Korea Non-life Insurance Sector: Robust savings insurance sales amid yield competition

Korea Non-life Insurance Sector: Robust savings insurance sales amid yield competition

● New savings-type insurance sales showed significant growth
recently (up 36% YoY against protection flat at 4% YoY for
3QYTD), leaving concern for negative spread issue.
● The main reasons behind such a strong growth were: (1) volume
competition among peers amid sluggish protection-type sales, (2)
more consumer demand for better yield compared with bank
deposits’, (3) sales push from channel side ahead of commission
scheme change, and (4) more recently, the banks’ aggressive
drive on bancassurance sales to increase fee income.
● New business margin could drop in FY11 due to product mix
shifting to (low-margin) savings types. However, we view that the
current high level of yield would not last long assuming net
investment yield falling YoY in FY12. We are already seeing a
MoM drop in offering yield in Feb and, more importantly, the
regulator’s signal to curb the yield competition.
● We think the potential auto insurance premium cut would be a
bigger earnings swing factor over the short to medium term. LIG
remains our top pick as a laggard play with inexpensive valuation.

Savings-type insurance sales show robust growth as yield
competition heats up
Savings-type insurance (including savings and annuities) sales
showed significant growth recently. While long-term protection-type
insurance sales grew 4.2% YoY, new savings-type insurance sales
jumped 36.4% YoY (savings at 30.9% YoY and annuities at 54.1%
YoY). It heated up more recently as the leading players triggered yield
competition raising the yield from 4.9-5.1% to 5.1-5.4% coming into
January (vs. current one-year bank deposit yield hovering at 2.8-
3.8%) despite a persistently low interest rate environment.

The main reasons behind the strong growth were: (1) most importantly,
the companies are fighting for overall volume amid sluggish protectiontype
sales; (2) consumer demand for savings-type itself is increasing
by the yield attractiveness (compared with low bank deposit yield) and
tax benefit; (3) there is sales push from channel side ahead of
commission scheme change starting this April—surrender value
increase and up-front sales commission decrease, unfavourable to the
channel in the short-term (Please see our report on Korea Non-life
Insurance Sector dated 13 Jan 2012 for more details); and (4) more
recently, banks rather took the lead in pushing bancassurance sales to
increase their fee income. However, it is good to note that there was no
intentional channel push by insurers providing any temporary higher
incentives to further boost sales at least.

Margin deterioration in FY11E, but yield competition should
ease in FY12
Due to the surge of new savings-type insurance sales and weakerthan-
expected protection-type sales this year, overall new business
margin could drop YoY in FY11, in our view. However, we deem that
the current level of high base yield for savings-insurance would not
last long assuming net investment yield falling YoY for FY12. The
company IRs we contacted today all seemed to admit that the current
level of yield is burdensome, leaving concern for negative spread in
savings reserve if further prolonged. We think volume competition
cannot but continue until March (this fiscal year end), but, as we
started to see the yield drop in Feb though marginal, stabilisation of
the yield should be gaining more pace afterward when the companies’
full-scale sales drive for protection-type sales starts with new product
launches and channel strategies starting next fiscal year (April 2012).

Separately, the regulator (Financial Supervisory Service)’s recent
investigation on four life insurers (including Korea Life Insurance)
regarding aggressive pricing is indirectly putting brakes on the yield
competition. For life insurers, FSS also hinted that it is internally
discussing to lower FSS guided standard yield (used as guidance for
assumed yield when making savings insurance products) by reflecting
a persistently low interest environment so as to help insurers alleviate
the negative spread issue (from fixed-rate legacy assets). Rather, we
think the potential auto insurance premium cut would be a bigger
earnings swing factor over the short to medium term. We maintain our
preference for LIG as a laggard play with inexpensive valuation.

Korea Non-life Insurance Sector valuation metrics