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

[Foreign Language] 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 Fiscal Year 2022 First Quarter Earnings Results by Hanwha Life Insurance. This conference will start with the presentation followed by a divisional Q&A session. [Operator Instructions] Now, we shall commence the presentation on the Fiscal Year 2022 First Quarter Earnings Results by Hanwha Life Insurance.

[Interpreted] Good morning. I am Choi, Sang-Wook, Head of IR under Sustainability Management team at Hanwha Life Insurance. We are providing consecutive interpretation in Korean and English for the 2022 first quarter earnings presentation. You can find the presentation material on our IR website. Today, CFO [indiscernible] will 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 financial statements under K-IFRS, and some numbers are subject to change after a full audit. Let me now begin the report. Page 1 is summary of key financials. In the first quarter, premium income declined 2.2% year-over-year to post KRW 3,127.9 billion. New business APE grew 16.8% year-on-year to KRW 419.6 billion, following the growth in General Protection Insurance sales. Despite industry-wide increase in accident claims, Hanwha Life Insurance has maintained a stable loss ratio trend at 81.7%. The expense ratio improved to 16.8%, thanks to our efforts for cost efficiency improvement. The first quarter net profit posted KRW 50.9 billion on the back of greater volatility in the financial market. Page 2 is on premium income. In the first quarter, premium income fell 2.2% year-on-year due to decrease in the margin retirement insurance volume. Hanwha Life has been improving the quality of premium income in preparation for the new regulatory regime. As a result, protection premium income continued to grow, and the share of general protection income expanded to 25%. Page 3 is on new business APE. In the first quarter, APE was up 16.8% year-on-year, driven by higher sales of General Protection products. We were able to increase the portion of General Protection products to 38% by selling products such as simplified health insurance designed to respond to market needs. Thanks to these efforts, new business margin remained high at 56%. Page 4 is on sales efficiency. In the first quarter, the 25th month persistency ratio recorded 70.7%, showing a continued trend of improvement. The 13th month retention ratio improved 13.7 percentage points quarter-on-quarter, thanks to the new agent training program of Hanwha Life Financial Service. And the number of FPs grew by 2.2%. We will continue to grow the size of the sales organization based on sales efficiency improvements. On Page 5, pre-tax profit posted KRW 65.8 billion due to greater financial market volatility, but excluding one-off costs. Including one-off drop chain support for restructuring, pre-tax income is around KRW 110 billion. Core insurance income grew 19.7% year-on-year to come in at KRW 219.1 billion on the back of growth in expense gain following cost efficiency improvement. Please refer to the presentation for the movement analysis on the market category. Page 6 is on the loss ratio and expense ratio. Despite the industry-wide trend of increase in accident claims, our loss ratio in the first quarter remained stable at 81.7%, thanks to strong accident claims management and a 4.9% growth of risk premium. Expense ratio improved by 0.2 percentage points on year to 16.8%. Next is on asset management. Our investment portfolio is stable, consisting mainly of interest-bearing assets, including 54% domestic funds, 22% loan assets and 17% overseas securities. Investment yield posted 2.75% with greater volatility in the financial market. The running yield is the same as last quarter at 3.16%. As interest rates are rising globally, we expect the running yield and new money yields continue to improve in the medium to long-term horizon. Next, on Page 8, our bond portfolio is comprised of 70% domestic long-term bonds and 22% overseas long-term bonds. So bonds with 10 year or longer maturity account for 92%. The company is managing high quality and stable fixed income portfolio, of which 98% of domestic bonds are rated above AAA and 97% of overseas bonds are rated above single A. Page 9 is on the loan portfolio. Our loan portfolio is well balanced with 36% alternative investments, 33% retail loans and 31% policy loans. Our loan quality has been managed well, with delinquency rate of 0.18% and the NPL ratio of 0.06%. Next is on policy reserves and crediting rates. On the back of the structural runoff of legacy policies, the portion of reserve liabilities for fixed rates above 6% has declined to 24%, demonstrating that our policy reserve structure has been improving. Despite the recent increase in market interest rates, the average credit rate has improved 3 basis points on year to 4.37% on the back of continued decline in the fixed rate portion. Page 11 is on RBC and duration. The RBC ratio recorded 161%, mainly due to the decline in valuation gains of securities available for sale in the context of rapid rise in market rates. Hanwha Life Insurance is currently making efforts to manage the RBC ratio stably before the adoption of K-ICS by issuing domestic subordinated bonds, expanding the percentage of variable guarantee hedging and boosting the asset duration. Active ALM brought the duration gap in the first quarter to 0.13 years. Next, regarding the financial information of Hanwha Life Financial Service, please refer to Page 12. Finally, Page 13 is about our Signature Cancer insurance. In April this year, Hanwha Life Insurance launched Signature Cancer Insurance in response to insurance consumption trends. It is a personalized insurance product that has been designed with the customer-centric product paradigm in line. The market response has been quite positive. In the first 2 weeks, more than 20,000 policies were sold and the percentage of younger policy holders in their 20s and 30s is high at 27.1%. Furthermore, the originality of Signature Cancer Insurance was recognized, thus Hanwha Life has -- was granted a 6-month exclusive time. As a market leader, we will continue to make unwavering efforts for product development innovation. This is the end of the earnings report for the first quarter of 2022. Thank you for your attention.

