[ANALYST REPORT] Non-life insurers: Threats from low interest rate trends

Combined NP in May reached W247bn (-3.5% YoY, +6.0% MoM)

The combined NP of six non-life insurers in May reached W247bn (-3.5% YoY, +6.0% MoM). The auto loss ratio inched down on the minor effects of renewed policies and premium hikes. However, the risk loss ratio went up 6.9-12.5%p YoY due to 1) two more business days and 2) a low comparison base stemming from the MERS outbreak. As such, we believe the risk loss ratio will increase YoY as the MERS effect would cover June as well.

FSC aims to reform medical indemnity insurance

In May, the Financial Supervisory Committee (FSC) and the Ministry of Health & Welfare announced that they would set up a task force to reform the medical indemnity insurance system before year-end.

Regulators will take a two-track strategy to focus on 1) revising the relevant infrastructure to reduce moral hazard and 2) reforming the product to give more choices to consumers. As such, regulators plan to 1) unify the medical codes of service not covered by the National Health Insurance and 2) the FSC will define a simplified medical indemnity insurance product by April 2017 with a lower price than the standardized product with consumers able to get easy access.

The main purpose of the effort is to lessen the burden on both consumers and insurers to make musculoskeletal treatments and fluid therapy, considered the main culprits for insurance premium leakage, as a special policy.

As such, we believe insurers will benefit from the rational premium calculation and lower loss ratios thanks to efficient data management and stanching the premium leakage. However, we believe the action will take considerable time since other interested parties, such as doctors, are very opposed to the revision.

But we believe the direction would be positive for insurers since the regulator seems well-aware of the excessive loss ratio driven by insurance premium leakage.

Shares to recover after finding the direction of interest rates

We believe non-life insurers will enjoy favorable earnings over 2Q and 3Q16 considering the reduced auto loss ratio effects should persist. However, the Monetary Policy Committee’s additional interest rate cut is tough for investors. 

The KTB 5-yr yield is down 51bp from 1.81% to 1.30% while it fell 13bp right after the rate cut in June. We believe investors should be conservative after the Brexit vote since another one or two domestic rate cuts are likely while for the moment the US Fed’s hike seems unfeasible.

As such, the valuation ceiling for insurers should be adjusted. However, we believe a gradual share price recovery is likely after investors find the direction of interest rates, given the earnings improvement driven by the lower auto loss ratio.

We prefer Dongbu Insurance and Hanwha General Insurance (GI) among six non-life insurers considering their earnings stability as we believe it is a major investment point in a turbulent financial environment.

Dongbu has gradually increased its retained investment yield to buy overseas corporate bonds while Hanwha GI has maintained higher investment yields for strength in SOC investment.

Weak earnings on low comparison base stemming from MERS

Samsung F&M (000810, BUY, TP W363,000): Samsung F&M posted NP of W95bn in May, up 7.9% YoY and 9.3% MoM. Cumulative April-May NP of W181bn equals 66.8% of our 2Q16 forecast. The risk loss ratio jumped 8.0% YoY to 77.4% due to more business days and a low comparison base driven the MERS outbreak.

The auto loss ratio jumped 1.9%p YoY to 79.9% on a higher accident ratio among new policyholders and more frequent large claims. However, we believe the loss ratio should stabilize as the insurer lifted premiums in April and strengthened the underwriting process.
 
The monthly investment yield increased 0.3%p YoY and 0.6%p MoM to 3.8% thanks to a one-off disposal gain of W40bn including real estate from an office building near Yeoksam station and the sale of securities.

Hyundai M&F (001450, BUY, TP W40,000): Hyundai M&F posted NP of W38bn in May, down 2.0% YoY but up 14.5%. Cumulative April-May NP of W71bn equals 72.7% of our 2Q16 estimate. The auto loss ratio dropped 4.9%p to 80.0% thanks to renewals and premium hikes. The cumulative auto loss ratio improved 5.3%p to 81.6% compared to the annual guidance of 84.4%.

However, the risk loss ratio increased 6.9%p YoY and 1.6%p MoM to 93.7% while the cumulative ratio reached 94.4% compared to the annual guidance of 90.7%. As such, we believe further monitoring is needed for the risk loss ratio’s direction as monthly volatility seems considerable.

Dongbu Insurance (005830, BUY, TP W80,000): Dongbu Insurance posted NP of W42bn in May, down 28.8% but up 1.4% MoM. Cumulative April-May NP of W84bn equals 68.4% of our W123bn 2Q16 estimate. The P&C loss ratio soared 18.5%p YoY and 23.2%p MoM to 89.8%, reflecting a one-off loss from a thermoelectric power plant in Taean. Meanwhile, the risk loss ratio increased 12.5%p YoY to 91.8% on a low comparison base stemming from the MERS outbreak.

We believe the risk loss ratio will inch up in June as the MERS effects during 2Q15 crossed into 3Q15 as well.

Source: Korea Investment & Securities http://eng.truefriend.com/