Ugly ducklings: Double-digit EV growth, plenty of upside trading at

Transcription

ANCHOR REPORT
Korea life insurance
EQUITY RESEARCH
Hedge your inflation risk
May 16, 2011
Ugly ducklings: Double-digit
EV growth, plenty of upside
trading at ex-growth multiples
Research analysts Korea Insurance
Michael Na
[email protected]
+82 2 3783 2334
Young Kwon Kim
[email protected]
+82 2 3783 2339
Korean lifers have greatly underperformed the KOSPI since listing
due to flattening of the yield curve.
But we expect the long end of the yield curve to rise slowly but
surely, starting in 2H11.
Meanwhile, we expect Korean lifers to deliver double-digit EV
growth for the next four years.
BUY at the bottom of the rate cycle.
Key analyses in this anchor report include:
• Four-year projection of embedded value.
• Long-term industry growth outlook – longevity market developing
• SOTP valuation of Samsung Life – we think this is more accurate and
our target price is top of the Street.
See Appendix A-1 for analyst
certification and important
disclosures. Analysts
employed by non-US affiliates
are not registered or qualified
as research analysts with
FINRA in the US.
Korea Life Insurance
EQUITY RESEARCH
Insurance
Hedge your inflation risk May 16, 2011
Ugly ducklings: Double-digit EV
growth, plus plenty of potential
upside at ex-growth multiples
Action: Initiating with BUY
We initiate coverage of Korean lifers, Samsung Life, Korea Life and Tong
Yang Life with BUY calls and PTs of KRW150,000, KRW9,400 and
KRW21,000, respectively. Korean lifers have underperformed the KOSPI
since their IPOs due to the flattening yield curve. A flatter yield curve could
continue to put pressure on the sector in the near term, but we would
recommend accumulating on any weakness as we expect the long end of
the yield curve to pick up slowly but surely from 2H11F.
Anchor themes
Korean lifers, in our view, can
del ver double-digit EV growth.
While they trade like ex-growth
companies due to a flatter yield
curve, we believe the long-end
of the yield curve will start to
rise in 2H11F.
Catalysts: Interest rate cycle to turn
Our economist expects long-dated bond yields to rise from 2H11F at a
measured pace on continued BOK rate hikes. We also look for rising
inflation expectations, ECB tightening and the close of QE2 to lift pressure
on the long end of the yield curve. The benefit of rising interest rates is
clear for Korean lifers, which have significant exposure to fixed-rate
liabilities (60% for Samsung Life, 70% for Korea Life and 56% for Tong
Yang Life).
Nomura vs consensus
Our PTs for SLI and TYL are
11% and 27%, respectively
higher than consensus, the
highest on the Street. Our
FY11F net profit estimate for
KLI is 16% lower than
consensus.
Korea can deliver double-digit EV growth
We expect Samsung Life (ex-affiliate stakes), Korea Life and Tong Yang
Life to deliver average EV growth of 16%, 12% and 15% over the next four
years, driven by strong growth in value of in-force (VIF) business and
improvement in the profitability of in-force business.
Priced ex-growth
We believe the Korean lifers are priced ex-growth, despite having strong
EV growth profiles. Samsung Life (ex-affiliate stakes), Korea Life and Tong
Yang Life are trading at 0.8x, 0.8x and 0.7x FY11F P/EV, respectively.
Research analysts
Korea Insurance
Michael Na - NFIK
[email protected]
+82 2 3783 2334
Young Kwon Kim - NFIK
[email protected]
+82 2 3783 2339
Most upside for Samsung Life and Tong Yang Life, in our view
We like Samsung Life for its strong EV growth and given our bullish stance
on Samsung Electronics and Samsung Card. We also like Tong Yang Life,
as we see a cheap entry point considering its solid growth profile and the
likelihood that it will be the first of the lifers to be free of negative spread
legacy issues; thus, it is more than just a rate cycle play.
Upside potential for Korea Life from faster-than-expected rate hikes
We expect the least upside for Korea Life (26%, vs. 53% for Samsung and
62% for Tong Yang) due to its slower EV growth, and it will likely take time
to rebuild a profitable in-force book. But in a hyper inflation scenario, it
would be good to own, given it is the most exposed to fixed-rate liabilities.
Fig. 1: Korea life insurance coverage summary
Stock
Samsung Lif e [032830 KS]
Korea Lif e [088350 KS]
Tongy ang Lif e [082640 KS]
Rating
BUY
BUY
BUY
Note: As of 11 May 2011
Rating: See report end for details of Nomura’s rating system.
Price (W)
98,000
7,460
12,950
Target Price (W)
150,000
9,400
21,000
disclosures. Analysts employed
by non US affiliates are not
registered or qualified as
research analysts with FINRA in
the US.
Nomura | AEJ Korea Life Insurance
May 16, 2011
Contents
Initiating coverage with BUY
4
4
Priced ex-growth
4
Long end likely to pick up
5
Korea can deliver double-digit EV growth, in our view
5
Samsung Life outpacing peers
5
Long-term positive industry outlook
6
Addressing concerns on PF loans
7
Risk factors
Valuation
8
8
Samsung Life: PT of W150,000 implies 53% potential upside
10
Korea Life: PT of W9,400 implies 26% potential upside
11
Tong Yang Life: PT of W21,000 implies 62% potential upside
12
Valuation would be higher using appraisal valuation method
14
Valuation sensitivity
15
Changes in PT assuming a 50bp increase in NIER
17
Valuation comps
Buying at the bottom of a rate cycle
18
18
Flatter yield curve putting pressure on insurers
19
Long-end should be lifted
21
Benefits from rising rates
23
23
Now entering the longevity market
24
Korean retirees not prepared for longevity risk
2
26
Plenty of room for growth
29
Wealth accumulation products to drive growth
32
Corporate pension market to grow rapidly
May 16, 2011
Embedded profitability to improve
35
35
Loading margin to improve
36
Spread on savings premium to improve gradually
39
Risk margin to stabilise
Second tiers gaining market share
40
40
The Big Three losing market share
41
41
Tong Yang benefiting from financial crisis
43
Appendix 1: Calculating EV
46
Appendix 2: Life insurer M&A landscape
47
Samsung Life
81
Korea Life
102 Tong Yang Life Insurance
128 Appendix A-1
3
May 16, 2011
We initiate coverage of Korean life insurers with BUY ratings and target prices of
W150,000 for Samsung Life (53% potential upside), W9,400 for Korea Life (26%
potential upside), and W21,000 (62% potential upside) for Tong Yang Life.
Priced ex-growth
Korean lifers have significantly underperformed
Korean life insurers have significantly underperformed the KOSPI since their IPOs
(Samsung Life by 45%, Korea Life 46% and Tong Yang Life 56%).
Korea can deliver double-digit EV growth
We expect the Korean lifers to deliver double-digit EV growth over the next four years.
However, despite the prospects of strong EV growth, we believe the Korean lifers are
priced ex-growth. In our view, the depressed valuations are attributable to a flattening
yield curve.
Long end of the yield curve sinking despite BOK rate hikes
Despite a 100bp rate hike by the central bank, Bank of Korea (BOK), since July 2010,
the three-year treasury yield has dropped by 22bp to 3.68%. During the same period, the
five-year treasury yield has fallen by 51bp to 4.1%.
Lifers extremely sensitive to interest rates
Korean lifers' valuation depends heavily on interest rates, given their significant exposure
to fixed-rate policies. The reserve for fixed-rate policies as a proportion of the total
interest-bearing reserve is 60% for Samsung Life, 70% for Korea Life and 56% for Tong
Yang Life. Of note, a 50bp increase in our investment yield assumption boosts the EV by
8% for Samsung Life, 14% for Korea Life and 9% for Tong Yang Life.
Long end likely to pick up
Rate hike campaign to continue
Nomura Korea economist Mr Young Sun Kwon expects two more rate hikes in May and
July, and another two in 1H12F, which would lift the terminal policy rate of the current
cycle to 4.0% by 2Q12F. Meanwhile, he expects real policy rates to remain negative,
doing little to limit inflationary pressure unless it is combined with won appreciation.
Bond market will eventually react to growing concerns on inflation
Mr Kwon forecasts CPI inflation will rise above 4% in 2011F, exceeding the BOK's target
band. Interest rate hikes coupled with a stronger local currency and price controls should
partly offset cost-push inflation pressures from higher oil prices, but rising nominal wages
and housing rents are also fueling inflation. Mr Kwon forecasts CPI inflation will rise from
2.9% in 2010 to 4.4% in 2011F, before easing to 3.6% in 2012F. Thus, we think the long
end of the bond market will eventually react to growing concerns on inflation.
Foreign capital inflow to slow
Whether hunting for better yields or anticipating Korean won appreciation, the inflow of
foreign capital has been adding pressure on the long end since 2H09. However, with the
European Central Bank (ECB) turning hawkish and the US Federal Reserve's QE2
programme winding down, we expect the foreign capital inflow to slow and possibly even
turn into an outflow going forward. We think that the long end of the yield curve could rise
on interest rate hikes in developed markets, as we had seen in 4Q10. In addition, recent
won appreciation could hinder foreign capital inflow lured in by market anticipation of a
further rise in the Korean won, which would further ease pressure on the long end.
Long end to rise slowly
Our Korea economist forecasts the five-year treasury yield to start to pick up in 3Q11F
and reach 4.5% by end-1H12F (from the current 4.1%), and the three-year treasury yield
to edge up to 4.2% by end-1H12F (from the current 3.6%).
4
May 16, 2011
Korea can deliver double-digit EV growth, in our view
Starting from a low base
Up until 1998, government regulations required life insurers to pay 9% on nonparticipating policies and 7.5% on participating policies. The Korean government lowered
the crediting rate by 100bp in 1999 and fully deregulated in 2000. Meanwhile, the Korean
bond market has experienced a secular bull market over the past two decades. In 1995,
the average rate on the three-year treasury was 13%, compared with the current rate of
3.6%. Consequently, Korean lifers are stuck with huge negative spread books that make
their value of in-force (VIF) business extremely small relative to their business volume.
Fast rebuilding in-force book
The VIF business only recently turned positive for most of the Korean life insurers.
Hence, the value of new business (VNB) makes up a significant proportion of the VIF
book. The VNB as a proportion of the VIF was 29% for Samsung Life, 52% for Korea Life
and 29% for Tong Yang Life as of March 2011.
Plenty of new business
We note that the three-year average 25th-month lapse ratio for Korean lifers stands at
39%. This means that nearly four out of 10 contracts are no longer in-force after two
years. Although a higher lapse ratio has a negative impact on the VIF, it would have a
positive impact on new business volumes. Currently, the reported VIFs by Korean lifers
already reflect such high lapse ratios. That said, we see little downside to new business
volumes for the Korean lifers.
Samsung Life outpacing peers
Samsung Life: average EV growth of 16% for next four years
We expect Samsung Life to deliver RoEV of 16.7% and 16.1% for FY11F and FY12F,
respectively, driven by strong growth in the VIF business and the unwinding of profitable
in-force book. We forecast 25% and 22% growth in VIF for FY11F and FY12F,
respectively. Growth contributions from VNB will likely be significant as it makes up 30%
of VIF. We also expect solid VNB growth as the company starts its hiring cycle and
ventures into non-traditional channels.
Korea Life: average EV growth of 12% for next four years
We expect Korea Life to deliver RoEV of 12.6% for FY11F and FY12F, driven by strong
growth in VIF business. We forecast 49% and 33% growth in VIF for FY11F and FY12F,
respectively. The growth contribution from VNB is likely to be significant, as it made up
52% of VIF as of March 2011. However, our EV growth forecasts for Korea Life are
slower than for its peers, to reflect the company’s lack of profitable in-force book and
statutory earnings will likely be depressed in the near term.
Tong Yang Life: average EV growth of 15% for next four years
We also expect Tong Yang Life to deliver strong EV growth. We forecast RoEV of 15.6%
and 14.4% for FY11F and FY12F, respectively, driven by new business growth and the
unwinding of its profitable in-force book. We expect VNB growth of 5% for each of FY11F
and FY12F. Tong Yang looks set to deliver solid VNB growth given its relatively small
size, increasing market share and improving profitability on the back of increasing
operating leverage.
Insurance density is relatively low
The Korean life insurance sector may seem mature based on insurance penetration
levels (premium/GDP), which rank Korea the tenth most penetrated life insurance market
globally. However, we note that based on insurance density (premium per capita), Korea
ranks 24th after Austria.
Demographic changes to have positive impact
We expect strong growth in demand for products that manage longevity risk (eg, income
annuities and long-term care insurance) as the first 8mn baby boomers (16% of total
5
May 16, 2011
population, born in 1955–1964) start to retire this year. In our opinion, the boomers will
seek sources of lifetime income and long-term care insurance given limited pension and
healthcare support from the government and corporations. We also expect the second
group of baby boomers (14% of total population, born in 1968–1975) to be a continued
source of demand for death insurance and wealth accumulation products.
Separate account business to drive growth
We believe separate accounts, which include investment-linked insurance and corporate
pension, will remain the main growth driver for the Korean life insurers. The life
insurance industry is uniquely positioned as the only sector that can provide protection
against longevity risk. Life insurers can provide guaranteed streams of income with
potential for upside with investment-linked insurance to retirees. Growth in the corporate
pension market has been somewhat disappointing, but we expect to see meaningful
growth starting this year, given tax benefits on retirement insurance.
General account profitability normalisation to continue
The spread on savings premiums should improve as high-yield guarantee policies
continue to expire and new low-yield floating-rate policies dilute the in-force book.
Separate account growth to improve capital efficiency
ROE should improve as we expect separate account premium growth to outpace general
account premium growth given that separate accounts require less capital.
Addressing concerns on PF loans
Court receivership / workout of construction companies
Earlier this year, we witnessed the court receivership / workout cases of several
construction companies ranked in the Top 100 by building capacity. The names include
World Construction, Jin Heung Corp, LIG E&C, Dongyang E&C and Sambu
Construction.
Restructuring of construction sector winding down
However, exposure for the insurance sector remains limited with a smaller project
financing (PF) loan balance of KRW4.9tn, which translates to only 7% of the total
KRW67tn in PF loans remaining in the system. In addition, almost 40 constructors
previously ranked in the Top 100 have entered court receivership / workout programmes.
That said, the possibility of more firms following suit remains low, in our view.
Fig. 2: Constructors ranked in Top 50 that have entered workout / court receivership
Rank
12
17
22
25
26
31
35
Construction Firm
Kumho Industrial
Kyeongnam Corp
Halla E&C
Poonglim Industrial
Byucksan E&C
Shindongah Construction
Namyang E&C
Rank
38
39
40
47
46
44
Construction Firm
Namkw ang Corp
Hanil Construction
Jinheung Corp.
Samho
Kumkw ang Corp
Dongyang E&C
Source: Edaily, MLTM, Nomura research
Limited downside risk
Going forward, we expect default from the construction sector to be largely mitigated,
given: 1) continuing signs of recovery in the domestic housing market; and 2) high
likelihood for major shareholders to make capital injections to free up liquidity. According
to local press (Korea Economic Daily, 3 May, 2011), Doosan Group announced a capital
injection of KRW500bn to its affiliate Doosan E&C. Hyosung, STX Group and Daelim
Industrial have followed suit with similar capital injections to free up liquidity for affiliates
in the construction sector.
6
May 16, 2011
Risk factors
Asset allocation
Shinsegae and CJ Group own a combined 16.6% of Samsung Life. KDIC and Daewoo
International own a combined 24.8% of Korea Life. Given that all the aforementioned
parties have expressed interest to off-load their stakes and the lock-up period is over, we
see potential risk from an asset allocation perspective.
IFRS phase II implementation
Although implementation looks to be a few years away, the liability adequacy test
required by IFRS phase II could have a material impact on Korean life insurers. If the test
identifies that the insurance liability is inadequate, the entire deficiency would be
recognised in the P&L immediately. Insurers may have to reserve for "negative spread
books", which would significantly lower book values and capital adequacy ratios. Lifers
may have to raise additional capital if the liability adequacy test uses risk-free rates.
Solvency II implementation
Given that Korea only recently implemented the Risk Based Capital (RBC) evaluation
system, we think that Solvency II implementation will be many years away. However, to
prepare insurers for Solvency II, the regulator could tighten the Korean RBC system,
which is currently far less strict than the international RBC system.
7
May 16, 2011
Valuation
We believe Korean lifers are priced like ex-growth stocks, despite offering prospects of
double-digit EV growth for the next three years.
Samsung Life: PT of W150,000 implies 53% potential upside
Value of affiliate stakes is one of the key share price drivers
In our view, Samsung Life share price is driven by three key factors: 1) EV growth, 2)
market rates, and 3) value of affiliate stakes. The first two factors should be the same for
all life insurers. However, given that affiliate stakes amounts to half of its book value, we
cannot treat it like other equity investments, especially when one single stock (Samsung
Electronics) represents 68% of the total affiliate stakes.
Yes, Samsung Electronics' share price performance affects Samsung Life
Samsung Life outperformed Korea Life by 8.2% when Samsung Electronics
outperformed the KOSPI by 28% from 3 November 2010 to 28 January 2011. However,
when the outperformance of Samsung Electronics halted, Samsung Life moved in
tandem with Korea Life. This means that we have to take a view on Samsung Electronics
when analyzing Samsung Life.
Valuation attractive, trading at 0.8x forward P/EV
We subtract the value of affiliate stakes in order to obtain an appropriate EV multiple.
Based on our analysis, Samsung Life's insurance business is currently trading at 0.8x
forward P/EV. The implied multiple appears to be attractive given that we expect average
EV growth of 16% a year through FY14F.
Insurance business: W100,000 per share
We value Samsung Life's insurance business on an embedded-value basis, applying a
P/EV multiple of 1.5x forward EV. We have assumed a sustainable RoEV of 15%, a COE
of 11% and a growth rate of 3%. Of note, we expect EV growth of 17.5% and 16.4% for
FY11F and FY12F, respectively. We have assumed lower net investment earnings rate
(NIER) for the purpose of our EV forecast. Samsung Life uses NIER of 5.2% for its FY10
EV calculation. In comparison, we assume 5.0% (20bps lower than Samsung Life's
assumption). In addition, we used risk discount rate of 11% (50bps higher than Samsung
Life’s assumption of 10.5%).
Fig. 3: Samsung Life: EV projection and PT
Sustainable RoEV of 15%-plus through FY14F
(Wbn)
FY09
Adjusted net worth (ANW)
13,685
Affiliate stakes (A)
5,084
Insurance business book (ANW-A)
8,601
Value of in-force business (VIF)
2,954
11,555
Embedded value (EV)
Growth of EV (RoEV)
Current mkt cap
19,620
Mkt Cap - A
14,536
1.26
P/EV
VNB
1,070
2.79
NBM
Target multiple
Target mkt cap for insurance business
TP for insurance business
Implied NBM
FY10
16,284
8,242
8,042
4,141
12,183
8.9%
19,620
11,378
0.93
972
(0.83)
FY11F
17,136
8,242
8,894
5,058
13,952
17.5%
19,620
11,378
0.82
1,015
(2.54)
FY12F
18,085
8,242
9,843
6,042
15,885
16.4%
19,620
11,378
0.72
1,084
(4.16)
FY13F
19,154
8,242
10,912
7,042
17,954
15.5%
19,620
11,378
0.63
1,138
(5.78)
FY14F
20,529
8,242
12,287
7,997
20,284
15.2%
19,620
11,378
0.56
1,188
(7.50)
1.5
20,000
100,000
6.0
Source: Company data, Nomura estimates
8
May 16, 2011
Holding company: W50,000 per share
As shown below, Samsung Life's affiliate stakes amount to W14.6tr as of 31 March.
Among its holdings, Samsung Electronics makes up 68% of the total value of the affiliate
stakes. The company books valuation gains from affiliate stakes as other comprehensive
income net of tax and policyholder proportion (currently at 32.1%). We have applied our
PT (or current price for unrated stocks) to derive our target NAV.
Fig. 4: Affiliate stake valuation
We see 32% upside for the value of affiliate stakes
Mar11
Price
Accounting # of Shares % holding
TP or
Current
price
Mar11
(Wbn)
Mar12F
(Wbn)
Samsung Electronics
Cost
10,622,814
7%
932,000
9,900
1,350,000
14,341
Samsung Card
Equity
32,468,868
26%
55,500
1,802
67,000
2,175
Samsung F&M
Cost
4,905,718
10%
242,500
1,190
223,000 *
1,094
Samsung Securities
Cost
7,603,659
11%
80,600
613
83,800 *
637
Samsung C&T
Cost
7,476,102
5%
71,800
537
85,000
635
Samsung Heavy
Cost
7,800,000
3%
39,900
311
45,300 *
353
S1
Cost
2,030,476
5%
56,300
114
50,900 *
103
Hotel Shilla
Cost
2,865,158
7%
25,550
73
27,100 *
78
Samsung Techw in
Cost
289,800
1%
79,800
23
95,000
28
Samsung SDI
Cost
10,155
0%
168,000
2
160,000
2
Cheil Industries
Cost
6,871
0%
116,500
1
160,000
1
Samsung Futures
Equity
1,025,000
41%
41
41
Samsung Asset Management
Cost
1,024,000
5%
21
21
Samsung Economic Research Institute
Cost
1,776,000
15%
10
10
Samsung Corning Precision Glass
Cost
2,176
0%
2
2
Total Value
14,639
19,521
Net of holding company discount (27%)
10,687
14,250
Shareholders' proportion (69.6%)
7,438
9,918
Per share (Won)
38,000
50,000
Note: * reflects current price as of May 11, 2011
Source: Company data, Nomura research
Shareholders’ proportion rising
Unrealised gains from affiliate holdings are split between shareholders and
policyholders. The policyholders' proportion is the part of reserve relating participating
policies to total reserve. Currently, the policyholders’ and shareholders’ proportions are
32% and 68%, respectively. We expect the shareholders’ proportion to increase by 1.01.4pp in a year’s time as the reserve relating to participating policies as a proportion of
the total reserve declines.
Fig. 5: Shareholders’ proportion of unrealised gains on AFS
Shareholders' proportion should increase by 1.0-1.4pp per annum
60.9%
39.1%
Mar07
63.6%
36.4%
65.5%
34.5%
Mar08
Mar09
Policyholders' proportion
66.7%
33.3%
67.9%
32.1%
Mar10
Mar11
Shareholders' equity
69.3%
30.7%
Mar12F
9
May 16, 2011
We apply a 27% holding company discount
Theoretically, we think the holding company discount should be the corporate tax rate
(22%). However, in reality, the holding company discount varies based on the
performance of its holdings and market liquidity. The holding company discount narrows
when its holdings outperform the market and vice versa. In addition, abundant market
liquidity lowers the discount. Given that we are bullish on Samsung Group, the holding
company discount could be lower than the tax rate. However, for the purpose of our
valuation, we apply a 27% discount, which is the five-year average NAV discount for LG
Corp. We select LG Corp as our benchmark as we believe it is one of the purest holding
companies in Korea with most of its holdings being listed.
Fig. 6: LG Corp discount to NAV
Average discount to NAV for the past five years of 27%
NAV Discount
Average
St Dev +1
St Dev -1
50%
40%
30%
20%
10%
0%
-10%
-20%
2-May-06
2-May-07
2-May-08
2-May-09
2-May-10
2-May-11
Source: Nomura research
Korea Life: PT of W9,400 implies 26% potential upside
Our PT is based on 1.0x P/EV
We forecast EV growth of 12.6% for each of FY11F and FY12F. We believe Korea Life
can sustain 11.5%-plus RoEV for the next four years. Our PT of KRW9,400 is based on
1.0x forward P/EV. We assume a sustainable medium-term RoEV of 11.5%, a COE of
11.5% and a growth rate of 3%. Of note, we assume a lower net investment earnings
rate (NIER) of 5.0% for the purpose of our EV forecast, compared with the 5.25% used
by Korea Life in its FY09 EV calculation.
Priced ex-growth
Korea Life is trading at 0.8x forward P/EV. We think the current valuation is attractive as
we expect sustainable RoEV of 11.5% in the medium term. The current implied NBM
(new business multiple) is in negative territory despite the company’s solid growth profile
and potential upside from rising interest rates.
Fig. 7: Korea Life: EV projection and PT
Sustainable RoEV of 11.5%-plus through FY14F
(Wbn)
FY09
6,100
408
Embedded value (EV)
6,508
Growth of EV (RoEV)
Current mkt cap
6,418
P/EV
0.99
VNB
410
NBM
(0.22)
Target multiple
Target mkt cap
Target price
Implied NBM
FY10F
6,601
795
7,396
15.0%
6,418
0.87
411
(2.38)
FY11F
7,055
1,187
8,242
12.6%
6,418
0.78
422
(4.32)
FY12F
7,569
1,580
9,150
12.6%
6,418
0.70
430
(6.35)
FY13F
8,112
1,973
10,085
11.6%
6,418
0.64
436
(8.41)
FY14F
8,737
2,365
11,102
11.8%
6,418
0.58
439
(10.66)
1.0
8,242
9,400
-
10
May 16, 2011
Tong Yang Life: PT of W21,000 implies 62% potential upside
We expect Tong Yang Life (TYL) to deliver EV growth of 15.5% and 14.6% for FY11F
and FY12F, respectively. We also expect TYL to sustain RoEV of 14%-plus through
FY14F. Our PT of W21,000 is based on 1.2x forward P/EV. We assume a sustainable
RoEV of 14.0%, a COE of 12.5% and a growth rate of 3%. We assume a higher COE
than for other life insurers given Korea Life’s relatively smaller size and liquidity. Of note,
we assume a lower net investment earnings rate (NIER) of 5.0% for the purpose of our
EV forecast, compared with the 5.25% used by TYL in its FY09 EV calculation.
TYL looks attractive even on a PBR methodology…
As more profitable new business continues to flow into in-force book, we think the return
on shareholders' equity will improve and reach a sustainable level of 15% in the medium
term. A PBR valuation derives a valuation of W15,000, implying 18% potential upside.
…but PBR could be misleading
Given the long-tail nature of life insurance, we think current earnings and book value do
not capture the value of current in-force book, especially if there is a significant
difference in profitability between in-force book and new business (which is the case for
Korean lifers who have been suffering from negative spread on legacy products). That
said, investor should not miss out on TYL who looks attractive even on PBR.
Fig. 8: Tong Yang Life: EV projection and PT
Sustainable RoEV of 14%-plus through FY14F
(Wbn)
FY09
1,019
472
Embedded value (EV)
1,491
Growth of EV (RoEV)
Current mkt cap
1,334
P/EV
0.9
VNB
142
(1.1)
NBM
Target multiple
Target mkt cap
Target price
Implied NBM
FY10F
1,127
546
1,673
14.4%
1,334
0.8
154
(2.2)
FY11F
1,260
635
1,895
15.5%
1,334
0.7
161
(3.5)
FY12F
1,400
728
2,128
14.6%
1,334
0.6
169
(4.7)
FY13F
1,559
837
2,396
14.9%
1,334
0.6
179
(5.9)
FY14F
1,750
953
2,703
14.8%
1,334
0.5
190
(7.2)
1.2
2,274
21,000
2.4
11
May 16, 2011
Valuation would be higher using appraisal valuation method
We calculate an even higher valuation using 10-year DCF model
Using an appraisal valuation method we calculate an even higher valuation for TYL, as
its VNB is the largest as a percentage of EV. In addition, we believe that NBM will
increase, as we expect the company to continue to gain market share. Of note, we only
reflect a 10-year projection in our NBM calculation. Typically, a 30-year DCF model is
used in the region to drive NBM. However, due to the infancy of the EV valuation
methodology in Korea, we do not want to pay for more than 10 years.
Samsung Life insurance business at KRW109,000 per share if using the appraisal
valuation method
For Samsung Life, the implied NBM is 6.0x our PT. However, if we were to use the
appraisal value methodology, we could justify up to a 7.7x NBM.
Fig. 9: Samsung Life: target NBM based on appraisal valuation method
(Wbn)
Annualized premium equivalent (APE)
New business margin
Value of new business (VNB)
Discount factor
PV of VNB
Sum of PV
Implied multiple
FY11F
3,773
26.9%
1,015
1.0
1,015
7,799
7.7
FY12F
4,075
26.6%
1,084
1.1
976
FY13F
4,319
26.4%
1,138
1.2
924
FY14F
4,535
26.2%
1,188
1.4
869
FY15F
4,716
26.1%
1,230
1.5
810
FY16F
4,905
25.9%
1,272
1.7
755
FY17F
5,052
25.8%
1,304
1.9
697
FY18F
5,153
25.7%
1,323
2.1
637
FY19F
5,256
25.6%
1,343
2.3
583
FY20F
5,362
25.4%
1,363
2.6
533
FY18F
2,686
17.3%
466
2.1
224
FY19F
2,740
17.3%
475
2.3
206
FY20F
2,795
17.3%
484
2.6
189
FY19F
1,536
15.5%
238
2.3
103
FY20F
1,598
15.5%
248
2.6
97
Source: Nomura estimates
Korea Life valuation at KRW12,800 if using the appraisal valuation method
For Korea Life, the implied NBM is 0x at our PT. However, using the appraisal value
methodology, we could justify up to a 6.9x NBM.
Fig. 10: Korea Life: target NBM based on appraisal valuation method
(Wbn)
New business margin
Discount factor
PV of VNB
Sum of PV
Implied multiple
FY11F
2,271
18.6%
422
1.0
422
2,908
6.9
FY12F
2,351
18.3%
430
1.1
388
FY13F
2,421
18.0%
436
1.2
354
FY14F
2,482
17.7%
439
1.4
321
FY15F
2,531
17.5%
443
1.5
292
FY16F
2,582
17.4%
450
1.7
267
FY17F
2,634
17.4%
458
1.9
245
Tong Yang Life PT at KRW30,000 if using the appraisal valuation method
For TYL, the implied NBM is 2.3x our PT. However, using the appraisal value method,
we could justify up to 8.0x NBM.
Fig. 11: Tong Yang Life: target NBM based on appraisal valuation method
(Wbn)
New business margin
Discount factor
PV of VNB
Sum of PV
Implied multiple
FY11F
992
16.2%
161
1.0
161
1,283
8.0
FY12F
1,062
15.9%
169
1.1
152
FY13F
1,136
15.8%
179
1.2
145
FY14F
1,210
15.7%
190
1.4
139
FY15F
1,282
15.7%
201
1.5
132
FY16F
1,353
15.6%
211
1.7
125
FY17F
1,421
15.5%
221
1.9
118
FY18F
1,477
15.5%
229
2.1
110
But we think it is more appropriate to use the P/EV methodology
While there is upside potential to our PTs using the appraisal value methodology, we
think it is more appropriate to use P/EV for the Korea life insurers given some variances
we encountered in EV, which may not be captured in the NBM technique. In addition, we
think the appraisal valuation method ignores near-term EV growth profile changes that
companies may face such as Korea Life who may take a while to rebuild profitable VIF.
12
May 16, 2011
Appraisal value methodology may work in good times
Samsung F&M's NBM expanded to 18.2x at the peak of the market in 2007. NBM of
18.2x could be explained only if we were to use the appraisal value methodology with a
30-year DCF model. We would derive NBM of 18.5x if we assume a sustainable VNB
growth of 7% and a risk discount rate of 11% for next 30 years. That said, we think that
our implied NBM of 6.0x at our PT based on P/EV valuation methodology is not
overstretched.
Fig. 12: Samsung F&M P/EV trend
Fig. 13: Samsung F&M NBM trend
Five-year average P/EV of 1.6x
Five-year average NBM of 8.3x
Apr-11
Oct-10
Apr-06
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
50,000
Apr-08
50,000
Oct-07
100,000
Apr-07
100,000
Oct-06
150,000
Apr-06
150,000
2.0x
200,000
Apr-10
1.0x
5.0x
Oct-09
200,000
250,000
Apr-09
1.2x
8.0x
Oct-08
250,000
17.0x 14.0x 11.0x
Apr-08
1.4x
(W)
300,000
Oct-07
1.6x
Apr-07
2.0x 1.8x
300,000
Oct-06
(W)
Ex-affiliate multiples much higher
We subtracted out the value of Samsung Electronics from both EV and market cap for
Samsung F&M. Of note, Samsung F&M owns 1.2% in Samsung Electronics. Our
analysis shows that Samsung F&M traded at much higher multiples excluding its
Samsung Electronics stake. Currently, Samsung F&M is trading at an ex-affiliate stake
trailing NBM of 5x. Again, we think our implied NBM of 6.0x is not overstretched.
Fig. 14: Samsung F&M ex-affiliate stake P/EV trend
Fig. 15: Samsung F&M ex-affiliate stake NBM trend
Five-year average P/EV of 2.0x
Five-year average NBM of 9.9x
(W)
3.3x 2.9x
300,000
2.5x
2.1x
(W)
300,000
17.0x 14.0x 11.0x
8.0x
Mar-11
Sep-10
Mar-10
Sep-09
Mar-09
Sep-08
2.0x
Mar-06
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
50,000
Apr-08
50,000
Oct-07
100,000
Apr-07
100,000
Oct-06
150,000
Apr-06
150,000
Mar-08
1.3x
5.0x
200,000
Sep-07
200,000
Mar-07
250,000
250,000
Sep-06
1.7x
13
May 16, 2011
Korea Life is most sensitive to interest rates
Korea Life has the highest EV sensitivity to the net interest earnings rate (NIER)
assumption as the company has the highest proportion of fixed-rate liabilities at 70%
compared to 60% for Samsung Life and 56% for TYL. We estimate a 50bp increase in
the NIER assumption would increase Korea Life’s EV by 13.8%, Samsung Life’s by
13.5% and TYL’s by 9.5%.
A 50bp increase in NIER assumption to increase Samsung Life’s EV by 12.8%
Samsung Life used an NIER assumption of 5.2% for its FY10 EV calculation. We believe
Samsung’s assumption is aggressive given current market rates. For the purpose of our
analysis, we adjust the NIER to 5.0%. Note that Samsung Life’s EV is also sensitive to
changes in the claims ratio.
Fig. 16: Samsung Life: EV sensitivity (KRW)
Fig. 17: Samsung Life: EV sensitivity (%)
(Wbn)
2,000
20%
1,500
14.4%
12.8%
15%
10%
1,000
5%
500
AFS affiliate stakes ±
10%
Maintenance ± 10%
-20%
Claims ± 10%
-15%
Lapse ± 10%
-10%
RBC ± 50ppt
-5%
NIER ± 50bps
10%
Claims ± 10%
Lapse ± 10%
Maintenance ± 10%
(2,000)
RBC ± 50ppt
(1,500)
NIER ± 50bps
(1,000)
Discount rate ± 1%
(500)
Discount rate ± 1%
0%
-
A 50bp increase in NIER assumption to increase Korea Life’s EV by 13.8%
Korea Life used an NIER assumption of 5.25% for its FY09 EV calculation. We believe
Korea Life’s assumption is aggressive given the current market rates. For the purpose of
our analysis, we adjust the NIER to 5.0%. We note that Korea Life is less sensitive to
changes in the claims ratio, unlike Samsung Life.
Fig. 18: Korea Life’s EV sensitivity (KRW)
1,500
Fig. 19: Korea Life’s EV sensitivity (%)
20%
(Wbn)
15%
1,000
10%
1,028
500
-20%
Lapse Rate ± 10ppt
-15%
Claims Rate ± 10ppt
-10%
NIER ± 50bps
-5%
Discount rate ± 1%
Lapse Rate ± 10ppt
(1,500)
NIER ± 50bps
Discount rate ± 1%
(1,000)
11%
0%
0
(500)
13.8%
5%
14
May 16, 2011
A 50bp increase in NIER assumption to increase TYL’s EV by 9.5%
TYL used an NIER assumption of 5.25% for its FY09 EV calculation. We believe TYL’s
assumption is aggressive given current market rates. For the purpose of our analysis we
adjusted the NIER to 5.0%. We note that TYL is least sensitive to the NIER assumption,
given that it has the lowest proportion of fixed-rate liabilities.
Fig. 20: Tong Yang Life’s EV sensitivity (KRW)
Fig. 21: Tong Yang Life’s EV sensitivity (%)
(Wbn)
150
10%
8%
100
6%
148
128
50
-8%
-10%
Maintenance ± 10%
-6%
Claims ± 10%
-4%
Lapse ± 10%
-2%
NIER ± 50bps
Discount rate ± 1%
(200)
0%
Maintenance ± 10%
Claims ± 10%
Lapse ± 10%
NIER ± 50bps
(150)
Discount rate ± 1%
(100)
8.2%
2%
0
(50)
9.5%
4%
Changes in PT assuming a 50bp increase in NIER
PT change would be minimal
Our PTs would not change in a meaningful way even if we were to assume a higher
NIER, as it would result in a lower RoEV eliminating low base effect. In addition, it would
take time for higher market rates to flow through the fixed income portfolio.
