The authors are analysts of KB Securities. They can be reached at firstname.lastname@example.org and email@example.com, respectively. — Ed.
Earnings miss market consensus and our estimate
— Samsung F&M turned in 3Q20 standalone NP of KRW195.6bn, missing our estimate (KRW215.4bn) and the market consensus. Although the combined ratio was in line with our estimate (104.2%), earnings stopped short because of shortcomings in investment yield amid the absence of asset disposal gains.
— In regard to auto loss ratio and long-term risk loss ratio, other insurers managed to close the gap with Samsung F&M. The reduction for auto loss ratio seems to be a natural occurrence during industry-wide decreases, and that of the long-term risk loss ratio seems to be because Samsung F&M did not raise its premiums as much as its competitors.
— Samsung F&M is expanding its business scope beyond general insurance; it invested USD260mn (USD150mn + USD110mn) in the reinsurance firm Canopius. Its large capital buffer allowed it to make such a large-scale investment.
— Despite its shortcomings in 3Q20, Samsung F&M is still our industry top pick. Our two major investment points (relatively low long-term risk ratio and high RBC ratio) may be even more germane in 2021.
3Q20 standalone NP at KRW195.6bn (+22.4% YoY)
— NP growth in 3Q20 seems attributable to (1) a 1.2pp drop in loss ratio (4.4pp drop in auto loss ratio) and (2) a 0.1pp drop in expense ratio amid a decrease in personal-line policy sales.
— Long-term risk loss ratio rose 2.4pp YoY, marking the one of the largest increases among top-tier insurers. The leap was attributable to the following: (1) A relatively marginal increase in 2019 that made for a relatively low base (2) The loss ratio for property coverage (included in risk premium) jumped over 10pp YoY because of typhoon damage. This is not a concern, as the increase seems attributable to seasonality.
— Investment profit fell 3.1% YoY to KRW482.5bn, as investment yield slid 0.2pp amid virtually non-existent asset disposal gains.
— Personal-line insurance sales dove 17.1% YoY to KRW39.9bn.
3Q20 Conference Call Highlights
1. Overseas operations
Further investments were made in Canopius in 3Q20 (last investment made in 2Q20). COVID-19 is hoisting up reinsurance premiums, creating new business opportunities. We hope to increase synergies in the U.S. to support forays.
ESG will no longer be a mere guideline. It will be incorporated across our business operations. We plan to cease new investments and discontinue extensions for maturing investments. We plan to strengthen ESG investment.
Q1: The rise in both long-term risk loss ratio and expense ratio and fall in contract acquisitions doesn’t look good. When will these indicators improve? And, if they do, how much so?
A1: The risk loss ratio climbed in 3Q20. There is a seasonal factor at play here. Namely, the ratio tends to show a QoQ rise in 3Q as people use summer vacation time for medical treatments and procedures. Another reason behind the rise is that we command a 40% share of the property insurance market. Typhoon damage usually results in a 49% loss ratio for property coverage, but in 3Q20, the loss ratio reached 62%.
A1: We are selling personal-line policies under stricter underwriting guidelines. Since the increase in 2019, sales expenses have been dropping throughout the year (excl. 1Q20) and should continue to fall in 4Q20.
Q2: The total/long-term written premiums have been contracting. Also, the auto loss ratio/expense ratio gap with second-tier insurers is narrowing. How do you plan to respond?
A2: We are trying to increase written premiums from long-term policies. Top-line growth has slowed because of (1) decreasing property coverage sales and (2) falling contributions from long-term insurance claim reserves. We are countering this by (1) revising products to sustain property insurance and protection-type insurance sales and (2) improving retention rates and reducing insurance planner turnover.
A2: The profit margin gap with second-tier insurers is decreasing. However, our strategy seems to be working well. Our online combined ratio is currently at 95%. In terms of face-to-face channels, our competitors were more reliant on GA channels, which entail high loss ratios. COVID-19 reduced the loss ratio of policies sold via GAs, narrowing the gap between us and our competitors. In 2021, we plan to be more reliant on contactless sales channels while increasing the proportion of high-margin collateral in face-to-face channels.
Q3: There was mention of generating synergies in the U.S. market via investment in a reinsurance firm. Which one are you looking at? How much will the introduction of ESG affect insurance sales and investments?
A3: We decided that an inorganic method would be more feasible in our overseas ventures, leading to our investment in Canopius, a Lloyd’s player. Lloyd’s insurers generate 40% of their revenue and profit in the U.S. Canopius does not have a primary insurer license in the U.S. We provide the license, which entitles us to monitor their operations for experience and a share of their profits.
A3: Currently, the introduction of ESG should affect KRW590.0bn in investments (coal-fired power generation), which represents 0.8% of our invested assets. Since these are long-term investments, it will be 20 years until non-ESG investments completely disappear from our investment portfolio. We plan to stop underwriting coverage for coal-fired power plant projects.
Q4: In the long term, how much will your earnings rebound? Also, what’s your long-term shareholder return rate?
A4: We believe our pretax profit will reach around KRW1.0tn, but our longer-term target is KRW1.5tn. Due to limited business options in Korea, we are considering equity investments in growing overseas companies. This makes our capital policy crucial. Because reliable and steady earnings are as crucial as DPS and share buybacks, we plan to prioritize earnings.