1) Investment highlights
- June net income surged 42.4% YoY to KRW71.5bn and 2Q net income met consensus at KRW276.8bn (+19.6% YoY, -45% QoQ). The auto loss ratio and general loss ratio both improved considerably to drive income higher.
- The loss ratio in June improved by 2.1% YoY to 81.5% thanks to a 1.4%p decrease in the auto loss ratio, 9.7%p fall in the loss ratio, and a 1.4%p decline in long-term loss ratio. The long-term risk loss ratio inched up but was still held at the 70% level. The expense ratio edged up 0.8%p YoY due to an escalated cost associated with long-term policy sales.
- The loss ratio in 2Q improved by 2.2%p YoY to 81.3%, driven by a 4.4%p decrease in the auto loss ratio, 6.3%p fall in the loss ratio, and 0.7%p decline in the long-term loss ratio. Stellar loss ratio management helped improve the combined ratio to 100.4% (-1.5%p YoY, -1.4%p QoQ).
- 2Q investment yield dipped by 0.6%p YoY to 2.6%. As a result, investment income fell 10.2% YoY (- 5.3%p YoY stripping off the property sales gain seen in 2Q16). Management plans to increase purchases of high-yield long-term bonds to boost the matching percentage of asset and liability duration and to raise the investment yield.
- In 2H, we expect the combined ratio to remain low and investment yield to improve. We maintain BUY and our target price of KRW355,000.
2) Major issues and earnings outlook
- Four major non-life insurers including Samsung Fire & Marine plans to cut its auto insurance premiums by 0.8-1.6% beginning in end-August (Samsung 1.6%, Dongbu(005830.KS: BUY ) 0.8%, Hyundai(001450.KS: BUY) 1.5%, and KB(unlisted) 1.5%). We see this as a preemptive action by insurers to protect themselves from potential pressure on premiums from the new administration and do not believe it will lead to intense competition as seen in the past.
- In 1H, Samsung’s auto insurance market shares stood at 33.7% in the face-to-face channel (flat YoY) and 30.5% in the cyber marketing (CM) channel (+1.4%p YoY). The CM channel’s share of auto insurance increased by 4.5%p YoY to 36.1%. Despite moves to reduce premiums across large insurers, Samsung’s market leadership will likely hold.
- The RBC ratio in 2Q was the industry’s best at 360%. The company’s capital strength provides room to enhance shareholders’value and business prowess.
3) Share price outlook and valuation
- We used a SOTP valuation based on the Gordon growth model to determine the value of the core business and affiliates.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.