A 50bp rise in NIER would increase Samsung’s PT by 2%
In effect, a 50bp increase in the NIER would see our PT for Samsung Life rise by 2%.
While we could lower our target multiple from 1.5x to 1.4x to reflect a lower RoEV in the
near term, we believe the RoEV is likely to pick up in the medium term as higher market
rates flow through its fixed income portfolio.
Fig. 22: Samsung EV projection and PT assuming 50bp increase in NIER
(Wbn)
Embedded value (EV)
Growth of EV (RoEV)
Current mkt cap
Mkt Cap - A
P/EV
VNB
NBM
Target multiple
Implied NBM
FY09
13,685
5,084
8,601
3,914
12,515
19,620
14,536
1.16
1,070
1.89
FY10
16,284
8,242
8,042
5,041
13,083
7.7%
19,620
11,378
0.87
972
(1.75)
FY11F
17,136
8,242
8,894
6,052
14,946
17.0%
19,620
11,378
0.76
1,015
(3.52)
FY12F
18,085
8,242
9,843
7,121
16,964
15.9%
19,620
11,378
0.67
1,084
(5.15)
FY13F
19,162
8,242
10,920
8,230
19,149
15.2%
19,620
11,378
0.59
1,138
(6.83)
FY14F
20,628
8,242
12,386
9,224
21,610
14.9%
19,620
11,378
0.53
1,188
(8.61)
1.4
20,900
104,000
5.9
15
May 16, 2011
A 50bp rise in NIER would increase Korea Life’s PT by 3%
In effect, a 50bp increase in the NIER would see our PT for Korea Life rise by 3%. While
we could lower our target multiple from 1.0x to 0.9x to reflect a lower RoEV in near term,
we think the RoEV is likely to pick up in the medium term as higher market rates flow
through its fixed income portfolio. Eventually, we may be able to apply a higher target
multiple.
Fig. 23: Korea Life’s EV projection and PT assuming 50bp increase in NIER
(Wbn)
Embedded value (EV)
Growth of EV (RoEV)
Current mkt cap
P/EV
VNB
NBM
FY09
6,100
1,436
7,536
6,418
0.9
410
(2.7)
FY10F
6,651
1,823
8,474
13.6%
6,418
0.8
423
(4.9)
Target multiple
Target mkt cap
Target price
Implied NBM
FY11F
7,127
2,222
9,348
11.3%
6,418
0.7
441
(6.6)
FY12F
7,679
2,630
10,309
11.2%
6,418
0.6
458
(8.5)
FY13F
8,324
3,052
11,375
11.6%
6,418
0.6
477
(10.4)
FY14F
8,992
3,487
12,478
10.8%
6,418
0.5
498
(12.2)
0.9
8,413
9,700
(2.1)
TYL’s PT unchanged despite higher NEIR assumption
For TYL, our target price would remain largely unchanged even if we were to assume a
higher NIER assumption. While we could lower our target multiple from 1.2x to 1.1x to
reflect a lower RoEV in the near term, we think the RoEV is likely to pick up in the
medium term as higher market rates flow through its fixed income portfolio. Eventually,
we should be able to apply higher target multiple.
Fig. 24: TYL’s EV projection and PT assuming 50bp increase in NIER
(Wbn)
Embedded value (EV)
Growth of EV (RoEV)
Current mkt cap
P/EV
VNB
NBM
Target multiple
Target price
Implied NBM
FY09
1,019
546
1,565
1,334
0.9
142
(1.6)
FY10F
1,127
617
1,744
13.5%
1,334
0.8
154
(2.7)
FY11F
1,261
703
1,964
14.8%
1,334
0.7
161
(3.9)
FY12F
1,398
793
2,191
13.7%
1,334
0.6
169
(5.1)
FY13F
1,571
890
2,461
14.5%
1,334
0.5
179
(6.3)
FY14F
1,787
993
2,781
15.0%
1,334
0.5
190
(7.6)
1.1
2,161
21,000
1.2
16
May 16, 2011
Valuation comps
Fig. 25: Insurance Valuation Comps
Sam sung
Korea
Tong Sam sung
Life
Life Yang Life
F&M*
032830 KS 088350 KS 082640 KS 000810 KS
BUY
BUY
BUY
n.a
KRW
KRW
KRW
KRW
98,000
7,460
12,950
220500
150,000
9,400
21,000
n.a
53%
26%
62%
n.a
200
869
108
47.375
19,600
6,479
1,393
10,446
18,095
5,982
1,286
9,644
Bloom gberg Ticker
Recom m endation
Local Currency
Share price (W)
Target price (W)
Im plied upside (dow nside) (%)
Shares outstanding (m n)
Market Cap. (bn)
Market Cap. (US$m n)
Current Multiples
P/BV (x)
P/E (x)
P/EV (x)
P/EV (ex. affilates) (x)
Profitability
ROE (%)
ROEV (%)
ROEV (ex. affiliates) (%)
Per Share Data
EPS
BVPS
EVPS
Hyundai
Dongbu
F&M* Insurance*
001450 KS
005830 KS
n.a
n.a
KRW
KRW
27450
48800
n.a
n.a
n.a
n.a
89.4
70.8
2,454
3,455
2,266
3,190
Ping An
Life
2318 HK
Neutral
CNY
81.4
90.0
11%
7,640
622
7,640
China
Life
2628 HK
BUY
CNY
26.5
40.0
51%
28,260
749
28,260
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
1.6
1.3
1.2
1.1
21.6
10.1
16.7
15.0
1.2
1.0
0.9
0.8
1.3
0.9
0.8
0.7
1.1
1.1
1.0
0.9
15.5
13.5
12.1
10.8
1.0
0.9
0.8
0.7
n.a.
n.a.
n.a.
n.a.
1.4
1.2
1.1
1.0
13.3
8.6
8.5
7.5
0.9
0.8
0.7
0.7
n.a.
n.a.
n.a.
n.a.
2.7
2.1
1.4
1.3
17.4
19.9
12.9
11.1
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
2.9
2.3
1.4
1.2
21.3
13.3
8.4
7.0
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
4.1
2.9
1.5
1.3
14.9
15.3
8.8
7.3
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
8.3
6.1
4.9
3.9
42.8
34.5
21.9
15.6
3.8
3.3
2.6
2.0
n.a.
n.a.
n.a.
n.a.
3.5
3.6
2.9
2.4
22.8
22.3
16.9
13.9
2.6
2.4
2.0
1.6
n.a.
n.a.
n.a.
n.a.
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
9.3
14.1
7.4
7.9
34.6
25.2
10.4
10.3
13.1
8.9
17.5
16.4
9.0
8.1
8.4
8.8
30.1
15.0
12.6
12.6
n.a.
n.a.
n.a.
n.a.
12.6
15.0
13.7
13.9
32.1
14.4
15.5
14.6
n.a.
n.a.
n.a.
n.a.
15.5
10.6
12.2
13.0
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
13.8
17.3
19.4
20.9
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
27.6
19.3
19.2
20.0
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
19.0
18.0
25.0
28.0
9.0
9.5
11.8
13.0
n.a.
n.a.
n.a.
n.a.
15.5
16.0
18.6
18.8
11.5
10.6
11.7
11.8
n.a.
n.a.
n.a.
n.a.
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
FY09A
FY10A
FY11E
FY12E
4,530
9,669
5,859
6,547
60,664
76,950
81,009
85,755
83,194
102,125
110,968
120,635
482
554
616
692
6,540
7,098
7,620
8,162
7,493
8,516
9,489
10,535
977
1,502
1,529
1,731
9,494
10,495
11,767
13,099
13,864
15,555
17,618
19,782
12,638
11,071
17,049
19,838
81,540
104,281
154,100
167,986
n.a.
n.a.
n.a.
n.a.
1,288
2,063
3,265
3,929
9,343
11,923
19,027
22,202
n.a.
n.a.
n.a.
n.a.
3,270
3,197
5,523
6,652
11,867
16,574
32,341
36,994
n.a.
n.a.
n.a.
n.a.
1.9
2.4
3.7
5.2
9.8
13.3
16.5
21.0
21.1
25.0
31.6
40.3
1.2
1.2
1.6
1.9
7.5
7.4
9.2
11.0
10.1
11.2
13.4
16.1
Note: *Represents Bloomberg estimates, pricing as of 11 May 2011
Source: Bloomberg, Nomura estimates
17
May 16, 2011
We believe the BOK will continue with its rate hike campaign, taking the key policy rate
to 4.0% by 2Q11F. We expect the long-end of yield curve to rise slowly along with rising
policy rates. Korean lifers should benefit from rising interest rates given their large
exposure to fixed-rate liabilities.
Flatter yield curve putting pressure on insurers
Long-end of the yield curve has been falling despite rate hikes by the BOK
Despite hikes of 100bp by the BOK since July 2010, the three-year treasury yield fell by
22bp to 3.68%. During the same period, the five-year treasury yield fell by 15bp. The
phenomenon happened in the early part of 2006, but it normalized thereafter.
Fig. 26: Interest rate trend
(%)
Policy Rate
3 Yr KTB
5 Yr KTB
May-99
Oct-99
Mar-00
Aug-00
Jan-01
Jun-01
Nov-01
Apr-02
Sep-02
Feb-03
Jul-03
Dec-03
May-04
Oct-04
Mar-05
Aug-05
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
10
9
8
7
6
5
4
3
2
1
Source: CEIC, Nomura research
Lifers extremely sensitive to interest rates
Korean lifers' valuation depends heavily on interest rates due to significant exposure to
fixed-rate policies. The reserve for fixed rate policies as a proportion of total interestbearing reserve amounts to 60% for Samsung Life, 70% for Korea Life, and 56% for
Tong Yang Life. Of note, a 50bp increase in investment yield assumption would boost
EV by 8% for Samsung Life, 14% for Korea Life and 9% for Tong Yang Life, according to
our sensitivity analysis.
Fig. 29: Tong Yang Life share price
vs. 3yr and 5yr treasury
(W'000)
18
(%)
5.5
TYL
3yr KTB
5yr KTB
16
5.0
14
4.5
12
4.0
Apr-11
Jan-11
2.5
Oct-10
3.0
6
Jul-10
8
2.5
Apr-10
3.5
Jan-10
10
3.0
Oct-09
Jan-11
Mar-11
Jan-11
Nov-10
Sep-10
2.5
3.5
Mar-11
3.0
4.0
Nov-10
3.5
(%)
5.0
4.5
Sep-10
4.0
KLI
3yr KTB
5yr KTB
(W'000)
10
10
9
9
8
8
7
7
6
Jul-10
4.5
Jul-10
May-10
(%)
5.0
May-10
SLI
3yr KTB
5yr KTB
(W'000)
120
115
110
105
100
95
90
85
Fig. 28: Korea Life share price vs. 3yr
and 5yr treasury
Mar-10
Fig. 27: Samsung Life share price vs.
3yr and 5yr treasury
18
May 16, 2011
Long-end should be lifted
Policy rate to reach 4.0% by 2Q12F
Our economist Young Sun Kwon expects two more rate hikes for the rest of 2011, and
another two in 1H 2012, lifting the terminal policy rate of the current cycle to 4.0% by
2Q12F. Meanwhile, he thinks that real policy rates should remain negative, doing little to
limit inflationary pressure unless it is combined with KRW appreciation.
Fig. 30: Nomura policy rate KTB forecast
7%
BOK official base rate (%)
5-year T-bond yield (%)
Fig. 31: Nomura vs. consensus
3-year T-bond yield (%)
Nomura
4.5%
Consensus
6%
4.0%
5%
4%
3.5%
3%
3.0%
2%
1%
2.5%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11F
3Q11F
4Q11F
1Q12F
2Q12F
0%
2.0%
1Q11
2Q11F
3Q11F
4Q11F
1Q12F
2Q12F
Source: Bloomberg, Nomura research
Our economist Young Sun notes that CPI inflation should rise above 4% in 2011F,
exceeding the BOK's target band. Interest rate hikes coupled with a stronger KRW (we
forecast KRW/USD to appreciate to 1,020 by end-2011F) and some administrative
measures (such as curbing hikes in public services and freezing college tuition fees)
should partly offset cost-push inflation pressures from higher oil prices. However, rising
nominal wages and housing rents are also adding to inflation. Young Sun forecasts
Korea’s CPI inflation to rise from 2.9% in 2010 to 4.4% in 2011F before easing to 3.6% in
2012F. We think that the long end of the bond market will eventually react to growing
concerns on inflation.
Fig. 32: Inflationary pressure on the rise
7%
CPI (y-y, RHS)
60%
7%
50%
6%
40%
5%
30%
4%
20%
3%
10%
2%
-10%
1%
-20%
0%
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
0%
Source: BOK, Nomura research
CPI (y-y)
BoK Base Rate
6%
5%
4%
3%
2%
1%
0%
Jan-01
Aug-01
Mar-02
Oct-02
May-03
Dec-03
Jul-04
Feb-05
Sep-05
Apr-06
Nov-06
Jun-07
Jan-08
Aug-08
Mar-09
Oct-09
May-10
Dec-10
Import price index (y-y, LHS)
Fig. 33: Real interest rate to remain negative
19
May 16, 2011
Foreign capital inflow putting pressure on the long-end
We believe that foreign capital inflow (especially from dollar block economies) into Korea
has been putting pressure on the long end of the yield curve. We think that exceptionally
low rates in developed countries and expectation for KRW appreciation are the primary
reasons for capital inflow into Korea.
Fig. 34: 5-year KTB vs. foreign net bond buy
Fig. 35: Net bond buy by origin of capital
3.2
50
3.0
0
May-10
Jun-10
Jul-10
Aug-10
Fig. 36: KRW vs. foreign net bond buy
Fig. 37: Flattening of Yield curve
Foreign capital inflow betting on KRW appreciation?
Long-end falling despite the rise in policy rate
(Wtn)
603
Net bond buy (LHS)
FX (KRW:USD)
503
403
303
203
103
Apr-11
Mar-11
Jan-11
Feb-11
Dec-10
Oct-10
Nov-10
Sep-10
Jul-10
Aug-10
Jun-10
May-10
3
(W)
1,250
1,230
1,210
1,190
1,170
1,150
1,130
1,110
1,090
1,070
1,050
(%)
12/1/2010
1/1/2011
5.5
2/1/2011
3/1/2011
Mar-11
100
3.4
Jan-11
150
3.6
Sep-10
3.8
Nov-10
200
China
Jul-10
4.0
May-10
250
4.2
Thailand
Jan-10
300
4.4
UK
Mar-10
4.6
US
14
12
10
8
6
4
2
0
(2)
(4)
Nov-09
350
Sep-09
4.8
(Wtn)
Jul-09
Net bond buy (RHS)
May-09
KTB 5yr (LHS)
The US and China money main source of capital inflow
(Wtn)
Mar-09
(%)
Jan-09
Foreigners appetite for KTB has been strong
5.0
4.5
4.0
3.5
3.0
2.5
2.0
KTB1y
MSB2y
KTB3y
KTB5y
KTB10y KTB20y
Whether hunting for better yields or expecting KRW appreciation, foreign capital inflows
have been adding pressure on the long-end since 2H09. However, with the ECB turning
hawkish and the Fed's QE2 programme winding down, foreign capital inflows may slow
and we may even witness outflows going forward. We think that the long-end of the yield
curve could be lifted with rising interest rates in developed markets, as we have seen in
4Q10. In addition, the recent strengthening of KRW could hinder foreign capital inflows
(funds pouring into Korea on expectations of KRW appreciation), further lifting pressure
on the long-end.
20
May 16, 2011
Fig. 38: Foreign net bond buy vs. US rate
(%)
2.9
US TN 5y (LHS)
Fig. 39: US rate vs. KTB rate
Net bond buy (RHS)
(Wtn)
500
(%)
480
2.7
2.5
440
2.5
2.3
420
2.3
2.1
380
2.1
360
1.9
400
340
1.7
320
1.5
KTB 5yr (LHS)
300
(%)
4.6
4.4
2.7
460
1.9
US TN 5y (LHS)
2.9
4.2
4.0
3.8
3.6
3.4
1.7
3.2
1.5
3.0
Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11
Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11
Source: FSS, KOFIA, Nomura research
Source: FSS, KOFIA, Nomura research
Long-end expected to rise slowly but surely
Young Sun forecasts that the five-year treasury yield will start to rise in 3Q11F and reach
4.5% by the end of 1H12F from the current yield of 4.0%, and the three-year treasury will
reach 4.2% by the end of 1H12F from the current yield of 3.6%.
Fig. 40: Nomura interest rate forecast
3yr T-bond yield
7%
5yr T-bond yield
BoK base rate
Forecast
6%
5%
4%
3%
2%
1Q12F
3Q11F
1Q11F
3Q10
1Q10
3Q09
1Q09
3Q08
1Q08
3Q07
1Q07
3Q06
1Q06
3Q05
1Q05
1%
Benefits from rising rates
Korean lifers have significant exposure to fixed-rate policies
The benefit from rising rates is clearly evident for life insurers with large exposure to
fixed-rate policies, in our view. The reserve for fixed-rate policies as a proportion of
interest-bearing reserve amounts to 60% for Samsung Life, 70% for Korea Life and 56%
for Tong Yang Life.
Valuation sensitivity highest for Korea Life
Our valuation sensitivity is the highest for Korea Life given that it has the largest
exposure to fixed rate policies. Korea Life has the highest exposure to fixed-rate policies
given the company’s focus on variable insurance. Although we think it is the right
strategy for the company given its capital constraints, the approach has resulted in a
larger duration gap than its peers. Variable products require less capital than traditional
21
May 16, 2011
products, but as savings premium gets booked to a separate account, it would not have
dilutive effect in terms of general account crediting rate.
But Korea Life also has the highest hurdle
Although Korea Life is most sensitive to rising rates, we do not think the stock will
outperform its peers given that its hurdle rate is the highest among the Korean Lifers and
we expect a slow rise in the long-end of the yield curve.
Fig. 41: % of fixed rate liabilities (December 2010)
80%
70%
Fig. 42: Proportion of high yield guarantee policies yielding
6% and over
6.6%
70%
60%
60%
58%
Korea Life Samsung Life Tong Yang Life
6.4%
6.2%
50%
40%
6.0%
30%
5.8%
20%
5.6%
10%
0%
5.4%
Korea Life
Samsung Life
TYL
Jun09 Sep09 Dec09 Mar10 Jun10 Sep10 Dec10
22
May 16, 2011
We believe the Korean life insurance market still has room to grow, given relatively low
insurance density. We expect investment-linked products and corporate pension to
continue to provide growth opportunities. We also believe the profitability of lifers will
likely improve as negative spread books mature and new low-yield floating rate policies
dilute their in-force book.
Now entering the longevity market
Second baby boomers the source of traditional life insurance
Traditional life insurance (eg, whole life and term life) started to grow meaningfully only in
early 2000s. Demand for traditional life insurance could fall as baby boomers start to
retire, in our view. However, Korea has the second group of 7mn baby boomers (14% of
total population, born in 1968–1976) that could be a continued source of demand for
traditional life insurance. The ‘second baby boomers’ are now having families and are
seeking protection for their family in case of death or critical illness.
Demand for wealth accumulation products still rising
Investment-linked insurance in Korea, introduced only in recent years, started to show a
meaningful growth only in late 2000s. Although new business volume fell sharply due to
the global credit crisis, the volume has been picking up again as the market recovers.
We remain positive on the long-term demand for investment linked insurance given that
they could provide guaranteed stream of income for life with potential for upside and tax
advantages (e.g., variable annuity).
First baby boomers now looking for protection against longevity risk
We expect strong growth in demand for products that manage longevity risk (eg, income
annuities and long-term care insurance) as the first group of 8mn baby boomers (16% of
total population, born in 1946-1964) start to retire this year. People are healthier and
living longer, and are fearful of outliving their assets (ie, longevity risk). Hence, boomers
will seek sources of lifetime income and long-term care insurance given limited pension
and healthcare support from the government and corporations.
Fig. 43: Life insurance product migration
Korea now entering the third stage "longevity market"
PROTECTION
2000 ~
ACCUMULATION
2005 ~
LONGEVITY
2010 ~
Asset Accumulation
Asset Protection
Tax Avoidance
Longevity Risk
Estate Planning
Quality of Life
Mortality Risk
Morbidity Risk
23
May 16, 2011
Korean retirees not prepared for longevity risk
Rapidly changing demographic to support life industry
We expect a rapid change in demographics for the next ten years. In 2020, all of the first
baby boomers will be in retirement, and all of the second baby boomers will face
retirement. However, it seems like both the first and second baby boomers are not fully
prepared for retirement. That said, we think demand for wealth accumulation and
longevity products should remain healthy for the next 10 years.
Fig. 44: 2010 demographic
Fig. 45: 2020 demographic
First baby boomers about to retire
(Age)
90 - 94
85 - 89
80 - 84
75 - 79
70 - 74
65 - 69
60 - 64
55 - 59
50 - 54
45 - 49
40 - 44
35 - 39
30 - 34
25 - 29
20 - 24
15 - 19
10 - 14
5 -9
0 -4
Demand for wealth accumulation & longevity products to increase
Female
2nd Baby boom generation
Age 36 - 43 (1968-75)
1st Baby boom generation
Age 47 - 56 (1955-64)
('000)
3,000
2,000
1,000
0
Female
(Age)
Male
1,000
2,000
3,000
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
Male
- 94 1st Baby boom generation
- 89
Age 57 - 66 (1955-64)
- 84
- 79
- 74
- 69
- 64
- 59
- 54
- 49
- 44
- 39
- 34
- 29
- 24
- 19
- 14
5 -9
0 -4
2,500
1,500
2nd Baby boom generation
Age 46 - 53 (1968-75)
('000)
500
500
1,500
2,500
Source: KOSIS, Nomura research
Retirees don’t have enough income from insurance and annuities…
The first baby boomers are about to retire. However, retirees are not fully prepared for
life after retirement. Insurance and annuities only make up a small proportion of Korean
retirees' income. In addition, government pension only makes up 7% of retirees' income.
Therefore, most of retirees in Korea are still dependant heavily on family support, or
have to work even after retirement.
Fig. 46: US retirees’ income breakdown
Fig. 47: Korea retirees’ income breakdown
Earned Others, 4%
income,
16%
Savings,
insurance &
annuities,
23%
Earned
income,
27%
Public
pension,
55%
Support
from family,
2%
Source: Korea Institute for Health and Social Affairs, Nomura research
Savings,
insurance &
annuities,
10%
Public
pension,
7%
Support
from family,
56%
Source: Korea Institute for Health and Social Affairs, Nomura research
24
May 16, 2011
…because Koreans depend heavily on real estate for wealth accumulation
We think that one of the key reasons is a heavy dependence on real estate for wealth
accumulation and a reluctance to cash out of real estate due to expectation of capital
gains. However, we think that as expected returns from real estate investment decline,
the proportion of insurance and pension as a percentage of total household assets will
likely increase going forward.
Fig. 48: Household asset breakdown (2006)
Fig. 49: Household financial asset breakdown (2009)
Koreans depends heavily on real estate for wealth accumulation
Koreans have most of their financial assets in bank deposits
Financial assets
(%)
100
Tangible assets
(%)
100
90
90
39%
80
54%
70
60
33%
18%
Cash & deposit
3%
7%
6%
77%
40
56%
46%
40
61%
30
67%
46%
20
20%
12%
32%
10%
18%
30
10
Other
1%
50%
20
23%
Stock
5%
24%
60
50
Bond
12%
70
50
10
80
Insurance & pension
24%
27%
28%
Korea
Japan
US
0
0
Korea
UK
Source: BOK, CEIC, Nomura research
Japan
US
UK
Source: BOK, CEIC, Nomura research
Family support may not be an option anymore
In our view, retirees will soon realise that they cannot depend on family support for
retirement income any more. A demographic transition is in progress in Korea.
Decreasing fertility along with lengthening life expectancy is reshaping the age structure
of the population. According to the Korean Statistical Information Service (KOSIS), Korea
recorded a birth rate of 1.15 in 2009, which is the lowest globally. This means that
support from kids can no longer serve as a substitute for insurance and pensions.
National pension system is not reliable
In addition, the change in demographic will likely put pressure on national pension
system. National Pension System Chairman warned that due to the change in
demographic, the national pension fund could be depleted by year 2064. This means
that the payout scheme could be changed to preserve the fund, and so Koreans cannot
rely on national pension as a primary source of income after retirement.
25
May 16, 2011
Fig. 50: Koreans are having fewer kids
Fig. 51: Korean population aging fast
Korean retirees cannot rely on family support anymore
Number of births ('000)
Age 60 and over as a proportion of population to reach 30% by 2030
(%)
Birth rate
1,200
5
1,000
4
800
(mn)
60
Below 20
20~64
Above 65
50
40
3
600
30
2
400
20
1
200
10
0
2010
2008
2004
2006
2002
2000
1998
1996
1994
1990
1992
1988
1986
1984
1982
1980
1978
1974
1976
1972
0
2030
2028
2026
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1970
0
Plenty of room for growth
Korean life insurance market appears to be a mature market
Korea is already one of the largest life insurance markets globally. Korea is the eighthlargest life insurance market after Italy and the third-largest in Asia after China by
premium volume. In addition, the penetration ratio (premium as % of GDP) of life
insurance is fairly high at 6.5%. Note that as Korean non-life insurers are multi-liners that
participate in the life business, the actual penetration ratio should be even higher.
Fig. 52: Korea is eighth-largest life insurance market (2009)
(%)
14
12
10
8
6
4
2
Source: Swiss re sigma
Po rtugal
Korea
Irelan d
Den mark
Fran ce
Fin land
Jap an
Hon g Ko ng
UK
So uth Africa
Taiwan
Spain
Canada
Taiwan
India
Korea
Italy
China
Germany
france
UK
0
Japan
US
(US$ bn)
500
450
400
350
300
250
200
150
100
50
0
Fig. 53: Korea is 10th most penetrated market (2009)
Survey says most households already own life insurance
According to a survey conducted by Korea Life Insurance Association (KLIA) in 2009,
most of Korea’s households (with an exception of poor and uneducated) already own life
insurance.
26
May 16, 2011
Fig. 54: Percentage of households owning life insurance by
income level (2009)
Fig. 55: Percentage of households owning life insurance by
education level (2009)
84.5% of households already have life Insurance
(%)
100
90
80
70
60
50
40
30
20
10
0
(%)
100
90
80
70
60
50
40
30
20
10
0
Average =84.5%
~W12m 12~24m 24~36m 36~48m 48~60m W60m~
Elementary
Middle
High
College
But insurance density shows a different picture
However, based on insurance density it appears that the Korean market is still
underdeveloped. We think that one of the key reasons is due to fewer females in Korea
participating in the workforce than more developed countries (and lower wage level than
that of males). In addition, the insurance penetration ratio, which is measured based on
the GDP figure, could be overstated given that the Korean economy is more trade
oriented.
Fig. 56: Proportion of female in workforce trend (Korea)
Fig. 57: Proportion of female in workforce by country (2009)
Female employment rising continuously
Fewer Korean females participate in workforce
(%)
(%)
48
43
42
42
41
41
40
40
39
39
38
38
47
46
45
44
43
42
41
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
40
US
Japan
Korea
27
May 16, 2011
Fig. 58: Insurance density: premium per capita in USD (2009)
Ranking
1
2
3
4
5
6
Country
Denmark
UK
Ireland
Sw itzerland
Finland
Luxembourg
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
Japan
France
Hong Kong
Sw eden
Liechtenstein
Belgium
Taiw an
Norw ay
Netherlands
Singapore
Italy
US
Autralia
Germany
Portugal
Canada
Austria
Korea
Spain
New Zealand
Malaysia
Thailand
India
30
Indonesia
Life business
3,816
3,528
3,437
3,405
3,380
3,229
Non-life
1,713
1,051
1,079
2,853
873
1,998
Total
5,529
4,579
4,516
6,258
4,253
5,227
3,139
2,980
2,887
2,690
2,350
2,323
2,257
2,074
2,046
1,912
1,878
1,603
1,525
1,360
1,357
1,300
1,236
1,180
853
249
207
92
48
840
1,289
417
850
23
1,171
495
1,351
4,508
645
851
2,107
1,307
1,518
549
1,644
1,507
710
949
1,318
115
62
6
3,979
4,269
3,304
3,540
2,373
3,494
2,752
3,425
6,554
2,557
2,729
3,710
2,832
2,878
1,906
2,944
2,743
1,890
1,802
1,567
322
154
54
22
10
32
Further study by KLIA survey shows a different picture
According to KLIA’s survey, 84.5% of households surveyed own life insurance. However,
a breakdown of insurance products shows that most of the households have healthcare
and casualty policies with low monthly payments and a large proportion of the
households acknowledge that their current insurance assets seem insufficient.
Fig. 59: Most households that own life insurance have very
little exposure to wealth accumulation products (2009)
Fig. 60: More households that already own life insurance
feel their insurance assets are insufficient (2009)
Current ownership is skewed to healthcare and casualty products with
low monthly payments
Even among the households that already own wealth accumulation
products feel the need for more
Sufficient
(%)
60
(%)
100
90
80
70
60
50
40
30
20
10
0
Insufficient
50
40
30
20
Healthcare Casualty
Source: KLIA, Nomura research
Death
Pension
Savings
Variable
Healthcare Casualty
Death
Pension Savings Variable
28
May 16, 2011
Plenty of new business
We should note that Korean lifers' average 25th month lapse ratio for the past seven
years has stood at 36%. This means that nearly four out of ten contracts are no longer
in-force after two years. Although a higher lapse ratio has a negative impact on VIF, it
tends to have a positive impact on new business volume. Currently reported VIF by
Korean lifers already reflect such a high lapse ratio. That said, we think there is little
downside to new business volume for Korean lifers.
Fig. 61: Current 13th month persistency ratio is 76%
Korea
Mirae asset
(%)
90
Samsung
Tong Yang
Kyobo
Korea
Mirae asset
(%)
80
Samsung
Tong Yang
Kyobo
75
85
70
80
65
75
60
55
70
50
65
45
60
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
2H04
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
2H04
1H04
1H04
40
Source: FSS, Nomura research
Underdeveloped compared to the banking sector
The banking sector has gone through several rounds of restructuring since 1998 at the
onset of the Asian Financial Crisis. As a result, the banking sector has emerged
significantly healthier and profitable, in our view. We think that there are too many
players with very little capital in the life insurance sector. We expect the government to
introduce initiatives (such as a transition to risk-based capital) as part of its ongoing effort
to restructure the financial sector.
Fig. 63: Total assets by sector (FY10)
Fig. 64: Shareholders' equity by sector (FY10)
(Wtn)
(Wtn)
140
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
120
100
80
60
40
20
0
Bank
Source: FISIS, Nomura research
Insurance
Brokers
Bank
Insurance
Brokers
Wealth accumulation products to drive growth
Death insurance growth slowing but not over yet
Until late 1990s, Korean life insurers sold mostly savings type policies that have a very
limited risk premium. We think savings type policies are mere substitutes for deposits. In
addition, savings type policies have been a money-losing business for most of the life
29
May 16, 2011
insurers. That said, we think growth of protection type policies that has a higher
embedded margin is better than what we could infer from the insurance penetration rate.
Fig. 65: Premium growth by product (general account)
Pure Endowment
Endowment
General account premium
(Wtn)
60
Death
Group
Fig. 66: Premium income by function
(%)
50
40
100
80
90
60
80
60
20
50
0
20
40
(20)
10
0
30
(40)
20
(60)
10
(80)
0
Mar-08
Mar-10
Mar-08
Mar-07
Mar-09
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
Mar-97
Mar-96
Mar-95
Mar-94
Mar-93
Protection
70
40
30
Savings
(%)
100
Separate account to derive growth
We expect separate accounts, which include investment-linked insurance and corporate
pension, to remain as the main growth driver for the Korean life insurers. The separate
account business will increase insurers’ commission income with a minimum charge of
capital cost, as investment risks transfer to policyholders of separate account products.
The demand for variable insurance and pension products should increase with need for
wealth accumulation and financial security, in our view.
Investment linked policies at infancy stage
Investment-linked products were introduced in 2003 and started to show meaningful
growth starting in 2006. Given its infant stage, we are positive on the long-term growth
prospect of investment-linked products. Investment-linked products could provide a
guaranteed stream of income with potential upside.
Fig. 67: Total premium growth by product
Fig. 68: Separate account growth
Pure Endowment (LHS)
Death (LHS)
Endowment (LHS)
General account premium (LHS)
Separate Account (LHS)
Growth (RHS)
(Wtn)
140
120
(%)
20
15
(Wtn)
35
Variable
Retirement
30
25
100
10
20
80
5
60
0
40
15
10
20
-5
5
0
-10
0
Mar-10
Mar-09
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
30
May 16, 2011
We expect the recovery to continue
Variable insurance initial premium volume fell sharply with the market crash in 2008.
However, investors are coming back to variable insurance now as the economy
rebounds. We think that this trend will likely continue, especially considering that insurers
are now adopting a “step-up” guarantee option, which provides downside protection
when the market is in a downturn.
Fig. 69: Variable premium vs. KOSPI
Variable
300
KOSPI
250
200
150
100
50
Oct-10
Jul-10
Apr-10
Oct-09
Jan-10
Jul-09
Apr-09
Jan-09
Jul-08
Oct-08
Apr-08
Jan-08
Jul-07
Oct-07
Apr-07
Jan-07
Jul-06
Oct-06
Apr-06
Oct-05
Jan-06
Jul-05
0
Note: Units represent monthly increase, Based as of April, 2005
Source: Wisenet, KLIA, INSIS, Nomura research
Fig. 70: Initial premium trend (Wtr)
Fig. 71: Separate account initial premium trend
Pure Endowment
(%)
100
Death
3.0
Endowment
80
Group
2.5
Separate Account
60
Total growth (YoY)
2.0
40
20
1.5
0
1.0
20
(Wbn)
2,000
1,800
Retirement Insurance
Retirement Pension
Variable
1,600
1,400
1,200
1,000
800
600
400
0.5
40
60
0.0
0
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Jul-08
Mar-08
Nov-07
Jul-07
Mar-07
Nov-06
Jul-06
Mar-06
Nov-05
Jul-05
Mar-05
Dec-10
Aug-10
Dec-09
Apr-10
Aug-09
Apr-09
Aug-08
Dec-08
Apr-08
Aug-07
Dec-07
Apr-07
Aug-06
Dec-06
Apr-06
200
Variable insurance as wealth accumulation and transfer vehicle
Aside from financial security after retirement, we believe demand for investment-linked
insurance should increase as an estate planning tool. Variable life insurance could
provide a solution to wealthier individuals who are looking to accumulate and transfer
wealth to the next generation with tax advantages, in our opinion.
31
May 16, 2011
Fig. 72: Wealth transfer is one of the key driver for insurance demand
Percent indicating top or major reason (by amount of life insurance owned)
Total
affluent
62%
44%
41%
21%
14%
14%
8%
4%
Reason
Financial security
Wealth transfer
Final expenses
Retirement
Mortgage
Estate tax
Investment
Charity
Business
<$100k
$100-$500k
36%
29%
61%
16%
4%
9%
1%
1%
68%
54%
43%
22%
17%
14%
8%
5%
0%
1%
1%
$500k$1m illion+
$999k
83%
76%
50%
47%
28%
22%
17%
29%
15%
16%
11%
20%
15%
16%
7%
2%
2%
2%
Source: LIMRA, Nomura Research; Note: in USD
Survey shows that Koreans are interested in variable insurance
As seen in the table below, the penetration rate for retirement pension, investment
accounts and variable annuities is still relatively low in Korea. Moreover, we can infer
from the survey conducted by KLIA that demand for insurance is shifting to investmentlinked and retirement products. That said, we think that insurers who align their corporate
strategy to meet changing consumer needs will likely outperform their peers.
Fig. 73: Penetration rate by products
(%)
100
2003
2006
Fig. 74: KLIA survey showing demand is shifting to
investment linked and retirement products
(%)
60
2009
2003
2006
2009
50
80
40
60
30
20
40
10
20
0
Medical
indemnity
Reverse
mortgage
Variable
Death
Variable
annuity
Savings
Retirement Investment
pension
accounts
Longterm
nursing
Death
Accident
Accident
Disease
Disease
Pension
0
Corporate pension market to grow rapidly
Corporate pension market now set to take off
Corporate pension business growth in Korea has been somewhat disappointing.
However, we expect the growth rate to pick up, given that recognition of provisions for
severance pay as an expense for tax purposes will be phased out. In addition, the
retirement insurance system has been discontinued. That said, we believe that corporate
pension growth will likely accelerate. The Korea Capital Market Institute forecasts that
the corporate pension market will grow to KRW330tn by 2020 from KRW28tr in 2010.
