M&As, Hyundai’s entry to change hierarchy in insurance

By Kim Jae-kyoung

The insurance industry is considered one of the most conservative sectors as it is hard to see a change both in market share and customer transfer. Over the past two decades, the so-called big three life insurers ― Samsung, Korea and Kyobo ― have dominated the domestic market, giving little leeway for other players to share the pie.

The deep-rooted oligopoly is highly expected to hang on for a while but 2012 is likely to be the beginning of a long-awaited industry change that will lead to a breakdown of the structure.

First of all, the industry is seeing a wave of mergers and acquisitions (M&As) coming. A couple of mid-sized insurers, including ING Life Korea and Tongyang Life, have been up for sale. Besides, Hyundai Motor Group’s entry into the industry and the launch of NH Nonghyup Life are likely to combine to speed up the transformation.

In the big picture, there are two external factors that will accelerate the upcoming change in the market. First, major financial groups, such as KB and Woori, are striving to enhance their non-banking sector to balance their business portfolios. Second, Hyunda Motor is looking to strengthen its financial business as a new growth engine.

“Over the past 15 years, the big three have ruled the local insurance market. I think this will change in the coming decade and this year is the beginning of it,” Lee Won-seok, a partner at the Boston Consulting Group, told Business Focus.

“In five to seven years, I expect that two more players will join the league of majors providing services from A to Z through multi channels, while small players will be specialized in offering customized products,” he added.

In the first three quarters of the 2011 fiscal year, Samsung is led the industry with a market share of 26.8 percent in insurance premium, followed by Korea with 13.6 percent and Kyobo with 11.3 percent, according to the Korea Life Insurance Association. ING Life, Mirae Asset and Shinhan are competing for the fourth place with around 4 to 5 percent.

KB Chairman eager to buy ING Korea

Market participants are now paying close attention to how ongoing sales of ING Life’s Asia-Pacific operations and Tongyang Life will unfold as the outcome will change the pecking order of the industry.

ING Group, the Netherlands-headquartered financial group, has expresses its willingness to offload its Asian operations, in a move to pay back the 2008 bailout it received from the Dutch government amid lingering uncertainties surrounding the global economy.

But it has yet to decide whether or not to sell its three Asian insurance joint ventures separately from its other Asia assets. ING has operations in seven Asian markets ― China, Hong Kong, India, Japan, Malaysia, South Korea and Thailand. It has insurance joint ventures in China, India and Korea.

At the end of last year, ING valued its Asia-Pacific insurance operations at 5.8 billion euros ($7.63 billion), according to an analyst presentation on ING’s website. With equity capital of 2.6 trillion won, ING Asia-Pacific operations posted pre-tax profits of 700 billion won in 2010.

A number of big financial groups and insurance giants both at home and abroad are expressing intention to take over the operations and are waiting for details of sales from ING.

KB Financial Group, the nation’s second-largest banking group by assets, is one of the strongest candidates as its chairman Euh Yoon-dae is keen on taking over the Korean unit of the Dutch group.

“In early April, ING will issue an information memorandum (IM) regarding the sale of ING Asia-Pacific operations. We will look into details once it is offered. The biggest issue is price,” Euh said in a phone interview with Business Focus.

“Of course, we are interested in ING Life Korea. If the Dutch group decides to sell its Korean operation separately from other assets, we will join the bidding as a single bidder. If they sell its entire Asia operations as a package, we will seek to form a consortium as we have no financial capabilities to buy all of them,” he added.

Major life insurers Samsung and Korea have also shown interest in the Dutch group’s Asia operations but for different reasons. They seek to gain strong foothold in Asian markets through the takeover.

“It is too early to comment because details of the sale have yet to be revealed. However, one thing obvious is that we are not interested in the Korean unit but in other Asian operations for overseas expansion,” said a source from Samsung Life said on condition of anonymity.

In a public disclosure in February, Korea Life said, “We are studying the feasibility of the deal and a follow-up disclosure will be made once a decision is made within a month.”

