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

[Foreign Language] Good morning, and good evening. Thank you all for joining this conference call, and now we will begin the conference of the fiscal year 2021 annual 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 annual earnings results by Hanwha Life Insurance.

[Interpreted] Good morning. I am Choi Sang-Wook, Head of IR under Sustainable Management team at Hanwha Life Insurance. We are providing consecutive interpretation in Korean and English for the 2021 annual earnings presentation. You can find the presentation material on our IR website. Today, CFO, [indiscernible], will first give a presentation, which will be followed by the Q&A session. Let me now invite our CFO.

[Interpreted] Good morning. This is CFO, [indiscernible]. Please note that today's presentation material was prepared solely for the convenience of investors based on the separate financial statements under K-IFRS, and some numbers are subject to change after a full audit. Also, Hanwha Life's 2021 EV and 2022 performance outlooks are based on reliable information and forward-looking assumptions. Let me now begin the report. Page 1 is the summary of the key financials. In 2021 due to the resurgence of COVID-19 variant, which had a negative impact on face-to-face sales activities, premium income and new business APE declined year-on-year, and our loss ratio increased slightly. Net income posted a growth of 150.4% to KRW 410.6 billion, thanks to a decrease in actual costs following the split-off and the spread margin improvement with declining crediting rates. EV increased by 4.9% year-on-year, and the value of new business margin posted a big Y-o-Y growth of 16.6 percentage points to 56.1%. Page 2 is on premium income. 2021 full year premium income was down 0.2% on-year as premium income from savings insurance declined. Hanwha Life is currently implementing product and sales strategies focused on profitability in order to maximize new business value to prepare for changes in the regulatory regime. As a result, the share of profitable general protection sales expanded, and the protection premium income grew 0.8% on year. Page 3 is on new business APE. APE was down 14.4% year-on-year on the back of strategic reduction of savings insurance sales and organizational restructuring related to the split-off. Protection APE accounts for 61% contributing to sustainable growth of risk premiums and growth in the value of new business. The APE breakdown by channel shows that Hanwha Life Financial Service accounted for 50%; bancassurance, 29%; and the GA channel, 17%. Page 4 is on sales efficiency. The 13th month and the 25th month persistency ratio for 2021 improved by 1.6 percentage points and 4.4 percentage points year-on-year, respectively, to record 84.8% and 64.6%. This is mainly driven by strengthening of customer relations and tailored retention management efforts by channel. The 13th month FP retention ratio came in at 44.1% due to the organizational restructuring following the creation of Hanwha Life Financial Service. We will work to improve the retention rate through training programs for new FPs and tight management of the FP organization. On Page 5, net income was up 150.4% on-year to KRW 410.6 billion. This is mainly thanks to the growth in expense gain following the split-off and improved interest gain from higher investment returns, thanks to our barbell investment strategy. Please refer to the presentation deck for the movement analysis with respect to each of the margin categories. Page 6 is on loss ratio and expense ratio. Our loss ratio posted 82.8%, mainly due to the increase in hospital visits, which was reduced during the peaks of the COVID-19 pandemic. In the medium to long term, Hanwha Life plans to manage the loss ratio to be around 82% by increasing the sale of protection lines to secure risk premiums and stabilizing the trend of accident claims. The expense ratio was down 0.6 percentage points on year to 14.3% with a decline in actual costs following the split-off. Next is asset management on Page 7. Investment portfolio of the company is largely comprised of interest-bearing assets, including 64% domestic bonds, 17% overseas securities and 22% loan assets. The 2021 investment yield recorded 3.59%, up 0.12 percentage points year-on-year on the back of gains from overseas bond sales while replacing short maturity bonds with long-dated bonds to increase the asset duration and gains from alternative investment asset sales to drive investment yields. Driven by the