Hanwha Life Insurance Co., Ltd. (A088350) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the First Half of the Fiscal Year 2021 Earnings Results by Hanwha Life Insurance. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation on the Fiscal Year 2021 First Quarter Earnings Results by Hanwha Life Insurance.

[Interpreted] Good morning. I am Choi Sang-Wook, IR Lead and Head of Hanwha Life Insurance's sustainable -- Sustainability Management team. We have minimized the number of participants in light of the recent spread of COVID-19, and hence, with me today are team heads from corporate planning and administration, insurance business, risk management, investment strategy, finance, IFRS platform, new business units, sustainability management and the CFO. For questions, we are unable to respond due to the absence of the persons in charge. The IR team will follow up on that issue. Also, we will provide consecutive interpretation in English, and the first half 2021 earnings material has been uploaded on the company's IR website. We will begin with our CFO, Lee Kyung-Geun's earnings presentation, which will then be followed by a Q&A.

[Interpreted] Good morning. I am Lee Kyung-Geun, the CFO. Please note that today's earnings are in K-IFRS basis prepared solely for timely communication of information for the benefit of investors' convenience and are, hence, subject to change following the auditor's review. With that said, I will begin Hanwha Life Insurance's first half 2021 earnings presentation. Page 1, a summary of our key financials. In the first half '21, premium income and new business APE declined year-on-year on continuing COVID-19 impacts, which were being constrained on in-person sales activities, while loss ratio and expense ratio inched up. However, high-margin general protection products that cater to customer needs saw its APE rise 22.5%. And driven by robust core insurance profit and reversal of variable guarantees on the back of rising share prices, which led to improvement in interest gain, net income was up 42.7% to KRW 250.8 billion. Next on Page 2 is premium income. First half '21 premium income was down 10.7% on year driven by low margin savings insurance maturities coming due and decline in the top line revenue. To prepare for the introduction of the new regulatory regime and to maximize the value of new businesses, we have been implementing product and sales strategies that focus on profitability. As a result, protection premium income was up 1.4% on year. And general protection, which is of high margin, saw its premium income rise 26.7% on year, continuing the trend of qualitative growth of the underwriting business. Page 3 is on new business APE and profitability. First half new business APE was down 29.5% on year due to our strategic decision to cut sales of savings insurance. With new product offerings that better meet market needs, like the health care insurance for surgery coverage recording good sales performance, and on stronger product competitiveness supported by the acquisition of exclusivity, i.e., Hanwha Life long-term care insurance, APE for general protection line increased 22.5% year-on-year, with new business margin recording 53.3%. Page 4 is APE by channel. In the first half, Q1 FP, plus second quarter Hanwha Life Financial Services, accounted for 55% of the APE, with GA channel capturing 15% and bancassurance, 25%. Since the launch of Hanwha Life Financial Services, Q2 total APE is 3.5% versus the first quarter. What is noteworthy is that Q2 Financial Services APE reported a growth of 11.5% compared to first quarter's FP channel APE. Page 5 is net income. First half net income was up 42.7% on year, coming in at KRW 250.8 billion. There were expense gains of KRW 144.6 billion, mortality gain of KRW 219.7 billion, amounting to a total of KRW 364.4 billion of robust core underwriting insurance profit for the first half of the year. Also driven by equity price increases, there were variable guarantee-related gains of KRW 53.6 billion in the first quarter and KRW 17 billion in reversals in Q2 as well as disposition gains from rebalancing away from short-term to longer-dated bonds, which drove a sizable improvement in interest gain. Page 6 is on core insurance margin. First half loss ratio was up 1.5 percentage points on year to 81.7%. Despite the uptrend in overall claims payment in the industry, thanks to 3.4% growth in the risk premium, mortality gain came in at KRW 219.7 billion. By expanding protection product offerings, we plan to secure a risk premium. And by stabilizing claim payments, we plan to keep mid- to long-term loss ratio at around the 80% level. On the back of decline in premium income arising from savings insurance volume reduction, expense ratio was up 1.2 percentage points year-on-year, recording 16.7%. Next is investment. Investment portfolio is comprised mostly of interest-bearing assets, including 