Among foreign life insurers, AIA Group is considered a potential candidate to participate in the bidding, given its strength in Asia and keen interest in the Korean market. The insurer still sees Korea as the underpenetrated market compared to Western markets and is looking for chances in the protection area ― life and medical.

“I think ING Asia-Pacific operations are a good fit for AIA Group, considering its financial capabilities and strategies,” a source close the company said, asking not to be named. The group has been focusing only on Asia for more than 90 years and it made a successful initial public offering in Hong Kong in 2010.

Tongyang Life, with a market share of 4.4 percent, is also up for sale and the bidding process is underway. In a preliminary bidding in January, five companies, including Korea Life and Prudential, the No. 2 insurance firm in the United States, participated in the bidding, according to a source close to the deal. The source said that Korea and Prudential have been selected as prime bidders and are in the middle of due diligence on Tongyang.

Vogo Fund, the largest shareholder of Tongyang with a 60.7 percent stake, is expected to wrap up the sale in the first half. Since it is a private deal, it is likely that the deal will proceed under the following processes ― selection of prime bidders, due diligence, primary bidding and selection of a preferred bidder.

When asked about the process and schedule of the deal, Vogo Fund president Byeon Yang-ho neither confirmed nor denied any speculations. “This is a private deal. There is nothing I can comment at this moment,” he said via the phone.

Hyundai aims to join the big three

Hyundai Motor Group’s foray into the insurance market is expected to have a limited impact on the insurance market but it is highly likely to emerge as a game changer in the long term as the nation’s leading conglomerate is gearing up to strengthen its financial business.

Hyundai Motor recently took over a 90.6 percent stake of Green Cross, the nation’s 17th largest life insurer, through the group's two affiliates ― Hyundai Mobis and Hyundai Commercial ― and changed its name to Hyundai Life on March 5. With the takeover, Hyundai has an extended range of financial units ― Hyundai Card, Hyundai Capital, HMC Investment Securities and Hyundai Commercial.

There are two reasons why market watchers take the Hyundai’s move seriously. First, it is in line with the group’s long-term strategy to enhance the financial business lineup. Second, Hyundai Card CEO Ted Chung has spearheaded the acquisition. He is the chairman of Hyundai Life’s board of directors.

According to a Hyundai executive, Chung, who is a son-in-law of Hyundai Motor Group Chairman Chung Mong-koo and also holds the post of Hyundai Capital CEO, proposed the idea and persuaded the chairman to purchase Green Cross. Since he took the helm of Hyundai Card in 2003, the firm’s market share surged to 16.3 percent in 2011 from the mere 3-percent level.

“The takeover of Green Cross is in line with Hyundai Motor Group’s long-term plan to foster its financial business. We aim to make Hyundai Life one of the nation’s top three insurers within 10 years,” an executive from Hyundai Card said, asking not to be named.

Given that it was incorporated into Hyundai Motor Group, Hyundai Life is expected to see a fast growth for a short period in a couple of areas, particularly the retirement pension segment. If Hyundai takes over another mid-size insurer in the coming years, its insurance unit is expected to emerge as a major player in the market.

Together with Hyundai Motor’s move, the launch of Nonghyup Life Insurance, the insurance arm of Nonghyup Financial Group, which made a debut on March 2, is also posing a threat to the dominance of the top three players.

Nonghyup Life is currently the fourth largest life insurer with 35.3 trillion won in total assets, only behind Samsung (155.2 trillion won), Korea (67.2 trillion won) and Kyobo (60.7 trillion won). Nonghyup ranks the fourth in assets but it is dominating the big three in terms of branch networks.

The new insurer can take advantage of a total of some 5,600 NH Financial Group’s sales outlets ― 1,172 for NH Bank and 4,473 affiliates in provincial areas, which is nearly seven times that of branches for Samsung Life.

“I don’t think that entries by Hyundai and Nonghyup will have huge impact on the hierarchy in the short-term but in the long term, they will emerge as a game changer for the industry,” an industry expert said, asking not to be named.

“I expect that the ongoing transition will eventually change the industry landscape, bringing the era of the big five insurers in the coming decade with Hyundai Life and NH Nonghyup joining the top league,” he added.