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

[Interpreted] Good morning and good afternoon. Thank you all for joining the Hanwha Life Earnings Conference Call. Today's agenda will begin with a presentation from Hanwha Life followed by a Q&A session. [Operator Instructions] We will now begin the Hanwha Life 2024 Q2 Earnings Presentation.

[Interpreted] Good afternoon. I am [indiscernible] from the IR team at Hanwha Life. Today's earnings call for the first half of 2024 will proceed with consecutive interpretation and the presentation materials are available on our IR website. Today, CFO [indiscernible] will first give a presentation, which will be followed by the Q&A session. Let me now hand over to our CFO.

[Interpreted] Good afternoon. This is CFO [indiscernible]. Thank you for joining our earnings call. Please note that today's presentation was prepared based on K-IFRS. Let me now begin the report on the earnings for the first half of 2024. Page 4 is our earnings highlights. In the first half of the year, Hanwha Life improved earnings fundamentals by securing solid new business CSM through the expansion of the protection lineup and strengthening the base for recurring income. Our protection APE grew 37% year-over-year resulting in the new business CSM of approximately KRW 1 trillion. The 13th month persistency ratio improved by 9.2 percentage points year-on-year to 91.3%. With the sales force increasing to 29,184 FPs, we maintained the strongest channel of competitiveness in the industry. Half year consolidated net income posted KRW 667.3 billion thanks to KRW 347.8 billion of deferred net income and improved results posted by our major subsidiaries. Let me give you more details on the following slide. On Page 5. The new business APE grew 4% year-over-year to KRW 1.9 trillion and the proportion of protection APE expanded to 80%. In particular, general protection APE recorded a high growth rate of more than 92% year-over-year thanks to our competitive product lineup, including the H Health insurance and Value Plus products. Page 6 is on the sales organization and persistency. The number of FPs grew 13.2% year-over-year in the first half of the year showing a sustained growth since the split-off in 2021. The 13th month persistency ratio stood at 91.3%, which is expected to improve our medium and long-term persistency gradually. Page 7 is on new business CSM. In the first half of 2024, our new business CSM posted approximately KRW 1 trillion with a successful shift to general protection policies in response to the slowdown of the short-term premium paying product. The proportion of general protection new business CSM was up 43% year-over-year to 70%. And on the back of expanded sales of high margin general protection policy, profitability of new business CSM improved by 12.6 percentage points Q-on-Q. Page 8 is on in-force CSM. With the inflow of new business CSM of around KRW 1 trillion, ordinary in-force CSM increased by KRW 236 billion year-to-date to approximately KRW 9.5 trillion. However, due to variable insurance CSM adjustment with the strengthening of discount rates, in-force CSM in the first half of the year recorded around KRW 9.2 trillion. On Page 9. Our separate net income for the first half of 2024 reported KRW 348 billion thanks to the stable bottom line trend of KRW 176 billion in Q1 and KRW 172 billion in Q2. The consolidated net income posted approximately KRW 667 billion based on the solid separate net income and good results by major subsidiaries: including KRW 260 billion from Hanwha General Insurance, KRW 55 billion from Hanwha Life Financial Service and KRW 31 billion from the Vietnam subsidiary. Page 10 shows details on insurance and investment income. We continue to post stable insurance income based on CSM amortization of around KRW 220 billion on a quarterly basis. In terms of investment, despite external uncertainties, we posted around KRW 160 billion of investment income on the back of higher interest and dividend income from interest-bearing assets. Likewise, we are reinforcing our basis for recurring investment income. Page 11 is on assets and investments. 91% of our investment portfolio are interest-bearing assets and the mix of FVPL and FVOCI is 26% and 34% respectively. The investment yield recorded 3.73%, which is higher than the crediting rate. As for our bond and loan portfolio, please refer to Slide #13 and #14. Next on Page 14, K-ICS and duration gap. Despite solid new business CSM inflow, our K-ICS ratio temporarily declined to 163% due to factors such as the strengthening of the liability side discount rate. The duration gap was reduced to 0.38 due to extended liability duration with changes to liability discount rates. Page 15 is on the financial situation of Hanwha Life Financial Service. After going into black in 2023, Hanwha Life Financial Service posted KRW 55 billion of net income in the first half of the year thereby maintaining the profit trend. This year, our sales company is expected to achieve cumulative break-even point and will try to maintain its #1 position in the GA market by continuing to strengthen its channel competitiveness. Finally on Page 16, business strategies for the second half of 2024. In the latter half of the year, the company will enhance corporate value through a virtual cycle of growth and profit base expansion. On one hand, we will expand the sales organization to achieve annual new business CSM of KRW 2.1 trillion, which will serve as a strong base for future profit. At the same time, we will pursue stable growth of in-force CSM through insurance contract management and efficiency investment. In addition, we will actively reduce required capital and expand available capital through new business CSM growth so that we can make sure our K-ICS ratio to be above 175% by the end of the year.

