We cut forecasts as economy heads
deeper into recession
􀀗 We also review valuations, and now rate
all stocks Neutral or lower
􀀗 We have no high-conviction picks, but
Samsung F&M could be a safe haven
Cut forecasts as recession deepens. We expect severe
competition in auto insurance as demand falls, reflecting
lower car sales. Overall, firms will struggle to grow
premiums other than in long-term insurance.
Underwriting under pressure from claims and deferred
asset cost (DAC) unwinding. After a bright start in FY
Mar-09, loss ratio improvement in auto insurance has begun
to fade. We expect this trend to continue. As premium
growth slows, DAC amortization will begin to hurt earnings
and nudge expense ratios upward. Acquisition costs will rise
as competition intensifies. Overall, we expect underwriting
results to worsen.
Investment income under pressure from impairment
charges on corporate defaults. With KOSPI falling c40%
last year, impairment charges have already impacted
earnings. While widening spreads between corporate and
government bonds will hold up the falling interest returns,
rising corporate defaults look set to become an issue as the
recession deepens.
We have no conviction in the space. We revise earnings
and roll forward valuation to the year ended March 2010.
We lower ratings on Dongbu and LIG to N(V) and remain
N(V) on Samsung F&M and UW(V) on Hyundai. We have
no high conviction picks in the sector, but Samsung F&M
appears a safe haven due to its balance sheet strength.