Financial Management Uncertainties
As the Korean insurance industry’s performances have improved this year, shareholders have much anticipation for an increase in dividends but insurers are hesitant to specify their dividend policies. This is because the introduction of the new accounting standard, IFRS17, and the new employee benefit system, K-ICS, has increased their financial uncertainties and insurers have decided that it is risky to increase dividends hastily according to analysts.
According to an official at Hanwha Investment & Securities on June 28, so far, only Samsung Life has specifically revealed their plans to return to shareholders this year, including their dividend payout ratio among the major Korean insurers. A dividend payout ratio refers to the proportion of dividends in net income.
Samsung Life suggested a dividend payout ratio of 35 to 45 percent this year. Assuming a six percent year-on-year increase in required capital, Samsung Life estimates a dividend payout ratio of 35 percent to maintain its K-ICS ratio. This resulted in an expected dividend yield of 5.9 percent for this year.
This year, an accounting standard change to IFRS17 is expected to increase the amount of profit recorded in insurers’ financial statements. However, with the exception of Samsung Life, most insurers have yet to announce a specific dividend policy in the first half of the year, citing uncertainties in the early stage of the new system.
In addition to the introduction of new systems such as K-ICS and IFRS17, which assess liabilities at current market value rather than at their original value, this year, Korean financial authorities have ordered insurers to raise capital and strengthen capital adequacy management in preparation for potential risks in the market. With the introduction of IFRS17, insurers will be required to set aside a reserve for surrender charges that must be returned to policyholders when an insurance contract is canceled. The surrender charge reserve is a statutory reserve and is excluded from profits that can be counted in the calculation of dividends.
However, some experts argue that insurers are overly concerned about dividends, saying that they will accelerate their shareholder return policies once new systems, including IFRS17, are in place. “Since profits have soared since the introduction of IFRS17, dividends per share will increase significantly even if a dividend payout ratio drops,” said Jung Jun-seop, a researcher at NH Investment & Securities. “Insurers with K-ICS ratios above 200 percent will also start discussing the repurchase and cancellation of their treasury stocks with regard to excess capital.”
The repurchase and cancellation of treasury stocks is a typical measure to stimulate share prices to rise. When treasury stocks are bought back from the market and canceled, the number of circulated shares falls, dialing up the value of the stock. As the number of shares decreases, the dividend per share will increase.
Meanwhile, Shinhan Investment & Securities released an estimate of dividendable profits of insurers based on their end-of-quarter results. It was estimated to be 33 trillion won (US$25 billion) for Samsung Life Insurance, 11.4 trillion won for Samsung Fire and Marine Insurance, 5.3 trillion won for DB Insurance, 4.1 trillion won for Hanwha Life Insurance, 2.6 trillion won for Hyundai Marine Insurance, 900 billion won for Mirae Asset Life Insurance, 800 billion won for Tongyang Life Insurance, and 400 billion won for Hanwha General Insurance.