[Click eStock] "Dongyang Saengmyeong, Stock Revaluation Expected Due to Long-term Interest Rate Rise"

Hana Financial Investment Report

[Asia Economy Reporter Minji Lee] Hana Financial Investment maintained its buy rating and target price of 4,900 KRW for Dongyang Life Insurance on the 26th. This is based on the judgment that the rise in long-term interest rates following the easing of COVID-19 will be a catalyst for stock price increases.

Last year, Dongyang Life Insurance's annual net profit was 128.6 billion KRW, down 15% from the previous year. The decrease in net profit was due to a base effect from the recognition of gains on subsidiary sales in 2019. Hongjae Lee, a researcher at Hana Financial Investment, said, “The recurring profit from insurance improved by 29% compared to the previous year, and the overall operating profit exceeded market expectations. The strong insurance profit was influenced by a 35% increase in non-operating profit and loss due to social distancing effects, given the low proportion of actual loss coverage.”

Last year's investment gains decreased by about 3.5% compared to the previous year due to one-time losses such as impairment losses on shares of Woori Financial Group in the third quarter. The return on managed assets recorded 3.1%, down 31 basis points (1bp=0.01%). A notable event in the fourth quarter was the provision of approximately 18 billion KRW related to immediate annuities, and gains from the disposal of stocks and bonds amounting to about 40 billion KRW were reflected.

The rise in domestic and international long-term bond yields is positive for life insurance companies. The increase in long-term interest rates affects the slowing decline of held reserves, easing the burden of variable annuity guarantee reserves, reducing institutional uncertainties related to the fair value evaluation of insurance liabilities, and improving the environment for replacement trading of held short- and long-term bonds. These factors serve as grounds for the revaluation of life insurance companies' stock prices.

Researcher Hongjae Lee stated, “Dongyang Life Insurance has had relatively low bond sale gains compared to other companies, so the base burden on investment gains is not high, and its sensitivity to solvency ratio changes due to fluctuations in other comprehensive income is low. Compared to other beneficiaries of long-term interest rate increases, its valuation attractiveness relative to profit strength remains valid.”