IFRS17-related Uncertainties Still Linger
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
While concerns regarding the planned introduction of IFRS17 and stricter LAT implementation continue to weigh on the domestic life insurance sector, we believe that Tongyang Life will be relatively spared from such regulatory uncertainties compared to its peers. The key to its future share performance, in our view, will be whether it is able to sustain a stable earnings trend.
Raise TP to W5,000
We raise our TP on Tongyang Life from W3,700 to W5,000 on: 1) upward revision to our earnings forecasts in reflection of a favorable macro environment (interest rates, share prices); and 2) a reduction in discount rate from 55% to 40% in light of Tongyang’s relatively lighter LAT burden. Our new TP is derived by applying a target P/B of 0.27x to 2021E BPS of W18,307.
That said, we maintain a Hold rating on the firm, as negative interest spreads sustain and IFRS17-related uncertainties still linger.
Regulatory uncertainties relatively lighter for Tongyang Life
As for the insurance sector as a whole, the planned introduction of IFRS17 in 2023 poses a significant risk factor, as prior to the new accounting system’s introduction, the Korean financial authority is to require domestic insurers to adopt the Korean Insurance Capital Standard (K-ICS) and to pass stricter LAT inspection. In detail, the confidence level for LAT is to be raised around end-2021. We believe that upon the implementation of IFRS17, most life insurers will experience a decline in shareholders’ equity due to debt increase.
That said, we point out that Tongyang Life should be relatively less burdened by the new system, given that its end-2020 LAT surplus ratio stood at 11.3%, the highest among listed life insurers. Although such LAT preparedness does not necessarily guarantee readiness for IFRS17, in our view, Tongyang is indeed relatively better prepared for the new system compared to its peers.
1Q21 NP at W66bn,+3.7% y-y
Tongyang Life is forecast to report 1Q21 NP of W66.0bn (+3.7% y-y), backed by: 1) sound investment profits amid the current stock market boom; 2) reduced variable insurance guarantee reserve burden; and 3) improving risk margins stemming from Covid-19-related benefit.