The author is an analyst of NH Investment & Securities. He can be reached at [email protected]. — Ed.
In 2022, there has been a mix of expectations and concerns for the insurance sector, as interest rates (the biggest variable for fundamentals) have jumped faster than expected and IFRS17 is set to be introduced in 2023. Generally, high interest rates are a positive that reduce insurers’ liability burden, but the current interest rate upcycle has been so fast-paced that it has caused many side effects. It has pushed down insurers’ equity capital and RBC ratios, and worsened the funding environment, leading to Heungkuk Life’s decision to delay the exercise of a call option. Also, a rise in the cancellation of savings-type new policies has dampened liquidity conditions.
Overall, however, higher interest rates are positive. The positive impacts should become more evident upon the adoption of IFRS17. Of course, the impact should be felt only by insurers that are able to weather the current storm. Fortunately, we believe that the majority of insurers under our coverage will overcome the current hardships.
In 2023, both life and non-life insurers are to show stable recurring earnings. Non-life insurers are forecast to display a slight increase in profits, while life insurers’ profits should stay around current levels. We advise keeping tabs on what will happen once IFRS17 is introduced. In particular, eyes should be on: 1) equity capital and CMS and CSM amortization ratio; 2) major assumptions and the levels of confidence in them; and 3) new shareholder return policies.
I. Pros and cons of higher interest rates
In principle, inflation rate hikes are good news for insurers, as they reduce their liability burden and duration, while improving asset management profits and boosting new contract values. The impact of higher interest rates is to be reflected in financial statements following the introduction of IFRS17 in 2023. But, a steep rise in rates has a number of downsides, too, including declines in equity and RBC ratios. It also leads to a surge in lapse ratio for savings-type contracts, putting liquidity pressure on insurers. Thus, in times of higher interest rates, insurers that are capable of enduring such downsides should benefit.
II. Likely rise in auto loss ratio to be offset by long-term risk loss ratio improvement
We expect 2023 combined NP (pre-IFRS17) at the four non-life insurers under our coverage to edge up 2% y-y to W3,106.9bn. Auto loss ratio at the firms should rise 1.3%p y-y to 82% in 2023, owing to a number of factors, including: 1) a cut in insurance rates; and 2) a rise in insurance costs. Positives for auto loss ratio include a step-by-step implementation of an auto insurance improvement plan. Meanwhile, in 2023, long-term risk loss ratios at non-life insurers are projected to fall 1.4%p y-y on average, backed by efforts to reduce overtreatment. Such a trend should sustain in 2023, as well. In line with the transition to IFRS17, most non-life insurers should enjoy a 30~80% profit hike.
III. 2023F underwriting profit at life insurers to remain flat y-y
Combined 2023F NP (pre-IFRS17) at the four life insurers under our coverage should drop 14.2% y-y to W1,746.4bn. However, excluding large-scale one-off factors in 2022, 2023F NP should come in almost flat y-y. Meanwhile, combined risk margin and expense margin are estimated at a respective W1,427.0bn (+3.8% y-y) and W1,433.7bn (+5.1% y-y). Meanwhile, life insurers should see meaningful improvements in financial statements following the introduction of IFRS17 next year.
IV. Top picks
We maintain a Positive rating on the non-life industry and a Neutral rating on life industry. While life insurers are to receive greater market attention after IFRS17 introduction, non-life plays should continue to fare better. We recommend Hyundai M&F as our top pick, noting: 1) a rise in risk premium upon a medical insurance renewal cycle (till 2024); and 2) the highest level of IFRS17-conversion benefits among Korea’s three largest non-life plays.
