Samsung Fire & Marine Insurance Co., Ltd. (A000810) Earnings Call Transcript & Summary

[Foreign Language] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal Year 2020 Third Quarter Earnings Results by Samsung Fire & Marine Insurance. This conference will start with the presentation followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation by Samsung Fire & Marine insurance.

[Interpreted] Good afternoon. I am IR part leader, Joon Chang Ho. Thank you very much for joining us for the Third Quarter 2020 Earnings Conference by Samsung Fire & Marine. We will begin with CFO, Bae Tae-Yeong's presentation on Q3 earnings results and future outlook, which will be followed by the Q&A session with the participating executives. Now I will turn it over to CFO, Bae.

[Interpreted] Good afternoon, I am CFO, Bae Tae-Yeong. On Page 1, direct premium written grew 4.3% year-on-year. the cumulative net profit is KRW 628.9 billion, posting a 7.4% growth year-on-year. In the third quarter, thanks to the improvement in underwriting profit, the net income was up 22.4% year-on-year to close to KRW 195.6 billion. On Page 2, long-term line sales are focused on high-margin policies to strengthen the profit base. The cumulative protection new premium declined 7% year-on-year, and it fell 16.8% in the third quarter, but the risk premiums that provide earnings sources posted a 7.5% growth cumulatively. The cumulative risk loss ratio was up 3.2 percentage points year-on-year to record 85.8%, and the expense ratio was up 1.5 percentage points year-on-year to 24.3%. The increase in the expense ratio was mainly due to the fees and commissions from last year's sales and the cost of recruiting tied agents. So we believe that the loss ratio trend is expected to stabilize in Q4. We will strengthen the management over non-NHI claims and promote the growth of risk premiums and net earned premiums. On Page 3, the auto insurance revenue was up 13.6% year-on-year on the back of the growth of the direct channel. The combined ratio was down 4.5 percentage points year-on-year to 100.3%. The loss ratio declined 3.3 percentage points, and the expense ratio also improved 1.2 percentage points, thanks to the growth of the direct channel and expense savings. In Q4, in spite of the seasonality, we will continue to manage the loss ratio by focusing on quality underwriting and claims management. Turning to Page 4. General insurance revenue grew 6.1% year-on-year and the net premiums earned grew 3%, but the underwriting profit declined on year, mainly due to some large claims accidents in Korea as well as heavy rains and typhoons in the third quarter. In Q4, the company will manage earnings volatility and improve profitability by strengthening the risk management of high-risk industries such as chemicals and revising the underwriting guidelines. On Page 5, the investment profit was down 0.1% year-on-year with the investment yield of 2.8% and the adjusted yield of 3.2% that excludes the unrealized gains. In Q4, we will secure investment profit by increasing high-margin dividend-paying assets and developing new investment opportunities. On Page 6, the asset liability spread margin as of the end of September was down 7 basis points from the end of last year to post 27 basis points, and the duration matching ratio is 80%. The RBC ratio is down 43 percentage points year-on-year to 319%. Given the prolonged low interest rate trend, we will maintain a competitive spread margin through flexible management of the offered rates. In addition to the Q3 earnings report, there are 2 more items that I'd like to share with you. The first is about our overseas business. Samsung Fire & Marine invested $150 million in Canopius, a U.K. Lloyd's company last year in order to overcome the limitation of the domestic market and develop new growth drivers. Last month, we signed a contract to provide additional $110 million due to new risk factors such as COVID-19 and digitalization, the global P&C market is quickly becoming a hard market, and thus, we see new business opportunities emerging. In this context top Lloyd's players such as Canopius, Beasley and Hiscox have raised capital to capture new growth opportunities and improve earnings. Samsung Fire & Marine shares this view and have decided to participate in the capital raise. Through this deal, the company will strengthen business cooperation with Canopius and promote business synergy in the U.S., which is the largest P&C market in the world to expand the profit stores in the commercial insurance line. The second is about our ESG activities. As Samsung Fire & Marine recognizes this ESG as a key requirement for sustainable business growth, it has moved beyond simply issuing ESG guidelines to actually incorporating ESG principles in its management philosophy. We suspended new investments in coal power generation-related projects, and we will stop refinancing for the existing investments. We have also put a stop on underwriting related to coal power generation. We laid out items to exclude from investment and underwriting in our ESG investment guideline and the ESG underwriting guideline, respectively. In terms of environment, we're increasing socially responsible investments focused on renewables, such as PV and wind. In 2019, it amounted to KRW 1.5 trillion of investment. As for social responsibility, we have strengthened training on ethics management for our employees as well as various CSR activities. The amount of CSR related spending, including donations, was KRW 23 billion last year. With respect to corporate governance, we are considering the upgrade of the sustainable management committee as of EOV committee so that the Board can oversee ESG management directly. We're also promoting diversity of the composition of the Board by strengthening the management of female director candidate. ESG management plans and activities, ESG investment plans and corporate governance improvement plans will be reported to the Board and implemented accordingly. Samsung Fire & Marine will not just focus on short-term results, but continue to build a sustainable business foundation from the long-term perspective. Thank you.

