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

Good afternoon. This is CFO, Jin-Seok Yang. Thank you for joining our earnings presentation. Please note that today's presentation is based on K-IFRS. Let me begin the report on the earnings for the first half of 2025. Page 1 is on earnings highlights. In the first half of 2025, Hanwha Life secured solid new business CSM through strong channel competitiveness and enhanced financial stability despite volatility in the industry due to regulatory strengthening. First, with a larger sales organization of 35,700 FPs, new business CSM reached KRW 925.5 billion in the first half of the year with greater visibility to achieving the full year guidance of KRW 2 trillion. Consolidated net profit posted KRW 461.5 billion with a separate net profit of KRW 180 billion. K-ICS ratio is estimated to be 161% in the second quarter, exceeding the recommended level of 130% by over 30 percentage points. Let me give you more details on the following slides. Page 2 is on new business APE and CSM. New business APE in the first half of the year totaled approximately KRW 1.8 trillion, down slightly year-on-year. However, Q2 new business APE increased 8.7% year-over-year, thanks to the growth of whole life policies in medium and long-term premium paying terms. New business CSM in the first half of 2025 recorded KRW 925.5 billion, nearly half of our annual guidance. Also, despite falling interest rates and intensifying competition, new business CSM multiples are improving, mainly driven by health insurance. Page 3 is on the sales organization. As of the first half of 2025, the number of FPs reached approximately 35,700, further solidifying the industry's strongest channel competitiveness. The new FP retention rate improved to 65.7% through competitive sales infrastructure such as well-structured FP training and development system. While the 13th month persistency remained stable at high 80%, the 25th month persistency improved substantially from the end of the previous year to 80.1%. Page 4 is on in-force CSM. In the first half of the year, ordinary CSM increased to approximately KRW 9.2 trillion on the back of new business CSM inflow of KRW 925.5 billion and experienced variance adjustments. But due to CSA adjustments related to liability discount rate cuts in the first quarter, in-force CSM balance as of the end of the first half decreased to approximately KRW 8.8 trillion. The impact of liability discount rate cuts, which brought down in-force CSM in the first half of the year was fully reflected in the first quarter. With experience variance expected to decline on the back of improved persistency, we expect in-force CSM volatility to reduce in the second half of the year. Page 5 is on net income. Due to a drop in insurance income driven by the increase in onerous contracts and reduced investment income on the back of greater financial market volatility, separate net income in the first half of 2025 fell year-over-year to KRW 179.7 billion. Net income on a consolidated basis also saw a Y-o-Y decline to KRW 461.5 billion. In the second half of the year, we will drive up insurance profit through stronger product monitoring and active management of experience variance and generate more investment profit on the back of market stabilization. Page 6 is on asset management. 92% of our investment portfolio are interest-bearing assets and investment yield in the second quarter was 3.17%. We will continue to increase investment profit in the second half of the year by expanding selective investments in high-quality assets, purchasing long-term bonds to replace short-dated bonds and strengthening dividend income from alternative investment assets. Regarding our bond portfolio, please refer to the relevant slide for more details. Now on Page 8, K-ICS and duration gap. Despite larger volatility in the industry due to liability discount rate cuts, our second quarter K-ICS ratio is estimated to be up 7 percentage points Q-o-Q to 161%, thanks to stable new business CSM inflow and hybrid bond issuance. Duration gap was reduced by 0.19 years from the prior quarter to 0.08 years. We will strive to increase the portion of long-dated bonds for stronger ALM and reduce required capital to our K-ICS ratio. Page 9 is on Hanwha Life Financial Service, which is our core sales channel. Net income in the first half of 2025 recorded KRW 69.1 billion, up 28% year-over-year, maintaining a solid earnings trend since turning a profit in 2023. Page 10 is on domestic and global credit ratings. Since we successfully adopted new regulatory regime, we have been expanding market leadership by strengthening sales competitiveness and maintaining financial stability through active capital management. As a result, 3 major domestic credit rating agencies upgraded our credit rating to AAA stable in March. And furthermore, in May, Fitch and Moody's global credit rating agencies also upgraded our credit ratings to A+ and A1, respectively. It means that positive changes that we have been making are recognized domestically and globally. Going forward, we remain committed to enhancing core competitiveness to be a financial company trusted by our customers and investors.

