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

[Interpreted] Good morning, and good evening. Thank you all for joining the conference call for the Hyundai Insurance earnings results. This conference will start with a presentation followed by a Q&A session. Now we will begin the presentation on Hyundai Insurance's Second Quarter of Fiscal Year 2025 Earnings Results.

[Interpreted] Hello, everyone. I am Dong Gon Kim, incharge of IR. First of all, I would like to thank our investors and analysts for joining our 2025 first half earnings conference call despite their busy schedules. Today, our call will take approximately 1 hour, including presentation and Q&A. Korean and English consecutive interpretation will be followed -- will be provided after the presentation of our first half earnings and the outlook for the second half. We will have a Q&A with the management present here today. We will now begin the presentation of the first half of 2025 performance review and outlook for the second half.

[Interpreted] Good afternoon. I am [indiscernible], Head of the Corporate Planning Division at Hyundai Marine & Fire Insurance. I would like to extend my sincere appreciation to all investors and analysts for joining our 2025 first half earnings conference call. Let me begin with our second quarter results. Please turn to Page 3 for the performance summary. For 2025 second quarter, net income on a stand-alone basis was KRW 247.8 billion, down 30.4% from KRW 355.7 billion during the same period last year. Across commercial, long-term and auto insurance lines, loss ratio increased, leading to a 43.4% Y-o-Y decrease in overall insurance underwriting profit to KRW 212.7 billion. On the other hand, investment profit rose 35% Y-o-Y to KRW 129.5 billion. At the end of the first half, our ROE stood at 19.6%. Moving on to performance by business segments. I will focus on second quarter results. On Page 4, you will see that long-term insurance underwriting profit increased 61.1% quarter-on-quarter. CSM amortization income continued its solid growth from the previous quarter, while claim payments related to reciproatory infectious diseases such as influenza stabilized rapidly. This resulted in a significant reduction in the loss from claim variant. However, compared to the same period last year, underwriting profit declined 36.6% due to a base effect. This is because last year's second quarter performance benefited from temporary loss reduction in certain disease coverages due to the medical service disruption in Korea and from the stabilization of health care insurance claims related to reciproatory illnesses. For long-term new business sales, second quarter monthly average of new business premium was KRW 10.1 billion, a 7.3% decline from KRW 10.8 billion last year. Health care insurance -- for health care insurance, the monthly average was KRW 9.1 billion, down 7.2% year-over-year. Looking at CSM for long-term insurance on the next page, the CSM balance at the end of the first half stood at KRW 9,376.4 billion, showing a rapid recovery supported by the April premium rate hike and ongoing increases in new business CSM. The new business CSM multiple has continued to improve since the strategic rate increase in April, recording 18.9x for health care insurance and 17.4x for total long-term new business in the second quarter. As a result, despite the decline in health care insurance sales, the total new business CSM amount increased 20.7% Y-o-Y to KRW 525.7 billion in the second quarter. Going on to auto and commercial insurance on Page 6. Auto insurance underwriting profit was KRW 0.9 billion in the second quarter, down 97.7% Y-o-Y. This was due to the ongoing impact of premium rate reductions combined with higher claim costs from increased auto repair labor charges and rising use of oriental medicine treatments. Commercial insurance profit was KRW 27.6 billion, down 39.5% Y-o-Y, mainly due to large loss incidents such as the Kumho tire plant fire. These are viewed as one-off events. Next, on our asset management. On the investment side, as part of our efforts to strengthen capital adequacy, we have been increasing our allocation to long-term bonds, resulting in a continued rise in the proportion of domestic bonds in our portfolio. In the second quarter of 2025, investment profit rose 35% Y-o-Y to KRW 129.5 billion, driven by sustained growth in interest income, valuation gains from equities and structured bonds and higher foreign exchange gains within insurance and financial results due to a weaker Korean yuan USD exchange rate. Capital and KICS ratio. At the end of second quarter 2025, shareholders' equity increased by KRW 524 billion from the end of the previous quarter, mainly due to higher market interest rates. Our KICS ratio improved by 10.6 percentage points quarter-on-quarter to reach 170%. This was supported by an increase in available capital from higher interest rates and a reduction in required capital through active duration management, including long-term, expanding long-term bond purchases and entering into forward contracts on government bonds. Let me now share our business outlook for the second half of 2025. Our key strategic focus will remain on enhancing profit generation capacity and improving capital adequacy through active asset liability duration management. First, building on the improved profitability of long-term new business achieved over the past 2 years, we will concentrate on increasing the total CSM in the second half. We aim to maintain the new business CSM multiple at industry-leading level of around 17x in the second quarter. We will also strengthen control over loss ratios, expense ratios and persistency rates to minimize year-end CSM volatility, thereby establishing a foundation for sustainable growth. Second, we will continue to focus on narrowing the asset liability duration mismatch gap. On the asset side, we will expand long-term bond purchases and actively utilize derivatives such as bond forwards. On the liability side, we will adjust our product portfolio to increase sales of long-term insurance products with lower interest rate sensitivity, thereby reducing our interest rate exposure. While external factors such as market interest rates and regulatory changes remain uncertain, through these capital improvement measures, we plan to maintain our RBC ratio above 100% -- our KICS ratio above 170% by year-end, exceeding our initial projection. This concludes our presentation of the 2025 first half results and second half outlook. Thank you for your attention.