[Interpreted] Now we'll begin with the Q&A session.

[Interpreted] [Operator Instructions] The first question will be presented by Jun-Sup Jung from NH Investments and Securities.

[Interpreted] I am Jung Jun-Sup from NH Investment & Securities. I have 1 question. There was news that you were selling the building in Gangnam district and I'm sure the gains from these sales will be recognized. And so can you give us some guidance on the amount of gains that you would recognize? And also including the gains from the sales of that real estate property, what kind of level of dividend payout can we expect down the road including Q3?

[Interpreted] I am [indiscernible] from the business management team. Let me respond to your question. Since 2011, we took over this real estate building that was owned by Hanwha Solution to expect some lease gains as well as for the purpose of driving up our investment yield. So we have been holding on to this real estate property while thinking when will be the right time to sell off it. After the end of the COVID-19 pandemic with the rise in real estate properties in the central business district, we continued to consider the optimal time for the sell-off and we've decided that selling it off this year will be the most optimal time. So that we've decided to sell it off in Q3. For this transaction, we expect about KRW 200 billion of income after tax, which will contribute to the basis for earnings available for dividend.

[Interpreted] I would like to ask 1 follow-on question. I expect that the base of earnings available for dividend is going to decline. So to what extent will that be?

[Interpreted] I'm Kyung Geun Lee from the finance team. Currently, there is a path forward working on improving regulations regarding reserving for surrender value. So the work is ongoing and we expect the outcome to come out in September or October this year. With the improved regulation on reserving for surrender value, we believe that the funds available for dividend payout will increase. In line with the government initiative to improve shareholder return, we will try our best to increase our dividend payout ratio.

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

[Interpreted] I'm Kang Seung-Gun from KB Securities. I have 2 questions. One on your CSM growth rate and outlook and the second one on the K-ICS ratio. Since last year, Hanwha Life has been driving and promoting new business growth focused on protection policies and that has been your strategy. However, in 2023, the outcome was not as much as we expected and also in the first half of this year, the growth of CSM is not as high as anticipated. I believe that it's not just about selling these policies, but also managing your assumptions and managing contracts will be important as well. So what is your expectation on the CSM growth rate for the entire year 2024 and how much are you anticipating from your CSM growth? The second question is you presented that your K-ICS target for the full year is 175% and in the presentation materials, it mentions that the impact of liability side discount rate strengthening was 11 percentage points downwards on the K-ICS ratio. So can you provide us with some information by breaking down into the impact of changes to market rates as well as VA and UFA and also please share with us your strategies to achieve this target of 175%?

[Interpreted] I'm [ Kim Jeong Yi ] from the Actuary team. Before I give you some background on our annual CSM target, I would like to first give you some breakdown on CSM adjustment for the first half of the year as you can refer to the presentation slides. As for experiential adjustments, they include adjustments of putting through the actual results and actuarial assumption changes, BFA and RA. For the first half of this year, it was mainly due to the actual results as well as FPA assessment, which led to the decline on our K-ICS ratio and you can find the details on the presentation slide. First of all, about the actual sales results because of the intensifying competition in the market for subscription policy, there are now more choices available for policyholders, which led to an increase in surrender and that is why there was a downward adjustment. As for this, while there's intensifying competition, we have excellent in-force CSM supported by new protection CSM inflow. Moving on to the impact of DSA, which is applied to variable guarantee policy because of the changes in this liability side by the regulators, there was a decline in the liquidity premium and decline in the discount rate, which resulted in the increase in BEL and decline in the CSM and this is rather a oneoff factor. In the second half of this year, there will good persistency and continued growth in protection sales as well as the alleviation of actual surrender impact and the oneoff factor of strengthened discount rate will not be here in the second half. As a result, we expect the growth in in-force CSM. And as our CFO mentioned, we will make sure and work hard to secure KRW 9.7 trillion of CSM for the entire year.

