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

[Interpreted] Good afternoon. This is CFO, Kim Si Jun. 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 fiscal year 2024. Page 1 is our earnings highlights. In 2024, we strengthened fundamental competitiveness in core areas such as products and channels, resulting in excellent financial performance with meaningful growth of both the top line and the bottom line. We have the strongest channel competitiveness in the industry with nearly 31,000 financial planners and have continued to launch trend market-leading products. Thanks to these efforts, our new business APE and protection APE grew 18% and 28% year-over-year, respectively. Net income also grew 17% year-over-year to KRW 72.6 billion, demonstrating Hanwha Life's strong fundamentals. Let me give you more details on the following. Page 2 is on new business APE. Despite intensified competition in the industry and economic slowdown, new business APE posted KRW 3.9 trillion, up 18% year-over-year and the share of protection APE increased to 81%. In particular, our protection APE grew 28% year-over-year, thanks to the launch of differentiated protection products that satisfy customer needs, including Signature Cancer Insurance, our steady seller, a health insurance and long-term care insurance. Page 3 is on sales force and persistency. In 2024, the SP workforce increased by around 4,000 compared to the prior year to 31,005. The 13th month and the 25th month persistency ratios also improved to 89.9% and 63.8%, respectively. We will strive to strengthen our business fundamentals by improving sales efficiency as well as business wiring. Page 4 is on CSM. New business CSM has exceeded our guidance of KRW 2 trillion for 2 consecutive years, posting KRW 2.1 trillion in 2024. The portion of general protection CSM further expanded to 73%, thanks to the solid portfolio focused on highly profitable general protection policy. Ordinary CSM increased by around KRW 510 billion to KRW 9.7 trillion on the back of new business CSM and experience variance adjustment. However, our in-force CSM at the end of 2024 recorded around KRW 9.1 trillion due to VFA adjustment from economic assumption changes, including strengthened liability EBITDA. On Page 5, separate net income posted KRW 72.6 billion in 2024, up 17% year-on-year, showing a solid growth trend since the introduction of new regulatory regime. Consolidated net income recorded KRW 866 billion, thanks to good earnings posted by major subsidiaries, including KRW 382.4 billion from Hanwa General Insurance, KRW 151.9 billion from Hanwha Life Financial Service and KRW 45 billion from the Vietnam subsidiary. Page 6 is on insurance and investment income. First, insurance income posted KRW 506.3 billion based on solid CSM amortization gains of around KRW 1 trillion. And when excluding INR-related one-off factors, it is approximately KRW 636 billion. Investment income posted KRW 390.6 billion, thanks to stable interest and dividend gains and strategic asset management. Page 7 is on asset management. 91% of our investment portfolio are interest-bearing assets and the investment yield remained higher than the liability crediting rate for every quarter in 2024, posting an investment yield of 3.59%, and we will continue to increase investment profit by enhancing asset portfolio profitability and strengthening risk management. Our bond and loan portfolio, please refer to Pages 8 and 9. Now on Page 10 is K-ICS and duration gap. Despite greater volatility around K-ICS across industry due to falling interest rates, strengthened liability discount rates and the insurance reform committee meeting, our fourth quarter K-ICS ratio is projected to be 165%, driven by new business CSM and issuance of capital securities. The asset duration and liability duration are 11.1 years and 10.5 years, respectively, with the duration debt improved to 0.26 years. Page 11 is on Hanwha Life Financial Service. As our core sales channel, the company's net income more than doubled year-over-year to KRW 151.9 billion in 2024. Going forward, Hanwha Life Financial Service will continue to utilize its highly efficient sales organization and digital infrastructure to reinforce its competitive edge in the insurance industry where the importance of the GA channel is growing. Page 12 is on the business environment outlook and strategy for 2025. The domestic insurance industry is faced with rapid changes such as changes in demographics and the financial environment as well as accelerated technological innovation. Against this backdrop, Hanwha Life is determined to secure future competitiveness by strengthening global market occupancy and digital capabilities while responding to rapid market with strong sales and financial prudence. Finally, Page 13 is on 2025 guidance. In the new year, we will keep our core business competency across the value chain and strengthen financial stability through effective responses to regulatory and market changes. To this end, we aim to secure an organization of 36,000 people achieved a 16% growth in general protection agencies. More than KRW 2 trillion of new business CSM inflow and over KRW 9.6 trillion in CSM [indiscernible]. Thank you.

