Interest Rate Hike Imminent... Rising Value of Non-Life Insurance Stocks

Securities Firms Raise Target Prices
"Undervalued Despite Strong Earnings Expectations"

[Asia Economy Reporter Park Jihwan] The stock prices of non-life insurance companies have recently been on a steep rise. The securities industry views them as representative beneficiaries of rising interest rates, and with a decline in loss ratios, clear upward earnings trends are expected, leading to successive increases in target stock prices.

According to the Korea Exchange on the 20th, since the 17th of last month until the day before, the average stock price increase rate of major non-life insurers such as Samsung Fire & Marine Insurance (7.7%), DB Insurance (7.4%), and Hyundai Marine & Fire Insurance (14.1%) reached 9.7%. This contrasts with the KOSPI, which fell by more than 3.5% during the same period.

The recent rise in insurance stocks is interpreted as driven by expectations of benefits from rising interest rates. The Bank of Korea raised the base rate from 0.5% to 0.75% last month, initiating normalization from ultra-low interest rates. The financial sector forecasts that the base rate could rise to the 1.25% range by the first half of next year. Non-life insurers are classified as representative beneficiaries of interest rate hikes because their main investment destination, bond yields, increase with rising interest rates, thereby improving profitability.

Another strength is the undervalued stock prices despite stable profit flows. According to Shinhan Financial Investment, the combined net profit of five non-life insurers (Samsung Fire & Marine Insurance, DB Insurance, Hyundai Marine & Fire Insurance, Meritz Fire & Marine Insurance, Hanwha General Insurance) in the third quarter of this year is expected to be 852.5 billion KRW, exceeding market consensus by 15.6%. This is because the automobile loss ratio is estimated to decrease by 6.5 percentage points due to rate hikes and the 5030 driving speed policy, and the general loss ratio is also expected to decrease by 14.6 percentage points due to seasonal factors such as a reduction in accident volume during the vacation season. The combined net profit for the fourth quarter is also expected to increase by 49.2% year-on-year to 632.6 billion KRW.

The expected price-to-book ratios (PBR) for this year are 0.62 for Samsung Fire & Marine Insurance, 0.64 for DB Insurance, 0.48 for Hyundai Marine & Fire Insurance, 1.14 for Meritz Fire & Marine Insurance, and 0.33 for Hanwha General Insurance. A PBR below 1 indicates undervaluation compared to liquidation value. Researcher Lim Heeyeon of Shinhan Financial Investment said, "At this point, all non-life insurers are valid for investment," adding, "They appear undervalued despite expected benefits from rising interest rates and stable profit flows."

The securities industry is forecasting further stock price increases, noting that the non-life insurance sector is showing earnings improvements beyond expectations. Researcher Lee Byunggeon of DB Financial Investment analyzed, "Despite the recent high stock price levels, earnings forecasts have significantly increased, maintaining high valuation appeal."

DB Financial Investment raised the target prices for Samsung Fire & Marine Insurance, DB Insurance, and Hyundai Marine & Fire Insurance by 16.8%, 21.6%, and 18.8%, respectively. KB Securities also simultaneously raised target prices for Samsung Fire & Marine Insurance (5%), DB Insurance (9%), and Hyundai Marine & Fire Insurance (9%).