[Foreign Language] Now we will have a Q&A session. [Operator Instructions]

[Foreign Language] [Operator Instructions] The first question will be provided by Jin-Sang Kim from Hyundai Motor Securities.

[Interpreted] I'm Kim Jin-Sang from Hyundai Motor Securities. I would like to ask 2 questions. The first question is related to your long-term business. On Page 2, I can understand that the management of the company did not expect any dramatic improvement of the long-term risk loss ratio. And I believe that there were some impacts coming from the past growth drivers that the company was promoting. But overall, I can see that the loss ratio in the long-term line is on the increasing trend, and your expense ratio has increased as well, while the new premiums for long-term line have been reducing. So overall, I can see that the situation for your long-term business is not very favorable. So when do you think this will improve in the future? And if so, what is your long-term combined ratio target? The second question is rather simple. In your presentation, you did not mention any specific one-off issues in the third quarter. If there are any one-off issues that the company has recognized, can you share them with us?

[Interpreted] I am Jeong Byung from the long-term profit management department. Let me answer your question regarding the long-term risk loss ratio. As you can see, in the third quarter, the long-term risk loss ratio was up to 86.3%. There are a couple of reasons why. First of all, in -- from July till September, which fall under the third quarter, there are summer vacations and people tend to go to a hospital to receive some treatments. So overall, compared to the second quarter, there is a tendency of higher risk/loss ratio in the third quarter. When you look at the figures for 2019, the loss ratio in the second quarter was 81.4%, but it increase to 83.9% last year. Likewise, there was an increase of total loss and risk/loss ratio by 1.1 percentage points in the year of 2020 as well. The second reason has to do with the structure of our long-term business. Samsung Fire & Marine has more exposure to property and fire insurance compared to the peers in the industry. I would say that the market share is about 41% of the new business for the property and fire insurance. And in August, we had some major typhoons that had impacted our loss ratio for property insurance. And as a result, there were some high claims, accidents and disability benefits that have to be paid out. So I would say that this was a major reason behind the increase in the loss ratio for the property insurance line. Usually, it's 49% around in terms of loss ratio, but it went up to 61.8%. So of these 2 reasons that I mentioned, I would say that the second reason had a more substantial impact on the increase in the loss ratio, but cumulatively speaking, the loss ratio for property insurance is about 49.3%, which is similar to what we'd expect for the full year.

[Interpreted] I'm [ Hung-Song Won ] from the CPC planning team. Let me provide some answer on our expense ratio and new business. As was mentioned in the beginning of the year, in acquiring new premiums for the long-term line, our focus has always been profitability and that has been the basic strategy for long-term sales business, and this trend has been continuing in the second quarter and the third quarter. So overall, while the amounts may seem to be lower, but I would say that the quality of our new policies and the quality of the recurring premium is very good. As for the expense ratio increase, this has much to do with our sales costs, and it is also once again related to new acquisitions. As you may recognize, there was very heated competition in 2019. As a result, we had to experience some increase in the acquisition costs compared to 2018. And coming on to this year 2020, we have been implementing various measures to increase the efficiency of the distribution costs by reducing incentives and other costs. When you look at the actual spending on sales and distribution costs, there was some increase, but the overall efficiency has improved. If you look at the specific numbers in the second quarter and the third quarter, the sales and commissions and incentives have actually improved. And we believe that this trend will continue even further into the fourth quarter because we've already improved our commission and incentive structure. So to sum up what we've just mentioned with respect to the long-term line operation, as for new business acquisition, we will continue to put focus on profitability and high-margin and at the same time, we will make efforts to stabilize the distribution cost trend. And overall, we believe that we can stably manage the expense ratio trend. As for property-related claims and losses, it may have some negative impact. But overall, we believe that we can manage this trend in a stable manner. So the key for the company would be to manage the loss ratio related to medical indemnity, and we will continue to make efforts in this regard. Thank you.

