Hyundai Marine & Fire Insurance Co., Ltd. (001450.KS) Earnings Call Transcript & Summary

[Interpreted] Good morning and good evening. Thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2023 earnings results by Hyundai Marine & Fire Insurance. This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation by Hyundai Marine & Fire Insurance.

[Interpreted] Good afternoon. This is [ Jeong-Keun Han ], Head of the Hyundai Marine & Fire IR. Let me first thank everyone for joining us at this 2023 earnings release conference call despite your business schedule. This conference call will last for 1 hour with consecutive interpretation. The CFO will first deliver his greetings, followed by Executive Vice President, [ Su Yu Sung ], who will present the results of 2023. There will be a Q&A session afterwards with all the executives in attendance. And we will now begin the conference call on 2023 with a presentation on the 2023 earnings. [Interpreted] Good afternoon. I am [ Chu Yin San ], the CFO of Hyundai Marine & Fire Insurance. First of all, I would like to thank all of our investors and analysts for your interest in the company and also taking the time out of your busy schedule to join us in our 2023 conference call. I will first walk you through the year-end business results, which is 2023 highlights on Page 4. Consolidated net income in 2023 fell 37.1% to KRW 805.7 billion from KRW 1.2813 trillion Y-o-Y. Breaking down by insurance line, long-term and general insurance service results decreased Y-o-Y, which also reduced the overall income by 61.2% Y-o-Y to KRW 526.5 billion. Net investment income increased by 19.5% Y-o-Y to KRW 495.6 billion. In Q4 alone, auto insurance service results grew Y-o-Y by long-term and general insurance results fell, leading to a decrease in net income by 95.5% Y-o-Y and 93.3% Q-o-Q to KRW 19.4 billion. Let me now turn to results by business units. First is long-term insurance on pages 5 and 6. Long-term insurance service results in Q4 fell 77.2% year-on-year to KRW 248.8 billion. While income from release of CSM, the basis for long-term insurance profit and loss, increased by KRW 169.7 billion Y-o-Y. Gain on claim variance decreased by KRW 255.5 billion Y-o-Y due to higher loss claims for medical indemnity in the wake of rise in flu and respiratory disease cases in the first half of 2023. While the loss from claim variance continued to improve since Q2, dropping at only KRW 8 billion in Q4, insurance service results fell by KRW 695.6 billion Y-o-Y due to rising losses on onerous contracts following adjustment in actuarial assumptions. In terms of long-term insurance acquisitions, the monthly average acquisition was KRW 12.6 billion, up by 6.2% Y-o-Y from KRW 11.9 billion. In particular, there was 15.4% growth in acquisitions Y-o-Y in health care with robust sales of simplified issue insurance targeting preconditions and elderly. Acquisition channel for long-term insurance at the end of Q4 consisted of 51% GA. Long-term insurance persistency ratio at month 13 slightly fell Y-o-Y and remain on improvement trend at month 15. Next, Page 6, is long-term insurance CSM. Remaining CSM at the end of 2023 was KRW 9.787 trillion, up 9.1% from 8.3194 trillion Y-o-Y. ASM multiple in 2023 or CSM to new business premium was 11.8% for health care. For new business in the overall long-term insurance, the multiple was 11.1%. In Q4 alone, new business in health care fell by 15% Q-o-Q, which also weighed down on new business CSM in long-term insurance at [ KRW 357.1 billion ], a slight drop Q-o-Q, but the CSM balance grew by 2.4% at the end of Q4, mostly due to the increase in experience adjustments following changes in actuarial assumptions. Next is auto and commercial insurance on Page 7. Auto insurance service results was KRW 2.012 billion -- I'm sorry, it was KRW 201.2 billion, a growth of 16.8% Y-o-Y. Improvement in auto insurance continued Y-o-Y despite the premium cut early this year and increased car use after the post-pandemic reopening. It is mostly owe to regulatory improvements and decreased seasonality. Commercial insurance service results fell 18.3% year-on-year to KRW 76.4 billion. There was a general decline in underwriting income from the rise in reinsurance costs due to high claim accidents like large fire. Next