KDB Life Insurance has been found to be in a state of virtually 'complete capital impairment' as of the end of last year. KDB Life has attempted to sell itself over the past decade but has failed, resulting in its incorporation as a subsidiary of the Industrial Bank of Korea. The Industrial Bank plans to sell KDB Life after normalizing it, but it faces a situation where astronomical funds need to be injected for normalization. The Industrial Bank has so far poured 1.5 trillion won into KDB Life. Given that the Industrial Bank is operated with tax funds, it seems unlikely to avoid criticism for using tax money to support a failing financial service.
According to KDB Life's business report and management disclosure on the 18th, the total assets of KDB Life decreased by 5.7% (107.7 billion won) from 18.8519 trillion won in 2022 to 17.7642 trillion won last year. In contrast, total liabilities increased by 7.6% (126.1 billion won) from 16.4416 trillion won to 17.7029 trillion won during the same period.
The total equity (self-owned capital) after subtracting total liabilities from total assets was 24.103 billion won in 2022, which was sound; however, it plummeted to 3.856 billion won the following year and dropped to 613 million won last year. Considering that KDB Life's capital is 4.983 billion won, the capital impairment ratio is 87.7%. If a publicly traded corporation has a capital impairment ratio of over 50%, it is designated as a management item, and if the issue is not resolved within two years, it faces delisting.
Capital impairment refers to the situation when self-owned capital (613 million won) falls below the capital (4.983 billion won). If KDB Life's self-owned capital decreases further to 0 won, the capital impairment ratio is assessed to be 100%, indicating complete capital impairment. If self-owned capital becomes negative, bankruptcy becomes a concern.
Even looking solely at the current situation, there are indications that KDB Life is no different from being completely capital impaired. This is because the self-owned capital of 613 million won includes contingent convertible bonds amounting to 2.41 billion won. Although contingent convertible bonds are classified as self-owned capital in accounting, they are considered a liability to be repaid in the future. Excluding the contingent convertible bonds, KDB Life's actual self-owned capital at the end of last year stood at -1.797 billion won, indicating a state of complete capital impairment.
KDB Life can exercise a call option for early repayment of 2.16 billion won (2nd series) for contingent convertible bonds in May 2028. The early repayment date for the remaining 250 million won (3rd series) is December 2029. Over the past year, KDB Life has paid out 14.5 billion won solely in dividends for the contingent convertible bonds. The interest is deducted from the retained earnings of the corporation, which recorded 2.9 billion won last year.
The capital impairment of KDB Life is attributed to the decrease in interest rates. When interest rates drop, the asset valuation of insurers rises, but the valuation of liabilities increases even more significantly. This difference is reflected in accumulated other comprehensive income, leading to an expansion of losses. KDB Life's accumulated other comprehensive income last year was -1.1608 trillion won, more than doubling from the previous year (-512 billion won).
The solvency indicators are also problematic. KDB Life's solvency ratio (KICS) was 158.2% based on the end of last year, applying transitional measures and slightly exceeding the financial authorities' recommendation of 150%. However, before applying transitional measures, it was only 53%, falling short of the legal minimum standard of 100%. If the KICS is below 100%, there could be a situation where insurance claims are not paid. The financial authorities are implementing a transitional measure that allows for a maximum of five years of exemption from sanctions even if the KICS does not exceed 100%, in order to minimize the impact of the introduction of new accounting systems.
The Industrial Bank acquired Kumho Life (currently KDB Life) in 2012 and has attempted to sell it since 2014, but all efforts have failed. During this process, the Industrial Bank injected 1.5 trillion won into KDB Life through capital contributions, but the assessment of its weak financial structure has not changed.
To sell its subsidiary KDB Life, the Industrial Bank will ultimately need to inject additional funds for normalization purposes. KDB Life is estimated to require 600 billion won to escape from capital impairment. It is no exaggeration to say that 1 trillion won is needed for normalization.
The Industrial Bank has faced criticism for prolonging the life of a failing financial institution using taxpayer money. The Industrial Bank acquired KDB Life amid the restructuring process of the Kumho Asiana Group, which was in a liquidity crisis, leading to allegations of preferential treatment. Subsequently, Lee Dong-geol, the former president of the Industrial Bank, noted during a 2018 government audit regarding KDB Life, 'This is a company that should not have been acquired in the first place,' adding, 'The acquisition process was opaque and occurred without understanding the reasons.'
If KDB Life is designated as a failing financial institution, significant repercussions are expected. At the end of last year, KDB Life's insurance contract liabilities amounted to 16 trillion won, which is four times the level of MG insurance (4 trillion won), which is currently undergoing bankruptcy proceedings. Insurance contract liabilities refer to the amounts that the insurer is obligated to pay to policyholders in the future.