[Interpreted] [Operator Instructions] The first question will be provided by Kim Do Ha from Hanwha Investment & Securities.

[Interpreted] I can see that you were able to defend your capital position despite the falling interest rate and also the results were pretty good in terms of duration lasting between buying assets. I have 2 questions. The first question is that regarding your CSM. I see that you have good sales efficiency. So, your new business CSM has been solid. However, across the year for 2024, there is an increase in cancellation and losses, which led to a negative impact on your CSM balance. And this is the case across the industry. However, it seems that your negative impact on your CSM balance seems to be larger than your competitors. So, in addition to your continuous efforts to increase persistency, I believe that you need some with strategies to address this issue. So, I'd like to learn more about that. And the second question is related to your dividend policy. This year, other than a few insurance companies, it seems that other insurance companies won't be able to pay dividend. And so, this may require some adjustment in your capital policy. So, I'd like to understand your current situation regarding the cylinder and pays, and I would like to understand when you will be able to secure distributable?

[Interpreted] As mentioned, we have had some negative impact on our CSM balance because of renewal or change into new policy and the impact on our CSM balance in a negative way was KRW 870 billion for full year of 2024. However, when we look into the outlook for 2025, we believe that the amount on CSM balance is going to be around KRW 800million. We expect a net increase to the CSM balance of KRW 1.5 trillion. Thanks to after new business CSM inflow as well as CSM amortization. So, when we consider the interest, we believe that that increases by around KRW 500 billion mark.

[Interpreted] We are focusing on increasing persistence even when new policies are written. So, for each sales team head, we have put in place a system where they check whether any new policy is going to have some concern regarding persistence or not. And also, persistence results are included in the evaluation and KPIs of sales organization heads. And so, these are some of the efforts we're making to increase persistence. Whenever there are any inquiries or complaints regarding their policies from customers, such complaints will be notified to responsible people right away through notification and text messages so that we can reach out to customers who have concerns and help them continue their policies. And also, at the customer centers, the inquiries for cancellation of insurance policies, or any inquiries regarding persistency, we have put in place the center that is responsible for addressing any concerns of our policyholders so that we can maintain persistency. And going forward, we're going to formulate a quantitative body for persistency management, including our subsidiary so that we can continue to enhance short-term as well as long-term from the finance team. And regarding your comments or question on surrender reserves, it is true that we continue to increase our new business and new policies, which result in an increase in surrender reserves. As we continue to sell new protection policies, our reserve surrender reserve requirement is increasing. And that is not only for Hanwha Life but also the pace for other insurance companies in the industry. That is why a lot of life insurance companies, even though their earnings increase, they have tax issues and other implications, which make it difficult for them to secure distributable income. That is why a lot of the life insurance association and also industry, are working hard to address the situation. So, in the first half of this year, life insurance companies in Korea will work together to come up with a measure or plan to improve regulations on this particular issue and make this plan to the regulatory authorities. And so, we will continue to respond to regulatory improvements and changes so that we can secure distribution dividends for 2025.

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

[Interpreted] My first question is related to the K-ICS ratio. For January, once again, strengthened liability discount rates will be and I'd like to understand the impact of such regulation on your K-ICS ratio. In the fourth quarter, you issued the bond, and I understand that you're preparing for another issuance of a hybrid bond in 2025. So, I'd like to know how much room you have for capital securities issuance this year? And I would also like to understand the movement in more detail across the year?