is investment. In 2023, net investment income increased 19.5% Y-o-Y to KRW 495.6 billion. Excluding net insurance finance expenses, net investment income reached KRW 1.2791 trillion with an investment yield of 3.22%. In Q4, total net investment income increased 22.4% Y-o-Y as stabilization in market rates led to a gain on valuation of FVPL assets. Turning to capital and our 2023 return to shareholders on Page 10. Shareholders' equity decreased due to the application of FSS actuarial guidelines for medical indemnity in Q3 and a reduction in other comprehensive net income due to lower market rates in Q4. Solvency ratio also decreased slightly Y-o-Y to 173.2% as a result of capital decrease and the guidelines. Dividend for 2023 is planned at KRW 2,063 per share, increase of 5% year-on-year. Although profitability declined due to higher losses on long-term claim variance, the company decided to increase the total dividend payout to maintain consistency and predictability in our shareholder return policy. Let me now move on to our business strategy and outlook for 2024. In addition to ensuring IFRS17 application in 2024, the company will go all out to solidify our fundamentals for future profitability by improving key indicators like loss ratio and expense ratio. We plan to increase corporate value by maximizing performance in each business line under the strategy of strengthening profit generation capability, strengthening efficiency-driven sales competitiveness and growing together with customers. Let me now explain our business strategy and outlook for long-term insurance on Page 13. New business and long-term insurance is expected to decline slightly Y-o-Y. CSM multiple will improve Y-o-Y, thanks to strategic pricing such as experienced risk adjustment in April 2024. In 2024, instead of focusing on short-term size growth, the company plans to keep increasing the overall CSM by improving the CSM multiple by increasing the share of high CSM products like precondition and no surrender value insurance and adjusting the experience risk ratio. We expect long-term claim difference to improve year-over-year. Expected claims will increase by applying more conservative loss ratio. At the same time, we plan to curb the growing trend in actual claims by strengthening efforts to prevent claims leakage, including more rigorous claims handling against excess claims under medical indemnity so that the claim variance can be meaningfully improved. Next is auto insurance. Auto insurance revenue is expected to increase slightly year-on-year. [ Internet-only ] auto insurance, which has an excellent combined ratio will maintain its growth trend from the previous year. For auto insurance service results, it is expected to decline Y-o-Y due to the premium cuts and rise in costs, such as components and repair. But the company will maintain its profitability trend with improved expense efficiency led by CM channels and the expected continuation of stabilized accident ratio. Next is commercial insurance on Page 15. Commercial insurance revenue is expected to increase slightly Y-o-Y. Net income is expected to improve Y-o-Y, mostly due to the base effect in 2023 or the high claims catastrophes. The company plans to improve underwriting income by driving revenue in high-margin products like casualty and marine insurance, while increasing business in force by improving reinsurance terms. Next is investment. Investment income, excluding insurance finance cost, is expected to decline in 2024 Y-o-Y. Interest income is expected to continue its growth from 2023. But there is also the base effect of gain on valuation of FVPL, arising from the fall in market rates. There is now a bigger need to improve our retained yield after market rates turn to a declining trend in the second half of last year. To strengthen our ALM management, the company will maintain the investment principle centered on domestic long-term bond while trying to improve retained yield by increasing the share of high-quality corporate bonds and corporate loans. This concludes my presentation on 2023 business results and 2024 outlook. Thank you very much for your attention. And we are now ready to take your questions. For the sake of efficiency, we would like to limit the questions to 2 per person.

