Domestic insurance stocks are sweeping the top ranks of market gains on expectations of interest rate hikes and benefits from regulatory improvements. As expectations for improved investment gains and stronger soundness are reflected at the same time, some names are rising sharply as a revaluation of the value of held assets is added.
According to the Korea Exchange (KRX) on the 22nd, the KOSPI insurance industry index returned 24.02% from the start of the month through the 19th. That is 3.5 times the KOSPI's gain (6.80%) over the same period. Samsung Life Insurance and Samsung Fire & Marine Insurance led the surge among index components, while major insurance stocks such as Hanwha Life Insurance and Hyundai Marine & Fire Insurance have also continued a strong trend compared with the start of the year.
Investor sentiment toward insurance stocks is improving as both the Bank of Korea and the U.S. Federal Reserve (Fed) have signaled a tightening stance recently. Bank of Korea Governor Shin Hyun Song said recently that rate hikes are necessary to stabilize prices, and the Fed also suggested the possibility of additional rate increases by raising its dot plot at the June Federal Open Market Committee (FOMC).
The insurance sector is considered a representative beneficiary of rate hikes. Given the asset-liability structure of managing premiums in safe assets such as bonds, during periods of rising rates, new investment yields improve while the present value of insurance liabilities declines, which can improve the capital adequacy ratio (K-ICS).
Regulatory improvements scheduled for the second half are also cited as a favorable factor for the insurance sector. If measures such as the 8-week rule for outpatient treatment and the introduction of managed benefits for manual therapy are implemented, the burden of insurance payouts could ease, leading to better insurance profit and loss, according to projections. Expectations for earnings improvement are especially growing among non-life insurers.
In the securities industry, the introduction of managed benefits for manual therapy is seen leading to an improvement in the loss ratio of indemnity insurance. Manual therapy is cited as the single largest non-reimbursable item in terms of indemnity insurance payout size, and analysts say excessive billing could decrease as both price and frequency limits are introduced.
Lim Hee-yeon, a researcher at Shinhan Investment & Securities, said, "It is positive that non-reimbursable items that had effectively been in a blind spot are now inside the institutional framework," adding, "If future increases in insurance payouts are due to a normal expansion in medical demand, they can be addressed by premium hikes; if due to overuse, they can be addressed by adding them to managed benefits."
However, it is difficult to interpret the recent strength in insurance stocks by the rate effect alone. The growth of core insurance operations remains limited. Korea's insurance market has already entered maturity, making it hard to secure new subscribers, and competition in the industry is overheating. In fact, recent cutthroat competition to win new contracts and rising business expenses are weighing on the industry.
A representative case is Samsung Life Insurance. Samsung Life Insurance holds an 8.4% equity stake in Samsung Electronics. As Samsung Electronics' market capitalization topped 2,000 trillion won for the first time on the back of a semiconductor rally, the value of Samsung Life Insurance's stake in Samsung Electronics also rose significantly. This is why some say that, in addition to expectations for an improved insurance environment, a revaluation of the value of the Samsung Electronics stake is driving the stock higher.
In fact, in the securities industry, there is also a view that Samsung Life Insurance should be approached from an asset value revaluation perspective rather than as a pure insurer. Park Hye-jin, a researcher at Daishin Securities, said, "The environment for core insurance operations is one of overheated competition and limited growth," adding, "It is time for a reasonable valuation of Samsung Life Insurance's stock, which is rising in tandem with Samsung Electronics' share price."
Non-life insurers are also reflecting expectations for earnings improvement beyond being mere defensive plays. As the burden of insurance payouts eases and expectations for better loss ratios grow, profit forecasts in the securities industry are trending higher. For Samsung Fire & Marine Insurance, annual operating profit is projected to rise 27.96% from 2.5805 trillion won last year to 3.3019 trillion won this year. Hyundai Marine & Fire Insurance has also shown recent strength, buoyed by expectations for regulatory improvements in indemnity and auto insurance.
Kim Jae-woo, a researcher at Samsung Securities, said, "For insurers, higher rates can dampen investment gains in the short term due to asset volatility such as lower bond prices, but in the mid to long term it is positive as the burden of insurance liabilities eases," adding, "Rather than the large-cap names highlighted by external factors such as equity value, we think interest will be effective in stocks with less valuation pressure."