[Interpreted] Now, Q&A session will begin. [Operator Instructions] The first question will be provided by Lim HeeYeon from Shinhan Investment.

[Interpreted] I am Lim HeeYeon from Shinhan Financial Investment. I have 2 questions. The first question is that some insurance companies have been saying that their negative spread margin will be addressed to a certain extent when the IFRS 17 is adopted. I wonder what is the impact of the introduction of the IFRS on our spread margin, that negative spread margin. Currently, interest rates are rising, and when this new regime is introduced, the negative spread margin issue may be addressed to a certain degree, but do you think that this will continue? The second question is about the variable guarantee of reserve hedging. I understand that you have been increasing the portion of hedging for variable guarantee insurance portion. I wonder if this has resulted in any substantial outcome. I understand that there is a high sensitivity of the variable guarantee reserve to the post-fee movements, and do you think that this will continue to go down?

[Interpreted] I'm Kim [indiscernible] from the IFRS team. Let me respond to your first question. I would first like to note that we are currently receiving consulting from an external entity, and we -- I would also like to mention that the regulations and details about the new regime has not been announced yet. I would also like to mention that we're currently internally considering the degree of [ reinsurance ] activity. So first of all, at the end of December last year of 2021, the 10-year yield was 2.26%. And as a result, we expect that our crediting rate is going to be around 3.1%. And at the time of the transition to IFRS 17, the effective interest rate is [indiscernible], at around 3%, because it is going to be based on the cost method. So I believe that the impact on -- or the positive impact on the negative spread margin will continue for some time.

[Interpreted] I am Kim Byung Ho from the Risk Management team. Let me respond to your second question. With respect to hedging of variable guarantee reserves, until last year, the percent -- the hedging percentage was about 34%. And this year, in the first quarter, there wasn't much hedging for variable guarantee because we see that interest rates continue to rise and it's around 2% additionally. And regarding the hedging costs, and I believe that you are mentioning any possible loss because of the conversion. We are not experiencing any additional hedging costs because there's no difference between the variable guarantee reserves according to the supervisory regime and the reserves based on the fair value method, so there is no difference between the 2. And moving on to the sensitivity on variable guarantee reserves, the sensitivity is KRW 16 billion for the investment yield of 1% movement and KRW 13 billion for interest rates movement of 10 basis points.

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[Interpreted] I would like to ask 2 follow-up questions. First of all, you mentioned that you're receiving some check and consulting from an external agency, and I understand that all the details about the IFRS 17 has not been finalized. But I was wondering if you could provide us with some color as to the size of CSM. And the second question is about the valuation losses on the derivative products. I do not think that this is related to hedging, but what is the estimate for the nature of these valuation losses?

