Hyundai’s Acquisition of Green Cross Life Spotlights Capital Concerns for South Korea’s Midsize Insurers

The recently approved acquisition of Green Cross Life Insurance by Hyundai Motor Group points to the difficulties faced by midsize insurance companies in South Korea's concentrated life market, including stricter regulatory requirements and fewer investors for fresh capital.

Hyundai Mobis Co. and Hyundai Commercial Inc., units of Hyundai Motor Group, gained regulatory approval to acquire a 90.66% stake in Green Cross Life for 231.6 billion won (US$206 million), according to the Financial Services Commission. Green Cross Life reported premium income of 770 billion won and total assets of 2.97 trillion won in 2010, according to the Korea Life Insurance Association.

The takeover will enhance Hyundai Motor Group's financial services portfolios by adding a life insurance business. As the regulator is unlikely to issue a new life insurance license, "buying an existing licence is an option" for the group, said Seewon Oh, senior financial analyst with A.M. Best Asia Pacific Ltd.

Green Cross Life has about 1% of the life insurance market share, with small number of sales representatives and limited product offerings. The insurer's book of business appears not be an attractive factor for the acquisition. Rather, the number of employees of Hyundai Motor Group can be substantial for the life business. The synergy with the group of companies like Hyundai Capital, Hyundai Card and HMC Investment Securities "could generate quite a bit of group and captive business," noted Oh.

For South Korea's "fairly homogenous" life insurance market, companies "need to generate enough operational efficiencies to compete" as "it's not easy to differentiate" in the market. Oh said "this is not easy for midsize companies."

When the market was in a strong growth mode in the past, Oh said "there were quite a few investors who were willing to come in with fresh capital, but things have changed." Finding an investor who is willing to continue with the existing business model may not be easy, unless the company has a strong attraction or niche selling point.

Two years ago, life companies such as Korea Life, Samsung Life and Tong Yang Life were listed on the Korea Stock Exchange to raise capital to fund further business growth. Other companies such as Green Cross Life, Mirae Asset Life, Dongbu Life and Kyobo Life had indicated interest in initial public offerings, but no further new listings were pursued since May 2010.

Mirae Asset Life and Green Cross Life sought new investors. Last June, Orix Corp., a Japanese financial services group, agreed to invest 300 billion won in Mirae Asset Life through a private investment fund jointly formed with other companies, in a bid to expand in potential overseas markets (Best's News Service, June 27, 2011).

"If you compared the listed price and the current price, and the profitability of companies [that were not listed to those that got listed], listing may not be the best option," said Oh.

Midsize insurers have been pressed by intensifying competition in a mature market and tightening regulation for capital requirements, according to Oh.

Korea's life market is concentrated among the top three insurers, Samsung Life, Korea Life and Kyobo Life, which accounted for 52.4% of total premium income in the 2010 fiscal year, according to Korea Insurance Research Institute. Midsize insurers have competed for market share by increasing savings-type product sales through bancassurance.

The Financial Services Commission introduced a risk-based capital regime two years ago, with full implementation in April 2011. The regulator also plans to tighten regulations on risk management by improving the quality of capital and raising the solvency margin ratio to more than 150%.

The introduction of a risk-based capital regime forced insurers to raise a large amount of capital two years ago. The regulator kept tightening rules on the solvency margin ratio, leading to higher required capital. Recently, Oh said the regulator requested the "confidence level" on risk-based capital solvency margins be lifted to 99% from 95%.

Some companies may prepare for additional capital to meet regulatory requirements under current weak market and economic conditions that include low interest rates and a volatile stock market. Stricter rules on solvency margins introduced by the regulator may put pressure on midsize insurers, said Oh.

To add to the midsize market's competition woes, in April Nonghyup National Agricultural Cooperative Federation, the largest mutual association in Korea, will be regulated by the insurance business law. "That means Nonghyup will underwrite the full range of insurance products from the current limited number of simple products," said Oh.

With a large sales network across the country, Nonghyup would be "a formidable competitor to midsize life insurers, which currently offers simple products with cheaper prices to compensate for low brand recognition," said Oh.

Life insurance growth opportunities lie in pension, annuity and health products, but these products offer relatively low margin compared to traditional life policies, noted Oh.

New life insurance business decreased 10.6% to 349 trillion won in 2010, according to the life association. Growth in total premium income was driven by saving-type insurance such as annuities, with a 14.5% rise in premiums to 27 trillion won in 2010. The popularity of savings-type insurance also led to an increase in bancassurance sales in 2010.

(By Iris Lai, Hong Kong bureau manager: [email protected])