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 out of fiscal year 2023 First Quarter Earnings Results by Hanwha Life Insurance. This conference will start with the presentation followed by a Q&A session. [Operator Instructions] Now we shall commence the presentation on the fiscal year 2023 first quarter earnings results by Hanwha Life Insurance.

Good morning. I am Choi, Sang-Wook. I am leader of Sustainability Management Team at Hanwha Life Insurance. We are providing consecutive interpretation in Korean and English for the earnings presentation for Q1 of 2023. We'll be able to find the presentation material on our IR website. Today, CFO, [indiscernible] will first give a report, which will be followed by a Q&A session. Let me invite our CFO.

[Interpreted] Good morning. This is CFO, [indiscernible], thank you for taking part in today's earnings release conference call despite your busy schedules. This is the first earnings release since the introduction of the new accounting standard. Please note that today's presentation material was prepared solely for the convenience of investors based on the separate financial statements under K-IFRS. The business results for Q1 of 2023 are stated based on IFRS 9 and IFRS 17 and 2021, Q1 and the full year business results for 2022 is restated based on IAS 39, IFRS S/4 and IFRS 17. Let me now begin the report. Page 1 is the earnings highlights. In Q1, new business APE grew 158% Y-o-Y on the back of healthy growth in protection insurance sales. Following this growth in profit margin for insurance sales, new business CSM grew 38.2% Y-o-Y to post KRW 571.6 billion. Meanwhile, investment yield posted 3.94%, up 0.39% over last year, owing to bond swap trading and also due to the decline in volatility in the financial market, leading to improving investment environment. Net profit posted KRW 356.9 billion due to enhanced investment returns and stable underwriting profit to the CSM amortization. Next is new business APE. The new business APE posted KRW 1,083.6 billion through the higher sales of protection policies and annuities. Protection APE posted KRW 385.8 billion, up 48.4% Y-o-Y, following stable sales of general protection type and growth in whole life insurance sales. For annual APE, leveraging the increase in demand early on in the year, brought about by the growth in life insurance market, annuity APE posted KRW 683.6 billion, significantly higher compared to last year. Based on the strong channel competitiveness at Hanwha Life Financial within the GA market, we will continue to pursue a sales strategy, prioritizing high profit margins. Page 3 is on new business CSM. Due to across the board sales growth in general protection and whole life, new business CSM posted KRW 571.6 billion, up 38.2% Q-on-Q. As of the end of Q1, in the case of CSM, the policies in force, KRW 0.5 trillion for new business CSM, experienced adjustment of KRW 0.4 trillion and CSM amortization of KRW 0.2 trillion was reflected to post KRW 9.7 trillion. To continue expanding CSM, which is the future earnings of the company, our target is to achieve new business CSM of more than KRW 1.8 trillion in 2023. For this end, we will continue to reinforce our product and sales capability. Next on Page 4 is sales efficiency. The 13th month persistency ratio stands at 83.8%, maintained at a stable level and the 25th month persistency ratio posted 54.7%. The 13th month retention ratio posted 48.6%, up 7.3% Q-o-Q, driven by strength in new agent development and training programs. In terms of the size of the FP sales force, through the acquisition of People Life in January 2023 and expanded recruitment to focusing on highly efficient FPs, the number has expanded to 24,752, the largest among our peers. Next, on Page 5, net profit posted KRW 356.9 billion, up significantly Y-o-Y. The enhanced earnings fundamentals is due to investment yield of KRW 349.5 billion on the back of stabilizing financial market in Q1 and the CSM amortization profit of KRW 214.2 billion from the KRW 9.7 trillion of in-force policies at CSM. While pursuing business strategy focusing on profitability to expanding higher-margin protection type sales, we will continue to enhance our CSM efficiency and asset management capabilities to achieve sustained value growth. For the net profit movement, please refer to the presentation slides. Moving on to Page 6, the loss ratio and expense ratio. The loss ratio rose Y-o-Y due to the seasonality effect of accident claims. Going forward, we intend to proactively secure risk premium based on protection sales increase and strengthen accident claim management to safely manage the 2023 annual loss ratio. Also, the expense ratio posted 19.2% on the back of increase in sales commissions from sustained growth of new business sales. Next on Page 7 is asset and investment. Our company has applied IFRS 9 in January of 2023. As such, the assets by type of business are SPPL 30%, SPOCI, 28%, AC,10% and loan assets are 15%. Also, 92% of investments are on the general counter interest earning assets. In the case of general cloud investment yield, in addition to the stable interest income generated from bond and alternative investment assets, owing to the improved SPPL valuation gains following easing of the market volatility in Q1 and through domestic and overseas bond for trading, investment yield posted 3.94%. Meanwhile, the average crediting rate posted 3.71% due to mark-to-market valuation of liabilities based on the IFRS 17. Next is Page 8. Our bond portfolio is composed of domestic long-term bonds, 79%, oversees long-term bonds, 18% and it concludes that mostly long-term bonds with more than 10 years of tenure for ALM. As for bond credit rating, for domestic bonds, 96% had a rating of AAA higher and 99% of overseas bond have single A and higher. That's a high-quality portfolio is being maintained. Page 9 is loan portfolio. Our loan portfolio is well balanced with 50% alternative investments and 50% retail loans. Recently, despite concerns over contraction in the real estate market and slowdown of the economy, our NPL ratio and delinquency ratio is 0.12% and 0.30%, respectively and is being maintained at a stable level. Going forward, based on a continuous monitoring of the financial market, we intend to manage our alternative investments from a conservative perspective. Next on Page 10, CICs and duration gap. Despite increases in required capital due to expanded risk types and tightening of the calculation standards, we're increasing capital from mark-to-market valuation of liabilities, the CICs ratio of the company in Q1 is expected to come to 185.5%. Meanwhile, the duration gap based on CIC, posted 0.96 years, down 0.5 years Q-o-Q to proactive ALM. Next for the financial results of Hanwha Life Financial Service, please refer to Page 11. With this, I conclude the earnings presentation of 2023, Q1. Thank you very much for your attention.

