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 call for Fiscal Year 2020 Fourth Quarter and Full Year 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 Joon Chang Ho, IR part leader at Samsung Fire & Marine. We will now like to start the earnings conference call for fiscal year 2020. Today, our new CFO, Mr. Hong Seong-woo will present key earnings results for fiscal year 2020 and business plans for 2021, which will be followed by the Q&A session with the participating executives. Now CFO Hong will start the report.

[Interpreted] Good afternoon. This is Hong Seong-woo, the new CFO of Samsung Fire & Marine. I will give you a brief summary of the earnings for fiscal year 2020 and discuss our strategic direction for this year and key initiatives that Samsung Fire & Marine is currently pursuing. On Page 1, the direct premiums written was up 3.8% year-on-year to post KRW 19.5 trillion. The net profit posted KRW 766.8 billion, a 25.9% increase year-on-year, thanks to the underwriting profit improvement. In Q4, the net profit grew 490.1% year-on-year to KRW 137.9 billion, driven by improved auto loss ratio. The common share DPS was decided at KRW 8,800, which represents a KRW 300 increase from the previous year. On Page 2, our long-term line is strengthening its profit base through the sale of high-margin policies. The protection new premium, including health premium, declined year-on-year, but the portion of protection premium in the new business that serve as future earnings stores increased 8.7 percentage points to 79.4%, and the protection premium grew 6.9%. The cumulative risk loss ratio was up 2.9 percentage points year-on-year to post 87.1%, but the actual risk/loss ratio, excluding the IBNR, increased 2.1 percentage points year-on-year. The expense ratio saw a slight increase due to the fees and commissions from the previous yield sales and on the cost of recruiting tied agents. But the expense ratio in Q4 improved 1.7 percentage points year-on-year to 23%. On Page 3, the auto insurance revenue was up 12.6% year-on-year on the back of the premium rate hikes and the online channel growth. As for the online channel, the renewal rate increased 0.7 percentage points to 93.6%, and the online DPW grew 22.2%. Also, the online channel combined ratio has improved at a faster rate than the other channels. The auto combined ratio improved 6.9 percentage points year-on-year to 100.8%. The loss ratio fell 5.8 percentage points, and the expense ratio fell 1.1 percentage points, thanks to the growth of the profitable online channel and effective expense management. Moving on to Page 4. General insurance DPW grew 5.8% year-on-year, and the net premiums earned grew 1.7%. However, the combined ratio increased by 6.1 percentage points year-on-year due to large claims accidents and damages caused by natural disasters, such as floods and heavy rains in Korea. Page 5 is on asset management. The investment profit was down 1.9% year-on-year due to the decline in interest income with a prolonged low interest rate trend. The investment yields posted 2.7% and the adjusted yield is 3%. Despite the continued pandemic, the quality of bonds and loan assets has been managed stably. On Page 6, the asset liability spread margin as of the end of December was down 5 basis points from the end of 2019 to post 29 basis points. And the duration matching ratio was down slightly to 84%. The percentage of floating liabilities is around 73%, and we're responding to the low interest rate situation through flexible application of the disclosed rates. The RBC ratio is down 3.8 percentage points from the end of 2019 to post 303.3%. Now I would like to brief you on this year's business strategy. This year, Samsung Fire & Marine will promote profitability oriented management, maintain the market leadership and pursue consistent growth by promoting balanced growth of long term, auto and general insurance lines, and strengthening our competitiveness in all channels, including the TA, GA and the online channels. For the long-term line, we will stay away from the unhealthy competition in the health insurance market that we experienced in 2019, and pursue qualitative growth centered on protection premium growth for new business, while securing protection-type recurring premium growth through sales efficiency. For your reference, the retention rate of newly recruited agents in 2020 was 44.5% at the 13th month and a 16.8 percentage point increase year-on-year. And the 13th month persistency ratio of protection policies improved 2.2 percentage points year-on-year to 83.4%. Thus, we expect the longer-term persistency ratios to continue to improve, which will lead to higher persistency ratios of profitable new business