[Interpreted] I am Kim [indiscernible] from IFRS team. Let me first, once again, remind you that we are currently considering internally the expense of retroactivity, which is going to have an impact on the size of contractual service margin. And Hanwha Life Insurance has been pursuing margin-based sales activities continuously. As a result for the past period CSM size has continued to change. And according to fair value method, I can give you some estimate as to our CSM standing at KRW 3.5 trillion. This is going to be the source of profit going forward. We will continue to increase the portion of Protection Insurance products and also improve the margin in our underwriting activities. And we expect that the new business CSM per year is going to be around KRW 1.8 trillion, but our target is to increase this figure to KRW 2 trillion. Therefore, after all the details are finalized and after the introduction of the IFRS 17, we believe that the size of CSM, which is going to be the source of our profit, is going to be around KRW 7.5 trillion. Thank you.

[Interpreted] I am Kim Byung Ho from the Risk Management team. Let me respond to your second question. We have incurred the valuation losses on derivative products, which are related to variable guarantee hedging positions. And on the other side of the position, on the liability side, there was reversal for liability reserves based on the fair value method.

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

[Interpreted] I am Kang Seung-Gun from KB Securities. The first question is related to your RBC management strategy. I understand that you are not only managing the RBC ratio, but also calculating the fixed ratio. And interest rates continue to rise, and this is going to have some positive impact on the fixed ratio. But as of now, we need to maintain the RBC ratio well, and your bottom line RBC ratio target is 150%. So currently, your ratio is 161%. And as we expect interest rates to continue to rise in the second quarter. I wonder if you can defend this line of 160%. So what are your strategies and plans to continue to manage your RBC ratio? And what is your minimum level of RBC ratio that you would like to defend? The second question is about protection on new business, and it is a great news that protection type sales continues to increase. And I wonder if this trend can continue in the second and the third quarter. And I would also like to understand the reasons behind the increase in the sale of protection products in the first quarter, and whether this is going to be sustainable?

[Interpreted] I am Kim Byung Ho from the Risk Management team. Let me first answer your question related to RBC. And to answer your question, RBC, our end of year RBC target is 170%. To achieve this target, we are considering issuing additional bonds to cater to the bonds that will mature next year. In addition to preemptive issuance of additional bonds, we are going to utilize increased variable guarantee hedging and other measures to be able to meet this end of year target -- RBC ratio target. And secondly, let me comment on how we are managing the fixed ratio. As you may know, the right interest rate trend is serving as a good opportunity for Hanwha Life Insurance, and we will continue to utilize our ALM strategy to address the mismatch between the assets and liabilities. And by taking advantage of the rising interest rate trend, we will try to stably manage the fixed ratio and our end of year fixed ratio target is going to be above 200%.

[Interpreted] I am [indiscernible] from the Insurance Business team. Let me answer your question related to the increase in General Protection new business APE. We had some good results in the first quarter, but we see that there is a lot more work for us to do. And the first reason why there was an increase in General Protection Insurance sales was because of product design and development and marketing activities that we've been carrying out since the second half of last year. The second reason in our understanding is the stabilization of the Hanwha Life Financial Service. Their systems have been more stabilized, and they were able to grow their sales efficiency [indiscernible]. And that has led to an increase in General Protection sales. The third reason is that we were able to increase our market share in the GA market on a year-over-year basis by more than 50%. So this has had a positive impact on our results. And for the past 3 years, we've been working to try to meet the needs of the market, and I believe this has made a big contribution. And starting from the second quarter, we expect that there will be more one-on-one or offline sales activities possible as we're entering into the phase of COVID-19 pandemic. And we will continue to increase our product competitiveness and carry out marketing activities to cater to the market needs. And at the same time, Hanwha Life Financial Service will become even more stabilized and will increase our presence in the GA market. Therefore, we believe that this improvement trend will continue in the second half of this year as well. But at the same time, we will make sure that we will continue to implement the margin focused portfolio management. Thank you.