[Interpreted] I'm [ Lee Won-Song ] from the corporate management support team. Let me answer your question related to one-off issues in the third quarter. I'd like to say that other than the typhoons and the heavy rains that we experienced in the summer, there are no other one-off issues in terms of earnings.

[Foreign Language] The following question will be presented by Do Ha Kim from Cape Investment & Securities.

[Interpreted] I'm Kim Do Ha from Cape Investment & Securities. I would like to post you 2 questions. The first question is related to the long-term line revenue. I asked you a similar question in the previous earnings conference, but when we look at the trend for long term revenue, in terms of direct premium written, there was a decline for 2 consecutive quarters and there was a decline in the net earned premium for 4 consecutive quarters. Indeed, there was heated competition in 2018 and 2019 with efforts to increase the market share. So we expected better results from the long-term line moving ahead. But this result is not as good as what we expected in the market. So what is the company's strategy in driving off the long-term line revenue going forward? Because when you look at those situations of the top second-tier insurance companies, they put focus on increasing their market share back then for a couple of years, and they were able to increase the revenue and thus, was able to increase the bottom line. But the situation for Samsung Fire & Marine is not like that. So I'd like to understand what the company's response to this is? My second question is related to the auto insurance. The improvement of the auto loss ratio is not as good as expected. In the past, Samsung Fire & Marine used to explain that thanks to the growth of the CM or online channel, while the loss ratio was pretty high, you were able to reduce your expense ratio -- improve the expense ratio, thus increasing the bottom line aspect. But nowadays, the impact from the online channel growth doesn't seem to be quite substantial, while the combined ratio improvement trend is not as good as the second-tier players. So we were expecting that the market share -- the strong market share leadership and the profitability would be very beneficial for Samsung Fire & Marine, but we are not really seeing that trend any longer. So what is your strategy at the company to drive up the profitability of the auto insurance business?

[Interpreted] I'm [ Hung-Song Won ] from the CPC planning team. Let me address your first question. The issue of increasing net premiums earned for the long-term line is something that the company has been considering and discussing extensively. So beginning of this year, we have been put in place various measures to increase the net premiums earned from the long-term line. I would say that the reason behind the recent fall in the recurring premiums from the long-term line would be mainly related to the protection side property insurance. We used to have a large increase in the revenue in this line, but we don't really see much of that growth from the new business any longer. As a result, the amount of recurring premium from this particular segment has been declining. On the other hand, we have been put in place various policies and measures to increase the sale of our healthcare insurance and improving the protection-related coverages. And as a result, from January to September this year, we were able to record 6.3% growth on year-on-year. There are 2 specific strategies that the company has been implementing to increase the amount of net premiums earned from the long-term line. First of all, when it comes to new underwriting, as was briefly mentioned in the beginning, we're trying to focus more on offering protection covers, so that we can improve the sales of healthcare insurance and other protection-related products. And to promote that, we have been revising and improving our incentive structure and the performance evaluation structure. And as for the property-related covers, we have seen some decline in the volume, but we're trying to maintain a certain level of market share in this regard. So we're strengthening the product competitiveness and improving the incentives to induce such direction. So overall, in summary, for new underwriting, we're focusing more on protection covers for healthcare and maintaining a certain level of property-related insurance. And our second strategy is to improve efficiency so that this could lead to an increase in the recurring premium. First of all, we're putting focus on improving the persistency ratio. So even at the beginning of contract signing, we're focusing on attracting policies that can be retained as long as possible. And in this regard, we have revised the performance indexes, and we put in place some demerits for those policies that may not be maintained for a long time. And the second part of the strategy is to increase the tied agent retention ratio so that we can have a stronger sales organization. So we have been improving our internal programs so that the tied agents retention ratio will be improved. This will also, in turn, contribute to increasing the recurring premium.

[Interpreted] I'm Kim Il-Pyeong from the automobile insurance strategy team. Let me address the second question. The company is very well aware of the shrinking gap between Samsung Fire & Marine and the other second-tier players in terms of profitability. So we have been having a lot of discussions on this. But overall, I'd like to say that our strategy, overall, focused on profitability has been maintained very well. And when you look at the combined ratio of the direct channel, it's currently 95%. So I believe that these strategies have been working very well. So in the direct channel, our strategy has been working fine. But as for the face-to-face channel, I'm sure that other players in the industry have been working very hard. But as for these policies that were signed through GA channel, which we consider as low-margin policies, has been taken by our competitors, but due to unexpected variables, such as COVID-19, their profitability have improved for these policies. And that is why we believe that there's some shrinking gap between us and the peers in terms of profitability. Now moving on to the company's response to the current situation, we have been put in place various measures to improve the auto interest margin. Our #1 priority is to stabilize the profitability trend of the auto insurance, and that is going to be our #1 priority going forward as well. And as for the topline growth, we will not push forward with dramatic increase in the top line growth, and we will to maintain a certain level of top line growth for next year, while trying to improve the profitability overall. And so you can say that we're now in the process of eliminating some low-margin policies in our portfolio. And going into next year, in order to continue to improve the profitability of our auto insurance business, we will continue to focus on growing our online or direct channel, but at the same time for non-direct channels, we are now in the process of switching to higher-margin policies. For instance, we've already improved our product structure so that we can upsell these covers for higher-margin covers. And overall, we believe that the profitability trend for next year is going to stabilize.

