Earnings Growth Outpacing That of Top-tier Non-life Insurers
The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. -- Ed.
Hanwha General Insurance (HGI) once again reported sound quarterly earnings amid improving business conditions. While there was a hefty drop in shareholders’ equity, we see no need for concern considering the coming of IFRS17 in 2023.
Earnings growth outpacing that at top-tier non-life insurers amid improved business environment
HGI once again reported sound quarterly earnings amid more favorable business conditions. Non-life insurers are now showing improvement in terms of both auto risk loss ratio and long-term risk loss ratio. As HGI has: 1) a relatively (versus peers) wider portion of medical insurance; and 2) higher long-term risk loss ratio sensitivity to earnings upswings, the firm is enjoying faster-paced earnings growth than that at top-tier non-life insurers.
This healthy earnings expansion trend is set to sustain in 2H22, with the arrival of the 5-year renewal cycle for medical insurance contracts to add onto business environment positives. Of note, first-gen medical insurance contracts account for 42.4% of the firm’s total medical insurance contracts. Moreover, one-off gains from a real estate disposal will likely be recognized.
That said, HGI’s 2Q22 results show a large drop in shareholders’ equity (W278bn, -67% q-q). In detail, since liabilities are not evaluated at present value under the current IFRS4 rules, decrease in value of assets (FV-OCI) stemming from interest rate hikes is solely reflected in shareholders’ equity figures. However, it is our opinion the amount of shareholders’ equity recorded under IFRS4 rules fails to reflect the insurer’s real EV. Under IFRS17-based rules, HGI sizes its shareholders’ equity at W3,000.1bn. Moreover, one-off profit gains from a property disposal should boost capital adequacy. Given such, we see no need for concern toward the decline in shareholders’ equity in 2Q22.
2Q22 review: NP leaps 86.9% y-y to W75.4bn
On a non-consolidated basis, HGI reported 2Q22 NP of W75.4bn, topping consensus by 22.4%. Its auto risk loss ratio and long-term risk loss ratio both improved significantly, arriving at 74.5% (-5.7%p y-y) and 92.5% (-7.7%p y-y), respectively. Expense ratio narrowed to 21% (-2.7%p y-y), displaying a stable trend.
We forecast full-year 2022 NP of W247.1bn (+58.5% y-y if excluding property disposal one-off gains). With the firm’s shares currently trading at a 2022E P/E of only 2.3x, a level half the size of the top-tier non-life insurer average, we see valuation merit.