20170412-三星证券-1Q_preview_-_Earnings_to_keep_climbing_13页_433kb

Sector Update Summary

Core Content

This document provides an analysis of the Korean insurance sector, focusing on the financial performance and investment strategies of key life and non-life insurers. The report includes forecasts for first-quarter (1Q) net profits, revisions to full-year earnings estimates, and the impact of new regulatory changes on capital adequacy ratios (RBC). It also outlines the investment strategy, emphasizing the importance of capital strength over underwriting improvements.

Key Companies and Their Performance

Life Insurers

• Samsung Life Insurance (032830 KS, KRW107,500)

  • Target Price: KRW130,000 (+20.9%)
  • 1Q17E Net Profit: KRW672.2b (above consensus of KRW614.1b)
  • Key Drivers: Strong risk margins, dividends from Samsung Electronics, and real-estate disposal gains.

• Hanwha Life (088350 KS, KRW5,950)

  • Target Price: KRW7,300 (+22.7%)
  • 1Q17E Net Profit: KRW123.0b (below consensus of KRW138.1b)
  • Key Drivers: Lower loss ratios, but impacted by one-off expenses and lower loading margins.

Non-Life Insurers

• Samsung Fire & Marine (000810 KS, KRW265,000)

  • Target Price: KRW310,000 (+17%)
  • 1Q17E Net Profit: KRW477.2b (above consensus of KRW477.1b)
  • Key Drivers: Real-estate disposal gains, underwriting improvements.

• Dongbu Insurance (005830 KS, KRW64,900)

  • Target Price: KRW70,000 (+7.9%)
  • 1Q17E Net Profit: KRW153.3b (above consensus of KRW150.0b)

• KB Insurance (002550 KS, KRW27,500)

  • Target Price: KRW32,000 (+16.4%)
  • 1Q17E Net Profit: KRW99.7b (above consensus of KRW105.2b)

• Hyundai Marine & Fire (001450 KS, KRW34,250)

  • Target Price: KRW34,250
  • 1Q17E Net Profit: KRW100.0b (above consensus of KRW99.0b)

Investment Strategy

• Capital Power Trumps Underwriting Improvements:

  • While underwriting improvements in auto loss ratios have driven earnings, the report emphasizes that capital adequacy is a more critical factor for long-term stability.
  • Stronger capital positions (e.g., Samsung Life and Samsung F&M) are recommended for focus in the current environment.

• RBC Ratio Concerns:

  • RBC ratios have declined due to stricter regulations and low interest rates.
  • The report highlights that capital concerns are expected to intensify in June with the implementation of new RBC regulations.

• Capital-Raising Efforts:

  • Insurers are focusing on increasing asset duration and reclassifying bond holdings to improve RBC ratios.
  • Some are expected to issue perpetual or subordinate bonds, though this may not be sufficient to meet regulatory targets.

Regulatory Impact

• New RBC Regulations (Effective June 2017):

  • Require a shift to scenario-based risk calculations for variable insurance reserves.
  • Expand liability duration to 30 years and lower the interest rate risk coefficient to 1.5%.
  • Add credit and market risk to pension products, increasing the complexity of RBC calculations.

• Impact on RBC Ratios:

  • Samsung Life and Samsung F&M are expected to see the largest RBC declines due to the new rules.
  • The report estimates the total capital required to be raised in the industry is between KRW10t and KRW15t, potentially more if interest rates rise.

Investment Recommendations

Key Takeaways

• 1Q Net Profit Outlook: Combined net profit for life insurers is expected to beat consensus, while non-life insurers are projected to significantly exceed expectations.
• Capital Adequacy: RBC ratios are under pressure, and the industry may need to raise capital to meet new regulatory standards.
• Interest Rate Impact: Rising interest rates are expected to benefit insurers in the long run but may create short-term challenges.
• Underwriting Improvements: While beneficial, these are likely to peak in the first half of the year, and insurers may need to focus on capital rather than operational improvements.
• Investor Focus: Companies with strong capital resources, such as Samsung Life and Samsung F&M, are better positioned to weather the regulatory changes.

Conclusion

The report underscores the importance of capital strength in the current insurance sector environment, highlighting that while underwriting improvements have had a positive impact, the long-term sustainability of insurers depends on their ability to maintain capital adequacy. The new regulatory framework, particularly the changes to RBC calculations, presents significant challenges, especially for second-tier players, and may lead to a reshaping of the industry landscape.