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To diversify, banks flock to insurance industry

Feb 04,2020
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Despite Korean insurance companies having one of their worst years in recent memory, financial holding companies here can’t seem to get enough of them.

In 2015, KB Financial Group acquired LIG Insurance, which has now become KB Insurance. In 2018, Shinhan Financial Group purchased ING Life Insurance, now known as Orange Life Insurance.

This year, Prudential Life Insurance is a big fish in the market, with a bidding price expected to be near 2 trillion won ($1.7 billion). KB Financial Group is among several private equity funds that have participated as a bidder.

Hana Financial Group also is already in the process of acquiring The-K Non-Life Insurance for 100 billion won.

In their New Year’s speeches, chiefs of major financial holding companies have unanimously emphasized their interest in mergers and acquisitions (M&A) to fortify company portfolios.

For financial holding companies, flagship banks have played major roles in determining the group’s assets and net income.

As of June 2019, Korea’s top five financial firms - KB, Shinhan, Hana, Woori and Nonghyup - reported that 78.7 percent of their assets and 75.1 percent of their net income derived from banks.

But the outlook is grim this year, following the central bank’s decision to maintain the low base rate. The net interest margin, the difference between the amount of money generated by financial institutions from interest rate and the amount of interest paid out to the lenders, dropped from 1.62 percent in the first quarter of last year to 1.59 in the third quarter.

The Bank of Korea may even drop the key interest rate in the first half of this year.

That is why major financial firms are expanding their portfolios into non-banking sectors, such as in insurance and securities.

The Korea Investors Service in December released a report saying that the low key rate and low-growth economic environment has led to unfavorable conditions for bank operations. It said the profitability of banks will drop, and dependency on net income will fall more drastically than dependency on assets, which will eventually lead to more demands for expansion in non-banking sectors.

Shinhan Financial Group and KB Financial Group are both vying for the industry’s top position.

In 2017, KB Financial was able to take the lead in the banking business after acquiring LIG Insurance in 2015 and Hyundai Securities in 2016. Shinhan Financial Group snatched back the top spot by acquiring ING Life in 2018 for 2.3 trillion won. At the time, ING Life had assets worth 31 trillion won.

For KB Financial Group, Prudential Life is a more than a tempting item, with 20 trillion won in assets and 144.8 billion won of operating profit, based on 2018 figures. While KB Financial is a leading player in banking, card, securities and other sectors, it lacks substantial investments in the insurance industry.

The insurance industry may be experiencing slow growth, but it’s a different story for the intersection of insurance and technology, another reason financial groups are eyeing insurance companies despite their low profitability.

The number of those firms included in the list of top 100 financial tech firms announced by global consulting company KPMG International Cooperative and investment company H2 Ventures rose from 11 in 2018 to 17 in 2019.

Hana Financial Group also recently invested 8.5 billion won in Bomapp, an insurance start-up that offers personalized insurance plans through its affiliates.

But acquisitions of insurance companies don’t always work out well. In 2011, Hyundai Motor Group acquired Green Cross Life Insurance to launch Hyundai Life Insurance but didn’t see much success.

“Besides the case of Orange Life, there are a lot of cases where [M&A] only end up in intensified competition and poor operation,” said Jo Bo-ram, an analyst at NH Investment & Securities in a report.

BY AHN HYO-SIK [jin.eunsoo@joongang.co.kr]