Posted on May 10, 2012 by Sergio Ulloa
French global insurance group AXA SA has made a move to strengthen its position in South Korea's important direct insurance market through the acquisition of general insurer Ergo Daum Direct in a deal announced this past week.
Officials representing both AXA and the Dusseldorf-headquartered ERGO Insurance Group completed and signed a share purchase and sales agreement on May 3rd
which will see AXA General Insurance Korea, the French global insurer's local unit, take over 100 percent of ERGO's subsidiary in South Korea, ERGO Daum Direct this year. Although the official purchase price has yet to be disclosed by either party, local media put AXA's expected outlay for their local market rival at around KRW50 billion (US$44.2 million). Closing of the sale remains subject to final regulatory approval.
Ergo Daum Direct is a Seoul-based non-life insurer that focuses its operations around direct motor insurance policy sales. Founded as Daum Direct Auto Insurance in 2003, the company has been quick to build a considerable business portfolio, with a client base now surpassing 500,000 members and annual insurance premiums worth KRW260 billion (US$229 million). The Korean insurer became a subsidiary of Ergo Insurance Group, when the firm, which is itself a subsidiary of global reinsurance giant Munich Re, acquired a 65 percent stake of the company in 2008. According to their 2011 year-end financial statement, Ergo Daum Direct is now the fourth largest direct motor insurance provider in South Korea, with a share of just under 8 percent of the domestic direct motor insurance market.
While Ergo has certainly benefited from their time in South Korea, the firm put up their local unit for sale last year on fears that their current market share and sales momentum would not be able to offset rising claims costs going forward. Ergo Daum Direct has been dragged down by losses due to high loss ratios in motor insurance and have been unable to raise insurance premiums appropriately and compete due to ongoing governmental pressure to freeze rates. AXA was among several suitors vying for Ergo's South Korean motor insurance book, and was finally able to successfully outbid its principal rival, the Korean Federation of Community Credit Cooperative, after local laws barred the cooperative from owning more than 30 percent share of the domestic financial entity.
AXA already have a leading presence in the South Korean motor insurance sector through its wholly-owned subsidiary AXA Direct Korea. AXA's local branch currently controls around 15 percent of the market with over 950,000 policyholders and KRW534 billion (US$467 million) in written annual premiums. Now, with the acquisition of Ergo Daum Direct, AXA becomes the biggest player in the Korean auto insurance industry as its market share will jump from 15 percent to 22 percent after the merger. In addition, if you combine the KRW700 billion (US$ 612.6 million) in net premiums both direct insurers have written as of January, AXA's Korean operations would rank ninth amongst all general insurers active in the Asia Pacific nation.
Speaking on the transaction in a press statement, Stephane Guinet, CEO of AXA Global Direct, noted that the decision to purchase Ergo's South Korean business will give AXA the opportunity to further reinforce it's its presence in one of Asia's fastest growing and most developed motor insurance markets for years to come. "We are extremely pleased to have agreed on the terms with ERGO for the purchase of ERGO Daum Direct, which further strengthens AXA's number one position in the Korean direct motor market," Guinet remarked, adding that with the addition of ERGO's business, AXA now serves almost 5 million clients through it's general insurance operations worldwide. Guinet Continued to say, "This acquisition demonstrates AXA's commitment to the Korean market and is fully consistent with our global strategy to accelerate our development in the Direct Property & Casualty business."
President and CEO of AXA Direct Korea, Xavier Veyry, assured clients of ERGO Daum Direct and AXA Direct Korea that the transaction will have no immediate impact on their account status and that going forward both organizations will benefit from improved access, service levels and product offerings. As it stands, insurance coverage will remain unchanged and fully in force. "Both companies have very similar business models and organisations," says Mr Xavier Veyry, adding that "through this acquisition we are efficiently reinforcing our platform for growth in the most dynamic and strategic distribution segment in Korea".
In a separate statement ERGO's representatives heralded AXA as a strong brand that is more than capable of developing the company's position further in the current South Korean direct motor insurance market which has its own specific challenges. Indeed, Ergo's decision to sell comes at a time when Korean insurers are facing tough market conditions at home, with intense competition and low profitability forecasts prompting many to consider new business opportunities by expanding into new insurance markets through mergers and acquisitions abroad. Evidence of this trend was seen in November last year when Korea Life Insurance penned a 50-50 joint venture insurance operation in China with Zheijiang International Business Group. The insurer, South Korea's second largest life insurance company, has also expressed an interest in ING Groep's Asia Pacific insurance operations. This has been followed by plans made by their chief rival, Samsung Life, to develop operations in Thailand, India and Indonesian insurance markets in 2012.
South Korea is one of the worlds most saturated and competitive insurance markets. According to a Swiss Re sigma study, the country's insurance penetration, as measured by the ratio of premiums to gross domestic product, is one of the highest in the world at 11.2 percent in 2010, behind only Hong Kong (11.4 percent) and Taiwan (18.4 percent). The South Korean market offers limited organic growth opportunities going forward compared with other markets in the region, in particular China and India where insurance market penetration holds rates of 3.8 percent and 5.1 percent respectively. In those countries, insurers remain focused on home market development, which features large populations and favourable demographic factors that should continue to support and drive premium growth. Given the fact that overseas expansion also helps to spread risk and balance business cycles as well as broaden client bases, it only makes sense for Korean most prominent insurers to pursue these new insurance markets abroad.
Insurance Companies Mentioned
AXA Group is a worldwide leader in Financial Services. Headquartered in Paris, the AXA Group companies are engaged in life insurance, health insurance and asset management services among others. AXA's operations are diverse geographically, with major operations in Europe, North America and the Asia/Pacific area.
ERGO is a subsidiary of global reinsurance giant Munich Re and offers a wide spectrum of insurance provision and services across 30 countries; it currently has more than 40 million customers. ERGO has a strategic focus in Central and Eastern Europe and certain Asian markets. The German insurer has become one of the leading health and legal expenses insurance companies within Europe. In addition ERGO provides property and personal accident insurance in India. In 2011, ERGO recorded a premium income of 20 billion euros and paid out benefits to customers amounting to E17.5 billion.