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The sale of Lotte Non-life Insurance, which was considered a major event in the insurance company merger and acquisition (M&A) market, ended up being a box office failure. Woori Financial Group, which was mentioned as a strong acquisition candidate, withdrew from the main bidding at the last minute.

As a result, the possibility that Lotte Non-Life Insurance's new owner will be a foreign investor has increased, but some predict that JKL Partners, Lotte Non-Life Insurance's largest shareholder, may not rush to sell. This is because the company is making efforts to improve profitability after introducing a new accounting system, and the company's charms, such as its non-life insurance license, still remain.

Lotte Non-Life Insurance Overview/Graphics = Biz Watch

According to the financial sector on the 28th, one to two foreign investors are said to have participated in the main bidding, which was closed by JP Morgan, the sale manager, on the same day. Woori Financial Group, which participated in the preliminary bidding, gave up the main bidding. Woori Financial Group explained in a public announcement, "We reviewed the acquisition of shares in Lotte Insurance as part of a plan to strengthen non-bank competitiveness, but decided not to pursue the acquisition." Recently, Woori Financial Group signed a non-binding memorandum of understanding (MOU) with the Chinese multilateral insurance group, the major shareholder of Tongyang Life Insurance and ABL Life Insurance, and is pursuing due diligence for the acquisition.

Will the new owner be foreign?

It appears that the company was unable to meet the price difference with JKL Partners, a private equity fund management company that is Lotte Non-Life Insurance's majority shareholder (77.04% stake). JKL Partners is said to be hoping for a sale price of at least 2 trillion won.

On the other hand, Woori Financial Group has announced that its available investment capacity for non-bank M&A is 1.8 trillion won. As Woori Financial Group did not participate in the main bidding, Lotte Insurance ended trading at 2,915 won, down 23.6% from the previous trading day. The market capitalization collapsed by 1 trillion won to 906.2 billion won. On the other hand, Woori Financial Group closed up 1.66% and Tongyang Life Insurance closed up 8.61%, respectively. ▷Related article: Woori Financial Group withdrew from Lotte Non-life M&A… Impact of Tongyang Life Insurance acquisition (June 28)

As market interest cools, attention is focused on whether foreign investors who participated in the main bidding will complete the sales race. However, some in the industry predict that Lotte Insurance may not rush to sell. It is observed that the company may try again at a time when the price can be properly evaluated considering the market situation.

Potential acquisition candidates, such as Hana Financial Group, which did not participate in both the preliminary and main bids but are in dire need of strengthening non-banks, may send love calls again. In relation to this, Lotte Insurance's position is, "Details related to the sale are under the jurisdiction of the shareholders and there is nothing that can be confirmed."

Lotte Insurance, even though I hate you, once again?

In terms of net profit, Lotte Insurance is evaluated as a valuable asset that will not incur a loss after acquisition. The company's net profit last year was 302.4 billion won. This is the highest performance ever since establishment. Insurance contract margin (CSM), a key indicator of an insurance company's future profitability, increased 33.1% from the previous year to 2.3966 trillion won at the end of December last year.

According to Korea Credit Rating, Lotte Insurance's share by type based on raw insurance premiums last year was 67.4% for retirement pension, 29.1% for long-term insurance, 1.7% for automobile insurance, and 1.8% for general insurance. While securing operating resources by utilizing retirement pensions, the company is steadily improving its portfolio focusing on long-term protection insurance, which is a core profit product under IFRS17. The proportion of long-term insurance in primary insurance premiums, excluding retirement pension, increased from 72% in 2019 to 89% last year.

On the other hand, the need for investment profit and loss management has increased in accordance with the new financial product accounting standards (IFRS9) introduced along with IFRS17. In the case of Lotte Insurance, the proportion of 'fair value assets for current period profit and loss (FVPL)' within the total operating assets is relatively high at 40%, leading to increasing volatility in performance due to valuation profit and loss.

As investment profit in the first quarter of this year plummeted 81.78% to 9.8 billion won compared to the same period last year, the company's net profit also fell 27.6% to 40.9 billion won. There are also concerns that the proportion of middle- and second-tier investments in overseas alternative investments is high.

Nevertheless, it is evaluated that the attractiveness of the non-life insurance business license is higher than anything else. KB Financial Group and Shinhan Financial Group showed notable performance in growth and profitability after acquiring a non-life insurance company (LIG Insurance) and a life insurance company (ING Life Insurance), respectively.

In particular, in the case of KB Financial Group, the share of insurance affiliates such as KB Insurance and KB Life Insurance in the overall group profit (simple summation) increased from 6.2% in 2020 to 17.0% in 2023. Kim Ji-young, a researcher at Kyobo Securities, said, “The insurance industry is an essential financial industry along with banking and securities,” and “Considering the rapidly aging population and the diversified demand for consumer insurance, the attractiveness of the insurance industry is still high.”

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