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[Interpreted] The following question will be presented by Kim Do Ha from Hanwha Investment Securities.

[Interpreted] I am Kim Do Ha from Hanwha Investment Securities. I would like to ask 2 follow-up questions to the comments that you already made. First of all, we're very interested in your RBC management and also additional debt issuance in response to K-ICS management. You mentioned that there are some debts to be repaid next year, and -- but it is my understanding that your initial KRW 500 billion of hybrid bond issued in 2017, the call option will arrive in April this year and I'm sure you have prepared for this. So I would like to know if you're going to make additional issuance, or it's going to be an issuance in replacement of the hybrid bonds issued in 2017? So my ultimate question is whether there is going to be any change to the overall outstanding balance of your hybrid bonds? The second question is related to the CSM amount. You mentioned that, according to the fair value method, it's estimated to be KRW 3.5 trillion. But when you apply retroactivity of 2 years maybe, then it's going to be KRW 7.5 trillion. So I would like to better understand the relations between these 2 figures and how these figures have been calculated?

[Interpreted] I am Han Young-Man from the Finance team. Let me answer your question related to our debt issuance plans. On February 4 of this year, we issued ESG subordinated overseas bond of KRW 750 billion. And as for the first hybrid bond that we ever issued in 2017, which amounts to KRW 500 billion, we have exercised the whole option on April 14, and as a result, the outstanding capital-based hybrid bond size is KRW 2.5 trillion. As was disclosed on March 24, in order to manage our financial assignments and also to preemptively prepare for the final call option that will arise in April of next year for the overseas hybrid bond that we issued for $1 billion, in order to prepare for these, we are planning to issue domestic subordinated bond. The size is going to be between KRW 300 billion and KRW 500 billion. And going forward, if there is any additional need for additional capitalization, we're going to take preemptive measures in order to address any concerns over our capital spending.

[Interpreted] I am Kim [indiscernible] from IFRS team, let me answer your second question. Currently, the financial authorities are conducting the QIS. And in this QIS, they're considering the 3-year retroactivity method, and so we applied the 3-year retroactive application. And in that case, there will be amortization of KRW 1.8 trillion on CSM each year, and then we have the remaining balance of KRW 5 trillion. So together, it's KRW 6.8 trillion, and then there's this fair value method CSM calculation.

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[Interpreted] The following question will be presented by Jae Hoon Shin from Hanwha Financial Investment.

[Interpreted] I am Jae Hoon from Hanwha Financial Investment. I remember that you mentioned that the new business ESS target each year is around KRW 2 trillion. Of course, it depends on what types of products you're going to continue to sell. But can you provide us with the figure of this new business CSM target per year as protection APE? So can you make that conversion and -- to help us better understand the size of our new business CSM going forward? The second question is about the competitiveness of your products versus protection products offered by P&C companies, because the P&C companies, non-life insurance companies are also fighting to gain more market share in the protection business and also the GA channel is going to be the main channel of distribution of insurance products. So in this competitive landscape, what do you think is your competitive edge in terms of the IFRS 17? Can you explain how you're going to compete against them?

[Interpreted] I am Kim [indiscernible] from IFRS 17. As to the comparisons between the APE secures and CSM amount by product category, I would like to take another or separate opportunity to communicate that with you. Also with respect to our competitive position against the P&C companies, I would like to utilize another opportunity to discuss this with you. But what I can say is that across the company, our APE target is 1.1 or 110%. Of course, protection-type business, APE margin is going to be higher than that. Thank you.

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[Interpreted] The following question will be presented by Kim Myung Wook from JPMorgan.

