What Is the Value of Prudential Life's First Large-Scale Unit Sale of the Year?

[Asia Economy Reporter Kangwook Cho] Market interest is growing in the first trillion-won scale major deal of the year: the acquisition of Prudential Life Insurance. While it is widely expected that KB Financial Group and Woori Financial Group will compete, there is also speculation about the possible entry of large private equity funds (PEFs). So, how does the market view the value of Prudential Life Insurance?

According to the investment banking (IB) industry on the 4th, Goldman Sachs, the lead manager for the sale of Prudential Life Insurance, will conduct a preliminary bidding on the 20th. The sale target is 100% of the shares of Prudential Life Insurance Korea held by Prudential Financing in the United States.

Prudential Life Insurance is regarded as a 'prime asset' with both profitability and soundness. As of the end of June, its assets stood at KRW 20.1938 trillion, ranking 11th in the industry, but its net income for the first half of the year was KRW 105 billion, ranking 5th. In particular, its Risk-Based Capital (RBC) ratio, which indicates the asset soundness of an insurance company, is 505.1%, ranking first. This is outstanding compared to the financial authorities' recommended level (150%) and the industry average (296.1%).

The issue is the price. The comparison target is Orange Life. Both companies are foreign life insurers, with equity capital as of the end of Q3 last year recorded at KRW 4.0038 trillion for Orange Life and KRW 3.1267 trillion for Prudential Life Insurance. When Orange Life was sold to Shinhan Financial Group in September 2018, it received a price-to-book ratio (PBR) of 1.1 times. The sale price for 59.15% of the shares reached KRW 2.3 trillion.

Applying the same standard, the value of Prudential Life Insurance exceeds KRW 3 trillion. The current expected price is lower than Orange Life’s price and also below Prudential Life Insurance’s net asset size. The market currently values Prudential Life Insurance at around KRW 2 trillion, reasoning that the company’s net assets are inflated due to bond valuation gains reflecting the low interest rate environment.

The problem lies in the low interest rate trend. The Bank of Korea lowered the base rate from 1.75% to 1.5% in July and further to 1.25% in October. Low interest rates can increase capital reinforcement burdens and negatively impact profitability. In fact, as market interest rates declined, Prudential Life Insurance’s investment asset yield dropped from 4.43% in 2015 to 4.11% in 2016, 4.05% in 2017, and 3.93% in 2018. Because of this, some argue that even the KRW 2 trillion sale price is expensive.

However, with the dominant view that KB Financial Group and Woori Financial Group will face off, and the possibility of large private equity funds (PEFs) entering the fray, there is also speculation that competition among them could drive up the sale price.

An IB industry insider said, "Although this is the first large deal of the year, the tug-of-war over the price will be fiercer than ever," adding, "However, since the heads of financial holding companies have solidified their commitment to mergers and acquisitions, interest in Prudential Life Insurance, regarded as a prime asset, is growing, which is a variable."

This content was produced with the assistance of AI translation services.