Frozen Insurance M&A Market... Why a Turnaround Is Expected This Year

Yebyeol General Insurance Public Sale Bidding Closes on the 23rd
Acquisition More Attractive Than During MG General Insurance Era
Lotte Insurance, KDB Life Insurance Also Poised for Change
M&A Activity Expected to Rise With Introduction of Basic

The chill in the insurance company mergers and acquisitions (M&A) market has yet to thaw. However, there is growing optimism that the atmosphere may change this year, as the assets currently on the market are becoming increasingly attractive compared to the past.

According to the financial sector on January 8, the deadline for preliminary bids for the public sale of Yebyeol General Insurance (formerly MG General Insurance) is just two weeks away, but there are still no clear signs of bidding activity in the market. Even taking into account the lack of major investment plans due to year-end and New Year personnel changes and organizational restructuring in the financial sector, the mood has cooled to the point that not even potential acquisition candidates are being mentioned.

However, from a buyer's perspective, Yebyeol General Insurance carries less risk than it did during the MG General Insurance era. Yebyeol General Insurance is a bridge insurer established in September last year with 100% investment from the Korea Deposit Insurance Corporation to resolve MG General Insurance. During its establishment, Yebyeol General Insurance significantly downsized its sales and marketing teams, reducing the number of employees from around 500 to about 250. The company also underwent management streamlining, including the disposal of non-performing assets and liabilities totaling 300 billion won.

When Meritz Fire & Marine Insurance showed interest in acquiring MG General Insurance last year, employment succession and severance payments were the biggest obstacles. However, with most of the key executives having stepped down and only core personnel remaining, the burden of employment succession has eased. It is also positive that both M&A and portfolio transfer (P&A) methods are allowed for the acquisition. Last year, the labor union strongly opposed the P&A method. Acquiring Yebyeol General Insurance would add approximately 500 billion won in insurance contract service margin (CSM), enabling the acquiring insurer to move up a tier in scale. However, chronic deficits, complete capital erosion, and a low risk-based capital ratio (K-ICS) remain key variables that must be considered.

Lotte Insurance is another company that is consistently mentioned as an M&A target. Since Woori Financial Group abandoned its acquisition after due diligence last year, there have been no reports of new acquisition attempts. However, Lotte Insurance has recently become more attractive to potential buyers due to new developments.

On November 5 last year, Lotte Insurance received a management improvement recommendation, a prompt corrective action, from the financial authorities. Lotte Insurance filed for a court injunction to suspend the effect of this action, but the request was recently dismissed. In response, Lotte Insurance submitted a management improvement plan to enhance its capital adequacy, which includes reducing business expenses, disposing of non-performing assets, and improving workforce and organizational management. Lotte Insurance plans to implement these improvements over the next year. For potential buyers who were weighing the acquisition, this presents an opportunity to offer a more reasonable price.

KDB Life Insurance, which has failed to be sold six times by Korea Development Bank, is also trying to turn things around by improving its financial soundness and announcing a change in CEO. On December 30 last year, KDB Life Insurance completed a capital increase of 500 billion won from Korea Development Bank. The appointment of Kim Byungcheol, Executive Vice President with extensive experience in sales, as the next CEO has also concluded the process of selecting a successor, which had been delayed for over nine months. With this capital injection and management normalization, the company's investment appeal is expected to increase this year compared to the past.

Regulatory changes in the insurance industry are also expected to boost the M&A market. The introduction of the basic capital K-ICS is a prime example. The basic capital K-ICS serves as a standard for assessing the quality of capital, requiring insurers to focus more on basic capital, such as paid-in capital increases, rather than supplementary capital like hybrid securities. The financial authorities are expected to announce regulatory standards related to the basic capital K-ICS soon, with implementation scheduled for next year. An industry insider commented, "For insurers with a significantly low basic capital K-ICS, there are few ways to improve their financial structure other than large-scale capital increases or restructuring through M&A," adding, "As the basic capital K-ICS is introduced, financial holding companies seeking to expand their insurance portfolios are likely to become more active in pursuing M&A than before."