HGI: still offers an attractive long-term investment vehicle

The author is an analyst at NH Investment & Securities. He can be reached at [email protected] — Ed.

Hanwha General Insurance (HGI) again reported strong quarterly results amid improving business conditions. Although there has been a sharp decline in equity, we see no reason to worry given the arrival of IFRS17 in 2023.

Earnings growth outperforming leading non-life insurers in improving business environment

HGI again announced strong quarterly results in a more favorable economic environment. Non-life insurers are now showing an improvement in terms of both motor loss ratio and long-term loss ratio. As HGI has: 1) a relatively larger share (compared to its peers) of medical insurance; and 2) greater sensitivity of the long-term loss ratio to increases in earnings, the company enjoys faster earnings growth than that of leading non-life insurers.

This healthy trend of earnings expansion should continue in 2H22, with the arrival of the 5-year renewal cycle for medical insurance contracts to add to the positive elements of the business environment. It should be noted that first-generation medical insurance contracts represent 42.4% of the company’s total medical insurance contracts. In addition, one-time gains from a real estate sale will likely be recognized.

That said, HGI’s 2Q22 results show a sharp decline in equity (W278bn, -67% qq). In detail, since liabilities are not valued at their present value according to current IFRS4 rules, the fall in the value of assets (FV-OCI) resulting from the rise in interest rates is only reflected in shareholders’ equity. However, we believe that the amount of equity recognized under IFRS4 rules does not reflect the actual EV of the insurer. Under rules based on IFRS17, HGI assesses its equity at W3,000.1 billion. In addition, one-time capital gains from the disposal of real estate are expected to strengthen capital adequacy. Under these conditions, we see no reason to worry about the decline in equity in 2Q22.

2Q22 review: NP jumps 86.9% YoY to reach 75.4 billion W

On a non-consolidated basis, HGI published a 2Q22 NP of 75.4 billion W, beating consensus by 22.4%. Its auto loss ratio and its long-term loss ratio both improved significantly, reaching 74.5% (-5.7% yy) and 92.5% (-7.7% yy) respectively. p yy). Expense ratio tightened to 21% (-2.7%p yy), showing a stable trend.

We forecast a full-year NP for 2022 of W247.1 billion (+58.5% YoY excluding one-time gains on real estate disposals). With the company’s shares currently trading at a 2022E P/E of just 2.3x, half the size of the average for leading non-life insurers, we see merit in the valuation.

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