Now we would like to begin the Q&A session.

Now Q&A session will begin. [Operator Instructions] The first question will be provided by [indiscernible] from JPMorgan Asset Management.

I have 2 questions. So the first one is if you can talk about the P&L. You mentioned that the earnings decline was due to onerous claims and also the other one was investment income being lower. Can you talk about more details, I guess, behind these 2? And also the second question I have is in terms of the K-ICS ratio being at 161% as of second quarter, what's the projection for the end of 2025 in terms of the K-ICS ratio, the movements and also, I guess, the tightening of regulatory measures over the next 1 year?

Yes. I'm [ Jung-Ki Min ] from the business management team. Let me answer your first question to give you more details on the increase in onerous contracts and decrease in investment income. So as you mentioned, we have 2 main drivers that brought down our earnings. The first one is increase in cost for onerous contracts. And the second one is decrease in asset valuation gains in terms of investments. With respect to increased cost for onerous contracts, first of all, mainly because of the cut in liability discount rates, we saw an increase in onerous contracts in our portfolio in the first half of the year. And also, there was an increase in losses coming from some health-related riders. However, a majority of these issues in the first half of the year have been addressed, in particular, with respect to our -- lowering the limit for underwriting for such riders and other risks that we undertook in June. And with respect to a decrease in investment profit in the first half of the year, we saw a decrease in asset valuation gains from some of the investments that we have in our portfolio. However, I'd like to mention that interest income has been on the increase, especially with the increased share of bonds and other interest-bearing assets in our portfolio. And we're also seeing an improvement in the financial market overall. So we believe that valuation gains will also continue to improve going forward. So in short, in the first half of the year, as you pointed out already, we saw an increase in onerous contracts in terms of our insurance profit and there was a decrease in the valuation gains from the investment side. However, going forward, we will continue to work hard to improve the profitability of our policies in the portfolio while continuing to secure more interest income and investment returns. So we expect a better improvement in the earnings in the second half of the year.

I am [ Park Jinsuk ] from the risk management team. Let me answer your second question on our K-ICS outlook as well as actions that we're taking to improve our K-ICS ratio. First of all, we will continue to work hard to improve the new business CSM inflow. And at the same time, we're making recommendations to the regulatory authorities regarding liability discount rate-related regulations, especially on accident claims. And in addition, we will continue to increase the share of long-dated bonds in our portfolio to reduce interest rate risk and investment risk. In addition, we are making preparation for potential introduction of the internal model regime that the regulatory authority announced last year. So all in all, through these efforts, we are planning to keep our K-ICS ratio to be mid-160% by the end of the year. And we are well aware of the potential downside risk of further falling of interest rates on our K-ICS ratio. So we are closely monitoring the interest rate movement in the industry. And regarding potential regulatory impact on our K-ICS ratio for the next 1 year, currently, the regulatory bodies are reconsidering some adjustments to liability discount rate related guidelines. The extension of the last liquid term and other liability-related regulations were already announced to be strengthened in the 2026 and 2027 period. However, given the difficult situations and the reality in the industry, the authorities are considering potential readjustment or revision of these guidelines. The details have not been announced yet, but we expect that the authorities are going to provide some direction for potential revision in either August or September. In addition, the authorities are considering a potential strengthening of duration gap-related regulations for better ALM. The details or timing have not been announced yet, but we expect some announcements to be made in August or September. So even before any details are announced by the authorities, we are working hard to be prepared for any regulatory changes that have already been announced based on the assumption that these regulatory changes will take effect as scheduled. And we will make sure to continue to monitor and manage our K-ICS ratio. Thank you.

Does this answer your question?

Yes, it does.

