KB Financial, Shinhan Financial Engage in Full-Scale Battle for Leading Group Position

Prudential Life Acquired for 2.3 Trillion Won... Major Industry Shift
Fiercer Competition in Non-Bank Sector Amid COVID-19 Financial Environment

[Asia Economy reporters Kangwook Cho and Hyungil Oh] The acquisition of Prudential Life Insurance by KB Financial Group is expected to cause a major shift in the financial sector. KB Financial plans to accelerate its leap to become the leading financial group by incorporating Prudential Life Insurance. In particular, the market anticipates that the fierce competition in the non-bank sector with Shinhan Financial Group, which acquired Orange Life (formerly ING Life) last year, will intensify. This is because, amid low interest rates and low growth leading to decreased interest margins, the spread of the novel coronavirus disease (COVID-19) this year has raised concerns about poor performance and deteriorating soundness in the banking sector, making improvements in the non-bank sector's performance all the more important.

◆ KB Financial vs. Shinhan Financial... The battle for the leading financial group intensifies = With the acquisition of Prudential Life Insurance, KB Financial can reclaim the 'leading financial' position it had lost to Shinhan Financial. Last year, Shinhan Financial, which acquired Orange Life (formerly ING Life), took over the leading financial group status from KB Financial.

KB Financial Group's net profit last year was 3.3118 trillion KRW, with a narrow gap of only 91.7 billion KRW compared to Shinhan Financial's 3.4035 trillion KRW. Prudential Life Insurance's net profit last year was 146.4 billion KRW, and simply adding this to KB Financial Group would change the rankings. Since KB Financial is acquiring 100% of Prudential Life Insurance's shares, Prudential Life's net profit will be fully reflected in KB Financial's performance.

However, Shinhan Financial also expects an increase of about 97.9 billion KRW (provisional) in net profit this year by incorporating Orange Life as a subsidiary earlier this year. Additionally, Shinhan Financial plans to merge Shinhan Life and Orange Life in July next year. The merged company will become the third-largest life insurance company in the industry based on net profit. The financial sector expects a close competition between the two sides for the leading financial group title throughout this year.

◆ The golden age of life insurance companies under financial holding companies = With KB Financial Group's successful acquisition of Prudential Life Insurance, a major shift has begun in the life insurance industry.

Unlike KB Insurance, which ranks 4th in asset size in the non-life insurance market, KB Life has not surpassed 10 trillion KRW in assets and remains outside the top 10. However, upon integration with Prudential Life Insurance, which has assets worth 21 trillion KRW, it can jump to 8th place in asset size. Reborn as a mid-sized life insurer, it is expected to generate mutual synergies in areas such as a strong planner organization and bancassurance (insurance sales through banks). The combined net profit will enter the industry's top 5 (154.9 billion KRW).

Greater changes will come in July next year. Shinhan Life, ranked 6th with assets of 34.1539 trillion KRW, and Orange Life, ranked 8th with 32.8413 trillion KRW, are set to merge. This will create a large life insurer that could threaten the long-standing Big 3 system of Samsung, Hanwha, and Kyobo Life. The combined net profit of Shinhan Life and Orange Life will reach 395.4 billion KRW, ranking third after Samsung Life (833.8 billion KRW) and Kyobo Life (521.2 billion KRW).

◆ Growing concerns over financial burden = However, the industry has raised concerns that KB Financial's financial burden may increase due to the acquisition of the life insurer. With prolonged low interest rates, life insurance premiums are expected to shrink for the fourth consecutive year, and with the introduction of new international accounting standards (IFRS17) and the new solvency regime (K-ICS), capital expansion burdens are increasing, potentially leading to higher long-term costs.

Such concerns were also raised at KB Financial's regular shareholders' meeting on the 20th of last month. In response, KB Financial Chairman Yoon Jong-kyu said, "The more difficult the environment, the more opportunities there are. We see insurance demand and consider it a good business." How to operate the insurance company amid the deepening low interest rates caused by the global spread of COVID-19 remains a challenge for KB Financial.

The 'chemical combination' of KB Life and Prudential Life Insurance is also a formidable task. Similar to Shinhan Financial's acquisition of Orange Life, the acquired insurer is larger than the acquiring insurer. It is necessary to resolve potential 'tensions' between the two companies and consider the turnover of planners.

Researcher Byunggun Lee of DB Financial Investment pointed out, "KB Financial's acquisition of Prudential Life Insurance could cause negative effects such as increased risk and reduced capital strength," adding, "Considering the tense market situation, it could be a significant financial burden."