[Interpreted] [Operator Instructions] The first question will be provided by Seung-Gun Kang from KB Securities.

[Interpreted] Now we see that the company's earnings in Q4 had fallen far short of expectations and also the dividend payout was determined at a lower level than had been expected. Now in terms of the causes of this, I would presume that it is because of the sizable losses on onerous contracts. But then so starting with the guideline and whenever there are these unexpected factors arising, and it seems as if there is a tendency for the values of the company to keep fluctuating. So I wonder what was the reason for the sizable losses on the onerous contracts that occurred in the Q4 last year. And also in relation to this, I also see that the CSM adjustment for the company was smaller than for other companies, perhaps that has to do with the loss ratio trend from the first generation to the third generation, but still, I would like to gain a better understanding on the reason for the smaller adjustment on CSM for the company than others. And the second question is again, now in relation to the factors that had led to fluctuations in the numbers for the company, I wonder whether the company believes that the factors will be stabilized in 2024. So if you could give us some guidance for 2024.

[Interpreted] Thank you. Now this is [ Jing Yong Dung ], Certified Senior Actuary, responding to your question in the order of the losses on onerous contracts and the CSM adjustment. Now when it comes to the losses on the onerous contracts, I would say that there are largely 2 types. One is there is the new inflow of onerous contracts. And the second cause is the rise in the losses due to the changes in the assumptions that are related to the contracts. And in our case, in other words, the sizable losses arising from the onerous contract at the end of last year is due to the second type of the reason. And the reason for this is, in other words, the steep increase in the losses at the end of last year is because of the rise in respiratory illnesses. Now the loss ratio had been flattish during the COVID period. But then now starting in -- starting last year, the cases of respiratory illnesses spiked up, which had then worsened the loss ratio for the medical indemnity of the third generation, and this ended up driving up the best estimate liabilities or BEL. Now having said that, the large loss at the end of last year, that led to increasing the liabilities would actually serve as a positive factor for the company in 2024. Because on one hand, it will serve to drive up the expected incurred claims for -- in the analysis of the claims variants. And second, the third-generation medical indemnity insurance policy is renewed every year, meaning that these policies could also be renewed throughout the year. And as they are renewed, then the next premium rate hike would be reflected. And then the -- in the course of this, the losses that were recognized last year would be reversed this year, meaning that much of the losses that have been recognized last year would be reversed throughout the year. Next is about the CSM adjustments. Now again, for the CSM adjustment, there are largely 2 causes. First is on a recurring basis or on an ordinary basis. And second is because of the changes in the assumptions at the end of the year. So in terms of the changes in the assumptions, then that is because of the changes in the best estimations. So the best estimations might change because we have to reflect the latest statistics or because there is a change in the criteria for calculating the estimations. Now for the company, we have already applied the estimations by the emphasis to our estimations in the third quarter of 2023. And then in terms of, for example, the performance incentives being reflected into the CSM that had already been reflected prior. So there was no change on that front. So in terms of the basis for the calculation, there was no change, except that we had to reflect the latest statistics. Now for the company, the CSM adjustment did not end up negative because there were offsetting effects because of the different items in the adjustment. For example, the surrender rate did go up, which was a factor that pulled down the CSM, but also the loss ratio for the old medical indemnity went up, which actually increased the CSM. In other words, these different elements offset each other. And then for the CSM adjustment in 2024. Now as I explained in the course of the loss -- in the course of explaining about the losses on the onerous contracts, as well as its impact related to the third generation of the policy, I would say that we are looking ahead to a similar benefit to be gained for the CSM as well for the first-generation products because the first-generation products are now due to be renewed this year. The first-generation products from -- which were assigned in 2009, many of them would be renewed in the first half of this year, upon which time the premium hike would be reflected, which would then improve the CSM. So then we believe that this is going to be enough to serve as a buffer against any impact on the CSM coming from the changes in the assumptions that would be applied at the end of this year.

[Interpreted] The following question will be presented by Jaewoong Won from HSBC.

