Rebecca Ng
SEOUL, South Korea, Nov 10, 2009 (A. M. Best via COMTEX) --

Following new government policies introduced in the South Korean insurance sector and the overall financial market in 2008 and 2009, uncompetitive companies -- including both local firms and foreign subsidiaries -- will be forced to consolidate either through acquisitions or business divestments if they are to retain market positions for future growth, experts say.

To strengthen market share and raise capital, different insurers in South Korea will follow differing strategies, including organic growth, an initial public offering, divesting noncore or uncompetitive assets in order to focus on value-driven units, or hunt for "crown jewels" from withering institutions.

Two examples of divergent strategy are found with Tong Yang Life Insurance Co. and U.S.-based Prudential Financial Inc.'s South Korean operations.

Diversified Strategies

Seoul-based Tong Yang Life Insurance [78500], a medium-size insurer and a subsidiary of the South Korean conglomerate Tong Yang Group, chose to go public and started trading its shares on the South Korea Stock Exchange in October with an eye to future investment opportunities.

It is the first South Korean life insurer to float shares on the domestic exchange. By the end of the first trading day on Oct. 8, Tong Yang Life recorded total market capital of 1.52 trillion won (US$1.29 billion).

On the other hand, due to the cultural and market knowledge differences, foreign financial companies would be more likely to set a long-term business strategy and review their market performance in a timely manner while they are operating in South Korea.

Lisa Villareal, vice president for global communications with Prudential Financial [58182], told BestWeek Asia/Pacific that Prudential Financial's strategy is to "focus on life insurance and asset management in key international markets around the world."

The company has operated in South Korea for two decades, but it is now reviewing its businesses and is exploring options regarding its investment and fund management businesses in the local market.

Villareal declined to confirm whether Prudential Financial wants to divest noncore assets through transactions that could fetch about US$850 million. She added that with market consolidation in South Korea, Prudential is looking at a "reconsideration of our strategy in Korea."

She said options include "a possible sale of either or both Prudential Investments & Securities Co. Ltd. and Prudential Asset Management Co. Ltd.," which are headquartered in Seoul. Such moves would not affect Prudential's life insurance business, Prudential Life Insurance Company of Korea Ltd., which is also known as POK or Prudential of Korea.

Earlier reports said a potential Prudential Financial deal could trigger a wave of consolidation in South Korea's brokerage and asset management sectors, where more than 100 companies compete, following the introduction of the Capital Markets Consolidation Act, effective earlier this year, through which the government has allowed banks and securities firms to engage in each other's businesses.

New Policies

According to Kim Dong-hwan, chief of the financial industry research division of the Korea Institute of Finance, the CMCA integrates the original 14 financial business laws, such as the Securities and Exchange Act, the Futures Trading Act and the Trust Business Act, into one. It aims to strengthen regulations on unfair transactions in the capital markets and protect investors from the delinquency of financial investment companies.

Kim said the purpose of the CMCA includes improving the efficiency of the domestic capital markets through improvements in the regulatory regime that promote innovation of financial investment products and services, and competition among companies.

In addition, Kim noted the CMCA aims at enhancing the reliability of the capital market by protecting investors from misfeasance or negligence on the part of financial investment companies, enhancing the transparency of internal decision-making and strengthening the rights of shareholders.

More Consolidations

Joong-Jin Park, chief executive officer and vice chairman of Tong Yang Life, said in a statement that the implementation of another law, the Insurance Business Act in the second half of 2008, will mean "a big change" in financial markets in South Korea. The introduction of the CMCA in 2009 will cause "uncompetitive companies lose ground amid financial consolidation with mergers and acquisitions proliferating among financial institutions."

Although the insurer decided to seek capital to expand initially through an IPO instead of participating in other transactions, Park said that once listed on the Korea Composite Stock Price Index, Tong Yang Life can receive greater amounts of capital through stock sales, facilitating expansion through voluntary M&As (BestWire, Oct. 8, 2009).

Another domestic financial services conglomerate, KB Financial Group, also believes the CMCA will generate more M&As in the country.

Jong-geun Choi, team head of strategy planning with KB Financial, said in an interview that "reinforcing the nonbanking sector, for example securities and insurance, is one of the KBFG's long-term strategies, thus, the group is trying to develop the sector through M&As, etc."

HSBC Korea President and CEO Matthew Deakin said in October that HSBC has no plan to acquire any financial company in Korea, including the up-for-sale Korea Exchange Bank and the Korean unit of Prudential Financial.

A Hong Kong-based spokeswoman for HSBC also confirmed that in Korea, "we have no shopping list when it comes to M&A." She said "our expansion plans are premised on organic growth."

Hanwha Securities, a financial subsidiary of the South Korean conglomerate Hanwha Group, however, has indicated a shopping preference. Lee Guk-chun, a spokesman for Hanwha Securities, said the group is "interested in the acquisition as Prudential Securities is put up for sale. However, we don't have any concrete plans yet."

Long-term Business

Although Prudential Financial is reconsidering its operations in South Korea, Villareal said the company "remains committed" to the Korean market through its "unwavering support" for its 20-year-old insurance company, Prudential of Korea, which she said is Prudential's second-largest insurance operation outside of the United States.

"Prudential entered Korea believing in the long-term growth potential for its wealth management market, and such a view hasn't changed," said Villareal. "However, due to reconsideration of our strategy in Korea, Prudential is currently exploring options with regard to its investment business in Korea."

According to Prudential Financial, in February 2004, it acquired an 80% stake in South Korea's Hyundai Investment and Securities Co. Ltd., and its subsidiary, Hyundai Investment Trust Management Co., for 355.5 billion won. This agreement did not involve Hyundai Securities.

The names of the Hyundai units were changed from HITC to Prudential Investment & Securities Co. and from HIMC to Prudential Asset Management Co.

In January 2008, Prudential purchased the remaining 20% share of its South Korean counterpart, said Villareal.

As of June 30, 2009, New York-listed Prudential Financial had US$580 billion of assets under management. It has operations in the United States, Asia, Europe and Latin America.