Undervalued Non-Life Insurance Stocks, Ready to Soar?

Securities Industry Strives to Match Life Insurers
Strong Q4 Performance Supports Stock Price Rise
Profitability Ratio Also Improves

[Asia Economy Reporter Park Jihwan] The stock prices of life insurance companies and non-life insurance companies, which dominate the insurance industry, are diverging significantly. Although both are commonly regarded as beneficiaries of rising interest rates, non-life insurers are notably underperforming compared to life insurers in the stock market.

According to the Korea Exchange on the 19th, since the end of September last year until the day before, insurance companies' stock prices have risen by 22.40%. Considering that the KOSPI rose 29.47% during the same period, this falls short of the market's overall growth rate. Specifically, life insurance companies' stocks increased by 51.75%, while non-life insurance companies' stocks rose by only 0.38%.

The particularly high stock price increase of life insurers is attributed to their higher sensitivity to interest rates compared to non-life insurers. Although all insurers benefit from rising interest rates, the benefits tend to concentrate on life insurers. Especially, life insurers, who heavily rely on long-term bond management in asset management, see interest rate movements as a significant variable affecting their performance and stock prices. When interest rates rise, investment income increases, and the burden of variable annuity reserve provisions decreases, leading to improved short-term earnings.

The securities industry expects undervalued non-life insurers' stock prices to catch up to the level of life insurers. Above all, the strong fourth-quarter earnings outlook for non-life insurers adds credibility to the stock price rise. The separate net income of four non-life insurers is expected to total 319.4 billion KRW, a 127.8% increase compared to the same period last year. This is 25.4% higher than the consensus (average estimate by securities firms).

Profitability indicators such as the combined ratio are also expected to improve. The combined ratio is the sum of an insurer's loss ratio (insurance claims relative to premiums) and expense ratio. Based on 100%, a higher ratio indicates a loss, while a lower ratio indicates a profit. Seunggeon Kang, a researcher at KB Securities, explained, "The combined ratio for the fourth quarter is expected to be 105.5%, lower than the average fourth-quarter combined ratio of 106.3% from 2014 to 2018," adding, "This represents a significant improvement compared to the worst performance in the fourth quarter of 2019, which was 111.6%."

The loss ratio in the automobile sector, which exceeded 100% last year, is also expected to improve to 86.1%, a 14.6 percentage point improvement year-on-year, reflecting the effect of increased automobile insurance premiums. Additionally, with an 11-12% increase in actual loss insurance premiums at the beginning of the year, profitability is expected to improve further.

Researcher Hongjae Lee of Hana Financial Investment commented, "Indicators related to insurance underwriting results are expected to remain at favorable levels this year as well as last year," and evaluated, "Non-life insurance stocks are not only underperforming the market returns compared to the KOSPI but are also particularly neglected within the financial sector."

This content was produced with the assistance of AI translation services.