[Interpreted] So, there was an extension of the last observed in 2025 and also the long-term rate will be adjusted by 25 basis points. So, that has had an impact on our K-ICS ratio. So, to give you more details about the K-ICS movement compared to September 2024 in December 2024, the K-ICS ratio has changed from 164.1% to 165%. Let me first give you details on the negative factors. So, between that period, there was a drop in the 10-year government bond in Korea by 12 basis points, while there was an increase in treasury bond yield in the U.S. by 70 basis points, which led to a negative impact on the K-ICS ratio by 6.8 percentage points. Regarding regulatory changes driven by the insurance reform committee meeting, the negative impact was 2.5 percentage points. And because of the increase in required capital, there was a negative impact of 6 percentage points. Moving on to the positive factors. So, the K-ICS percentage point increase to our K-ICS ratio, thanks to new business CSM in the fourth quarter and because of capital security issuance of KRW 800 billion, which was a positive impact of 6.2 percentage points. There was more clarity on K-ICS calculation from the financial authorities, which led to the improvement in the valuation of equity shares that we have in our wholly-owned subsidiary. And so, the positive impact was 4 percentage points.

[Interpreted] Thank you. About your question on how much room you have for capital securities, As of the end of 2024, we have room of KRW 3.5 trillion.

[Interpreted] The following question will be presented by [indiscernible] from JPMorgan Asset Management.

Yes, I have 2 questions. So, the first one is, can you talk about your exposures to overseas commercial real estate as of fourth quarter last year? And also, the second question is, in terms of your plan to improve your K-ICS ratio in 2025, you would like to upgrade, I guess, the risk management, I think one of the things that you would like to do for this year. And also, I guess, with rates being lower. So, can you talk more about other than issuing sub debt, what other things that you can execute to improve your K-ICS ratio?

[Interpreted] About your first question on our exposure to overseas real estate properties in the fourth quarter of last year KRW 2.8 trillion.

[Interpreted] Let me explain our plans to boost the K-ICS ratio in 2025. There are a number of risk factors, including strengthened regulations as well as decline in interest rates in 2025, which will have a negative impact on our K-ICS ratio. So, our basic approach or strategy is to continue to increase our new business CSM, which will have a positive impact on our K-ICS ratio by 12 to 13 percentage points. Furthermore, we will utilize reinsurance for risk coverage for diseases and other benefits so that we can have more room to cover. And we will also implement measures to reduce investment-related risk. And there is sensitivity interest movement when it comes to K-ICS. So, we'll continue to monitor the interest rate movement and take necessary action when needed. And so, by doing all of this, our plan or goal is to increase our K-ICS ratio to be above 170% in 2025. Anything else you'd like to add?

Yes. Maybe just to clarify, in terms of overseas CRE, how is the asset quality? And also, in terms of the new regulations and the lower rate environment, how much of negative impact on your K-ICS?

[Interpreted] About your question on the asset quality of our overseas CRE, because of the sluggish real estate market overseas, there was some decline in the valuation or prices of these properties. But all the investment that we have been monitoring on our watch list, all their losses have already been recognized. So, there's no additional loss that we will recognize in the future.

[Interpreted] On your follow-up question, the impact of stronger regulation and interest rate decline. First of all, impact of regulatory changes in 2025, [ LOP ] is going to be further expanded and the long-term forward rate is going to go down by 25 basis points, which will have a negative impact on our K-ICS ratio by 9 percentage points. And regarding the interest rate sensitivity, when the interest rates go down by 10 basis points, it will have a negative impact of 2 percentage points on our K-ICS ratio.

[Interpreted] The following question will be presented by Dan Wang from JPMorgan.

I have 2 questions. The first one is about the target solvency ratio. In your slides provide the guidance that 170% of the K-ICS ratio in 2025. So, I want to know on the forward-looking perspective, what is the company's view on the target solvency ratio in the next 2 or 3 years? And the second question is about the dividend. And I know that in previous questions, the management has commented that your company will try to make sure the dividend payout in 2025 and still in the discussion with the regulator. So, my question would be what could be the concrete plans or the measures that the company will take to guarantee the distributable earnings for the dividend payout? [The interpreter apologizes, the sound of the first question is difficult to hear.] The first question is about the target solvency ratio, from the company's view, what could be the comfortable target solvency ratio?