as well as in-force policies. In the auto line, we will expand the sale of high-quality policies with low combined ratio and widen the gap in the combined ratio between Samsung Fire & Marine and the second-tier companies through better cost reflection in pricing and efficient claims processing. These efforts will lead to an increase in pretax income and a strong profit foundation to achieve a turnaround in underwriting profit. In the General Insurance business, we will increase the domestic market share based on the growth of high-quality policies and revise our reinsurance strategy to reduce P&L volatility due to loss ratio hikes like last year. These measures are aimed at stronger risk management to deliver earnings in a more stable manner. For asset management, we will increase the portion of dividend-paying assets to defend the yield in the low interest rate environment and proactively manage potential risks based on strong -- strict asset quality analysis and monitoring. Now, I'd like to share with you 3 key initiatives that Samsung Fire & Marine is currently pursuing. The first initiative is related to overseas business. Samsung Fire & Marine has been trying to expand its business scope in the advanced insurance markets and in partnership with high-tech business in an effort to overcome the limitation of the domestic market and secure new growth drivers. By participating in the management of Canopius #4 Lloyd's company through equity investments in 2019 and 2020, we are looking for ways to stay away from unhealthy competition in the stagnant domestic market and explore new growth opportunities overseas. In addition, we're preparing to turn our Chinese entity into a joint venture with Tencent, China's biggest IT company, to develop new platform-based digital business opportunities in China and use it as a new profit source, thereby further enhancing the value of Samsung Fire & Marine. These moves will help us secure new growth drivers so that our overseas business can increase their earnings contribution. Our second initiative is related to digital strategy. Responding to rapid changes in the market driven by digital-based consumption patterns, we've been utilizing digital ARS and RPA to improve work efficiency. Also, our newly established digital business division is actively developing and implementing digital channel strategy. We plan to provide differentiated O2O services by utilizing our well-established offline infrastructure for P&C business such as auto, long-term and general insurance. In this regard, we have set a new vision of creating a digital ecosystem where consumers can enjoy services that address their daily pain points as well as receiving insurance services for risk protection. To achieve this vision, we're going to actively pursue partnership with platform companies and CVC investments. The final initiative is related to ESG. With diverse activities to lead the ESG trend, Samsung Fire & Marine is promoting sustainable growth and mutual prosperity with various stakeholders. As part of our effort to internalize ESG practices in our business management, we are increasing the sale of environment-related insurance products. We're also in the process of executing socially responsible investments worth KRW 3 trillion of commitments, including investment in renewable energy, and we plan to make additional KRW 2.5 trillion of such investment in the next 5 years. We're also considering the ESG factors in our underwriting process. We are pursuing constant change and promoting close communication with various stakeholders for co-prosperity and cooperation. For the benefit of both our agents and customers, we're building innovative systems based on digital technology to realize paperless insurance. Participation in domestic and overseas ESG initiatives such as UNEP FI and CDP and the Guide Dog project are some of the examples of our CSR activities to promote joint development with the local community. Furthermore, we will establish the ESG committee to express our commitment to ESG-based management and enable quick decision-making on ESG-related matters. The committee will serve to effectively respond to the demands of various stakeholders regarding ESG risks. Despite the uncertainties caused by the pandemic, Samsung Fire & Marine will continue to solidify its underwriting profit base, explore new opportunities in terms of overseas investment and new business and pursue substantial growth centered on future value creation. As we did in 2020, we are already producing better-than-expected results since the beginning of this year. We will do our best to deliver better results than last year and enhance the shareholder value. Thank you for your attention.

