Focus on System Change Responses
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
We expect non-life insurance players to post generally sound earnings for 1Q21, benefiting from improved loss ratios and expense ratios. Considering such, we believe that their share prices remain undervalued. Meanwhile, life insurance players’ 1Q21 earnings should prove acceptable, helped by: 1) lessened burdens from variable insurance-related guarantee reserves; and 2) strengthening investment yield. However, at this juncture, we view swift response to upcoming system changes and successful structural innovations as being more important factors than quarterly earnings performance.
1Q21E: Combined NP likely upped 57.5% y-y for non-life insurers and 236.6% y-y for life insurers
We estimate that combined 1Q21 NP for five non-life insurers under our coverage reached W839bn (+57.5% y-y). Non-life players should show improved loss ratios and expense ratios on: 1) insurance premium hikes; 2) Covid-19 effects; and 3) eased competition over new contracts.
Combined 1Q21 NP for four life insurers under our coverage likely upped to W1,251bn (+236.6% y-y), with earnings improvement being led by gains relating to favorable stock market conditions and Samsung Electronics (SEC)’s special dividend payout.
Non-life insurance: Despite earnings peak-out concerns, share prices remain absolutely undervalued
There are concerns that non-life insurers’ earnings will peak out in 1H21. That said: 1) their share prices still look undervalued; and 2) they are better positioned than their life peers regarding the upcoming accounting regulation changes (ie, IFRS17). Also positive are expectations that many players’ DYs will clock around 5%. Favoring players with less concerns from: 1) interest rate hikes (thanks to strong RBC ratios); and 2) high-base effects (from disposal gains booked last year), we continue to offer Samsung F&M as our top pick.
Life insurance: Focus upon system change responses and corporate structure change innovations
Recent interest rate hikes are unlikely to be sufficient for life insurers to escape negative interest spread. Moreover, capital uncertainties are lingering over upcoming system changes (eg, IFRS17 and K-ICS in 2023). Against this backdrop, we believe that valuations will differ by company, hinging upon their response to IFRS17 and results of sales channel changes.