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

Hello, everyone. I am [ Kyung Sang-Hyun ], in charge of IR in the business management team. We thank you for participating in the Hyundai Marine & Fire Insurance 2024 Year-End Conference Call. We will begin today's presentation with a 2024 earnings presentation and projections for 2025. The earnings call will continue for 1 hour with Korean and English consecutive interpretation. We will now begin the presentation.

Hello. I am [ Gu Han-Jong ], Head of the Planning and Management Division at Hyundai Marine & Fire Insurance. I would like to express my gratitude to all investors and analysts for participating in the 2024 earnings conference call. Before explaining the earnings performance, I would like to inform you that in this year's financial statement, there was a change in the treatment method of crediting interest rate variance following the Financial Supervisory Services' follow-up measures on Accounting Standard Unification announced in January 2025. Accordingly, the 2023 financial statements have been restated retroactively. As a result of this retrospective adjustment, the 2023 crediting interest rate variance of KRW 33.4 billion has been reclassified as other comprehensive income. Now I will explain the earnings performance. Please refer to Page 4, summary of financial performance. As of the cumulative total for 2024, on a stand-alone basis, net income recorded KRW 1.03 trillion, marking a 33.4% increase compared to KRW 772.3 billion same quarter in the previous year. Breaking it down, although Auto insurance profit declined, improvements in long term and Commercial resulted in a 98.1% Y-o-Y increase in total insurance profit, reaching KRW 1.043 trillion. Investment profit decreased by 21.9% to KRW 352.1 billion. For the fourth quarter, net income recorded a loss of KRW 15.7 billion, similar to the previous year, due to the decline in both Auto insurance profit and investment profit. At the end of 2024, ROE stood at 20.6%. Now I will discuss the performance by business segments, focusing on fourth quarter results. For long-term insurance, accumulated insurance profit in the fourth quarter increased by 247.6% Y-o-Y, reaching KRW 865.3 billion. In the fourth quarter, insurance profit improved by KRW 216.8 billion Y-o-Y. In the fourth quarter, there was an increase in influenza cases and other seasonal respiratory illnesses, which led to higher claims, which exacerbated the claim variance, resulting in a decline of approximately KRW 80 billion compared to the previous year. However, the impact of indemnity insurance premium rate increase reduced loss burden related costs by approximately KRW 330 billion Y-o-Y. Looking at long-term insurance new business sales, the cumulative monthly average new business premium for the fourth quarter was KRW 11.8 billion, down 6% from KRW 12.6 billion in the previous year. For health care insurance, the monthly average was KRW 10.8 billion, marking a 6.4% decrease Y-o-Y. At the end of 2024, the CSM balance stood at KRW 8.2478 trillion, reflecting a 9.2% decrease compared to the previous year due to regulatory reinforcement on lapse ratio for low surrender value insurance policies. The new biz, CSM, multiple continued to improve after the strategic premium rate hike in April at 11.9x for health care insurance and 12.9x for total long-term insurance new business. As a result, the fourth quarter new biz CSM reached KRW 496 billion, marking a 39% increase Y-o-Y. Next, let's look at Automobile and Commercial insurance. The cumulative insurance profit for Auto insurance in the fourth quarter decreased by 90.5% Y-o-Y, reaching KRW 19.2 billion, amid continued effects of premium rate reduction and accident frequency increase due to seasonal factors, such as heavy snowfall in the fourth quarter, fourth quarter recorded a loss of KRW 76.5 billion, a significant decline in insurance profit. For Commercial, insurance profit increased by 107.5% Y-o-Y to KRW 158.6 billion in the fourth quarter. The trend of increasing net premium written, particularly in preferred lines, continued, while the frequency of high-value claims decreased, leading to a significant improvement in profit compared to the previous year. Next, going on to asset management. Investment profit for 2024 decreased by 21.9% Y-o-Y to KRW 352.1 billion. Excluding the impact of insurance, financial profit and loss, total investment profit reached KRW 1.2084 trillion, and the investment yield was 2.81%, a 41 bp Y-o-Y decline. For the entire year, interest income increased Y-o-Y due to improvements in the yield on interest-bearing assets. However, overall investment income declined due to the base effect from FVPL bond valuation gains and dividend income in 2023. Now let us discuss capital solvency -- capital and solvency ratio. At the end of 2024, equity capital decreased Y-o-Y due to a decline in the discount rate applied to insurance liability and falling market interest rates. The solvency ratio fell 14.3 percentage points from the previous quarter to 155.8%, impact by capital reduction factors and regulatory reinforcement of lapse assumptions for low surrender value insurance policies at the end of the year. Now I will present on Hyundai Marine & Fire Insurance's key management strategies and business outlook for 2025. The overall industry outlook for 2025 suggests continued regulatory tightening such as the second phase of insurance liability discount rate reinforcement, while there are profit deteriorating factors, including premium rate reduction in Auto insurance and seasonal impacts, like influenza, there are also positive opportunities such as policy implementation addressing non-reimbursable medical expenses and indemnity insurance, which were discussed in the Insurance Reform Council. Against this backdrop, Hyundai Marine & Fire Insurance will focus its core 2025 strategy on strengthening capital adequacy. To achieve this, we will expand CSM by improving new business CSM multiples and manage new business portfolios to reduce interest rate risks, thereby enhancing new business profitability and capital adequacy. Second, we will improve persistency of long-term policies to increase in-force CSM and strengthen claims review and cost efficiency to limit liability growth, improving the quality of in-force policies. Third, we will enhance ALM and K-ICS management through asset duration extension, capital instrument issuance and reinsurance expansion. In conclusion, Hyundai Marine & Fire Insurance will shift away from a quantitative volume-driven strategy and focus on a qualitative growth to improve capital adequacy, ultimately laying the foundation for enhanced shareholder value. Now I will outline our detailed management strategies and outlook by business segment. First, in long-term insurance, we expect new business sales to decline slightly Y-o-Y. However, the new business CSM multiple is expected to continue rising, supported by the premium rate hike in April and a portfolio shift toward high CSM products. We plan for new biz CSM volume to increase Y-o-Y through margin improvements. The variance of long-term insurance is expected to improve slightly Y-o-Y, while actuary assumption adjustments at year-end will reflect increased expected claims. We will strengthen our efforts to prevent leakage through tighter indemnity insurance claim reviews, ensuring meaningful improvement in variance profitability. For Auto, we plan for premium income to remain at the previous year's level. However, insurance profit is expected to decline due to cumulative effects of premium rate reduction and rising claim cost. To mitigate this impact, we will enhance sales in the CM channel, which has superior profitability, actively utilizing profitable riders to minimize the decline in insurance profit. For Commercial insurance, premium income is expected to slightly increase in 2025. Insurance profit is projected to remain at a similar level of the previous year, supported by continued net premium written growth in profitable lines. We will enhance retention based on the strong profit performance of 2024 and maintain stricter underwriting policies for unprofitable lines. Next, asset management in 2025, excluding insurance financial profit and loss, investment profit is expected to improve as interest income increases due to continued efforts to enhance the yield on interest-bearing assets. Additionally, the valuation loss on [ FLPL ] alternative investment asset is expected to stabilize contributing to improvements. We will also enjoy proactive strategies such as -- we will also employ proactive strategies, such as bond for transactions and portfolio rebalancing to strengthen ALM while improving profitability. This concludes our presentation on 2024 earnings results and 2025 outlook. Thank you for your participation and your attention.