[Interpreted] I am Kim Myung Wook from JPMorgan. I would like to ask 2 questions. First of all, you mentioned a lot about your strategies with respect to the RBC ratio management. But I believe that there's not a lot of room for you to issue additional hybrid bonds given the current situation. And you mentioned that your end of year RBC target is 170%. So when you are coming up with this RBC ratio target, what was your long-term interest rate assumption for the end of this year? And if you can maintain this 170% RBC ratio by the end of this year, can we expect dividend payout for this year? The second question is, you mentioned that CSM value coming from new business signing is going to be around KRW 1.8 trillion a year. And I believe that this is a very large number, considering your past performances and a lot of assumptions. I wonder if you made an assumption that your product margin is going to increase, because given the new business value numbers that you presented to us in the past and the PV -- MVP margin ratio, I think that this is a very big figure. So I wonder if your assumptions have changed with respect to product margin or protection-type sales assumptions? Or I wonder if there's any other reason why you came up with this number.

[Interpreted] I'm Kim Byung Ho from Risk Management. And the current room for issuing capital type bonds for the RBC ratio management is KRW 3.7 trillion, so we have KRW 3.7 trillion of room for additional debt issuance. And our long-term issuance -- our long-term interest rate assumption for 10-year yield is 3%.

[Interpreted] I'm Han Young-Man from Finance team. Let me answer your question regarding the dividend plan. As you may know, last year, in order to prepare for the new regions to be introduced in Q3 and also to follow the government recommendation of boosting of financial soundness, we decided not to pay out dividends in order to reduce or minimize the outflow of capital and increase the retained earnings and thereby increasing the stock price, which will benefit the shareholders. And this year, in 2022, we will do our best to be able to give -- pay dividend to our shareholders. Thank you.

[Interpreted] I am Kim [indiscernible] from IFRS 17 team. As for the difference between EV method and IFRS 17, the main method is -- the main difference is whether you will respect or recognize the capital cost and tax-related costs. And depending on the cost compared to the APE, the CSM amounts will vary. Given our initial management plan or target for month initial APE and given the margin of APE, we believe that we can create annual CSM of KRW 1.8 trillion. Thank you.

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[Interpreted] The following question will be presented by Park Sinyoung from Goldman Sachs.

[Interpreted] I'm Park Sinyoung from Goldman Sachs. It's disclosed yesterday that you're going to give an additional capital of KRW 500 billion to Hanwha Asset Management, but you did something similar in the previous year while this has not led to any significant improvement in the performance. So can you provide us with some more color on this decision?

[Interpreted] I'm Yoon Jong Guk from the Corporate Planning and Administration team. Let me answer your question. So let me explain the background behind the decision to increase capital of KRW 500 billion for Hanwha Asset Management. As you pointed out, we did something similar in February 2020. At that time, the amount of capital increase was KRW 510 billion. And so the decision to -- for capital increase this time around is an expansion of what we did in 2020 in order to support the growth strategies of Hanwha Asset Management in the medium and long term. Thank you. The purpose of this capital increase is mainly to boost the global competitiveness of Hanwha Asset Management and strengthen their digital capabilities. These were the same objectives we had in mind when we increased capital -- we invested capital for Hanwha Asset Management in February 2020. However, at the time, the COVID-19 pandemic occurred and this has been prolonged much longer than what we anticipated. Therefore, there were some postponement or a delay in their global competence and also digital capability raising projects. And there was another opportunity for investment in Hanwha Investment Security, which we did, and this has led to an increase or significant increase in the net income last year. Therefore, in short, the investment that we made in February 2020 were not fully realized due to these external circumstances. And we believe that this is the right time to provide them with additional support so that they can carry out their global growth strategies and digital growth strategies. Thank you.

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[Interpreted] The following question will be presented by Lee Byung Gun from DB Financial Investment.