This concludes our presentation. [Operator Instructions] The first question will be provided by Dan Wang from JPMorgan Securities.

[Interpreted] I have 2 questions. The first one is about the dividend. Under the current like surrender value reserving practice, like the dividend proposal by the year-end might still face some challenges. So I want to know from the perspective of management, like can you just share some update regarding the guidance for the year-end dividend? The second question is about the solvency capital. So in your PBT in the section of the capital, it seems like the company's solvency ratio exhibits the relatively higher sensitivity against the interest rate movement. So can you explain to us what could be the key reason behind that? And what could be the key solutions from the company to tackle with that?

[Interpreted] Can you please repeat the second question? -- in particular, the first part of the second question?

[Interpreted] Yes, yes. So in a slide, namely the capital, that slide, the company shows that the solvency ratio has a larger sensitivity against the interest rate movement. So I want to know about the reasons behind that and what could be the solution to tackle with that?

[Interpreted] I am in the management. And I will be asking -- answering the first question regarding the dividend portion. I received a similar question during April, during our IR call, and I provided a similar answer to this question. It's twofold. First of all, it is important for us to increase our capability to generate profit internally. However, for this to be possible, it is also important that changes in the regulatory system needs to be taken or else we will not be able to pay out dividends. Regarding change in the regulatory system, I spoke about 3 areas that need to be improved during our February call. And the first thing is that for a company that has a high portion of indemnity insurance products for us to be profitable, we have to see some changes in the system regarding non-reimbursable indemnity-related claims. And there have been coverage in the media regarding the anticipated changes to systems related to non-reimbursables. And this is perceived as a positive signal. The second is related to our liability discount rate, which is anticipated to be done in a more alleviated way. And once again, the financial regulatory are disclosing some positive signals via the media. And the third portion of the regulation is related to reserve for reimbursement for lapse surrender value of lapsed policies. And for this, this also has to be improved, but we are not hearing concrete discussions regarding this portion. However, overall, we believe that we are coming closer to a timing point when the company can pay out dividends. And when that time comes, we, as the company, will be communicating very closely with the market.

[Interpreted] I am Hong from the Risk Management division, and I will be addressing your question about the portion -- about the fact that our company had a large portion of capital that has high sensitivity to changes in the interest rates. The first reason why we have a higher portion of capital amount that is highly sensitive to interest rate is because the portion of the children insurance products is quite high for our company. However, for this product, it is highly profitable. However, the duration is very long as it being a child insurance product. And in order to address this, we are managing the sensitivity -- interest rate sensitivity recently for new business. In order to address this issue, we are increasing the portion of year-end duration maturity products and also renewal products. For our asset side, we are taking on more long-term bonds and forward bonds. At the end of March, the duration gap was 3.7 years. In June, end of June, the duration gap was improved by 0.7 years to stand at 3 years. And by the end of the year, we will be additionally reducing our interest rate risk to reduce that duration gap to 2.0 years. If there is a reduction of 10 basis points, then this leads to a 2.5 percentage point reduction or improvement in our KICS. And so we will be continuously making improvements on our interest rate risks.

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

[Interpreted] Thank you giving me the opportunity. I have 2 questions. One is related to the claims and the second one is related to duration. I know that there have been improvements made in the claim variance. However, I understand that in the insurance industry in Korea overall, claims have -- actual claims have gone up. And so, I would like to know what your actual claim that have been paid out was. There should be some information related to this. And for these claims that have been paid out, what is the portion between non-indemnity and indemnity? And for the non-indemnity, is there a particular insurance product that led to increases in the claim payout? Next, I want to ask a question related to duration. I know that there have been improvements in your asset liability duration matching. -- improvement quarter-over-quarter. However, I understand that the financial supervisory regulators are looking into this duration mismatch issue and that this may, in the future, have an impact on new business. Looking at overseas, it seems that the standard may become plus/minus 1 year. You said that by the end of the year, your duration gap will be 2.0 years. However, this might not be safe yet. And so are there any additional plans related to new businesses as a plan B to reduce your duration gap additionally?

