Low interest rates and an forthcoming new accounting standards have created increasingly tough circumstances for life insurers in South Korea. As a result, many small and medium-sized firms have been put up for sale.

Some financial groups are keen to buy insurers to bolster their non-banking arms, while major private equity funds are looking for potential targets after raising trillions of won over the past few months.

At the same time, Korean life insurers are reshaping their investment strategy, turning their eyes to overseas territories to diversify their revenue streams, much like their Japanese peers. The push comes after their failure to find a silver lining in the increasingly tough local market in recent years due to intensifying rivalry, prolonged economic slowdown and low interest rates.

Korea’s life insurance industry posted a compound annual growth rate of just 0.5% between 2014 and 2019, found a study from analytics firm GlobalData released on February 24.

Siew Wai Wan

Yet the overarching drivers of selloffs lately are two upcoming regulatory changes: international financial reporting standard (IFRS) 17 and K-Insurance Capital Standard (K-ICS), sources tell AsianInvestor.

Small and medium-sized insurers are the most likely to be put up for sale given that they are more likely to face difficulties in meeting stricter regulatory requirements, against the backdrop of a highly competitive mature market, said Siew Wai Wan, senior director for insurance at Fitch Ratings.

“On the other hand, other local financial institutions and conglomerates have shown interest in including insurance businesses in their portfolio for business diversification and to enhance their overall market presence,” he added.

K-ICS is a domestic insurance valuation standard that calculates risk-based capital (RBC) based on market value. IFRS 17 will, once the effective date is set, replace IFRS 4 on accounting for insurance contracts. Under the new standards, liabilities in insurance contracts will be measured by market value instead of book value.

The introduction of IFRS 17 and K-ICS has prompted insurers to undertake a product mix shift towards products that are less sensitive to interest rate movements away from more traditional savings-type and annuity products. Therefore, potential buyers of Korean life insurers should consider an urgent need for capital injection, according to one Seoul-based adviser familiar with the life insurance industry in Korea.

“In particular, K-ICS will require much higher solvency requirements and the insurance risk would increase significantly compared to the current RBC standard, as it introduces lapse and expense risks,” said the adviser, pointing to the interest rate as another key risk.

“When IFRS 17 is in effect, there will be many companies that need an additional capital injection. Selling while it is still under IFRS 4 may seem relatively favourable, as there is no need to inject more capital now,” he added.

UP FOR SALE

Against this backdrop, three insurers are known to be on the block: Prudential Life Insurance Company of Korea, KDB Life and The-K Non-Life Insurance.

Prudential Life Korea, part of US-based Prudential Financial (which is also considering selling its Taiwan insurance business), was the 11th largest in the market and the fifth by net profit as of the first half of 2019. In addition, it is fiscally sound, with a risk-based capital ratio of 505%.

This profile has drawn the attention of five bidders: a mix of private equity firms and domestic financial groups seeking to add a life insurer to their portfolio. On February 25, however, the Korea Finance Consumer Federation opposed the private equity funds' bids. 

The-K Non-Life Insurance is a small insurer that was previously fully owned by the Korean Teachers Credit Union. On February 14, Hana Financial Group said that it had inked a sales and purchase agreement with the Korea Teachers’ Credit Union to buy a 70% stake in The-K Non-Life Insurance for W77 billion ($65.1 million). The-K Non-Life will become the 14th affiliate and second insurer arm to be under Hana’s umbrella. KTCU will remain a minority shareholder of the insurer with a 30% ownership.

KDB Life, the insurance arm of Korea Development Bank (KDB), has become a challenge for the state-run lender, as its attempt to unload its debt-ridden affiliate has reportedly hit the rocks amid the worsening market environment. KDB Life ranks 13th in the market by total assets, and the bank has tried to sell the life insurer three times since 2014.

Under current regulations, a private equity fund is not allowed to own a financial services firm for more than 10 years. As it acquired the life insurer in March 2010 through a private equity fund it set up with Consus Asset Management, KDB will have to pay a fine if it doesn't sell KDB Life by the end of March. The fund and its subsidiary own more than 90% of the firm.

CHINESE SALES EXPECTED

At least two additional Korean life insurers are expected to be put up for sale this year. China's Dajia Insurance Group is expected to sell its Korean subsidiaries TongYang Life and ABL Life as part of a push to offload overseas business and reduce its debt. 

Dajia was formerly known as Anbang, which was taken over by the Chinese state in 2017 when Wu Xiaohui, its chairman, was accused of fraud. On February 22, the China Banking and Insurance Regulatory Commission said that it was in talks to introduce strategic investors into Dajia.

China Insurance Security Fund, the industry body that is currently the controlling shareholder of Anbang, owns 98.2% of Dajia Insurance, while China Petrochemical Corporation and Shanghai Automotive Industry Corporation hold the rest.