Non-life Insurance Industry Turnaround Now Reality
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
Domestic non-life insurers’ 2Q20 earnings releases should display q-q improvement, with annual profit growth momentum set to gain further steam in 2H20. We believe that life insurers also saw q-q earnings rises in 2Q20, but mostly due to one-off reversals of variable policy reserves. We continue to prefer non-life plays.
Non-life insurance industry turnaround: No longer just possibility, now reality
It is no longer just a possibility, but now a reality that the non-life insurance industry has entered an upcycle, helped by: 1) earned premium increases in response to a series of auto insurance premium rate hikes; 2) predictions that the favorable influences of the Covid-19 crisis on non-life insurance earnings will extend over Apr~June-2020, longer than earlier expected; 3) an ongoing easing in new contract competition; and 4) likely sound earnings quality (temporary decrease in investment yield attributable to y-y high-base effects). We continue to suggest DB Insurance and Hyundai M&F as our sector top picks.
Life insurers to work at reducing interest margin risks
Amid the current low interest rate environment, it is inevitable that earnings will be tepid and that share prices will be bearish. Therefore, rather than aiming for short-term earnings improvement, we believe that life insurers will be better off if they utilize co-insurance, insurance contract transfers, and interest-rate derivatives in order to reduce their interest rate risk.
2Q20E NP (coverage companies): Non-life insurers +37.9% y-y; lifeinsurers +51.3% y-y
We estimate that combined 2Q20 NP for the five non-life insurers under our coverage upped to W638.9bn (+37.9% y-y), with combined ratio improving on: 1) premium hikes; 2) favorable influences from the Covid-19 crisis; and 3) an ongoing easing in new contract competition.
We size combined NP at the four life insurance insurers under our coverage at W644.5bn (+51.3% y-y), But, we believe that this improvement mainly stemmed from one-off reversals of variable policy reserves.