That concludes our presentation. We will now begin the Q&A. We will allow 2 questions per person for smooth proceedings.

[Operator Instructions] The first question will be provided by Won Jaewoong from HSBC.

I have 2 questions. The first question is related to K-ICS. The K-ICS ratio this year dropped to 156%. What do you expect -- rather what is your target K-ICS for the end of this year? And this year, there will be changes in regulation, such as changes in the discount rate to liability and also regulatory changes on the breakdown of loss ratio by age bracket and last observed term LOT. So despite these changes in regulation, do you think you will be able to achieve your K-ICS target? And the second question is related to dividend. When do you think that your company will be able to pay out dividend again?

I am [ Hong ] from the Risk Management Division. I will be providing forecast projections for K-ICS in 2025 and how the regulatory impact will be on our K-ICS. As you are well aware, last year in March, there was a strengthening of the discount ratio for long-term insurance and also there was a regulatory reinforcement on lapse rates for low surrender value insurance policy, which had an extremely negative impact on our K-ICS ratio. In order to compensate for this, we issued a subordinate bond. However, despite such efforts, there was an overall decrease. Our target for K-ICS in the end of 2025 is 160%. So in 2025, there will be strengthening of various regulatory measures such as a change in the discount rate for long-term insurance and LTFR, also LOT of 23 years, which will have an overall impact of 13 percentage-point impact on our K-ICS. Regarding the breakdown of loss ratio by age brackets that will be implemented, we do not believe that this will have a big influence. However, we will thoroughly monitor the situation and calculate as this is implemented. Also, in order to respond to -- in order to improve our K-ICS ratio, we plan to issue subordinate bonds, and we will be utilizing reinsurance in order to transfer our loss risk.