52% domestic bonds, 19% overseas securities and 22% loan assets. Investment yield for the first half was 3.55%. And supported by market rate hikes, both home and abroad, Q2 interest-bearing running yield came in at 3.14%, lessening the downward trend. Page 8 is on the bond portfolio. Domestic and overseas long-term bonds, with maturities of no less than 10 years, account for 92% of the portfolio. We increased long-term domestic bond exposure to 65%, ahead of the new regulatory regime introduction, which pushed our bond duration to 13.02 years. Also, of the bond exposure, 96% is rated above AAA for domestic bonds and above A for overseas bonds. Next is on the loan portfolio. The company has a well-balanced loan portfolio, of which 39% is alternative investments, 30% policy loans and 31% retail loans. Despite concerns over economic slowdown in the midst of the COVID-19 pandemic, delinquency was 0.19% and NPL reported 0.08%, with loan quality well under control. Page 10 is on policy reserve and crediting rate. Reserve liabilities for fixed rate above 6% accounted for 25%, continuing on with the structural improvement trend. Average crediting rate improved 8 basis points, recording 4.39% driven by structural runoff of legacy policies which pushed down the crediting rate. Next is on the RBC ratio and duration. RBC ratio was 203.1% on the back of lower valuation gains from available for sale following the rise in treasury bond yields. In Q2, asset duration was 10.12 years and liability duration, 9.71 years, with duration gaps coming in at 0.7 years. Ahead of a more stringent RBC regime scheduled with 2022 and case introduction in 2023, we plan to increase exposure to long-term domestic bonds and utilize interest-based derivatives so as to further widen asset duration to above 12 years. Next on Page 12 is sales performance of Hanwha Life Financial Service. We launched Hanwha Life Financial Services and our GA subsidiary as of 1st April this year. And monthly premium in Q2 '21 was up 27% versus before the launch, recording KRW 19 billion. Hanwha Life protection insurance accounted for 85%, while annuity 4% and general insurance 11%, which is a long-term health insurance. Hanwha Life Financial Services will continue to maintain Hanwha Life core product volume and will gradually increase share of general insurance so as to bolster its competitiveness in the GA market. On Page 13 is sales efficiency of Hanwha Life Financial Service. 13th month persistency ratio was 85.6%, a marginal decline Q-on-Q, while 25th month persistency ratio significantly improved to 70.6%. 13th month retention ratio improved 0.4 percentage points on quarter to record 48.3%. Hanwha Life Financial Services will focus on streamlining and making the organization more professional by way of securing highly qualified new agents as well as recruiting experienced talent so as to further drive efficiencies. We will develop into a specialized sales company with unrivaled competitive edge, underpinned by a massive sales organization, excellent infrastructure and a competitive sales support system. Next on Page 14 is Hanwha Life Financial Services' financial highlights and its long-term strategy. Q2 Hanwha Life Financial Services assets was KRW 790.4 billion; total equity, KRW 621.4 billion; with first quarter revenue and net loss, interest rate loss, recording KRW 213.2 billion and negative KRW 28.6 billion, respectively. Hanwha Life Financial Service will develop integrated coverage plans for both life and nonlife insurances, enter new branches for agents and strengthen incentive and work schemes for back-office staff so that we may leap forward as a distributor of total life solutions and achieve a turnaround by 2023 on an EBIT basis. We ask for your continued interest and support. With that, I will end my presentation on the earnings of Hanwha Life for the first half of 2021. Thank you for your attention.

[Interpreted] [Operator Instructions] The first question will be provided by Kim Jin-Sang from Hyundai Motor Securities.

[Interpreted] I would like to ask you 2 questions. First is on Page 3. We see that your new business margin has been on a very strong and a positive trend. And I believe that, that growth -- the margin of that growth is quite significant compared to the past. What is your plan? How much of an upside do you foresee that you would go in the future with regards to the margin for the new business? And for the value of new business, margin is important but also, you cannot ignore the importance of APE. What is your plan for new business APE going forward? Second question, other than the reversal amounting to KRW 17 billion regarding your variable insurances, are there any other one-off factors that we need to be mindful of for this quarter? And I did not really catch the explanation behind why we are seeing a Q-on-Q increase in the expense ratio. Can you clarify that point?

