20161024-三星证券-Earnings_to_keep_improving_16页_473kb

Insurance Sector Update Summary

Core Content

This report provides an analysis of the performance and outlook for non-life insurers in South Korea, focusing on the impact of auto loss-ratio improvements and the broader sector dynamics. The key players include Samsung Fire & Marine, Hyundai Marine & Fire, Dongbu Insurance, KB Insurance, and Meritz Fire & Marine. The report highlights that 3Q 2016 results were strong, with combined net profit rising 51.6% year-over-year to KRW639.8b, aligning with the consensus forecast.

Main Points

• Earnings Momentum: Earnings are expected to peak in 2016 due to record-high profits, with a notable disparity in 2017 performance.
• Auto Loss Ratio Improvements: The government's measures to reduce moral hazard, such as the Insurance Fraud Prevention Act and tightened claim payment regulations, have significantly improved auto loss ratios, offsetting declines in investment yields.
• Market Share Dynamics: Samsung Fire & Marine and Hyundai Marine & Fire have gained market share, with Samsung F&M maintaining a strong lead in the auto insurance market.
• Premium Trends: Per-vehicle premiums have been increasing for over three years, and some insurers are now offering discount riders to attract customers, which may signal the peak of premium growth.
• Stock Picking Strategy: The report recommends individual stock selection over a sector-wide approach, with Samsung Fire & Marine and Dongbu Insurance as top picks.

Key Information

3Q 2016 Performance

• Samsung Fire & Marine: Combined net profit of KRW231.9b (up 30.7% y-y), with a significant improvement in auto loss ratios.
• Hyundai Marine & Fire: Combined net profit of KRW100.4b (up 28.1% y-y), with auto loss ratio down 8.3% pts in July and 8.2% pts in August.
• Dongbu Insurance: Combined net profit of KRW176.8b (up 43.2% y-y), with auto loss ratio declining by 10.2% pts in July and 10.6% pts in August.
• KB Insurance: Combined net profit of KRW63.3b, with notable one-off losses impacting its performance.
• Meritz Fire & Marine: Combined net profit of KRW67.4b, with a slight decline in loss ratio.

Target Prices and Recommendations

Earnings Forecast Revisions

Auto Loss Ratio Improvements

• Auto loss ratios have improved by 3-4% pts for the top four insurers, significantly offsetting the impact of investment yield declines.
• Government regulations, such as the Insurance Fraud Prevention Act and revised auto insurance contracts, have helped reduce repair and rental costs.
• The average repair cost for minor damages is now 90% of total cases, with a significant portion of these costs being for repairs rather than replacements.

Discount Riders and Market Strategies

• Insurers are using discount riders to compete, such as:
  • Dongbu: Smart-UBI auto insurance (5% discount), Baby in Car (4% or 10% discount).
  • Hyundai: 'With children' insurance (7% discount), Blue Link (7% discount).
  • KB: Public transport discount (4% or 10% discount), 'With children' insurance (7% discount).

Investment Yield and Efficiency Ratios

• Investment yields have fallen by 20-30bps due to low interest rates.
• Efficiency ratios (combined ratio) have improved, with the top four insurers seeing a decline from 102.2% in 1Q13 to 102.5% in 2Q16.

Outlook

• 2017 Earnings: Earnings will be heavily influenced by auto loss ratios. With the government's reforms and premium hikes, there is potential for continued improvement.
• Moral Hazard Reduction: The Insurance Fraud Prevention Act and other regulatory measures are expected to further reduce claims and improve loss ratios.
• Premium Pressure: Auto premium rates may face downward pressure in the lead-up to the 2017 presidential election due to increased competition and regulatory concerns.
• Investment Strategy: The report advises against excessive optimism and suggests a stock-picking approach, emphasizing the strong fundamentals and growth potential of Samsung Fire & Marine and Dongbu Insurance.

Conclusion

The insurance sector, particularly non-life insurers, is showing strong performance in 3Q 2016, driven by improvements in auto loss ratios and strategic pricing. While investment yields remain a concern, the impact of these improvements is expected to continue into 2017. Investors are advised to focus on individual stocks, especially Samsung Fire & Marine and Dongbu Insurance, which are well-positioned for future growth.