Samsung Life: 2Q22 Preview: Strong Underwriting Profit; Soft Variable Insurance Guarantees

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The author is an analyst of KB Securities. He can be reached at cygun101@kbfg.com. — Ed.      

 

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Maintain BUY; lower target price 2.4% to KRW80,000           

We maintain BUY on Samsung Life but lower our TP by 2.4% to KRW80,000. Our TP is based on KRW126,824 12m fwd BVPS and 0.64x target multiple (sustainable ROE: 4.3%→5.0%; COE: 5.9%→6.1%; TGR: 3.2%). In addition to the increase in COE, we lowered 12m fwd BVPS by 25.2% to reflect surging long-term bond yields and a decline in valuation gains from the Samsung Electronics stake, which also contributed to lowering our TP. That said, we maintain BUY given the following:

(1) Uncertainty over supplementary capital and solvency is mild, as Samsung Life’s RBC ratio is higher than that of competitors.

(2) The company can still absorb more profit volatility for variable insurance guarantees considering overall earnings and hedge ratio are rising steadily.

(3)  The steady increase in yields from new investments appears to be easing the burden from unfavorable interest rate spreads. 

2022 forecast: Consolidated NP revised down 8.3% to KRW1.1tn     

We revise down 2022E consolidated NP (attributable to controlling interests) by 8.3% to KRW1.11tn, as soft 1Q22 variable insurance guarantee profits should continue to weigh on earnings. However, we anticipate a reversal in variable guarantee reserves in 4Q22 due to surging interest rates. 

2Q22 forecast: Consolidated NP of KRW211.1bn (43.8% below market consensus) 

For 2Q22, we forecast consolidated NP (attributable to controlling interests) at KRW211.1bn, which is 43.8% below the market consensus. A KRW210.0bn decline in profits from variable insurance guarantees fueled by the recent KOSPI decline and rising interest rates (i.e., 390pt fall for KOSPI, 66.6bps rise in 5y KTB yield) should depress 2Q22 earnings. However, 2Q22 underwriting profit should improve 45.4% YoY, reaching KRW381.5bn. A 4.6% increase in risk premiums and 5.0pp decline in risk loss ratio are expected to boost mortality profit by 35.2% YoY to KRW184.5bn. In addition, loading profit should increase by 39.7% YoY to KRW197.0bn on favorable base effect (selling expenses surged last year). Among covered life insurers, Samsung Life is expected to report the largest improvement in underwriting profit. Meanwhile, protection-type new contract APE is forecast to drop 8.0% YoY, indicating that new contract growth will remain sluggish for some time. 



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