[Interpreted] Well, thank you very much for the good encouraging words with regards to the margin for our new business and for the insurance business team. I believe that with the adoption of the new regulatory regime, we believe that margin is going to become more important when that time comes. To look at the drivers behind this improvement in the margin is we were able to sell bigger volumes of the general protection products, which actually entailed better margins. So going forward as well, our plan is to continue to sell more of such general protection products so that, that could have a positive impact on the margin of the new businesses. Also, with respect to your second question on the APE for the new business, I think I would need to first explain to you the background behind why there's been a slight dip in that figure in the first half. On a year-over-year basis, our new business APE did decline and there are 2 main reasons or drivers behind that, especially because as we've seen the reduction in the volume sold through the bancassurance channel, there has been, a, reduction of the APE relating to the savings type of insurance products; and second, as we were going through the split of process of our organization, there's been an impact coming from a lessened focus on our sales activity. Now for the bancassurance market, last year on the backdrop of a low interest rate environment, our strategy was to focus our shift of savings products to long-term annuity insurance products, and that had an impact on the decline of the savings volumes that we sold via the bancassurance channel. Recently, we are seeing some of the uptake in the interest rate environment, and hence, we plan to focus on enlarging the volume from the bancassurance channel. So we think that, that will have an impact on driving of the APE for the savings line. Regarding the second point, as our CFO has mentioned, that as we move into the second quarter from Q1 of 2021, our focus on the sales activities is we are now refocusing on the sales activity, and hence, that's actually driving up a good performance. So we will be able to regain our footing on par with what we have seen in the past. Going forward, as we've always done, we would have a very key focus on profitability and margin so that we can continuously really build on our new business APE as well as the value of new business.

[Interpreted] I am Yoon Jong Guk. I'm from the corporate planning and administrative team. I would like to just add a couple more words regarding the first question, and I will also respond to the second question. With respect to our new business margin targets with the coming of the new regulatory regime, new business value is going to become very critical. So we have a very strong focus on that very element. Basically, our target base off of the IFRS 17 new business-related standards, our minimum requirements that we wish to secure is KRW 1.4 trillion to KRW 1.5 trillion on an annual basis. If you convert that to a protection-based monthly premium basis, there will be a monthly average of around KRW 7.7 billion. That's the guidance that we are working off from in order to secure profitability. Now regarding the second question, are there any other nonrecurring items other than the reversal of the variable guarantee reserves, no, there are no other nonrecurring items that one needs to be mindful of. Regarding the first half expense ratio, why it had actually gone up by 1.2 percentage points, now in the second quarter, there was a payment that we paid out to our employees. Basically, this expense item is subject to the agreement between the labor union and the company. The actual -- the negotiation schedule is not a prefixed schedule. But for this year, that agreement with the labor union was dropped in the Q2. So based on the agreement with the -- to the labor and the company, that one-off, we call it the support expense reward that we give out to our employees, were actually paid out in Q2. That had an impact of increasing the expense ratio over the second quarter. So you can consider this increase in expense ratio to be a seasonal factor, and it was something that we were able to expect under our business plan. In the second half of the year, we do not expect any such nonrecurring or one-off items that will impact the expense ratio in the second half of the year. As we've seen in the first half, we think that expense ratio trends will be kept at a steady level in the second half of the year.

[Interpreted] The following question will be presented by Kang Seung-Gun from KB Securities.

[Interpreted] I would also like to ask 2 questions. First, on a consolidated basis, your net profit is KRW 160 billion, and that's quite a big difference compared to your stand-alone figure, which is for KRW 56 billion. Can you explain as to why that is the case? And if you could share with us the breakdown, that would be quite helpful. Second, on a Q-on-Q basis, we've seen a significant decline in your liability duration. Is that because of the RBC regime relating to the interest rate liabilities duration? If that is not the key driver, why are we seeing such a significant drop in liabilities duration? I would like to understand that.