market rate hikes, the running yield on interest-bearing assets was flat year-on-year at 3.1%, with the declining trend finally coming to a stop. Page 8 is on the bond portfolio. To respond to changes in the regulatory regimes, our portfolio is mainly comprised of domestic long-dated bonds. And the domestic and overseas bonds with 10-year or longer maturity account for 92%. The company currently manages high-quality and stable fixed income portfolio, of which 98% is rated above AAA for domestic bonds and 96% rated above A for overseas bonds. Page 9 is on the loan portfolio. Our loan portfolio is well balanced with 36% alternative investments, 33% retail loans and 31% policy loans. We were able to manage our loan quality with NPL ratio of 0.06% and delinquency rate of 0.17%. Next is on policy reserves and crediting rates. On the back of structural runoff from legacy policies, reserve liabilities were fixed rates above 6%, has been consistently declining since 2017 to come in at 24% in 2021, which shows that our policy reserve structure has been improving. As a result, the company's crediting rate fell 5 basis points on year to 4.36%, sustaining the trend of improvement. Page 11 is on RBC and duration. The RBC ratio recorded 184.6%, mainly due to the decline in valuation gains of securities available for sale on the back of increase in interest rates. Duration gains came in at 0.39 years driven by active ALM, which led expanded asset duration. In January, we implemented bond account reclassification to respond to the current RBC regime as well as a new solvency regime called K-ICS and successfully issued overseas subordinate ESG bond worth $750 million. Going forward, Hanwha Life will continue to expand the asset duration and maximize the value of new business margin to manage capital adequacy in preparation for the introduction of new regulations in 2023. Page 12 is on EV, which is based on the international standard of CEV. In 2021, EV before shareholder dividend recorded KRW 10.2 trillion, driven by the increase in the value of new business as well as value in force with the changes to economic assumptions. Return on EV is 4.9%. Please refer to the presentation for EV movement analysis. On Page 13, value of new business increased 21.3% year-on-year, mainly due to changes of actuarial and economic assumptions. The value of new business margin improved significantly to 56.1%, thanks to the expanded sales of higher-margin general protection lines. As IFRS 17 is soon to be introduced, we will continue to increase general protection sales to secure a solid level of CFM and maximize profit margin. Page 14 is on sensitivity analysis and major assumptions. Sensitivity for a 50 basis point increase in interest rate is KRW 88 billion for EV and KRW 48 billion for VoNB. Please refer to the presentation deck for more details. Among the economic assumptions, discount rate of 8% and investment yield of 3.3% was applied in consideration of the increase in treasury bond yields. Next is on ESG. Hanwha Life has created an excellent sustainability management system based on the transition to green finance and corporate social responsibility initiatives, which has been recognized with the overall ESG rating of A by the Korea Corporate Governance Service in 2021. In particular, we received A+, the highest rating in Korea in the environment and social categories, thanks to our efforts for greenhouse gas emissions reduction through the creation of GHG inventories and integration of human rights into business management. We will continue to strengthen company-wide ESG management to ensure that ESG becomes a core principle of business management. Lastly, on 2022 outlook, we expect that in 2022, industry-wide profitability will improve on the back of interest rate increase while the interest -- industry continues to prepare for new regulations, including IFRS and K-ICS. We will increase the sales of high-margin general protection lines and strengthen product competitiveness to continue our margin-sensitive business strategy. Based on such efforts, for 2022, we target the value of new business margin to be above 50% and general protection APE growth rate of 10%. Also, to secure future profit after the introduction of IFRS 17, we aim to increase the 25th month persistency ratio to be above 66% and the 13th month FP retention rate to be higher than 50%, while expanding the asset duration to respond to regulatory changes. This ends annualized financial year 2021 full year earnings and EV presentations. Thank you for your attention.

