Meritz Securities and Fire Delisting... "Holding Company Returns 50% of Net Profit to Shareholders" (Comprehensive)

Active Response to Rapid Environmental Changes... Efficient Capital Allocation for Stable Profit Generation
Demonstrating Organic Financial Flexibility Across the Group... Maximizing Synergy Among Affiliates and Swift Decision-Making

[Asia Economy Reporter Lee Seon-ae] Meritz Financial Group is transitioning to a wholly-owned subsidiary system in which the holding company owns 100% of the shares of each affiliate.

On the 21st, Meritz Financial Holding Company announced a comprehensive stock swap to incorporate Meritz Fire & Marine Insurance and Meritz Securities as wholly-owned subsidiaries. Shareholders of Meritz Fire & Marine Insurance and Meritz Securities can either receive shares of Meritz Financial Holding Company or exercise their right to request a stock purchase.

Meritz Financial Holding Company stated, "Due to the rapid expansion of volatility in the financial market and increased uncertainty in future investments, we decided to actively respond to changes in the business environment and generate stable profits." The exchange ratio is 1.2657378 shares of the holding company stock for each share of Meritz Fire & Marine Insurance, and 0.1607327 shares of the holding company stock for each share of Meritz Securities. Meritz Holding plans to issue new shares to deliver the exchanged stocks. Currently, Meritz Holding owns 59.5% of Meritz Fire & Marine Insurance and 53.4% of Meritz Securities. Upon completion of the comprehensive exchange, Meritz Fire & Marine Insurance and Meritz Securities will each be incorporated as 100% subsidiaries of Meritz Holding.

However, the market interprets this decision as prioritizing liquidity securing for recent real estate project financing (PF) related fund raising. Since the announcement was sudden, shareholder opposition is also expected.

During the conference call, Kim Yong-beom, Vice Chairman of Meritz Financial Holding Company and CEO of Meritz Fire & Marine Insurance, noted, "Meritz Fire & Marine Insurance made significant profits until June, and there were investment opportunities in securities, but when all three companies are listed like Meritz Financial Holding Company, investment takes time." He explained the background of the comprehensive stock swap by saying, "In the past, we missed regrettable investment opportunities because of this. Recently, the management environment is changing rapidly, so this phenomenon is being maximized, and this is a measure to eliminate it."

He continued, "There were two considerations when conducting the comprehensive stock swap: quickly eliminating inefficiencies due to the rapidly changing management environment, and having the profit capacity to meet all regulatory capital requirements while handling enhanced shareholder return rates and dissenting shareholders' buyout rights. The combined net income of securities and fire insurance was 1.43 trillion KRW last year and has increased through the third quarter of this year, so we judged that we now have the capacity to conduct the comprehensive stock swap."

The market views liquidity securing as a key factor behind the comprehensive stock swap. Currently, the securities sector is facing difficulties in fund raising following issues raised by Legoland-related real estate PF fund movements. According to a report released at the end of June based on data from the end of March by Korea Credit Rating, Meritz Securities is among the securities firms with the highest exposure to real estate finance. However, Meritz Securities maintains that there is no problem as it is focused on senior debt.

The company expects that this decision will enable the group to demonstrate organic financial flexibility through efficient capital allocation based on the stable profitability of both Meritz Fire & Marine Insurance and Meritz Securities. It also anticipates maximizing synergy effects between affiliates by combining Meritz Securities' deal sourcing (potential investment company discovery) capabilities with Meritz Fire & Marine Insurance's long-term investment structure. Furthermore, it believes that simplifying decision-making through resolving conflicts of interest among shareholders will establish a stable and efficient management system.

However, shareholder opposition is anticipated. Shareholders who oppose can express their dissent before next year's general meeting of shareholders and subsequently exercise their right to request stock purchase within a designated period. They can sell at the purchase price proposed by Meritz Financial Group. As of the closing price on the 21st, Meritz Fire & Marine Insurance closed at 35,700 KRW, and Meritz Securities at 4,520 KRW.

Considering opposition to delisting, Meritz Financial Group has decided to strengthen shareholder value enhancement by enabling stable and continuous shareholder return policies through increased capital efficiency and improved profitability. From next year, the integrated Meritz Financial Holding Company plans to return 50% of consolidated net income to shareholders, including dividends and treasury stock repurchases and cancellations. This level exceeds the average shareholder return rates of the past three years for each company (holding company 27.6%, fire insurance 39.7%, securities 39.3%). Meritz Financial Group plans to maintain this active shareholder return policy for more than three years.

Comprehensive stock swaps of financial companies require approval from the Financial Services Commission. Meritz Financial Holding Company, Meritz Fire & Marine Insurance, and Meritz Securities plan to apply for the relevant approval review to the Financial Services Commission in December.

Meanwhile, market attention was focused on whether Chairman Cho Jung-ho of Meritz Holding would succeed as the major shareholder. However, Vice Chairman Kim firmly stated that this comprehensive stock swap resolution is unrelated to major shareholder succession. He said, "Chairman Cho Jung-ho has declared that he will not pursue corporate succession, and currently, his shareholding ratio in the holding company would drop to 47% after the comprehensive stock swap and fall below 20% after taxes. Since the major shareholder has no plans for share succession, there is no conflict of interest between the major shareholder and general shareholders."