20150723-三星证券-2Q_preview__Impact_from_MERS_12页_401kb

Sector Update Summary

Core Content

This report provides an analysis of the performance and outlook for life and non-life insurers in South Korea, focusing on the second-quarter (2Q) results and the long-term investment implications. It highlights the impact of the MERS virus on insurance markets, the performance of key insurers, and the analyst's updated investment recommendations.

Main Points

• 2Q Performance Overview:
  The 2Q net profits for covered life and non-life insurers are expected to meet consensus estimates. Life insurers combined net profit is projected at KRW502.3b, down 13.1% year-over-year (y-y) due to a one-off gain in 2Q14. Non-life insurers combined net profit is expected to rise 14.5% y-y to KRW661.7b, driven by improved loss ratios and MERS-related benefits.

• MERS Impact:
  The MERS outbreak had an unexpected positive effect on insurers by reducing traffic accidents and hospital visits, thus lowering claims and improving loss ratios. However, as MERS cases declined significantly in July, the market's fear of the virus is expected to subside, leading to visible improvements in loss ratios over July-August. The analyst notes that these benefits are one-offs and the long-term performance of insurers depends on fundamentals.

• Non-Life Insurers:
  Second-tier non-life insurers have narrowed the profit gap with Samsung F&M, partly due to MERS and improved underwriting efficiency. However, the analyst believes the gap is unlikely to close further, as the MERS effect is already priced in and the fundamentals of second-tier insurers remain weaker compared to Samsung F&M.

• Investment Strategy:
  The analyst emphasizes the importance of fundamentals over one-off events like MERS. While second-tier insurers may have had short-term gains, the long-term potential depends on their ability to improve performance relative to Samsung F&M. Key firms like KB Insurance are noted for showing differentiated fundamentals and potential for upside.

• Key Recommendations:

  • Tong Yang Life: Upgraded from HOLD to BUY with a target price increase from KRW12,000 to KRW18,000.
  • KB Insurance: Target price raised from KRW30,000 to KRW35,000.
  • Korean Re: Target price increased from KRW12,000 to KRW15,000.
  • Samsung F&M: Maintained as BUY★★★ with a target price of KRW340,000.

Key Information

Life Insurers Performance

• Samsung Life: 2Q15E net profit is estimated at KRW290.1b, down 33.2% y-y, but up 35.6% q-q. Target price is KRW140,000 (+37.3%).
• Hanwha Life: 2Q15E net profit is estimated at KRW160.2b, up 41.8% y-y and 2.4% q-q. Target price is KRW9,000.
• Tong Yang Life: 2Q15E net profit is estimated at KRW52.0b, up 71.0% y-y and down 30.1% q-q. Target price is KRW18,000.
• Total Life Insurers: Combined net profit of KRW502.3b, down 13.1% y-y but up 3.8% vs consensus.

Non-Life Insurers Performance

• Samsung F&M: 2Q15E net profit is estimated at KRW250.4b, up 5.4% y-y and down 14.8% q-q. Target price is KRW340,000 (+21.0%).
• Hyundai M&F: 2Q15E net profit is estimated at KRW84.3b, up 32.2% y-y and 28.5% q-q. Target price is KRW30,000.
• Dongbu Insurance: 2Q15E net profit is estimated at KRW134.6b, down 0.5% y-y and up 42.2% q-q. Target price is KRW60,000.
• LIG Insurance: 2Q15E net profit is estimated at KRW60.9b, up 28.5% y-y and down 11.5% q-q. Target price is KRW35,000.
• Meritz F&M: 2Q15E net profit is estimated at KRW53.0b, up 77.7% y-y and up 155.1% q-q. Target price is KRW13,000.
• Korean Re: 2Q15E net profit is estimated at KRW78.6b, up 22.5% y-y and up 31.0% q-q. Target price is KRW15,000.
• Total Non-Life Insurers: Combined net profit of KRW661.7b, up 14.5% y-y and 2.7% vs consensus.

One-Off Events

• Tong Yang Life: Benefited from a tax refund of KRW9.4b.
• Samsung F&M: Suffered from commercial accident payouts of KRW15.0b.
• Hyundai M&F: Incurred impairment losses of KRW4.0b.
• Dongbu Insurance: Incurred incentive pay of KRW25.0b.
• KB Insurance: Had revaluation gains of KRW16.3b and impairment losses of KRW10.0b, along with early retirement payments of KRW4.0b.

Revised Full-Year Forecasts

• Samsung Life: 2015E net profit revised to KRW1,250.3b (+9.7%), 2016E to KRW1,300.2b (+8.8%).
• Hanwha Life: 2015E net profit revised to KRW540.4b (+1.6%), 2016E to KRW560.2b (+1.7%).
• Tong Yang Life: 2015E net profit revised to KRW185.1b (+14.3%), 2016E to KRW180.1b (+17.7%).
• Samsung F&M: 2015E net profit revised to KRW960.5b (+0.2%), 2016E to KRW1,026.9b (+0.5%).
• Hyundai M&F: 2015E net profit revised to KRW271.1b (+7.7%), 2016E to KRW277.5b (-4.4%).
• Dongbu Insurance: 2015E net profit revised to KRW414.9b (+6.6%), 2016E to KRW431.9b (+0.1%).
• LIG Insurance: 2015E net profit revised to KRW230.5b (+1.1%), 2016E to KRW279.0b (+6.9%).
• Meritz F&M: 2015E net profit revised to KRW133.1b (+15.2%), 2016E to KRW149.6b (+3.6%).
• Korean Re: 2015E net profit revised to KRW202.3b (+36.3%), 2016E to KRW185.6b (+23.5%).

Valuation and Fundamentals

• P/E Ratios: Samsung F&M is at 7.4x 2015 P/E, which is considered attractive.
• P/B Ratios: Samsung F&M is at 1.2x 2015 P/B, while second-tier insurers are at lower multiples.
• Earnings Per Share (EPS): Samsung F&M's EPS is expected to increase from KRW18,994 in 2015 to KRW20,307 in 2016.
• Return on Assets (ROA): Samsung F&M's ROA is projected to rise from 1.6% in 2015 to 1.5% in 2016.
• Return on Equity (ROE): Samsung F&M's ROE is expected to increase from 9.4% in 2015 to 9.0% in 2016.
• Dividend Yield: Samsung F&M's dividend yield is projected to increase from 2.7% in 2015 to 3.0% in 2016.
• Payout Ratio: Samsung F&M's payout ratio is expected to rise from 19.1% in 2015 to 19.5% in 2016.

Conclusion

The report underscores that while MERS had a positive impact on 2Q results, investors should focus on long-term fundamentals. Samsung F&M remains the market leader, and second-tier insurers may not close the gap further. KB Insurance is highlighted as a potential upside candidate due to its improved fundamentals and valuation. The analyst recommends a focus on sustainable improvements rather than one-off events.