[Foreign Language] Now the Q&A session will begin. [Operator Instructions] [Foreign Language] The first question will be presented by Sang Seung-Gun from KB Securities.

[Interpreted] I am Kang Seung-Gun. The first question is related to RBC. And the second question relates to the value of new business margin. As for the first question, of course, we understand that your RBC ratio has gone down because interest rates have gone up. But in the first quarter of 2022, do you have any plan for account reclassification? Or have you already done so? And if that is the case, how much of a change to the RBC sensitivity to interest rate movement? The second question relates to the value of new business margin. It has gone up mainly partly because of changes to the actuarial assumptions. So can you provide us with some more color on that? And also as we're transitioning to the IFRS 17, there should be some adjustment to the calculation of new business margin. And when you apply your internal standard versus IFRS 17, how much of a difference do you anticipate according to your internal simulation?

[Interpreted] I am Kim Byung Ho from the Risk Management team. I understand that there are 3 questions. First of all, regarding the RBC and the account reclassification. We have already implemented the account reclassification as of the 1st of January this year. And as a result of such reclassification, there was a reduction of the RBC sensitivity from 12% to 4.9% for a 10 basis point interest rate movement. You mentioned about actuarial assumption changes. There are many factors that the actuarial assumptions, but the most important element is persistency ratio. And I can say that our persistency ratio has improved over the years, and that has been reflected in the assumptions for actuarial parts. And regarding the margin for the internal system versus the IFRS 17, it is actually very similar. There's not much difference because we utilize the same cash flow. Thank you.

[Interpreted] And I have a follow-up question. So what is the value of new business margin as of 2021 based on the present value of future insurance?

[Interpreted] I'm Kim [indiscernible] from the IFRS team. Let me answer this question. According to our estimation internally, we believe that against the AP, the margin is 110% because, as was mentioned, we have been improving our product portfolio to be mainly based on protection lines. Thank you.

[Foreign Language] The next 2 questions will be presented by Kim Myung Wook from JPMorgan.

[Interpreted] I'm Kim Myung Wook from JPMorgan. I'd like to ask 2 questions. The first question is related to the funding costs for reserving. Currently, there have been increases in interest rates. And I wonder how much of an impact will this have on your funding costs going forward? Because when you look at the past year, I can see that there was a reduction in the savings portion. And compared to the past, the blended funding cost did not fall much. This year, we see the increasing trend of interest rates, and this may lead to increase in the funding cost for floating rate reserves, which are linked to market interest rates. So this year and next year, going forward, what is going to be on an estimated level of funding cost for your reserves? Do you think this level will go down or stay flat or go up? The second question is related to your EV assumptions. I understand that there were some assumption changes and the macro business environment has changed and your new business has improved as well. But when we look at the value of in-force, your estimation is KRW 2.2 trillion. If we assume that the actuarial assumptions stay the same, can we -- how much of an unwind earning or profit can we get from this value of in-force each year? Can we assume that there will be cash generation at the rate that is similar to the discount rate?

[Interpreted] I am Kim Byung Ho from the Risk Management team. Let me answer the first question about the crediting rate for reserves. Currently, when you look at the liability structure, it is 51% floating rate reserves and 49% of fixed rate reserves. So this ratio is going to be maintained for some time. And for the fixed rate portion, the credit rate has been going down by an average of 12 basis points each year. And as for your question related to the funding costs for floating rate called portion, this is mainly related to our offering rate announcements. And despite the market interest rate increase, we have been maintaining a similar level of offering rate last year and it's going to be the same for this year. And we will make adjustment accordingly -- according to market situations down the road. And as for our annual estimation, I believe that the funding cost for the floating rate reserve is going to go down by 10 basis points each year because this is our policy. Thank you.

[Interpreted] I am Kim Joon-Yu from the IFRS team. Let me answer your second question. But before that, I'd like to add some more additional comments related to your first question. As we prepare for the [indiscernible] of the IFRS 17, we have been considering various [indiscernible] years regarding EV valuation and the value of new business valuation. And so moving on to the margin that I mentioned for the previous answer, it is based on our internal management indicator in preparation for the IFRS 17. Moving on to your second question. As we -- if we maintained a similar EV assumptions, we expect the online effect of 2.5%. And as the CFO mentioned, we will continue to increase the sale of protection products that are higher margin. And if we meet the new business target, I believe the growth rate is going to be 7% to 8%. So if you combine these 2, the ordinary growth rate that we can assume is 10%. But we need to also take into account the variance between the assumed and the actual. So the EBIT target that I can communicate with you is 5%.

[Foreign Language] The next 2 questions will be presented by [indiscernible] from JPMorgan Asset Management.

[Interpreted] I have 2 questions. So the first one is given the continuing outbreak of COVID, how does this impact your operations in terms of sales and being able to meet with customers? And secondly, given RBC ratio declined to around 184% last year, so how do you expect to manage your RBC this year whether to maintain it at this level or improve?

[Interpreted] I am [indiscernible] from the Insurance Business team, and let me answer first question regarding the impact of the COVID-19 situation on our business operation. It is very true that there has been quite challenge because the pandemic started in 2020. Since the outbreak of the pandemic in 2020, we have been focusing on sales of general protection product that has been our product strategy and also to utilize non face-to-face or online sales channels. We have been implementing our various strategies. The overall life insurance market sales volume has gone down by 15%, which also has an impact on Hanwha Life as well. But starting from the second half of last year, there were -- we've been doing some face-to-face sales activities as we learn the ways to live with the pandemic. So we have been witnessing the recovery pattern. And we expect that with the COVID pandemic situation stabilizing with the utilization of the sales organization, we'll be able to benefit from the recovery. Thank you.

