Hana Securities: “Shinhan’s acquisition of Lotte Insurance is uncertain about profits… A conservative approach must be taken”

(Seoul = Yonhap News) Reporter Kim Yu-ah = Hana Securities presented its opinion on the 14th that regarding Shinhan Financial Group [055550]'s decision to acquire Lotte Non-life Insurance [000400], additional capital injection may be necessary in the future and profit uncertainty still remains, so a conservative approach is needed.

Researcher Seol Yong-jin issued a report on this day and said of Shinhan Financial Group, which announced its decision to acquire Lotte Insurance the previous day, "Considering the possibility of capital burden and profit visibility, a conservative approach is necessary."

Shinhan Financial Group announced that it signed a stock purchase agreement (SPA) with JKL Partners, a private equity fund management company and the largest shareholder of Lotte Non-Life Insurance, to acquire a 77.04% stake in Lotte Non-Life Insurance for KRW 693.3 billion and to secure the remaining shares in the future. It is evaluated as a measure to strengthen the non-bank portfolio.

Researcher Seol predicted, "In order to secure 50% of Lotte Insurance's K-ICS (solvency ratio) standard, basic capital of 490 billion won will be needed after transitional measures, even if approximately 450 billion won secured through potatoes, etc. is reflected," and added, "The required capital may increase further due to the realization of the discount rate in the future." For this reason, it is analyzed that there is a high possibility of additional capital increase.

Next, regarding Lotte Insurance's CSM (insurance contract margin), he pointed out, "The worsening trend of actual vehicle (difference between actual insurance premiums and project expenses compared to expected insurance premiums and project expenses) continues from the second half of 2024, and considering the accumulation of deficits in some auto/general insurance, a more conservative approach to actual profit strength will be necessary."

Although Shinhan Financial Group's position is to maintain the CSM balance at the 2 trillion won level, there is uncertainty.

Researcher Seol predicted, “It is positive that competitiveness in the non-banking sector is expected to be slightly strengthened after the acquisition (Lotte Insurance), but the profit gap compared to competitors will only narrow slightly.”

He continued, “Considering the high uncertainty, such as the burden of profit and loss due to the high proportion of retirement pensions and concerns about the need for additional blood transfusions, it is somewhat disappointing that it is difficult to expect significant bargain purchase gains (low-price acquisition gains),” and added, “The speed of normalization of non-life subsidiaries after acquisition is the key, and concerns about opportunity costs of capital will be inevitable.”

Shinhan Financial Group's target stock price was 132,000 won and the investment opinion was maintained at Buy. The closing price the previous day was 99,700 won.