Meritz, Large-Scale Restructuring... Proactive Response to Economic Downturn Crisis

Meritz Financial Group Headquarters

[Asia Economy Reporter Changhwan Lee] Meritz Financial Group has surprised the market by announcing the full acquisition of its affiliates Meritz Fire & Marine Insurance and Meritz Securities as wholly owned subsidiaries, drawing attention to the reasons behind this decision. Industry experts analyze that this move aims to prevent potential capital risks that the affiliates might face amid increasing chances of an economic downturn next year.

On the 21st, Meritz Financial Group announced that it will carry out a comprehensive stock swap to incorporate Meritz Fire & Marine Insurance and Meritz Securities as 100% subsidiaries.

The exchange ratio is 1.2657378 shares of the holding company stock per 1 share of Meritz Fire & Marine Insurance, and 0.1607327 shares of the holding company stock per 1 share of Meritz Securities. Meritz Financial Group plans to issue new shares to deliver the exchanged stocks. Meritz Fire & Marine Insurance and Meritz Securities will be delisted early next year.

The primary reason Meritz Financial Group is moving to fully incorporate its fire and securities affiliates is to enable efficient capital reallocation. Previously, the affiliates operated separately, which caused delays in decision-making; this move aims to improve that.

Kim Yong-beom, Vice Chairman and CEO of Meritz Fire & Marine Insurance

Kim Yong-beom, Vice Chairman of Meritz Financial Group, explained, "From the perspective of capital reallocation, it is necessary to fully incorporate the fire and securities affiliates as subsidiaries. For example, when trying to invest in securities using profits from the fire affiliate, currently, since they are separate companies, it takes at least six months to a year to wait for the shareholders' meeting, receive dividends, and then increase capital. This inefficiency will disappear through the merger."

There is also analysis that this move is a proactive measure to prepare for potential liquidity crises that may arise in the affiliates amid growing global economic recession risks.

In the case of Meritz Securities, it has been pointed out that its proportion of real estate project financing (PF) loans is relatively high among securities firms, making it vulnerable to real estate market crises.

According to Korea Credit Rating, as of the end of March, Meritz Securities' exposure to real estate PF bridge loans and main PF loans relative to its equity capital was 88%, one of the highest among domestic securities firms.

Meritz Securities emphasized that 95% of its real estate PF loans consist of senior bonds with low default risk, so the risk is not significant; however, concerns in the market could grow as the real estate market cools down.

Meritz Fire & Marine Insurance also has a high ratio of real estate PF loans relative to assets at 24%, the highest in the insurance industry. Furthermore, with the introduction of the new international accounting standard IFRS17 from next year, Meritz Fire & Marine Insurance may face capital expansion requirements.

An insurance industry official said, "Insurance companies are currently raising capital ahead of the new accounting standards next year, but the market is stiff due to incidents like the Legoland case, causing difficulties. If Meritz Fire & Marine Insurance and Meritz Securities are incorporated into Meritz Financial Group, the capital procurement situation is likely to improve."

Meritz also emphasized that this decision was made to actively respond to rapidly increasing volatility in the financial markets.

Vice Chairman Kim stated, "Because the management environment is changing rapidly, there was motivation to eliminate inefficiencies related to capital reallocation as soon as possible. Fire insurance shows relatively favorable net income flows when interest rates rise, while securities show relatively favorable net income flows when interest rates fall. Combining them will result in improved management efficiency."

Shareholder returns will also be strengthened. Vice Chairman Kim said, "From the 2023 fiscal year, the integrated Meritz Financial Group plans to return 50% of consolidated net income to shareholders as a principle, including dividends and share buybacks and cancellations."

He added, "This comprehensive stock swap has nothing to do with major shareholder succession. The major shareholders have no plans for succession, and there is no conflict of interest between major shareholders and general shareholders regarding the stock price."

This content was produced with the assistance of AI translation services.