[Foreign Language] The following question will be presented by Seung-Gun Kang from KB Securities.

[Interpreted] I'm Kang Seung-Gun from KB Securities. I would like to ask you 2 questions. The first question is related to your general insurance line. In your presentation, you mentioned that you've decided to participate in the capital base for the reinsurer, so that you can bring about some synergy in the U.S. market. I'd like to understand what specific approaches you're considering in entering into the U.S. market? Because I remember a couple of years ago, there was some liability transfer of the U.S. branch and some withdrawal of your presence in the U.S. market. So going forward, what is your strategy for the U.S. market? The second question has to do with your ESG implementation, you mentioned that you're going to strengthen the application of ESG principles in your underwriting and investment and if I understand that this means Samsung Fire & Marine will not underwrite any general insurance contracts for companies that are utilizing fossil fuels nor making investments in these companies. But there should be some existing policies with these kinds of companies. So moving forward into the future, if you're reducing exposure to these enterprises for the purpose of ESG in terms of investment and in terms of underwriting, what would be the size or the portion of such exposure shrinking that you're anticipating going forward?

[Interpreted] I'm [indiscernible] from new business strategy team. Let me address your first question regarding our participation in the Lloyd's market. You pointed out that in the past, Samsung Fire & Marine was trying to promote the U.S. business on our own, but it did not produce results as expected. Based on the lessons that we've learned from this experience, we've considered our strategic direction for these overseas markets, including the Lloyd's and the U.S. market, which are very advanced. And we concluded that it will be reasonable to pursue an inorganic growth opportunities in these advanced markets. And that was the background behind our decision to contribute to a Lloyd's company last year. And moving on to the connection between our investment in Canopius and our strategy for the U.S. market. As you can see, many Lloyd's companies, especially this one, they're top line growth and the bottom line growth, about 40% of them are coming from the U.S. market. So by investing in the Canopius additionally, we are involved between their management. And by getting access to the U.S. market, which accounts for about 40% of their business, we can have indirect experience in operating in the U.S. market, and we can also enjoy the outcome of such investments in an indirect manner. And secondly, moving on to the specific cooperation between Samsung Fire & Marine and Canopius, I'd like to mention that we do have -- we do still have an underwriter license in the U.S. market, while Canopius does not. So by utilizing a contract called fronting structure, we can let Canopius utilize this underwriter license. And at the same time, we can take advantage of the underwriting expertise of Canopius. So overall, this kind of structure is going to benefit both sides. And we believe that this plan will be actually materialized starting from next year. And in doing so, we can get access to the U.S. market and enjoy the portion of such growth in that market while continuing to accumulate experiences in doing business in the U.S. market. So in summary, by increasing our equity stake in Canopius with the additional capital raise this time, I believe that we will continue to expand our influence in the Board and the management of Canopius and increase our business cooperation. Currently, the global P&C market is getting -- becoming a hard market, we will be able to share the benefit of such hard market in terms of profitability in the short term. And in the long term, we're going to continue to tap into the Lloyd's market and the U.S. market and identify some good inorganic opportunities with strengthened competency and understanding of these markets.

[Interpreted] I'm [ Park Chang-Hun ] from the finance planning team. Let me address your second question regarding ESG investment. Currently, when it comes to the amount of exposure related to coal power generation, it is about KRW 590 billion. So it is even less than 1% of the AUM, so I would say 0.8%. However, these exposures are rather a long-term commitment. So we will not be able to reduce the exposure's down substantially in the short term. And in order to completely eliminate our exposure to this industry, it's going to take about 20 years.

[Interpreted] I'm [indiscernible] from the corporate planning team 1, I'd like to comment on our ESG underwriting. As for our existing underwriting of construction projects related to coal power generation, all these contracts have expired. So currently, as of today, we do not have any exposure to this particular segment. And in the future as well, we will not undertake any underwriting related to coal power generation, both home and abroad.