[Interpreted] I also have 2 questions. Now in 2023, perhaps because of the changes in the regulations and also rise in the loss ratio, but the company's earnings did fall short of expectations. And then also in terms of the dividend payout, the increase or the incremental dividend payout was smaller than what we have seen from other companies. And coming into this year, then, of course, there were some explanations about the first-generation medical indemnity coming up for renewal this year and also the third-generation products also being renewed every year. And as a result of this, much of the loss from last year would be reversed this year, then this probably means that there is going to be a bump in the company's profitability this year. So my question is then will this be duly reflected into the dividend payout decision this year? In other words, where the company had fallen a bit short of other companies in terms of increasing the dividend payout last year. Now if the company were to see a relatively higher growth in profitability than other companies, then will this be then accordingly reflected into the dividend pay decision this year? And the second question is now the company's fixed ratios are also a bit lower, and that has been a cause of concern in terms of the dividend payout as well as shareholder return policy. So then again, similarly, if there is improvement in CSM as well as profitability and also if there are improvement in the application of the [ EFI and LLP ], then does the company believe that there is room for the K-ICS ratios to keep improving?

[Interpreted] This is the CFO responding to your question. Now first, about the potential increase in profitability in 2024 and whether that would also be duly translated into higher dividend payout for this year. Now the company has maintained the principle of cash dividends. And since 2020 -- since 2020, I would say, up until 2023, the company's net income had continuously improved and also the company's dividend per share or the DPS had also improved according to our improvement in the net income. Now coming into 2024, as was explained by the Certified Senior actually earlier, we will go all out to improve our profitability. And if that is successful, then we will also make sure that, that is duly reflected into our shareholder value as well. [Interpreted] This is [ Hung Fa Jung ] of Risk Management division, responding to the second part of your question, and that is about the impact of the stronger liability management and also what -- how the company intends to deal with this. Now in terms of the insurance liability discount, now as a result of this, the [ UFR ] lowering of the UFR in 2024. Now in relation to the liquidity premium as well, so in 2024, the UFR is expected to drop by 7%, in 2024, again, by about 5.5 percentage points, in 2026, within 1 percentage point. And then in 2027, again, because of the fall in the liquidity premium, the drop would be within around 5%. So in total, the drop would be about 20%. Now because of the new business in the long-term insurance, now this is also going to -- and as a result, the K-ICS is now standing at around 183%. And then -- and also because of the continued new business, there is going to be an increase by about 2%. But then the shareholder return and dividend payout would pull this down by 1%. And then the business in force and also our investment income would drive it up by about 5%. So overall, there is an expected around 5% increase every year. Now of course, they are subject to change depending on the changes in the actuarial assumptions like the loss ratio as well as depending on the changes in the market rates. But then the company intends to keep it at mid-170% level by -- even by strengthening our management of the required capital. Thank you. We will take the next question.

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

I have 2. So first one is following up on the K-ICS ratio. So just to double confirm on the previous question. So the management thinks like for the K-ICS ratio by the end of 2024, we can expect around 5% increase every year. So meaning that this will be [ 180 ] level of the K-ICS ratio by end of 2024. That's the first question. The second one is in the slides, we mentioned -- you mentioned about longer -- long-term line. So you plan to increase the new business CSM by expanding the sales of higher CSM health care projects. So my question would be, what's your -- from the perspective of the company, what's your guidance of the new business CSM targets in 2024? And also if you can provide any more guidance on the ending balance of CSM by 2024 will be better. [Foreign Language]

