Insurance:4Q preview,Results to miss consensus
WHAT’S THE STORY?
4Q preview: We now expect our covered life insurers—Samsung Life, Hanwha Life, andTong Yang Life—to post a combined 4Q net profit of KRW89.7b, missing consensus by65%. Despite some positive one-offs (eg, real-estate disposal gains), we foresee net profitdeclining due to massive increases in guarantee reserves for variable insurance, incentivepayments, and valuation losses amid a bearish stock market. Nevertheless, risk-loss ratioshave stayed low at around 70%, and protection-type initial premium growth has beensolid. As for our six covered non-life insurers—Samsung Fire & Marine, Hyundai Marine& Fire, Dongbu Insurance, KB Insurance, Meritz Fire & Marine, and Korean Re—theircombined net profit likely missed consensus by 8.4% because of: 1) additionalprovisioning resulting from soaring initial premium; 2) losses related to insurance salesmade through credit card companies, known as ‘cardsurance’; 3) valuation losses oninvestment securities; and 4) incentive payments.
Investment strategy for non-life insurers: The market remains optimistic that nonlifeinsurers will outperform in the current bear market. We, however, recommend caution,noting that: 1) competition has heated up since online insurance supermarket, InsuranceDamoa, opened at end-November; 2) insurers’ long-term risk-loss ratios are continuing todiverge; 3) protection-type initial premiums are stagnating; and 4) shares are trading onaverage at a demanding 1.2x 2016 P/B. Specifically, second-tier insurers have launchedonline products priced similarly to those of Samsung F&M, stoking concerns over stiffeningcompetition. That said, given Samsung F&M’s economies of scale, unrivalled brand power,and loyal online clients, we do not believe rivals’ moves will undermine the market leader’scompetitiveness in the longer term. We cut our 2016 and 2017 EPS forecasts for our coverednon-life insurers by 5.1% and 2.1%, respectively, and downgrade Dongbu Insurance toHOLD since its shares recently staged a relatively strong rally.
Investment strategy for life insurers: Despite a protracted low interest rateenvironment, life insurers have put in solid performances over the past five years byaggressively managing loss ratios and strengthening their underwriting capabilities.
However, there are now a number of concerns. First, loss ratios are already low, with largeplayers having cut theirs to around 70%. Second, negative investment spreads are likely todeteriorate further given low market yields (1.6% for 3-year KTBs and 2% for 10-yearKTBs. Third, there is potential for sizeable share overhang given rumors of HanwhaGroup selling its stake in Hanwha Life, and CJ Group’s series of M&As. Fourth, regulatoryrisk—eg, stricter liability adequacy test rules—remains an issue. We cut our 2016 and2017 EPS forecasts for life insurers by 11.4% and 16.2%, respectively.