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

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

[Interpreted] I'm Kim Jin-Sang from Hyundai Motor Securities. Thank you for the good results, and I'd like to ask 2 questions. The first question is related to your long-term business. As you can see, the amount of premium income from the long-term line has been stagnant and there was some positive effect from the COVID-19 in 2020, but this effect is likely to decline in 2021. As a result, the loss amount is likely to increase going forward. So what is your overall long-term line -- risk -- long-term risk/loss ratio outlook? The second question is related to the guidance. We have just started the new year. And if you can provide us with some guidance figures, especially in terms of the loss ratios, the expense ratios and the investment yield, I would appreciate it? Especially when you look at the investment yield, it is currently 2.7%, which is at a lower level. You mentioned in your presentation that you are already producing better-than-expected results since the beginning of the year. So can you provide us with some color on your overall guidance? And any updates on your business?

[Interpreted] I'm Jeong Byung from the Long-term Profit Management department. Let me address your first question. So especially, I'm going to report on the loss ratio trend and the risk premium amount from the long-term line. As you pointed out in your question, in 2021, we believe that the impact of COVID-19 is going to decline probably in the second half of this year. As a result, the loss ratio may inch up a little bit, but I'd like to point out 2 main issues. First of all, when you look at the amount of risk premiums, we have seen increase in the protection-type risk premium, especially in terms of recurring premium, even though we had some decline in the savings premium and other long-term insurance products. And also, we can see that the persistency ratio of the protection policies has been increasing. In 2020, the 13th month persistency ratio was 80.1%, but in 2021 already, we expect that the persistency ratio will go up to 84%. And in January, the persistency ratio was recorded at 85%. So overall, we believe that the risk premium amount will continue to increase that will provide a source for profit. I'd like to make 1 more comment about medical indemnity. Starting from January, there was premium rate hikes for the medical indemnity, and there will be another round of premium rate hike for the existing medical indemnity policy starting from April, and the rate of premium rate hike is going to be much larger than the previous years. And moving on to our outlook on the loss amount, as you can see, with the COVID-19 coming to an end, we can expect increased use of medical treatments and more health check-ups later in this year. So we can expect that there will be an increase in claims for less serious diseases and other medical treatments. And as for non-NHI benefit claims, that will inquire -- that will require large amounts of claims payout, we are strictly managing such trends. And we have been building a database related to such claims payout so that we can prevent more hazard. And we are also improving our programs and procedures so that we can strictly manage such practices. So in summary, as for our long-term line, we believe that we can manage the loss ratio stably. On one hand, we will continue to work on increasing the risk premiums. And on the other hand, we will effectively manage the claims so that we can reduce the loss amount. So overall, the loss ratio, even though there are some reasons or concerns for the increase in the loss ratio, we believe that the loss ratio trend can be similar to that of last year. Already in January and February this year, even though it was -- it is now before the official closing, the loss ratio trend is lower than last year. So I would say about 3 percentage points lower on a year-over-year basis, even though it is not officially closed. So we believe that we can manage the long-term risk loss ratio in a stable manner.

[Interpreted] I'm [ Lee-Won-Song ] from the Corporate Management Support team. Let me cover your second question. First of all, I'd like to ask for your understanding that we are not able to provide you with any specific figures related to our guidance. So even though I cannot give you any specific numbers, I'd like to provide some more color on our long-term auto, general and asset management. In this new year, year 2021, we believe that there will be a lot of uncertainties in the financial market as well as uncertainties related to the COVID-19 situation. So we will continue to improve efficiency in our business management so that we can generate stable profit. Let me first comment on the auto insurance. The impact of auto premium rate hikes will continue to be effective in 2021, but there is a lot of increase in the cost side. So by preemptively reflecting the cost increase in our pricing and through effective underwriting and portfolio management, we would like to create earnings from the auto insurance. As for the long-term line, we will stay away from unhealthy competition that we had in 2019. So we will stay away from volume or quantitative growth. Instead, we will continue to put focus on increasing the high-quality new business and increasing the persistency ratio and the retention ratio so that the protection recurring premiums will continue to increase. Also, we will continue to work hard on improving the profitability of the long-term business by effectively managing those sales and other expenses and by increasing the premium rates for medical indemnity. And at the same time, we want to increase the portion of non-medical indemnity policies in the portfolio, and this will lead to a turnaround in the underwriting profit. And for the general insurance line, in 2021, the overall general insurance market is going to benefit from the hardening of the market and the premium rate increases. So we believe that the market overall is going to benefit from this growth. And through effective underwriting and reestablishment of the reinsurance policies, we would like to pursue stable profit generation. And moving on to the asset management. There has been some decline in the interest income. But currently, the investment environment is improving with stock market booming and interest rates inching up in its trend. We believe that the investment yield for this year is going to be similar to that of last year. We will utilize various options, including the disposal of equity assets and increasing the portion of high dividend assets so that we can continue to defend our investment yield. And I'd like to comment on the expected results from the first quarter of this year, especially in the long-term line and the auto line in January and February. Even though this is not an official number, we have seen the improvement in the loss ratio and the decline in the expenses, especially the sales expenses, and the stock prices have been increasing. So even though we exclude the special dividend coming from Samsung Electronics, we expect a year-over-year growth in the first quarter.

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

[Interpreted] I am Kang Seung-Gun from KB Securities. I would like to ask 2 questions. The first question is, when you look at the overall stock prices of P&C companies in Korea, the prices have been quite stagnant, especially when you look at the price of Samsung Fire & Marine, even though the company has been emphasizing its outstanding for a more competitive combined ratio and the loss ratio, these results have not been reflected in its stock price. And I believe that the key here would be to change the trend of long-term risk/loss ratio. So what kinds of efforts do you think the company has to make in order to change this trend so that this will be reflected in the stock price? The second question is related to your overseas initiatives. You mentioned about creating a joint venture with Tencent. What's the current situation? And in 2019, for instance, your auto revenue in China and -- was certain amount. And how much do you think it will increase after this kind of initiative in China?

