While Seoul Guarantee Insurance Co. Ltd. is bringing positive financial metrics to its forthcoming IPO, the listing comes ahead of possible tougher conditions for companies with exposure to higher interest rates.
The South Korean comprehensive guarantee insurer said in a news release that it is moving ahead with an IPO scheduled for October, starting a deal roadshow late September. The company provides guarantee insurance to small businesses and lower-income population segments to conduct business in various industries such as construction and retail. Policy-related products the insurer provides include guarantees on loans that enable retail borrowers with low to midrange credit scores to access loans at lower interest rates.
The timing of the IPO makes sense as the insurer had benefited from an easy credit market and a lower amount of claims that led to two consecutive periods of earnings expansion, said Clarence Chu, Asia-Pacific IPOs and placements analyst at Aequitas Research.
"With a tightening of credit markets underway in Korea to combat inflation, the story for SGI is beginning to shift and it might have to deal with a tougher environment as interest rates remain elevated," Chu said.
S&P Global Ratings expects the insurer's profitability to remain broadly stable over the next two years, underpinned by efforts to strengthen risk controls on underperforming policies and gradual improvements in investment returns amid higher interest rates. This is despite overall premium cuts and subdued domestic economic growth prospects, the rating agency said.
Seoul Guarantee Insurance's net income grew to 564 billion South Korean won in 2022 from 329 billion won in 2020. Gross premiums written rose to 2.082 trillion won from 1.953 trillion won, with the net combined ratio improving to 67.2% from 85.8%, over the same period.
The insurer's pricing power will likely underpin its business stability over the next two years, S&P Global Ratings said in a Sept. 20 report. The pricing power stems from its strong market position, estimated at 25% based on outstanding guarantees and controlled distribution channels. The insurer mainly uses its own branches and online distribution channels, helping keep acquisition costs low.
The company did not respond to a request for comment from S&P Global Market Intelligence.
Government links
The government-ran Korea Deposit Insurance Corp. (KDIC) beneficially owns 93.85% of Seoul Guarantee Insurance, and is looking to dispose of a 10% stake through the planned IPO, The Korea Times reported. The KDIC is a subsidiary of the country's financial regulator, the Financial Services Commission.
The IPO price ranges is expected to be 39,500 won to 51,800 won, according to the report, which added that KDIC plans to further cut its stake after a six-month lock-up period. The company added in its press release that it plans to highlight strengths such as its "solid" business performance and financials, and its high dividend payout ratio.
The purpose of the IPO and ongoing sell-down is to expedite the insurer's repayment of public funds to the government, S&P Global Ratings said. The rating agency expects the insurer to maintain a high dividend payout ratio of about 50% over the next two years to repay the government's capital injections in the 2000-2001 period. The insurer paid out about 50% of its annual net profit in 2022 as dividends, the rating agency noted.
Chu said KDIC employed public funds to bail out the insurer back in the Asian Financial Crisis in 1997, and thus, it has to return the said funds via a protracted sell down of its stake. The analyst expects the stake sale to complete in 2027, so government influence will likely remain over time.
"However, as an investor, I would be more concerned of the overhang from the future selling, and what it could [mean] for SGI's stock price in the coming periods," Chu said.
As of Oct. 23, US$1 was equivalent to 1,345.06 South Korean won.