32
May 16, 2011
Fig. 75: Corporate pension M/S by institution
Broker
FY20F
FY09
Jan09
Feb09
Mar09
Apr09
May09
Jun09
Jul09
Aug09
Sep09
Oct09
Nov09
Dec09
Jan10
Feb10
Mar10
Apr10
May10
Jun10
Jul10
Aug10
Sep10
Oct10
Nov10
Dec10
Jan11
Feb11
0
FY19F
5
FY18F
10
FY17F
15
FY16F
20
FY15F
25
FY14F
30
FY13F
(Wtn)
180
160
140
120
100
80
60
40
20
0
FY12F
Insurance
FY11F
Bank
FY10
(Wtn)
35
Fig. 76: Korean corporate pension market forecast
Source: KCMI, Nomura research
Lifers should do well
Although banks have been leading in the corporate pension business, we think that life
insurers will grab a fair share of the market considering their extensive experience in
defined benefit plans, which have been the most popular plans so far. According to
Korea Capital Market Institute, the defined benefit (DB) plan should lead growth in
Korea. So far, Life insurers have shown strength in defined benefit plan.
Fig. 77: DB forecasted to lead growth till FY20F
Fig. 78: Corporate pension M/S by product
Defined benefit (DB) plan and Individual retirement account (IRA) to drive
growth (vs. defined contribution (DC)
Lifers have shown strength in DB
(Wtn)
180
160
140
120
100
80
60
40
20
0
DB
DC
(Wtn)
16
IRA
DB
DC
IRA
14
12
10
8
6
Source: KCMI, Nomura estimates
FY20F
FY19F
FY18F
FY17F
FY16F
FY15F
FY14F
FY13F
FY12F
FY11F
FY10
FY09
4
2
0
Banks
Life Insurer
Brokerage
Non-life insurer
Samsung Life leading the pack
Samsung currently has a 15% share of the corporate pension market. We expect the
company to maintain its leading position given that it has a captive market. Although the
profitability of corporate pension is questionable with so many players in the market, we
think that when the industry normalizes, it should be able to generate 50bp on the assets
(Samsung Life believes 60bp is possible). Theoretically, if Samsung Life maintains a
15% market share, the company should be able to generate net profit of KRW117bn
(compared to net profit of KRW1,200bn in FY11F) by FY20F.
33
May 16, 2011
Fig. 79: Samsung Life has 15% corporate pension market share
Samsung Life
Kookmin Bank
Shinhan Bank
Woori Bank
IBK
Kyobo Life
Hana Bank
HMC Securities
Nonghyup
Samsung F&M
Mirae Securities
KDB
Korea Life
KEB
LIG F&M
Hi Securities
Samsung Securities
KIS
Mirae Life
Tong Yang Securities
0%
2%
4%
6%
8%
10%
12%
14%
16%
34
May 16, 2011
We expect all three profit sources (risk margin, loading margin, and savings margin) to
improve or stop deteriorating going forward. Loading margin should improve as lifers
gain scale and technical pressure when the deferred acquisition cost (DAC) accounting
change is lifted. Savings margin should improve as low-yield floating rate policies replace
high-yield fixed policies. In addition, we think further deterioration in risk margin is
unlikely given that there will be no additional increase in IBNR reserve requirements.
Understanding profit sources
There are three different profit sources for traditional life products: 1) mortality and
morbidity margin (difference between assumed claims and actual claims); 2) loading
margin (difference between assumed operating expense and actual operating expense);
and 3) savings margin (spread between investment yield and interest paid to
policyholders). For investment-linked insurance, the investment risk is transferred to
policyholders and insurers earn commission income for managing the account. Mortality
and morbidity margin can be improved by better risk management, loading margin can
be improved by increasing the scale and savings margin can be improved by taking in
greater risk with investment assets. However, protecting the spread is of higher priority
for insurers given the long-tail nature of the business. Hence, asset and liability duration
gap management is critical for insurers.
Policy mix change in favour of lifers
We expect a continued shift in policy mix toward higher-margin policies. Underwriting
profitability should improve as low-yield floating rate policies replace high-yield fixed rate
policies and higher-margin protection type policies replace lower-margin savings type
policies. We expect continued growth in protection type policies due to increased
demand for living benefits. Savings type policies have lower embedded margins due to a
higher proportion of saving premiums that carry thin margins.
Loading margin is the main profit source for Korean lifers
The loading margin has been the main profit source for the Korean insurers over the
years. We think that the loading margin has been relatively high since insurers still have
control over distribution channels, and the regulator allows it to a certain degree to
compensate for negative spreads on savings premiums.
Fig. 80: Industry loading margin in KRW amount
Fig. 81: Industry loading margin in %
(Wtn)
5
(%)
35
30
4
25
20
3
15
2
10
5
1
0
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 10
Mar 09
Mar 08
Mar 07
Mar 06
Mar 05
Mar 04
Mar 03
Mar 02
Mar 02
0
35
May 16, 2011
Actual margin should be higher
Note that a proportion of loading premium that relates to the separate account is
captured in fees from the separate account. Meanwhile, the entire expense is captured in
the general account. Hence, we believe that loading margin expansion has already
started.
Loading margin has been under technical pressure
The loading margin has been under technical pressure due to the change in accounting
for acquisition costs in 2004. Prior to the accounting change, insurers capitalized
estimated acquisition costs into a deferred acquisition cost (DAC) account, then
amortized over seven years. Therefore, the entire loading margin was recognized
upfront. However, after the change, insurers now defer the actual amount, recognizing
the loading margin evenly for seven years. Given that we are six years into the new
accounting method, we think that additional pressure from the accounting change will be
limited.
Increase in upfront payment proportion added pressure on loading margin
We should note that the recent downward trend of loading margin does not indicate
deterioration in profitability. The loading margin fell as the industry increased the upfront
proportion of sales commission. However, total commission paid out remained the same.
That said, we think the loading margin should improve going forward.
Spread on savings premium to improve gradually
Regulator created negative spread books
The regulator required life insurers to pay 9% on non-participating policies and 7.5% on
participating policies until 1998. The Korean government lowered the crediting rate by
100bp in 1999 and deregulated in 2000. Meanwhile, the Korean bond market has
experienced a secular bull market over the past two decades, taking the three-year
treasury yield down to 3.6% from 13% in 1995. Consequently, Korean lifers are stuck
with huge negative spread books.
Fig. 83: Crediting rate trend
Participating
Non-Par
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1996
1995
1994
Deregulated starting in 2000
1993
8.5%<
8.0%
7.5%
7.0%
6.5%
6.0%
5.5%
5.0%
4.5%
>4.0%
(%)
10
9
8
7
6
5
4
3
1998
(%)
90
80
70
60
50
40
30
20
10
0
1997
Fig. 82: Fixed yield book breakdown by crediting rate
Unwinding of legacy issue will take time
67% of negative spread policies have remaining maturity of 20 years and longer. In
addition, the lapse ratio for these policies is extremely low given their attractive yields.
36
May 16, 2011
Fig. 84: Fixed yield book breakdown by maturity
Fig. 85: Average crediting rate by company
(%)
(%)
70
60
50
40
30
20
10
0
60
% of reserve with crediting rate over 6%
Average crediting rate
(%)
6.4
6.29
50
40
6.2
6.0
5.94
5.8
30
5.67
20
5.4
+20yr
15-20yr
10-15yr
7-10yr
6-7yr
5-6yr
4-5yr
3-4yr
2-3yr
10
1-2yr
5.6
5.2
Samsung Life
Korea Life
Tong Yang Life
But dilution effect likely to bring down the average crediting rate
Although high-yield guarantee products will remain in-force for quite some time, we think
their spreads are likely to improve given that insurers have been selling low-yield floating
rate products. As high-yield guarantee products mature and new low-yield floating rate
products dilute the existing pool, saving spreads should improve. In addition, we think
that rising market rates should further improve the spread.
Fig. 86: Proportion of high yield guarantee policies yielding
6% and over
Fig. 87: Average crediting rate
Proportion of high yield guarantee policies declining steadily for all three
companies
Average crediting rate falling steadily for all three companies
Korea Life
(%)
60
Samsung Life
Tong Yang Life
55
(%)
6.6
Korea Life
Samsung Life
Tong Yang Life
6.4
50
6.2
45
6.0
40
35
5.8
30
5.6
25
20
5.4
Jun09
Sep09
Dec09
Mar10
Jun10
Sep10
Dec10
Jun09
Sep09
Dec09
Mar10
Jun10
Sep10
Dec10
But recovery should take longer than expected due to RBC transition
However, we note that the recovery in savings margin should take longer than expected.
Life insurers have been increasing the long-dated bond proportion of investment (with an
exception of Tong Yang Life) in order to improve their RBC ratio. The RBC ratio, which is
a stricter measure of capital adequacy, assesses interest rate risk based on the asset
and liability duration gap. As a result, the proportions of loans have declined. Given their
loan books generate 300bp-400bp more in investment returns than those of bond
portfolio, we believe improvement in the investment yield will take longer than expected.
In addition, adding long-dated bonds at the bottom of interest cycle will not help the
cause either.
Tong Yang relatively unaffected by RBC
Tong Yang Life actually increased its loan proportion while its peers lowered it. In our
opinion, Tong Yang, which had a relatively narrower asset and liability duration gap, was
less affected by the RBC transition.
37
May 16, 2011
Fig. 88: Change in investment asset mix
Fig. 89: Duration gap narrowing
Lifers have been adding more long-dated bonds in order to lower the
asset liability duration gap
Lifers lowered the duration gap by increasing asset duration which will
have an adverse affect on investment returns
Bonds
(%)
55
50
45
40
35
30
25
20
15
Loans
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
Dec09
Dec10
Samsung
Dec09
Dec10
Korea
Dec09
Dec10
Tong Yang
Mar10
Dec10
Samsung
Mar10
Dec10
Korea
Mar10
Dec10
Tong Yang
38
May 16, 2011
Risk margin to stabilise
The fall is mostly due to timing
The mortality and morbidity margin has been falling continuously over the years after
peaking at 32% in 2002. We think that further downside risk to the margin is limited.
The high margin in the early-2000s was attributable to rapid growth in death insurance
that was introduced in 1997. Given that policies in the early stage had lower claims, the
rapid growth in death insurance resulted in margin expansion. However, the trend
reverses when growth slows and claims rise on in-force policies. We think that further
downside to the mortality and morbidity margin is limited, given that premium growth for
death insurance has been stagnant over the past three to four years, and the margin fell
for six years after peaking in 2002.
No additional increase in IBNR reserve requirement
The Implementation of incurred but not reported (IBNR) in 2004 also played a part in the
mortality and morbidity margin squeeze. Life insurers started to reserve for IBNR in
FY04. The reserve rate was increased every year to 10% in FY06. We think the pressure
from the IBNR reserve is limited, given that there will be no additional increase in IBNR
reserve requirements.
Lifers now have more flexibility in pricing
Life insurers secured flexibility in terms of pricing for risk starting with the fifth mortality
table in April 2006. The regulator allowed insurers to reflect their own mortality risk
assumptions for pricing. We think the flexibility gives insurers room to manage the
mortality margin and to improve it in the long term.
Fig. 90: Industry risk margin in KRW
Fig. 91: Industry risk margin in %
(Wbn)
(%)
2.0
35
30
1.5
25
20
1.0
15
10
0.5
5
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar02
Mar02
0
0.0
39
May 16, 2011
The Big Three losing market share
Big three gained market share at the wrong time
The Big Three (Samsung Life, Korea Life and Kyobo Life) gained market share in the
late 1990s due to industry consolidation. However, their market share gain during this
period was a short-lived positive, as during this period, the crediting rate was still
regulated and fixed at 9% for non-participating and 7.5% for participating policies. In
addition, when the crediting rate was deregulated, the Big Three lost most of the gains in
the late 1990s. As a result, the Big Three have proportionally larger negative spread
books. We think that this legacy issue will continue to impose constraints on their
channel and pricing strategy.
Fig. 92: M/S in terms of total premium
Samsung
(%)
100
Kyobo
Korea
Fig. 93: M/S in terms of initial premium
SME
Foreign
Kyobo
Korea
SME
Foreign
Mar93
Mar94
Mar95
Mar96
Mar97
Mar98
Mar99
Mar01
Mar02
Mar03
Mar04
Mar05
Mar06
Mar07
Mar08
Mar09
Mar10
Mar11
Dec10
Mar11
Dec10
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
0
Mar02
0
Mar01
20
Mar99
40
20
Mar98
40
Mar97
60
Mar96
60
Mar95
80
Mar94
80
Mar93
Samsung
(%)
100
The Big Three slow to adopt non-traditional channels
Since the turn of the century, the Big Three have started to lose market share with the
proliferation of non-traditional distribution channels such as bancassurance, independent
distribution channels and direct marketing channels (e.g., home shopping networks,
telemarketing and the Internet). We think that the Big Three have been reluctant to adopt
the non-traditional channels due to channel conflicts. The Big Three had large forces of
exclusive solicitors who did not welcome the newly developing channels.
Others
Mar11
Bancassurance
Mar10
Agent
Mar09
Solicitor
Mar08
Mar99
Mar11
Mar10
Mar09
Mar08
Mar07
Mar06
0
Mar05
20
0
Mar04
20
Mar03
40
Mar02
40
Mar01
60
Mar00
80
60
Mar99
80
Employee
Mar07
(%)
100
Mar06
Other
Mar05
Bancassurance
Mar04
Agent
Mar03
Solicitor
Mar02
Employee
Mar01
(%)
100
Fig. 95: Big 3’s distribution channel
Mar00
Fig. 94: Industry distribution channels
Big Three focus on shifting to variable insurance
The Big Three were quick to introduce investment-linked products when they started to
lose market share in the traditional insurance product market. We think this was an
inevitable strategy for the Big Three, given that their combined solvency margin fell
below 200% in the early 2000s. Due to capital constraints, the Big Three had to shift their
focus to variable insurance, which requires less capital than traditional products.
40
May 16, 2011
Fig. 96: Big 3 vs industry average solvency ratio (%)
Total Average
250
Fig. 97: Big 3 Solvency ratio (%)
450
Top 3 Average
Samsung Life
400
Korea Life
Kyobo Life
350
200
300
250
150
200
150
100
100
50
50
Mar02 Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09
Mar02 Mar03 Mar04 Mar05 Mar06 Mar07 Mar08 Mar09
Multi-channel strategy working nicely
Second-tier insurers have been gaining market share lead by Tong Yang Life and
Shinhan Life. The second tiers have been taking advantage of newly developed
distribution channels. In our opinion, they have been able to take on new channels
without much conflict with the exclusive solicitors due to their weak solicitor base before
the emergence of non-traditional channels.
Second tiers have more flexibility in pricing
We think the Big Three have built in a higher risk and loading margin into their products
to make up for their loss-making legacy books. However, second-tier insurers who are
relatively free from the legacy issue are able to price their products more attractively.
Fig. 98: Whole life pricing by company (male)
Fig. 99: Whole life pricing by company (women)
(W)
660,000
640,000
620,000
600,000
580,000
560,000
540,000
520,000
(W)
540,000
520,000
500,000
480,000
460,000
440,000
420,000
400,000
Source: Hankyoreh, Nomura research
Tong Yang
Note: 40 year old, KRW300mn death benefit, payment period of 20years
Source: Hankyoreh, Nomura research
Dongbu
Heungkuk
Kumho
Shinhan
Korea
Kyobo
Alianz
KB
Green cross
Mirae asset
Samsung
Dongbu
Tong Yang
Heungkuk
Kumho
Allianz
Kyobo
KB
Korea
Shinhan
Green cross
Mirae asset
Samsung
Note: 40 year old, KRW300mn death benefit, payment period of 20years
Tong Yang benefiting from financial crisis
Foreign players damaged heavily during the crisis
In our opinion, Tong Yang Life should benefit from foreign life insurers (namely ING Life
and PCA Life) that lost a large number of exclusive solicitors during the financial crisis.
We have not seen foreign lifers rebuilding their sales force yet.
Other medium size local players were also damaged heavily
In addition, we note that Tong Yang Life’s domestic competitor KDB Life (unlisted) has
had deployed a similar distribution strategy but it weakened during the financial crisis.
KDB Life, formerly Kumho Life, incurred significant investment losses during the financial
crisis, which has dragged down its solvency margin to only 30%. The company was later
sold to Korea Development Bank. Mirae Asset Life (unlisted) also lost a large number of
41
May 16, 2011
solicitors during the crisis. Mirae Asset Life had grown fast on the back of growing
demand for investment linked insurance and its reputation as a leading asset manager.
However, during the crisis, its new business volume for investment linked products fell
sharply and so did the solicitors.
Fig. 100: ING Life & PCA Life solicitor trend
Fig. 101: KDB Life & Mirae Asset Life solicitor trend
ING Life and PCA Life lost 38% of their solicitors
KDB and Mirae Asset Life lost 33% of their solicitors
15,000
21,000
19,500
13,000
18,000
11,000
15,000
9,000
13,500
7,000
Fig. 102: Initial premium market share
Fig. 103: Medium size lifers' market share
Foreign lifers losing out
Mirae Asset and KDB losing out
100%
10%
80%
8%
60%
6%
40%
Tong Yang
Mirae asset
Kumho
Shinhan
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
5,000
3Q08
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
4Q08
3Q08
12,000
4Q08
16,500
4%
20%
2%
Mar-11
Dec-10
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Foreign
Mar-02
SME
Mar-01
Korea
Mar-99
Kyobo
Mar-98
Samsung
0%
Mar-97
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Mar-10
Mar-11
Dec-10
0%
42
May 16, 2011
Appendix 1: Calculating EV
Embedded value and appraisal value
Embedded and appraisal values are the most widespread method of valuing life
insurance companies outside the US, and are of increasing importance as investors pay
attention to the published appraisal values of listed life insurance companies. We expect
the use of embedded/appraisal values to increase in Asian markets. The purpose of this
Appendix is to provide basic definitions and key drivers of embedded and appraisal
values. An appraisal value is derived by developing a detailed model to project the future
distributable cash flows arising from the underlying business (ie, the insurance and
savings policies and supporting capital) of a life insurance company. These cash flows
are discounted at a risk adjusted rate of return, known as the risk discount rate (RDR), to
give a value for the company.
An appraisal value can be broken down into three components: net worth, value of inforce business and value of future new business. The net worth and value of in-force
business are added together, and is referred to as the embedded value. The following
chart shows how the three components come together.
Fig. 104: Components of appraisal value
Shareholders net worth
(Shareholder funds + shareholders interest in life funds)
+
Value of in-force business
(value of future profit margins accruing to shareholders from policies in-force at date
of the valuation)
= Embedded value
+
Value of new business
(value of 1 year's new business X new business multiplier)
= Appraisal value
Net worth
For regulatory reasons, life insurance companies must hold capital in excess of their
current policy liabilities. This capital is intended to protect policyholders against the
potentially detrimental effects of random economic shocks or fluctuations in the
underlying operational experience of the portfolio. The excess capital must at least cover
a ‘capital adequacy’ level specified by the regulator. Otherwise, the company is not
allowed to pay dividends to shareholders. For this reason, it is usual for life insurance
companies to hold capital in excess of the capital adequacy level. The net worth, or
shareholders’ net worth, is the value of the shareholders’ interest in the capital held in
excess of the policy liabilities. Some of this capital is ‘locked-in’, since it must cover the
capital adequacy level. The locked-in capital is valued at a discount to face value,
reflecting the fact that it will earn a lower rate of interest than that at which it is
discounted. The capital, which does not need to be locked-in, is valued at face value,
reflecting the fact that it is available for distribution or other uses. Usually the discount
applied to the locked-in capital is taken off the value of in-force business, leaving the
entire net worth at face value.
Value of in-force business
Life insurance is a long-term business, with some policies extending over 50 years into
the future. The valuation of each policy on a life insurance company’s books is
performed by constructing a model to project cash flows from the policy into the future
under a set of assumptions. The main cash flows projected can be separated into two
categories: income and outgoings. The sources of future income are the regular
43
May 16, 2011
premiums payable on the policy (if any), the investment return on the assets backing the
policy liability reserves, and any charges levied on funds under management. The
sources of future outgoings are expenses and commission, policy-related claims,
surrender and maturity payments, and taxation.
The value of in-force business is the value of all policies that a life insurance company
has on its books at the balance date, to which the appraisal value relates. Often a policyby-policy valuation will be carried out to project the cash flows and discount the
shareholders’ share of the profits to the balance date.
Value of future new business
The two components of the appraisal value mentioned above relate to the business
already written by the life insurer and the capital supporting it. However, to value the
company properly, one should also account for products that the company has already
developed, and the distribution systems that it has in-place to sell them. The value of
future new business attempts to encapsulate the value of the above, and is often
referred to as the ‘goodwill’ component in the appraisal value.
The value of future new business can be calculated in one of two main ways. Both use a
model to project future cash flows on a set of assumptions, i.e., a similar method to that
used to value in-force business.
The simplest way to value future new business is to calculate the value of one year’s
sales using the projection model, and then applying a multiple to it. The multiple used
would implicitly reflect the discount rate, the assumed growth rate in new business
volumes and any assumed ‘profit squeeze’ in the future. The ‘profit squeeze’ is a
conservative adjustment that reflects:
An assumption that over time, competitive forces will erode some of the margins on
profitable new business.
The extra uncertainty involved in making assumptions about the profitability of new
business, the further into the future one looks.
The other method involves making explicit assumptions about sales volumes in each
future year (by product), and then projecting these sales into the future. The cash flows
from each year’s sales are overlaid on one another, and the combined cash flows are
discounted at the risk discount rate.
Calculation of implied valuation metrics
• Price/EV = (Price - value of other operations per share) / EV per share
• New business multiple = (Price - EV per share - value of other operations per share) /
Value of one year’s new business per share.
Limitations of EV valuation methodology
• Embedded value could fail to warn investors of the impact on insurers from falling
markets via asset/liability mismatch and costly options and guarantees.
• Embedded value could fail to track changes in the risk profile of an individual company.
• Embedded value capitalizes asset risk premiums before actual value creation.
Therefore, the limitations of the embedded value method become more apparent when
interest is low and credit quality is poor.
Evolution of EV
Leading life insurance firms in Europe have disclosed a form of embedded value dubbed
EEV, European embedded value, since May 2004 when EEV principles were published
by the CFO Forum. These principles attempted to address criticisms to the old
methodology, TEV, traditional embedded value, and facilitated the implementation of
market consistent valuation methods, which led many leading insurance companies in
Europe to disclose EEV based on market-consistent approaches.
Many insurance companies in Europe disclose MCEV as part of their financial reports
and use it as an internal management tool, so the CFO Forum published MCEV
Principles in June 2008 in order to make EV information effective and appropriate for
investors by streamlining MCEV disclosure standards for international use.
44
May 16, 2011
Fig. 105: MCEV vs TEV- Differences
MCEV
Total net assets section
Adjusted net worth
Value of existing
business
TEV
Total net assets section
Reserv e f or price f luctuations
(excluding net unrealised gains/losses on bonds)
Contingency reserv e
Reserv e f or price f luctuations
Reserv e f or possible loan losses
Contingency reserv e
Net unrealised gains/losses on land and buildings
Reserv e f or possible loan losses
Unf unded pension liability (deducting item)
Net unrealised gains/losses on land
Intangible f ixed assets (deducting item)
Unf unded pension liability (deducting item)
PV of certainty -equiv alent prof it
(discount rate: risk f ree rate)
Time v alue of options and guarantees
(deducting items)
(The dif f erence between the presetn v alue of certainty equiv alent
prof it and the present v alue of stochastic f uture prof its)
Cost of capital (deducting item)
Present v alue of f uture af ter tax-prof its
(discount rate: risk f ree rate + risk premiums)
Cost of capital (decuting item)
Frictional costs (deducting item)
Cost of minimum guarantee f or existing v ariable
(The present v alue of inv estment cost and taxes on assets backing
the required capital at each point of time in the f uture
Cost of non-hedeable risks (deducting item)
lif e insurance (deducting item)
(allowance f or the uncertainty of non-economic assumptions, the cost
of non-hedgeable economic risks as well as other risks that are not
ref lected on the other assumptions
45
May 16, 2011
Appendix 2: Life insurer M&A landscape
Fig. 106: Korea life insurance M&A history
46
Samsung Life
032830.KS 032830 KS
EQUITY RESEARCH
INSURANCE
Meet Korea's fastest-growing life insurer May 16, 2011
Rating
Starts at
16% EV growth for next four
years, trading at 0.8x P/EV;
bullish on Samsung Group
Target price
Starts at150,000
Closing price
May 12, 2011
Potential upside
16% EV growth for next four years
We expect Samsung’s EV (ex-affiliate stakes) to grow on average 16% a
year for the next four years, driven by strong growth in the value of inforce (VIF) business and the unwinding of its profitable in-force book. We
also expect solid value of new business (VNB) growth as its hiring cycle
starts and ventures out to non-traditional channels.
Net premium (bn)
FY11F
FY12F
Korea Insurance
Michael Na - NFIK
[email protected]
+82 2 3783 2334
[email protected]
+82 2 3783 2339
FY13F
Actual
Old
New
Old
New
Old
New
14,862
0
14,898
0
15,017
0
15,167
Reported net profit (bn)
1,934
1,172
1,309
1,509
Normalised net profit (bn)
1,934
1,172
1,309
1,509
9,668.9
5,859.0
6,546.7
7,544.6
Normalised EPS
Norm. EPS growth (%)
Norm. P/E (x)
Price/EV (x)
Price/implied VNB (x)
Dividend yield (%)
113.4
-39.4
11.7
15.2
10.1
N/A
16.7
N/A
15.0
N/A
13.0
1.0
N/A
0.9
N/A
0.8
N/A
0.7
-0.8
N/A
-2.6
N/A
-4.2
N/A
-5.8
2.0
N/A
2.0
N/A
2.0
N/A
2.6
ROE (%)
14.1
ROA (%)
1.4
7.4
0.0
0.8
7.9
0.0
Key company data: See page 2 for company data, and detailed price/index chart.
0.8
+53.1%
Research analysts
We are bullish on Samsung Group
Our technology analyst CW Chung is bullish on Samsung Electronics
(33% of Samsung Life's book value) with a PT of W1,350,000 (53%
upside). Our financial services analyst Gil Hyung Kim is also bullish on
Samsung Card (6% of Samsung Life's book value) with a PT of W67,000
(26% upside).
FY10
KRW 98,000
Nomura vs consensus
Our price target, 11% higher
than consensus, is the highest
on the Street.
Buying at the bottom of rate cycle
Samsung’s insurance business (ex-affiliate stakes) is trading at 0.8x
forward P/EV despite its strong growth profile. We think the stock is
trading at a depressed level due to a flatter yield curve. However, we
expect the long-end to be lifted starting in 2H10 with 1) continuous rate
hikes by the BOK, 2) rising expected inflation, and 3) tightening by ECB
and QE2 ending.
31 Mar
KRW 150,000
Anchor themes
deliver double-digit EV growth.
rise in 2H11F.
We initiate coverage of Samsung Life with a Buy rating and a PT of
W150,000, implying 53% upside potential. Samsung Life is the largest life
insurer in Korea and the quasi holding company of Samsung Group.
Currency (KRW)
Buy
8.6
0.0
0.9
the US.
Nomura | ASIA Samsung Life
May 16, 2011
Key data on Samsung Life
Profit and Loss (KRWbn) Growth (%)
Life premiums
Non life premiums
Net profit
Normalised EPS
Normalised FDEPS
FY10
14,883
FY11F
14,912
FY12F
15,032
FY13F
15,182
-21
14,494
-21
14,862
-15
14,898
-15
15,017
-15
15,167
14,494
-11,586
-4,485
-1,903
-1,341
-4,821
5,501
14,862
-10,374
-6,548
-1,657
-1,594
-5,311
6,584
14,898
-11,255
-5,696
-1,768
-1,474
-5,295
6,227
15,017
-11,327
-5,697
-1,851
-1,395
-5,253
6,286
15,167
-11,422
-5,709
-1,916
-1,341
-5,221
6,484
5,501
6,584
6,227
6,286
6,484
681
1,273
932
1,033
1,263
488
1,237
614
646
671
1,169
-263
906
2,510
-576
1,934
1,546
-374
1,172
1,679
-369
1,309
1,935
-426
1,509
906
1,934
1,172
1,309
1,509
906
-225
681
1,934
-400
1,534
1,172
-400
772
1,309
-400
909
1,509
-500
1,009
Notes
No more significant variances
expected going forward.
Price and price relative chart (one year) 2.5
na
113.4
113.4
113.4
0.2
na
-39.4
-39.4
-39.4
0.8
na
11.7
11.7
11.7
1.0
na
15.2
15.2
15.2
80
100000
70
95000
60
(%)
A pr 11
22.0
33.1
8.6
0.91
na
90
105000
M ay 11
22.0
30.5
7.9
0.83
na
100
M ar 11
24.2
34.1
7.4
0.78
na
110
110000
J an 11
23.0
20.7
14.1
1.38
na
115000
F eb 11
22.5
24.8
9.3
0.71
na
Price
Rel MSCI Korea
(KRW)
Nov 10
13.0
20.0
13.0
2.6
1.1
4.83
4.83
0.0
0.7
-5.8
D ec 10
15.0
23.1
15.0
2.0
1.1
4.92
4.92
0.0
0.8
-4.2
O c t 10
16.7
25.8
16.7
2.0
1.2
5.11
5.11
0.0
0.9
-2.6
S ep 10
10.1
15.6
10.1
2.0
1.3
5.82
5.82
0.0
1.0
-0.8
J ul 10
21.6
33.3
21.6
1.1
1.6
5.33
5.33
0.0
1.2
2.8
A ug 10
Valuation and ratio analysis
FD normalised P/E (x)
FD normalised P/E at price target (x)
Reported P/E (x)
Dividend yield (%)
Price/book (x)
Investment return (%)
Recurrent investment return (%)
Non-recurrent return/invt. return (%)
Price/EV (x)
Loss ratio (%)
Combined ratio (%)
Effective tax rate (%)
Dividend payout (%)
ROE (%)
ROA (%)
ROR (%)
FY09
14,515
J un 10
Year-end 31 Mar
Gross premiums
Government charges
Reinsurance ceded
Net written premium
Change in unearned premium reserves
Net earned premium
Claims and benefit payments
Change in reserves
Commission and DAC expenses
Other expenses
Underwriting surplus
Recurrent investment income
Realised and unrealised gains
Investment income
Other income
Employee share expense
Operating profit
Amortisation
Other non-operating income
Associates and JCEs
Pre-tax profit
Income tax
Net profit after tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
Transfer to retained earnings
1M
3M
12M
Absolute (KRW)
-1.3
-4.9
-14.0
Absolute (USD)
-1.5
-1.5
-10.4
Relative to index
-3.1
-12.6
-42.8
Market cap (USDmn)
Estimated free float
(%)
52-week range
(KRW)
3-mth avg daily
turnover (USDmn)
Major shareholders
(%)
Lee, Gun hee
Samsung Everland
17,916.2
121000/95500
38.85
20.8
19.3
48
May 16, 2011
Balance Sheet (KRWbn) As at 31 Mar
Cash and deposits
Bonds
Equities
Unit trusts
Loans and mortgages
Foreign investments
Real estate
Other investments
Total investments
Deferred acquisition costs
Prepaid and unearned prem. reserves
Debtors and prepayments
Fixed assets
Goodwill
Separate account assets
Other assets
Total assets
Insurance reserves
Catastrophe reserves
Insurance protection fund
Deposit and investment contracts
Separate account liabilities
Provision for Unearned Premiums
Provision for Outstanding Claims
Interest bearing liabilities
Other liabilities
Total liabilities
Minority interest
Common stock
Preferred stock
Retained earnings
Proposed dividends
Other equity
Total liabilities and equity
Balance sheet ratios (%)
Life solvency margin
Non-life solvency margin
Net premiums/equity
Tech. reserves/total premiums
Investment portfolio mix (%)
Cash and deposits
Bonds
Equities
Unit trusts
Loans and mortgages
Foreign investments
Real estate
Other investments
Per share
Reported EPS (KRW)
Norm EPS (KRW)
Fully diluted norm EPS (KRW)
DPS (KRW)
BVPS (KRW)
Life/LT EVPS (KRW)
Life/LT VNBPS (KRW)
Value of non-life bus. PS (KRW)
FY09
3,545
44,224
12,833
FY10
4,909
49,319
15,678
FY11F
5,176
52,763
16,091
FY12F
5,448
54,279
16,524
FY13F
5,720
55,784
16,950
24,530
12,544
5,124
4,486
107,285
3,907
24,360
12,680
5,242
6,757
118,944
3,903
25,447
14,058
5,413
5,791
124,738
4,166
26,607
15,560
5,593
6,928
130,939
4,362
27,803
17,171
5,774
8,164
137,367
4,514
19,536
2,316
133,045
92,025
21,083
2,409
146,340
98,086
22,757
2,414
154,075
103,430
24,537
2,434
162,271
108,856
26,403
2,458
170,741
114,298
19,637
21,083
22,757
24,537
26,403
9,250
120,912
11,781
130,950
11,726
137,913
11,808
145,200
11,960
152,661
106
107
107
107
107
6,078
7,197
7,969
8,879
9,887
5,949
12,133
133,045
8,085
15,390
146,340
8,085
16,162
154,075
8,085
17,071
162,271
8,085
18,080
170,741
na
na
na
na
na
119.5
634.0
96.6
659.1
92.2
693.6
88.0
724.2
83.9
752.8
3.3
41.2
12.0
0.0
22.9
11.7
4.8
4.2
4.1
41.5
13.2
0.0
20.5
10.7
4.4
5.7
4.1
42.3
12.9
0.0
20.4
11.3
4.3
4.6
4.2
41.5
12.6
0.0
20.3
11.9
4.3
5.3
4.2
40.6
12.3
0.0
20.2
12.5
4.2
5.9
Notes
Strong adjusted net worth (ANW)
growth driven by unwinding of
profitable in-force book.
4,530.48
9,668.87
5,859.02
6,546.66
7,544.57
4,530.48
9,668.87
5,859.02
6,546.66
7,544.57
4,530.48
9,668.87
5,859.02
6,546.66
7,544.57
1,125.00
2,000.00
2,000.00
2,000.00
2,500.00
60,664.10 76,949.51 80,808.53 85,355.18 90,399.75
83,194.10 102,124.51 110,967.75 120,634.74 130,979.93
5,350.00
4,860.00
5,074.44
5,419.28
5,690.45
0.00
0.00
0.00
0.00
0.00
49
May 16, 2011
Korea’s fastest-growing life insurer
Samsung Life is the largest life insurance company in Korea and the quasi holding
company of Samsung Group. We expect its insurance business to deliver strong EV
growth in the medium term. In addition, we are bullish on Samsung Electronics, which
makes up 33% of its shareholders’ equity.
Strong EV growth
RoEV of 17.5% and 16.4% for FY11F and FY12F
We expect Samsung’s insurance business (ex-affiliate stakes) to deliver RoEV of 17.5%
and 16.4% for FY11F and FY12F, respectively, driven by strong growth in the value of
in-force (VIF) business and the unwinding of its profitable in-force book.
Quality growth driven by new business
We think that new business (VNB) contribution to EV growth should be significant, as it
makes up 24% of VIF. In our view, growth driven by new business is healthier and
deserves higher valuation. We expect 52% and 51% of RoEV should come from new
business for FY11F and FY12F, respectively.
Solid VNB growth
We expect VNB growth of 4.4% and 6.8% for FY11F and FY12F, respectively. Although,
we expect new business margin to fall due to an increase in wealth accumulation
products, the volume growth should be more than enough to offset margin compression
as the company aggressively ramps up its traditional solicitor channel and ventures out
to non-traditional channels. In terms of the solicitor restructuring cycle, we think the
company is passing through a trough. The company noted that the number of exclusive
solicitors dropped due to layoffs of ineffective solicitors.
Long-term growth opportunity from corporate pension
Although, it may not contribute to the bottom line in a meaningful way in the near term,
the rapidly growing corporate pension market should be positive for Samsung Life, which
has the largest captive market. If Samsung Life maintains its current market share of
15.2% and earns 60bps on pension assets, as it expects, then the company should
generate W142bn in operating profit by FY20F, when the corporate pension market is
expected to reach W156tr in assets according to Korea Capital Market Institute.
Holding company value to rise
Bullish on Samsung Group
Samsung Life is a quasi holding company of Samsung Group. Major stakes include
7.21% in Samsung Electronics, 26.41% in Samsung Card, 10.36% in Samsung F&M and
11.38% in Samsung Securities. Our technology analyst CW Chung is bullish on
Samsung Electronics and has a PT of W1,350,000 (52% upside). Our financial analyst
Gil Hyung Kim is also positive on Samsung Card and has a PT of W67,000 (28%
upside).
Currently, unrealized gains from affiliate holdings are split between shareholders and
policyholders. We should also note that the shareholders’ proportion should increase by
1.4ppt a year going forward as reserve relating to participating policies as a proportion of
total reserve declines.