[Interpreted] I am Kim Byung Ho from the Risk Management team. Let me answer your question regarding the RBC. As you may know, the RBC regime will remain until the end of this year. So our overall policy is to focus more on our smooth transition to K-I-C-S or K-ICS' new solvency regime. And secondly, we still need to manage our RBC ratio for this year. And so in this regard, we already issued an overseas subordinated bond, and we conducted account reclassification to reduce the RBC sensitivity to interest rate movement. And our annual RBC target is to maintain the current RBC level, while our bottom line or minimum level to maintain is 170%.

Sir, is that enough for you?

Did that answer your question?

Yes.

[Foreign Language] The next 2 questions will be presented by Lee Hyun Jung from Hana Financial Investment.

[Interpreted] I am Lee Hyun Jung from Hana Investment -- Hana Financial Investment. My first question is, can you provide some explanation on the negative growth of fourth quarter sales of your subsidiaries? And the second question is your capital gain plan. And what is your overall annual investment yield target? And the third question relates to your treasury stock. You currently hold 13% treasury stock. Do you have any plan to retire or cancel them? This may not, of course, have an impact on your stock price, but I do not see any reason for you to continue to hold the treasury shares. So what is your plan for utilizing the treasury stock? And when the K-ICS is introduced with the changes to the adjusted network, it may not be easy for you to expand the shareholder dividend going forward. So what is your overall shareholder return policy?

[Interpreted] I'm [indiscernible] from the Insurance business team. Let me answer your first question. As for commissions paid for life insurance companies, they used to be paid in the first initial year. But according to the IFRS 15, it is now on -- recognized on a monthly basis. And the grace period has expired. So starting from the fourth quarter, we need to recognize the commissions paid on a monthly basis, and that is the main reason why there was a negative growth. Because this was a monthly recognition, the total amount may not be very different. Thank you.

[Interpreted] I am [indiscernible] from the Investment Strategy team. Let me answer your question regarding our capital paying plan. As you may know, disposal gains have been recognized because we continue to buy domestic bonds while selling overseas bonds to cover for the Korean won-denominated insurance liabilities. And also, we have been replacing short-term bonds with long-term bonds to increase the asset duration. And the size of capital gain may very much depend on the interest rate level, so we cannot give any specific target number for 2022. But we got KRW 600 billion of disposal gains last year, and it was actually mainly because of the sale of alternative investment assets. And for this year and also last year, there was a huge gain in the valuation gain for our committed investments. And this year, we expect that there will be also additional capital gain coming from the equity-type or committed investments. So all in all, I cannot give you a specific figure or a number for disposal gain to be expected for this year, but I think it's going to be a similar level than last year. Thank you.

[Interpreted] I'm Yoon Jong Guk from the Corporate Planning & Administration. Let me address your question regarding the treasury stock. As you mentioned, we have 13.5% equity state as treasury stock. We do not have a specific plan for this. As of today, we are going to continue to consider various options, including the continuous holding or cancellation or exchange. We are going to consider various options in a way to maximize the shareholder value. And if we develop a specific plan, we will make sure to communicate that with the market.

[Interpreted] I am Han Young-Man from the Finance team. Let me answer your question regarding the medium- and long-term shareholder return policy. You may consider share buyback or dividend as 2 main instruments we can utilize for shareholder return. And as of now, we don't have any specific plan to share with you. But in the medium to long term, we're going to consider our dividend policy in consideration of the company's business performance and the market situation as well as new regulations and the situation of the competitors in the market so that we can make sure to provide a friendly shareholder return policy. Thank you.

[Interpreted] I have a follow-up question. In addressing the third question, you mentioned that you may -- you will consider various options, including the holding or exchange or cancellation of shareholder treasury stock. But as for this exchange you're holding, how can this enhance shareholder value? So can you provide us with some more elaboration on this?

