Korea Life Insurance has raised W1.78 trillion ($1.56 billion) from its initial public offering after it fixed the price 8.9% below the initial guidance range at W8,200 per share and slightly increased the number of primary shares on sale.
Some observers suggested last week that the company was given a golden opportunity when Prudential agreed to buy AIA Group, the Asian life insurance business wholly owned by American International Group (AIG), putting a stop to AIA's plans for an IPO. The acquisition, which took most of the market by surprise, effectively removed as much as $15 billion worth of exposure to the Asian life insurance sector, making some investors at least look for replacement paper elsewhere in the sector.
Indeed, sources say there was an increase of interest in the Korea Life IPO after the Prudential/AIA deal was announced last Monday, but it is questionable if it had much impact on actual demand in the end. After all, Korea Life -- even if it is the country's second largest life insurer -- is significantly different from AIA, which has a unique exposure to life insurance in 15 Asian countries, ranging from the mature markets in Hong Kong and Singapore to the newer high-growth markets in China and India.
It may have been of greater significance, in fact, that the IPO of the country's largest life insurer, Samsung Life Insurance, may end up being delayed due to a lawsuit filed by a group of 2,802 policyholders for not paying dividends to eligible subscribers in the process of becoming a listed company. According to a report in Korea Times, the plaintiffs demand that Samsung Life hand over W10 trillion won ($8.1 billion) in dividends that they didn't pay from 1958 to 2009 -- the largest amount of compensation in Korean history to be disputed in a single litigation.
The Samsung Life IPO is currently expected to come in June and some investors are waiting for that deal before they commit money to the Korean life insurance sector. However, the potential delay was said to have led some investors to put money into Korea Life at this point.
The most important impact of Prudential's acquisition, one banker noted, may have been the fact that the agreed price values AIA at 1.7 times its 2010 embedded value (EV). This made Korea Life's offer, which was valued just below 1 times forward EV, look relatively more attractive.
Some international investors also bought into the deal on the hope that Korea Life will be included in the MSCI Korea index.
That said, it was the size of the domestic demand that surprised most people. The high level of local demand prompted the bookrunners to readjust the final allocation between the international and domestic tranches so that 39% went to international investors and 61% to domestic accounts. Initially, the plan was to split the deal more evenly with 49% going to international accounts and 51% to the Korean investors.
However, the international book was also well covered with more than 50 participating accounts, one source said. In terms of numbers, about half of those were long-only with the other half coming from hedge-fund, but because the size of the orders from long-only investors was larger, the international book ended up with a definite long-only bias. About half of the demand was said to have come from Asia, while the rest was split fairly evenly between Europe and the US.
The deal was initially offered in a range between W9,000 and W11,000, which could have resulted in a total deal size of up to $2 billion. However, since the initial price ranges in Korea are not that firm, investors were attaching price limits that were below the range and a couple of days before the bookbuild ended, the bookrunners went out with guidance saying the deal would likely price between W8,000 and W9,500.
At the final price, Korea Life is valued at just below 1 times its embedded value for the fiscal year to March 2010 and at 0.92 times its EV for fiscal the fiscal year to March 2011. The Chinese life insurance companies, which are growing a lot faster, courtesy of the fact that the life insurance industry in China is still quite undeveloped with a very low penetration rate, are trading at price-to-EV ratios of between two and three, while 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.
Market talk has suggested that Samsung Life, which is expected to raise $4 billion in connection with its listing, will be offered at a price-to-EV multiple of more than one, and while Samsung should have a higher valuation due to its greater market share and size, the question is how much more expensive it will be.
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.
The deal comprised 217.13 million shares, or 25% of the enlarged share capital, of which 158.53 million were new. This was an increase from an earlier target to sell 210 million shares in total and 130 million new shares and allowed the company to raise the same amount of fresh capital (W1.3 trillion) as if the original number of shares had been priced at the mid-point of the initial price range.
At the same time, the existing shareholders -- three companies within the Hanwa group and Korea Deposit Insurance Corp - reduced the number of shares they put up for sale to 58.6 million from 80 million as the price came down.
The Hanwa group will remain the controlling shareholder after the IPO with about 50.2% of the outstanding share capital. KDIC will hold 24.7%.
Credit Suisse, Deutsche Bank and J.P. Morgan were the international bookrunners, while Daewoo Securities, Tong Yang Securities and Woori Investment & Securities were responsible for the domestic tranche.
Korea Life is scheduled to start trading on March 17.