[Interpreted] About your question on our more longer-term outlook on our solvency ratio. So, from the horizon by 2027, there will be continuous strengthening of liability discount rate related regulations which will definitely have a negative impact on our solvency ratio, but we will continue as we have been doing to improve our new business CSM and reduce required capital. Furthermore, I would like to mention that recently, the supervisor authorities announced a plan to approve -- to allow insurance companies to utilize their internal models. So, in 2025, they will receive application for internal models, which will later be approved and then starting from 2026, insurance companies to use their internal model for required capital calculation. And we don't have any concrete guidance yet as to the impact -- potential impact of using the internal model on our solvency ratio. We will have to wait and see, but Hanwha Life will apply for the approval of our internal model, which is likely to reduce our required capital model. So, for the next 3 years, as I mentioned, regulations regarding liability will continue to strengthen, but we will certainly be able to use our internal model for risk capital calculation. So going on, I am taking measures. Our Medium-term solvency ratio target is between 170% to 180%. Thank you.

[Interpreted] I would like to answer the question on what our concrete plans are to secure distributable earnings. We will continue to work to improve regulations regarding surrender reserves so that we can secure funds for dividend pay-out, and at the same time, we will continue to drive up our net income. And when calculating distributable earnings, we are supposed to take off unrealized gains. And we would like to change the direction in a way that unrealized gains and unrealized losses can be against each other. So, we will work to propose an improvisation of legal provision on calculation of the distributable earnings. Thank you.

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

[Interpreted] A quick question. The first question is on your new business target for 2025. So, I would like to understand the volume of new business you are targeting for 2025 as well as your target CSM multiple. The second question is in order to secure distributable income I need to understand if you have any plans to dispose some of your assets as in the case of selling your building? So, if you have any similar plans, please share with us?

[Interpreted] Let me address your question. First, on your second question on whether we have any plans for the closing of any properties. We don't have such a plan yet. And for your first question on our efforts to improve the new business CSM in 2025 as well as profitability. In 2024, new business CSM, including a 28% growth on a year-over-year basis of protection new business APE was about KRW 2.12 trillion. In 2024, interest rates continue to fall and there were some changes to assumptions. So, the entire volume itself or the amount has been affected, thanks to efforts to increase general protection policies. For 2 years in a row, we were able to achieve new business of more than KRW 2 trillion. Going forward in 2025, we like to continue to take advantage of the separation between product development and sales by utilizing our [indiscernible] organization. We will maintain an appropriate level of Hanwha Life as well as other types of insurance and at the same time, improve and increase the share of general protection policies which have higher CSM profitability so that we can achieve new business CSM of more than KRW 2 trillion in 2025 as well.

[Interpreted] Can you comment on CSM multiples?

[Interpreted] When you look at the fact sheet, you can find that the new business protection ratio was 7.8 in 2024 and we will work hard and try to improve the profitability of our new business so that CSM Multiple can be more than 9. Thank you.

[Interpreted] Currently there are no participants with questions. [Operator Instructions] There is no further questions, I'd like to invite our CFO back for his closing remarks. And with that, we would like to conclude this earnings conference call.

[Interpreted] In 2024, amid high uncertainty in the domestic and global market, Hanwha Life was able to achieve top line growth and maintain strong earnings fundamentals and financial stability. In 2025, we will pursue digital innovation through AI adoption in all areas encompassing customers, sales and products to improve the value of our insurance business while enhancing competency in the global market. Furthermore, we will respond to market changes proactively and actively pursue regulatory improvement to enhance shareholder value. I hope that this earnings conference call was a valuable opportunity for you to join us on our journey to excellence. Thank you once again for your continued trust and support. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]