[Interpreted] I'm Jeong Byung from the Long-term Profit Management department. Let me cover your first question. First of all, you asked a question about the overall trend for long-term risk/loss ratio and what we have been doing in this regard? I believe that the loss ratio for long-term line is heavily affected by the loss ratio of medical indemnity. And as there is an expectation of increased use of medical treatments, the loss ratio may go up slightly in this regard. And we have seen a witness -- we have witnessed a growth of non-NHI, especially very expensive non-NHI benefit claims, so we have been strengthening the claims analysis and investigation in this regard so that we can manage these claims properly. And also, we are trying to turn these non-NHI benefits to be included in the National Health Insurance so that we can manage the loss ratio more stably. So on one hand, we will strengthen the claims processing. And at the same time, we will continue to adjust and increase the premium rates for medical indemnity. Already, there was a 19% premium rate hike, which was the highest in the industry, and we will continue to push forward with a premium rate normalization. In addition, we are expecting the launch of Health Insurance 4.0 in July this year, and this will bring about some changes in terms of premium rate adjustment period to be changing from 5 years to 3 years and the introduction of differentiated pricing for medical indemnity. And we're going to utilize these changes effectively so that we can maintain a stable trend for the loss ratio.

[Interpreted] I'm Hong Seong-woo, CFO, and I will cover your question related to a joint venture with Tencent. The process of creating a joint venture with Tencent is going as scheduled, and we target to close this deal within this year. Since we signed a contract with Tencent consortium in November last year, we're now in the process of preparing for paperwork and documentation to get the approval from the Chinese authorities. And we're also collaborating with the Tencent team so that we can build up a business plan for this joint venture. It is rather too early to tell you about the expected earnings contribution from this joint venture, but this is going to be an online insurance provider, and we will continue -- we will develop new business areas and new business models with Tencent so that we can offer more flexible and speedy insurance services that will lead to more differentiation.

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

[Interpreted] I'm Kim Myung Wook from JPMorgan. I would like to post 2 questions. The first question is related to your investment strategy. When we look at the overall earnings breakdown, when you look at the underwriting profit, it is pretty well managed. Even though there was some slight worsening of the long-term risk/loss ratio, the overall underwriting income was -- is in a good shape. But when we look at the investment income, it is rather disappointing. I know that interest rates are going up in the market and Samsung Fire & Marine has quite a large amount of free surplus. So I wonder if the company has any plan to be more active in the asset management in order to boost up the yield, maybe by utilizing the assets that are not related to the ALM. Maybe you can pursue more disposal gains or other measures to increase the investment yield. Or should we understand that the company will continue to maintain a conservative stance in its investment strategy? The second question is related to the shareholder return. You have been maintaining a high level of payout ratio, which is around 50%, and this is very high compared to the other insurance companies. So going forward, at this point in time, do you have any plans to increase this dividend payout ratio to be beyond 50% to 60% or 70%? Or are you considering other measures or other options to increase or improve the shareholder return?

[Interpreted] I'm [indiscernible] from the Financial Planning team. Let me answer your first question on investment yields. So as you mentioned, currently, in recent months, the market rates have been increasing. And overall, there has been some improvement in the investment environment. However, the investment yield or the overall interest rate level is pretty low. So as the CFO mentioned in his presentation, our recent investment strategy is to increase our exposure to a higher yield alternative investment and increase the portion of dividend-paying assets. So these are some of the strategies that we're implementing to defend the investment yield. And we believe that the investment yield for this year is going to be similar to that of last year. And you also commented about the potential utilization of disposal gains. And recently, stock prices have been going up, and our valuation gains are pretty good. So we are going to actively utilize equity disposal to boost investment yield.

[Interpreted] I'm Hong Seong-woo, the CFO. I would like to answer your second question. As you may know very well, Samsung Fire & Marine has announced the medium-term dividend policy in early 2019 in order to increase the transparency in our communication with respect to dividend to our investors and shareholders. So the content of this medium-term shareholder return policy was, from 2019 to 2021, for 3 years, we're going to be a new center on cash dividend payout with a dividend payout ratio going all the way to 50%. And in 2019, because there was some damage to the underwriting profit, we had to defend the dividend per share. So temporarily, the dividend payout ratio was over 50%. And as was announced in 2020, we decided at the DPS level to be within the guidance. Therefore, according to the 3-year dividend policy of increasing the dividend payout ratio to be around 50%, we're going to maintain this policy for 2021 as well. It is too early to give a certain outlook on this year's performance, but we're going -- we're expecting that the dividend per share is going to be slightly higher than the level that we provided last -- this year. And we do not think that there will be any major damage to our performance like we had in 2019. But if there's any issue in our earnings performance, we're going to be quite active in defending the dividend per share level. And you also asked whether we have any plan to increase the dividend payout ratio to be more than 50%? We expect that the new regime, including the IFRS 17, is going to be introduced in 2023. So we're going to consider that as well as considering our dividend policy, and we have some more detail, we will communicate that with the market.