[Interpreted] I am Hee-Dae Hwang from the risk management team. Let me give you some more details on the impact of liability by the stock rate cases. So as for the discount rate VA changes of 10 basis points, there's an increase of KRW 800 billion of liability; and for the BSA of 10 basis point movement, there is an increase of KRW 300 billion of liabilities. Moving on to our strategy to boost our K-ICS ratio for 2024. In the second half of this year, we will continue to increase available capital by increasing new business CSM in the third and the fourth quarter and our target of impact from increased new business CSM is more than 8 percentage points on the K-ICS ratio. And at the same time, we will continue to work to reduce our required capital especially on the side of beneficiary certificate and if necessary, we will actively consider issuing another round of hybrid or capital-light security. And all in all by implementing these strategies, we will make sure to reach our K-ICS ratio target of 175% by the end of the year.

[Interpreted] The next question will be presented by Yong Hoon Sung from Hanwha Securities.

[Interpreted] I'm Yong Hoon Sung from Hanwha Securities. There are some concerns over the impact of interest rate cuts in particular in the second half of the year, we expect some interest rates to go down and they may have impact on your CSM multiple and your earnings, including investment costs. So you may provide us with some information mainly in terms of sensitivity or in terms of direction as to how much of an impact you anticipate from interest rate cuts on your earnings and CSM?

[Interpreted] I'm Shin Chung-Ho from the investment strategy team. Let me respond to your question on the impact on our investment yield. When you come to investment income, interest rates going down will not have significant impact. Indeed, we may benefit from lower interest rates because valuation gains will decrease from fixed income portfolio that we have classified as FVPL. So overall, this may have a positive impact on our investment returns. Not only our bonds, but also infrastructure related alternative investments because we have longer duration when interest rates go down, we will see an increase in valuation gains. On the other hand, lower interest rates may bring down the new money deals so there may be some concerns about that. But given the total amount of assets we have, the size of new investment is not very big. So overall, all in all in 2024, we believe that there will be positive impact from lower interest rates on our investment activity.

[Interpreted] I'm [ Kim Jeong Yi ] from Actuary team. I'd like to discuss the impact of lower interest rates on the profitability of our new business CSM. So the sensitivity is about 425 basis points of interest rate movement downwards will have about 5% impact on the profitability of new business CSM. So it's not very significant.

[Interpreted] The next question will be presented by Yong Jin Seol from SK Securities.

[Interpreted] Seol Yong Jin from SK Securities. There were other questions that were already asked. So I'd like to ask a very quick question. On the profitability of CSM side, I see that there is an increase in multiple for annuity policies compared to savings policy. So can you elaborate more on that?

[Interpreted] I'm [ Kim Jeong Yi ] from Actuary team. The reason why we have seen in profitability between annuities and savings policy is because there is a difference in CSM multiple for monthly premium paying policies versus single premium paying policies. So in general, single premium paying policies have better profitability. In particular in the second quarter, we saw improvement in new business CSM mainly because of the increase in sales of single premium paying policies in the second quarter for annual lease products.