The following question will be presented by Kim Jiwon from JPMorgan.

I am Kim Jiwon from JPMorgan. I would like to ask 2 questions. The first question, I believe, has been asked almost every quarter. I'd like to get some -- your input on the solvency guidance by the end of the year. I'm asking this question because numbers have been changing quite frequently. And you mentioned that you are assuming some regulatory changes and also making assumptions on potential interest rate declines. I'd like to understand to what extent you can defend and you can continue to build up your solvency capital. And I would also like to understand under what conditions you will be able to start paying dividends back to your shareholders again. This is rather a broad question that I'd like to understand your view on the economic capital that you have. You already mentioned the potential utilization of the internal model. But I'd like to get your view on the economic capital that you have right now. Do you believe that this is a sufficient level? What is your position? As you shared with us, the credit rating agencies, both domestically and globally have upgraded the credit ratings, but the regulatory body's view seems to be different that they think that insurance companies like Hanwha are not really able to pay dividends to shareholders. So it seems that there are some different perspective on the capital and the definition of capital. And your reported solvency ratio is slightly lower than your peers in the industry. So if you can give us some color on the company's view on the economic capital, whether this is sufficient for future business growth and shareholder return.

I'm the head of the risk management team. Let me give you information on our year-end K-ICS guidance. The major factor that increases volatility in our K-ICS ratio is interest rate movement. As for interest rate sensitivity, when the rate goes down by 10 basis points, our K-ICS ratio will fall by 1.5 percentage points. Even though our duration gap is almost 0, that's actually on the capital -- available capital side. But when you look at the required capital side, when interest rates go down, liabilities will go up as well as assets, thereby having a negative impact on the K-ICS ratio. So there is substantial impact on our K-ICS ratio coming from interest rate movements. So as I mentioned earlier, in order to boost our K-ICS ratio, we will continue to increase the portion of long-dated bonds in the portfolio to reduce interest rate risks. And also, we will try to reduce investment risks so that we can have better position in terms of required capital. And our year-end K-ICS ratio target is mid 160%. And you asked a question on the company's view on economic capital. To reflect the new regulatory regime, we are mark-to-marketing the assets and liabilities. Both the assets and liabilities are mark-to-market. And so on the numerator side, we are using the K-ICS approach for capital management. But on the denominator side, which is required capital, we're not using the standard K-ICS model provided by the regulatory authority, but rather we're using our internal model that takes into account our own characteristics. And for more details, we will communicate to you through the IR team.

I am Kyung Geun Lee from the finance team. Let me answer your question on what conditions we will be able to resume shareholder return. Because of the surrender or cancellation reserve -- additional reserving, we weren't able to pay dividends to shareholders in 2024 and that is also going to be quite similar for this year as well. Because of this additional surrender reserve requirement, even though our earnings have improved, we weren't really able to secure enough distributable earnings. And there is a wide recognition in the industry, especially among the life insurance companies that such a requirement has to be revised. So the Life Insurance Association is having a dialogue with the authorities to be able to revise this aspect and we are expecting a positive outcome to come out soon. Thank you.

The following question will be presented by Do Ha Kim from Hanwha Investment & Securities.

I am Kim Do Ha from Hanwha Investment & Securities. I'd like to ask you a couple of questions. First of all, there was a media report on your completion of the acquisition of Velocity Clearing in the U.S., while the size itself is not very big, I'd like to understand its impact on your earnings as well as your capital solvency ratio. And what is your expectation coming from this particular transaction? The second question is something that we've been asking other insurance companies. Well, you are trying to defend and manage your experience variance. But at the same time, we are seeing an increase in claims payments. And I'd like to understand any particular policy types or any particular risk or riders that have caused an increase in claims payout for the first half of this year. And I would also like to understand if this trend will continue for how long? The third question is regarding VFA movement. There was not a substantial change in the VFA adjustment, but rather there was ordinary adjustment of KRW 360 billion. So if you can break this down further by different factors, we would appreciate it.