[Interpreted] Now Q&A session will begin. [Operator Instructions] The first question will be presented by Myung Wook Kim from JPMorgan.

[Interpreted] I have 2 questions. The first question is up until the first quarter of 2023, the solvency capital ratio is expected to come around 180%. So what is the target of solvency ratio that you maintain till the end of 2023? And also, it seems that you have been able to generate a lot of profit this quarter. Does that mean that you will be able to pay out dividends? Or have you been thinking about the possibility of paying out dividends? And if there are difficulties in paying out dividends, what kind of risk you will see in paying the dividend? That was my first question. My second question has to do with the new business at CSM. So for the annuity new business at CSM, it seems that the numbers are quite large. Is this product, does it have a sufficiently high margins? And do you think this is sustainable? Can you elaborate on this issue as well?

[Interpreted] So I'm the Team Head of the Risk Management team. Let me get the first question. So our solvency ratio till the end of 2023 is 190%. So that is the target that we intend to manage our ratio. And also, we intend to focus our sales on the protection type of insurance policy. And through this, we intend to continue to attract new business at CSM.

[Interpreted] So I am the Team Head of the Finance team. Let me get the question about the dividend. So with the introduction of the IFRS 17, what we have to do is we have to satisfy reserves for the difference in the reserves for the cost based approach and the reserves for the mark-to-market based valuation. And so there is this reserve called retained dividend reserves. So as of March of this year, the surrender value reserves stands at KRW 2 trillion. And through the end of this year, 2023, there is a possibility of additional reserves being set aside. So depending on how this reserve means that the Fund IV dividend will decline. However, we are making multi-fronted efforts in order to pay out dividends, including the revision of the enforcement decree for the commercial law. And so our expectation is that we will indeed be able to pay out dividend by the end of the year.

[Interpreted] So I am the Team Head of the Actuary team. And let me get the question about the annuity product sales and profitability. So for this product compared to the APE, profit margin is about 15% to 20%. This quarter, the profitability was around 20% compared to the APE. The reason why it appears to be larger is because it has reflected the recent interest rate levels. And so depending on the movement of the interest rate, the profit margin can vary. So was that a sufficient answer to your question?

Yes, it was.

So we'll now move on to the next question. The next question will be presented by Byung Lee from DB Financial Investments.

[Interpreted] So I have 2 questions. So you have acquired People Life. But in this quarter, the People Life has not been reflected as yet, but it is our expectation that it would be quite helpful in your sales going forward. So unlike your other subsidiaries, in the case of People Life, they have been selling other insurance company's products. And so what will be the strategy for the products that are sold by People Life? And what proportion of Hanwha Life Insurance products do you think they will be able to sell? There has been an increase of about 15%. And so in the second quarter, what is your outlook for the business results going forward? And also, my second question has to do with the difference between the actual and expected. So I would like to hear Hanwha's view about this matter because yesterday, one of your peers had earnings presentation. And what they said was that if insurance company difference between actual and the expected is not large, then that means they have not taken a conservative approach and that their difference in terms of expected natural is large because they have taken a conservative approach to this matter and that investors must confirm this fact. So this is actually contrary to the general view about the difference between expected and actual and so this was rather confusing from the investor's point of view. So can Hanwha elaborate on their point of view about the difference between the actual and the expected? And what is your current level of actual and expected? And what is your outlook for this number going forward?