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

[Interpreted] I'm Lee Byung Gun from DB Financial Investment. First of all, your new business CSM multiple has gone up. But according to your disclosed material when you consider the present value of new business CSM, there hasn't been much improvement. This may be mainly because of the profitability issue with full life policies. I can see in the materials that the profitability of full life is quite similar to your annual fixed product even considering single premium paying policies and the profitability or margin of whole life policy seems to be quite different from what we saw last year. And in the second quarter, you didn't sell as much of single premium paying policies as you did in the first quarter. So what was the reason behind the deterioration of profitability for whole life policies and should we expect the same trend to continue going forward? The second has to do with surrender value related reserves and there may be some improvement, as you mentioned, in the regulations regarding that. So this may lead to an increase in earnings available for dividend by the end of the year and also next year. But given the growth rate of your CSM, I can see that reserving for surrender cash value will have to continue to increase and the rate of increase seems to be faster than what we anticipated before the regulatory changes. So when do you think down the road such reserve for surrender value will start to decline given your liabilities mark at the cost level as well as mark-to-market.

[Interpreted] I'm SeongMi Kim from the business management team. The new business CSM for whole life, the multiple is about 3x in the first half of this year and because of the lower interest -- lower discount rates for liabilities, there was much of an impact in the first half of the year on the deterioration of the profitability for whole life. However, we are implementing various measures to improve profitability for whole life by shifting our portfolio, selling more of general protection policy. So in the second half of the year, we will continue to increase the proportion of general protection policies in our portfolio and also continue to sell more of medium- and long-term premium paying policies rather than single premium paying policies so that we can increase the margin and profitability of our portfolio in total.

[Interpreted] I am Choi Sung-Kyun from product development team. Let me add some more on our efforts to diversify and upgrade our portfolio for whole life. So as was already explained, currently our whole life policies are mainly short-term premium paying policies, but we are now working to shift this trend. So in June this year we launched new whole life products that have medium- and long-term premium paying period. So this is a part of our effort to diversify our whole-life portfolio. And it will take some time for the actual sales forces to get used to selling medium and long-term premium paying policies. And we believe that there will be substantial change and income change to our portfolio starting from the second half of the year. We're also shifting our attention from death benefits to disease and accident related benefits to meet the actual insurance policyholder's needs for whole life products and increase the margin for CSM.

[Interpreted] I'm [ Kim Jeong Yi ] from Actuary team. Let me comment on your question regarding surrender value reserves. It's not just the Hanwha Life, but also the entire industry is going through this change. And under the current regulation, the reserve for surrender value for the first year of new policies is very substantial. And so as we continue to sell new policies, this amount of reserve is expected to continue to increase for some time. But it need not start to go downwards or rather it will stay flat at certain point. Currently we are having communication with the regulators and the authorities regarding this regulation and I believe that some outcome will come out sometime soon. As for the time line of when this trend will peak and stay flat, we believe that it will take about 7 years before the IFRS 17 accounting for new business or new business CSM would be applied and when there will be a full cycle of cost recognition for new policies. So down the road after 2027, we may be able to see the trend to peak and stay flat. We believe this can be a trend in consideration of the reserve based on cost as well as our surrender profitability. But as for whether the trend will peak and then go downwards or stay flat, we will have to wait and see because it's still too early.

[Interpreted] The next question will be from Myung Wook Kim from JPMorgan Securities.

[Interpreted] I'm Kim Myung Wook from JPMorgan Securities. You provided us with the solvency target of 175% by the end of 2024. I'd like to understand what potential factors and uncertainties may have an impact on your ability to meet this target of 175%. I'm asking this question because I remember in February when you were announcing your earnings for the entire fiscal year of 2023, you gave a guidance of solvency ratio of 190%, but in the 6 months much has changed. So down the road in the second half of the year, what kind of factors may have an impact on your solvency ratio maybe including changes in regulation, growth of macroeconomic factors? What kind of factors should we pay attention to? And secondly, when given the solvency target of 155%, what will be the level of dividend we can anticipate? Is it going to be similar to the level of last year?