[Interpreted] I am Lee Byung Gun from DB Financial Investment. I would like to thank you for your effort to prepare for the [ Q1 result ] despite very challenging business environment. I would like to ask a couple of questions in more detail. First of all, you mentioned your long-term interest rate assumption and under this assumption, do you believe that your policy reserves will increase compared to what it is now? You may answer this in terms of the percentage of growth or whether this policy reserve amount will increase or not. The second question is related to additional capital raising. You have your RBC target and you also have the K-ICS ratio target. And given the current interest rate assumptions, do you have in mind that you will issue additional capital type bond within this year or not? And do you also have in mind that this year's hybrid bond -- this year's subordinated bond issued is going to be postponed for K-ICS application? So do you think it will have been factored in your overall capital raising strategy for this year? And I wonder how you're going to apply this delayed application of K-ICS for your capital raising.

[Interpreted] I'm Kim Byung Ho from the Risk Management team. First of all, the policy reserves based on the fair value method is smaller than what it is now. Secondly, we have considered our targets for RBC -- both RBC and K-ICS in planning our debt issuance. The third point is that we have not factored in the transition measures. Thank you. So one clarification. Given the current interest rate environment, the policy reserves required based on the fair value method is smaller than what it's now. As of December 2021, we consider the new value -- the value of new business and the value of such business coming in into our portfolio. And given the current interest rate, that is the position that we have about the policy reserve amount.

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

[Interpreted] Okay. So I am Lim HeeYeon from Shinhan Financial Investment. I'd like ask for some clarification on the numbers that you shared with us. You mentioned that based on fair value method of CSM of KRW 3.5 trillion and the additional CSM addition or additional CSM inflow of KRW 1.8 trillion, and you also mentioned KRW 7.5 trillion. So I'd like to better understand the relations between these numbers that you shared with us so that we can better communicate with the market.

[Interpreted] Okay. First, I am Kim [indiscernible] from IFRS 17 team. Let me go over and more -- elaborate more on these figures. So at the time of transition, which is December of 2021, according to the fair value method, there will be amounts from IFRS 17 and there's a different amount from IFRS 13. So the difference between these 2 regimes is going to be recognized as additional CSM, so that amount is KRW 3.5 trillion. And the 3-year retroactivity method, what I mean by this is that for policy signed for the past 3 years, there will be additional -- there will be CSM amount calculated for these policies. But the policies that were signed prior to this point in time, there will be CSM calculation based on the fair value method. So there will be a different time point between the retroactive application and the fair value method and the remaining balance of CSM amortization for 3-year worth of policies and the CSM amount based on fair value method, when you combine these 2, it will be KRW 7.5 trillion. Thank you.

[Interpreted] One additional clarification question. You mentioned about the remaining balance of KRW 5 trillion, so I have to try to understand this. And you mentioned that there will be additional CSM created each year, which is going to be KRW 1.8 trillion. So to make it more clear, let's say that there's KRW 7.5 trillion for 3-year retroactive method and there will be additional KRW 1.8 trillion of CSM created each year. Of course, there will be some volatility or variation. But if we combine these 2 figures, KRW 7.5 trillion plus KRW 1.8 trillion, plus/minus [indiscernible], that's going to be the CSM margin that we can anticipate for the next 10 years. Is that correct?

[Interpreted] I am Kim [indiscernible] from IFRS 17 team. So yes, fair value method based on CSM plus KRW 1.8 trillion of CSM additional from -- coming from new business, of course, the amortization period may vary for the 3-year period of retroactivity. But all in all, then if you combine these 2 figures, it will be KRW 5 trillion. So it's a total, the CSM value that was calculated as of December 2021 is KRW 7.5 trillion. So for this amount of CSM of KRW 7.5 trillion, it's going to be amortized at the rate to 8% to 9% each year. This will be counted as insurance profit. And then there will be additional CSM from -- coming from new business, KRW 1.8 trillion each, and this will also be combined and will be amortized over the years by 8% or 9%. The amortization period may vary depending on the companies, but the easy way to understand this is that these values will be amortized over the period of policy maturity.

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

[Interpreted] With no further questions, we would like to conclude the 2022 first quarter earnings presentation. Thank you very much for your participation. If you have any additional questions, please feel free to contact the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]