Uncertainties Regarding System Changes Remain High
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
Hanwha Life’s share price has been rising in response to a recent interest rate uptrend. However, the firm still needs time to resolve a negative interest spread issue, and uncertainty factors (including RBC and IFRS-17 effects) still need to be considered.
Raise TP to W4,000
We raise our TP on Hanhwa Life from W3,500 to W4,000, reflecting: 1) healthy 1Q21 earnings; and 2) a lessened burden from variable insurance reserves (2021~2022) in response to recent interest rate hikes. Our new TP was derived by applying a target P/B of 0.28x (raised from 0.21x thanks to higher profit estimates and increase in average 2021~2022E ROE from 2.8% to 3.5% in light of a decline in shareholders’ equity) to 2021E BPS of W14,463 (reduced from W16,447 owing to a decline in shareholders’ equity in line with an uptrend in interest rates) in 2021.
But: 1) we note that the insurer’s favorable 1Q21 earnings reflect a number of one-off factors; and 2) we leave our Hold rating unaltered as uncertainties regarding system changes (such as IFRS-17 effects) remain high.
1Q21 review: Posts NP of W194.2bn, +306.1% y-y
Hanwha Life recorded non-consolidated 1Q21 NP of W194.2bn, surpassing both our estimate and consensus. It booked several one-off items, including: 1) disposal gains of W120bn; 2) reversal of variable insurance guarantee reserves of W33bn thanks to favorable stock market conditions; and 3) overseas stake disposal gains.
Underwriting profits (risk margin + expense margin) remained roughly similar y-y. Warranting attention is 1Q21 risk loss ratio of 80.6% (-6.4%p y-y). Although the loss rate may rise if positive effects from Covid-19 dissipate in the future, the firm plans to maintain its mid/long term loss ratio at around 81%.
RBC ratio fell to 205% (-33.7% p q-q) due to rising interest rates. Hanwha Life showed a higher ratio decline compared to peers, as a large portion of its invested securities are classified as available-for-sale securities, leaving it vulnerable to decreases in the value of invested assets and shareholders’ equity during times of interest rate uptrends. Thus, with interest rates expected to climb further in the future, there will likely be a need for capital expansion.