Shinhan Financial seen spending additional W500b on Lotte Non-Life Insurance acquisition

Shinhan Financial is expected to pour an additional 500 billion won ($374 million) or so into Lotte Non-Life Insurance on top of the acquisition price, according to investment banking and financial industry sources. The figure combines a 300 billion won rights issue to strengthen the insurer's financial soundness and roughly 200 billion won to buy out the remaining shares needed to make it a wholly owned subsidiary. All told, total outlays from the control stake purchase through capital reinforcement could reach approximately 1.2 trillion won.

Shinhan Financial signed a share purchase agreement Tuesday to acquire a 77.04 percent stake in Lotte Non-Life Insurance from JKL Partners for 693.3 billion won, investment banking and financial industry sources said Wednesday. After obtaining regulatory approval and closing the deal, Shinhan plans to secure the remaining shares and pursue a merger with its existing subsidiary Shinhan EZ Non-Life Insurance.

The central question is how much additional capital will be needed after the acquisition closes. Because the purchase price goes to the existing shareholders rather than into the company itself, a separate injection of funds is required to improve Lotte Non-Life Insurance's financial health.

300 billion won rights issue to meet new core capital rules

The capital reinforcement under discussion stands at around 300 billion won, to be injected directly into Lotte Non-Life Insurance through a paid-in capital increase by Shinhan Financial.

The main driver is a new core capital solvency ratio requirement taking effect next year. Financial regulators plan to enforce a 50 percent core capital ratio standard starting next year, requiring insurers to hold sufficient loss-absorbing capital — such as paid-in capital and retained earnings — rather than simply boosting their overall solvency ratio through subordinated bond issuance.

However, insurers will not be required to meet the 50 percent threshold immediately upon the rule's introduction. Regulators plan to allow a nine-year grace period before applying prompt corrective action, with each company required to raise its core capital ratio in stages according to individual compliance schedules.

Lotte Non-Life Insurance's core capital ratio stood at minus 5.38 percent as of the end of June under the exception model with transitional measures applied. Assuming required capital remains unchanged, a 300 billion won rights issue alone could lift the ratio to around 12.4 percent — short of the 50 percent regulatory target but sufficient to meet the phased compliance schedule.

Alongside the rights issue, a capital restructuring that could include a free reduction of capital is also being discussed. The idea is to reorganize the company's capital accounts to create room to build up its surrender value reserve. If additional provisioning is recognized, it could reduce the amount deducted from core capital and help improve the ratio.

A free capital reduction alone, however, does not bring cash into the company or increase net assets. The actual improvement will depend on the restructuring method and the amount of reserve recognized, and further variables remain — including potential future changes to the surrender value reserve regime.

Up to 200 billion won seen needed for remaining shares

Securing the remaining shares to make Lotte Non-Life Insurance a wholly owned subsidiary will require additional funding. The current acquisition agreement covers only JKL Partners' 77.04 percent stake; the roughly 5 percent held by Hotel Lotte and shares held by other shareholders must be acquired separately.

Buying all remaining shares — excluding treasury shares — at the same per-share price of 2,900 won as the control stake transaction would require approximately 203.1 billion won: about 45 billion won for Hotel Lotte's stake and about 158.1 billion won for the shares held by other shareholders.

Adding the 300 billion won rights issue, the additional burden could reach as much as 503.1 billion won. Including the initial acquisition price of 693.3 billion won, total outlays would come to approximately 1.2 trillion won.

This estimate, however, assumes all remaining shares are purchased in cash. The actual cash outlay would differ if the tender offer price changes or if a share swap is used instead. The amount of capital reinforcement needed could also shift with future interest rate movements, leaving open the possibility that the additional investment ends up either higher or lower than 500 billion won.

Shinhan eyes integration gains; JKL's return hinges on payout order

For Shinhan Financial, the challenge is generating returns commensurate with the additional capital deployed. The plan is to combine Lotte Non-Life Insurance's long-term insurance business base with the group's customer network and cut overlapping costs through a merger with Shinhan EZ Non-Life Insurance to maximize the return on investment.

For seller JKL Partners, the order in which sale proceeds are distributed will determine how much it recovers. The investment structure follows a waterfall arrangement, under which acquisition financing and investors with priority recovery rights are paid first, with the blind fund receiving whatever remains. As a result, blind fund investors may not recover their full principal.

"Lotte Non-Life Insurance's investment structure has acquisition financing and project funds in the senior position, with the blind fund holding subordinated equity," an investment banking industry official said. "Given the distribution of acquisition financing principal and interest and project fund payouts, the probability of losses for subordinated investors is likely to be high."