瑞士信贷：韩国保险行业研究报告2008年11月

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Korea Insurance Sector
SECTOR REVIEW
Samsung F&M versus second-tier insurers
■
Our earnings reality check supports the sector’s improved ability to
manage, given its structural shift in product mix towards more “sticky”
long-term protection products and lower equity trading exposure, with
a key negative swing factor likely to be investment yields.
■
This reality check on our previous assumptions for key earnings
drivers, plus the companies’ recent operating results, lead us to raise
our FY09 adjusted net profit estimates slightly for the five non-life
insurers under coverage by 4.3% to W1,325 bn. Meanwhile, we reduce
our FY10 estimates by 8.2% to W1,253 bn, largely to reflect a tougherthan-
expected investment yield outlook.
■
We also revise our rating for Hyundai M&F to OUTPERFORM (from
Neutral) and reduce our target price to W18,7000 (from W21,400). We
revise our target price for Dongbu Insurance to W16,500 (from
W24,600), for LIG Insurance to W20,300 (from W26,000) and for Meritz
F&M to W6,100 (from W8,600).
■
Our scenario analysis shows: 1) a remote risk of capital-raising for all
insurers (despite their falling solvency margins) and 2) Samsung
F&M’s superior capital buffer (which should lead it to solidify its
market leadership further over the next six to 12 months).
■
Our earnings and/or balance sheet vulnerability test for second-tier
players (based on different levels of investment yields) suggests that
the type of macro assumptions embedded in their current share prices
look overly pessimistic. While all second-tier players look oversold, our
relative preference at this stage of the cycle is LIG and Hyundai M&F.

Samsung F&M versus second-tier
insurers
While the macro environment will remain challenging for a while, our earnings and balance
sheet stress test for the second-tier players not only suggests that the market’s current
expectations about their ability to manage the current downturn looks overly pessimistic,
but also ignore their improved and more stable earnings power. Hyundai M&F and LIG are
our top second-tier picks at this stage.
Earnings reality check
Our earnings reality check (by examining recent trends in key earnings drivers and their
behaviours in the previous downturns) suggests: 1) no change to the sector’s historically
defensive earnings profile, 2) its improved ability to manage, given its structural shift in
product mix towards more “sticky” long-term protection products and lower equity trading
exposure (notably so for the second-tier players), 3) Samsung F&M’s more resilient
earnings outlook (given its conservative investment portfolio) and 4) the growing
importance of investment yields for overall earnings.
Revisiting our estimates
The combination of this reality check on our previous assumptions for key earnings drivers
and their recent operating results tracking lead us to slightly raise our FY09 adjusted net
profit estimates for the five non-life insurers under coverage by 4.3% to W1,325 bn (up
5% YoY), while cutting our FY10 estimates by 8.2% to W1,253 bn (down 5.5%) largely to
reflect a tougher-than-expected investment yield outlook and introducing our FY11
estimates at W1,459 bn (up 16.4% YoY). Despite our modest downgrade, our revised
models not only continue to show the sector’s relatively defensive earnings outlook, but
also the second-tier players’ improved earnings stability.
Capital-raising risks look remote
Given the combination of ballooning unrealised losses on their fixed-income and/or equity
holdings and the investment outlook likely to remain tough for a while, many investors
have lately become increasingly wary of the potential risk of capital raisings for a few
insurers over the coming quarters. However, our scenario analysis shows: 1) a remote risk
of any sizeable capital-raisings for all insurers (although we see some operational
handicaps for a few second-tier insurers given their sharply falling solvency margins) and
2) Samsung F&M’s strong capital buffer (which should lead the company to strengthen its
market leadership further over the next six to 12 months).
Second-tier players look oversold
The currently large valuation discount between Samsung F&M and the second-tier players
implies the market’s pessimism about the latter’s significant earnings and/or balance sheet
vulnerability to the upcoming downturn, in our view. But our stress test for the second-tier
players shows that the type of investment yields embedded in their current share prices
look overly pessimistic (i.e. 1% versus their 20-year low of 3.3%).
While all second-tier players look oversold, our relative preference at this stage of the
cycle lies in LIG Insurance (with a revised 12 month target price of W20,300) and Hyundai
M&F (with a revised 12-month target price of W 18,700). We also believe that the market’s
concern over refund guarantees (for shipbuilders) looks overdone for Meritz F&M, so we
keep our OUTPERFORM rating with a revised 12-month target price of W6,100.
Meanwhile, we retain our NEUTRAL rating on Samsung F&M given its full valuation (with
a target price of W200,000) and Dongbu Insurance (given its group-related contingent
risks) with a revised 12-month target price of W 16,500.

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