[Interpreted] I'm from the finance team. I would like to explain to you the difference between the stand-alone and the consolidated basis net profit. Q2 of 2021, including the performances and earnings of our subsidiary, on a consolidated basis, our net profit is -- has gone from KRW 250.9 billion to KRW 501.7 billion, and that actually breaks down or is attributable by the consolidated subsidiaries impact of KRW 772.3 billion and consolidated securities impact of KRW 179.8 billion. Especially regarding the second item, our investments to our overseas investment securities, we've made an investment into a start-up of [indiscernible] based in the U.S., and they were quite successful in listing into the New York Stock Exchange in 2021. As a result, the value that we earned on with regard to our overseas equity exposure has really gone up, and valuation gains from such securities have gone up as well. So on a year-on-year basis, pretax basis, we have seen an upward impact of KRW 292.7 billion.

I come from the risk management team. The liability duration, why it declined, the impact is from the regime, the new regulatory regime. As you know, when it comes to the general protection type of products, the 30-year liability maturity has been extended to a 50-year maturity. So up until September '22, there's going to be a phased expansion or increase of that maturity. So in Q2, if you look at the volume of duration that's stated below 30 years, there has been a 4-year decline in the liability duration. And also, by September of '22, we expect the duration that's based of the -- based off of RBC regime is going to be 11.8 years. Basically, the liability mismatch charge is going to be lower than the minimum interest rate charge figure. Also to add on the previous question on what our target margin is for the new business, for this year, we are kind of looking at about 53.3%. That's because of the possible decline in the assumed rate this year as well as the rebalancing or change in the portfolio. But in light of the margin or profitability that we are seeing from other domestic insurers and overseas insurance companies, I believe that our target or the level that we need to really shoot for and achieve is around 60%.

[Interpreted] The following question will be presented by Jung Jun-Sup from NH Investment Securities.

[Interpreted] I'm Jung Jun-Sup from NH Investment Securities. I just have one question. There are expectations of an interest rate hike, and in Q4, it seems that there will be some rise in the interest rate. What do you think is the appropriate level of the variable guarantee reserve? If you could provide some guidelines that would be quite helpful. And also, by the year-end, what do you think is going to be your dividend payout stance? And with the introduction of IFRS 17, how will your dividend policy change? Or what's your plan for your dividend policy?

[Interpreted] From the risk management team, team leader, Kim Byung Ho, will respond to your question on variable guarantee reserve.

[Interpreted] So to project what the interest rate is going to look like and then to tell you what the impact is going to be on our reserve, I think it's going to be overly arbitrary. So I will share with you our sensitivity analysis. So as of end of September, if we base off of the interest rate scenario, which we have used as of last year, last year, the starting interest rate was 1.12%. Come September, if there is a 10 basis point change, this is a 5-year basis interest rate, if there's a 10 bp impact, then there is going to be either a reversal or provisioning of KRW 35 billion. And on top of that, as of the year-end, if the share price or the return that we get from the fund investment, if there's a 1% change, that has sensitivity of KRW 40 billion. And also, we have something called long-term average interest rate, and we currently expect that there's going to be a 20 basis point decline. And with that change, there will be a KRW 50 billion sensitivity.

This is the CFO. I would like to respond to your question about the year-end dividend and our dividend policy after IFRS 17. At this point, it will be difficult to share with you any specific number regarding a dividend payout for this year. But in light of the profitability trend that we have seen, we think and we expect that, on a year-over-year basis, you will see some positive movement or positive increase regarding the dividend on a -- compared to the previous year. Our dividend payout policy after the introduction of IFRS 17, as was always the case, we will do our best to adopt a dividend payout policy that is shareholder-friendly.

[Interpreted] The following question will be presented by Lim HeeYeon from Shinhan Investment Corporation.

[Interpreted] I would like to ask you 4 questions. A lot of other financial institutions and companies have both valuation gains from nonmarketable assets. And I understand that Hanwha Life has also put some investment-related returns from your digital-related investments. Can you tell us more specifics regarding what those are? And second, you've mentioned you want to expand your asset duration up to 12 years. What impact would that have on your running yield as well as interest gain related to the negative spread aspect? What impacts would that have on those items? And third, you've shared with us what your year-end economic assumptions are. But if there are any changes in the actuarial assumptions, what -- how much of an additional provisioning would be required? Fourth question, the market has had quite a bit of concern with the introduction of the IFRS 17 and the impact that will have on your company. However, the IR team has been quite helpful in communicating a lot of information, but still, I would like to understand what impact IFRS 17 introduction will have on your solvency ratio.