[Interpreted]I am, [indiscernible] and I am in charge of the long-term insurance products division. Regarding your question on the claims that have been paid out, this depends on the revenue of individual insurance companies that will have an impact. And so I would like to explain the claims payout based on loss ratio. So for the first half of 2025, for indemnity, we saw a reduction of loss ratio of 2%. For non-indemnity, it was 2. 4%. So overall, it was an increase of -- rather there was an increase of 2.4% for non-indemnity -- and therefore, overall, it was a 1.4% increase. For the non-life insurance sector, in Korea, the loss ratio improved by 4% to 5%, whereas -- and so we were better than the overall industry. And in terms of the actual loss, the claims that have been paid out, for our company, it was increased. That amount was increased by 10%, whereas for the industry, it was 15% to 9%. So it is our understanding that actual -- the loss amount due to claim payout, our company fared better than our peers.

[Interpreted] I am [indiscernible] from the Risk Management division. I will be addressing the duration question. First of all, the regulators regarding the ALM regulation through their press release have stated that they have not determined the regulation and that it will be done gradually. FSS also has stated that this will be done gradually and that it will be -- it will take time. And regarding the insurance liability discount rate, the LOT of that being extended from the current 23 years, it is stated that it will be gradually extended starting from 2027. And even in 2027, it won't be extended suddenly, the 23-year LOT will just be extended to 24 years. And so if this is adopted in 2027, then we believe our duration gap can be maintained and managed within 1.5 years. And even if such a system is adopted in Korea about the ALM management, the impact on our new business will be limited. And separate and aside from changes in the regulations, we plan to manage our duration gap in the mid- to long term within 1 year to be within 1 year.

[Interpreted] I am Kim, and I am in the Marketing Planning division. I would like to be talking about our strategy in terms of interest rate sensitivity of new business. First of all, it is our strategy to increase the portion of year-end maturity insurance products, the composition of this. Compared to the end of last year, in the first half of this year, we were able to increase the portion of year-end maturity insurance products by 3 percentage points. In addition to that, for the insurance products that have high interest rate sensitivity, we will set caps on this, set limitations on this, and we will be managing the sales of our various insurance products based on the product type and the maturity of those products as a portfolio, in particular, for the child insurance products that have a high sensitivity to interest rates, we will induce and encourage the year-end maturity products.

The following question will be presented by HeYeon Lim from Shinhan Investment & Securities.

[Interpreted] I have 2 parts in my question. The first part is related to changes in the regulatory system. And the second is related to CSM. Relating to the systems, I would like to ask you about the policy surrender return value. And when do you think this policy will be adopted? And when do you think there will be improvements here? And what types of recommendations do you think the regulators will be adopting from the industry? And next question is about your new business. It seems that you have quite high-quality new business recently. And so what do you think is the competition landscape? And the next question is related to caregiver claims. And so I understand that this payment for caregivers and is having a negative impact on your loss ratio and that there will be some discussions according to the regulators regarding improvements made to this item. Could you give us some insights into that? And next, related to CSM, can you give us a breakdown of the adjustments made to your CSM? It seems that your CSM quality has improved. The multiple has improved. Is there a particular insurance line that has contributed to the improvement of CSM? And is there an internal index that you use to assess your CSM quality and level?

[Interpreted] I am [indiscernible] from the Actuary division. Regarding reserve for surrender value, it has been 3 years since this has been in operation compared to what had initially been planned. The consensus within the industry that the regulation is too severe. The justification of adopting this initially was that it will protect existing policyholders as there have been changes to the new IFRS system. However, looking at the way the reserves are being accumulated, it is not actually coming from -- mostly from the existing policies, but through the new businesses. And that is why the reserves for the surrender value have been accumulated quite excessively, and that is why there have been discussions about this recently. And most of the discussions are making improvements to this system is related to new business. Although the financial regulators have not specified and discussed this in concrete, yet the industry believes that this system is not sustainable. And therefore, it is believed within the industry that at some time in point, there will be improvement to the current reserve for surrender value system.

