private equity fund jointly established by KDB and Consus Asset Management in 2010 to acquire KDB Life Insurance. KDB holds a 70 percent stake in this fund, while Consus Asset holds a 2.29 percent stake.
The KDB said it may invest an additional 8 billion won to cover future fund expenses, which might increase the total potential investment by the state-run bank this time up to 307 billion won.
When KDB Life Insurance receives the capital injection, the KDB would focus on revamping the insurer's financial structure with the ultimate goal of selling it.
Insurer's weak financial structure remains a challenge
However, major potential obstacles to the successful sale of the insurer lie in its relatively weak financial soundness and corporate value compared to competitors, as well as the life insurance sector's overall sluggish market outlook.
KDB Life Insurance's new risk-based capital (RBC) requirement — a ratio that ensures financial companies' holding enough capital to sustain operating, according to a new Korea Insurance Capital Standard — stood at 117.5 percent at the end of last year, down from 134.1 percent in the previous quarter.
Although it met the minimum legal requirement of 100 percent under the Insurance Business Act, it not only fell short of the financial authorities' recommended level of 150 percent but also lagged far behind the average 232.8 percent of life insurance companies.
Insurance industry watchers said KDB Life's RBC ratio has improved to over 130 percent at the end of the first quarter of this year, and the new capital infusion from the KDB this time is expected to help the firm to comfortably exceed the financial authorities' recommended level.
With the RBC requirement ratio improving and other monetary indicators enhancing with the capital injection, the KDB is anticipated to exert efforts to raise the life insurer's corporate value by following various strategies, including restructuring and reassessment.
Earlier this month, KDB Chairman Kang Seog-hoon referred to KDB Life as a "sore finger" during a press conference marking his second anniversary of taking the post.
"We did our best for the sale, but there were no prospective buyers. As the private equity fund holding KDB Life Insurance's stake matures in February next year, the KDB is currently examining ways to enhance the value of KDB Life Insurance and will later decide what to do with it," Kang said.