Meritz Fire & Marine Insurance, Surprising Q1 Earnings... But Long-Term Investment Remains 'Uncertain'

Structure Offsetting Business Expense Increase with Gain from Sale of Marketable Securities
Cape Investment & Securities Report, Investment Opinion 'Neutral' Presented

[Asia Economy Reporter Minji Lee] Opinions have emerged that the current profit structure of Meritz Fire & Marine Insurance, which recorded a surprise earnings in the first quarter, is difficult to maintain in the mid to long term. Accordingly, Cape Investment & Securities maintained a neutral investment rating on Meritz Fire & Marine Insurance.

According to the Financial Supervisory Service's electronic disclosure on the 17th, Meritz Fire & Marine Insurance recorded a net profit of 107.6 billion KRW in the first quarter, a 64% increase compared to the same period last year. This significantly exceeded the market expectation of 72.2 billion KRW, resulting in an earnings surprise. The large increase in profit was due to an excess occurrence of 18 billion KRW in earned premiums and 51 billion KRW in investment gains. Operating profit rose 68% to 153.2 billion KRW during the same period.

New contracts for protection-type life insurance in the first quarter amounted to 35 billion KRW, a 12% increase from last year. Doha Kim, a researcher at Cape Investment & Securities, said, “It is estimated that there was an actual reduction in selling expenses due to a decrease in new contracts, but since the limit on deferred acquisition costs was also reduced, the expense ratio rose by 0.3 percentage points compared to last year.” He added, “As the sale of held financial assets continued, the investment yield significantly exceeded the industry average, recording 6.4%, up 1.4 percentage points from a year ago.”

The long-term risk loss amount in the first quarter increased by 28% compared to a year ago, raising the long-term risk loss ratio by 6.2 percentage points year-on-year. Gains on disposal of available-for-sale securities were 167 billion KRW, an increase of 95.8 billion KRW during the same period. Researcher Kim pointed out, “Among non-life insurers, Meritz Fire & Marine Insurance was the only one whose operating profit increased by 61.3 billion KRW compared to a year ago, but the current situation is not considered positive.” He added, “It is expected that the trend of offsetting increased operating expenses compared to the same period last year with asset disposals is still being maintained.”

He continued, “The current profit structure, which defends net profit by encroaching on held reserves, has low sustainability in the mid to long term.” He advised, “It is also necessary to consider that long-term risk premiums may increase by 30% on a cumulative basis for the third quarter compared to a year ago.”

However, the target stock price was raised by 7% to 14,000 KRW. This is based on the judgment that, like other non-life insurance stocks, Meritz Fire & Marine Insurance is expected to have a relative investment preference advantage due to earnings growth.

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