[Interpreted] Thank you very much for those good questions. I'm the CFO. Responding to your question about our investment into new business and fintech, we are making these investments to secure a growth engine for the future. In terms of the investment that we've made on nonlisted companies, in 2016, we've made investments into the establishment of K-Bank, which is Korea's first online bank, and we also participated in their capital increase. And in total, we invested KRW 69 billion. In 2019, we made investments into Payco, which is a simple pay platform, worth KRW 64.5 billion, has been invested into Payco. And also, our investment business division as well as through our wholly owned subsidiary, Hanwha Asset Management, we are engaging in various different types of investments. Basically, on top of our core insurance business, we plan to make investments into other platform and fintech businesses so that we can generate new business opportunities in these future industries.

Responding to your question, I am [indiscernible] from the investment strategy team. With regards to the asset duration that you've mentioned, yes, ahead of the introduction of the new regime, we're continuously expanding our asset duration. Very recently, we've seen a slight uptick in the interest rate, but the overall interest rate backdrop is of a declining interest rate. So it's quite inevitable that we would see some declines in the running yield. Now having said that, as you've seen from our presentation slide, the decline in that running yield is very much limited. The reason, number one, is because we've put in a lot of effort to really try to increase our investments into highly profitable alternative investments, highly profitable but stable, within our capital capacity. And at the same time, we've seen a recent uptick in the interest rate trend, and that also limited the decline in running yield. And also, to add on top of that, we look at our liability from a mark-to-market perspective. So compared to the rate that we are applying on our reserve, the current yield on our interest-bearing assets, we do our best to make sure that we can increase them as much as possible. So actually, in terms of the negative spread as well as depending on the new level, all of our efforts are well aligned.

I am Kim Byung Ho from the risk management team. Regarding your question about any actuarial assumption changes regarding our guaranteed reserve, there is no particular assumption changes as of this point in time, but we have to really monitor and see the statistical -- statistics. However, of all of these different elements, lapse ratio is one of the most important variable. And if there is about 10% change in the lapse ratio, that will have the sensitivity impact of around KRW 150 billion. So responding to your -- the first question on the K-ICS ratio, I do understand there's a lot of questions around that and a lot of interest around that. I would like to first start by saying that it's quite difficult and we cannot say at this point in time what that specific number is going to be. But I think I can share with you what the company stance is when it comes to that K-ICS ratio. So in terms of our target, how we position ourselves against it is that compared to the current interest rate, even if there is a decline of 100 basis points, we want to make sure that we can satisfy and comply with the minimum requirement of the company's K-ICS ratio in terms -- in light of the business structure, the new business as well capitalization of the company. So to make sure that we really minimize the volatilities regarding our capital base, we are exerting our efforts to further improve on the new business value as well as new business margin. And also, the policy lending actually does have a positive impact. So we want to expand that base as well. And the capital-related volatility from the overseas bond is different from the domestic impact that we are trying to move into and transition or buy into more of the domestic bond compared to the overseas bonds. In terms of the required capital perspective, there still exists quite big of a mismatch between asset and liability duration. So that's why we want to really increase on the asset duration, and we will do that as well as utilize a TB forward, so the treasury bond forward, so that we could reduce or narrow the mismatch between asset and liability. Also, depending on how the interest rate moves from a strategic perspective, we are, at this point, looking at different methods or different ways to minimize the variabilities of the capital by looking at co-reinsurance and also taking a hedged -- hedging position with regards to the variable liabilities and the interest rate liabilities.

[Interpreted] Currently, there are no participants with questions. [Operator Instructions]

[Interpreted] Well, if there are no further questions, we would now like to close Hanwha Life Insurance's first half 2021 earnings presentation. I would like to thank everyone for joining us this morning. If you have more follow-up questions, please do not hesitate to contact us at our IR team at Hanwha Life Sustainability Management. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]