Private equity funds that acquired insurance companies are struggling contrary to expectations. JC Partners, which acquired MG Non-Life Insurance, has induced its designation as a problematic financial institution, making it difficult to recover its invested capital, while Lotte Insurance, acquired by JKL Partners, has seen its soundness plummet to the lowest level in the insurance industry, leading to a decrease in its value.
Private equity funds acquire insurance companies with weakened sales capabilities, increase their value, and then sell them for profit. MBK Partners' acquisition of ING Life Insurance in 2013 and sale to Shinhan Financial for over 2 trillion won is a representative example. However, with the recent introduction of a new accounting standard (IFRS 17) and soundness regulations from financial authorities, analysis suggests that this investment method may not be easy to succeed.
◇ MG Non-Life Insurance did not proceed with equity capital increase of 10 billion won, designated as a problematic financial institution
According to the insurance industry on the 23rd, private equity firm JC Partners formed a fund of 200 billion won and acquired 95.5% equity of MG Non-Life Insurance, becoming the largest shareholder in April 2020. The fund saw contributions of hundreds of billions from Woori Bank and Saemaul Geumgo.
However, MG Non-Life Insurance was designated as a problematic financial institution less than two years later in 2022. Financial authorities assessed MG Non-Life Insurance’s overall rating as grade 4 (weak) through a management evaluation in April 2021. The loss ratio of MG Non-Life Insurance reached 116.4% in 2020, the year JC Partners became its largest shareholder, an increase from 103.3% in 2018. MG Non-Life Insurance failed to manage its loss ratio, resulting in losses for many contracts.
Financial authorities demanded that MG Non-Life Insurance improve its soundness by increasing capital, reducing business expenses, and disposing of risky assets. MG Non-Life Insurance presented a plan to issue 150 billion won in new shares and other capital securities to financial authorities. Financial authorities initially disapproved the plan due to lacking concreteness in improvement, but considering the difficulty in fundraising from the disapproval, they granted conditional approval.
However, MG Non-Life Insurance did not proceed with the planned 10 billion won capital increase scheduled for the end of 2021. In the meantime, its liabilities grew to over 110 billion won greater than its assets, and financial authorities designated MG Non-Life Insurance as a problematic financial institution. JC Partners protested and filed a lawsuit but lost.
Ultimately, JC Partners found itself in a position where it could not recover its invested capital. Following the designation as a problematic financial institution, the Deposit Insurance Corporation, as the selling agent, tried several times to push for a sale but failed and is now considering bankruptcy and contract transfers. Regardless of the outcome, MG Non-Life Insurance is heading towards bankruptcy.
◇ Declining soundness of Lotte Insurance, sale uncertain
Lotte Insurance, acquired by JKL Partners for 730 billion won in 2019, is also witnessing a deterioration in soundness. The solvency ratio, a soundness indicator for Lotte Insurance, was 213.2% at the end of 2023, exceeding the recommended level of 150% set by financial authorities. However, it has declined each quarter, recording a mere 154.6% at the end of last year, just above the recommended level. Although it issued subordinated bonds worth 80 billion won in February last year and 140 billion won in June the same year to boost capital, it had little effect. Lotte Insurance also planned to issue subordinated bonds worth 100 billion won in February this year but postponed it.
In particular, as financial authorities have announced plans to introduce a solvency ratio based mainly on core capital this year, Lotte Insurance's defense of its soundness is expected to become even more challenging. The core capital solvency ratio evaluates soundness based solely on the core capital of insurance companies, such as paid-in capital and retained earnings. Capital secured by issuing subordinated bonds in the past will be excluded from the calculation of the core capital solvency ratio.
As of the end of last year, Lotte Insurance's core capital stood at -27.5 billion won, a sharp decline from the previous quarter (198.8 billion won). Consequently, the core capital solvency ratio also dropped from 11.1% to -1.56% during the same period. The only institutions with a negative core capital solvency ratio are Lotte Insurance and MG Non-Life Insurance, a problematic financial institution.
For an insurance company to increase its core capital, it must significantly boost operational profits or consider actions such as issuing new shares or reducing dividends. Given the difficulty of significantly increasing operational profits in the short term, this ultimately leads to an increase in cost burdens, such as capital augmentation. In the current situation where concerns are raised about Lotte Insurance’s high valuation in the insurance industry, the possibility of sale is expected to decrease further.
A Lotte Insurance official noted, "The decline in Lotte Insurance's soundness is due to rapid regulatory changes that were unavoidable," adding, "There are no issues at all with the management situation or fundamentals."