Insurance Companies Increasing in Value Thanks to IFRS17 New Accounting Standards

New Accounting Standards Lead to Greater Performance Improvement for Non-Life Insurers Compared to Life Insurers
Insurance Acquisition Competition Expected, Valuations May Rise Further

The value of non-life insurance companies is expected to rise this year. This is due to active mergers and acquisitions (M&A) mainly among major financial holding companies, as well as a greater improvement in performance compared to life insurance companies following the introduction of the new accounting standard IFRS17.

According to industry sources on the 11th, major non-life insurers have posted strong results this year. Lotte Non-Life Insurance recorded an operating profit of 105 billion KRW and a net profit of 79.4 billion KRW in the first quarter, marking the highest quarterly performance ever.

KB Non-Life Insurance also achieved a net profit of 253.8 billion KRW in the first quarter, a 25.7% increase compared to the same period last year. KB Financial Group reclaimed its position as the leading financial group from Shinhan Financial Group, thanks to KB Non-Life Insurance's strong performance. KB Financial's net profit reached 1.4976 trillion KRW, surpassing Shinhan Financial Group's 1.388 trillion KRW by about 110 billion KRW. Although Shinhan Life's net profit of 133.8 billion KRW was 40.1 billion KRW higher than KB Life's 93.7 billion KRW, Shinhan EZ Non-Life Insurance recorded a loss of 900 million KRW, widening the overall net profit gap between the two groups.

With the profitability of insurance companies confirmed, Woori Financial Group and Hana Financial Group are also reportedly pursuing acquisitions of sizable insurance companies. Hana Financial Group currently has small life and non-life insurers as subsidiaries but there is growing demand for a mid-sized non-life insurer. Woori Financial Group does not have any insurance subsidiaries and is widely expected to actively pursue acquisitions of securities and insurance companies.

In particular, since the improvement in non-life insurers' performance under IFRS17 is greater than that of life insurers, the value of non-life insurers is expected to increase. According to a recent report titled 'Analysis of IFRS17 Preliminary Disclosure' published by the Korea Insurance Research Institute, under the previous accounting standard (IFRS4), the net profit of domestic non-life insurers at the end of last year was about 4.7 trillion KRW, but with the introduction of IFRS17, it increased by 51% to approximately 7.1 trillion KRW. In contrast, applying the same standard, life insurers' net profit only rose slightly from 3.7 trillion KRW to 3.9 trillion KRW, an increase of about 6%. This combination of acquisition competition and improved performance is the background for the expected rise in non-life insurers' value.

Kyobo Life Insurance's pursuit of acquiring KakaoPay Non-Life Insurance is also interpreted as a judgment that it is a reasonably priced prime asset amid the rising value of non-life insurers. According to the investment banking (IB) industry, Kyobo Life is conducting due diligence for the acquisition of KakaoPay Non-Life Insurance. The cost to acquire a 51% stake is expected to be around 60 to 70 billion KRW. This is cheaper compared to MG Non-Life Insurance, whose acquisition attempt failed once due to price differences, or Lotte Non-Life Insurance, whose value is already discussed in the trillion KRW range. Since Kyobo Life needs to expand into financial businesses beyond life insurance to transition into a financial holding company, and can also seek synergy with its internet-only life insurer Kyobo Lifeplanet Life Insurance, this is considered a valuable asset.

However, there are criticisms that the basis for the rise in insurance companies' value is weak. This is because each insurer applies different standards when calculating the Contractual Service Margin (CSM), an important profitability indicator under IFRS17. CSM is a concept that recognizes future profits from insurance contracts annually, unlike before. Since it is calculated based on assumptions such as loss ratios and lapse rates, there is concern that insurers might calculate CSM using somewhat favorable assumptions. No Geon-yeop, a research fellow at the Korea Insurance Research Institute, explained, "Some insurers might be tempted to increase CSM in the short term to raise their value. However, since the CSM calculation process is subject to external evaluation, there are limits to applying it advantageously, and as this is the early stage of the system's implementation, the market will inevitably go through trial and error before the system settles."