Earnings Surprise Expected for 3Q21

The author is an analyst of Shinhan Investment Corp. She can be reached at heeyeon.lim@shinhan.com. – Ed.

 

3Q21 NP to come in atKRW165.4bn (+57.0% YoY)

Meritz Fire & Marine Insurance is expected to have delivered an earnings surprise for 3Q21, with operating profit of KRW228.7bn (+53.6% YoY) and net profit of KRW165.4bn (+57.0% YoY). Net profit likely surpassed the consensus estimate (KRW139.6bn) by 18.5%. The insurer should have registered underwriting profit of KRW14.3bn, vs. a loss of KRW53bn in 3Q20, swinging into positive territory for the first time in ten years since 1Q11. This is also a remarkable improvement from 2Q21’s KRW2.5bn loss.

New business for protection-type personal insurance should have declined 19.3% YoY to a monthly average of KRW9.5bn due to the high base effect created from increased marketing ahead of benefit changes in 1H21. Expense ratio likely decreased 0.2%p YoY to 23.2% as a result. Long-term risk loss ratio is projected to have dropped 1.7%p YoY to 94.9% amid stricter social distancing measures. We believe auto and general loss ratios improved to 76.3% (-4.7%p) and 71.5%(-13.6%p), respectively. Seasonal factors, such as typhoons and accidents during the summer holiday season, were not significant. Investment yield is estimated to be solid at 3.69% (-4bp YoY).

2021 NP forecast at KRW569.3bn (+31.5% YoY)

For 2021, we forecast operating profit of KRW780.7bn (+28.0% YoY) and net profit of KRW569.3bn (+31.5% YoY). Contrary to market worries, the increase in loss ratios should be limited after the country shifts to living with COVID-19 at the end of the year. Even without considering the impact of the pandemic, loss ratios should remain steady owing to IBNR provisioning and change of rules, such as a cap on financial planner fees and the Safe Speed 5030 initiative (speed limit of 50km/h in downtown areas and 30km/h in residential areas). Earnings are highly likely to remain solid in 2022 in view of the mask-wearing mandate and lower burden of additional amortization of deferred acquisition cost. We forecast 2022 operating profit of KRW907.9bn (+16.3% YoY) and net profit of KRW656.4bn (+15.3% YoY).

Retain BUY and raise target price by 14% to KRW32,000

We raise our target price for Meritz Fire & Marine Insurance by 14.3% to KRW32,000 to reflect upward earnings forecast revision. The insurer’s share buyback (KRW210.3bn) and year-end cash dividend (10% of net profit) plans represent a dividend payout ratio of 46.9%, pointing to a more shareholder-friendly policy vs. 35-37% of previous years. Fundamentals are also the strongest among the listed non-life insurers. Thus, Meritz Fire & Marine Insurance continues to remain in our favor.

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