Tong Yang: right fit for Korea Life?

By Kang Seung-woo

Korea Life Insurance recently submitted a letter of intent (LOI) to purchase a major stake in Tong Yang Life Insurance with high hopes of becoming the nation’s second-largest life insurer.

However, its takeover plan has drawn mixed reactions.

“As Korea Life has the advantage of agent-led policies, while Tong Yang Life is good at bancassurance and director insurance, Korea Life can enjoy channel diversification to lure clients,” said an economist from a Seoul-based brokerage on condition of anonymity.

He added that Tong Yang has a weak sales network, so it has focused on bancassurance that accounts for about 40 percent of its overall business portfolio.

“As the local insurance market does not have room to grow any more, the merger will be able to create synergy,” he said.

The analyst said that Tong Yang’s recent fast rise will boost the bid in terms of a growth engine.

“Unlike the big three in the life insurance industry, Tong Yang Life has grown at a solid pace, which is a big factor in the bid,” he said. The big three refers to Samsung Life Insurance, Kyobo Life Insurance and Korea Life.

Korea Life last week made its initial bid to buy a controlling 60.7 percent stake in Tong Yang held by Vogo Fund, expected to unload shares worth about 871.5 billion won ($764.3 million) as of last Wednesday in the first six months of the year.

As the country’s oldest and third-largest life insurance company, it is the most aggressive bidder as the acquisition of Tong Yang Life would pave the way for the insurance unit of Hanwha Group to become the No. 2 player with 75 trillion won in assets, passing Kyobo Life whose assets are 62 trillion won.

According to the sector, Hanwha Group Chairman Kim Seung-youn has paid close attention to a takeover of Tong Yang Life, as consolidation with its solid performance in bancassurance could bring about a strong synergy.

Despite the bright outlook, some say the bid price will be a stumbling block in the completion of the deal.

Tong Yang Life’s stock price closed at 13,400 won on Friday, but Vogo Fund, which became the largest shareholder in March last year after purchasing a 44 percent stake, wants to sell its stakes at around 26,000 won per share including a premium for management rights.

“The price is the key to the acquisition. The market estimates that the right price is between 18,000 won and 22,000 won per share based on intrinsic value,” said a Seoul-based economist.

Another put a question mark over the merger, saying size is not everything.

“Korea Life would enjoy a higher market share via a takeover but a high-stakes combination between two firms does not always guarantee a positive result,” he said.

“Unlike commercial banks, the insurance sector should develop through sales, not mergers and acquisitions.”

Meanwhile, Prudential Financial, the U.S. second-largest life insurance firm, has also submitted a LOI.