My name is I'm [ Sung-Kyun Choi ] I'm the Head of the Marketing division. Let me get the first question about People Life. So People Life was acquired by our company in the month of January of this year. And as of March, the fiscal results for this company was -- so it's KRW 2.51 billion, that was the highest in recent years. This was the result of the new management presenting new vision and also, closely communicating with the market. And also, they had economies of scale because they were able to enlarge their sales force. There were new recruits on a monthly basis of 100 FPs. And so this led to strong results. So in the first quarter of this year, the initial monthly premium of People Life stood at KRW 1.9 billion and this was an increase of KRW 200 million on a Y-o-Y basis. In the case of the life insurance, it was KRW 1.2 billion and there was also an increase over -- on a Y-o-Y basis. And the portion of our company sales was KRW 700 million and this is KRW 300 million increase on a Y-o-Y basis. And so our company among the total insurance companies take up 55% of sales. In the case of the [ partner ], because this company has strength in the corporate sector channel, so we will focus our efforts on the CEO term life insurance policy. And for the retail channel, we will be focusing on the general protection policies going forward. And for the whole life insurance, we will be closely responding to the market trends in this area. In the case of People Life going forward, in order to grow the size of the sales force, we will be following our existing education and training program and also to maximize its corporate sector strength, we will be providing differentiated support programs. And also for the retail channels, we will be providing specialized sales force. So I'm the Team Head of the Actuary team. Let me get the second question about the difference between actual and expected. So first of all, when we talk about the difference, there is a difference between the expected cash flow and the actual cash flow. So here, in the case of the expected cash flow, it is calculated based on the best estimate assumption. So this is a neutral assumption. And so the difference between the expected assumption-based cash flow and the actual cash flow for the difference between the actual and expected and we handle this difference in 2 ways. First of all, in the income statement, the difference between the accident claims and the general expenses are calculated and they are recognized in the income statement. And other assumptions for the cash flow, for instance, the KRW 3 million fund, the surrender value refund and the policy loans that is not expressed in the income statement, they are recognized in the CSM. So I think the focus of your question is the difference that is expressed in the income statement and also the balance sheet. So the adjusted CSM amount and our profit going forward is that in the income statement, we are going to minimize any volatility in the profit and losses, that means we're going to minimize the difference between the actual and expected. Yes, it is true that there are limitations to actual expectations and assumptions. But if we minimize the volatility in the profit and losses and also if the new business CSM margins are written off, do you believe that the profit and losses can be maintained at a stable level. So has been this sufficient answer?

Yes, it is.

So we will now move on to the next question. The next question will be presented by Seung-Gun Kang from KB Securities.

[Interpreted] So I have 2 questions. One is on the new business CSM. The other is on investment yield. For the new business CSM, so it appears that compared to the APE, if you calculate the margin ratio on a Y-o-Y basis, there has been a significant decline. So if you look at the total new business from 99%, that has been reduced just to 3%. I do believe this is to in part because of the large share of annuities fund. Also, if you look at the protection type as well, in the case of life insurance, it has fallen from 138% to 38%. So there's been a significant drop. What is the causes to find this decline? And how do you foresee the future outlook for the margin ratio going forward? My second question has to do with the insurance of financial gains and investment. It's not clearly delineated at this point. But if you can explain, breaking it down into the investment gains and the insurance financial costs and the variable gains and the retirement on the general account, this will be very helpful in my understanding of these products?

So my name is [ Jung Hyun Lee], I'm going to take a question about the new business at CSM. So in the case of first quarter, there was a large portion of sales of annuities and this had an impact on the profit margin compared to APE. So from a total loss of KRW 571.6 billion of CSM, the annuity picked up KRW 148 billion. And as I said, the margin -- profit margins for annuity is 20%. And so our target for deposit margins to APE for this year is maintaining at around 100%. So the more sales or for the annuity products, it appears that this business [indiscernible] overall profitability of the company. But if you look at the first quarter CSM, the total was KRW 413 billion and the protection type actually was around 110% compared to APE. And so the overall CSM type has grown. This is in part because the annuity insurance sales has created -- generated additional CSM. So the profit margins of CSM is pretty much similar. So let me summarize my answer. The annuity product sales has contributed to our general insurance CSM. However, this might appear to lower profitability compared to the APE and this is also true for the whole life insurance as well. On a Y-on-Y basis, there's an increase of KRW 60 billion in CSM because of the whole life insurance policy. And this is mostly because of the new -- the initial monthly premium for single premium products. So this has led to an increase in CSM. However, like the annuity that might look at this, the initial monthly premium and compared to APE, the profitability is still lower. So in a nutshell, there has been additional CSM but secured, but there is this visual -- illusionary aspect of making appear as is compared to APE, our profit margins are lower. So I am from the Corporate Planning and Administration team. Let me get the question about the investment yield by account. So in the first quarter, the total investment came to [ KRW 358 billion ]. Amongst them, the general was KRW 222 billion and variable KRW 280 billion and the retirement was KRW 100 billion and the insurance financial expense was KRW 690 billion.

