[Digital Today reporter Ji-young Lee] Mergers and acquisitions of insurers by financial groups are regaining momentum. Korea Investment Financial Holdings secured preferred negotiating rights to buy KDB Life, and OK Financial Group is also proceeding with the acquisition process for Yebyeol General Insurance. Kyobo Life is pursuing the acquisition of AXA General Insurance, and Shinhan Financial Group is again being mentioned as a candidate to buy Lotte Insurance, which is preparing for sale. M&A moves around insurers are continuing as financial groups without insurers seek new entry and those with insurance affiliates aim to reinforce weak areas.

On Aug. 21, the financial sector said Korea Investment Financial Holdings was selected on Aug. 13 as the preferred bidder for the sale of KDB Life. Korea Investment Financial Holdings, Hanwha Life and Heungkuk Life took part in the final bidding, which closed on Aug. 7, and Korea Investment Financial Holdings ultimately secured preferred negotiating rights. It will move to steps such as signing a share purchase agreement after negotiating with Korea Development Bank over detailed acquisition terms.

Korea Investment Financial Holdings has affiliates including brokerage, asset management, a savings bank and capital, but it does not own an insurer. If the KDB Life acquisition is finalised, it will enter the insurance business for the first time and be able to further broaden its financial portfolio.

Woori Financial Group also previously filled a gap in its business portfolio through insurer M&A. It built an all-round financial group structure spanning insurance as well as banking and securities by bringing Tongyang Life and ABL Life in as subsidiaries last year.

A new entry by financial groups is also under way in the general insurance business. The Korea Deposit Insurance Corp selected OK Next, an OK Financial Group affiliate, on July 10 as the preferred bidder for the public sale of Yebyeol General Insurance. The two sides are currently in talks to sign the main contract. If the deal is completed, OK Financial Group, which owns a savings bank and capital units, will enter the insurance business for the first time.

Kyobo Life is also pursuing the acquisition of AXA General Insurance. It is currently selecting an adviser, and the possibility has been raised that it will move into due diligence after the adviser is chosen. Kyobo Life expanded its business scope this year to life insurance, securities, asset management and savings banking by bringing SBI Savings Bank in as a subsidiary, but it has no general insurance affiliate. If the AXA General Insurance acquisition is completed, it can expand its portfolio to include general insurance. It is still at an early review stage, and specific decisions and terms have not been set.

◆ Shinhan again mentioned for Lotte Insurance

As preferred bidders have been chosen in succession for KDB Life and Yebyeol General Insurance, the market’s attention is shifting to the sale of Lotte Insurance. Lotte Insurance’s largest shareholder, JKL Partners, is considering switching to a public sale.

Shinhan Financial is again being mentioned as a candidate to acquire Lotte Insurance. Shinhan Financial had been reviewing the acquisition, but the market sees recent talks as having slowed after it became known there were differences between the sides over price and other issues.

Shinhan Financial says it has not officially ended its review of the Lotte Insurance acquisition. Shinhan Financial Group has not officially stated that it has shelved or ended talks with Lotte Insurance, and it explained that it is reviewing the matter while keeping various possibilities open within a range that maintains soundness.

Korea Investment Financial Holdings’ decision to focus on the KDB Life acquisition is also changing the line-up of candidates for Lotte Insurance. After being selected as preferred bidder for KDB Life, Korea Investment Financial Holdings has effectively taken a step back from the bid for Lotte Insurance. Kyobo Life is also pursuing AXA General Insurance, and Hanwha Life is seeking to acquire Acuon Capital. As a result, Shinhan Financial, which had previously been reviewing the Lotte Insurance acquisition, is again being mentioned as a candidate in the market.

Behind Shinhan Financial’s review of Lotte Insurance is a strategy to strengthen its relatively weak general insurance segment. Shinhan Financial has Shinhan Life, its life insurance affiliate, and Shinhan EZ General Insurance, its general insurance affiliate. If it takes over Lotte Insurance, it could expect the effect of expanding the scale and competitiveness of its general insurance business rather than entering the insurance industry anew.

Still, Shinhan Financial is stressing a principle of not undermining capital soundness during the M&A process. A Shinhan Financial Group official said, "We are reviewing it while taking into account maintaining soundness."

Lotte Insurance’s recent improvement in capital conditions is also a variable in the sale process going forward. Lotte Insurance’s core capital K-ICS ratio stood at minus 5.4 at the end of the second quarter this year, improving by 16 percentage points from minus 21.4 at the end of the first quarter. Over the same period, the size of its core capital deficit also shrank to 91.0 billion won from 350.8 billion won. The additional capital injection that an acquirer must shoulder could be smaller than before, but some see it as difficult to say the capital burden has been resolved given the core capital K-ICS ratio remains negative.

◆ Filling insurance gaps and reinforcing weak areas

The aims of financial groups that have recently moved to acquire insurers vary. Korea Investment Financial Holdings and OK Financial Group currently have no insurer within their groups, so if acquisitions are completed they will secure a new business pillar in insurance. Kyobo Life’s strategy is to add general insurance to a financial portfolio built around life insurance.

In contrast, Shinhan Financial already has both life insurance and general insurance affiliates, so even if the Lotte Insurance acquisition materialises it would be less about entering a new sector and more about raising the scale and competitiveness of its relatively weak general insurance segment. Including Woori Financial, which took over Tongyang Life and ABL Life last year, financial groups’ M&A strategies to expand non-bank businesses using insurers are appearing in various forms.

Whether bids lead to actual deals depends on price and capital capacity. Acquiring an insurer may require additional funds after the purchase, as well as the sale price, to manage soundness indicators. In particular, as financial authorities strengthen core capital regulations for insurers, the target insurer’s capital condition and the scale of future capital expansion are seen as key variables that will determine whether a deal succeeds.

With limited scope for organic growth in the insurance industry, moves by financial groups to expand business areas through M&A or bolster the competitiveness of existing insurance businesses are expected to continue for some time. Still, whether remaining assets including Lotte Insurance are actually sold is expected to be decided by how much sellers and prospective buyers find common ground on acquisition price and the capital burden.