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The author is an analyst of NH Investment & Securities. He can be reached at junsup@nhqv.com. — Ed.
End-1H22 LAT results show net surplus increases at most insurers. Moving ahead, IFRS17-related effects are set to expand.
End-1H22 LAT net surplus rises at most insurers
End-1H22 liability adequacy test (LAT) results show net surplus increases at most insurers compared to their end-2021 numbers. On average, net surplus upped 22% at the five non-life insurers and 123% at the four life insurers under our coverage.
We mainly attribute this LAT net surplus growth to interest rate hikes. The skyrocketing in interest rates in 1H22 (+164bp for 5yr KTB yield) has relieved liability burden at insurers, especially life insurers.
Given LAT net surplus growth, valuations look appealing
We point out that contract service margin (CSM) under IFRS17 and LAT net surplus are conceptually similar. Accordingly, we can use current equity capital + LAT net surplus to obtain a glimpse of what insurers’ equity capital + CSM will look like under IFRS17.
Equity capital + LAT net surplus (P/(BV+LAT net surplus) is below 0.4x for all of the insurers under our coverage, with the figure standing below 0.2x at Hyundai M&F, Hanwha General Insurance, Hanwha Life, Tongyang Life, and Mirae Asset Life.
We believe that: 1) the recently favorable business environment (higher interest rates, improved risk loss ratios and retention ratios) for insurers will help boost their EV after the introduction of IFRS17; and 2) insurers’ valuations are appealing when checking the LAT results. Recent earnings releases make non-life insurers’ shares attractive, and life insurers are expected to show healthier financial statements following IFRS17.
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