The Time for Turnaround Is Here
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
Looking at the domestic non-life insurance industry in 2020, we expect to see: 1) auto loss ratio improvement; 2) insurance-related operating expense decline; and 3) positive effects from the Covid-19 crisis. Likely to be the only financial sector achieving earnings growth this year, the non-life insurance industry should enjoy earnings improvement that continues into 2021.
After two years of weak earnings, the time for turnaround is here
Despite the sluggishness seen over the past two years, the non-life insurance sector is expected to recover this year. In detail: 1) in 1H20, auto and long-term risk loss ratios should outperform expectations on favorable effects from Covid-19; 2) in 2H20, auto loss ratio improvement is expected, with effects from auto premium hikes beginning to appear; and 3) helped by a decline in competition for new business, annual expense ratio should show improvement.
Although NP likely showed a slight decrease y-y in 1Q20, it is expected to pick up from 2Q20. We estimate combined 2020 NP at the non-life firms under our coverage at W1.87tn (+29.1% y-y), a figure beating consensus by 13.7%.
Upgrade rating to Positive; present DB Insurance & Hyundai M&F as top picks
We upgrade our rating on the non-life insurance industry from Neutral to Positive. Our top picks have changed from Samsung F&M to DB Insurance and Hyundai M&F, as the latter two players should respond more sensitively (than Samsung F&M) to the loss ratio improvement expected during the upcoming earnings turnaround. We further note that our new top picks offer greater exposure to auto insurance (forecast to be a main driver of 2H20 earnings improvement) than that of Meritz or Hanwha General Insurance (HGI). Moreover, trading at 2020E P/Bs of 0.4x, both plays boast attractive valuations, even considering a discount for Covid-19-related market uncertainties.
Non-life players under coverage to post combined 1Q20 NP of W441.1bn (-8.7% y-y)
The non-life players under our coverage are projected to post combined 1Q20 NP of W441.1bn (-8.7% y-y), a figure slightly above consensus. Amid the spread of Covid-19, the steep increase in claims seen until the end of last year likely eased to a fair extent.