Margins to improve from 2015
Due to an increase in loss ratios, the combined net profit of the top-five non-life insurers declined q-q in 3Q14. We attribute the differences in share price performance YTD to a decoupling of net margins. While we recommend focusing on first-tier non-life insurers for the time being, sector margin improvements-to center on second-tier non-life insurers-are expected to emerge from 2015, suggesting that it will become more fruitful to focus on those companies next year.
3Q14 review: Loss ratios rise q-q due to monsoon
- In 3Q14, the combined net profit of the top-five non-life insurers came in at W443.7bn (down 4.4% y-y, down 13.4% q-q; equivalent to an ROE of 10.7%). While net profit at Samsung F&M and Meritz Insurance met consensus, that at Hyundai M&F, LIG Insurance, and Dongbu Insurance fell short. Excluding Meritz, net profit at the top-five insurers declined q-q due to increased loss ratios (on seasonality). Of note, the booking of incurred but not reported (IBNR) provisioning by Samsung F&M and Dongbu weighed on their net profit figures.
- With loss ratios set to climb in 4Q14 (on seasonality), we lower our 4Q14 combined net profit forecast for the top-five non-life insurers to W355.8bn (up 13.4% y-y, down 19.8% q-q) as we now believe that the three (out of the top five) that did not book IBNR losses in 3Q14 will do so in the fourth quarter. We predict that the top-five non-life insurers will post cumulative 2014 and 2015 net profit figures of W1,791bn (up 11.7% y-y) and W2,191bn (up 22.4% y-y), respectively.
Margins to improve slowly in 2015
- Excluding Dongbu, the share price performance of first- and second-tier life insurers is widening. In detail, Samsung F&M’s share price has recently made a new high, and Dongbu’s shares have also outperformed the Kospi (despite affiliate-related issues). However, Hyundai M&F, LIG Insurance, and Meritz Insurance’s shares have underperformed YTD. For the time being, we forecast that Samsung F&M and Dongbu’s competitive edges will sustain. In particular, Samsung F&M has been able to maintain strong profitability at its auto and commercial insurance divisions-we believe that second-tier insurers will find it difficult to emulate Samsung F&M’s success.
- Nevertheless, we predict that non-life insurers’ earnings will trend upwards in 2015, driven by commercial auto premium hikes in 1H14 (to boost their 1H15 numbers) and a decline in long-term risk-loss ratios in 2H15 (backed by premium increases for real-loss compensation insurance). We expect these two positives to center on second-tier non-life insurers (Hyundai M&F, LIG, and Meritz). For now, we recommend Samsung F&M and Hyundai M&F as our sector top picks.
*Source:Woori Investment & Securities Co.