Executive Summary
Insurance industry outlook for 2H08
Despite a controversy over the valuation of insurers, we believe insurance stocks
are attractive. Currently, insurers’ adjusted P/B averages around 2.0x,
approximately 25% down from 2.7x in 2H07. Their adjusted ROE is projected to
increase by roughly 1.1%p in 2008 vs. 2007. In addition to the ROE increase,
lowered NP volatility resulted from increased proportion of LT line in earnings,
another trigger for valuation upgrade. Loss ratio of the LT line is less volatile than
that of auto line.
We attribute the insurance stocks’ underperformance vs. the market in 2008 to
concerns over: 1) the beginning of another rise in auto line loss ratio; 2) the slowing
in LT line top-line growth; and 3) an investment profit contraction due to subprime
woes and a decline in equity investment yield.
We believe the recent correction in insurance stocks was overdone and recommend
investors to capitalize on current doldrums as an opportunity to accumulate
insurance shares, given the following:
First, we are focusing on soaring gasoline prices. In a historical context, when
gasoline prices have risen sharply, the car accident ratio has dropped because
fewer people tended to drive. Auto line premium increased from January 2008 when
contract renewals began (the latest hike was approximately 6% in February 2007),
according to an auto line premium index released by the National Statistical Office
(NSO). This means that if the car accident rate remains unchanged in line with 2007,
the loss ratio could even fall YoY.
Secondly, we believe now is the time to shift the focus of attention to long-term line
loss ratio and away from top-line growth, which is highly predictable in the mid term.
We maintain a positive view on forecast LT line loss ratio, given: 1) that the
proportions of disease, accident insurance (loss ratio is already high) and bundletype
insurance (loss ratio is on a steady rise) in LT insurance are unlikely to
increase any further; and 2) that the risk/loading premium loss ratio has maintained
a stable level if we exclude the additional provisioning of INBR since 2005.
Thirdly, based on our simulation result, if we assume a 5% yield from equity-related
assets, most major non-life insurers (except for Dongbu Insurance and Hyundai
F&M) should post similar investment yields in 2008 to those of 2007.
Over the long-term, the domestic insurance industry should emerge as a primary
beneficiary of government policies. President Lee, Myung-bak has unveiled his plan
to reform the hospital designation system under which all medical institutions are
covered under the national health insurance. If we assume that the hospital
designation rule is eased and this, in turn, expands the private health insurance
market, non-life insurers’ top-line should grow by W1.3tn in 2010 for a 10% decline
in NHIC’s coverage rate. Market growth should contribute to non-life insurers’ NP
growth by W130bn p.a., which is equivalent to 8% of their combined NP estimates
for 2007, given that operating margin of risk/loading premium in LT line is roughly
13%.

Contents
I. Executive Summary 3
Insurance industry outlook for 2H08
II. Insurance valuation 5
Insurance stocks look like attractive investments
III. Auto Line 8
Projections for accident and loss ratios of auto line
IV. LT Line 10
Key lies in loss ratio
Long-term line remains profitable
V. Investment Profit 13
Investment profit expected to grow roughly 16% in 2008
VI. Implications of Private Health Insurance Market Expansion 15
Relevant government policies
Implications for the market and P/L
　Hyundai Marine & Fire (001450.KS, BUY, W 33,000) 19
　Meritz F&M (000060.KS, BUY, W 14,000) 26
　Samsung Fire & Marine (000810.KS, BUY, W 300,000) 35