Buying at the bottom of rate cycle
A 50bps increase in investment yield assumption should boost EV by 12.8%
The benefit from rising interest rates is clearly evident for Samsung Life given that fixedrate policies make up 60% of its in-force book. A 50bps increase in investment yield
assumption should boost EV by 12.8%.
50
May 16, 2011
Trading at 0.8x P/EV
Samsung Life (ex-affiliate stakes) is trading at 0.8x forward P/EV. We think that the stock
is trading at a depressed level due to a flatter yield curve. Although the BOK has raised
the key policy rate by 100bps since July 2010, the long-end of the yield curve has been
falling continuously. However, we believe the long-end should be lifted starting in 2H11.
another two in 1H12, lifting the terminal policy rate of the current cycle to 4.0% by 2Q12.
Meanwhile, he thinks that real policy rates should remain negative, doing little to limit
inflationary pressure, unless it is combined with KRW appreciation.
Young Sun noted that CPI inflation should rise above 4% in 2011, exceeding the BOK's
target band. Interest rate hikes coupled with a stronger KRW and price controls should
partly offset cost-push inflation pressures from higher oil prices. But rising nominal
wages and housing rents are also adding to inflation. Young Sun forecasts CPI inflation
to rise from 2.9% in 2010 to 4.4% in 2011, before easing to 3.6% in 2012. We think that
the long-end of the bond market will eventually react to growing concerns on inflation.
Whether hunting for better yields or betting on KRW appreciation, inflow of foreign capital
has been adding pressure on the long-end since 2H09. However, with ECB turning
hawkish and the US Fed's QE2 program winding down, we may see foreign capital
inflow slowing down and may even see outflow going forward. We think that the long-end
of the yield curve could be lifted with rising interest rates in developed markets, as we
have seen in 4Q10. In addition, the recent KRW appreciation could hinder foreign capital
inflow that is betting on KRW appreciation, putting further pressure on the long-end.
Long-end to rise slowly, but surely
Young Sun forecasts the five-year treasury to rise starting in 3Q11 and to reach 4.5% by
the end of 1H12 from a current yield of 4.0%, and 4.2% for the three-year treasury from a
current yield of 3.6%.
Risk factors
Prolonged low interest environment
As market rates fall, the disparity between portfolio rates and new money rates has been
widening. In addition to valuation risk, we believe a prolonged low interest environment
will impose operational risks: 1) continued reliance on new sales to subsidize in-force
business, 2) possible fall into the minimum guarantees zone, 3) negative impact on new
business volume due to lower crediting rate, and 4) companies possibly compromising
risk management standards in order to pick up additional yield.
Technology industry downturn
Samsung Life owns 7.21% of Samsung Electronics, representing 33% of its book value.
Share overhang
The combined ownership of Samsung Life by Shinsegae and CJ Group stands at 16.6%.
The lock-up period for Shinsegae should end on 12 May 2011. The lock-up period for CJ
Group already ended on 12 November 2010. Both parties have shown interest in
liquidating their stakes and investing into their core operations or M&A.
51
May 16, 2011
Valuation
We derive our PT of W150,000 based on SOTP methodology. We value the insurance
business using P/EV methodology, and the affiliate stakes applying a 27% holding
company discount to our PT on individual stocks (or current market value for unrated
stock).
Samsung Life should be valued on SOTP
Value of affiliate stakes is one of the key share price drivers
In our view, Samsung Life share price is driven by three key factors: 1) EV growth, 2)
market rates, and 3) value of affiliate stakes. The first two factors should be the same for
all life insurers. However, given that affiliate stakes amounts to half of its book value, we
cannot treat it like any other equity investments, especially when one single stock
(Samsung Electronics) represents 68% of the total affiliate stakes.
Yes, Samsung Electronics' share price performance affects Samsung Life
Samsung Life outperformed Korea Life by 8.2% when Samsung Electronics
outperformed the KOSPI by 28% from 3 November 2010 to 28 January 2011. However,
when the outperformance of Samsung Electronics was halted, Samsung Life moved in
tandem with Korea Life. This means that we have to take a view on Samsung Electronics
when analyzing Samsung Life.
Fig. 107: Samsung Electronics outperformed the KOSPI
from 3 Nov 2010 through 28 Jan 2011
(%)
Samsung Electronics
KS KOSPI
140
Fig. 108: Samsung Life outperformed Korea Life from 3 Nov
2010 through 28 Jan 2011
Samsung Life
(%)
Korea Life
115
135
110
130
Fig.3
125
105
120
115
100
Outperformed by 28%
110
95
105
90
100
95
3-Nov-10
3-Jan-11
3-Mar-11
85
4-Nov-10
4-Dec-10
4-Jan-11
4-Feb-11
4-Mar-11
4-Apr-11
Source: Quantiwise, Nomura research
Fig. 109: Share price from 3 Nov 2010 through 28 Jan 2011
Fig. 110: Share price from 28 Jan 2011 through now
Samsung Life outperformed Korea Life by 8.2%
Samsung Life share price moved in tandem with Korea Life
(%)
Samsung Life
Korea Life
(%)
110
110
105
105
100
100
Outperformed
by 8.2%
95
90
2-Nov-10
Samsung Life
Korea Life
95
90
2-Dec-10
2-Jan-11
28-Jan-11
28-Feb-11
31-Mar-11
52
May 16, 2011
Insurance business: W100,000 per share
Valuation attractive, trading at 0.8x forward P/EV
We subtract out the value of affiliate stakes in order to obtain an appropriate EV multiple.
Based on our analysis, Samsung Life's insurance business is currently trading at 0.8x
forward P/EV. The implied multiple appears to be attractive given that we expect average
EV growth of 16% a year through FY14F.
Samsung to sustain EV growth of 15%-plus through FY14F
We value Samsung Life's insurance business on an embedded-value basis, applying a
P/EV multiple of 1.5x forward EV. We have assumed a sustainable RoEV of 15%, a COE
of 11% and a growth rate of 3%. Of note, we expect EV growth of 17.5% and 16.4% for
FY11F and FY12F, respectively.
EV adjusted to reflect lower market rates
We have assumed lower net investment earnings rate (NIER) for the purpose of our EV
forecast. Samsung Life uses NIER of 5.2% for its FY10 EV calculation. In comparison,
we assume 5.0% (20bps lower than Samsung Life's assumption). In addition, we used
risk discount rate of 11% (50bps higher than Samsung Life’s assumption of 10.5%).
Fig. 111: Embedded value projection and PT computation
Samsung should be able to sustain EV growth of 15%-plus through FY14F
(Wbn)
FY09
FY10
FY11F
13,685
16,284
17,136
5,084
8,242
8,242
8,601
8,042
8,894
2,954
4,141
5,058
11,555
12,183
13,952
Embedded value (EV)
Growth of EV (RoEV)
8.9%
17.5%
Current mkt cap
19,620
19,620
19,620
Mkt Cap - A
14,536
11,378
11,378
1.26
0.93
0.82
P/EV
VNB
1,070
972
1,015
2.79
(0.83)
(2.54)
NBM
Target multiple
Implied NBM
FY12F
18,085
8,242
9,843
6,042
15,885
16.4%
19,620
11,378
0.72
1,084
(4.16)
FY13F
19,154
8,242
10,912
7,042
17,954
15.5%
19,620
11,378
0.63
1,138
(5.78)
FY14F
20,529
8,242
12,287
7,997
20,284
15.2%
19,620
11,378
0.56
1,188
(7.50)
1.5
20,000
100,000
6.0
We could justify W109,000 per share using appraisal value method
The implied NBM is 6.0x at our PT. However, if we were to use the appraisal value
methodology, we could justify up to a 7.7x NBM. Of note, we have only reflected a 10year projection in our NBM calculation. Typically, a 30-year DCF model is used in the
region to drive NBM. However, due to the infancy of the EV valuation methodology in
Korea, we do not want to pay for more than 10 years.
More appropriate to use P/EV methodology
There is upside potential to our PT using the appraisal value methodology. However, we
think it is more appropriate to use P/EV methodology for Samsung Life given some
negative variance we encountered in EV, which may not be captured in the NBM
technique. In addition, the technique ignores near-term changes in the EV growth profile.
Fig. 112: VNB projection and target NBM using appraisal valuation method
Our PT would be W109,000 using appraisal valuation method
(Wbn)
FY11F
FY12F
3,773
4,075
New business margin
26.9%
26.6%
1,015
1,084
1.0
1.1
Discount factor
PV of VNB
1,015
976
Sum of PV
7,799
Implied multiple
7.7
FY13F
4,319
26.4%
1,138
1.2
924
FY14F
4,535
26.2%
1,188
1.4
869
FY15F
4,716
26.1%
1,230
1.5
810
FY16F
4,905
25.9%
1,272
1.7
755
FY17F
5,052
25.8%
1,304
1.9
697
FY18F
5,153
25.7%
1,323
2.1
637
FY19F
5,256
25.6%
1,343
2.3
583
FY20F
5,362
25.4%
1,363
2.6
533
53
May 16, 2011
Appraisal valuation method may work in good times
Samsung F&M's NBM expanded to 18.2x at the peak of the market in 2007. NBM of
18.2x could be explained only if we were to use the appraisal value methodology with a
30-year DCF model. We would derive NBM of 18.5x if we assume a sustainable VNB
growth of 7% and a risk discount rate of 11% for next 30 years. That said, we think that
our implied NBM of 6.0x at our PT based on P/EV valuation methodology is not
overstretched.
Five year average P/EV was 1.6x
Five year average NBM was 8.3x
(W)
280,000
190,000
1.0x
190,000
Apr-06
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
100,000
Apr-08
100,000
Oct-07
130,000
Apr-07
130,000
Oct-06
160,000
Apr-06
160,000
Apr-11
220,000
Oct-10
1.2x
Apr-10
2.0x
220,000
Oct-09
5.0
Apr-09
250,000
Oct-08
1.4x
250,000
18.0x 15.0x 11.0x
8.0
Apr-08
1.7x
Oct-07
2.0x
Apr-07
2.5x
Oct-06
(W)
280,000
Samsung F&M’s ex-affiliate stakes multiples much higher
We subtracted out the value of Samsung Electronics from both EV and market cap for
Samsung F&M. Of note, Samsung F&M owns 1.2% in Samsung Electronics. Our
analysis shows that Samsung F&M traded at much higher multiples excluding its
Samsung Electronics stake. Currently, Samsung F&M is trading at an ex-affiliate stake
trailing NBM of 5x. Again, we think our implied NBM of 6.0x is not overstretched.
Fig. 115: Samsung F&M ex-affiliate stake P/EV trend
Fig. 116: Samsung F&M ex-affiliate stake NBM trend
(W)
3.2x
280,000
2.6x
2.2x
250,000
1.9x
1.6x
19.0x 15.0x 12.0x 9.0x
280,000
6.0x
250,000
220,000
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
Apr-08
Oct-07
Apr-06
Apr-11
Oct-10
Apr-10
Oct-09
Apr-09
Oct-08
100,000
Apr-08
100,000
Oct-07
130,000
Apr-07
130,000
Oct-06
160,000
Apr-06
160,000
2.0x
190,000
Apr-07
1.3x
190,000
Oct-06
220,000
(W)
54
May 16, 2011
Holding company: W50,000 per share
Samsung Life's affiliate stakes amount to W14.6tr
As shown below, Samsung Life's affiliate stakes amount to W14.6tr as of 31 March.
Among its holdings, Samsung Electronics makes up 68% of the total value of the affiliate
stakes. The company books valuation gains from affiliate stakes as other comprehensive
income net of tax and policyholder proportion (currently at 32.1%). We have applied our
PT (or current price for unrated stocks) to derive our target NAV.
Fig. 117: Affiliate stake value projection
We see 32% upside for the value of affiliate holdings
Accounting
Samsung Electronics
# of Shares
% holding
Cost
10,622,814
7.21%
Samsung Card
Equity
32,468,868
Samsung F&M
Cost
4,905,718
Samsung Securities
Cost
Samsung C&T
Samsung Heavy
Mar11
Price
Mar11
(Wbn)
PT or
Current
price
1,350,000
Mar12F
(Wbn)
932,000
9,900
14,341
26.41%
55,500
1,802
67,000
2,175
10.36%
242,500
1,190
223,000 *
1,094
7,603,659
11.38%
80,600
613
83,800 *
637
Cost
7,476,102
4.79%
71,800
537
85,000
635
Cost
7,800,000
3.38%
39,900
311
45,300 *
353
S1
Cost
2,030,476
5.34%
56,300
114
50,900 *
103
Hotel Shilla
Cost
2,865,158
7.30%
25,550
73
27,100 *
78
Samsung Techwin
Cost
289,800
0.55%
79,800
23
95,000
28
Samsung SDI
Cost
10,155
0.02%
168,000
2
160,000
2
Cheil Industries
Cost
6,871
0.01%
116,500
1
160,000
1
1,025,000
41.00%
41
41
Samsung Futures
Equity
Samsung Asset Management
Cost
1,024,000
5.49%
21
21
Samsung Economic Research Institute
Cost
1,776,000
14.80%
10
10
Samsung Corning Precision Glass
Cost
2,176
0.01%
2
2
Total Value
14,639
19,521
Net of holding company discount (27%)
10,687
14,250
Shareholders' proportion (69.3%)
7,406
9,875
Per share (Won)
38,000
50,000
Note: * reflects current price as of May 11, 2011
Unrealized gains from affiliate holdings are split between shareholders and
policyholders. The policyholders' proportion is the proportion of reserve relating
participating policies to total reserve. Currently, policyholders and shareholders
proportions are 32% and 68%, respectively. We should note that the shareholders’
proportion should increase by 1.0ppt to 1.4ppt a year going forward, as reserve relating
to participating policies as a proportion of total reserve declines.
55
May 16, 2011
Fig. 118: Shareholders' proportion of unrealized gains on AFS
Shareholders' proportion should increase by 1~1.4ppt every year
60.9%
39.1%
Mar07
36.4%
Mar08
34.5%
Mar09
Policyholders' proportion
33.3%
69.3%
67.9%
66.7%
65.5%
63.6%
32.1%
Mar10
30.7%
Mar11
Mar12F
We apply 27% holding company discount
Theoretically, we think the holding company discount should be the corporate tax rate
(22%). However, in reality the holding company discount varies based on the
performance of its holdings and market liquidity. The holding company discount narrows
when its holdings outperform the market and vice versa. In addition, abundant market
liquidity lowers the discount as well. Given that we are bullish on Samsung Group, the
holding company discount could be lower than the tax rate. However, for the purpose of
our valuation, we have used 27%, which is the five-year average discount to NAV for LG
Corp. We selected LG Corp as a benchmark as we believe it is one of the purest holding
companies in Korea, with most of its holdings being listed.
Fig. 119: LG Corp discount to NAV
Average discount rate to NAV for the past five years is 27%
50%
40%
30%
20%
10%
0%
-10%
-20%
5/2/2006
5/2/2007
NAV Discount
5/2/2008
Average
5/2/2009
St Dev +1
5/2/2010
5/2/2011
St Dev -1
We are bullish on Samsung Electronics
Our technology sector analyst CW Chung is bullish on Samsung Electronics with a PT of
W1,350,000, implying 52% upside potential. CW believes that earnings will bottom out in
1Q11 and recover thereafter. All four major divisions (Memory, Panels, Handsets and
Digital Media) should see earnings improvement going into 2H11 after bottoming out
either in 1Q11 or 2Q11. CW derives his PT applying a target P/BV multiple of 2.0x (ROE
of 17-18% from 2H11F-FY12F).
56
May 16, 2011
Fig. 120: Samsung Electronics EPS vs. share price
Share price (LHS)
('000 W)
EPS (RHS)
('000 W)
160
1,400
140
<The lost four years>
1,200
120
1,000
100
800
80
600
60
40
400
20
200
0
0
(20)
00
01
02
03
04
05
06
07
08
09
10
11F 12F
We are also bullish on Samsung Card
Our financial sector analyst Gil Hyung Kim is bullish on Samsung Card (the secondlargest affiliate holding after Samsung Electronics). Gil Hyung expects a one-off adjusted
EPS CAGR of 20% over the next two years for Samsung Card. He expects system card
purchase volume to advance in the double digits on the back of 1) migration of
consumers to online from offline, 2) inflationary pressure, and 3) extended tax benefits.
In addition, funding cost should decline as the company refinance W1.2tn legacy highyield (=6% annually) debentures issued during the global financial crisis.
Fig. 121: Online sales growth outpacing offline
Fig. 122: Funding cost to fall
Online purchase requires use of credit card
Average funding cost should normalize at around 5%
Total
Cyber shopping mall
Home shopping
(%)
60
50
Amount of debentures maturing (LHS)
Avg Int rate (RHS)
Current yield on 5 yr card bond (RHS)
(Wbn)
1,800
1,600
1,400
40
(%)
8.0
7.0
1,200
30
1,000
20
6.0
800
600
0
400
(10)
200
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
10
5.0
0
4.0
2011
2112
2013
2014
2015+
Source: DART, KOIFA, Nomura research
EV sensitive to investment yield and claims ratio assumptions
The following chart shows the sensitivity in the EV to changes in some of Samsung Life's
key assumptions. A key variable is the investment return assumption. For Samsung Life,
this is currently 5.2%, which we believe is aggressive given current market rates.
However, our EV forecast already reflects lower market rates. In addition, we believe that
we are going through a trough in terms of the interest rate cycle.
57
May 16, 2011
Fig. 123: EV sensitivity (Wbn)
Fig. 124: EV sensitivity (%)
(Wbn)
2,000
20%
10%
1,000
5%
500
10%
Claims ± 10%
Maintenance ± 10%
-20%
Lapse ± 10%
-15%
RBC ± 50ppt
-10%
NIER ± 50bps
10%
Claims ± 10%
Lapse ± 10%
RBC ± 50ppt
Maintenance ± 10%
(2,000)
NIER ± 50bps
(1,500)
Discount rate ± 1%
(1,000)
-5%
Discount rate ± 1%
0%
(500)
14.4%
12.8%
15%
1,500
A 50bps increase in investment yield assumption to boost the EV by 12.8%...
The sensitivity analysis indicates a 50bps increase in investment yield assumption would
boost the EV by 12.8% (ex-affiliate stakes).
…but would only increase our PT by 4%
In effect, that would increase our PT by 4%. We should note that the affect on VNB from
changing investment yield assumption is limited, since most of new businesses are
floating rate policies. That said, higher EV due to an increase in investment yield
assumptions would eliminate the base effect and should result in a lower RoEV. Hence,
our target multiple would have to be lowered to 1.4x. However, we think RoEV should
pick up in the longer term as higher market rates flow through its fixed income portfolio.
Fig. 125: EV projection and PT assuming 50bps increase in NIER
Our PT would increase by 4% assuming 50bps increase in NIER
(Wbn)
FY09
FY10
13,685
16,284
5,084
8,242
8,601
8,042
3,914
5,041
12,515
13,083
Embedded value (EV)
Growth of EV (RoEV)
7.7%
Current mkt cap
19,620
19,620
Mkt Cap - A
14,536
11,378
1.16
0.87
P/EV
VNB
1,070
972
1.89
(1.75)
NBM
Target multiple
Implied NBM
FY11F
17,136
8,242
8,894
6,052
14,946
17.0%
19,620
11,378
0.76
1,015
(3.52)
FY12F
18,085
8,242
9,843
7,121
16,964
15.9%
19,620
11,378
0.67
1,084
(5.15)
FY13F
19,162
8,242
10,920
8,230
19,149
15.2%
19,620
11,378
0.59
1,138
(6.83)
FY14F
20,628
8,242
12,386
9,224
21,610
14.9%
19,620
11,378
0.53
1,188
(8.61)
1.4
20,900
104,000
5.9
VNB sensitive to discount rate and lapse ratio
VNB is not sensitive to interest rates given that most of new businesses are floating rate
policies. VNB is rather sensitive to the lapse ratio since most cancellations occur in the
first 25 months, and by definition new business include policies acquired in the past year.
58
May 16, 2011
Fig. 126: VNB sensitivity (Won)
Fig. 127: VNB sensitivity (%)
(Wbn)
15%
150
10%
10.5%
9.3%
100
5%
50
-150
Claims ± 10%
Maintenance ± 10%
-15%
Lapse ± 10%
-10%
RBC ± 50ppt
-5%
NIER ± 50bps
Maintenance ±
10%
Claims ± 10%
Lapse ± 10%
RBC ± 50ppt
NIER ± 50bps
-100
Discount rate ±
1%
-50
Discount rate ± 1%
0%
0
59
May 16, 2011
Fig. 128: Samsung Life financial summary
Profit and Loss Statements
Won billions, Year ending Mar 31
Total Premium
General Account
Separate Account
FY07
20,851
15,365
5,485
FY08
19,816
14,664
5,152
FY09
21,094
14,494
6,600
FY10
22,027
14,862
7,165
FY11E
22,636
14,898
7,738
FY12E
23,335
15,017
8,319
FY13E
24,068
15,167
8,901
FY14E
24,844
15,364
9,480
FY15E
25,674
15,625
10,048
Premium Income
Risk Premium
Loading Premium
Savings Premium
15,378
2,625
3,829
8,912
14,676
2,681
3,473
8,510
14,515
2,782
3,539
8,174
14,883
2,887
3,572
8,403
14,912
2,957
3,579
8,376
15,032
3,046
3,608
8,378
15,182
3,142
3,644
8,396
15,379
3,250
3,691
8,438
15,641
3,373
3,754
8,514
Benefits Paid
U/W Expenses
Net of Acquisition Costs & DAC Deferral
Acquisition Cost
DAC Deferral
Amortization of DAC
Net Increase in DAC
Maintenance Costs
2,105
3,159
37
1,926
(1,889)
2,112
(224)
1,233
2,270
2,888
35
1,739
(1,703)
2,159
(455)
1,150
2,374
3,230
40
1,931
(1,891)
1,903
(13)
1,299
2,530
3,250
(0)
1,604
(1,605)
1,657
(5)
1,599
2,543
3,257
0
2,031
(2,031)
1,768
263
1,226
2,614
3,261
0
2,047
(2,047)
1,851
196
1,214
2,690
3,272
0
2,068
(2,068)
1,916
152
1,204
2,775
3,292
0
2,095
(2,095)
1,969
126
1,198
2,874
3,326
0
2,130
(2,130)
2,017
113
1,196
Maturity & Surrender Refund
Changes in Premium Reserve
Net Investment Income
11,004
3,427
4,941
10,138
3,955
4,362
10,136
3,574
5,501
7,845
6,548
6,584
8,711
5,696
6,227
8,713
5,697
6,286
8,732
5,709
6,484
8,818
5,738
6,829
8,897
5,789
7,229
779
254
1,033
646
697
(52)
824
439
1,263
671
734
(63)
873
711
1,584
692
771
(79)
927
1,056
1,983
707
806
(99)
1,679
369
1,309
1,935
426
1,509
2,276
501
1,775
2,690
592
2,098
Risk & Loading Margins
Savings Margin
Operating Profit
Non-operating Profit
Commission Income (Separate Account)
Others
Pre-tax Profits
Effective Tax
Net Profits
Selective Balance Sheet Data
Total Assets
Invested Assets
Cash & Deposits
Securities
Stocks
Other equity investment
Fixed Income Instrument
Net Loans
Real Estate
Non-invested Assets
DAC
Others
Separate Account Assets
1,190
(578)
612
351
440
(89)
963
248
715
FY07
116,379
93,497
3,005
63,259
11,027
41
52,190
22,517
4,716
7,421
4,375
3,046
15,461
Total Liabilities
107,015
Policy Reserve
83,149
Premium Reserve
76,378
Reserve for Outstanding Claims
5,209
Reserve for Unearned Premium
32
Reserve for Policyholders' Dividend
1,459
Excess Reserve for Policyholders' Dividend
77
Reinsurance Premium Reserve
6
Adjustment of Policyholder
3,688
Other Liabilities
4,492
Separate Account Liabilities
15,461
Total Shareholders' Equity
Paid in Capital
Capital Surplus
Retained Earnings
Capital Adjustment
9,364
100
94
5,139
4,031
996
(1,222)
(226)
445
539
(93)
219
106
113
716
(35)
681
488
527
(39)
1,169
263
906
678
595
1,273
1,237
602
635
2,510
576
1,934
736
196
932
614
661
(47)
1,546
374
1,172
FY08
121,667
99,043
5,388
64,445
9,594
78
54,772
24,523
4,687
6,094
3,920
2,174
16,531
FY09
133,045
107,229
3,545
74,087
12,931
67
61,089
24,530
5,067
6,280
3,907
2,373
19,536
FY10
146,340
118,944
4,909
84,434
15,678
74
68,682
24,360
5,242
6,312
3,903
2,409
21,083
FY11E
154,075
124,738
5,176
88,702
16,091
68
72,544
25,447
5,413
6,580
4,166
2,414
22,757
FY12E
162,271
130,939
5,448
93,291
16,524
61
76,707
26,607
5,593
6,795
4,362
2,434
24,537
FY13E
170,741
137,367
5,720
98,069
16,950
53
81,066
27,803
5,774
6,971
4,514
2,458
26,403
FY14E
179,550
144,089
5,992
103,089
17,377
44
85,669
29,048
5,959
7,129
4,639
2,490
28,332
FY15E
188,809
151,219
6,267
108,436
17,814
34
90,588
30,365
6,151
7,284
4,752
2,532
30,305
114,237
87,286
81,465
4,381
24
1,374
50
7
3,589
6,716
16,531
120,912
92,025
88,119
2,187
22
1,335
39
7
4,740
4,510
19,536
130,950
98,086
94,322
2,288
15
1,300
154
7
6,466
5,315
21,083
137,873
103,430
99,683
2,300
0
1,300
154
7
6,466
5,219
22,757
145,120
108,856
105,045
2,363
0
1,300
154
7
6,466
5,261
24,537
152,481
114,298
110,418
2,433
0
1,300
154
7
6,466
5,314
26,403
159,915
119,734
115,777
2,510
0
1,300
154
7
6,466
5,383
28,332
167,475
125,229
121,183
2,599
0
1,300
154
8
6,466
5,474
30,305
7,431
100
94
5,212
2,025
12,133
100
6
6,078
5,949
15,390
101
6
7,197
8,085
16,202
101
6
8,009
8,085
17,151
101
6
8,959
8,085
18,260
101
6
10,067
8,085
19,635
101
6
11,442
8,085
21,333
101
6
13,141
8,085
60
May 16, 2011
Fig. 129: Samsung Life per share data and performance ratios
Per share data
Earnings Per Share (Won)
Book Value Per Share (Won)
ROA (%)
ROE (%)
EPS Growth (%)
Gross Dividend
DPS (Won)
Dividend Payout Ratio (%)
Issued Shares (million) - Common
Performance ratios
Growth (%)
Total Premium
General Account
Separate Account
Risk Margin
Loading Margin
Savings Margin
Commission Income
Net Profits
Total Assets
Invested Assets
Net Loans
Policy Reserve
Shareholders' Equity
FY07
FY08
35,729
5,651
468,209 371,526
0.6
0.1
7.9
1.3
38.9
(84.2)
40
2,000
5.6
20
40
2,000
35.4
20
FY09
4,530
60,664
0.7
9.3
(19.8)
FY10
9,669
76,950
1.4
14.1
113.4
FY11E
5,859
81,009
0.8
7.4
(39.4)
FY12E
6,547
85,755
0.8
7.9
11.7
FY13E
7,545
91,300
0.9
8.5
15.2
FY14E
FY15E
8,875
10,492
98,175 106,666
1.0
1.1
9.4
10.2
17.6
18.2
225
1,125
24.8
200
400
2,000
6.0
200
360
1,800
6.0
200
360
1,800
6.0
200
400
2,000
5.5
200
400
2,000
5.5
200
400
2,000
5.0
200
FY07
FY08
FY09
FY10
FY11E
FY12E
FY13E
FY14E
FY15E
2.5
(0.5)
12.1
57.5
(32.3)
NM
39.1
38.9
6.9
7.9
18.1
4.5
7.0
(5.0)
(4.6)
(6.1)
(21.0)
(12.7)
NM
22.4
(84.2)
4.5
5.9
8.9
5.0
(20.6)
6.4
(1.2)
28.1
(0.8)
(47.3)
NM
(2.1)
701.7
9.4
8.3
0.0
5.4
63.3
4.4
2.5
8.6
(12.4)
4.3
NM
14.1
113.4
10.0
10.9
(0.7)
6.6
26.8
2.8
0.2
8.0
16.0
0.2
(0.7)
9.8
(39.4)
5.3
4.9
4.5
5.4
5.3
3.1
0.8
7.5
4.5
7.5
0.3
5.6
11.7
5.3
5.0
4.6
5.2
5.9
3.1
1.0
7.0
4.6
7.3
0.7
5.3
15.2
5.2
4.9
4.5
5.0
6.5
3.2
1.3
6.5
4.9
7.3
0.6
5.0
17.6
5.2
4.9
4.5
4.8
7.5
3.3
1.7
6.0
5.2
7.3
0.5
4.6
18.2
5.2
4.9
4.5
4.6
8.6
Premium Income Mix (%)
Risk Premium
Loading Premium
Savings Premium
17.1
24.9
57.9
18.3
23.7
58.0
19.2
24.4
56.3
19.4
24.0
56.5
19.8
24.0
56.2
20.3
24.0
55.7
20.7
24.0
55.3
21.1
24.0
54.9
21.6
24.0
54.4
Margin Analysis (%)
Risk Margin / Risk Premium
Loading Margin / Loading Premium
Savings Margin / Savings Premium
Net Investment Yield
Net Interest Margin
Effective Comm. Rate on Separate Account
19.8
17.5
(6.5)
5.6
6.1
3.0
15.3
16.8
(14.4)
4.6
6.2
3.4
14.7
8.7
(0.4)
5.5
6.0
2.9
12.4
9.0
7.1
6.0
6.3
3.0
14.0
9.0
2.3
5.2
5.7
2.9
14.2
9.6
3.0
5.0
5.4
2.8
14.4
10.2
5.2
5.0
5.3
2.8
14.6
10.8
8.4
5.0
5.3
2.7
14.8
11.4
12.4
5.0
5.3
2.7
Investment Mix (%)
Cash & deposits
Securities
Net loans
Real estate
3.2
67.7
24.1
5.0
5.4
65.1
24.8
4.7
3.3
69.1
22.9
4.7
4.1
71.0
20.5
4.4
4.1
71.1
20.4
4.3
4.2
71.2
20.3
4.3
4.2
71.4
20.2
4.2
4.2
71.5
20.2
4.1
4.1
71.7
20.1
4.1
Securities Mix (%)
Stock
Other equity investment
Gov't and public bonds
Special bonds
Corporate bonds
Beneficiary certificates
Overseas securities
Structured securities
Others
17.4
0.1
33.7
16.1
4.3
6.6
20.4
0.0
1.5
14.9
0.1
32.4
18.4
4.1
6.1
20.5
0.0
0.7
17.5
0.1
31.7
21.8
3.6
4.9
16.9
0.0
1.0
18.6
0.1
32.4
22.5
3.6
4.9
15.0
0.0
0.6
18.1
0.1
34.4
21.2
3.8
5.3
15.8
0.5
0.7
17.7
0.1
34.2
20.0
4.0
5.6
16.7
1.0
0.7
17.3
0.1
33.9
18.7
4.3
6.0
17.5
1.5
0.8
16.9
0.0
33.6
17.5
4.5
6.3
18.3
2.0
0.9
16.4
0.0
33.3
16.2
4.8
6.7
19.2
2.5
0.9
8.0
80.0
12.8
540.7
8.0
58.9
292.1
7.1
80.9
13.4
594.8
6.1
57.2
238.1
7.7
81.0
14.2
634.0
9.1
67.4
332.8
9.9
81.0
14.5
659.1
10.5
92.5
395.4
10.5
81.1
14.6
693.6
10.5
105.9
411.9
10.5
80.8
15.0
724.2
10.6
110.9
429.2
10.6
80.6
15.3
752.8
10.7
116.6
448.7
10.8
80.3
15.6
778.5
10.9
123.2
472.0
11.1
80.2
15.9
800.7
11.3
131.0
499.6
Balance Sheet Strucuture (%)
Avg Equity/Avg Assets
Avg Invested Assets / Avg Asets
Avg Separate Account Assets / Avg Asets
Policy Reserve / Premium Income
Period-End Equity/Assets
Avg Equity / Premium Income
Solvency Margin Ratio
61
May 16, 2011
Strong EV growth
We expect Samsung Life to post average EV (ex-affiliate stakes) growth of 17.5% and
16.4% for FY11F and FY12F, respectively, driven by strong growth in VIF and the
unwinding of the profitable in-force book. The contribution from new business should be
significant, as VNB makes up 24% of VIF.
VIF growth of 22% and 20% for FY11F and FY12F
We believe that Samsung Life's VIF is relatively low compared to its size and the volume
of its business due to "negative spread" policies. Policies written prior to FY01 carry
negative value, mainly due to the high guarantee crediting rates. Total negative value
(PV of pre-tax profits) contributed by these legacy policies amounts to W3.1tr as of
September 2009. With lower NIER assumption we could safely assume that VIF did not
have much value in it until very recently.
Fig. 130: PV of pre-tax profit by policy type (Sep 09)
Fig. 131: PV of pre-tax profit by contract year (Sep 09)
NIER assumption of 5.6% was used for information presented here
NIER assumption of 5.6% was used for information presented here
CY09
CY08
Par
negative
CY07
Par
non-negative
CY06
Non-par
CY05
0
CY04
2,000
CY03
4,000
CY02
PV of pre-tax profits
= W6,826bn
9,762
CY01
6,000
CY00
3,115
8,000
CY99
10,000
PV of pre-tax profit by contracty year
(Wbn)
2,000
1,500
1,000
500
0
(500)
(1,000)
(1,500)
(2,000)
(2,500)
(3,000)
CY98
179
~CY97
12,000
Significant contribution from VNB
We expect strong VIF growth given that VNB made up 24% of VIF as of 31 March 2011,
based on our adjusted numbers. Of note, we have adjusted VIF by lowering NIER to 5%
from 5.2% in order to reflect lower market rates. In addition, we used discount rate of
11% compared to 10.5% for Samsung Life. We estimate VIF growth of 22% and 20% for
In our view, growth driven by new business is healthier and deserves higher valuation.
We expect 52% and 51% of RoEV to be generated by addition of new business for
62
May 16, 2011
Fig. 132: VIF growth profile
Fig. 133: RoEV contribution breakdown
We expect 22% and 20% VIF growth for FY11 and FY12
We think EV growth driven by new business is healthier
(Wbn)
8,000
VIF-VNB
1,188
1,138
6,000
4,000
2,000
VNB
1,084
1,015
4,043
4,958
5,904
6,809
0
Mar12
Mar13
Mar14
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
Mar15
Source: Nomura Research
RoEV from VIF & ANW
RoEV from VBN
9.1%
8.4%
7.5%
6.2%
8.4%
8.1%
8.0%
9.0%
Mar12
Mar13
Mar14
Mar15
Source: Nomura Research
VNB growth of 4.4% and 6.8% for FY11F and FY12F
Samsung has better policy mix than its peers
Samsung has higher new business margin than its peers due to better policy mix (8.9ppt
higher than Korea Life and 12.2ppt higher than Tong Yang Life). The company sells
more protection-type policies that its peers.
Fig. 134: Policy mix Samsung vs. Industry
(%)
100
Protection
3%
Annuities
8%
(%)
50
4%
34%
80
60
Fig. 135: EV margin by product type
Savings
62%
61%
59%
29
41%
40
13
20
35%
31%
37%
FY07
FY08
FY09
8
25%
0
Industry
Total
Protection
Annuities
Savings
But VNB fell by 9.5% in FY10
VNB fell by 9.5% in FY10. Annualized premium equivalent (APE) fell by 3.6% due to
exclusive solicitor channel restructuring. The company noted that number of exclusive
solicitors dropped due to layoffs of ineffective solicitors. In addition, new business margin
fell sharply to 27.6% from 29.2% in FY09 due to a shift in policy mix to lower-margin
investment-linked insurance products and savings-type policies. Of note, our numbers
are based on risk discount rate (RDR) of 11% compared to 10.5% for Samsung Life’s
assumed RDR.
63
May 16, 2011
Fig. 136: APE trend (Wbn)
Fig. 137: New business margin trend
3,659
29.5%
3,526
29.2%
29.0%
-3.6%
28.5%
28.0%
27.6%
27.5%
27.0%
26.5%
FY09
FY10
FY09
FY10
APE recovering already
Samsung Life has shown strong recovery in APE in 4QFY11 as the restructuring of
exclusive solicitor channel ends. In addition, the new CEO’s strategic change to increase
volume through bancassurance made a positive impact on APE.