[Interpreted] I'm CFO. Let me respond to your questions myself. When it comes to the main reason why there was a decline in the K-ICS ratio, it's mainly because of the lower discount rate for liabilities which resulted in the increase in mark-to-market liability. And as a result, when we were calculating the K-ICS ratio, there was a decline in the available capital while there was an increase in recurring capital. And the main factor for 2024 is the changes to liability spread, which was introduced early this year and the liability spread went down by 37 basis points which had a negative impact on our K-ICS ratio by 33.3%. So if you translate this into our interest rate sensitivity, it's 9.0 percentage point on the K-ICS ratio by 10 basis point movement. So compared to the end of December last year when we had a K-ICS ratio of 183.8%, there was a decline of 33.3 percentage points, as I mentioned, because of the changes to liability spread and the discount rate. So at the end, we got 150.5%. However, we were able to close this quarter with 183% of solvency ratio thanks to several reasons. First of all, 4 percentage points up in the first quarter from new business CSM and also in the second quarter so a total of 8 percentage point increase on the K-ICS ratio from new business CSM. And also on the required capital side we're able to reduce by 4.5 percentage points and that ended up with 163%. Originally the regulators thought that there will be a 14 basis points downward impact from liability spreads, but the actuality was that it was 37 basis points in the first half of the year. Therefore, we do not anticipate any additional impact of lower rates in the second half of the year. In the section, we have 4 percentage points positive impact on a quarterly basis coming from new business CSM. For the second half of the year, it will be a total of 8 percentage points up on K-ICS ratio. And as the head of the risk management team mentioned, we will actively consider the potential issuance of capital-light securities if necessary and we will also consider increasing reinsurance for disease and accident related exposure. So the worst case will be 175%, but we are confident that we can post more than 175% of K-ICS ratio by the end of the year. Moving on to your question on our dividend plan. If we are able to defend our solvency ratio to be minimal 175%, we're currently communicating with the regulators regarding the limit on dividends available to earnings and we will make sure to reach for at least the level that we had last year so that we can give out dividend or EPS to be similar or above last year.

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

[Interpreted] I'm Heewon from Morgan Stanley. I would like to ask a question about your value up related plan. Some other financial institutions already made announcements, including Hanwha General Insurance when they gave a guidance on EPS growth rate guidance and so on. And of course I understand that there are some regulatory uncertainties especially surrounding surrender value related to reserving, but when are you planning to make announcements and disclosure on your value up initiatives?

[Interpreted] I'm Young-Man Han from Corporate Finance team. Regarding the value of initiatives, as you know very well, it is about individual companies setting up medium- and long-term targets for growth and develop detailed plans on business restructuring and investment, the shareholder returns in order to increase their corporate value and then they will announce these plans and continue to communicate with the shareholders. So for Hanwha Life, we're currently considering on this topic and nothing has been finalized yet. As soon as we have finalized the plan, we will make sure to announce them to the market and communicate with you.

[Interpreted] The next question will be presented by Do Ha Kim from Hanwha Investments & Securities.

[Interpreted] I'm Kim Do Ha from Hanwha Investment & Securities. I would like to ask 2 quick questions. Since last quarter, you have been increasing the proportion of domestic funds in your portfolio. So is that correct, how much? And are these domestic funds classified as BPL? And I would also like to know your exposure to overseas opportunistic investment, including your exposure to overseas commercial real estate?

[Interpreted] I'm [ Shin Sang Wook ] from the investment strategy team. Yes, as you mentioned, we have been increasing the share of domestic in our portfolio mainly because interest rates start falling and because there is a reduced duration gap between assets and liabilities. So we have been intentionally driving up the share of domestic funds. And we are investing in domestic bonds for the purpose of ALM so they are mostly classified as FVOCI. And for some bonds that fails our internal test, they may be classified as FVPL. But currently for all new domestic bonds that we've included in our portfolio, they are all FVOCI. And for your second question on overseas alternative investment, the total size is KRW 22 trillion and our exposure to overseas commercial real estate is about KRW 3 trillion.

[Interpreted] The next question will be presented by Jiyong Im from Shinhan Investment & Securities.