I am [ Gu Han-Jong ] from the Planning and Management Division. First of all, I would like to state that we'd like to extend our sincere apologies to shareholders and market participants for not being able to distribute dividend for the 2024 fiscal year. It is our top priority, and our company is putting our utmost effort in order to pay out dividend. And we are doing our utmost to reach a turnaround in our capital situation. We are even perceiving external consulting on this matter. And we are putting an effort in order to work closely with the industry associations and the financial supervisory institutions in order to improve the situation. However, as you may understand, it will take some time for us to achieve tangible results. We are carrying out various simulations to have an understanding of when we will be able to resume dividend payout. But due to various regulatory variances, uncertainties and market interest rate uncertainties, at this time, it is not possible for us to give you a timing and date of when we will be able to resume our dividend payout. I would also like to state that, regarding the indemnity insurance reform that is planned, for our company, we have a high portion of indemnity insurance products. Therefore, if such reform of indemnity insurance products takes place, then you will -- can expect accelerated improvements in our performance. More than ever, the government seems very committed to realizing such reforms quickly. Therefore, we hope to see this situation turn around, and we will closely communicate with the market.

The following question will be provided by Seol Yong Jin from SK Securities.

I have 2 questions. The first one is related to your new biz portfolio. I see that in your new biz portfolio compared to general type, now you are having a more simplified new business insurance products. And so I would like to know the portion of yearly matured new businesses, so new businesses that have a maturity on a yearly basis, what is that portion? And can you also give us the multiplier for different insurance product lines? And I know that you have issued subordinate bonds and that you plan to continuously issue subordinate bonds, but there is a ceiling and limit on the amount that can be issued. What is the remainder?

I am [ Dong Ju Kim ] in Marketing. Regarding the annual -- the new businesses with a maturity period of 1 year, we have been increasing this portion Y-o-Y continuously. Last year, it was 57%. And in 2025, we plan to maintain it at levels similar to last year. The target is 57%.

I am [ Hong ] in the Risk Management team, and I will be speaking about our ceiling in terms of the supplementary capital. So as of December 2024, the available capital that can be issued was KRW 2.4 trillion, and the remaining amount is KRW 1.5 trillion. In 2025, as the required capital increases, we believe that the ceiling will be increased to KRW 2.3 trillion. Due to liability discount ratio changes due to regulatory changes, and if there is added uncertainty in the market interest rate and if we reach our limit in terms of the subordinate bonds that we can issue, then the conditional assets are another measure that we can consider. And for these capital securities that have conditions attached to it, it provides for better measures in terms of the principal and the interest. And this can be carried out by 15% of the required capital, which means that it will be possible for us to issue up to KRW 1.2 trillion.

I will now explain about the long-term insurance products, CSM by product line. So for the simplified insurance products, the CSM is 20x compared to annual maturity and the new maturity, the annual maturity is 2 to 3x higher. Clarification that the yearly is 2 to 3x lower. And compared to the simplified version for the general, it is 3 to 4x lower. Therefore, the CSM for these types of insurance products is 16 to 17 -- the CSM is 16 to 17x.

The following question will be presented by Kang Seung-Gun from KB Securities.

In the fourth quarter, it seems that there has been a variance adjustment of more than KRW 1 trillion. And I know that part of it is related to the regulatory reinforcement on the lapse ratio for the lower surrender value insurance. And so -- in the fourth quarter, however, it seems that there were other factors too. So can you explain this? And in terms of your yearly profit, in the fourth quarter in particular, there seems to be more volatility in terms of the variance and the differences and the contracts with loss burden. And so this seems to have -- this undermines the stability of your earnings. And therefore, I believe, however, that the volatility has improved compared to last year slightly. Why is there such volatility in these areas? And in 2025, I'm sure it's not easy for you to make forecasts, however, are there some measures that are going to be put in place in order to stabilize such volatility?