Fig. 138: Quarterly APE trend (Wbn)
345
286
267
260
1Q08
2Q08
301
279
342
328
284
278
271
1Q10
2Q10
3Q10
245
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
4Q10
VNB to rebound in FY11F
We expect a sharp recovery of VNB in FY11F growing by 4.4%. Although we expect new
business margin to fall due to increase in investment-linked insurance and savings-type
policies, the volume growth should be more than enough to offset margin compression,
in our view, as the company aggressively ramps up its traditional solicitor channel and
ventures out into non-traditional channels.
Fig. 139: Samsung Life’s number of solicitor YoY change
Fig. 140: Number of solicitors by company
10,000
5,000
0
(5,000)
(10,000)
(15,000)
(20,000)
1Q00
3Q00
1Q01
3Q01
1Q02
3Q02
1Q03
3Q03
1Q04
3Q04
1Q05
3Q05
1Q06
3Q06
1Q07
3Q07
1Q08
3Q08
1Q09
3Q09
1Q10
3Q10
(25,000)
Samsung Korea Kyobo
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
15,000
64
May 16, 2011
Solid growth to continue in FY12
We estimate 6.8% growth in VNB in FY12F as the positive momentum from solicitor
channel restructuring and expansion into non-traditional channels continue. However, we
may see a further decline in new business margin due to unfavourable policy mix change
and increases in new premiums from lower-margin non-traditional channels.
Fig. 141: APE and NB margin forecast
5,500
APE sales (Won bn)
28%
NB profit margin
5,000
4,500
27%
4,000
3,500
26%
3,000
2,500
FY20F
FY19F
FY18F
FY17F
FY16F
FY15F
FY14F
FY13F
FY12F
FY11F
25%
FY10
2,000
Higher persistency ratio positive for VNB
During the financial crisis, Samsung's persistency ratio fell sharply (but was no worse
than its peers). We note that the 25th month persistency ratio is rebounding slower than
expected due to solicitor channel restructuring. However, given that the 13th month
persistency ratio has recovered already and solicitor channel restructuring has been
completed we think that 25th month persistency ratio should improve going forward.
Fig. 142: 13th month persistency ratio
Korea
Kyobo
Tong Yang
(%)
90
Fig. 143: 25th month persistency ratio
Samsung
Mirae asset
(%)
Korea
Mirae asset
80
Samsung
Tong Yang
Kyobo
75
85
70
80
65
75
60
55
70
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
1H04
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
40
2H04
60
1H04
45
2H04
50
65
Long-term growth opportunity from corporate pension
Although, it may not contribute to the bottom line in a meaningful way in the near term, a
rapidly growing corporate pension market should be positive for Samsung Life, which
has the largest captive market. If Samsung Life maintains its current market share of
15.2% and earns the 60bps on pension assets as it expects, then the company should
generate W142bn in operating profit by FY20, when the corporate pension market will
reach W156tr in assets, according to Korea Capital Market Institute.
65
May 16, 2011
Fig. 144: Corporate pension market share as of Jan 2011
Samsung Life believes it could increase Its market share to 20%
Samsung Life
Kookmin Bank
Shinhan Bank
Woori Bank
IBK
Kyobo Life
Hana Bank
HMC Securities
Nonghyup
Samsung F&M
Mirae Securities
KDB
Korea Life
KEB
LIG F&M
Hi Securities
Samsung Securities
KIS
Mirae Life
Tong Yang Securities
(%) 0
2
4
6
8
10
12
14
16
Industry shakeout not a question of “if?”, but “when?”
Samsung Life believes that it could eventually take 20% of the corporate pension market
given its large captive market and eventual industry consolidation. We believe that most
market participants are losing money on the corporate pension business due to intense
competition. Samsung management has admitted that even with the captive market, it is
barely breaking even. We think industry consolidation is not a question of “if?”, but
“when?” We think 50bps should be a reasonable level of profitability in the medium term.
However, Samsung's target spread of 60bps may not be farfetched post-shakeout.
Fig. 145: Corporate pension market projection
(Wtn)
180
160
140
120
100
80
60
40
20
0
DB
DC
Fig. 146: Lifers showing strength in defined benefits
(Wtn)
IRA
DB
16
DC
IRA
14
12
10
8
6
4
FY20F
FY19F
FY18F
FY17F
FY16F
FY15F
FY14F
FY13F
FY12F
FY11F
FY10
FY09
2
0
Banks
Life Insurer
Brokerage Non-life insurer
66
May 16, 2011
ANW growth of 13% for FY11 and FY12
Significant variances unlikely
The company posted net profit of W901bn in FY09, an increase of 702% YoY from a low
base of W113bn in FY08 amid the global financial crisis. The recovery was fuelled by a
pickup in investment yield to 5.3% from 4.5% in FY90. Net profit increased sharply again
in FY10 by 118% thanks to one-off gains such as a write-back of Seoul Guarantee ABS
loan-loss provisions. We expect a fall in net profits in FY11 to a normal level and steady
improvement thereafter.
Fig. 147: Samsung Life NP trend
Fig. 148: Samsung Life ROE trend
(Wbn)
2,500
(%)
16
14
2,000
12
10
1,500
8
1,000
6
4
500
2
FY15E
FY14E
FY13E
FY12E
FY11E
FY10
FY09
FY08
FY15E
FY14E
FY13E
FY12E
FY11E
FY10
FY09
FY08
FY07
FY07
0
0
Risk margin to improve
Risk margin has been trending down since FY02 and has started to stabilize. Samsung
Life enjoyed a hefty risk margin in the early part of the 2000s thanks to rapidly rising
death insurance premiums. Given that death insurance policies have lower claims at the
early stage, rapid growth resulted in margin expansion. However, with a slowdown in
recent years, the trend has reversed. In addition, the implementation of IBNR in 2004
made the falling trend worse. We think that further downside is limited going forward.
There will likely be no additional increases in IBNR reserve requirements. Moreover, life
insurers have secured flexibility in terms of pricing with the fifth mortality table in April
2006. The industry risk margin already saw some improvement in FY09. We think
Samsung's risk margin will probably follow the industry trend going forward.
Risk margin improvement may not be visible
We should note that risk premium from variable insurance is captured in fees from
separate accounts. Given the recent surge in fees from separate accounts we think that
risk margin is already improving. However, due to accounting issue we may not see the
exact amount or percentage of improvement.
67
May 16, 2011
Fig. 149: Risk margin in KRW amount
Fig. 150: Risk margin in %
1,400
(%)
40
1,200
35
(Wbn)
30
1,000
25
800
20
600
15
400
10
200
5
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar02
Mar02
0
0
Loading margin has been under technical pressure
Loading margin has been falling sharply since FY03. We think that loading margin has
been falling due to a change in accounting for acquisition costs in 2004. Prior to the
accounting change, insurers capitalized estimated acquisition costs into a deferred
acquisition cost (DAC) account, then amortized them over seven years. Therefore, the
entire loading margin was recognized upfront. However, after the change, insurers now
defer the actual amount, recognizing the loading margin evenly for seven years. Given
that we are six years into the new accounting method, we think that additional pressure
from the accounting change will be limited.
More recent decline in loading margin triggered by payment change competition
We think that the last year's fall in loading margin was triggered by the increase in
industry competition. Insurers increased the upfront proportion of sales commission in
order to fight off independent agents who were trying to lure solicitors away from
insurers. However, we should note that total commission paid out remained the same.
We think that the falling trend of loading margin due to the timing issue will eventually
normalize and loading margin should improve to the mid-teen level.
Fig. 151: Loading margin in KRW amount
Fig. 152: Loading margin in %
(Wbn)
(%)
700
40
600
35
30
500
25
400
20
300
15
200
10
100
5
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar02
Mar02
0
0
Savings spread to stabilize
Despite continued dilution from low-yield floating rate policies saving spread has not
seen a significant improvement. We do not expect a drastic improvement in the savings
spread given that new money yield has been lower than yield on existing portfolios for
over two years now. That said, we may not see an improvement in investment yield for
three more years given that it would take more than four years to overturn its bond
68
May 16, 2011
portfolio, and we expect slow recovery in the long bond yield. However, we believe that
we are going through a trough in terms of rate cycle and continuous dilution from new
low-yield floating rate policies should be enough to stop the worsening trend.
Fig. 153: Proportion of +6% fixed rate reserves
Fig. 154: Savings spread
(%)
Spread
58
1%
56
6.35%
0%
0%
54
Avg. crediting rate
6.30%
6%
6.04%
6.24%
6.08%
0%
52
Yield earned
6%
5.94%
6%
6.00%
6%
5.77%
0%
6%
0%
50
5%
0%
48
-0.04%
46
FY08
FY09
3Q10
FY07
5%
-0.17%
-0.22%
0%
FY07
5%
-0.11%
0%
5%
FY08
FY09
1H10
Improvement will take time
Although, we believe that we are going through a trough in terms of interest rate cycle,
improvement of savings spread could be slower than expected due to the recently
implemented RBC. In order to comply with the more strict capital adequacy requirement,
insurers have been adding long-dated bonds to their portfolio to reduce the duration gap.
However, the timing was not in favour of insurers, given that the transition to new
regulation happened at the bottom of the rate cycle.
Fig. 155: Bond portfolio breakdown by maturity
Fig. 156: Duration gap trend
Buying long-dated bonds at the bottom of rate cycle
RBC duration gap is lower at 2.4 years
(%)
100
Asset duration
Less than 1yr
1~5 yr
5 ~ 10 yr
More than 10 years
90
80
70
60
50
40
30
20
10
0
10.1
Gap:
5.3
4.8
FY05
FY06
FY07
FY08
FY09
3Q10
FY06
9.7
Gap:
4.9
Liability duration
9.2
Gap:
4.9
9.1
Gap:
4.7
8.9
Gap:
4.5
4.7
4.4
4.4
4.4
FY07
FY08
FY09
3Q10
Fees on separate account
Separate account assets have grown at a 20% CAGR for the past nine years thanks to
the explosive growth of investment-linked insurance. Currently, Samsung Life earns 3%
fees on separate account assets, falling from 3.4% in FY08. However, the company
noted that actual management fees should be 50-75bps. The difference actually comes
from pass-through items such as risk premium, maturity and surrender refunds. We have
already noted that the falling trend of risk margin has been stabilized. This means that a
fluctuation coming from the pass through of risk premium is now stabilized. For the
purpose of our earnings projection, we assume that fees from separate account as a
percentage of separate account asset continue downward trend by 6bps, stabilizing at
around 2.6% in FY16.
69
May 16, 2011
Fig. 157: Fees on separate accounts trend
(Wbn)
35,000
30,000
Fees %
4%
3%
25,000
20,000
2%
15,000
10,000
1%
5,000
FY17F
FY16F
FY15F
FY14F
FY13F
FY12F
FY11F
FY10F
FY09
FY08
FY07
FY06
FY05
FY04
FY03
FY02
FY01
0%
FY00
-
70
May 16, 2011
Bullish on Samsung Group
Samsung Life's affiliate stakes represent 54% of its book value. Samsung Electronics
and Samsung Card make up 80% of affiliate holdings. It appears that taking a view on
Samsung Electronics and Samsung Card is an essential part of investing in Samsung
Life. Note that we are bullish on both Samsung Electronics and Samsung Card.
Why we are bullish on Samsung Electronics
All cylinders firing
Our technology analyst CW Chung expects to see gradual share price appreciation as
both earnings improvement from cyclical recovery and new growth engines come into
play: 1) The DRAM market, one of the most important catalysts of Samsung’s share
performance, is likely to bottom out in 1Q11. 2) We expect continued healthy growth in
Telecom and NAND, both of which are direct beneficiaries of Smartphone and tablet PC
growth. 3) OLED, Sys-LSI, and Home Appliances, in all of which Samsung has invested
heavily, are to begin to contribute meaningfully to both top line and bottom line.
Samsung deserves PBR of 2.0x
Considering the constant high-teen ROE that Samsung can generate, CW believes the
shares deserve a PBR of 2.0x. CW has a BUY rating on Samsung Electronics and a PT
of W1,350,000 (implying 51% upside potential). He has applied a 2.0x of PBR with 12M
Fwd BVPS of W672,000.
Fig. 158: EPS vs. share price
Fig. 159: PBR trend
Share price (LHS)
('000 W)
('000 W)
EPS (RHS)
1,400
1,200
160
140
<The lost four years>
('000 W)
1,200
PBR 2.5x PBR 2.0x
PBR 1.5x
1,000
120
1,000
100
800
80
600
60
40
400
800
PBR 1.0x
600
400
20
200
0
(20)
12F
11F
10
09
08
07
06
05
04
03
02
01
00
0
200
0
00 01 02 03 04 05 06 07 08 09 10 11F
DRAM bottoming out in 1Q11
Off from the high base of 2010, in which the DRAM market enjoyed the historic boom,
we are likely to see a decline in earnings in 2011. However, thanks to 1) the market
share of as high as 40%+, 2) the technology migration running ahead of the competitors
(therefore 20~40ppt margin gap), and 3) the superior application mix (ie, larger exposure
to specialty DRAM) and, therefore, higher ASP than its peers, we believe Samsung’s
competitiveness in the DRAM market should continue to hold into 2011. We forecast
2011F bit growth of 58% y-y and ASP to fall by 41% y-y. 2011F DRAM operating profit is
forecast at W4.5tn, down 41% y-y.
NAND to continue healthy growth
Thanks to the rise in demand for smartphones, tablet PCs, and solid-state drives, we
forecast benign a market situation in NAND. Though we expect industrywide capex (and
accordingly, NAND wafer capacity) to increase quickly, this does not concern us much,
as bit supply growth in 2011 should stand at around 80%, at best, similar to the growth in
demand. Unlike in DRAM, Samsung’s competitiveness in NAND doesn’t seem as
advanced vs its peers. We forecast 2011F NAND operating profit at W2.7tn, up 26% y-y,
or OP margin of 28% (up 2ppt y-y).
71
May 16, 2011
Fig. 160: SEC- DRAM OP
Fig. 161: SEC- NAND OP
DRAM OP (LHS)
DRAM OP margin (RHS)
(Wbn)
2,400
(%)
(Wbn)
80 %
1,200
NAND OP (LHS)
NAND OP margin (RHS)
(%)
80 %
60 %
1,600
60 %
800
40 %
800
20 %
0 %
0
40 %
20 %
400
0 %
0
(20)
(20)
(40)
(800)
04
05
06
07
08
09
10F
11F
(40)
(400)
04
05
06
07
08
09
10F
11F
System-LSI to contribute meaningfully from 3Q11
Having spent W3tn in the System-LSI business in 2010, Samsung plans to invest
another W4.2tn in 2011. The System-LSI business is building new capacity in Austin
(US), which will come online in 2Q11 and is likely to contribute meaningfully to the top
line from 3Q11. The major driving factors for S-LSI should be the AP (Accelerated
Processors) for tablet PCs and Smartphone. Apple and Samsung itself are key
customers for now. Samsung took up 30~40% of market share in the AP space in 2010,
and we expect it to grow in line with the demand growth of Smartphone and tablet PCs.
We forecast the segment’s 2011F revenue and operating profit at W9.7tn (up 38% y-y)
and W800bn (up 136% y-y), respectively.
OLED making up for LCD
With TV shipments muddling through and the demand for IT panels falling short of the
market’s previous expectations, this segment’s operating profit is forecast to remain flat
y-y. However, Samsung’s differentiation against its peer group will continue to increase
as the results from the OLED operation contributes more into the whole segment.
Regarding the OLED, as two 5.5G lines are planned to commence volume production in
2011, the gap versus the following panel makers should further widen. With around
W924bn operating profit from the OLED business included, we forecast the whole
display segment operating profit should stand at W2tn, flat y-y.
Revenue contribution from smartphones fast increasing
With the revenue contribution from smartphone business fast increasing, Samsung is
likely to see continued earnings improvement in the telecom business. While
smartphones contributed only 14% of the segment’s 4Q10 handset shipments, the
higher-than-feature phone ASP resulted in the revenue contribution proportion of as high
as 38%. Operating profit margin of smartphones is estimated at around the high-teen
percentage in 4Q10, but may see some downward pressure as competition soars. Still,
though, we believe Samsung can manage to retain 10% OP margin from its smartphone
business. 2011F shipments of feature phones and smartphones are forecast to grow at
down 5% y-y and up 164% y-y, respectively. Thanks to the increased shipment
proportion of smartphones, segment operating profit is forecast at W4.7tn, up 10% y-y.
72
May 16, 2011
Fig. 162: OLED to drive panel revenue
(Wtn)
14
Feature phone
Fig. 163: Smart phone to drive telecom revenue
Smartphone
(Wtn)
16
LCD
OLED
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
09
10
11F
12F
10
11F
12F
13F
14F
Risks on our view include;
1) Faster-than-expected KRW appreciation. 2) Increasing competition in the smartphone
space. 3) Excessive industrywide capex in NAND, which we have seen in the past
cycles.
Why we are bullish on Samsung Card
Structural growth coupled with rising expected inflation
Our financial sector analyst Gil Hyung Kim is bullish on Samsung Card (the secondlargest affiliate holding after Samsung Electronics). Gil expects a one-off adjusted EPS
CAGR of 20% over the next two years for Samsung Card. He expects system card
purchase volume to advance in the double digits on the back of 1) migration of
consumers to online from offline, 2) inflationary pressure, and 3) extended tax benefits.
In addition, funding cost should decline as the company refinance W1.2tn legacy highyield (=6% annually) debentures issued during the global financial crisis.
Structural migration of cash to credit
We project Samsung Card’s card payment (lump-sum and installment purchase) volume
growth of 17% and 14% y-y in FY11F and FY12F, respectively. This is above our
nominal private consumption forecasts of 7.4% and 7.6% for those years. Fast-growing
sales at online stores are leading to more consumption on plastic money, as the card
settlement portion is over 80% (vs. an average of 63%).
Additionally, under inflation pressure, consumers are expected to purchase more on
credit cards than in cash in order to enjoy bonus points and cash-back services. Lastly,
tax benefits on credit card purchases encourage more credit card spending and
discourage tax evasion. Samsung Card has deeply penetrated into the Korean economy
and we believe it would fully benefit from above-GDP growth of the card industry.
73
May 16, 2011
Fig. 164: Sales growth by retail business type (y-y)
(%)
Total
60
Cyber shopping mall
50
Home shopping
Fig. 165: Credit card usage in retail stores
Credit card
22%
Others
31%
46%
40
61%
30
20
78%
10
69%
54%
0
39%
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
(10)
Home&Internet Large discount
shop
stores
Department
stores
Supermarkets
Source: KOSIS, BoK, Nomura research
Funding cost should decline
Given that asset yields are almost fixed for the credit card issuers, funding costs are key
drivers for net interest margin. Samsung Card, as a mono-line issuer, relies on wholesale
funding. In theory, BoK rate hikes, led by inflation pressure, should put upward pressure
on the company’s funding costs. However, we believe Samsung Card’s funding costs will
continue to shift downward over the next two years, upholding net interest margin.
Yield curve flattening
Despite the rate hikes of BoK, we expect the yield curve to flatten, as the long tail would
be less sensitive to short-term rates. More than 80% of the total funding has maturity of
three years and longer. Hence, the impact of a rising short-term rate would have
marginal impact on Samsung Card’s funding costs.
Funding mix change
Funding contribution from commercial paper, which is cheaper than long-term
debentures, have subsided since the financial woes in 2008. This should provide more
room for Samsung Card to lower overall funding costs, in our view.
Refinancing of high costs debentures
Deleveraging was hardly evidenced by Samsung Card during the global financial crisis,
when the company issued debentures at a high cost. Such legacy high-cost debentures
are maturing in 2011 and are likely to be refinanced at a lower cost, reducing funding
costs overall.
Fig. 166: Samsung Card funding mix (FY10)
Corporate
Bond
63%
Fig. 167: Samsung Card debentures outstanding by
maturity
Commercial
Paper
1%
Borrowing
10%
Amount of debentures maturing (LHS)
Avg Int rate (RHS)
(Wbn)
1,800
1,600
1,400
(%)
8.0
7.0
1,200
1,000
6.0
800
600
5.0
400
200
Securitization
%
26%
0
4.0
2011
2112
2013
2014
2015+
Source: DART, Company data, KOFIA, Nomura research
74
May 16, 2011
Risks to our view:
1) Given high penetration of Korean credit card industry– 4.4 cards per economically
active person, we think industry competition could put pressure on marketing expenses.
2) Further tightening of regulations on credit card operation if card issuers exert
aggressive competition for asst growth.
75
May 16, 2011
Addressing concerns
There have been concerns on PF loans and further tightening of RBC standard which
seems to be very generous in comparison to international standard. However, we think
the concerns are overdone. PF loans are guaranteed by either banks or one of the
largest constructors. Samsung Life is sufficiently capitalized by any standard.
All PF loans are not created equal
10 projects, W665bn
Samsung Life has lent W665bn to ten different projects. W350bn relating to three
projects has been guaranteed by a major bank. The rest amount is also guaranteed by
major constructors who are in good financial condition. We see limited downside from PF
loan exposures. If the stock dips due to concerns on PF loans, it would be a buying
opportunity.
Projects in Seoul and metropolitan area
Samsung Life indicated that all ten projects are located in Seoul or metropolitan area
where housing demand is still healthy. The company further noted that the project that
have started have presale ratio of over 90%.
Unsold units falling quickly
Constructors have reduced new supply since the financial crisis and unsold units have
been declining rapidly. The company has noted that most of its projects are located in
Seoul and metropolitan areas where unsold units are minimal.
Fig. 168: Unsold housing unit trend
Fig. 169: Unsold units by region
# of unsold units falling sharply after peaking in December 2008
Most of unsold units are in provincial areas
(# of units)
180,000
150,000
(Thou units)
165,599 units
in Dec 2008
180
Metropolitan
160
Provincial
140
120,000
120
90,000
100
60,000
80
60
30,000
40
20
Source: MLTM, Nomura research
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
Jun-96
Mar-97
Dec-97
Sep-98
Jun-99
Mar-00
Dec-00
Sep-01
Jun-02
Mar-03
Dec-03
Sep-04
Jun-05
Mar-06
Dec-06
Sep-07
Jun-08
Mar-09
Dec-09
Sep-10
0
Tightening of RBC standard
Tightening of RBC unlikely
There have been some concerns on capital adequacy of Korean lifers given that Korean
RBC is short of being adequate. However, we do not think that the regulator would
tighten RBC standard in the medium term. Even if the regulator does decide to make
RBC more strict, we believe it would be at a measured pace so that it would not disrupt
insurers’ operations. We should note that smaller insurers have barely met the new RBC
standard. Further tightening of RBC standards in the near term would disrupt the whole
industry.
Samsung Life meets all standards
Samsung Life's current Korean RBC stands at 334%. If we were to use 99% confidence
level instead of 95% used by the current Korean RBC, the ratio would be 236%, which
appears to be adequate.
76
May 16, 2011
If tightened, Samsung Life should benefit
However, we cannot fully rule out the possibility of the regulator abruptly tightening the
RBC standards. If this were to happen, we think that Samsung Life with a buffer should
benefit given the action will likely trigger industry consolidation.
Fig. 170: Samsung's RBC ratio under different standards
Fig. 171: RBC ratio by company
(%)
(%)
400
600
350
500
300
400
250
300
200
200
100
150
99%
confidence
US RBC
S&P RBC
LIG
Hyundai
Dongbu
Samsung F&M
95%
confidence
TongYang
0
Korea
50
Samsung Life
0
100
77
May 16, 2011
Risk factors
Prolonged low interest environment
More than valuation risk
In addition to valuation risk, prolonged low interest environment could impose operational
risks. As the market rates fall the disparity between portfolio rates and new money rates
has been widening. As a result, the company could continue to post negative variances.
This would undermine credibility of EV valuation would eventually result in lower multiple.
Could trigger minimum guarantees
Samsung Life provides guaranteed minimum accumulation benefit (GMAB) on its
investment linked products and minimum return guarantees on floating rate policies. If
market rates fall below a threshold, these guarantees could be triggered. Once insurers
find themselves in this situation, insurers may compromise risk management standards
in order to pick up additional yields.
Harder to acquire new business
Lower interest rate environment could negatively impact new business volume due to
lower crediting rate.
Underperformance of Samsung Electronics
Technology industry downturn
A broader technology industry downturn could impose risk on Samsung Life. Samsung
Life owns 7.21% in Samsung Electronics representing 33% of its book value.
Other risk factors for Samsung Electronics
1) Faster-than-expected KRW appreciation. 2) Increasing competition in the smart phone
space. 3) Excessive industrywide capex in NAND, which we have seen in the past
cycles.
Share overhang
Shinsegae owns 11.07%
Shinsegae owns 11.07% of Samsung Life. The lock-up period for Shinsegae should end
on 12 May 2011. Shinsegae has indicated that Samsung Life stake could be a funding
source if they were to invest overseas or find an attractive acquisition target. However,
our consumer analyst Cara Song believes that there isn't any attractive acquisition target
at the moment.
CJ Group owns 5.49%
CJ Group combined ownership of Samsung Life stands at 5.49%. CJ Corp and CJ
CheilJedang own 3.2% and 2.3%, respectively. The lock-up period for CJ Group already
ended in 12 November 2010. CJ Group is currently in the process of bidding for Korea
Express. CJ Group has noted that Samsung Life stake will be a funding source
ESOP owns 3.82%
Employee stock ownership program also owns 3.82% of Samsung Life. The lock up
period ends on 12 May 2011. We think the chance of ESOP stake coming on to the
market is low given the tendency of individual investors waiting until they recover losses.
78
May 16, 2011
Company Overview
Samsung Life is by far the largest life insurer in Korea and quasi holding company of
Samsung Group.
Company History
Established as Dong bang Life insurance in 1957, the company became part of
Samsung Group in 1963. After changing its name to Samsung Life Insurance in 1989,
the company has grown to be the largest life insurance company in Korea with W133tn
in total assets (Mar, 10). In May, 2010, the company listed on the KRX.
Fig. 172: Key historical milestones
Date
1957. 5
1963. 7
1989. 9
1993. 12
1997. 11
2005. 7
2006. 4
Fig. 173: Shareholding structure
History
Established Dong Band Life Insurance
Incorporates into Samsung Group
Changes name to Samsung Life Insurance
Establish base in New York
Establish JV in Thailand
Establish JV in China
First non-depository financial institution to supass
W100tn in asset
Gain licencse to manage trust assets
Establish oversees branch in Vietnam
Listed on KRX
2007. 12
2008. 7
2010. 5
Lee, Kun-Hee
Samsung Everaland
Shinsegae
20.8%
27.9%
CJ Group
Samsung Foundation
of Culture
Samsung Life Welfare
Foundation
ESOP
19.3%
2.3%
3.8%
4.7%
4.7%
11.1%
Other affiliates
5.5%
Free float
Source: DART, Company data, Nomura research
Fig. 174: Korea life insurers ranking
Rank
1
2
3
4
5
6
7
8
9
10
Total asset (Wbn)
Company
Amount
Samsung Life
82,811
Korea Life
29,506
Kyobo Life
27,105
ING Life
10,311
Allianz
9,462
AIA Life
6,124
Shinhan Life
6,044
Tong Yang Life
5,831
Mirae Asset Life
5,722
Heung Kuk Life
5,650
M/S
38%
14%
13%
5%
4%
3%
3%
3%
3%
3%
Policy reserve (bn)
Company
Amount
Samsung Life
99,116
Korea Life
43,249
Kyobo Life
39,367
ING Life
11,528
Allianz
10,985
Shinhan Life
9,369
Tong Yang Life
9,262
Heung Kuk Life
8,486
KDB Life
7,397
Mirae Asset Life
6,944
M/S
36%
16%
14%
4%
4%
3%
3%
3%
3%
3%
Total Equity (Wbn)
Company
Amount
Samsung Life
13,334
Korea Life
5,981
Kyobo Life
4,568
ING Life
1,739
Prudential
1,193
Tong Yang Life
1,095
AIA Life
992
Shinhan Life
966
Allianz
930
Met Life
763
M/S
38%
17%
13%
5%
3%
3%
3%
3%
3%
2%
Exclusive solicitors (person)
Company
Amount M/S
Samsung Life
34,440 23%
Korea Life
24,600 17%
Kyobo Life
22,122 15%
Mirae Asset Life
8,696 6%
Shinhan Life
7,834 5%
Met Life
7,132 5%
Allianz
6,821 5%
ING Life
6,782 5%
Tong Yang Life
6,033 4%
Heung Kuk Life
5,029 3%
Source: DART, Nomura research
Policy mix breakdown
Samsung Life derives 45% of total premium from protection-type policies. We should
note that protection-type policies carry much higher embedded margin than wealth
accumulation products such as annuities and savings-type policies. However, demand
growth is coming from wealth accumulation products.
Distribution channel
In terms of the distribution channel, Samsung Life distributes its products mainly through
traditional channels; exclusive solicitors (78%) and exclusive agents (12%).
Bancassurance sales account for 8% of distribution (on initial premium basis), but should
grow faster than other channels as the company becomes more receptive to the
bancassurance channel.
79
May 16, 2011
Fig. 175: Policy mix trend
Fig. 176: Distribution channel breakdown
Savings Group
2%
6%
Protection
(general)
30%
Annuities
(separate)
27%
Independent
agents
1%
Bancassurance
8%
Other
1%
Exclusive
agents
12%
Annuities
(general)
20%
Protection
(separate)
15%
Exclusive
solicitors
78%
Management profile
In December 2010, Kuen-hee Park was appointed the new CEO of Samsung Life. Mr.
Park has been part of Samsung Group since 1978, holding positions in Samsung
restructuring headquarters, Samsung Capital, Samsung Card, and Samsung Electronics.
His latest position within Samsung Group was head of Samsung Electronics in China.
Quasi holding company of Samsung Group
Samsung Life plays a key role in Samsung Groups ownership structure. As seen in chart
below, Samsung Life holds controlling stake in both Samsung Electronics and Samsung
Card.
Fig. 177: Samsung Group Ownership Structure
80
Korea Life
088350.KS 088350 KS
EQUITY RESEARCH
INSURANCE
If you believe in hyper inflation May 16, 2011
Rating
Starts at
Leveraged play on rising
interest rates
Buy
Target price
Starts at9,400
KRW 9,400
Closing price
May 12, 2011
KRW 7,460
Potential upside
+26%
Anchor themes
rise in 2H11F.
Action: Initiating coverage at BUY
We initiate coverage of Korea Life with a BUY rating and a PT of W9,400.
Korea Life is the second-largest life insurer in Korea with strength in
investment-linked products.
Too inexpensive to ignore
Korea Life is trading at 0.8x forward P/EV. In our view, its valuation is
undemanding considering that we expect Korea Life’s EV to grow an
average of 12% a year for the next four years.
Nomura vs consensus
Our net profit estimate for
FY11F is 16% lower than
consensus. Our PT is 4% lower
than consensus.
Catalyst: Interest rate cycle to turn
We think the stock is trading at a depressed level due to a flatter yield
curve. However, our economist believes that the long-end of the curve will
rise steadily starting in 2H11 with: 1) continuous rate hikes by the BOK; 2)
rising expected inflation; and 3) tightening by ECB and QE2 ending.
Research analysts
Name to own if you believe in hyper inflation
Seventy percent of Korea Life’s reserve relates to fixed-rate policies, the
highest among the listed lifers. Hence, its EV sensitivity to a change in
interest rate is also the highest. While our economist believes the rates will
rise at a measured pace, we believe Korea Life would be a good name to
own in a hyper-inflation scenario. Of note, we estimate a 50bp increase in
the NIER would boost Korea Life’s EV by 14%.
Korea Insurance
Michael Na - NFIK
[email protected]
+82 2 3783 2334
[email protected]
+82 2 3783 2339
Valuation: PT of W9,400, implying 26% upside
Our PT of W9,400 is based on 1.0x forward P/EV. We assume a
sustainable RoEV of 11.5%, a COE of 11.5% and a growth rate of 3%.
31 Mar
FY10
FY11F
FY12F
FY13F
Currency (KRW)
Actual
Old
New
Old
New
Old
New
Net premium (bn)
6,772
0
6,987
0
7,197
0
7,413
481
535
601
673
481
535
601
673
553.8
616.5
692.2
775.3
Normalised EPS
15.0
Norm. P/E (x)
13.5
N/A
12.1
N/A
10.8
N/A
9.6
0.9
N/A
0.8
N/A
0.7
N/A
0.6
-2.2
N/A
-4.2
N/A
-6.2
N/A
-8.2
Dividend yield (%)
1.3
N/A
1.3
N/A
2.0
N/A
2.0
ROE (%)
8.1
ROA (%)
0.8
Price/EV (x)
11.3
12.3
8.4
0.0
0.8
12.0
8.8
0.0
0.9
9.1
0.0
0.9
the US.
Nomura | ASIA Korea Life
May 16, 2011
Key data on Korea Life
Profit and Loss (KRWbn) Growth (%)
Life premiums
Non life premiums
Net profit
Normalised EPS
Normalised FDEPS
FY10
6,790
FY11F
6,994
FY12F
7,204
FY13F
7,420
-15
6,529
-18
6,772
-7
6,987
-7
7,197
-7
7,413
6,529
-4,742
-2,354
-1,239
-738
-2,545
2,355
6,772
-5,108
-2,248
-999
-635
-2,218
2,223
6,987
-5,286
-2,356
-1,020
-628
-2,302
2,363
7,197
-5,436
-2,444
-1,044
-635
-2,362
2,431
7,413
-5,590
-2,535
-1,071
-640
-2,423
2,528
2,355
2,223
2,363
2,431
2,528
-190
5
61
69
105
736
625
645
702
758
546
-127
418
629
-149
481
706
-171
535
771
-170
601
863
-190
673
418
481
535
601
673
418
-87
331
481
-87
394
535
-87
449
601
-130
471
673
-130
543
Notes
Our net profit estimate for FY11F is
16% lower than consensus.
Price and price relative chart (one year) 3.8
na
15.0
15.0
15.0
3.0
na
11.3
11.3
11.3
3.0
na
12.3
12.3
12.3
3.0
na
12.0
12.0
12.0
80
7000
70
6500
60
A pr 11
22.0
19.3
9.1
0.92
na
90
7500
M ay 11
22.0
21.7
8.8
0.87
na
100
8000
M ar 11
24.2
16.2
8.4
0.82
na
110
8500
J an 11
23.6
18.1
8.1
0.79
na
9000
Feb 11
23.3
20.8
9.0
0.75
na
Price
Rel MSCI Korea
(KRW)
Nov 10
9.6
12.1
9.6
2.0
0.8
na
na
0.0
0.6
-8.2
Dec 10
10.8
13.6
10.8
2.0
0.9
na
na
0.0
0.7
-6.2
O c t 10
12.1
15.2
12.1
1.3
1.0
na
na
0.0
0.8
-4.2
S ep 10
13.5
17.0
13.5
1.3
1.1
na
na
0.0
0.9
-2.2
J ul 10
15.5
19.5
15.5
1.3
1.1
na
na
0.0
1.0
-0.1
A ug 10
Reported P/E (x)
Dividend yield (%)
Price/book (x)
Price/EV (x)
Loss ratio (%)
Combined ratio (%)
Dividend payout (%)
ROE (%)
ROA (%)
ROR (%)
FY09
6,545
J un 10
Year-end 31 Mar
Gross premiums
Government charges
Reinsurance ceded
Net written premium
Net earned premium
Change in reserves
Other expenses
Investment income
Other income
Operating profit
Amortisation
Associates and JCEs
Pre-tax profit
Income tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
(%)
1M
3M
12M
Absolute (KRW)
1.5
-2.4
-11.2
Absolute (USD)
1.3
1.1
-7.4
Relative to index
-0.3
-10.1
-40.0
Market cap (USDmn)
(%)
52-week range
(KRW)
3-mth avg daily
turnover (USDmn)
Major shareholders
(%)
Hanwha E&C
Hanwha
5,922.6
9270/6760
6.71
24.9
21.7
82
May 16, 2011
Cash and deposits
Bonds
Equities
Unit trusts
Loans and mortgages
Foreign investments
Real estate
Other investments
Total investments
Fixed assets
Goodwill
Other assets
Total assets
Insurance reserves
Other liabilities
Total liabilities
Minority interest
Common stock
Preferred stock
Retained earnings
Proposed dividends
Other equity
Net premiums/equity
Cash and deposits
Bonds
Equities
Unit trusts
Loans and mortgages
Foreign investments
Real estate
Other investments
Per share
Reported EPS (KRW)
Norm EPS (KRW)
DPS (KRW)
BVPS (KRW)
Life/LT EVPS (KRW)
Life/LT VNBPS (KRW)
FY09
1,752
19,487
511
FY10
2,015
21,936
1,197
FY11F
2,094
23,330
1,826
FY12F
2,186
23,615
2,544
FY13F
2,283
23,835
3,357
12,536
1,197
2,245
6,172
43,900
2,332
13,277
1,293
2,276
4,988
46,982
2,290
13,193
2,199
2,349
4,082
49,074
2,337
13,122
3,234
2,433
4,312
51,446
2,393
13,029
4,410
2,523
4,556
53,992
2,454
11,433
1,333
58,997
40,470
12,739
1,417
63,427
43,153
14,143
1,459
67,014
44,852
15,584
1,503
70,926
46,821
17,059
1,548
75,053
48,899
11,526
14,001
17,008
20,661
25,097
1,322
53,318
108
57,262
-1,465
60,395
-3,645
63,837
-6,575
67,421
4,837
4,883
4,883
4,883
4,883
481
760
1,209
1,680
2,223
362
5,680
58,998
522
6,165
63,426
527
6,618
67,014
527
7,089
70,926
527
7,632
75,053
na
na
na
na
na
115.0
618.3
109.9
635.5
105.6
641.3
101.5
649.9
97.1
659.0
4.0
44.4
1.2
0.0
28.6
2.7
5.1
14.1
4.3
46.7
2.5
0.0
28.3
2.8
4.8
10.6
4.3
47.5
3.7
0.0
26.9
4.5
4.8
8.3
4.2
45.9
4.9
0.0
25.5
6.3
4.7
8.4
4.2
44.1
6.2
0.0
24.1
8.2
4.7
8.4
481.66
481.66
481.66
100.00
6,539.68
7,493.01
472.06
0.00
553.78
553.78
553.78
100.00
7,097.75
8,515.67
472.70
0.00
616.47
616.47
616.47
100.00
7,619.92
9,482.36
486.38
0.00
692.19
692.19
692.19
149.99
8,162.12
10,514.23
495.29
0.00
775.30
775.30
775.30
149.99
8,787.42
11,579.17
501.78
0.00
Notes
Asset growth driven by separate
account.
