Some analysts wary of Samsung Fire shares’ gain on new accounting rule

Samsung Fire & Marine Insurance Co. headquarters [Courtesy of Samsung Fire]

The recent rise in shares of Samsung Fire & Marine Insurance Co. backed by foreign capital inflows and improved first-quarter performance are raising concerns among some analysts that a conservative approach should be taken due to the regulatory uncertainty surrounding the implementation of the new International Financial Reporting Standard (IFRS17).

Since the start of this year, Samsung Fire’s stock price has gained 17.75 percent as of Wednesday. This outperforms the Kospi’s 16.96 percent gain during the same period and even surpasses the 8.79 percent climb in the KRX Insurance index, which represents the overall stock performance of the insurance sector.

The significant foreign buying of Samsung Fire shares has been a driving force behind the rise. Foreign investors have purchased a net total of 204.6 billion won ($156.6 million) worth of the shares in the current year alone, making it the largest net buying among insurance stocks.

Samsung Fire’s robust financial performance also contributed to its stock price gain. In the first quarter, the company recorded a net profit of 612.7 billion, marking a 16.7 percent growth from a year ago. Both insurance underwriting and investment profit increased by 20.8 percent and 32.8 percent respectively, further bolstering the company’s earnings.

Analysts evaluate the introduction of IFRS 17 is positive as it has led to profit growth for local insurance companies. Under the IFRS 17 model, insurance liabilities, which were previously evaluated based on cost, are now evaluated at market value. Unrealized gains related to insurance contracts are converted into the present value and reported as contractual service margin (CSM).

While insurance contracts are recognized as liabilities at the inception of contract, CSM is gradually amortized as income over time. Samsung Fire’s CSM amounted to 12.35 trillion won at the end of the first quarter, reflecting a 148.8 billion gain from the end of last year, making it the largest increase among all insurance companies.

“The significant increase in Samsung Fire’s insurance profit was primarily due to the rise in CSM amortization,” said Kim Do-ha, an analyst at Hana Financial Investment Co.

Some experts argue that insurance companies may have interpreted IFRS 17 optimistically, suggesting that they could manipulate their assets and liabilities to inflate their performance.

On May 31, financial authorities provided specific guidance on the new accounting standard, issuing the IFRS17 Actuarial Assumptions Guidance.

“The expansion of regulatory uncertainties has made me delay the reevaluation of insurance company stocks based on the accounting system transition effects,” said Lee Hong-jae, an analyst at Hyundai Motor Securities Co., adding that “At the center of IFRS17 is CSM, and the recent tightening of actuarial assumption guidelines by financial authorities has increased uncertainty about future CSM and net worth.”

“We recommend a conservative approach to investing in non-life insurers, including Samsung Fire, as regulatory risk will affect their financial performance over the long term.”