20160428-三星证券-Insurance_OVERWEIGHT__Time_to_manage_expectations_17页_806kb

Sector Update Summary

Core Content

This document provides an analysis of the Korean insurance sector, focusing on the performance and outlook of major life and non-life insurers. The report highlights the impact of regulatory changes, premium rate liberalization, and low interest rates on the sector's profitability and stock valuations. It also outlines the investment strategy for the sector, recommending specific stocks based on their performance and prospects.

Main Points

1. 1Q Performance Overview

• Life Insurers: Combined net profit for Hanwha Life and Tong Yang Life is expected to fall 8% y-y to KRW212.4b, meeting market consensus. The decline is attributed to falling investment yields, though underwriting profitability remained solid due to improved risk margins and increased sales of protection-type and lump-sum-payment products.

• Non-Life Insurers: Combined net profit for six non-life insurers is expected to fall 1.4% y-y to KRW595.1b. Premium rate hikes, especially in auto and indemnity policies, contributed to improved loss ratios. However, investment performance negatively impacted earnings.

2. Stock Picking Recommendations

• Top Picks: Samsung F&M and KB Insurance are highlighted as top picks due to their market dominance and relatively attractive valuations.
• Caution Advised: The report cautions against excessive optimism, as expectations have largely been priced in.

3. Favorable Regulations and Policies

• Non-Life Insurers: Recent regulatory reforms and premium rate liberalization have boosted non-life insurers' shares. These include:
  • Rate hikes for auto policies (3–5%) and indemnity policies (20–30%).
  • Elimination of moral hazard in auto and indemnity insurance.
  • Eased IFRS 4 Phase II standards, which should reduce the burden on insurers' liabilities.
• Insurance Damoa: The online insurance platform has been introduced to enhance product comparability and competition.

4. Impact of Low Interest Rates

• Investment Yields: Insurers are facing declining investment yields, which are exacerbated by persistently low interest rates.
• Crediting Rates: Crediting rates have dropped to 2%, limiting the room for further reductions.
• Asset-Liability Management: Insurers like Samsung F&M are affected by low yields, with potential earnings impacts from interest rate spreads narrowing.

5. Valuation Analysis

• Valuation Metrics: Non-life insurers are trading at 1x FY16 P/B and 13.4x P/E, which are considered unattractive compared to global peers.
• Global Comparison: Korean insurers are underperforming in terms of valuation compared to global insurers, which have been pulling back for years.

6. Regulatory Risks Post-Election

• Political Pressure: With the ruling party losing a parliamentary majority, there is an increased likelihood of regulatory changes, which could affect the sector.
• Potential Volatility: The report notes that regulatory changes following the general election may lead to increased volatility in share prices.

Key Information

• Target Prices:

  • Samsung F&M: KRW350,000 (16.9% upside)
  • Tong Yang Life: KRW14,000 (30.8% upside)
  • KB Insurance: KRW37,000 (17.8% upside)
  • Hanwha Life: KRW7,300 (9.4% upside)
  • Dongbu Insurance: KRW73,000 (3.4% upside)
  • Hyundai M&F: KRW32,000 (0.8% upside)
  • Meritz F&M: KRW15,000 (8.7% upside)

• 1Q Performance Highlights:

  • Hanwha Life: Net profit of KRW139.7b (down 10.7% y-y)
  • Tong Yang Life: Net profit of KRW72.7b (down 2.4% y-y)
  • Samsung F&M: Net profit of KRW256.4b (down 12.7% y-y)
  • Hyundai M&F: Net profit of KRW77.6b (up 18.3% y-y)
  • KB Insurance: Net profit of KRW61.6b (up 200.2% y-y)

• Regulatory Reforms:

  • Auto Insurance: New standards require specific disclosure of rental car providers, offer similar-class vehicles, and eliminate estimated repair cost systems.
  • Medical Indemnity: Measures to standardize treatment costs and allow hospitals to bill insurance companies directly are being considered to reduce over-diagnosis.

• Investment Strategy:

  • Focus on stock picking rather than broad market optimism.
  • Recommend Samsung F&M due to its market dominance and expansion prospects.
  • Recommend KB Insurance for its strong loss ratio and potential capital boost from a rights offering.

Risks

• Valuation Concerns: Shares of second-tier underwriters are overvalued relative to historical levels.
• Interest Rate Impact: Further declines in yields may affect profitability.
• Regulatory Uncertainty: Changes in the regulatory environment post-election may introduce volatility.

Conclusion

The Korean insurance sector is experiencing mixed performance in 1Q 2016, with life insurers seeing modest declines and non-life insurers benefiting from regulatory reforms and premium hikes. While some stocks like Samsung F&M and KB Insurance are recommended as top picks, the report emphasizes the need for caution due to unattractive valuations and potential regulatory shifts. The sector's future performance will depend on the effectiveness of reforms, interest rate trends, and the outcome of political changes.