By Park Hyong-ki | The Korea Times | May 21, 2019
JKL Partners, a local manager of private equity funds, may need to raise more capital from its investors for the acquisition of Lotte Insurance, according to industry sources.
Otherwise, it will have to pursue a stake sale of the insurance company to raise capital after it buys Lotte Insurance, they added.
This is because the new owner will need to increase Lotte Insurance’s risk-based capital (RBC) ratio toward 200 percent.
Its reserves, measured by the RBC ratio, stood at 163 percent as of the end of March, according to the Financial Supervisory Service (FSS).
The regulator requires insurers to keep their RBC ratios at above 150 percent. But for financial market stability, they are suggested to keep it at 200 percent.
This means JKL, Lotte Insurance’s preferred bidder, will need at least 200 billion won ($180 million) in additional capital to boost its RBC ratio to the suggested level.
The private equity manager has bid 427 billion won for a 58.5 percent stake in Lotte Insurance, which is estimated to be valued at 730 billion won, industry sources said.
“The cost to finance insurers will inevitably rise because of stronger international accounting standards,” an industry source said.
“I do not think the private equity will face trouble in raising cash given its experience.”
In line with IFRS 17 scheduled to take effect in 2022, the regulator will enforce its local version of the regulations called the K-Insurance Capital Standard (K-ICS) under which life insurers will need to increase their capital.
The IFRS17 and K-ICS, when implemented, will measure their liabilities stemming from the sales of insurance contracts by market value, not book value. This means companies will need to have enough cash reserves to meet rising obligations for those contracts.
Korea Investors Service, a local credit rating agency, has indicated that it could downgrade Lotte Insurance’s rating from “A,” should the company and its owner fail to raise capital.
JKL is expected to seal the insurance deal in the latter half of this year, Lotte Group noted.
JKL’s portfolio includes GDK Cosmetics and GS ITM.
Established in 2007, JKL is known for launching funds to invest in distressed companies that need immediate restructuring.
The MBK-Woori Bank consortium has been chosen as Lotte Card’s preferred bidder, replacing Hahn & Co.