Hyundai M&F
The author is an analyst for NH Investment & Securities. He can be reached at junsup@nhqv.com -- Ed.
Some adjustments to Hyundai M&F’s capital and capital ratios appear unavoidable given financial authorities' IFRS17 guidelines. But, we view a recent correction in the firm’s share price as being somewhat excessive.
Equity capital adjustments unavoidable given financial guidelines
Some adjustments to the previously disclosed IFRS17 financial statements are unavoidable given the financial authorities’ present guidelines for IFRS17 actuarial assumptions. Details are yet to be determined, but overall the new guidelines will likely have a stronger impact on equity figures rather than profit/loss figures.
Among the guidelines, Hyundai M&F is to be mainly affected by the assumption of medical insurance and the extension (to 15 years) of the period to reach the target loss ratio (100%).Accordingly, we expect to see increased debt (BEL, CSM) and decreased first- and second-generation equity subject to the fair value method. As a small rise in CSM should offset a lessening in profitability stemming from the change in the CSM amortization standard, the impact on actual profit/loss figures should prove limited. In other words, once this guideline is applied, a decline in equity capital and a narrowing in K-ICS ratio should look more probable than substantial changes in profit/loss numbers.
Lower TP in light of uncertainties, deem recent share price adjustment to be overblown
Among the three non-life insurers, we believe that Hyundai M&F will be the most affected by a fall in equity capital. The insurer’s 1Q23 cancellation refund reserve was W4.4tn, accounting for 56% of its equity capital, a larger portion than that at rivals. Once its equity capital decreases, its current K-ICS ratio (178.6%) should also shrink.
It is difficult to estimate the specific impact at this point, but given mounting uncertainties, we lower our TP to W50,000 (from W56,000) by expanding our discount rate (55% → 60%) rather than changing our earnings forecasts. Our new TP was calculated by applying a target P/B of 0.45x to the 2023E BPS of W111,202. But, we believe that: 1) there will be no change in earnings available for dividend payouts as retained earnings are to decline by the same amount as the decrease in cancellation refund reserve; 2) institutional uncertainties will fade gradually; and 3) we deem a recent correction in Hyundai M&F’s share price as being excessive.