[Why&Next] Kyobo Life Insurance at a Crossroads of Fate... Increased Likelihood of Transitioning to a Holding Company

Shin Changjae Buys Back 5.33% Stake from Affirma
One Step Closer to Special Resolution for Holding Company Transition
24% Affinity Says "No Decision Has Been Made Yet"

Kyobo Life Insurance's chances of winning the seven-year-long dispute with private equity funds have increased. If the last remaining disputing party, the Affinity Consortium, reaches an agreement with Shin Chang-jae, the chairman of the board, Kyobo Life's transition to a holding company is also expected to accelerate.

The Ball is Now in Affinity's Court

Chairman Shin repurchased all of Kyobo Life's 5.33% stake from Apalma Capital on the 7th at 198,000 KRW per share. This led the finance and capital market sectors to evaluate that "the transition of Kyobo Life to a holding company has become more favorable."

To understand the background, one must go back as far as 18 years ago. Private equity fund Apalma purchased a 5.33% stake in Kyobo Life in 2007 at 185,000 KRW per share, and the Affinity Consortium acquired 24% in 2012 at 245,000 KRW per share. According to the shareholders' agreement, Apalma had a put option to sell shares back to Chairman Shin if an IPO was not conducted by 2012, and Affinity had the same option until 2015.

Due to the global financial crisis in 2008 and structural changes in life insurance profitability caused by aging, Kyobo Life's IPO was delayed. Consequently, in 2018, Apalma and Affinity exercised their put options based on prices of 397,000 KRW and 410,000 KRW respectively, as appraised by accounting firms. Chairman Shin, judging these prices to be excessively high, filed for arbitration with the International Chamber of Commerce (ICC) the following year. The first arbitration result in 2021 ruled that "Chairman Shin is not obligated to accept the put option price proposed by Affinity."

Originally, the contract with Affinity stipulated that the put option price would be the higher of the initial purchase price of 245,000 KRW per share or the Fair Market Value (FMV) assessed by an accounting firm. The second arbitration result filed by Affinity at the end of last year stated that "within 30 days, an external institution must assess the FMV and the investor's shares must be repurchased accordingly." Chairman Shin recently selected EY Han Young as the FMV appraisal institution.

According to the shareholders' agreement between Chairman Shin and Affinity, both parties appoint appraisal institutions to evaluate the FMV. If the difference between the two valuations is within 10%, the average price is recognized as the put option exercise price. If the difference exceeds 10%, Affinity proposes three third-party appraisal institutions, and the price determined by the one selected by Chairman Shin becomes the exercise price. Considering the corporate value of existing listed life insurers, the industry expects EY Han Young's proposed price to differ significantly from 410,000 KRW.

The ball is now in Affinity's court. They must choose whether to dispute the exercise price to the end or reach an agreement. An Affinity representative told Asia Economy, "We have nothing to say at this time."

"Kyobo and Affinity Will Eventually Reach an Agreement"

Experts familiar with private equity structures generally believe that "although the FMV issue remains, both sides will eventually agree at a reasonable level." Private equity funds within the Affinity Consortium have long valued their Kyobo Life shares at 'zero' in their funds. They are only unable to liquidate the funds.

This time, Apalma sold its stake for 13,000 KRW more per share than its 2007 purchase price. The total sale amount is estimated at 216.2 billion KRW, yielding a profit of about 14.1 billion KRW compared to 2007. According to Kyobo Life's business report, it paid dividends totaling approximately 1.2928 trillion KRW from 2008 to 2023. Apalma, holding a 5.33% stake, is estimated to have received about 68.9 billion KRW in dividends. Considering the capital gains, Apalma made a profit of about 83 billion KRW. Although better than a zero book value, the average annual return over 18 years was only 2.3%.

With this Apalma-Kyobo deal, Affinity's plan to "ally with other private equity funds like Corsair to sell management control shares to a third party" has also collapsed. Analysts suggest that Affinity is likely to agree at a price above its 2012 purchase price of 245,000 KRW per share. When Affinity first expressed its intention to exercise the put option, Chairman Shin had offered to buy shares at around 270,000 KRW to Park Young-taek, then chairman of Affinity.

Kyobo Life's Holding Company Transition Within Sight

If Kyobo and Affinity reach an agreement, the next step will be Kyobo Life's transition to a holding company. Kyobo Life already announced its holding company transition plan in 2023. The plan aims to diversify its business structure away from the shrinking life insurance-centered business due to low birth rates and aging, and secure new growth engines.

To transition to a holding company, a special resolution with over 66.7% shareholder approval at the general meeting is required. However, the Affinity Consortium and Apalma together hold nearly 30% of shares, and the stance of other private equity funds was uncertain. If Affinity also agrees, the holding company transition will have a favorable wind. A Kyobo Life official said, "We need to observe the situation," but the industry expects Kyobo Life to accelerate the holding company transition.

As of the end of last year, the Affinity Consortium (Affinity Equity Partners, IMM Private Equity, EQT Partners, and Singapore Investment Corporation) holds 24.01%. Assuming Chairman Shin purchases this, combined with his own 33.78%, his two sisters and cousin's 5.12%, and the 5.33% acquired from Apalma, the total reaches 68.24%. This is sufficient for a special resolution.

Moreover, the FMV agreed upon with the private equity funds will serve as an important benchmark in the holding company transition. Corporate valuation is a critical issue during the transition, and the FMV figures used to resolve the put option dispute with major shareholders can serve as key evaluation data.

Chairman Shin's need for approximately 1 trillion KRW to purchase Affinity's shares also underpins the urgency of the holding company transition. Strengthening Shin's control during the transition increases the likelihood that securities firms lending funds for the share acquisition can recover their loans.