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Taiwan Life Insurers
2882.TW, 2882 TT
Downgrade to: Underweight
Previous: Neutral
NT$29.15
Price Target: NT$18.00
We downgrade Cathay to UW; recap risks elevated 2888.TW, 2888 TT
Underweight
NT$7.46
Price Target: NT$3.00
Taiwan
Insurance - Life
Dexter HsuAC
(886-2) 2725-9868
dexter.st.hsu@jpmorgan.com
J.P. Morgan Securities (Taiwan) Limited.
Sunil Garg
(852) 2800-8518
sunil.garg@jpmorgan.com
J.P. Morgan Securities (Asia Pacific) Limited
See page 38 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may
have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their
investment decision.
Cathay share price performance
20
50
80
NT$
Feb-08 May-08 Aug-08 Nov-08 Feb-09
2882.TW share price (NT$
TSE (rebased)
Source: Datastream, J.P. Morgan estimates
Shin Kong share price performance
5
15
25
NT$
Feb-08 May-08 Aug-08 Nov-08 Feb-09
2888.TW share price (NT$
TSE (rebased)
Source: Datastream, J.P. Morgan estimates
• Recapitalization risks; we downgrade Cathay to UW, cut our Shin
Kong PT: BV erosion of 56-66% for the sector suggests EV (to be
disclosed with 1Q09 results) could surprise on the downside. The 5%
investment return assumption appears to be too simplistic and detached
from reality. Problems associated with legacy negative spread books are
now being highlighted as foreign companies exit (the latest being
Prudential UK). Given the limited transparency on how much of the
legacy negative spread has been priced into deals, Taiwan’s standards
are relatively loose, and we highlight the need for capital in the sector.
• Issue 1: EV at risk: We expect EV/share for Cathay Life and Shin
Kong Life to fall by 26%/62% in FY08, and major drivers to be: (1)
book value erosion—Cathay Life/Shin Kong Life saw 56%/66%
contraction in their book values even after recaps; (2) the shrinkage of
value-in-force—besides lower investment return estimates, the variance
between actual and assumed investment return should be taken out; and
(3) margin erosion on VUL policies—the margin estimates on VUL
policies were high given the low persistency.
• Issue 2: Falling VNB negative for the appraisal value: VNB
contracted by 13% in 2008—weak results were in line with our
expectation and suggested that the high new business multiple adopted
by life insurers was unrealistic. With potential volume contraction and
flat margin, we estimate the FY09 VNB to decline by 11% for the sector.
We also highlight negative regulatory changes to traditional policies and
investment-linked policies.
• Issue 3: Structural challenges: The change in the RBC formula should
be temporary and a more stringent RBC standard could be adopted in the
future. The implementation of IFRS 4 in 2011 could crystallize the
negative spread issues, though there is limited transparency, in our view.
• We downgrade Cathay to UW: We cut our Dec-09 PT for Cathay to
NT$18 (EV-based) from NT$30. Risks are: (1) hyper inflation due to
intensive government spending; (2) strong recovery of the equity market;
and (3) any favorable regulatory changes.
Table of Contents
Investment summary................................................................3
Issue 1: Embedded value at risk—We expect EV to contract by 26% to 62% ............3
Issue 2: Falling VNB negative for the appraisal value.................................................4
Issue 3: Structural challenges.......................................................................................5
Issue 1: Embedded value at risk .............................................7
Net worth erosion.........................................................................................................7
Pressure on value-in-force ...........................................................................................9
We expect EV to contract by 26-62%........................................................................11
The impact of lower investment return assumptions .................................................12
Issue 2: Falling VNB negative for appraisal value...............13
2008 review................................................................................................................13
2009 outlook ..............................................................................................................14
VNB continues to fall ................................................................................................16
Issue 3: Structural challenges...............................................18
Recapitalization risks.................................................................................................18
Asset-liability mismatch to be crystallized ................................................................19
The implementation of IFRS is negative ...................................................................21
Valuation and estimates ........................................................23
Cathay Financial: We downgrade to UW..................................................................23
Shin Kong Financial: We reiterate UW.....................................................................26
Cathay Financial: Summary of financials.............................29
Shin Kong Financial: Summary of financials.......................33
300714.pdf
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