83
May 16, 2011
Leveraged play on rising interest rates
Korea Life is the second-largest life insurance company in Korea. The company has
been the leader in investment-linked insurance. We believe that Korea Life is a good
name to own for investors who are bullish on inflation.
Attractive valuation, limited downside
Solid EV growth
We expect Korea Life to deliver RoEV of 12.6% for each of FY11F and FY12F, driven by
strong growth in the value of in-force business (VIF). We forecast VIF growth of 49% and
33% for FY11F and FY12F, respectively. Of note, our estimate VIF is adjusted to reflect
a lower net interest earnings rate (NIER).
The contribution from new business (VNB) should be significant, as it makes up 52% of
VIF based on our adjusted numbers as of March 2011. Thanks to low base effect, we
think the company will continue to generate robust VIF growth.
ANW growth may take time to recover
Although Korea Life will likely enjoy robust VIF growth in the medium term, its EV growth
will likely lag behind that of other listed lifers given that its VIF is small relative to its
adjusted net worth (ANW). We think it will take time for Korea Life to rebuild its VIF for it
to contribute to the bottom line in a meaningful way.
Trading at ex-growth multiples
Despite its solid EV growth profile, Korea Life is trading at 0.8x forward P/EV. We think
that Korea Life is trading like an ex-growth company due to a flatter yield curve.
However, Nomura’s Korea economist, Mr Young Sun Kwon, believes that the long-end
of the curve will rise slowly going into 2H11.
Most leveraged to rising interest rates
Highest proportion of fixed-rate policies
As 70% of Korea Life’s reserve relates to fixed-rate policies, its valuation sensitivity to
interest rates is the highest among the listed lifers in Korea. Although this could be a
double-edged sword, we believe that we are going through a trough in the interest rate
cycle.
50bp increase in NIER assumption likely to boost EV by 13.8%
Our economist forecasts a 45bp rise in the three-year treasury yield over the next 12
months. We estimate that a 50bp increase in the NIER would boost Korea Life’s EV by
13.8%.
But actual pickup in investment yield will take time
However, we should note that the investment yield on fixed-income securities will likely
fall for two more years given that it takes three to four years to overturn the bond
portfolio. In addition, we think that transition to Risk Based Capital (RBC) may further
delay the recovery of investment returns given that life insurers are forced to buy longdated bonds to meet a stricter measure of capital adequacy.
We are less bullish on Korea Life due to high hurdle rate
Korea Life’s current average crediting rate is the highest among the listed lifers. Given
that we expect a steady but slow recovery in market rates, we are less bullish on Korea
Life than other lifers.
We would likely turn more bullish if rates were to pick up faster than expected
But again, if inflation gets out of hand as the BOK falls behind the curve, we would
become more bullish on the name. We believe that in a hyper-inflation environment the
company’s operation would likely improve as fast as the improvement in its valuation.
84
May 16, 2011
BUY at the bottom of the rate cycle
Our economist expects two more rate hikes in for the rest of 2011, and another two in
1H12, which will lift the terminal policy rate of the current cycle to 4.0% by 2Q12.
Meanwhile, he thinks that real policy rates will remain negative, doing little to limit
inflationary pressure, unless it is combined with KRW appreciation.
Our economist noted that CPI inflation is set to rise to more than 4% in 2011, exceeding
the BOK's target band. Interest rate hikes coupled with a stronger KRW and price control
should partly offset cost-push inflation pressures from higher oil prices. But rising
nominal wages and housing rents are also adding to inflation. Our economist forecasts
CPI inflation to rise from 2.9% in 2010 to 4.4% in 2011, before easing to 3.6% in 2012.
We think that the long end of the bond market will eventually react to growing concerns
on inflation.
Whether hunting for better yields or looking for KRW appreciation, inflow of foreign
capital has been adding downward pressure on the long end since 2H09. However, with
the ECB turning hawkish and the Fed's QE2 programme winding down, we may see
foreign capital inflow slow and even turn to an outflow further out. We think that the long
end of the yield curve could be lifted with rising interest rates in developed markets, as
we have seen in 4Q10. In addition, the recent KRW appreciation could hinder foreign
capital inflow looking for KRW appreciation, and thus further ease the downward
pressure on the long end.
Long end to rise slowly but surely
Our economist forecasts the five-year treasury yield will rise from 3Q11 and reach 4.5%
by end-1H12 (from the current 4.0%), and the three-year treasury yield will rise to 4.2%
by end-1H12 (from the current 3.6%).
Risk factors
Prolonged low interest rate environment
As the market rates fall, the disparity between portfolio rates and new money rates has
widened. In addition to valuation risk, a prolonged low interest rate environment will likely
present operational risks including: 1) continued reliance on new sales to subsidize inforce business; 2) a decline into the minimum guarantees zone; 3) a negative impact on
new business volume due to a lower crediting rate; and 4) companies may compromise
risk management standards to boost yield.
W1tn in PF loans
Korea Life has W1tn in PF loans outstanding that are related to housing projects.
Although the housing market has improved and the number of unsold apartments has
been falling steadily over the past two years, we have seen continuous filings of court
receivership by medium-size construction companies recently. That said, we think the
stock may face downward pressure whenever PF loans become an issue in the market.
The company has noted that all of its PF loans are guaranteed by larger constructors
and projects are located in Seoul and metropolitan areas where demand is still healthy.
85
May 16, 2011
Fig. 178: Korea Life financial summary
Total Premium
General Account
Separate Account
Premium Income
Risk Premium
Loading Premium
Savings Premium
Benefits Paid
U/W Expenses
Acquisition Cost
DAC Deferral
Amortization of DAC
Net Increase in DAC
Maintenance Costs
Savings Margin
Operating Profit
Others
Pre-tax Profits
Effective Tax
Net Profits
FY08
10,529
6,729
3,801
FY09
10,499
6,529
3,970
FY10
11,183
6,772
4,411
FY11F
11,839
6,987
4,852
FY12F
12,437
7,197
5,240
FY13F
13,046
7,413
5,633
FY14F
13,662
7,635
6,027
FY15F
14,253
7,864
6,389
6,735
1,552
2,315
2,862
6,545
1,606
2,057
2,867
6,790
1,647
1,969
3,157
6,994
1,693
1,993
3,308
7,204
1,741
2,032
3,432
7,420
1,790
2,070
3,560
7,643
1,841
2,109
3,693
7,872
1,893
2,149
3,830
1,375
1,965
28
1,269
(1,241)
1,403
(162)
695
1,410
1,673
27
965
(938)
1,239
(301)
708
1,410
1,634
35
956
(921)
999
(42)
643
1,449
1,654
0
1,067
(1,067)
1,020
48
587
1,490
1,686
0
1,100
(1,100)
1,044
55
587
1,531
1,718
0
1,132
(1,132)
1,071
62
586
1,574
1,751
0
1,166
(1,166)
1,100
66
584
1,618
1,784
0
1,201
(1,201)
1,131
71
582
4,464
1,422
1,814
3,769
2,223
2,355
3,698
2,248
2,223
3,837
2,356
2,363
3,946
2,444
2,431
4,058
2,535
2,528
4,210
2,630
2,675
4,367
2,728
2,829
527
(1,209)
(682)
773
779
(6)
91
8
83
580
(770)
(190)
736
766
(30)
572
(567)
5
625
655
(30)
583
(521)
61
645
679
(34)
597
(528)
69
702
739
(37)
611
(506)
105
758
798
(40)
625
(472)
153
815
858
(43)
546
127
418
629
149
481
706
171
535
771
170
601
863
190
673
968
213
755
639
(435)
204
869
915
(46)
1,073
236
837
Total Assets
Invested Assets
Cash & Deposits
Securities
Stocks
Money Invested
Net Loans
Real Estate
Non-invested Assets
DAC
Others
FY08
52,597
39,320
1,853
23,556
592
222
22,742
11,672
2,239
3,881
2,633
1,248
9,395
FY09
58,998
43,875
1,752
27,367
511
192
26,663
12,536
2,220
3,690
2,332
1,358
11,433
FY10
63,427
46,982
2,015
29,414
1,197
170
28,047
13,277
2,276
3,706
2,290
1,417
12,739
FY11F
67,014
49,074
2,094
31,438
1,826
152
29,460
13,193
2,349
3,796
2,337
1,459
14,143
FY12F
70,926
51,446
2,186
33,705
2,544
132
31,029
13,122
2,433
3,895
2,393
1,503
15,584
FY13F
75,053
53,992
2,283
36,158
3,357
108
32,693
13,029
2,523
4,002
2,454
1,548
17,059
FY14F
79,325
56,648
2,384
38,761
4,273
80
34,409
12,890
2,614
4,115
2,521
1,594
18,562
FY15F
83,757
59,462
2,488
41,553
5,303
47
36,204
12,711
2,710
4,233
2,591
1,642
20,061
Total Liabilities
Policy Reserve
Premium Reserve
Other Liabilities
48,996
38,082
36,384
1,397
18
292
14
0
148
1,277
9,395
53,318
40,470
38,770
1,356
13
288
15
0
297
1,026
11,433
57,262
43,153
41,328
1,382
7
274
24
0
364
1,006
12,739
60,395
44,852
43,154
1,421
0
274
24
0
364
1,037
14,143
63,837
46,821
45,083
1,461
0
274
24
0
364
1,068
15,584
67,421
48,899
47,120
1,502
0
274
24
0
364
1,100
17,059
71,112
51,053
49,233
1,544
0
274
24
0
364
1,133
18,562
74,880
53,288
51,425
1,587
0
274
24
0
364
1,167
20,061
5,680
4,343
494
481
362
6,165
4,386
496
760
527
6,618
4,386
496
1,209
527
7,089
4,386
496
1,680
527
7,632
4,386
496
2,223
527
8,213
4,386
496
2,804
527
8,877
4,386
496
3,467
527
Paid in Capital
Capital Surplus
Retained Earnings
Capital Adjustment
3,601
3,550
0
66
(12)
86
May 16, 2011
Fig. 179: Korea Life per share data and performance ratios
Per Share Data
ROA (%)
ROE (%)
EPS Growth (%)
Gross Dividend
DPS (Won)
FY08
117
5,072
0.2
2.3
(76.9)
FY09
482
6,540
0.7
9.0
311.9
FY10
554
7,098
0.8
8.1
15.0
0
0
0.0
710
0
0
0.0
869
87
100
6.0
869
FY11F
616
7,620
0.8
8.4
11.3
87
100
6.0
869
FY12F
692
8,162
0.9
8.8
12.3
130
150
6.0
869
FY13F
775
8,787
0.9
9.1
12.0
130
150
5.5
869
FY14F
869
9,457
1.0
9.5
12.1
174
200
5.5
869
FY15F
964
10,221
1.0
9.8
10.9
174
200
5.0
869
PERFORMANCE RATIOS
Growth (%)
Total Premium
General Account
Separate Account
Risk Margin
Loading Margin
Savings Margin
Commission Income
Net Profits
Total Assets
Invested Assets
Net Loans
Policy Reserve
FY08
FY09
FY10
FY11F
FY12F
FY13F
FY14F
FY15F
(6.2)
(7.1)
(4.6)
(13.9)
(35.7)
NM
31.6
(76.9)
6.3
5.4
7.9
4.6
(1.2)
(0.3)
(3.0)
4.5
10.4
9.9
NM
(1.7)
403.9
12.2
11.6
7.4
6.3
57.7
6.5
3.7
11.1
21.1
(12.9)
NM
(14.5)
15.0
7.5
7.1
5.9
6.6
8.5
5.9
3.2
10.0
2.9
1.2
NM
3.7
11.3
5.7
4.5
(0.6)
3.9
7.4
5.0
3.0
8.0
2.9
1.9
NM
8.8
12.3
5.8
4.8
(0.5)
4.4
7.1
4.9
3.0
7.5
2.9
1.9
NM
8.1
12.0
5.8
4.9
(0.7)
4.4
7.7
4.7
3.0
7.0
2.9
1.9
NM
7.4
12.1
5.7
4.9
(1.1)
4.4
7.6
4.3
3.0
6.0
2.9
1.9
NM
6.7
10.9
5.6
5.0
(1.4)
4.4
8.1
Risk Premium
Loading Premium
Savings Premium
23.0
34.4
42.5
24.5
31.4
43.8
24.2
29.0
46.5
24.2
28.5
47.3
24.2
28.2
47.6
24.1
27.9
48.0
24.1
27.6
48.3
24.0
27.3
48.7
11.4
15.1
(42.2)
4.9
6.1
8.8
12.2
18.7
(26.9)
5.8
5.9
7.4
14.4
17.0
(18.0)
5.0
5.5
5.4
14.4
17.0
(15.8)
5.0
5.4
4.8
14.4
17.0
(15.4)
5.0
5.3
4.7
14.4
17.0
(14.2)
4.9
5.3
4.7
14.5
17.0
(12.8)
5.0
5.3
4.6
14.5
17.0
(11.4)
5.0
5.4
4.6
Investment Mix (%)
Cash & deposits
Securities
Net loans
Real estate
4.7
59.9
29.7
5.7
4.0
62.4
28.6
5.1
4.3
62.6
28.3
4.8
4.3
64.1
26.9
4.8
4.2
65.5
25.5
4.7
4.2
67.0
24.1
4.7
4.2
68.4
22.8
4.6
4.2
69.9
21.4
4.6
Securities Mix (%)
Stock
Money invested
Special bonds
Corporate bonds
Overseas securities
Others
2.5
0.9
52.0
15.0
9.1
8.1
5.8
0.0
1.9
1.9
0.7
45.6
18.6
7.0
14.5
4.4
0.0
3.4
4.1
0.6
42.9
25.1
6.6
10.4
4.4
0.0
2.2
5.8
0.5
44.9
23.4
5.9
10.0
7.0
0.5
2.0
7.5
0.4
43.1
21.7
5.2
9.6
9.6
1.0
1.8
9.3
0.3
41.3
20.0
4.6
9.2
12.2
1.5
1.6
11.0
0.2
39.5
18.4
3.9
8.8
14.8
2.0
1.4
12.8
0.1
37.8
16.7
3.2
8.4
17.4
2.5
1.2
7.1
75.0
17.3
565.4
6.8
53.8
215.6
8.3
74.6
18.7
618.3
9.6
70.9
299.1
9.7
74.2
19.7
635.5
9.7
87.2
295.3
9.8
73.6
20.6
641.3
9.9
91.4
320.2
9.9
72.9
21.6
649.9
10.0
95.1
326.1
10.1
72.2
22.4
659.0
10.2
99.2
321.8
10.3
71.7
23.1
668.0
10.4
103.7
317.5
10.5
71.2
23.7
676.9
10.6
108.6
312.4
Margin Analysis (%)
Net Interest Margin
87
May 16, 2011
Valuation
We have derived our PT of W9,400, based on 1.0x forward P/EV. The stock is trading at
0.8x forward P/EV. We think valuation is undemanding, considering that we expect the
company to deliver sustainable RoEV of 11.5% over the next four years.
Valuation attractive at 0.8x forward P/EV
Korea Life is trading at 0.8x forward P/EV, which we believe is attractive considering that
we expect sustainable RoEV of 11.5% in the medium term. We apply 1.0x forward P/EV
to derive our PT. We assume a sustainable medium-term RoEV of 11.5%, a COE of
11.5% and a growth rate of 3%.
Priced ex-growth
The current implied NBM (new business multiple) is in negative territory despite the
company’s solid growth profile and upside potential from rising interest rates.
We assume a lower net investment earnings rate (NIER) than the company in our EV
forecasts. Korea Life uses a NIER of 5.25% in calculating its FY09 EV, while we assume
a NIER of 5.0% (ie, 25bp lower than Korea Life's assumption).
Fig. 180: Korea Life: EV projection and PT
Korea Life should be able to deliver RoEV of 11.5%-plus through FY14F
(Wbn)
FY09
FY10F
FY11F
6,100
6,601
7,055
408
795
1,187
Embedded value (EV)
6,508
7,396
8,242
Growth of EV (RoEV)
15.0%
12.6%
Current mkt cap
6,444
6,444
6,444
P/EV
0.99
0.87
0.78
VNB
410
411
422
(0.16)
(2.32)
(4.26)
NBM
Target multiple
Target mkt cap
Target price
Implied NBM
FY12F
7,569
1,580
9,150
12.6%
6,444
0.70
430
(6.29)
FY13F
8,112
1,973
10,085
11.6%
6,444
0.64
436
(8.35)
FY14F
8,737
2,365
11,102
11.8%
6,444
0.58
439
(10.60)
1.0
8,242
9,400
-
We believe that 11.5% RoEV is sustainable despite the lacklustre outlook for Korea
Life’s ANW growth in the near term. We note that even if we assume no growth in VNB,
Korea Life should be able to achieve VIF growth of 48% and 32% for FY11F and FY12F,
respectively, given that we expect VNB to make up 52% of VIF (value in-force) as of
March 2011. Of note, we assume a NIER of 5.0% to forecast VIF.
Positive variance likely based on Nomura EV figures
We use a NIER of 5.0% to forecast VIF. However, we believe the actual investment yield
will remain above 5.0%, thus yielding positive variance in the near term. That said, we
think that continuous positive variance is likely if Korea Life does not have any hiccups in
its in-force profit management.
We could justify PT of W12,800 using appraisal valuation method
We think that our PT is conservative given that valuation using the appraisal value
method results in a higher NBM. The implied NBM is 0x at our PT. However, using the
appraisal value method, we could justify up to a 6.9x NBM. Of note, we only reflect a 10year projection in our NBM calculation. Typically, a 30-year DCF model is used in the
region to derive NBM. However, due to the infancy of the EV valuation methodology in
Korea, we do not want to pay for more than 10 years.
88
May 16, 2011
More appropriate to use P/EV methodology
There is upside potential to our PT using the appraisal value methodology. However, we
think it is more appropriate to use P/EV for Korea Life given some negative variance we
encountered in EV, which may not be captured in the NBM technique. In addition, the
NBM technique ignores near-term changes in EV growth profile.
Fig. 181: Korea Life: target NBM based on appraisal value method
The appraisal value method implies a PT of W12,800, 36% higher than our P/EV-based PT of W9,400
(Wbn)
FY11F
FY12F
FY13F
FY14F
FY15F
FY16F
2,271
2,351
2,421
2,482
2,531
2,582
Annualized premium equivalent (APE
New business margin
18.6%
18.3%
18.0%
17.7%
17.5%
17.4%
422
430
436
439
443
450
Discount factor
1.0
1.1
1.2
1.4
1.5
1.7
PV of VNB
422
388
354
321
292
267
Sum of PV
2,908
Implied multiple
6.9
FY17F
2,634
17.4%
458
1.9
245
FY18F
2,686
17.3%
466
2.1
224
FY19F
2,740
17.3%
475
2.3
206
FY20F
2,795
17.3%
484
2.6
189
EV sensitive to investment yield and claims ratio assumptions
The following charts show the sensitivity in the EV to changes in some of Korea Life's
key assumptions. A key variable is the investment return assumption. For Korea Life, this
is currently 5.25%, which we believe is slightly aggressive considering the current market
rates. Note that we used a NIER of 5.0% to forecast VIF and VNB. In addition, we
believe that we are going through a trough in the interest rate cycle.
A 50bp increase in investment yield would boost EV by 13.8%...
Our sensitivity analysis indicates a 50bp increase in investment yield would boost EV by
13.8%. Of note, Korea Life is most sensitive to rising interest rates among the listed life
insurers due to its largest exposure to fixed-rate liabilities. 70% of its reserve relates to
fixed-rate policies, compared with 60% for Samsung Life and 58% for Tong Yang Life.
Fig. 182: EV sensitivity in KRW
Fig. 183: EV sensitivity in %
1,500
20
15
1,000
10
1,028
500
0
(20)
Lapse Rate ±
10ppt
(15)
Claims Rate ±
10ppt
(10)
NIER ± 50bps
(5)
Discount rate ± 1%
Lapse Rate ±
10ppt
Claims Rate ±
10ppt
(1,500)
NIER ± 50bps
(1,000)
11%
0
Discount rate ± 1%
(500)
13.8%
5
… but our PT would increase by only 3%
In effect, this would increase our PT by 3%. We should note that the affect on VNB from
a changing investment yield assumption is limited since most new businesses are
floating-rate policies. We would not expect to see ANW growth pick up immediately given
that it takes time for higher market rates to flow through the bond portfolio. Hence, the
increase in our PT would be less than what the valuation sensitivity indicates.
89
May 16, 2011
Fig. 184: Korea Life: EV projection and PT assuming 50bp increase in NIER
Our PT would increase by only 3%, assuming a 50bp NIER increase
(Wbn)
FY09
FY10F
FY11F
6,100
6,651
7,127
1,436
1,823
2,222
Embedded value (EV)
7,536
8,474
9,348
Growth of EV (RoEV)
13.6%
11.3%
Current mkt cap
6,444
6,444
6,444
P/EV
0.86
0.76
0.69
VNB
410
423
441
NBM
(2.7)
(4.8)
(6.6)
Target multiple
Target mkt cap
Target price
Implied NBM
FY12F
7,679
2,630
10,309
11.2%
6,444
0.63
458
(8.4)
FY13F
8,324
3,052
11,375
11.6%
6,444
0.57
477
(10.3)
FY14F
8,992
3,487
12,478
10.8%
6,444
0.52
498
(12.1)
0.9
8,413
9,700
(2.1)
VNB sensitive to discount rate and lapse ratio
VNB is not sensitive to interest rates given that most new businesses are floating-rate
policies. VNB is rather sensitive to the lapse ratio, however, since most cancellations
occur in the first 25 months and by definition new business includes policies acquired in
the past year.
Fig. 185: Korea Life: VNB sensitivity in KRW
Fig. 186: Korea Life: VNB sensitivity in %
VNB not sensitive to NIER since new businesses are floating-rate policies
VNB not sensitive to NIER since new businesses are floating-rate policies
40
10
30
8
20
6
35
33
10
0
(8)
(10)
Lapse Rate ± 10ppt
(6)
(4)
NIER ± 50bps
(2)
Discount rate ± 1%
Lapse Rate ± 10ppt
(40)
NIER ± 50bps
(30)
Discount rate ± 1%
(20)
8.0%
8%
2
0
(10)
4
90
May 16, 2011
Solid EV growth
We expect Korea Life to deliver on average 12% RoEV in the next four years, driven by
solid growth in VIF. The contribution from VNB should be significant, making up 52% of
VIF as of March 2011, based on our forecasts (adjusted from company figures to reflect
lower market rates).
Fifty-one percent of Korea Life’s reserve relates to high-yield guarantee policies, with a
crediting rate of 6% and over. This block is contributing a sizeable negative value to VIF.
Hence, we can safely assume that VIF did not have much value until recently.
Fig. 187: Korea Life: VIF breakdown (March 2010)
Fig. 188: Korea Life: VIF as % of EV
NIER of 5.25% is used for information presented here
Not much value In VIF for now
5,384
(%)
717
45
18
1,265
16
14
782
12
1,743
10
8
6
922
4
2
Non-par
(+)
Non-par
(-)
Par
(+)
Par
(-)
Tax
CoC
0
VIF
(Mar,
2010)
FY3/10
FY3/11
FY3/12
FY3/13
FY3/14
We look for strong VIF growth of 49% and 33% for FY11F and FY12F, respectively,
given that we expect VNB to make up 52% of VIF as of March 2011. Of note, we use a
NIER assumption of 5.0% for our VIF forecast.
In our view, growth driven by new business is healthier and deserves a higher valuation.
We expect 46% and 43% of RoEV to be generated by addition of new business for
Fig. 189: Korea Life: VIF growth profile
(Wbn)
2,500
VIF-VNB
Fig. 190: Korea Life: RoEV contribution breakdown
(%)
14
VBN
439
2,000
1,500
1,000
5.8%
5.5%
6.8%
Mar12
4.9%
4.6%
7.1%
6.8
7.3%
Mar13
Mar14
Mar15
8
430
422
1,925
1,537
500
RoEV from VNB
12
10
436
RoEV from ANW and VIF
6
4
1,150
765
2
0
0
Mar12
Mar13
Mar14
Mar15
91
May 16, 2011
VNB growth of 3% and 2% for FY11F and FY12F
Volume growth driven by bancassurance
We forecast new business volume growth of 4% and 3.5% for FY11F and FY12F,
respectively. We believe that our volume growth assumptions are reasonable given that
the demand for wealth accumulation products is growing and Korea Life is taking
advantage of the fast-growing bancassurance channel.
Fig. 191: Korea Life: APE and new business margin trend
Margin should fall as policy mix shifts to lower margin products
(Wbn)
2,800
(%)
19.0
New business margin
2,700
18.6
2,600
2,500
18.2
2,400
17.8
2,300
2,200
17.4
2,100
FY3/21
FY3/20
FY3/19
FY3/18
FY3/17
FY3/16
FY3/15
FY3/14
FY3/13
17.0
FY3/12
2,000
Fig. 192: Korea Life: initial premium by channel (KRW)
Fig. 193: Korea Life: initial premium by channel (%)
Initial premium growth coming from bancassurance channel
Korea Life increasing exposure to bancassurance
(Wbn)
800
Tied Agents
Agency
Bancassurance
TCM
(%)
Tied Agents
Agency
Bancassurance
TCM
100
600
80
60
400
40
200
20
0
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
% 0
Solicitor channel strengthened
Korea Life initiated a restructuring programme for its exclusive solicitor channel at the
time of IPO in March 2010. The initial premium from the exclusive solicitor channel has
grown steadily of late as the company enters a rehiring cycle. We think that this trend will
likely continue as Korea Life has said it plans to add more solicitors.
Increased sales through exclusive channel to support NB margin
We think that the recent development in the exclusive solicitor channel will be positive for
NB margin as well as volume given that the exclusive solicitor channel is more profitable
than non-traditional channels. Of note, the exclusive solicitor channel sells more highermargin traditional protection-type policies.
92
May 16, 2011
Fig. 194: Korea Life: number of solicitors
Fig. 195: Korea Life: initial premium from solicitor channel
Korea Life cut inefficient solicitors in 1Q3/10
The Initial premium from the solicitor channel is growing with rehiring
25,500
(Wbn)
480
460
440
25,000
420
400
380
24,500
360
340
320
24,000
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
300
But modest VNB growth
However, VNB growth is likely to be slower than volume growth due to margin pressure
coming from product mix change to lower-margin wealth accumulation products.
Fig. 196: Korea Life: APE by product type (KRW)
Fig. 197: Korea Life: APE by product type (%)
Growth driven by lower-margin annuities
Product mix shifting to lower-margin wealth accumulation products
(%)
200
Annuities(Gen)
100
0
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1Q09
Protection(Gen)
Savings(Gen)
Annuities(Gen)
Protection(Gen)
3Q10
Savings(Gen)
2Q10
300
Protection(Var)
1Q10
Protection(Var)
4Q09
400
Annuities(Var)
3Q09
Annuities(Var)
500
Savings(Var)
% 100
% 90
% 80
% 70
% 60
% 50
% 40
% 30
% 20
% 10
% 0
2Q09
Savings(Var)
600
1Q09
(Wbn)
700
Higher persistency ratio positive for VNB
During the financial crisis, Korea Life's persistency ratio fell sharply, with its 25-month
persistency ratio falling by more than that of peers. However, we expect an improvement
in the 25-month persistency ratio going forward given that the 13-month persistency ratio
has bounced back quickly to pre-crisis levels and the company has entered a solicitor
rehiring cycle after completing its restructuring programme.
93
May 16, 2011
Fig. 198: 13-month persistency ratio trends
Fig. 199: 25-month persistency ratio trends
Persistency ratio bouncing back quickly
25th month persistency ratio should follow 13th month soon
Korea
Kyobo
Tong Yang
(%)
90
Samsung
Mirae asset
(%)
Korea
Kyobo
Tong Yang
80
75
85
Samsung
Mirae asset
70
80
65
75
60
70
55
50
65
45
60
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
2H04
1H04
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
2H04
1H04
40
Equity bull market should help Korea Life
The variable insurance initial premium volume fell sharply with the market crash in 2008.
However, the volume started to pick up again with the market recovery in 2009. If the
KOSPI continues to advance, we think the variable insurance volume will pick up further
and Korea Life stands to benefit given that it has shown strength in the space.
Fig. 200: KOSPI vs variable insurance initial premium
Fig. 201: Initial premium breakdown
Variable insurance initial premium picking up with rising KOSPI
Korea Life has shown strength in variable insurance
(Index)
2,200
KOSPI (RHS)
190
2,000
170
150
1,800
130
1,600
110
1,400
90
1,200
70
1,000
50
2005
2006
2007
2008
Source: KLIA, Quantiwise, Nomura research
2009
2010
(%)
100
90
80
70
60
50
40
30
20
10
0
Pure endow
Group
Variable
Death
Retirement
Endowment
Pension
1Q FY03
3Q FY03
1Q FY04
3Q FY04
1Q FY05
3Q FY05
1Q FY06
3Q FY06
1Q FY07
3Q FY07
1Q FY08
3Q FY08
1Q FY09
3Q FY09
1Q FY10
3Q FY10
1Q FY11
Variable insurance FYP (LHS)
(Wbn)
94
May 16, 2011
Fig. 202: Variable insurance initial premium trend
(Wbn)
Korea
250
Samsung
Fig. 203: Variable insurance initial premium trend
(Wbn)
Kyobo
Korea
1,200
Samsung
Kyobo
1,000
200
800
150
600
100
400
50
200
0
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
0
Modest ANW growth
Not much value in VIF yet
Korea Life has suffered from the low interest rate environment more so than other lifers,
due to its higher average crediting rate. We think the pain will likely continue until the
company rebuilds its VIF. We estimate VIF as percentage of ANW of only 12% at FY10F
year end. This means that contribution from the unwinding of in-force book will likely be
limited in terms of ANW growth.
Fig. 204: Korea Life: net profit trend
Fig. 205: Korea Life: ROE trend
Expect modest profit growth until Korea Life rebuild its VIF
(Wbn)
(%)
900
800
700
600
500
400
300
200
100
0
10.0
9.5
9.0
8.5
8.0
7.5
FY15F
FY14F
FY13F
FY12F
FY11F
FY10
FY09
FY15F
FY14F
FY13F
FY12F
FY11F
FY10
FY09
7.0
Risk margin has been under technical pressure
Risk margin has been trending down since FY03 and started to stabilize. Korea Life
enjoyed a hefty risk margin in the early 2000s thanks to a rapidly rising death insurance
premium. Given that death insurance policies have lower claims at the early stage, rapid
growth resulted in margin expansion. However, with a slowdown in recent years, the
trend has reversed. In addition, the implementation of IBNR in 2004 made the falling
trend worse. We think that further downside is limited going forward.
There will be no additional increase in IBNR reserve requirements. Moreover, life
insurers secured flexibility in terms of pricing with the fifth mortality table in April 2006.
That said, we expect risk margin to improve.
95
May 16, 2011
But risk margin improvement may not be visible
We should note that risk premium from variable insurance is captured in fees from
separate accounts. Given the recent surge in fees from separate accounts, we think that
risk margin is already improving. However, due to accounting, we may not see the exact
amount or percentage of improvement.
Fig. 206: Korea Life: risk margin (KRW)
Fig. 207: Korea Life: risk margin (%)
(Wbn)
(%)
300
30
25
200
20
15
100
10
5
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-02
0
0
Loading margin also under technical pressure
Loading margin has been falling sharply since FY03. We think that loading margin has
been falling due to a change in accounting for acquisition costs in 2004. Prior to the
accounting change, insurers capitalized estimated acquisition costs into a deferred
acquisition cost (DAC) account, then amortized over seven years. Therefore, the entire
loading margin was recognized up front. However, after the change, insurers now defer
the actual amount, recognizing the loading margin evenly for seven years. Given that we
are six years into the new accounting method, we think that additional pressure from the
accounting change will be limited.
More recent fall in loading margin triggered by payment structure change
We think that the past year's fall in loading margin was triggered by increasing industry
competition. Insurers increased the up-front proportion of sales commission to fight off
independent agents who were trying to lure solicitors away from insurers. However, we
should note that total commission paid out remained the same. We think that the falling
trend of loading margin due to the timing issue will eventually normalize and loading
margin will improve to the mid-teens level.
Fig. 208: Korea Life: loading margin (KRW)
Fig. 209: Korea Life: loading margin (%)
(Wbn)
Mar-10
Mar-09
Mar-08
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
0
Mar-07
200
Mar-06
400
Mar-05
600
Mar-04
800
Mar-03
1,000
Mar-02
(%)
45
40
35
30
25
20
15
10
5
0
1,200
96
May 16, 2011
Savings spread may fall further
Despite continued dilution from low-yield floating-rate policies, saving spread has not
seen a significant improvement. We do not expect a drastic improvement in the savings
spread given that new money yields have been lower than the yield on existing portfolios
for over two years now.
Average crediting rate too high and falling too slowly
We believe that we are going through a trough in the rate cycle. However, given that
Korea Life’s average crediting rate is well above 6% and falling at a slow pace as the
premium growth is driven by separate accounts, we may not see an improvement in
savings spread for some time.
Fig. 210: Korea Life: average crediting rate
Fig. 211: Korea Life: % of high-yield guarantee policies
Crediting rate to fall 10~12bps pa
51% of reserve relates to policies with fixed rate of 6% or higher
(%)
6%
6.44
6.40
5%
6.40
6.38
Spread
6.51% 6.46%
4%
6.36
6.36
Avg. crediting rate
6.32
1%
6.28
0%
6.24
-1%
-2%
6.20
3Q FY09 4Q FY09 1Q FY10
2Q FY10
5.26%
5%
5.42%
4.93%
-0.02% -0.13%
-0.11%
-1.19%
-1.25%
1Q
FY09
3Q FY10
5.19%
2Q
FY09
3Q
FY09
4Q
FY09
-0.94%
1Q
FY10
6%
6%
6.22%
6.27%
2%
6.29
7%
6.36% 6.33% 6.29%
6.44%
3%
6.33
6.40% 6.38%
Yield earned
4%
-1.36%
2Q
FY10
5%
4%
3Q
FY10
Slower dilution effect
High-yield guarantee policies still make up a significant proportion of Korea Life’s
liabilities and the proportion is declining at a slow pace. Korea Life’s premium growth has
come mostly from separate accounts. Hence, we think the dilution effect is minimal and
will not bring down the high-yield guarantee proportion in a meaningful way in the near
term.
Fig. 212: Premium trend: general vs separate accounts
Fig. 213: Proportion of high-yield guarantee policies
Premium growth driven by separate accounts
51% of reserve relates to policies with fixed rate of 6% or higher
(Wtr)
General account
10
9
8
7
6
5
4
3
2
1
0
(%)
Separate account
55
53
51
49
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
47
45
3Q FY09
4Q FY09
1Q FY10
2Q FY10
3Q FY10
97
May 16, 2011
Improvement will take longer than expected
Although we believe that we are going through a trough in the interest rate cycle,
improvement in the savings spread could be slower than expected due to the recently
implemented RBC. To comply with the more strict capital adequacy requirement,
insurers have been adding long-dated bonds to their portfolios to reduce the duration
gap. However, the timing was not in favour of insurers given that the transition to the new
regulation happened at the bottom of the rate cycle.
