20160712-三星证券-Insurance__OVERWEIGHT__Low_interest_rate_woes,_despite_solid_underwriting_20页_894kb

Sector Update Summary: Insurance (OVERWEIGHT)

Core Content

This document provides an update on the performance and outlook of the Korean insurance sector, focusing on the impact of low interest rates, regulatory changes, and industry competition. It outlines projections for quarterly and full-year net profits, highlights key stocks, and discusses the challenges and opportunities in the sector, particularly in relation to IFRS 4 Phase II implementation and auto insurance reforms.

Main Points

1. 2Q Performance and Projections

• Life Insurers:

  • Hanwha Life and Tong Yang Life are expected to report combined net profits of KRW172.8b in 2Q16, a 37.5% decline year-over-year.
  • Hanwha Life is projected to see a 45.2% drop in net profit, while Tong Yang Life is expected to have a 5.2% decline.
  • Hanwha Life's net profit is down due to poor risk margins, while Tong Yang Life's performance is slightly improved from a one-off gain related to Burger King Korea.

• Non-Life Insurers:

  • Combined net profits for non-life insurers are expected to remain flat at KRW636.1b in 2Q16, up 11.9% year-over-year, driven by auto loss ratio improvements.
  • Non-life insurers are facing investment yield declines due to the low interest rate environment, but underwriting gains are helping to offset these issues.

• One-Off Gains and Losses:

  • Non-life insurers reported one-off gains and losses, including real estate disposals, securities disposals, and early retirement program payments.
  • These one-offs are expected to have a limited impact on overall performance.

2. Low Interest Rate Environment

• The prolonged low interest rate environment is significantly affecting the sector's fundamentals.
• The Bank of Korea (BOK) is expected to cut rates further, which could worsen investment spreads.
• The LAT discount rate is projected to fall by at least 1% due to the new standards, increasing insurer liabilities.
• Insurers are struggling to maintain margins as investment yields continue to decline and crediting rates are constrained.

3. Valuation and Investment Strategy

• The insurance sector is expected to have limited upside due to the lack of catalysts.
• Regulatory changes have supported relative outperformance, but valuation merits are waning compared to other financial sectors.
• Selective stock picking is recommended over a sector-wide approach.
  • Top Picks: Samsung Fire & Marine (KRW320,000, 16.8% upside), KB Insurance (KRW34,000, 26.9% upside).
  • Other firms with potential include Tong Yang Life (KRW13,000, 24.4% upside), Hanwha Life (KRW6,500, 15% upside), and Dongbu Insurance (KRW70,000, 6.9% upside).

4. IFRS 4 Phase II Introduction

• The introduction of IFRS 4 Phase II is expected to significantly impact the sector.
• The Financial Services Commission (FSC) is taking a flexible stance, while the Financial Supervisory Service (FSS) is pushing for a gradual adoption.
• The regulatory standards are not yet detailed, but the implementation is likely to cause a drop in the LAT discount rate, increasing liabilities.

5. Auto Insurance Reforms and Competition

• Auto loss ratios have improved due to:

  • Premium hikes of 2-5% year-to-date.
  • Government efforts to curtail fraudulent claims.

• Recent reforms include:

  • Reduced payouts for minor accidents.
  • Revisions to auto insurance policy standards.

• These changes aim to reduce moral hazard and improve industry-wide profitability.

• Insurance Damoa, the online insurance supermarket, is expected to boost competition and consumer benefits.

  • It provides a platform for price comparison and product customization.
  • Expected to significantly alter the competitive landscape by year-end.

6. Sector Outlook

• The sector is expected to face continued pressure from low interest rates.
• Underwriting gains are likely to stabilize, and the focus may shift to market-share competition.
• Samsung Fire & Marine is still the dominant player in the non-life insurance sector.
• The low interest rate environment is expected to continue, limiting upside potential.

Key Information

• Target Prices:

  • Samsung Fire & Marine: KRW320,000 (+16.8%)
  • KB Insurance: KRW34,000 (+26.9%)
  • Tong Yang Life: KRW13,000 (+24.4%)
  • Hanwha Life: KRW6,500 (+15%)
  • Dongbu Insurance: KRW70,000 (+6.9%)
  • Meritz Fire & Marine: KRW14,500 (-3.0%)

• Valuation Metrics:

  • Non-life insurers' P/B ratios are at 2.4x relative to the banking sector and 1.5x relative to the securities sector.
  • Limited upside potential due to lack of catalysts.

• IFRS 4 Phase II:

  • Expected to reduce the LAT discount rate by at least 1%.
  • May increase liabilities and impact sector fundamentals.

• Auto Insurance:

  • Auto loss ratios are improving due to premium hikes and policy reforms.
  • Insurance Damoa is expected to boost competition and consumer benefits.

Conclusion

The insurance sector in Korea is facing challenges due to the low interest rate environment, but underwriting improvements and regulatory changes are helping to stabilize performance. While the sector may not offer significant upside, selective stock picking is recommended, with Samsung Fire & Marine and KB Insurance as top picks. The introduction of IFRS 4 Phase II and the impact of auto insurance reforms are key factors to watch, as they could significantly alter the sector's landscape and profitability.