[Interpreted] The next question will be presented by Heewon Choi from Morgan Stanley.

I had a question about APE. So in this quarter, the APE from the annuity sale seems to be quite large. In your presentation, you mentioned that this was considered high demand in the earlier part of the year in bancassurance mortgage. So is this a one-off development or do you think that, that trend can be maintained going forward for the annuity APE generation?

So I'm [ Kim Byung Ho ] from the marketing division. Let me get that question. So we have been responding to the high interest rate market since the next January of this year. And in order to improve the profitability of our channel, we have been selling till March of this year, hybrid interest product that combines a defined interest rate and this growth interest rate. So in just 2 months since the launching of this product, we have KRW 50 billion for this product. However, because of the 25% rule in the bancassurance sector, we have suspended the sales of this product in mid-March. However, in the month of May, we are again selling this product although still have room for additional sales of these products. So going forward, we're going to constantly monitor the compound interest rate trends and also limitations in terms of the sale proportions of the banks. And we will deploy based on these factors, whether we will resume the sales of this product a lot. But even if it is resumed, we don't foresee the sales volume to be as large as in the past.

[Interpreted] The next question will be presented by Jae Hoon Shin from Hanwha Investment and Securities.

[Interpreted] In terms of information request, can you break down your [indiscernible] by different categories and provide this data later on that will be quite helpful? And my question is there is a repeat of the previous questions, but it seems that the share of your single premium sales have gone up. And this appears to be dragging down on the margin for the protection type. So on a recurring basis, you said that the protection type of margin to APE is around 110%. Can you reconfirm whether this figure is indeed that? And also, why has the risk amount increased? Or what are the main causes behind that? Can you elaborate on that issue?

I'm from the Corporation Planning and Administration team. Let me get that question. So with regards to the new business of CSM, our profit margins in Q1 compared to APE for [ Q1 ] other margins were 80% to 90% for the general protection, is 150% for the annuity product, 15% to 20% that has been previously explained. However, it was explained by a different colleague that the profitability has come down because we have shifted our focus from focus to single premium sales. However, there has been a misunderstanding with regards to that issue because we have only entered into the single premium market starting from the mid-April. And so in the first quarter, the [indiscernible] sales into premium results have not been reflected. So in the case of the first quarter, actually, it was a non-single premium wholesale products that were reflected in the results. And under the new accounting system of IFRS 17, the profit margins for the long term compared to single premium is actually lower. And that is the reason why it appears in the first quarter, the margins are low. So I'm [indiscernible] I'm Head of the Claims Management team. Let me get that question about the loss ratio, your second question. So according to our presentation data, it does appear that the loss ratio has gone up in the first quarter. So on a Y-o-Y basis, the accident claim payout has increased by 9%. And our analysis shows that because of the easing anti-COVID-19 pandemic measures, there has been greater usage of the medical and health services. So if you look at the breakdown of the [indiscernible] out, diagnosis, hospitalizations and operations or procedures, they are the top 3 claims payout. So our analysis shows that the overall life insurance market is seen increase accident claim payout and there are no irregularities that we have been able to identify with where excessive benefits have been paid out. There has been no such instances of these kind of benefits being paid. At present, the loss ratio for the month of April and May comes to below 80% at around 70%. And we believe this level can be maintained through the year-end because the overall trends have been stabilized.

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

[Interpreted] So I have 2 questions. The first question has to do with the CSM movement. It seems that there has been a decline of KRW 400 billion in terms of the experience adjustment. So the size of this decline seems to be rather large even compared to our peers. What is your outlook going forward regarding the CSM movement? And my second question has to do with the invested assets. The share of fair value of P&L seems to be quite high at 30%. Can you tell us the breakdown of this SPL category? What is your future direction in terms of managing assets because if the share of the SPL is high, then the profit volatility will go up and this will also translate into higher volatility for this capital as well. And also in relation to this, can you also elaborate on the CIC sensitivity as well?