[Interpreted] Now this is Hung Fa Jung of Risk Management division. I would respond to your question about whether there is going to be a 5% increase annually for the fixed ratio. Now let me clarify. Now because of the strengthening of the insurance liabilities discount between 2024 to 2025, there is going to be the effect of lowering the ratio by 5 to 7 percentage points. And then this would be offset by the new business as well as the business in force. So the net is going to be about 2 percentage lower. But then from 2027 and on, we believe that there is going to be an increase by 5 percentage points every year. [Interpreted] This is [indiscernible], Senior Vice President of Long Term Insurance Product Division responding to the second question about the CSM size for new business. Now in 2024, the revenue from new business is expected to slightly fall Y-o-Y. So our target is to -- so that is the target, meaning that the revenue coming from new business is likely to fall. But then for the CSM multiple for the new business, now because of the change in the product portfolio and also because of the upward adjustment in the experienced risk ratio, the CSM in this -- because of this, the premium is going to be increased, meaning that the CSM multiple is also going to be higher. So this means that although the revenue from the new business is likely to drop, the CSM multiple coming from new business is likely to be higher because of the changes in the portfolio. So this means that overall, the CSM is expected to be considerably higher Y-o-Y. Now for the adjustment in the experience risk ratio, this is expected to be undertaken in April this year. And as we speak, the work on the risk ratio is ongoing, so I cannot specify the number at this time. But from what we can see at this point, it is highly likely that there is going to be a considerable improvement from the second quarter, meaning that we can expect a considerable increase Y-o-Y. Thank you very much for your question. And as it happens, we actually have a lot of questioners in queue. So then to make this more efficient, we would now like to limit the question to one per person. We will now take the next question.

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

[Interpreted] Now for the company's net income or profitability, I believe that the biggest factor, the most important factor would be the loss component. And now of course, for the loss component, then I would assume that perhaps in the third quarter, it was about KRW 1.1 trillion coming from the long-term insurance, I believe. And can the company provide a breakdown of the loss components in greater detail? So I would imagine that most of them are arising from medical indemnity, but then can we also get a breakdown between like a third generation or the fourth generation, so just to find a breakdown? And also for the loss components, I would assume that they don't last forever, meaning that after some time, then they could also be turned into revenue. And given the fact that for the third-generation products, the renewal cycle is quite short. That probably means that the time that they remain the loss component is going to be short. So there is probably some kind of a timeline or schedule on how they would be reflected into the financial statement. So I would like to know for the loss components for the third-generation insurance products, then what is the timeline as per the financial statements?

[Interpreted] Now this is Jing Yong Dung again, responding to your question. Now yes, for the loss component, it was KRW 1.1 trillion. And by the end of the year, it shot up to KRW 1.7 trillion. So given the fact that now we have accumulated quite sizable liabilities, this is going to be reflecting positively to the company's financials this year, either in terms of the claim variance analysis or the reversal of the losses. And you also asked about the timeline. Now 80% of these loss components belong to the first-generation medical indemnity and the third-generation medical indemnity, the coverage period is 15 years. So you can assume that they have about -- they have over 10 years left. So I would say that there is quite an ample time left for the loss to be reversed.

[Interpreted] The following question will be presented by Aditi Joshi from JPMorgan.

So my first question is related to the CSM and the persistency. So if we look at the persistency ratios, for the -- it has been falling. So I just wanted to understand that what is your model assumption for persistency ratio in the new business CSMs? Do you reflect the last 3 years' experience? Or do you just reflect last 1 year's experience in the persistency ratio when you model the new business CSM and the CSM? And the second question is a very quick one. Can you please share the sensitivity of CSM balance when -- with respect to changes in the interest. Yes, that's all. [Foreign Language]

[Interpreted] Now this is Jing Yong Dung, Certified Senior Actuary again, responding to your questions. Now first, in calculating our surrender rate, we apply the past 5 years, experienced statistics. And second, about the sensitivity to the interest rate for the new business CSM, well, I cannot specify the -- I cannot remember the number at the top of my head right now. But then as far as I remember, then up to change by about quite a large extent, by about 100 bps, the new business CSM does not change much. But again, I would have to go through the communications team to give you the more specific response later on. We'll take the next question.

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

[Interpreted] I also have a question about K-ICS. I understand that there are some adjustments regarding K-ICS that are coming. And I wonder whether that would be applied in the first quarter or the fourth quarter of this year and also the targets that the company had explained earlier. I wonder whether that is reflective of the adjustments to be made this year or not.

[Interpreted] This is Hung Fa Jung from the Risk Management division. And in terms of the surrender risk coefficient easing, this was already reflected in the fourth quarter. So this was also reflected into the K-ICS ratio as well. Thank you very much for the question. We will take the next one.

