Korea Life first out in year of heavy insurance-sector issuance

The listing of resources companies is expected to be one of the key trends in Asia this year -- a trend that has already started with the Hong Kong IPOs of Russian aluminium major UC Rusal and Mongolia-based coal miner SouthGobi Energy Resources in January.

But as the disappointment over Rusal's poor trading debut grows -- yesterday it closed 25.8% below its IPO price -- investor focus is shifting to another trend that is expected to characterise 2010, namely life insurance. The highlight of the year is likely to be the spin-off of troubled American International Group's (AIG) wholly owned Asian subsidiary, American International Assurance Company (AIA) for a separate listing in Hong Kong. The US insurer, which has operations across Asia, last week named its line-up of bookrunners and is expected to come to market in the second quarter. Initial expectations of a deal in the range of $5 billion to $8 billion have also started to creep higher with some media reports now suggesting the deal could be even twice as large as that.

Looking at individual markets, the attention will be on Korea, however, where at least three life insurance companies are planning to go public. First out will be Korea Life Insurance, the country's second largest life insurer, which will launch an institutional roadshow on Monday next week with the aim of raising up to W2.31 trillion ($2 billion).

It is expected to be followed by Mirae Life Insurance (fourth largest) and industry leader Samsung Life Insurance. The third largest player, Kyobo Life Insurance, may also seek to go public, although its preparations are not quite as advanced as for the other three.

The Korean life insurance companies have been talking about listing for years, but regulatory and technical issues, including a disagreement on how to divide profits between policyholders and shareholders, have resulted in repeated delays. With those issues finally solved, smaller industry player Tong Yang Life Insurance completed the country's first ever IPO by a life insurance firm in September last year, raising $286 million. Many observers thought the company came to market at too rich a valuation, however, and the stock has had a tough time since it started trading. It is currently trading just below W14,000, which is about 17% below the W17,000 IPO price.

The modest investor interest in Tong Yang might be partly related to the fact that so many of its larger rivals are in the pipeline and it will be interesting to see whether it will be positive or negative for Korea Life to come before Samsung. One market watcher notes that Samsung is definitely larger -- market talk suggests it may raise $4 billion in the IPO -- but the fact that it still isn't certain when it will hit the market (June is said to be likely) means that investors may, at least for now, be happy to buy into Korea Life to achieve the portfolio diversification that it is offering.

According to a source, Samsung Life is also expected to be offered at more than one time its embedded value (EV), which should make Korea Life's implied valuation of about one time the estimated 2010 embedded value quite attractive. The Chinese life insurance companies, which are growing a lot faster, courtesy of the fact that the life insurance industry in China is still undeveloped with a very low penetration rate, are trading at price-to-EV ratios of between two and three times. The Taiwan life insurers, which are at a similar maturity stage and face many of the same issues as the Korean players, like negative spreads and a high exposure to foreign exchange and real estate assets, trade at about 1-1.2 times embedded value, the same source said.

Sources close to the company say that independent actuarial firm Milliman has estimated Korea Life's embedded value at the end of 2009 at between W5.36 trillion and W5.93 trillion, based on discount rates between 10% and 12%, and the value of one year's new life insurance business in the 12 months to December 31, 2009, at between W387 billion and W460 billion.

Korea Life and its owners will offer 210 million shares, or 25% of the enlarged share capital, at a price between W9,000 and W11,000. Even if priced at the low end, the deal will raise W1.89 billion ($1.6 billion), making it the second largest Korean IPO after Lotte Shopping's $3.5 billion listing in 2006.

Of the total, 80 million shares will be sold by three companies within the Hanwa group and Korea Deposit Insurance Corp, while the rest will be new shares. The initial indication is that 49% of the shares will be offered to international investors, while 51% will go to domestic investors.

The final price will be fixed on March 3 and the trading debut is scheduled for March 17. Credit Suisse, Deutsche Bank and J.P. Morgan are the international bookrunners, while Daewoo Securities, Tong Yang Securities and Woori Investment & Securities are responsible for the domestic tranche.

The IPO is coming on the back of a year in which strong equity returns helped boost the returns for life insurers, although global equity markets are still feeling quite directionless. As of last night, the Korean market was off 3.3% since the beginning of the year after gaining 1.65% yesterday.

The life insurance industry in Korea is expected to continue to grow in the medium- to long-term as a result of key industry fundamentals such as an aging population, the development of new life insurance sales channels and products as well as public policy reforms. The level and speed of such growth may be affected by the current volatile conditions and weakness in the Korean and global economies, as well as the ongoing uncertainty surrounding global financial markets, interest and exchange rate fluctuations, higher unemployment, lower consumer confidence, and a potential rise in inflation rates.

Samsung Life's IPO will be arranged by Goldman Sachs, Korea Investment & Securities, Bank of America Merrill Lynch, Morgan Stanley and Shinhan Investment Corp.

And last week, sources said that AIA has mandated another seven bookrunners (Bank of America Merrill Lynch, CCB International, Citi, Credit Suisse, Goldman Sachs, ICBC and UBS) in addition to Deutsche Bank and Morgan Stanley, which were named global coordinators for its upcoming listing in June last year.