Fig. 214: Bond portfolio breakdown by maturity (%)
Fig. 215: Duration gap trend
Buying long-dated bonds at the bottom of rate cycle
Reducing duration gap by adding long-dated bonds
(%)
100
7.76
7.74
7.71
7.67
4.47
4.33
4.20
3.68
3.48
3.47
3.50
3Q FY09
4Q FY09
1Q FY10
Less
than 1yr
90
80
7.65
1~5 yr
70
60
50
3.64
5 ~ 10 yr
40
30
20
More
than 10
yrs
10
0
FY07
FY08
FY09
3Q10
3.84
3.97
2Q FY10
3Q FY10
Fees on separate accounts
Separate account assets have seen a 29% CAGR over the past nine years thanks to
significant demand growth and a strategic move to focus on investment-linked insurance.
Currently, Korea Life earns 5.4% fees on separate account assets, down from 8.8% in
FY09. However, we believe that the actual management fee will be no more than 75bp.
The difference comes from pass-through items such as risk premium, maturity or
surrender refunds. We have already noted that the falling trend of risk margin has
stabilized. This means that fluctuation coming from the pass-through of risk premium has
also stabilized. For the purpose of our earnings projection, we assume that fees from
separate accounts as a percentage of separate account assets would continue to trend
down by 5-10bp a year and stabilize at around 4.5% in FY16F.
Fig. 216: Separate account assets and fees (%)
(Wtr)
Separate account assets (LHS)
25
(%)
10
Fees (RHS)
Mar-17F
Mar-16F
Mar-15F
Mar-14F
Mar-13F
0
Mar-12F
0
Mar-11
2
Mar-10
5
Mar-09
4
Mar-08
10
Mar-07
6
Mar-06
15
Mar-05
8
Mar-04
20
98
May 16, 2011
Risk factors
A prolonged low interest rate environment would be most negative to Korea Life given
that it has the highest proportion of high-yield guarantee policies. Its exposure to PF
loans could also impose risk.
Prolonged low interest rate environment
More than valuation risk
In addition to valuation risk, a prolonged low interest rate environment would impose
operational risks, in our view. As the market rates fall, the disparity between portfolio
rates and new money rates has widened. As a result, the company could continue to
post negative variances. This could undermine the credibility of EV valuation and
eventually result in a lower multiple.
Could trigger minimum guarantees
Korea Life provides a guaranteed minimum accumulation benefit (GMAB) on its
investment-linked products and minimum return guarantees on floating-rate policies. If
the market rates fall below the given threshold, these guarantees could be triggered.
Once insurers find themselves in this situation, insurers may compromise risk
management standards to boost yields.
Harder to acquire new business
A lower interest rate environment could have a negative impact on new business volume
due to a lower crediting rate.
PF loans
Korea Life has W1tn in PF loans
Korea Life has W1tn in PF loans outstanding that relates to housing projects. Although
the housing market has improved and unsold apartment numbers have fallen steadily for
the past two years, we have seen continuous filings of court receivership by medium-size
construction companies recently. That said, we think Korea Life may face downward
pressure whenever PF loans become an issue in the market. The company has noted
that all of its PF loans are guaranteed by larger constructors and projects are located in
Seoul and metropolitan areas where demand is healthy.
Unsold units falling quickly
Constructors have reduced new supply since the financial crisis and unsold units have
been declining rapidly. The company has noted that most of its projects are located in
Seoul and metropolitan areas where unsold units are minimal.
Fig. 217: Unsold housing unit trend
Fig. 218: Unsold units by region
Sharp drop in number of unsold units after peak in December 2008
Most unsold units are in provincial areas
(# of units)
('000 units)
165,599 units
in Dec 2008
180,000
180
Metropolitan
160
150,000
Provincial
140
120,000
120
90,000
100
80
60,000
60
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
Jun-10
Jun-09
Jun-08
Jun-07
Jun-06
Jun-05
Jun-04
Jun-03
Jun-02
Jun-01
Jun-00
Jun-99
20
Jun-98
0
Jun-97
40
Jun-96
30,000
99
May 16, 2011
Korea Life
Company overview
Company history
Established in 1946, Korea Life was the first life insurance company in Korea. Korea Life
has grown to become the second-largest life insurance company after Samsung Life in
terms of total assets and gross premium. The company started its overseas business in
2009 by establishing a subsidiary in Vietnam.
Other
Hanwha
affiliates
0.0%
Date
History
1946. 6
Established as first life insurance company
1986. 12
Surpass total asset of W1tn
1996. 5
1999. 12
Acquire contracts from Duwon Life
2001. 4
Acquired contracts from Hyundai, Samshin Life
2002. 12
Joined Hanwha Group
2007. 7
Establish bases in London and New York
2008. 4
2009. 4
Start operations in Vietnam
2010. 3
Listed in KRX
Hanwha
E&C
24.9%
Others
20.8%
Hanwha
Chemical
3.7%
Lazard Asset
Management
7.2%
KDIC
21.7%
Hanwha
Corp
21.7%
Fig. 221: Korea life insurers ranking
Rank
Total asset (Wbn)
Company
Policy reserve (bn)
Amount
M/S
Company
Total Equity (Wbn)
Amount
M/S
Company
99,116
36%
Samsung Life
Amount
13,334
M/S
Amount
M/S
Samsung Life
34,440
23%
17%
Korea Life
24,600
17%
13%
Kyobo Life
22,122
15%
38%
Company
1
Samsung Life
82,811
38%
Samsung Life
2
Korea Life
29,506
14%
Korea Life
43,249
16%
Korea Life
5,981
3
Kyobo Life
27,105
13%
Kyobo Life
39,367
14%
Kyobo Life
4,568
4
ING Life
10,311
5%
ING Life
11,528
4%
ING Life
1,739
5%
Mirae Asset Life
8,696
6%
5
Allianz
9,462
4%
Allianz
10,985
4%
Prudential
1,193
3%
Shinhan Life
7,834
5%
6
AIA Life
6,124
3%
Shinhan Life
9,369
3%
Tong Yang Life
1,095
3%
Met Life
7,132
5%
7
Shinhan Life
6,044
3%
Tong Yang Life
9,262
3%
AIA Life
992
3%
Allianz
6,821
5%
8
Tong Yang Life
5,831
3%
Heung Kuk Life
8,486
3%
Shinhan Life
966
3%
ING Life
6,782
5%
9
Mirae Asset Life
5,722
3%
KDB Life
7,397
3%
Allianz
930
3%
Tong Yang Life
6,033
4%
10
Heung Kuk Life
5,650
3%
Mirae Asset Life
6,944
3%
Met Life
763
2%
Heung Kuk Life
5,029
3%
Korea Life derives 36% of total premium from protection type policies. We should note
that protection type policies carry much higher embedded margin than wealth
accumulation products such as annuities (56%) and savings type policies (8%).
However, demand growth is coming from wealth accumulation products.
Distribution channel
In terms of the distribution channel, Korea Life distributes its products mainly through
traditional channels; exclusive solicitors (54%) and independent agents (12%).
Bancassurance sales account for 13% of distribution (on initial premium basis), but
should grow faster than other channels as the company becomes more receptive to
bancassurance channel.
100
May 16, 2011
Fig. 222: Policy mix
Group
0%
Savings
8%
Annuities
(Separate)
33%
Protection
(general)
23%
Protection
(separate)
13%
Annuities
(general)
23%
Note: Aggregated as of 3Q10
Corporate
sales
20%
Direct
marketing
1%
Bancassura
nce
13%
Exclusive
solicitor
54%
Independen
t agent
12%
Note: Aggregated as of 3Q10
Management profile
In February 2011, Nam-Gyu Cha was appointed the CEO of Korea Life. Prior to this
position, Mr Cha was Co-vice President of insurance sales at Korea Life. He was also
the head of Hanwha TechM in 2007.
Changes in shareholding structure
Prior to IPO, Korea Life was 67% owned by Hanwha Group and affiliates, and 33%owned by Korea Deposit Insurance Corporation (KDIC). After the listing, Hanwha Group
and KDIC reduced their shareholdings to 54.6% and 25%, respectively.
101
Tong Yang Life Insurance
082640.KS 082640 KS
EQUITY RESEARCH
INSURANCE
Attractive from all angles May 16, 2011
Rating
Starts at
15% EV growth for next four
years, trading at 0.7x P/EV,
legacy issue unwinding
FY12F
Michael Na - NFIK
[email protected]
+82 2 3783 2334
[email protected]
+82 2 3783 2339
FY13F
Actual
Old
New
Old
New
Old
New
Net premium (bn)
2,908
0
3,225
0
3,548
0
3,796
Normalised EPS
164
186
210
161
164
186
210
1,500.2
1,527.7
1,726.3
1,948.6
53.5
1.8
13.0
12.9
Norm. P/E (x)
8.6
N/A
8.5
N/A
7.5
N/A
6.6
Price/EV (x)
0.8
N/A
0.7
N/A
0.7
N/A
0.6
-1.8
N/A
-3.1
N/A
-4.3
N/A
-5.5
2.3
N/A
2.7
N/A
3.1
N/A
Dividend yield (%)
ROE (%)
15.0
ROA (%)
1.4
13.7
0.0
1.2
13.9
0.0
1.1
+62.2%
Korea Insurance
Currency (KRW)
161
KRW 12,950
Research analysts
Catalysts: Legacy issue unwinding, more than a rate cycle play
We expect structural improvement in TYL’s savings margin. We think the
weight of reserve for high-yield guarantee policies is likely to drop below
15% by March 2015, as high-yield guarantee policies continue to expire
and new low-floating rate policies dilute the in-force book.
Closing price
May 12, 2011
Nomura vs consensus
Our price target, 27% higher
than consensus, is the highest
on the Street.
Solid new business growth
We expect TYL to deliver solid value of new business (VNB) growth, given
its relatively smaller size, new growth opportunities from wealth
accumulation products and proliferation of non-traditional distribution
channels, in which TYL is a dominant player.
FY11F
KRW 21,000
Anchor themes
rise in 2H11F.
Attractive valuation; 62% potential upside
TYL is trading at 0.7x forward P/EV. This looks attractive, as we expect
TYL to deliver average EV growth of 15% in the next four years, driven by
new business growth and the unwinding of profitable in-force book. Our
PT of W21,000 is based on a sustainable RoEV of 14%, a COE of 12.5%
and a growth rate of 3%. Of note, we use a net interest earnings rate
(NIER) of 5.0% (25bps lower than the company’s assumption).
FY10
Target price
Starts at21,000
Potential upside
Action: Initiating coverage with BUY
We initiate coverage of Tong Yang Life (TYL) with a BUY rating and a PT
of W21,000 (implying 62% upside). TYL is a medium-size life insurance
company in Korea that has been continuously gaining market share.
31 Mar
Buy
3.5
14.1
0.0
1.1
the US.
Nomura | ASIA Tong Yang Life Insurance
May 16, 2011
Key data on Tong Yang Life Insurance
Profit and Loss (KRWbn) 2,908
-1,328
-1,235
-341
-288
-283
465
3,225
-1,499
-1,406
-366
-312
-359
537
3,548
-1,686
-1,573
-398
-331
-440
639
3,796
-1,857
-1,713
-430
-331
-535
763
414
465
537
639
763
93
182
179
199
228
48
38
38
39
40
140
-35
105
220
-58
161
217
-52
164
238
-52
186
269
-59
210
105
161
164
186
210
105
-32
73
161
-32
129
164
-38
127
186
-43
143
210
-48
161
13.3
21.5
13.3
2.3
1.4
na
na
0.0
0.9
-0.7
8.6
14.0
8.6
2.3
1.2
na
na
0.0
0.8
-1.8
8.5
13.7
8.5
2.7
1.1
na
na
0.0
0.7
-3.1
7.5
12.2
7.5
3.1
1.0
na
na
0.0
0.7
-4.3
6.6
10.8
6.6
3.5
0.9
na
na
0.0
0.6
-5.5
25.1
30.7
12.6
1.04
na
26.5
20.0
15.0
1.37
na
24.2
22.9
13.7
1.20
na
22.0
23.2
13.9
1.13
na
22.0
23.1
14.1
1.08
na
Price and price relative chart (one year) Price
Rel MSCI Korea
(KRW)
15000
14500
105
100
14000
13500
95
90
13000
12500
85
80
12000
11500
75
70
11000
65
(%)
1M
3M
12M
Absolute (KRW)
2.8
2.8
0.0
Absolute (USD)
2.6
6.4
4.2
Relative to index
0.9
-4.9
-28.8
Market cap (USDmn)
Growth (%)
Life premiums
Non life premiums
Net profit
Normalised EPS
Normalised FDEPS
28.1
na
53.5
53.5
53.5
11.0
na
1.8
1.8
1.8
10.0
na
13.0
13.0
13.0
7.0
na
12.9
12.9
12.9
A pr 11
2,270
-1,029
-1,034
-387
-141
-321
414
M ay 11
-4
3,796
M ar 11
-4
3,548
J an 11
-3
3,225
F eb 11
-1
2,908
Premium growth to outpace industry
average as the company gains
market share.
N ov 10
-1
2,270
Notes
D ec 10
FY13F
3,800
O c t 10
FY12F
3,551
S ep 10
FY11F
3,229
J ul 10
FY10
2,909
A ug 10
Reported P/E (x)
Dividend yield (%)
Price/book (x)
Price/EV (x)
Loss ratio (%)
Combined ratio (%)
Dividend payout (%)
ROE (%)
ROA (%)
ROR (%)
FY09
2,271
J un 10
Year-end 31 Mar
Gross premiums
Government charges
Reinsurance ceded
Net written premium
Net earned premium
Change in reserves
Other expenses
Investment income
Other income
Operating profit
Amortisation
Associates and JCEs
Pre-tax profit
Income tax
Minority interests
Other items
Preferred dividends
Normalised NPAT
Extraordinary items
Reported NPAT
Dividends
(%)
52-week range
(KRW)
3-mth avg daily
turnover (USDmn)
Major shareholders
(%)
Vogo Fund
1,273.1
14700/11200
1.49
58.4
103
May 16, 2011
Cash and deposits
Bonds
Equities
Unit trusts
Loans and mortgages
Foreign investments
Real estate
Other investments
Total investments
Fixed assets
Goodwill
Other assets
Total assets
Insurance reserves
Other liabilities
Total liabilities
Minority interest
Common stock
Preferred stock
Retained earnings
Proposed dividends
Other equity
Net premiums/equity
Cash and deposits
Bonds
Equities
Unit trusts
Loans and mortgages
Foreign investments
Real estate
Other investments
Per share
Reported EPS (KRW)
Norm EPS (KRW)
DPS (KRW)
BVPS (KRW)
Life/LT EVPS (KRW)
Life/LT VNBPS (KRW)
FY09
167
3,219
245
FY10
407
4,430
242
FY11F
504
5,617
440
FY12F
615
6,643
716
FY13F
731
7,632
1,075
2,352
172
688
1,351
8,195
799
2,681
261
460
1,007
9,488
830
3,176
530
566
983
11,815
896
3,691
910
684
1,213
14,472
974
4,172
1,412
808
1,459
17,290
1,053
1,676
416
11,087
7,810
1,819
305
12,442
8,978
1,950
339
15,000
11,313
2,081
373
17,900
13,914
2,215
399
20,955
16,686
1,715
2,288
3,054
4,076
5,440
541
10,066
47
11,313
-633
13,734
-1,499
16,492
-2,740
19,386
743
751
751
751
751
223
320
447
589
750
55
1,021
11,087
58
1,129
12,442
69
1,266
15,000
69
1,408
17,900
69
1,569
20,956
na
na
na
na
na
222.3
343.9
257.5
308.7
254.8
350.4
251.9
391.8
241.9
439.1
2.0
39.3
3.0
0.0
28.7
2.1
8.4
16.5
4.3
46.7
2.5
0.0
28.3
2.8
4.8
10.6
4.3
47.5
3.7
0.0
26.9
4.5
4.8
8.3
4.2
45.9
4.9
0.0
25.5
6.3
4.7
8.4
4.2
44.1
6.2
0.0
24.1
8.2
4.7
8.4
977.15
977.15
977.15
300.00
9,494.34
13,864.24
1,320.32
0.00
1,500.19
1,500.19
1,500.19
300.14
10,497.94
15,555.49
1,427.28
0.00
1,527.67
1,527.67
1,527.67
350.16
11,768.74
17,630.81
1,494.47
0.00
1,726.25
1,726.25
1,726.25
400.19
13,094.80
19,765.23
1,569.47
0.00
1,948.59
1,948.59
1,948.59
450.21
14,593.18
22,144.13
1,663.49
0.00
Notes
Unwinding of profitable in-force book
to drive earnings growth.
104
May 16, 2011
Attractive from all angles
We initiate coverage of Tong Yang Life (TYL) with a BUY rating and a PT of W21,000.
We believe TYL provides a cheap entry point, considering its solid growth profile and
likelihood of becoming the first Korean life insurer to be free from negative spread legacy
issues, making it more than just a rate cycle play.
Solid growth profile
EV growth of 15% for the next four years
We believe TYL is able to deliver average EV growth of 15% over the next four years,
driven by new business growth and the unwinding of profitable in-force book. We
forecast its VNB will grow 5% in each of FY11F and FY12F. Although we expect demand
growth to come from its less profitable wealth accumulation products, we believe TYL is
able to grow its VNB through faster volume growth, thanks to proliferation of nontraditional distribution channels in which TYL is a dominant player.
Gaining market share
In our opinion, TYL should deliver solid VNB growth given its relatively smaller size and
proliferation of non-traditional distribution channels. TYL’s regular initial premium market
share increased from 1.9% in 2001 to 6.3 % in the first three quarters of FY10, due to its
early adoption of non-traditional distribution channels. Of note, TYL is the third-largest
player in direct marketing channels in the Korean insurance segment with a 9.0% share
vs a 2.5% share for the exclusive solicitor channel.
Competition weakening
The reluctance of the three largest Korean life insurers (Samsung Life, Korea Life and
Kyobo Life) to adopt fast-growing non-traditional channels, due to channel conflicts with
the exclusive solicitors, should enable TYL to gain further market share, in our view. TYL
will also likely benefit from foreign life insurers and other medium size domestic life
insurers that lost a large number of exclusive solicitors during the financial crisis.
We expect TYL’s loading margin to improve, as it enjoys greater operating leverage with
growth. Its risk margin should also improve, as the company increased its death benefit
proportion (vs. living benefit) amid an improving mortality rate and increased flexibility in
the use of mortality table as of 2006.
Positive long-term industry outlook
We see growth opportunities for Korean life insurers as they transform into wealth
managers and providers of protection for longevity from providers of protection against
mortality and morbidity risks. We believe that, as the first baby boomers (born in
1946~1964) start to retire, the demand for products that provide lifetime income and
long-term care insurance will likely pick up. The second group of baby boomers (born in
1968~1976) will be the continued source of demand for death insurance and investmentoriented life insurance products (with tax advantages), in our view.
Trading at 0.7x P/EV
TYL is now trading at 0.7x forward P/EV. We think the stock is trading at a very
depressed level due to a flatter yield curve. Although the central bank, Bank of Korea,
has raised its key policy rate by 100bps since July 2010, the long-end of the yield curve
has been falling continuously. However, we believe the long-end should start to rise in
2H11F.
Long-term benefits from rising interest rates
The benefit from rising interest rates is clearly evident for TYL, given that fixed-rate
policies make up 56% of its in-force book. A 50bps increase in investment yield
assumption would boost its EV by 9.5%, according to our sensitivity analysis.
105
May 16, 2011
another two in 1H12F, lifting the terminal policy rate of the current cycle to 4.0% by
2Q12F. Meanwhile, he thinks that real policy rates should remain negative, doing little to
limit inflationary pressure unless it is combined with KRW appreciation.
Young Sun notes that CPI inflation should rise above 4% in 2011F, exceeding the BOK's
target band. Interest rate hikes, coupled with a stronger KRW and price control, should
partly offset cost-push inflation pressures from higher oil prices. However, rising nominal
wages and housing rents are also adding to inflation. Young Sun forecasts Korea’s CPI
inflation to rise from 2.9% in 2010 to 4.4% in 2011F, before easing to 3.6% in 2012F. We
think that the long end of the bond market will eventually react to growing concerns on
inflation.
Whether hunting for better yields or expecting KRW appreciation, foreign capital inflows
have been adding pressure on the long-end since 2H 2009. However, with the ECB
turning hawkish and the Fed's QE2 programme winding down, foreign capital inflows
may slow and we may even witness outflows going forward. We think that the long-end
of the yield curve could be lifted with rising interest rates in developed markets, as we
have seen in 4Q10. In addition, the recent strengthening of KRW could hinder foreign
capital inflows (funds pouring into Korea on expectations of KRW appreciation), further
lifting pressure on the long-end.
Long-end to rise slowly but surely
Young Sun forecasts that the five-year treasury yield will start to rise in 3Q11F and reach
4.5% by the end of 1H 2012F from the current yield of 4.0%, and the three-year treasury
will reach 4.2% by the end of 1H 2012F from the current yield of 3.6%.
Legacy issue unwinding
First to be free from negative books
TYL was relatively smaller in the 1990s when high-yield guarantee policies were sold,
with less than 2% of market share compared with the current share of 6.7%. This has
given TYL a relatively smaller negative spread book. We expect the reserve for highyield guarantee policies as a proportion of total interest-bearing reserve to fall below 15%
by FY15F from 30% in FY11F, as high-yield guarantee policies continue to expire and
new low-yield floating rate policies dilute the in-force book.
Structural improvement
We think Korea’s larger life insurers will likely move with the market rates, due mainly to
their large negative spread books. However, as we expect TYL to be free from the
legacy issue in the medium term, we believe the stock will be less affected by the market
rates.
Potential M&A play
Vogo Fund now the largest shareholder
Tong Yang Group sold a 44.05% stake in TYL to Vogo Fund and a 2.46% stake to MinJu
Lee at a price of KRW18,000 on 23 March 2011. MinJu Lee is the former chairman of
C&M (a cable company now owned by Macquarie and MBK Partners). Tong Yang Group
now only owns 3% of TYL.
MinJu Lee could take over if he wants
Tong Yang Group has an option to buy back 30% share from Vogo Fund. This means
that Vogo could sell the rest of its stake (27.55%) to any party. If MinJu Lee were to buy
the stake and purchase an additional 3% in the market, he would become the largest
shareholder. Given that he has sold C&M for KRW1.46tn, we would think he has
significant capital for investment.
106
May 16, 2011
PF loans could impose risk
W270bn in PF loans
We are not totally comfortable with the asset quality of TYL’s loan portfolio, as the
company has W270bn (25% of shareholders’ equity) in project financing (PF) loans
relating to real estate projects. We have seen several contractors in Korea turning to
court receivership lately.
Court receivership / workout of construction companies
Earlier this year, we witnessed the court receivership / workout cases of several
construction companies ranked in the Top 100 by building capacity. The names include
World Construction, Jin Heung Corp, LIG E&C, Dongyang E&C and Sambu
Construction.
Restructuring of construction sector winding down
However, exposure for the insurance sector remains limited with a smaller PF loan
balance of KRW4.9tn, which translates to only 7% of the total KRW67tn in PF loans
remaining in the system. In addition, almost 40 constructors previously ranked in the Top
100 have entered court receivership / workout programmes. That said, the possibility of
more firms following suit remains low, in our view.
Fig. 225: Constructors ranked in Top 50 that have entered workout / court receivership
Rank
12
17
22
25
26
31
35
Construction Firm
Kumho Industrial
Kyeongnam Corp
Halla E&C
Poonglim Industrial
Byucksan E&C
Shindongah Construction
Namyang E&C
Rank
38
39
40
47
49
46
44
Construction Firm
Namkw ang Corp
Hanil Construction
Jinheung Corp.
Samho
Hw asung Industrial
Kumkw ang Corp
Dongyang E&C
Limited downside risk
Going forward, we expect default from the construction sector to be largely mitigated,
given: 1) continuing signs of recovery in the domestic housing market; and 2) high
likelihood for major shareholders to make capital injections to free up liquidity. According
to local press (Korea Economic Daily, 3 May, 2011), Doosan Group announced a capital
injection of KRW500bn to its affiliate Doosan E&C. Hyosung, STX Group and Daelim
Industrial have followed suit with similar capital injections to free up liquidity for affiliates
in the construction sector.
107
May 16, 2011
Fig. 226: TYL- Financial Summary
Total Premium
General Account
Separate Account
FY07
2,447
1,860
586
FY08
2,590
2,028
562
FY09
2,883
2,270
613
FY10F
3,553
2,908
645
FY11F
3,906
3,225
681
FY12F
4,266
3,548
718
FY13F
4,554
3,796
758
FY14F
4,839
4,043
796
FY15F
5,081
4,245
835
Premium Income
Risk Premium
Loading Premium
Savings Premium
1,862
240
643
978
2,030
257
715
1,056
2,271
272
691
1,307
2,909
344
698
1,866
3,229
371
759
2,099
3,551
398
817
2,337
3,800
414
855
2,531
4,047
429
890
2,728
4,249
438
914
2,898
Benefits Paid
U/W Expenses
Acquisition Cost
DAC Deferral
Amortization of DAC
Net Increase in DAC
Maintenance Costs
205
538
20
428
(409)
276
132
110
233
611
12
485
(473)
378
95
126
247
524
12
395
(383)
387
(4)
129
894
461
322
918
580
325
901
919
414
Savings Margin
Operating Profit
Others
139
(56)
83
22
27
(6)
128
(118)
11
30
46
(15)
192
(100)
93
48
52
(5)
106
75
182
38
43
(5)
118
61
179
38
45
(7)
128
72
200
39
46
(7)
135
95
230
40
48
(7)
142
123
265
42
49
(7)
147
152
299
44
52
(8)
Pre-tax Profits
Effective Tax
Net Profits
105
23
81
140
35
105
220
58
161
217
52
164
239
53
186
271
60
211
307
67
239
344
76
268
41
8
33
307
628
20
388
(368)
341
31
237
1,021
1,235
465
330
682
0
432
(432)
366
66
249
1,169
1,406
537
354
732
0
476
(476)
398
78
257
1,332
1,573
639
369
765
0
509
(509)
430
79
256
1,488
1,713
766
382
795
0
542
(542)
463
79
253
1,664
1,855
914
390
815
0
569
(569)
493
76
246
1,846
1,971
1,071
Total Assets
Invested Assets
Cash & Deposits
Securities
Stocks
Other Equity Investment
Net Loans
Real Estate
Non-invested Assets
DAC
Others
FY07
8,013
6,011
461
3,134
364
23
2,747
1,824
592
970
709
261
1,032
FY08
FY09 FY10F FY11F FY12F
9,140 11,087 12,442 15,000 17,921
6,689
8,183
9,488 11,815 14,494
230
167
312
393
484
3,749
4,987
5,442
7,065
9,024
273
245
280
421
610
25
26
26
28
29
3,450
4,715
5,136
6,616
8,384
2,050
2,352
3,055
3,564
4,078
661
676
678
793
908
1,185
1,228
1,135
1,235
1,347
803
799
830
896
974
382
428
305
339
373
1,266
1,676
1,819
1,950
2,081
FY13F
21,023
17,357
580
11,236
851
28
10,357
4,530
1,011
1,451
1,053
399
2,215
FY14F
24,315
20,410
682
13,717
1,150
23
12,543
4,912
1,099
1,557
1,132
425
2,348
FY15F
27,728
23,592
788
16,440
1,511
16
14,913
5,198
1,166
1,654
1,208
446
2,483
Total Liabilities
Policy Reserve
Premium Reserve
Other Liabilities
7,479
6,012
5,758
232
4
18
3
0
2
394
1,032
8,494
6,778
6,505
251
3
20
1
0
11
421
1,266
Paid in Capital
Capital Surplus
Retained Earnings
Capital Adjustment
534
438
7
86
3
646
484
81
118
(37)
10,066
7,833
7,501
288
2
21
2
0
17
500
1,676
11,314
8,978
8,613
319
2
21
4
0
20
409
1,819
13,734
11,313
10,948
343
0
21
4
0
20
452
1,950
16,513
13,914
13,526
368
0
21
4
0
20
497
2,081
19,452
16,686
16,282
383
0
21
4
0
20
532
2,215
22,552
19,618
19,200
396
0
21
4
0
20
567
2,348
25,746
22,649
22,223
404
0
21
4
0
20
595
2,483
1,021
538
205
223
54
1,129
543
207
320
58
1,266
543
207
447
68
1,409
543
207
590
68
1,572
543
207
753
68
1,762
543
207
944
68
1,982
543
207
1,163
68
108
May 16, 2011
Fig. 227: TYL per share data and performance ratios
Per Share Data
ROA (%)
ROE (%)
EPS Growth (%)
Gross Dividend
DPS (Won)
FY07
961
6,328
1.1
16.7
17.0
FY08
337
6,680
0.4
5.5
(64.9)
FY09 FY10F FY11F FY12F FY13F FY14F FY15F
977
1,502
1,529
1,731
1,964
2,225
2,493
9,494 10,495 11,767 13,099 14,613 16,388 18,430
1.0
1.4
1.2
1.1
1.1
1.1
1.0
12.6
15.0
13.7
13.9
14.2
14.4
14.3
189.6
53.7
1.8
13.2
13.5
13.3
12.0
0
0
0.0
84
0
0
0.0
97
0
0
0.0
108
FY07
FY08
FY09
FY10F
FY11F
30.6
17.7
100.8
77.3
(9.9)
NM
45.5
23.9
18.0
12.4
21.3
12.1
22.6
5.9
9.0
(4.2)
(30.7)
(0.8)
NM
66.5
(59.7)
14.1
11.3
12.4
12.7
21.1
11.3
11.9
9.1
7.9
59.6
NM
14.4
221.8
21.3
22.3
14.8
15.6
58.0
23.3
28.1
5.3
43.6
(58.1)
NM
(17.8)
53.7
12.2
16.0
29.9
14.6
10.5
Risk Premium
Loading Premium
Savings Premium
12.9
34.5
52.5
12.7
35.2
52.0
12.0
30.4
57.5
Margin Analysis (%)
Net Interest Margin
14.2
16.4
(5.8)
5.8
6.0
3.3
9.2
14.6
(11.1)
5.3
6.8
4.0
Investment Mix (%)
Cash & deposits
Securities
Net loans
Real estate
7.7
52.1
30.3
9.8
Securities Mix (%)
Stock
Money invested
Special bonds
Corporate bonds
Overseas securities
Others
PERFORMANCE RATIOS
Growth (%)
Total Premium
General Account
Separate Account
Risk Margin
Loading Margin
Savings Margin
Commission Income
Net Profits
Total Assets
Invested Assets
Net Loans
Policy Reserve
32
300
6.0
108
38
350
6.0
108
43
400
6.0
108
48
450
5.5
108
48
450
5.5
108
48
450
5.0
108
FY12F
FY13F
FY14F
FY15F
9.9
10.9
5.5
11.8
10.5
(0.2)
4.3
1.8
20.6
24.5
16.7
26.0
12.1
9.2
10.0
5.5
7.1
9.4
0.2
2.1
13.2
19.5
22.7
14.4
23.0
11.3
6.7
7.0
5.5
4.1
6.4
0.3
4.0
13.5
17.3
19.8
11.1
19.9
11.6
6.3
6.5
5.0
3.6
5.8
0.3
3.6
13.3
15.7
17.6
8.4
17.6
12.1
5.0
5.0
5.0
2.0
4.2
0.2
5.8
12.0
14.0
15.6
5.8
15.4
12.5
11.8
24.0
64.2
11.5
23.5
65.0
11.2
23.0
65.8
10.9
22.5
66.6
10.6
22.0
67.4
10.3
21.5
68.2
9.3
24.1
(7.6)
5.7
6.5
3.6
10.6
10.0
4.0
5.4
5.7
2.5
11.0
10.2
2.9
5.2
5.5
2.3
11.0
10.3
3.1
5.0
5.3
2.2
11.0
10.5
3.8
4.9
5.3
2.2
11.0
10.7
4.5
5.0
5.3
2.1
11.0
10.8
5.3
5.0
5.4
2.1
3.4
56.0
30.6
9.9
2.0
60.9
28.7
8.3
3.3
57.4
32.2
7.2
3.3
59.8
30.2
6.7
3.3
62.3
28.1
6.3
3.3
64.7
26.1
5.8
3.3
67.2
24.1
5.4
3.3
69.7
22.0
4.9
11.6
0.7
20.9
17.9
21.5
16.9
6.3
0.0
4.1
7.3
0.7
9.1
21.4
21.0
15.9
5.8
0.0
4.6
4.9
0.5
28.0
23.3
13.2
12.5
3.4
0.0
3.8
5.1
0.5
23.1
22.4
9.5
24.5
2.6
0.0
4.8
6.0
0.4
30.1
22.0
9.6
21.8
5.5
0.5
4.2
6.8
0.3
29.7
21.6
9.6
19.0
8.4
1.0
3.6
7.6
0.2
29.3
21.2
9.7
16.3
11.3
1.5
2.9
8.4
0.2
28.8
20.8
9.8
13.5
14.2
2.0
2.3
9.2
0.1
28.4
20.4
9.9
10.8
17.1
2.5
1.6
6.5
76.7
11.2
322.9
6.7
26.0
217.3
6.9
74.0
13.4
333.9
7.1
29.1
180.1
8.2
73.5
14.5
344.9
9.2
36.7
258.1
9.1
75.1
14.9
308.7
9.1
37.0
261.7
8.7
77.6
13.7
350.4
8.4
37.1
261.5
8.1
79.9
12.2
391.8
7.9
37.7
261.2
7.7
81.8
11.0
439.1
7.5
39.2
260.2
7.4
83.3
10.1
484.8
7.2
41.2
258.9
7.2
84.5
9.3
533.0
7.1
44.1
257.1
109
May 16, 2011
Valuation
TYL is trading at an attractive multiple of 0.7x forward P/EV. As the long-end of the yield
curve starts to rise, we think the stock should trade up to our target price of W21,000.
Rising market rates are a key share-price catalyst, in our view.
PT of W21,000, implying significant upside
Valuation attractive trading at 0.7x forward P/EV
We value TYL on an embedded value basis, applying a P/EV multiple of 1.2x forward
EV. We assume a sustainable RoEV of 14%, a COE of 12.5% and a growth rate of 3%.
We used a higher COE than other life insurers to reflect TYL’s relatively smaller size and
liquidity.
Our RoEV forecast could be on the conservative side
Of note, our estimated sustainable RoEV would be 1ppt higher if we were to exclude the
negative variance we have reflected in our forecast; we noticed the negative variance in
FY08 and FY09. We would likely remove the assumed negative variances should we
gain more confidence in TYL's EV.
We assume a lower net investment earnings rate (NIER) for the purpose of EV forecast.
TYL used an NIER of 5.25% for its FY09 EV calculation. In comparison, we assume an
NIER 5.0%.
Fig. 228: EV projection and PT
(Wbn)
Embedded value (EV)
Growth of EV (RoEV)
Current mkt cap
P/EV
VNB
NBM
FY09
1,019
472
1,491
1,334
0.9
142
(1.1)
FY10F
1,127
546
1,673
14.4%
1,334
0.8
154
(2.2)
Target multiple
Target price
Implied NBM
FY11F
1,260
635
1,895
15.5%
1,334
0.7
161
(3.5)
FY12F
1,400
728
2,128
14.6%
1,334
0.6
169
(4.7)
FY13F
1,559
837
2,396
14.9%
1,334
0.6
179
(5.9)
FY14F
1,750
953
2,703
14.8%
1,334
0.5
190
(7.2)
1.2
2,274
21,000
2.4
PT would be KRW30,000 based on the appraisal value methodology
The implied NBM is 2.4x our PT. However, using the appraisal value method, we could
justify up to 8.0x NBM. Of note, we only reflect a 10-year projection in our NBM
calculation. Typically, a 30-year DCF model is used in the region to derive NBM.
However, due to the infancy of the EV valuation methodology in Korea, we do not want
to pay for more than 10 years.
More appropriate to use P/EV
There is upside potential to our PT using the appraisal value method. However, we think
it is more appropriate to use the P/EV methodology for TYL, given some negative
variance seen in the EV, which may not be captured in the NBM technique. In addition,
the technique ignores near-term changes in EV growth profile.
Fig. 229: VNB projection and target NBM using appraisal valuation method
(Wbn)
New business margin
Discount factor
PV of VNB
Sum of PV
Implied multiple
FY11F
992
16.2%
161
1.0
161
1,283
8.0
FY12F
1,062
15.9%
169
1.1
152
FY13F
1,136
15.8%
179
1.2
145
FY14F
1,210
15.7%
190
1.4
139
FY15F
1,282
15.7%
201
1.5
132
FY16F
1,353
15.6%
211
1.7
125
FY17F
1,421
15.5%
221
1.9
118
FY18F
1,477
15.5%
229
2.1
110
FY19F
1,536
15.5%
238
2.3
103
FY20F
1,598
15.5%
248
2.6
97
110
May 16, 2011
Valuation cross-check
With Samsung F&M
Samsung F&M is trading at a trailing P/EV of 1.3x and an NBM of 4.3x; historically, it has
never traded below 1.1x trailing P/EV. In comparison, TYL is trading at a trailing P/EV of
0.8x and negative NBM. We believe TYL's EV growth profile measures up to that of
Samsung F&M. Samsung F&M's average EV growth over the past five years is 15%
compared to 15% for TYL for the next four years. That said, we think that the risk is
greater on the upside in terms of valuation multiple.