[Interpreted] The following question will be presented by [indiscernible] from WhiteOak Capital.

I just wanted to understand your -- the preference between the products within health care in your business, we see a lot of peers talking about diverse insurance being the profitable product and focusing a lot on that. While I think in our disclosures, it looks like Hyundai Marine & Fire focuses more on aging. That seems to be the product you like. That's someone that's expanding in new business premiums. So I wanted to understand your product preferences and the relative profitability profiles of the different health care products. [Foreign Language]

[Interpreted] This is [ Pat Segan ] of the long-term insurance products division. Now for the company in terms of the new products, we have children insurance or the juvenile insurance. And in this market, we actually enjoy an overwhelming market share. And we are now trying to gain more contracts based on these children's insurance. And then on top of this, our plan this year is to roll out new products that would appeal to different age groups or the different generation groups in the market. So for example, for the cancer insurance or the SI that have a stable loss ratio and high margin, we have already rolled out new products in January this year to favorable response. And then down the road, we are also planning to increase the share of high CSM products, like the no surrender value insurance up to the appropriate level. In addition, we are also planning to introduce more products that would reflect the population aging trend as well as the advancing medical technologies and also the -- what we see as a new promising market segment, the pet insurance. So we would -- we also intend to introduce more products on these segments so that we can keep improving the CSM. Thank you. We will take the next question.

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

[Interpreted] I'll be brief for the PF in real estate and also for the overseas real estate, what is the company's exposure? And what is the provision at the -- in the beginning of the period and at the end?

[Interpreted] Now about the real estate PF exposure, the real estate PF loan exposure, it's about KRW 1 trillion. So that's about 2.5% of our total investment assets. Now for the PF, we have 2 presale types in [indiscernible] and for this, we have KRW 3.8 billion in provision. And then we also have the PS in [indiscernible]. So in total, for the PF, our provision is about KRW 13.7 billion. Our total provision for corporate loans is KRW 17.7 billion. Now for the offshore real estate, it's about KRW 1.6 trillion, so it's a bit over 3% of our total investment assets. And it has a diversified portfolio. The geography is mostly in the U.S. and Europe. But then in terms of the portfolio, it's quite diversified, office, logistics, applied fund and so forth. Now in terms of the loss on valuation in the fourth quarter because of various reasons, including vacancy of the offices, it was about KRW 49 billion in loss. And for 2023, it was about KRW 30 billion minus in terms of the valuation loss for the domestic real estate. Thank you for your question.

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

[Interpreted] Now my question is, now it seems that the company's earnings as well as the dividend payout do fall a bit short of expectations. And also then because of various reasons, it seems as if there is not going to be a dramatic improvement in the capital ratios either. Then I wonder if the company has any plans for the share buyback or the treasury share cancellation. So perhaps if it is done already, then it would have no financial impact. But then I believe that it will still send a very strong message to the market about how the company is committed to enhancing shareholder value. So the government is also recommending a stronger disclosure on either holding or disposal of share of treasury share. So I wonder whether the company has any such plans.

[Interpreted] Thank you for your question. This is the CFO, Chu Yin San. Now our shareholder return policy has been centered on cash dividend payouts and the company's treasury share is about 13%. And at this time, there is no plan to cancel or have a further buyback of the share. And for this year, as was explained earlier, we will focus on improving profitability across our business lines. So each business line will go all out to improve profitability as a result of which, there is also going to be a corresponding improvement in the shareholder return. And also, what you have alluded to about the company value of project that I believe is going to be announced sometime next week. So we would have to wait and see what the government announces, and then we would also watch the market reaction as well as the trends or movements in other companies. And then we would also take this into consideration inside the company. Thank you. We will take the next question.

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

[Interpreted] So if there are no further questions, then we would conclude the conference call at this point. Please contact the IR managers any time for further questions and comments. Once again, we thank all the investors and analysts for your time. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]