I am Kim from the Actuary Division. So your question is -- can be divided into 3 categories: adjustments of experience-based adjustments and variance-related issues, also about the burden, some losses. And for the experience-related adjustments, so it was mostly due to changes in regulation and reinforcement of regulation. There was also the part of optimization. In 2023, at that year, there was a KRW 1 trillion amount of CSM adjustment, and most of this was due to regulatory changes, which was KRW 730 billion, and then there -- which was mostly due to the regulatory tightening of the lapse rate assumptions for low surrender value products. And then there was the KRW 100 billion of the optimization. In 2025, we do not expect major changes to regulations. There is the optimization adjustment matter. And for the loss ratio, there is a positive factor. And for the lapse ratio and the expense ratio, there, we believe that the minus -- or the negative impact that occurred in 2024 in terms of our expense ratio adjustments and our expense lapse ratio, we expected that there will be actually positive factors in 2025. Regarding the lapse ratio, in 2023 and '24, we think that it will be similar, but -- and that the lapse ratio has reached its maximum. Therefore, it will be reduced in terms of the negative effect. For the claim variance in 2024, up until the third quarter, we were actually quite improving in the area of improvement. However, in the fourth quarter, there was a sudden surge in respiratory diseases, which led to a major increase in the claim variance. In 2025, we expect that the claim will increase by KRW 450 billion. However, we do not feel that in 2025 there will be such a surge in respiratory diseases. Therefore, we expect improvement in the claim variance -- loss claim variance. Regarding the policies that have a burden of loss, in 2024, that amount was KRW 100 billion. But this was actually a major improvement compared to 2023 in which we saw for the third generation indemnity policies a loss of KRW 500 billion. So as you can see, there have been improvements in this area. And the accumulated recognized losses for such loss bearing products was KRW 1.4 trillion. As we see improvements in indemnity insurance products at the third and fourth generation, there is actually even a possibility that what has been recognized as losses will be reversed. And this reversal may take place at the end of 2025 or slightly after that.

The following question will be provided by Kim Jiwon from DAOL Investment & Securities.

[Interpreted] I have 2 questions. The first is related to CSM. Compared to the beginning of the year, at the end of the year, the CSM has gone down, which means that in terms of the insurance profitability, that there will be a reduction in the amortization of profit. In 2025, my actual question is related to this, what will be your priority? Will your emphasis be more on the insurance product profitability, or will it be on the investment profitability improvement? And also, once again on 2025 strategy, in terms of your business operation, will you focus on ALM or more on profitability?

[Interpreted] I am Kim from the Actuary Division. Regarding CSM multiplier and amortization-related profit, due to the reduction in CSM, there will be a reduction of the amortization profitability. However, that level is maintained similar to the previous year. For our new business, CSM, in 2023, the CSM multiplier was 11, and then it was increased to 13 in 2024. In 2025, once again, with adjustments in the premiums expected in April, we believe that CSM of new business will improve, and this will lead to an increase in the amortization profitability.

[Interpreted] I am from the Financial Planning and I will be explaining about our investment strategy. Our investment strategy for 2025 is not to miss out on anything. In other words, we will be pursuing ALM and profitability simultaneously. Considering the interest rate in the market, we will try to expand interest-bearing assets and we will be well managing our mid-term portfolio and we will analyze the market situation closely in order to mitigate against risks and yet seek profitability. In order to manage our ALM, we will be investing in long-term treasury and -- treasury bonds, and we will also invest in special bonds. And therefore, the profitability, we will be giving loans to corporations and we will consider alternative investments. We will be increasing asset -- interest-bearing assets, maintaining a smooth stream of interest. And for the FVPL, we believe that the losses will be reduced and that there will be overall improvement of profitability compared to the previous year.

[Interpreted] I am [ Hong ] from Risk Management. I will briefly touch upon our ALM strategy. As you know, there is an increase in assets that are sensitive to the interest rate due to strengthening of the regulation on lapse rates for low surrender value insurance policies and also due to the discount rate changes and the regulation. In order to improve our ALM, there will be issuance of subordinate bonds. And in order to have ALM, for such subordinate bond issuance, we will be purchasing long-term bonds, and we will engage and bond advanced transaction and we will consider derivative products in order to mitigate against situations of an increase in the interest rates. And for our insurance liabilities, we will be reducing the more longer-term ones. And therefore, the long-term insurance, there will be efforts to carry out joint reinsurance seeding.

The following question will be provided by Lee Byung Gun from DB Financial Investment.

[Interpreted] Thank you for managing the situation despite the difficult environment. And I know that you are working on managing your KICS. And there will be costs associated with issuing subordinate bonds because you would have to align the maturity of the subordinate bonds with long-term treasury and long-term bonds that you also align. But there's another possibility or measure that you can use, which is reinsurance. And so what I would like to know is the costs associated with utilizing reinsurance compared to issuance of subordinate bonds. So when there is a 1 percentage point improvement of KICS, what would be the reinsurance cost compared to cost of operating a subordinate bond? Of course, there would have to be a consideration of interest rate sensitivity. But in any case, could you provide a comparison of the cost of utilizing reinsurance versus subordinate bonds and improving 1 percentage point of KICS?