[Interpreted] I am Yoon Jong Guk from the Corporate Planning and Administration. Let me provide some more information about this. When it comes to extremes, what it means is that currently on the financial statement, you can see that the treasury stock is actually a minus on the capital side. But if you exchange the treasury stock with the equity stock of another company, then it will be counted as investment assets. This will lead to an increase in the base for dividend payout, which will be able to improve the shareholder value in this regard.

[Foreign Language] The next 2 questions will be presented by Lee Byung Gun from DB Financial Investment.

[Interpreted] I am Lee Byung Gun from DB Financial Investment. I have 2 questions. First of all, starting from the middle of last year, there have been some media reports about the life insurance company expanding partnerships with your sales subsidiary. And there were also talks in the market about the potential increase or expansion of partnerships for the benefit of the sales agency. So I wonder if you have any plan to expand the life insurance company partnership for your sales subsidiary. And in what way it's going to happen, whether it is going to be in the form of renewal case in other ways to increase the sales and the size of the subsidiary? The second question is related to the transitional measures for K-ICS. Some insurance companies try to avoid implementing the K-ICS transitional measures because they may impose some restrictions on shareholder return. So what is your view on the transitional measures of K-ICS? And what is your plan around this? And also, I wonder if you plan to issue additional subordinated bonds or hybrid bond later this year because coming from next year, there are going to be stronger restraints or constraints regarding debt issuance. So in consideration of refinancing for your existing bond exposure, you may want to consider additional bond issuance at the end of this year. So can you provide us with some more information on this?

[Interpreted] I'm [indiscernible] from the Insurance Business team. Let me answer your question regarding partnership potentials of the sales subsidiary. As you know very well, the GA market in the insurance industry has been growing rapidly, and we have felt the constraints and limitations of relying too much on the tight agent channel, and that is why we conducted the split off and established the sales subsidiary in April last year. Many insurance -- life insurance companies in the industry may seek collaboration and partnership with GAs in the form of equity investment or acquisition as a subsidiary or forming front partnerships. Because Hanwha Life has advantage and competitiveness in terms of infrastructure and training and human resources with respect to the GA channel, there has been some small- and medium-sized general agencies that want to work with us. As you pointed out, we are pursuing efficient ways to collaborate with the GAs, as it was seen in the case of acquiring [ Reno ]. And going forward, we will continue to create synergies by working closely with medium and small GAs through partnerships and other forms of engagement. Thank you.

[Interpreted] I am Kim Byung Ho from the Risk Management team. Let me answer your question related to the transitional measures. We will continue to consider the pros and cons of implementing the transitional measures. First of all, I would like to note that the transitional measures were not finalized yet. So we need to wait and see. And secondly, when we look at the draft plan for transitional measures, there is a limitation on dividend payout. So we will have to consider this aspect, and we have not yet made our decision. And regarding a plan for hybrid bonds or subordinated bond issuance, we are actually currently considering various options, including the interest rate movements and other factors. We have not yet made a final decision yet, but we will continue to make sure that we will have enough adequacy in consideration of refinancing coming next year.

[Interpreted] I would like to ask a follow-up question regarding your GA strategy. Of course, I understand that you will continue to expand partnership and cooperation with the smaller GA. This is a very good direction. But what is interesting is that usually a subsidiary GA would only distribute the mother company's products, but you recently signed a sale partnership with -- for another life insurance company. So this means that your subsidiary GA will be able to sell life insurance products from the other company. So does that mean that you have decided to do so because you want to expand the scope of partnership? Or is it because you want to improve the product competitiveness of your subsidiaries?

[Interpreted] I am [indiscernible] from the insurance business. Let me answer your question. In order to have a solid partnership with the GA, we need to make sure that it is not tight because the GA, or general agency, sells or distributes many different companies' products. So we need to be able to accept this. And that is why Hanwha Life Financial Service wanted to distribute life insurance products from other companies starting from February. So with this beginning of covering other company's products, we will continue to explore other possibilities. You may have some concerns about the potential drawdown or drawback on the mother company's insurance sales, but we are confident that we have strong product competitiveness [Audio Gap] So to sum up, we are pursuing various kinds of partnerships because you want to expand and improve the capability of our sales organization so that they can not only continue to sell our products, but also become very competitive GA. Thank you.

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

[Interpreted] With no further questions, we would like to conclude Hanwha Life Insurance 2021 Annual Earnings Presentation. Thank you very much for your participation. If you have any further inquiries, please contact the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]