So let me take that question. In the case of the experience adjustment, it is -- so based on the assumptions and this lease adjusted CSM, first of all, this is the first component. And another component is the change in actuarial assumption. So there is the assumption changes to CIC and also changes from the RA. These are the components of the experience adjustment. However, in the case of our experience adjustment, typically, this is offset by the [indiscernible] and so in the case of the first Q, the reason why the experience adjustment appear to be quite large is because of one-off issues. There's no change in our [ career ] modeling. And so this has led to a one-off figures of KRW 340 billion. And that is the reason why we are minus KRW 400 billion in terms of this figure for the first quarter.

I'm [indiscernible] about the SPL asset. So the SPL you are seeing is based on the integrated consolidated financial statements. So this also includes valuable assets in the overall assets. And for the variable treaties or for the purpose of matching, we have classified bonds of KRW 2.2 trillion and that is included. And for the remainder of the SPL, for mostly these alternatives of securities that must be classified as appeal under the regulation. So on the multiple securities, those that have been classified as a fair value P&L for those assets that are there for the purpose of matching variable treaties and apart from those assets, there are some stocks. However, the portion is quite minimal. And among the alternative assets, those that are classified as fair value P&L are those and beneficiary secured, those take up the lion's share. We will continue to make effort to minimize volatility in terms of P&L with regard to this asset. And with regards to the interest rate sensitivity of these SPL assets. As I said, most of the assets are composed of the terms of assets. And so it is quite difficult to calculate the direct impact of the interest rate and their sensitivity for the alternative assets. However, we are making internal efforts to come up with this figure. And when we do, we will provide the necessary updates to the market.

[Interpreted] So I have an additional question yet. With regards to the CIC, if you have any fixed-related interest rate sensitivity that you have been able to figure out, can you share that information with us and also the sensitivity to the year one as well?

So if you look at the CIC interest rate sensitivity, at the current interest rate level, if there is a change of tenders in the interest rate that this will have about a 2% to 3% impact on the CIC's ratio. That is our position. And for the year one, currently, the financial regulators are managing the UFR, so that every year, it's up by 15 bps. And this 15 bps will drop to spike and that will lead to an increase liabilities by KRW 150 billion.

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

[Interpreted] I also have a question about the CICs ratio. So you presented that in this quarter, you estimate the CICs ratio to come to 180% and that you expect it can be improved to 190% by the year-end. But if you look at the financial statements that you have provided us with, the capital size actually dropped significantly on a Y-o-Y basis. And in the month of April, we also repaid your other bonds in foreign currency. So is this guidance on Q3 appropriate? And if you do indeed believe that it can be improved by the year-end, what factors do you think will drive that improvement?

So I'm the Head of the Risk Management team. Let me get that question about the CIC. So we estimate the CIC ratio in the month of March to be 180%, but the -- because we are still in the process of calculating this number, there is still possibility of the final number changing. And as you have noted in the month of April, there has been repayment of $1 billion of the volume. And so when that happened, there is a decline of CIC by 10 percentage points. But going forward, we think increase our sales of highly profitable protection-type insurance and also increased new business CSM and managed the duration gap effectively. Therefore, we will be able to minimize any volatility in the asset side. Also in preparation of any future rises in the interest rate, we are also within the possibility of taking a reinsurance for the mass lapse ratio. And through this, we intend to deeply manage the ratio going forward. And one thing of note is that remember 190% for the year-end is product expectation, but it is our target for which we will be siding towards.

[Interpreted] The next question will be presented by Jung Hyun Lee from Hana Investment and Securities.

So I have a question about the minus KRW 350 billion in terms of the insurance expenses. So how can a minus figure, negative figure come out. Can you elaborate on this?

[Interpreted] Let us check that matter internally and get back to you later on. Thank you.

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

[Interpreted] So if we have no further questions, we would like to invite our Strategy and Administration team to make comment.

[Interpreted] So I am the CFO, [indiscernible], let me talk about the dividend. So efforts to revise the enforcement decree of the commercial asset Korea is proceeding smoothly and also the underwriting profit is increasing and related CSM is expanding as well. And under the IFRS 17, the insurance service-related gains are also increasing. So because of the increase in recurring profit, we have sufficient funds for dividends. And as such, we will do our best to pay dividends at the time of [indiscernible] 2023, and we will continue to put our [indiscernible] forward.

[Interpreted] With this, we will close the 2023 Q1 earnings release conference call. We'd like to thank everyone for participating in this call. And if you have any additional enquiries, please contact our Sustainability Management team, IR part, and we will do our best to provide you with the answer to your questions. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]