[Interpreted] I am Yoon, Head of the long-term insurance products, and I will be talking about the coverage for caregivers. It is true that coverage for caregiver cost was a major issue in the end of 2024 and first quarter of 2025. This was a major sales issue. And for our company, we have been selling this product -- insurance product. However, it was done quite stably. And in terms of the loss ratio of this insurance product, it is not in a serious state at all. However, we are reviewing the loss ratio of the caregiver coverage -- insurance product of other companies keenly. And as soon as we identify any issues, we will be addressing them as they come out. I am in the long-term insurance product business, Chair, and I would like to talk about the CSM. Out of the insurance products that we are currently selling, the ones that have a high CSM are the insurance products that are related to treatment such as cancer treatment, anticancer chemotherapy and cerebral and vascular disease-related items and the diagnosis of these 2 major diseases. And we are adjusting the inflow of these types of insurance products. CSM multiplier multiple is being used as an index of evaluating our people. And in the sales, if you go out in the field, there is an understanding and culture and awareness that it is important to have a long-term premium payment and sales of insurance products that have a high CSM multiple. And for our health care insurance, we are striving and targeting to maintain the CSM at 18x. And so this is -- this level of 18x is a target at the headquarters and also at the sales force in the field. Regarding adjustments of CSM in terms of the claim variance and other variances, we have seen a reduction of KRW 100 billion, and this has been improved, thanks to efforts to increase our persistency ratio.

The following question will be presented by J Won from HSBC.

[Interpreted]I have a question regarding your commercial insurance product and your new business CSM multiple. First, on your commercial insurance products, there has been some deterioration in your loss ratio and a reduction in your retention rate. And so will this trend continue? What will be your future strategy for commercial insurance products? And for your CSM, currently, it is at 18x. When there is a reduction in the crediting interest rate in August, do you think that we can expect CSM to be increased to 19x or 20x -- and this was briefly mentioned in another question regarding your asset and liability duration mismatch issue that the regulators are saying that if the duration is too long -- mismatch duration gap is too long, that this may have an impact on health care insurance products. Are you saying that it will be around 2 years? Do you believe that in order to reduce this asset liability duration gap, you will be reducing your CSM or reducing your sales in the second half?

[Interpreted] I am Lee from the commercial insurance product line from that business, and I will be addressing this question on the deterioration of profitability and reduction in your retention rate of commercial products. So the reason why we experienced deterioration of our profitability Y-o-Y was because of the 2 major property-related losses, incidents that occurred in the second quarter, which led to an overall increase in our losses. And this has also led to a reduction in our retention rate. And so due to these 2 major incidents that took place, it led to an XOL of KRW 25 billion, and this has led to a reduction of our retention rate of 4%. If this effect is eliminated, then our retention rate is similar to the previous year. In addition to that, in the first half of this year, we saw an increase of our overseas insurance product sales, and that is what also led to a decrease in our retention rate. And so if we exclude the XOL reinstatement premium effect and this overseas insurance sales effect, then the retention ratio is similar to last year, and we will be maintaining our strategies to maintain a similar level in the second half of this year.

[Interpreted]I am Yoon from the long-term insurance product division, and I will be explaining our strategy for managing CSM in the second half of 2025. It is true that if the credit -- expected crediting interest rate is reduced that the CSM will increase. However, in the case of our company in 2024 and 2025, we made adjustments to our experience table, which led to an increase in our premium, and this has improved our CSM greatly. And so for this anticipated interest rate recently, other companies have reduced this to 2.75%. However, this has been reduced from -- this was a reduction from 3% to 2.75%, whereas we have been maintaining it at 2.8%. So there is a difference of 5 bps, but we are being a bit conservative in this area. However, we will be moving tightly according to changes in the market situation.

[Interpreted] So this is Hong from the Risk Management division. I will be answering the question on the duration issue and the influence that this may have on our new business. As I have stated earlier, regarding this duration issue, the regulators have stated that they have not determined anything yet, which means that the possibility of this becoming an issue in the market within a year and 2 is very slim. However, regardless of this, it is our company's strategy to manage our duration gap at 1.5 to 2 years.

[Interpreted] We will go on to the next one. The following question will be presented by [indiscernible] from Dale Investment & Securities.

[Interpreted]I have a quick question related to the claim operation costs related to the Korean -- the foreign exchange rate with the dollar.

[Interpreted] So I'm from the actuary division regarding FX rate for our insurance liability. This is -- the foreign exchange rate is related to our overseas seeding. So I cannot say exactly, but 1 difference will have an impact of KRW 100 million.

[Interpreted] If we have no further questions, we will conclude our conference call. We would like to thank our investors and analysts for participating. If you have any other further questions, please contact the IR team. Thank you very much.