[Interpreted] I am [ Hong ] from Risk Management. I will be explaining the benefits of issuing subordinated bonds versus ceding reinsurance. As you are well aware, when the a subordinate bond is issued amounting to KRW 100 billion, then the cost will be 120 to 150 bps, basis points. And for reinsurance, it's a similar level. Of course, it will depend on the contract unit, reinsurance contract unit, and who the counterparty is. But the cost is pretty much similar.

The following question will be provided by Lim HeeYeon from Shinhan Investment & Securities.

[Interpreted] I have a question related to CSM. I would like to know if you have been reflecting the loss ratio breakdown. The changes in regulation regarding the loss ratio breakdown according to different age brackets, was that reflected? Last year, or in the fourth quarter, it was not reflected. And when do you believe you will be reflecting this change and the loss ratio breakdown into different age brackets, what timing in 2025, and what will be the impact? Then my second question is, I understand that there are efforts within the insurance industry to come up with calculations to provide estimations of when an accident takes place and when the claim is placed for that loss associated with that accident. And will this change in calculation in the timing of the accident versus actual claim being placed, will this have an impact on the CSM? And the third question, I want to ask about your 2025 new business strategy. It seems that you are trying to increase your CSM to the level of 2023. But considering market situation, it does not seem that it will be easy. So are there some other plus factors that I have not considered? And in particular, in 2025, I think that there will be intense competition for new businesses, and there was guidance from the government of reducing premiums. So it seems that your plans are slightly optimistic or aggressive. So are there some -- what are the factors that you believe will lead to such results?

[Interpreted] I am Kim from the Actuary Division. So this -- first of all, the timing of when this change in the loss ratio according to the age bracket will be implemented, it will be implemented first quarter 2025. And this is under the assumption that, the older you are, that as you age, the loss ratio will increase. Therefore, there has to be an increase in the liability. However, it is different based on portfolio of the insurance types. In our case, in our company's case, we have many policies with low -- with the policyholders that are younger. And in this case, they actually have a high loss ratio. And if we use this age bracket breakdown system, then it will reduce the liability. But there will also be different policies that will see an increase in the loss ratio, which will increase the liability. Therefore, the positive and negative effects will offset one another. Therefore, we do not believe that this change in regulation will have an impact on our liability in first quarter. Regarding the loss ratio and reflecting the present value to the loss ratio, the implementation of this regulation and policy change is actually, at this moment, uncertain. And with, however, the present value is reflected in the loss ratio, then it will reduce the insurance liability and have an effect of increasing CSM. If this is reflected this year, then -- within this year, so for our estimation of CSM, even if we disregard the present value application to the loss ratio, we think that the CSM can be increased from KRW 8 trillion to KRW 9 trillion. For this year, we do not expect major changes in regulation and in policies. For the loss ratio, the assumptions, it will turn around to positive. And for the expense ratio, there were many negative factors, but this will be going into positive factors as we enter 2025. And for the surrender ratio as well, there were many negative factors, but the negative factors are reducing. Therefore, this year, we think that CSM can be increased to KRW 9 trillion. And for our new business CSM, the multiplier is 11 -- has been improved from 11x to 13x. And this was because of increases in premiums and adjustments to our insurance product portfolio. Therefore, this year in 2025, again, we believe for our new business, CSM will improve.

[Interpreted] I am Kim from the Marketing and Planning. And there was a question about new business revenue expected in 2025. In 2024, we saw a decrease in our market share because we aimed and targeted increase of highly profitable insurance products. So we adjusted our portfolio to make sure that we have quality insurance products sold. And thanks to this, the CSM for the new business increased and there was more profitability by channel. If you take a look at first quarter CSM multiplier compared to year-end, there was an increase of 3.2x. We will maintain this marketing stance. This year, we will increase the CSM total amount. And in order to do so, we will carry out 2 strategies. One will be increasing the CSM multiplier. And second, we will operate differentiated strategies by channels. In order to improve CSM multiplier, we plan to focus our attention on high CSM products such as the specialized health care product for 3 major critical diseases. And we will also strengthen our effort on the simplified insurance product. And we will have differentiated strategies by channels. For our tied exclusive channels, they have high profitability, therefore, we will work on increasing revenue obtained through these tied channels. We will reinforce the training and education provided to them, and in order to increase the persistency ratio and in order to increase in-force policies. And for the GA channels, we will make sure that it does not become unprofitable by improving the overall quality there too. So we will work on improving profitability and managing loss ratio of the GA channel.

[Interpreted] Since there are no further questions, we will conclude today's earnings call. We kindly -- we thank the investors and analysts for their participation. If you have any further questions, please contact the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]