[Why&Next] Meritz Fire & Marine Insurance Moves to Acquire MG Insurance... What Is the Strategy?

Meritz Fire & Marine Insurance and Daily Partners Participate in MG Non-Competitive Contract
P&A Acquisition Method Likely... Aim to Secure CSM
Union Opposition and Political Interest... Questions Expected at National Assembly Audit

The insurance company merger and acquisition (M&A) market has heated up after a long time. When the sale method of MG Insurance, which failed to find a buyer despite four rounds of public auctions, recently switched to a private contract, domestic private equity fund (PEF) operator Daily Partners and Meritz Fire & Marine Insurance, one of the top five non-life insurers, began to actively bid. Since last year, only news of failed acquisitions of major insurance companies had been reported, but recently, with buyers appearing for MG Insurance following Dongyang and ABL Life, the market sentiment is changing.

MG Insurance M&A, which had only seen cautious moves... Reversal after switching to 'private contract'

MG Insurance, ranked within the top 10 domestic non-life insurers, was designated as a financially distressed institution by the Financial Services Commission in 2022, prompting the sale to be actively pursued. The largest shareholder of MG Insurance is JC Partners, a domestic PEF holding 95.5% of the shares. JC Partners filed a lawsuit against the Financial Services Commission to cancel the distressed institution designation, but it was rejected. The Korea Deposit Insurance Corporation (KDIC) has been conducting public sale bids since last year under the commission's mandate.

The first public auction in February last year failed due to no preliminary bidders. The second auction in August of the same year also failed as only one PEF operator submitted a letter of intent (LOI). In the third auction resumed in March this year, Daily Partners and JC Flower participated in the preliminary bidding but did not proceed to the final bid. KDIC held a re-auction of the third round in July, with Daily Partners, JC Flower, and Meritz Fire & Marine Insurance expressing acquisition intentions, but it was canceled due to the absence of a suitable buyer. Subsequently, the sale method switched to a private contract, and on the 2nd of this month, Daily Partners and Meritz Fire & Marine Insurance made the final participation.

A private contract is a method of selecting a buyer arbitrarily and signing a contract, rather than through competitive bidding such as auctions or tenders. Although competitive bidding is the principle under the Public Procurement Act, in the case of MG Insurance, since four rounds of competitive bidding failed, KDIC had grounds to switch to a private contract. Within the industry, various interpretations are being made regarding KDIC's switch to a private contract, including speculation that it might be paving the way for Meritz Fire & Marine Insurance. A KDIC official said, "Currently, the sale lead manager Samjong KPMG is reviewing the submitted LOIs," adding, "We plan to comprehensively evaluate the appropriateness of the investment amount, the financial plan supporting it, and the contract execution capability, and select a preferred negotiation partner within this month."

Is Meritz Fire & Marine Insurance's participation aimed at securing CSM through P&A?

The most notable point in this MG Insurance acquisition battle is Meritz Fire & Marine Insurance's participation. It did not appear in the first to third public auctions but suddenly jumped in during the third re-auction without conducting due diligence on MG Insurance.

It seems that KDIC opening the asset and liability transfer (P&A) method, in addition to M&A involving share acquisition from the third auction, was the decisive factor leading to Meritz Fire & Marine Insurance's participation. Unlike M&A, P&A allows selective acquisition of only some of the assets and liabilities of the target company without employment succession obligations. The corporation left with only non-performing assets is liquidated. Combined with the private contract method, Meritz Fire & Marine Insurance can negotiate under more favorable conditions. Kim Yong-beom, Vice Chairman of Meritz Financial Group, stated during the first half earnings conference call in August that regarding the MG Insurance acquisition, "If it helps enhance shareholder value, we will complete it; otherwise, we will stop."

The market estimates the sale price of MG Insurance to be around 200 billion to 300 billion KRW. As of the first quarter of this year, MG Insurance's solvency ratio (K-ICS) was 42.7%, far below the financial authorities' recommended level of 150%, making additional capital injection inevitable. Approximately 1 trillion KRW in funding is expected to be needed for normalization after acquisition. Although KDIC plans to support up to 500 billion KRW in public funds, from Meritz Financial Group's standpoint?which has declared a fundamental principle of returning 50% of consolidated net income to shareholders from last year through next year?this could be a burden. This is why P&A, which allows selective acquisition of only sound assets, is attractive. Meritz Fire & Marine Insurance has not yet disclosed whether the acquisition method will be M&A or P&A, but the industry is highly considering the possibility of P&A. Meritz Fire & Marine Insurance's K-ICS in the first quarter was 226.9%, indicating sufficient capacity to absorb some of MG Insurance's assets and liabilities.

Meritz Fire & Marine Insurance appears to be targeting the contract service margin (CSM), which has become important under the new International Financial Reporting Standards (IFRS 17) framework. MG Insurance's CSM was 677.4 billion KRW as of the end of last year. If Meritz Fire & Marine Insurance (10.4687 trillion KRW) absorbs this, it can narrow the CSM gap with DB Insurance (12.1524 trillion KRW) to the 1 trillion KRW level without competing on agent incentives. Meritz Fire & Marine Insurance rose to second place in the industry last year with a separate net income of 1.5748 trillion KRW, surpassing DB Insurance (1.5367 trillion KRW). However, as of the first half of this year, competition is fierce, with DB Insurance (1.1241 trillion KRW) reclaiming second place from Meritz Fire & Marine Insurance (997.7 billion KRW).

Strong opposition from MG Insurance union... Political interest ahead of the National Assembly audit

However, the strong opposition from the MG Insurance union to P&A is a variable. The MG Insurance union fears the dismissal of all 650 employees. If conflicts with the union prolong, it could jeopardize Meritz Fire & Marine Insurance's value-up plans. The MG Insurance branch of the Korean Financial and Service Workers' Union held a press conference in front of the Financial Services Commission's main gate on the 4th, strongly criticizing Meritz Fire & Marine Insurance's participation in acquiring MG Insurance. Bae Young-jin, head of the MG Insurance branch of the Financial Workers' Union, said, "We heard that Meritz Fire & Marine Insurance applied for 750 billion KRW in public funds support from KDIC," adding, "KDIC should not have considered Meritz Fire & Marine Insurance, which exceeds the minimum cost, as a private contract candidate but is reviewing it as the first priority contract candidate." KDIC denies the claim regarding the 750 billion KRW.

Political circles are also joining the fray ahead of the National Assembly audit. Shin Jang-sik, a member of the National Assembly's Political Affairs Committee from the Justice Innovation Party, said, "P&A is a contract method where the acquirer takes the good assets without any loss, and the government bears all the bad debts," adding, "I will conduct rigorous questioning of Kwon Dae-young, the secretary-general, during the Financial Services Commission's institutional audit to hold him accountable."