(W'000)
Mar/11
Sep/10
Mar/10
Mar/09
Sep/08
Mar/08
Sep/07
Mar/11
Sep/10
Mar/10
Sep/09
Mar/09
Sep/08
Mar/08
Sep/07
Mar/07
Sep/06
Mar/06
1.0x
2.0x
Mar/07
1.2x
8.0x
5.0x
Sep/06
1.5x
18.0x 14.0x 11.0x
300
280
260
240
220
200
180
160
140
120
100
Mar/06
1.8x
1.2x
2.0x
300
280
260
240
220
200
180
160
140
120
100
Sep/09
(W'000)
With PBR methodology
As more profitable new businesses continue to flow into its in-force book, we think return
on shareholders' equity will likely improve to reach a sustainable level of 15% in the
medium term. Our PT would be KRW15,000 (implying 19% upside) based on the PBR
methodology.
But PBR could be misleading
Given the long-tail nature of life insurance, we believe current earnings and book value
cannot capture the value of current in-force book, especially if there is a significant
difference in profitability between in-force book and new business (which is the case for
Korean lifers who have been suffering from negative spread on legacy products). That
said, investors should not miss out on TYL that looks attractive even on P/BV.
Rising interest rate positive for EV
Rising market rates are a potential positive catalyst for the share price of TYL. Based on
the sensitivity analysis provided by the company, a 50bps increase in investment yield
assumption would boost the value of its in-force book by 27% and EV by 9.5%. Of note,
the investment yield assumption is 5.25% and the actual yield for the first three quarters
of FY11 is 5.7%. By comparison, the current average crediting rate is 5.67%.
111
May 16, 2011
Fig. 232: EV sensitivity
Fig. 233: EV sensitivity in %
EV most sensitive to change in NIER assumption
50bps increase in NIER assumption to boost EV by 9.5%
(%)
10
(Wbn)
150
8
6
100
148
50
Claims ± 10%
(8)
(10)
Lapse ± 10%
(6)
NIER ± 50bps
(4)
Maintenance ± 10%
(200)
(2)
Discount rate ± 1%
Claims ± 10%
Lapse ± 10%
NIER ± 50bps
Maintenance ± 10%
(150)
0
Discount rate ± 1%
(100)
8.2%
2
(50)
9.5%
4
128
VNB more sensitive to risk discount rate and lapse ratio
VNB is not sensitive to interest rates unlike VIF, as most of TYL’s new businesses are
floating rate policies. VNB is rather sensitive to the lapse ratio since most policy
cancellations occur in the first twenty five months and by definition, new business
includes policies acquired in the past one year.
Fig. 234: VNB sensitivity
Fig. 235: VNB sensitivity in %
VNB is not sensitive to NIER assumption
VNB most sensitive to lapse ratio assumption
(Wbn)
(%)
20
15
15
10
10
12
(20)
Maintenance ± 10%
Claims ± 10%
(10)
Lapse ± 10%
Claims ± 10%
Lapse ± 10%
NIER ± 50bps
Maintenance ± 10%
(15)
Discount rate ± 1%
(10)
(5)
NIER ± 50bps
0
0
(5)
13.1%
5
Discount rate ± 1%
5
20
(15)
PT assuming 50bps increase in NIER
PT change would be minimal
Our PT would not change in a meaningful way even if we were to assume a higher
NIER, as it would only result in a lower RoEV eliminating low base effect. In addition, it
would take time for higher market rates to flow through the fixed income portfolio.
We would not change TYL’s PT
For TYL, we would not change our PT even with a higher NIER assumption. While we
could lower our target multiple from 1.2x to 1.1x to reflect a lower RoEV in the near term,
we believe RoEV will likely pick up in the medium term as higher market rates flow
through its fixed income portfolio. Eventually, we should be able to apply a higher target
multiple.
112
May 16, 2011
Fig. 236: TYL’s EV projection and PT assuming 50bps increase in NIER
Our PT would not change even assuming higher NIER
(Wbn)
FY09
1,019
546
Embedded value (EV)
1,565
Growth of EV (RoEV)
Current mkt cap
1,334
P/EV
0.9
VNB
142
NBM
(1.6)
Target multiple
Target mkt cap
Target price
Implied NBM
FY10F
1,127
617
1,744
13.5%
1,334
0.8
154
(2.7)
FY11F
1,261
703
1,964
14.8%
1,334
0.7
161
(3.9)
FY12F
1,398
793
2,191
13.7%
1,334
0.6
169
(5.1)
FY13F
1,571
890
2,461
14.5%
1,334
0.5
179
(6.3)
FY14F
1,787
993
2,781
15.0%
1,334
0.5
190
(7.6)
1.1
2,161
21,000
1.2
113
May 16, 2011
15% EV growth for next four years
We expect TYL to deliver average EV growth of 15% a year for the next four years,
driven by unwinding of profitable in-force book and solid new business growth.
Ahead of competition
Proliferation of non-traditional distribution channel has been the key
TYL has been growing faster than its peers by expanding into non-traditional distribution
channels. The Korean insurance market is still a push market where increasing points of
contact with potential customers results in volume growth. TYL has the third-highest
market share in direct marketing channels such as home shopping TV networks, Internet
and telemarketing.
TYL is gaining market share
Given that the non-traditional channels are growing faster than the traditional channels,
we expect TYL to gain additional market share going forward. Of note, TYL holds a 9.0%
share of non-traditional channel (bankassurance and direct marketing channels)
compared with 2.5% for the traditional channels (exclusive solicitor and employees).
TYL’s regular initial premium market share increased from 1.9% in 2001 to 6.3% in 2008.
Fig. 237: Traditional channel market share
Fig. 238: Non-traditional channel market share
TYL has 2.5% MS of exclusive solicitor channel
TYL has 9.0% MS of non-traditional channel
Shinhan
Allianz
Tong Yang
Samsung
Woori Aviva
KB
Korea
Samsung
Kyobo
Korea
Allianz
Shinhan
ING
Tong Yang
Mirae Asset
45
40
35
30
25
20
15
10
5
0
Cardif
(%)
14
12
10
8
6
4
2
0
(%)
Balanced channel strategy
The proportion of new business acquisition by bancassurance recently increased sharply
due to increased demand for savings-type of policies. However, the company still
maintains a better balanced distribution channel than its peers, in our view. We think that
the multi-channel strategy is the right approach as it reduces dependency on one
particular channel and allows faster implementation of new channel strategy.
Fig. 239: TYL's initial premium by channel
(%)
100
Banassurance
Independent agents
Direct marketing
Fig. 240: TYL's new business market share trend
Solicitors
(%)
6.5
80
6.0
60
5.5
40
5.0
20
4.5
0
6.1%
6.3%
5.8%
4.8%
5.0%
4.0
Mar07
Mar08
Mar09
Mar10
Dec10
Mar07
Mar08
Mar09
Mar10
Jan11
114
May 16, 2011
Competition weakening
The big three still not receptive of non-traditional channels
The reluctance of the three largest Korean life insurers (Samsung Life, Korea Life and
Kyobo Life) to adopt the fast-growing non-traditional channels, due to channel conflicts
with the exclusive solicitors, should help TYL to gain further market share, in our view.
Foreign players damaged heavily during the crisis
TYL should also benefit from foreign life insurers, namely ING Life and PCA Life, losing a
large number of exclusive solicitors during the financial crisis. We have not seen foreign
lifers rebuilding their sales force yet.
Other medium size local players were also damaged heavily
In addition, we note that TYL's domestic competitor KDB Life (unlisted) has had
deployed a similar distribution strategy but it weakened during the financial crisis. KDB
Life, formerly Kumho Life, incurred significant investment losses during the financial
crisis, which drag down its solvency margin to mere 30%. The company was later sold to
Korea Development Bank. Mirae Asset Life (unlisted) also lost a large number of
solicitors during the crisis. Mirae Asset Life had grown fast on the back of growing
demand for investment linked insurance and its reputation as a leading asset manager.
However, during the crisis, its new business volume for investment linked products fell
sharply and so did the solicitors.
Fig. 241: ING Life & PCA Life solicitor trend
Fig. 242: KDB Life & Mirae Asset Life solicitor trend
ING Life and PCA Life lost 38% of their solicitors
KDB and Mirae Asset Life lost 33% of their solicitors
14,000
22,000
13,000
20,000
12,000
18,000
11,000
10,000
16,000
9,000
14,000
8,000
12,000
7,000
6,000
10,000
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Fig. 243: Initial premium market share
Fig. 244: Medium size lifers' market share
Foreign lifers losing out
Mirae Asset and KDB losing out
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
100%
80%
60%
40%
20%
Mar11
Dec10
Mar10
Mar09
Mar08
Mar07
Mar06
Mar05
Mar04
Mar03
Mar02
Mar01
Mar99
Mar98
Mar97
Mar96
Mar95
Mar94
Dec10
Mar11
Mar10
Kumho
Mar09
Mar08
Mar07
Mar06
Mirae asset
Mar05
Mar04
Tong Yang
Mar03
Foreign
Mar02
SME
Mar01
Korea
Mar99
Kyobo
Mar98
Samsung
Mar97
Mar93
0%
Shinhan
115
May 16, 2011
In-force book growing fast
We like TYL since its already profitable in-force book is growing at a fast pace, thanks to
solid VNB growth. We expect VIF to grow 16% and 15% in FY11F and FY12F,
respectively, driven by new business growth.
TYL's VNB as a proportion of VIF is significant at 29%. Of note, we have adjusted its VIF
by lowering the NIER to 5% from 5.25%. We estimate VNB growth of 5% for each of
FY11F and FY12F. Note that if we were to remove negative variances we reflected for
the purpose of the VIF projection, then our VIF growth estimates would be 22% and 19%
for FY11 and FY12, respectively.
In our view, growth driven by new businesses is healthier and deserves a higher
valuation. We expect 34% of EV growth to come from the addition of VNB over the next
two years.
Fig. 245: VIF growth profile
Fig. 246: RoEV contribution breakdown
VIF-VNB
(Wbn)
1,000
VNB
800
183
175
600
400
200
167
158
663
569
478
393
0
Mar12
Mar13
Mar14
RoEV from VIF and ANW
(%)
18
16
14
12
10
8
6
4
2
0
5.6%
Mar15
RoEV from NB
5.2%
4.8%
4.5%
10.3%
9.4%
9.6%
10.0%
Mar12
Mar13
Mar14
Mar15
VNB growth of 5% for FY11F and FY12F
Solid VNB growth
We forecast VNB growth of 5% for each of FY11F and FY12F. We think that TYL should
grow its annual premium equivalent (APE) by 7% on average for FY11F and FY12F,
driven by continuous market share gain. Meanwhile, we believe that the new business
margin will likely fall continuously given that most of growth is coming from lower-margin
savings type policies and investment-linked products.
Fig. 247: APE and NB margin forecast
(Wbn)
1,700
APE sales (Won bn)
(%)
17
NB profit margin
1,500
16
1,300
1,100
16
900
Mar21
Mar20
Mar19
Mar18
Mar17
Mar16
Mar15
Mar14
Mar13
15
Mar12
700
116
May 16, 2011
Not too concerned about product mix change
There have been some concerns on the company’s increased proportion of savings type
policies in new business. Although its overall new business margin could fall (as savings
type policies have lower embedded margins due to their lower risk premium proportion),
we are not overly concerned given that the company is not shifting its existing channel
capacity to savings type policies. The company has noted that the increase in the
savings type policy proportion comes from adding additional bancassurance capacity.
Fig. 249: APE by policy type (KRW)
40%
20%
21%
42%
34%
32%
36%
Mar-10
Dec-10
43%
27%
21%
Mar-08
Mar-09
Savings
Annuities
Protection (Separate)
Protection (General)
3QFY3/11
30%
8%
Corporate pension
2QFY3/11
29%
6%
(Wbn)
350
300
250
200
150
100
50
0
1QFY3/11
6%
Savings
4QFY3/10
5%
But not at the expense of higher margin protection type
Protection
3QFY3/10
Variable
2QFY3/10
Annuities
1QFY3/10
Proportion of lower margin savings type increasing
Slower persistency ratio recovery is a concern
Samsung Life and Korea Life have shown a quick recovery in the thirteenth month
persistency ratio. However, TYL's persistency ratio is not recovering as fast. TYL has
noted that the most recent figures show that persistency ratio is improving steadily. We
would become less bullish if its persistency ratio fails to recover to levels seen before the
financial crisis. Of note, VNB is most sensitive to the persistency ratio.
Korea
Mirae asset
(%)
90
Samsung
Tong Yang
Fig. 251: Current 25th month persistency ratio is 56^
Kyobo
Korea
Mirae asset
(%)
80
85
Samsung
Tong Yang
Kyobo
70
80
75
60
70
50
65
60
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
2H04
1H04
1H10
2H09
1H09
2H08
1H08
2H07
1H07
2H06
1H06
2H05
1H05
2H04
1H04
40
12% and 11% ANW growth for FY11F and FY12F
ANW growth driven by unwinding of profitable book
TYL's VIF, as a proportion of EV, is the highest among listed life insurers at 33% (based
on FY11F) compared to 29% for Samsung Life and 11% for Korea Life. We think that the
unwinding of profitable VIF should result in 12% and 11% ANW growth for FY11F and
FY12F, respectively. We forecast TYL's earnings will grow by 13% and 12% in FY11F
and FY12F, respectively. We attribute the projected earnings growth to strong
improvement in premiums and risk and loading margins. In addition, we expect steady
growth in commission income from separate accounts.
117
May 16, 2011
Fig. 252: Net profit projection
Fig. 253: ROE projection
(Wbn)
350
(%)
16
300
15
250
200
14
150
100
13
50
12
0
Mar11 Mar12 Mar13 Mar14 Mar15 Mar16 Mar17
Mar11 Mar12 Mar13 Mar14 Mar15 Mar16 Mar17
Source: Nomura model based
Source: Nomura model based
In-force book profitability is improving
We expect the profitability of in-force book to improve, driven mainly by improvement in
loading margin and savings margin. We expect TYL’s loading margin to improve on
increased operating leverage. In addition, savings margin is also expected to improve as
the weight of high-yield guarantee policies declines.
TYL has one of the lowest operating expense ratios among Korea lifers. Its expense ratio
is even lower than those of the Big-Three insurers, which have a much bigger scale. We
think that with volume growth, TYL should enjoy operating leverage and improve its
loading margin.
Fig. 254: TYL to enjoy greater operating leverage
(Wbn)
300
Actual maintenance expense
Maintenance margin
Fig. 255: Loading margin improving
(%)
60
250
Maintenance margin as % of expected
maintenance expense
55
200
50
150
100
45
50
0
40
Mar-08
Mar-09
Mar-10
Mar-11(e)
Mar-08
Mar-09
Mar-10
Mar-11(e)
TYL’s risk margin has been falling due the implementation of IBNR in 2004. Lifers started
to reserve for IBNR in FY04. The reserve rate was increased every year to 10% in FY06.
We think that further pressure from the IBNR reserve is limited, given that there will be
no additional increase in IBNR reserve requirements. Hence, we expect the risk margin
of TYL to improve, as the company increased the death benefit proportion amid an
improving mortality rate and increased flexibility in the use of mortality table as of 2006.
118
May 16, 2011
Fig. 256: Mortality/morbidity margin improving
Claims paid
(Wbn)
350
Fig. 257: Risk margin improving
Mortality margin
Mortality margin as % of risk premium
(%)
18
300
16
250
14
200
12
150
10
100
8
50
6
0
Mar-07
Mar-08
Mar-09
Mar-10
Mar-07
Mar-11(e)
Mar-08
Mar-09
Mar-10
Mar-11(e)
Fees on separate account
TYL’s separate account assets saw a 30% CAGR over the past ten years, due to
significant growth of investment linked insurance. Currently, TYL earns 2.4% fees on
separate account assets, a drop from 4.0% in FY09. We believe the actual management
fee collected should be 50bps to 75bps. The difference comes from pass-through items
such as risk premium, maturity or surrender refunds. We expect the fees from separate
account as a percentage of separate account asset to continue to trend downward,
stabilizing at around 2.1% in FY17F.
Fig. 258: Fees on separate account
Fees as % of total asset to stabilize at around 2%
(Wbn)
3,000
Fees %
5%
2,500
4%
2,000
3%
1,500
2%
1,000
FY16F
FY15F
FY14F
FY13F
FY12F
FY11F
FY10
FY09
FY08
FY07
FY06
FY05
FY04
0%
FY03
FY02
1%
FY01
500
119
May 16, 2011
Legacy issue unwinding
TYL should be free from problematic high-yield guarantee policies in the medium term, in
our view. We think the larger lifers will likely move with the market rate owing to their
large negative spread books, but the legacy issue is actually unwinding for TYL.
High-yield guarantee policies maturing
Large exposure to high-yield guarantee policies
TYL, in our view, has been suffering from high-yield guarantee policies which it had sold
in the 1990s. Currently, 55.5% of its savings reserves represent fixed crediting rate
policies, and 30.7% of its fixed crediting rate policies have a guaranteed yield above 5%.
Fig. 259: Fixed vs. floating policy
Fig. 260: Fixed crediting rate with yield higher than 5%
Fixed
70%
45%
Floating
62.3%
55.5%
60%
50%
35%
30.7%
30%
44.5%
37.7%
40%
39.2%
40%
25%
20%
30%
15%
20%
10%
10%
5%
0%
0%
Jun09
Jun09
Dec10
Dec10
High-yield guarantee policies maturing slowly
The high-yield guarantee policies sold in the 1990s have less probability of being
surrendered, in our view. Moreover, above 70% of the policies have a maturity of 20
years and longer. However, we have seen a decline in the absolute amount of reserves
by 6.4% for TYL. Theoretically, if there was no surrender or maturing, then the reserve
amount should increase by 7.53% (average crediting rate for high-yield guarantee
policies), based on our estimates. However, the absolute amount of reserves increased
by only 1.1%.
Fig. 261: TYL fixed rate policies by crediting rate
3.75%
3.80%
3.90%
4.00%
4.20%
Dec10
4.50%
4.60%
4.80%
5.00%
5.50%
6.00%
6.50%
7.50%
8.50%
9.50%
10.50%
Jun09
4.25%
(Wbn)
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
120
May 16, 2011
High-yield guarantee weight to fall below 15% by FY14
Weight of high-yield guarantee policies to fall below 15% by FY14
Although the maturing of the problematic high-yield guarantee policies will be a slow
process, we believe the proportion should fall fairly quickly as new low-yield floating rate
policies dilute the in-force book. We expect the reserves for high-yield guarantee
policies, as a proportion of total interest-bearing reserves, to fall below 15% by FY14.
Fig. 262: High guarantee policy reserves
Fig. 263: Average credit rate on total in-force policies
(%)
60
(%)
7
50
7
40
6
30
Mar12F
Mar11F
Mar-10
Mar-09
Mar-08
Mar-06
Mar13F
Mar12F
Mar11F
Mar-10
Mar-09
5
Mar-08
0
Mar-07
5
Mar-06
10
Mar-07
6
20
121
May 16, 2011
Potential M&A play
Vogo Fund is now the largest shareholder in TYL with a 57.6% stake. Tong Yang Group
has an option to buy back a 30% stake. But Vogo Fund could sell 27.6% to anyone. We
think management control is up for grabs.
Vogo Fund has the key
Vogo Fund is now the largest shareholder
Tong Yang group sold a 44.05% stake in TYL to Vogo Fund and a 2.46% stake to MinJu
Lee at a share price of KRW18,000 on 23 March 2011. MinJu Lee is the former chairman
of C&M (a cable company now owned by Macquarie and MBK Partners). Tong Yang
group now only owns 3% of TYL.
Tong Yang group has the option to buy back 30% from Vogo Fund
Tong Yang has a three-year option to buy back a 30% stake from Vogo Fund for a strike
price of KRW18,000 plus 11.5% compounding interest rates minus any dividend paid.
However, this still leaves 27.6% for Vogo Fund to place to a third party.
Tong Yang group needs to pay KRW770bn for the 30% stake
We think that management will likely increase the payout ratio in order to lower the strike
price. Based on our forecasts, TYL should be able to buyout 30% without much impact
on its capital adequacy ratio. That said, we think, the strike price will likely be KRW770bn
for the 30% stake over three years. If Tong Yang group does not turnaround its financial
status, the amount seems burdensome for the group, in our view.
Fig. 264: Shareholding structure before stake sale
Others,
21.5%
Tong Yang
Group, 49.5%
Fig. 265: Shareholding structure after stake sale
Others, 21.5%
Treasury
stock, 1.4%
Treasury
stock, 1.4%
Tong Yang
Group, 3.0%
Boston
Company,
5.0%
Taiyo Life,
4.1%
Taiyo Life,
4.1%
Vogo TYL,
13.5%
Vogo TYL,
57.6%
Boston
Company,
5.0%
ESOP, 5.0%
ESOP, 5.0%
Source: Company data, DART, Nomura research
MinJu Lee,
2.5%
Source: Company data, DART, Nomura research
MinJu Lee the potential buyer
MinJu Lee could take over if he wants
Tong Yang group has an option to buy back a 30% stake from Vogo Fund. This implies
that Vogo could sell the rest of its stake (27.55%) to anyone. If MinJu Lee were to buy
the stake and purchase an additional 3% from the market, he would become the largest
shareholder in TYL, based on our estimates. MinJu Lee currently runs a private equity
firm Atinum Partners. Given that he sold C&M for KRW1.46tn, we would think he has
adequate capital to invest.
Taiyo Life to be the casting vote
Taiyo Life owns 4.1% of TYL. We think Taiyo Life will likely be the casting vote in the
case of a deadlock situation. We think Taiyo Life may side with Tong Yang group,
considering its relationship with the group over the years. However, we would think that
the price will be the key deciding factor.
122
May 16, 2011
Company overview
Company history
Established in 1989 as Tong Yang Benefit Life Insurance, the company changed its
name to “Tong Yang Life Insurance” in 1995. Considered to be one of the top SME
insurance companies in Korea, the company has been quick to expand into nontraditional distribution channels, such as bancassurance and direct marketing channels.
Tong Yang Life was listed on the KRX in 2009, the first insurance company to be listed in
the industry.
Date
Fig. 267: Current shareholding structure
History
1989. 4
Established as Tong Y ang Benef it Lif e insurance
1995. 8
Change name to Tong Y ang Lif e insurance
1999. 5
Dev elop CI of "My Angel" to promote sales
Others, 21.5%
Treasury
stock, 1.4%
1999. 12
Major shareholder change f rom Tong Y ang major to Tong Y ang capita
2000. 7
Merge with Pacif ic Lif e Insurance
2005. 3
Change major shareholder to Tong Y ang Financial
2007. 9
Tong Y ang Asset Management incorporated as subsidary
2009. 9
Supassed W10tn in total assets
2009. 10
Listed on KRX (f irst to do so in industry )
2011. 3
Vogo Fund becomes the largest shareholder with 58.4%
Tong Yang
Group, 3.0%
Vogo TYL,
57.6%
Taiyo Life,
4.1%
Boston
Company,
5.0%
ESOP, 5.0%
MinJu Lee,
2.5%
Fig. 268: Korea life insurer ranking
Rank
Total asset (Wbn)
Company
Amount
Policy reserve (bn)
M/S
Company
Amount
Total Equity (Wbn)
M/S
Company
1 Samsung Lif e
82,811
38% Samsung Lif e
99,116
36% Samsung Lif e
2 Korea Lif e
29,506
14% Korea Lif e
43,249
16% Korea Lif e
3 Ky obo Lif e
27,105
13% Ky obo Lif e
39,367
4 ING Lif e
10,311
5% ING Lif e
4% Allianz
5 Allianz
9,462
Amount
13,334
M/S
Company
Amount
M/S
38% Samsung Lif e
34,440
23%
5,981
17% Korea Lif e
24,600
17%
14% Ky obo Lif e
4,568
13% Ky obo Lif e
22,122
15%
11,528
4% ING Lif e
1,739
5% Mirae Asset Lif e
8,696
6%
10,985
4% Prudential
1,193
3% Shinhan Lif e
7,834
5%
1,095
5%
6 AIA Lif e
6,124
3% Shinhan Lif e
9,369
3% Tong Y ang Lif e
3% Met Lif e
7,132
7 Shinhan Lif e
6,044
3% Tong Y ang Lif e
9,262
3% AIA Lif e
992
3% Allianz
6,821
5%
8 Tong Y ang Lif e
5,831
3% Heung Kuk Lif e
8,486
3% Shinhan Lif e
966
3% ING Lif e
6,782
5%
9 Mirae Asset Lif e
5,722
3% KDB Lif e
7,397
3% Allianz
930
3% Tong Y ang Lif e
6,033
4%
5,650
3% Mirae Asset Lif e
6,944
3% Met Lif e
763
2% Heung Kuk Lif e
5,029
3%
10 Heung Kuk Lif e
Tong Yang Life Insurance derives 50% of its total premium from savings type products,
followed by annuities (29%). We should note that savings type policies carry lower
embedded margin than protection type products. However, demand growth is coming
from wealth accumulation products (savings and annuities). Protection type products
account for 21% of total premium.
Distribution channels
In terms of distribution channel, Tong Yang Life distributes its products mainly through
bancassurance (51%), on an initial premium basis. It is followed by solicitors (19%),
direct marketing (18%), and independent agents (12%).
123
May 16, 2011
Group
0%
Protection
(general)
15%
Protection
(separate)
6%
Annuities
(general)
8%
Savings
50%
Exclusive
solicitor
19%
Bancassurance
51%
Annuities
(separate)
21%
Independent
agent
12%
Direct
marketing
18%
Management profile
Jung-Jin Park has been the CEO and vice-president of Tong Yang Life insurance since
2006. Previously, Mr Park has held various positions within Tong Yang Securities and
Tong Yang Life Insurance.
Vogo Fund is now the largest shareholder
Tong Yang group sold a 44.05% stake in TYL to Vogo Fund and a 2.46% stake to MinJu
Lee at a price of KRW18,000 on 23 March 2011. MinJu Lee is the former chairman of
C&M (a cable company now owned by Macquarie and MBK Partners). Tong Yang Group
now owns only 3% of TYL.
Fig. 271: Tong Yang Group – ownership structure
124
May 16, 2011
125
May 16, 2011
126
May 16, 2011
127
May 16, 2011
Appendix A-1
Analyst Certification
I, Michael Na, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any
or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be
directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.
Issuer Specific Regulatory Disclosures
Mentioned companies
Issuer name
Korea Life
Samsung Life
Cheil Industries
China Life Insurance
Ping An Insurance Group
Samsung C&T Corp
Samsung Card
Samsung Electronics
Samsung SDI
Samsung Techwin
Samsung Securities
Samsung Heavy Industries
Ticker
088350 KS
032830 KS
082640 KS
001300 KS
2628 HK
2318 HK
000830 KS
029780 KS
005930 KS
006400 KS
012450 KS
016360 KS
010140 KS
Price
7,380 KRW
98,100 KRW
12,500 KRW
122,000 KRW
26.80 HKD
82.25 HKD
76,500 KRW
52,700 KRW
916,000 KRW
189,000 KRW
85,800 KRW
82,300 KRW
43,350 KRW
Price date
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
13-May-2011
12-May-2011
12-May-2011
Stock rating
Buy
Buy
Buy
Buy
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
Not rated
Not rated
Sector rating
Not rated
Not rated
Not rated
Not rated
Not rated
Not rated
Not rated
Not rated
Not rated
Not rated
Not rated
Disclosures
4,138
4,135
4,58,123
4,58
4,139
4,106
4,130
4,134
4,158
4,108
Disclosures required in the U.S.
123 Market Maker - NSI
Nomura Securities International Inc. makes a market in securities of the company.
Disclosures required in the European Union
4
Market maker
Nomura International plc or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities / related
derivatives of the issuer.
Disclosures required in Hong Kong
58
Nomura financial interest/business relationships disclosures:
Nomura International (Hong Kong) Limited or an affiliate in the global Nomura group is a market maker or liquidity provider in the securities
/ related derivatives of the issuer.
Disclosures required in Korea
106 Liquidity Provider for Equity Linked Warrant
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung
Electronics (005930.KS), and holds 57,224,970 warrants as of 13-May-2011.
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung Heavy
Industries (010140.KS), and holds 17,217,930 warrants as of 13-May-2011.
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung SDI
(006400.KS), and holds 24,367,550 warrants as of 13-May-2011.
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung Techwin
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Cheil Industries
128
May 16, 2011
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung Life
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung C&T
Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is Samsung
Securities (016360.KS), and holds 10,487,990 warrants as of 13-May-2011.
Previous Rating
Issuer name
Korea Life
Samsung Life
Cheil Industries
China Life Insurance
Ping An Insurance Group
Samsung C&T Corp
Samsung Card
Samsung Electronics
Samsung SDI
Samsung Techwin
Samsung Securities
Samsung Heavy Industries
Previous Rating
Not rated
Not rated
Not rated
Neutral
Not Rated
Not Rated
Neutral
Not Rated
Neutral
Reduce
Neutral
Date of change
15-May-2011
15-May-2011
15-May-2011
22-Feb-2011
02-Nov-2010
02-Nov-2010
28-Mar-2009
04-Apr-2011
03-Jul-2009
07-Sep-2009
12-Aug-2009
Rating and target price changes
Korea Life
Samsung Life
Ticker
Old stock rating
New stock rating
Old target price
New target price
088350 KS
032830 KS
082640 KS
Not rated
Not rated
Not rated
Buy
Buy
Buy
N/A
N/A
N/A
9,400
150,000
21,000
Korea Life (088350 KS)
7,380 (13-May-2011)
Chart Not Available
Valuation Methodology Our TP of KRW9,400 is based on 1.0x forward P/EV. We assume a substainable RoEV of 11.5%, a
COE of 11.5% and a growth rate of 3%.
Risks that may impede the achievement of the target price 1. A prolonged low interest rate environment 2. Potential default
risk relating to KRW1tn in project financing loans.
Samsung Life (032830 KS)
98,100 (13-May-2011)
Chart Not Available
Valuation Methodology Our TP of W150,000 is derived using a SOTP valuation methodology. We apply 1.5x P/EV to derive a
TP of W100,000 for Samsung's insurance business and a 27% discount to NAV to derive a TP of W50,000 for its affiliate stakes.
Risks that may impede the achievement of the target price 1. Prolonged low interest environment. 2. Technology sector
downturn. 3. Share overhang stemming from potential stake sale by Shinsegae and CJ Group.
Tong Yang Life Insurance (082640 KS)
12,500 (13-May-2011)
Chart Not Available
Valuation Methodology Our TP of W21,000 is based on sustainable RoEV of 14%, COE of 12.5% and growth rate of 3%.
Risks that may impede the achievement of the target price 1. A prolonged low interest rate environment 2. Potential default
risk relating to KRW1tn in project financing loans.
129
May 16, 2011
Important Disclosures
Conflict-of-interest disclosures
Important disclosures may be accessed through the following website: http://www.nomura.com/research/pages/disclosures/disclosures.aspx . If
you have difficulty with this site or you do not have a password, please contact your Nomura Securities International, Inc. salesperson (1-877865-5752) or email [email protected] for assistance.
Online availability of research and additional conflict-of-interest disclosures
Nomura Japanese Equity Research is available electronically for clients in the US on NOMURA.COM, REUTERS, BLOOMBERG and
THOMSON ONE ANALYTICS. For clients in Europe, Japan and elsewhere in Asia it is available on NOMURA.COM, REUTERS and
BLOOMBERG.
Important disclosures may be accessed through the left hand side of the Nomura Disclosure web page http://www.nomura.com/research or
requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email
[email protected] for technical assistance.
The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a
portion of which is generated by Investment Banking activities.
Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the
sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of
research reports in which their names appear.
Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily
responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also
contribute to research reports in which their names appear and publish research on their sector.
Distribution of ratings (US)
The distribution of all ratings published by Nomura US Equity Research is as follows:
38% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 4% of companies with this
rating are investment banking clients of the Nomura Group*.
55% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 1% of companies with this
7% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 0% of companies with this
As at 31 March 2011.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
Distribution of ratings (Global)
The distribution of all ratings published by Nomura Global Equity Research is as follows:
49% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 37% of companies with this
40% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with
this rating are investment banking clients of the Nomura Group*.
11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 16% of companies with
this rating are investment banking clients of the Nomura Group*.
As at 31 March 2011.
*The Nomura Group as defined in the Disclaimer section at the end of this report.
Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America for
ratings published from 27 October 2008
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock.
Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management
discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate
valuation methodology such as discounted cash flow or multiple analysis, etc.
STOCKS
A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months.
A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months.
A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months.
A rating of 'Suspended', indicates that the rating and target price have been suspended temporarily to comply with applicable regulations
and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction
involving the company.
Benchmarks are as follows: United States/Europe: Please see valuation methodologies for explanations of relevant benchmarks for stocks
(accessible through the left hand side of the Nomura Disclosure web page: http://www.nomura.com/research);Global Emerging Markets (exAsia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology.
SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months.
A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months.
Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging
Markets ex-Asia.
130
May 16, 2011
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published from
30 October 2008 and in Japan from 6 January 2009
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock,
based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc.
A 'Buy' recommendation indicates that potential upside is 15% or more.
A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%.
A 'Reduce' recommendation indicates that potential downside is 5% or more.
A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or
firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the
subject company.
Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity
identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or
companies.
SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
absolute recommendation.
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
Explanation of Nomura's equity research rating system in Japan published prior to 6 January 2009 (and ratings in
Europe, Middle East and Africa, US and Latin America published prior to 27 October 2008)
STOCKS
A rating of '1' or 'Strong buy', indicates that the analyst expects the stock to outperform the Benchmark by 15% or more over the next six
months.
A rating of '2' or 'Buy', indicates that the analyst expects the stock to outperform the Benchmark by 5% or more but less than 15% over the next
six months.
A rating of '3' or 'Neutral', indicates that the analyst expects the stock to either outperform or underperform the Benchmark by less than 5% over
the next six months.
A rating of '4' or 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark by 5% or more but less than 15% over
the next six months.
A rating of '5' or 'Sell', indicates that the analyst expects the stock to underperform the Benchmark by 15% or more over the next six months.
Stocks labeled 'Not rated' or shown as 'No rating' are not in Nomura's regular research coverage. Nomura might not publish additional
research reports concerning this company, and it undertakes no obligation to update the analysis, estimates, projections, conclusions or other
information contained herein.
SECTORS
A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next six months.
A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next six months.
A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next six months.
Benchmarks are as follows: Japan: TOPIX; United States: S&P 500, MSCI World Technology Hardware & Equipment; Europe, by sector Hardware/Semiconductors: FTSE W Europe IT Hardware; Telecoms: FTSE W Europe Business Services; Business Services: FTSE W Europe;
Auto & Components: FTSE W Europe Auto & Parts; Communications equipment: FTSE W Europe IT Hardware; Ecology Focus: Bloomberg
World Energy Alternate Sources; Global Emerging Markets: MSCI Emerging Markets ex-Asia.
Explanation of Nomura's equity research rating system for Asian companies under coverage ex Japan published prior
to 30 October 2008
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Fair Value - Current Price)/Current Price,
subject to limited management discretion. In most cases, the Fair Value will equal the analyst's assessment of the current intrinsic fair value of
the stock using an appropriate valuation methodology such as Discounted Cash Flow or Multiple analysis etc. However, if the analyst doesn't
think the market will revalue the stock over the specified time horizon due to a lack of events or catalysts, then the fair value may differ from the
intrinsic fair value. In most cases, therefore, our recommendation is an assessment of the difference between current market price and our
estimate of current intrinsic fair value. Recommendations are set with a 6-12 month horizon unless specified otherwise. Accordingly, within this
horizon, price volatility may cause the actual upside or downside based on the prevailing market price to differ from the upside or downside
implied by the recommendation.
A 'Strong buy' recommendation indicates that upside is more than 20%.
A 'Buy' recommendation indicates that upside is between 10% and 20%.
A 'Neutral' recommendation indicates that upside or downside is less than 10%.
A 'Reduce' recommendation indicates that downside is between 10% and 20%.
A 'Sell' recommendation indicates that downside is more than 20%.
SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral
A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative
Target Price
A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be
impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the
company's earnings differ from estimates.
131
May 16, 2011
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Ugly ducklings: Double-digit EV growth, plenty of upside trading at

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