The author is an analyst of NH Investment & Securities. He can be reached at email@example.com. — Ed.
Insurers’ end-2H21 LAT net surplus decreased compared to the end-1H21 figure; however, we still view non-life insurers as being more attractive than life insurers.
End-2021 LAT net surplus decreased compared to end-1H21 figure
End-2021 liability adequacy test (LAT) net surplus decreased compared to the 1H21 figure. For the non-life players under our coverage, LAT net surpluses dropped 4~39% hh, while life insurers reported changes of -23~+24%.
There are two reasons for the LAT net surplus decrease: 1) with LAT rule reinforcement, the confidence level changed from the 55 percentile to the sector average and LTFR fell 25bp; and 2) insurers’ own actuarial assumptions changed. While the assumptions differ by company, they have moved closer to IFRS17 levels. The interest rate increase was positive for LAT surplus, but the impact of negatives was much greater.
LAT-based valuations: Non-life insurers more attractive
The end-2021 LAT results are similar to IFRS17 data, as the contract service margin (CSM) of IFRS17 and LAT surplus are conceptually similar. We can use current equity capital + LAT net surplus to obtain a glimpse of insurers’ equity capital + CSM under IFRS17.
The combined market cap for the insurance plays under our coverage is below half of equity capital + LAT net surplus (P/(BV+LAT net surplus) is below 0.5). The most undervalued insurer is Hanwha General Insurance and the second most undervalued insurer is Hyundai M&F. Both insurers’ P/Bs are lower than the peer group average. Life insurers are less undervalued than non-life insurers, as their LAT net surpluses are small for their market caps and equity capitals.