[Foreign Language] The following question will be presented by Myung Wook Kim from JPMorgan.

[Interpreted] I'm Kim Myung Wook from JPMorgan. I would like to pose 2 questions. The first question is, when you look at the slide on Page 7, you provided us with a breakdown of your net profit into investment profit and underwriting profit. I can see that the top line growth has been quite constrained. And there are quite a lot of constraints related to the underwriting side improvement. And at the same time, the insurance-related profit is not going to increase dramatically given the current situation. Moving on to the investment profit. The spread margin is under pressure and the low interest rate trend is continuing while your AUM is not growing substantially. So given these situations in the medium term, what are the company's strategies in order to upgrade your earnings basis to the next level? And how are you planning to increase your profit sources for the medium term? The second question has to do with the -- your surplus and how you're going to utilize it? In terms of capital adequacy, I understand you have about KRW 15 trillion of surplus that is available. And I want to know how much is your capital budget for overseas deployment out of this KRW 15 trillion base? And what is going to be the basis for shareholder return? Any specific budget number for this? In 2020, your net profit and earnings overall improved, but the market capitalization of Samsung Fire & Marine has not improved as much. So I'm sure the company is now considering the kind of framework that is going to be implemented to improve the ROE and the shareholder return. So what is your overall stance on this?

[Interpreted] I am CFO, Bae Tae-Yeong. I understand that your questions are concerning our company's target for earnings growth and strategies that we want to implement to meet that target as well as the ways to improve the shareholder return framework. So the questions that you asked me -- asked us are actually the questions that Samsung Fire & Marine internally has been struggling with for quite some time. So it was quite interesting for me to receive the same kinds of questions from an external analyst. I am not in a position to give you any specific numbers or specific sense today, but I'd like to give you a high-level overview of what we are considering and what we're going to be pursuing in the medium term. Currently, in terms of pretax profit, we have the strength of about KRW 1 trillion. Of course, there are some one-off issues related to equity stakes of affiliate companies. But excluding them, I would say that we have about KRW 1 trillion of base that includes both underwriting profit and investment profit. There are many environmental changes and structural changes taking place in the P&C industry in Korea. But internally, we believe that we can achieve a 50% growth of this profit base, which is from KRW 1 trillion to KRW 1.5 trillion in the medium term, that is what I would say, our medium-term target. Of course, domestically, we will continue to make various efforts to improve the investment profit and underwriting profit domestically, but there are, as we all know, some constraints. Therefore, in responding to these constraints, as Mr. [indiscernible] from the new business strategy team mentioned, we're going to try to go overseas. Especially when you look at the commercial line business or the domestic market size is only KRW 5 trillion. But by definition, commercial insurance is global in nature. So by combining -- by working with vastly growing companies, either through equity, stake acquisition or pool to take over, we'll be able to capture new opportunities, and this will lead to a better shareholder return. And as for that portion, I'm going to comment now. Right. So we are considering various ways to improve our capital efficiency, in other words, how we can drive up our return on equity. This may be seen as a pain point at Samsung Fire & Marine. There are many issues that we need to address with respect to increasing the ROE and how we can connect that to increasing shareholder return. I believe I mentioned this a couple of years ago that both the P&C companies and life companies in Korea will be affected severely or very seriously by the new IFRS 17. This does not just have implications on their accounting practices, but also have actual implications in terms of how the numbers announced by companies will be interpreted and how company's management will be evaluated under this new regime. There have been some delays and postponements, but this new regime will soon be introduced in a couple of years. And this is going to be one of the big issues that will impact overall industry. Within Samsung Fire & Marine, we're trying to figure out a better way to improve shareholder return by utilizing our capital strength in a more efficient manner. Currently, we have been utilizing -- and including other companies utilizing dividend payout ratio adjustment, EPS adjustment and share buyback and so on. But for both domestic and overseas investments -- investors, we not only are considering a dividend payout ratio or other aspects, but I think it's more important to provide us -- provide investors with more visibility and predictability in terms of business growth going forward. And under the new regime to be introduced, there will be new types of competition among the players in the industry. And all in all, I believe that this new structural changes in the industry are going to be an advantage for Samsung Fire & Marine. I've said a lot of things. But overall, in short, I want to emphasize that the top management, including the CEO, are considering this issue very seriously, and we will do our best to produce the good results.

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

[Interpreted] With no further questions, we would like to conclude the earnings conference call for the third quarter of 2020 for Samsung Fire & Marine. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]