[Interpreted] I'm Jiyong Im from Shinhan Investment & Securities. I'd like to ask 3 questions. First of all, you achieved a lot of growth in terms of new business CSM, but we expect a lot of uncertainties next year and next year we expect some regulations on the GA channel to be strengthened. And there may be some base effects because we achieved a lot of growth this year, which may see some impact on your top line growth next year. So what are your response strategies and what is your view on this growth trend? Do you think this trend will continue or we'll see some changes? Secondly, together with profit generation, you are specializing on insurance policies for women and so how much of a growth potential do you see that remains in this particular market segment? And the third question is regarding your asset investment strategy. Starting from the second half of the year, we expect base rates to go down and until next year you may have to employ different strategies for your asset management. And under the K-ICS regime, discount rates will continue to go down, which will lead to your increase in long-term plans in your portfolio. And on top of that, what other asset classes are you planning to increase including your portfolio to diversify your investment assets and to drive up investment needs?

[Interpreted] I'm [ Lee Gyung Seop ] from Insurance Business management team. Let me respond to your first question. In the first half of this year in the entire life insurance industry, there was quite a lot of competition and drive for short-term premium paying policies and it resulted in volume growth. However, there's intensifying competition over property related covers and other whole life benefits. So we see limited potential of growth in terms of volume. So for our strategy, we will continue to sell full life, but at the same time, we will focus more on general protection products and continue with the sales strategy focused on profitability.

[Interpreted] I'm Sung-Kyun Choi from the product development team. In the GA channel, life insurance companies are still followers to the leading P&C companies. But we have seen some very promising results because in 2023, our monthly general protection policy sales through the GA channel was KRW 3.2 billion while this year in the first half, the monthly sales of general protection policies increased to KRW 5.5 billion especially focusing on health related covers. And you also asked a question about the outlook on the market for women. Hanwha General Insurance has a signature product called the Signature Woman insurance and Hanwha Life has Signature Cancer insurance products and they have a very differentiated competitive edge. For instance in the cancer insurance market, in July we recorded KRW 2 billion per month of volume so we are quite a dominant player and when you translate this into a market share for cancer insurance, it's about 30%. And we see that women have a very good purchasing power in the insurance market. So not only cancer insurance, but also other types of insurance products we can offer so we continue to work on product development.

[Interpreted] I'm Shin Chung-Ho from the investment strategy team. Let me take your third question on our investment strategies as interest rates going down. As you mentioned, when interest rates go down, there is an increasing need for purchase of long-term bonds because we are an insurance company that has a longer duration ALM. When interest rates go down, then duration gap will be reduced and liability side duration will go up and that is why we need to increase exposure to long-term bonds. So under the current environment, on one hand, we have to continue to pursue ALM; but at the same time, we need to identify and invest in assets that can drive up the investment return. We are not investing with some expectations or anticipation for the market, but rather we're responding to market situations. But under the current market situation, we still believe that fixed income is the most promising asset for us. So increasing exposure to fixed income instruments is not just for the purpose of ALM, also for opportunistic investments. So given the current interest rate trend, we will continue to increase our exposure to fixed income. And we're also looking at overseas bonds for opportunistic investments so especially in overseas funds that have a steeper yield curve and also to increase further investment yields, we are also considering increasing exposure to overseas funds as well. And because we need to continue to reduce required capital and maintain or manage our K-ICS ratio, we cannot be active in terms of stock investment. We will actively consider opportunities for stock investment as well and also for alternative investments, both equity instruments and debt instruments, they can help drive up the investment yield. So we're looking for opportunistic investments, including alternative investment in distressed assets. So I said all that. But in short, I'd like to say that ALM will be our basic and underlying approach to asset management. And at the same time, we will look for more opportunities to increase the overall yield for the portfolio. And when we have strong conviction, we may also increase exposure to equity investments.

[Interpreted] With no further questions, I'd like to invite back our CFO for his closing remarks before we conclude today's earnings call.

[Interpreted] In the second half of 2024, we expect intensifying competition in the industry and continued uncertainties on the back of concerns over economic recession due to unfavorable global macroeconomic indicators. However, Hanwha Life will strive to improve our business fundamentals as an insurance company, including expanded new business CSM, growth of in-force CSM and improved capital adequacy to ensure that we have sufficient earnings fundamentals to effectively respond to rapidly changing market conditions and drive quality growth focused on profitability. I hope that today's call was a valuable opportunity for you to better understand our business. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]