SEOUL, KOREA – LT new business and NP growth slowed at non-life insurers in Oct, as anticipated.And, the slowdown is likely to continue over the next two to three months. As such, we believe there is some downside risk to our 3QFY12 (end Dec) earnings forecasts for non-life insurers (excluding Samsung F&M).
Going forward, policy change regarding insurance (lower standardized target investment rate, regulatory changes regarding medical indemnity products, etc) should impact top and bottom lines of insurers. In addition, changes in public welfare programs after the election should also affect long-term profitability. Given these lingering uncertainties, we expect non-life shares to trade in a tight band over the near term amid seasonally low earnings. We favor in rank order: Samsung F&M, Hyundai M&F, LIG Ins, Meritz F&M, Korean Re and Dongbu Ins. Samsung F&M: Stable earnings overall Samsung F&M (SF&M) posted Oct NP of W78bn, down 15% YoY, but up almost twofold from Sep, mostly due to W28bn in one-off costs. And, Oct NP is more than one-third our 3QFY12 estimate of W206bn. Underwriting losses shrank to W14.3bn from over W60bn in Sep. In particular, the auto loss ratio (K-IFRS basis) slipped from 82.9% in Sep to 78% partially due to the conservative accounting in Sep. And, a total W8.7bn in one-off claims were incurred at the P&C lines. LT protection-type new business increased 26% YoY. Specifically, protection-type personal insurance new business increased to W9bn, up 33% YoY and up 12% MoM. Given personal insurance growth at second-tier insurers slowed to single digit MoM growth after aggressive sales efforts in 1HFY12, SF&M appears to be posting more consistent growth. Maintain as top non-life pick Non-life shares outperformed the Kospi in 1HFY12 on stable earnings momentum as defensive plays, but have corrected since Nov. SF&M posted a pullback of only 6%, the smallest decline among non-life plays, confirming our outlook that the firm capital base and diversified profit structure should be considered a competitive advantage among tightening regulations and growing policy uncertainties. And, we maintain SF&M as our top pick with a TP of W300,000, the average of 2.0x PB (ROE 15.6%, COE 8.9%, perpetual growth 2.5%) for operating assets and 1.0x for affiliate share value.
Hyundai M&F: Poor NP on greater U/W losses Hyundai M&F (HM&F)’s Oct NP reached only W22.3bn, down 35% YoY and 36% MoM, well less than a third of our 3QFY12 estimate of W90.7bn. Despite higher investment income (+20% YoY), underwriting losses increased to W22.1bn (turn to loss YoY, +W19bn MoM) on a higher combined ratio (102.9%, +3.3%p YoY). P&C and auto loss ratios were also up on one-off claims for farm insurance and seasonally higher accident rates, respectively. LT protection-type new business eroded 3% YoY on reduced P&C new policies, but personal insurance new
business expanded 31% YoY to W6.5bn. Cheap given improving earnings capacity HM&F shares fell 7%, the second small decline among non-life insurers. And, we still believe shares trade at the low valuation range (1.4x PB, 7x PE) given an ROE forecast of 20%. We maintain HM&F as our second top pick after SF&M. Our TP of W43,000 equates to a BPS of W19,537 and a target PB of 2.2x (ROE 22.0%, COE 11.1%, perpetual growth 2.0%).
Dongbu Ins: NP falls despite strong investment earnings Dongbu Insurance (DI) posted Oct NP of W31.7bn, down 17% YoY and down 12% MoM. Despite higher investment income (+40% YoY), backed by W15.6bn in gains
from security disposals, underwriting losses increases (turn to loss YoY, +W17.3bn MoM), resulting in NP shy of one-third of our 3QFY12 estimate of W110.9bn. Poor underwriting results are attributed to a surge in the auto loss ratio (88.4%, +4.5%p YoY, +12.2%p MoM, K-IFRS basis). In addition to base effect (ratio 4-5%p lower in Sep), seasonal factors in the auto line and a higher loss ratio at the online channel (over 90%, accounts for 35% of total auto line) fueled the uptick. Oct LT protectiontype new business increased 33% YoY. Specifically, protection-type personal insurance new business reached a robust W6.4bn, up 35% YoY.
Maintain Hold amid conservative stance on insurance sector DI shares have been the worst performers this year, down 7% YTD. While further downside appears limited, we recommend a conservative approach over the near term. We maintain Hold and a TP of W56,000, which equates to 1.9x PB (BPS W31,174, ROE 18.3%, COE 10.5%, perpetual growth 2%).
LIG Insurance: Earnings weak on greater U/W losses LIG Insurance (LIG) posted Oct NP of W16bn, down 28% YoY and 40% MoM, well short of one-third our 3QFY12 estimate of W67.3bn. Despite higher investment income (+39% YoY) on W3bn in gains from treasury stock sales, underwriting losses grew to W25.9bn on a higher combined ratio (103.9%, +3.5%p YoY, K-IFRS basis). Auto and LT loss ratios increased on seasonally higher accidents and an increasing LT risk loss ratio, respectively. W4bn in one-off farm insurance claims were also incurred, pushing up the P&C loss ratio. Higher net expense ratios are mostly attributed to W2.9bn in monthly provision for severance liabilities, in addition to increased deferrals of acquisition costs. LT protection-type new business growth reached 17% YoY. Specifically, protection-type personal insurance new business reached a robust W5.3bn, up 29% YoY.
PB below 1x, PE below 6x, but ROE as high as 20% In Jul-Oct, shares surged 25%, but have corrected 10% since Nov. While the earnings gap with first tiers is narrowing more slowly than anticipated, shares are trading at only 0.96x PB and 5.5x PE, while we forecast FY12-13 ROE of 20%. We believe shares will be defensive amid a poor environment for insurance shares. Our TP equates to a BPS of W21,916 and target PB of 1.8x (ROE 19%, COE 11.5%, perpetual growth 2.0%).
*Article provided by The Korea Economic Daily
*Source: Korea Investment & Securities Co.
*For more information, please visit The Korea Economic Daily