[Foreign Language] The next question will be presented by Jong-Wook Ham from NH Investment & Securities.

[Interpreted] I'm Jong-Wook Ham from the NH Investment Securities. I would like to ask 1 question. On Page 7 of the presentation, you can see the protection new sales outlook for 2021, which is actually declining from 2020 level. Does that mean that you want to focus on profitability so that, as a result, the protection new sales will decline? Or is it because you're expecting some slowdown in the overall market?

[Interpreted] I'm [indiscernible] from CPC Planning team. Let me answer your question. When we were making an outlook -- market outlook for 2021, we were not able to exclude the effect of COVID-19 situation. But if we based our assumption that COVID-19 situation will gradually improve going forward this year, we believe that the market will experience 4% to 5% growth in the direct premiums return. And we also expect that insurance companies in Korea are going to focus on profitability in making new business. Of course, when it comes to competition among the second-tier companies, they may try to increase the high-risk coverage limit so that they can increase the top line growth. As the CFO mentioned in his presentation, in 2021, Samsung Fire & Marine will refrain from top line growth competition and we will focus on increasing the high-quality protection policies in the portfolio and increasing the recurring premium size by managing the in-force policies, and this will lead to a better underwriting process. So we do not have any aggressive target in terms of protection new business because we want to stay away from the unhealthy competition in the market. But as was in the case of 2020, we were able to have 8.7 percentage point increase in the protection premium to 79.4% compared to 2019. So in summary, even though there may be some increasing competition in the industry in 2021, we will stay away from it and continue to focus on profitability.

[Foreign Language] The next question will be presented by Tae Joon Jeong from Yuanta.

[Interpreted] I'm Tae Joon Jeong from Yuanta Securities. I have 2 questions. The first question is about losses -- loss estimate in your investment income. So can you clarify more on that? And the second question is that, in your remarks, you mentioned that the investment yield and the dividend payout ratio are going to be similar to that of 2020 or slightly higher. Does that include the special dividend payout from Samsung Electronics to be scheduled for the first quarter?

[Interpreted] I'm [indiscernible] from the Financial Planning team. Let me answer your first question. So regarding the recognition of impairment loss, there was some recognition of the losses for the hotel properties in the fourth quarter. These properties were affected by the COVID-19 pandemic, and that had negative impact on the investment yield. And moving on to your second question. The investment yield outlook for this year does include the impact of special dividend of Samsung Electronics.

[Interpreted] I'm [ Lee-Won-Song ] from the Corporate Management Support team. And let me provide some additional comments on the second question. So once again, the dividend payout ratio for 2021 will include a special dividend payment from Samsung Electronics as was the case in 2019, when we included the Samsung Electronics equity stake disposal gains for dividend payout.

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

[Interpreted] I'm Kim Do Ha from the Cape Investment & Securities. I'd like to ask a clarifying question based upon your response to the previous question. Even though there were no one-off issues when the investment yield declined, your -- the amount of investment -- the amount of assets under management will continue to increase naturally. So it is rather unusual that the investment yield has declined, and you had KRW 140 billion that was used for dividend payout. So can you explain to us the dynamic between the investment yield movement and the operational income movement?

[Interpreted] I'm [indiscernible] from the Financial Planning team. Let me answer your question. Because of the prolonged low interest rate environment, our interest income has been declining by KRW 80 billion to KRW 100 billion. So that is the first reason why the investment income has not increased compared to 2020, even though there was special dividend from Samsung Electronics. And other factors would include that last year, we had about KRW 70 billion of bond disposal gains and real estate property disposal gains. But such disposal gains for 2021 is going to be smaller than that. So as a result, because of these factors, the investment income is expected to be at that level.

[Foreign Language] Currently, there are no participants with questions. [Operator Instructions] [Foreign Language] The next question will be presented by HeeYeon Lim from Shinhan Securities.

[Interpreted] I'm Lim HeeYeon from Shinhan Financial Investment. First of all, Happy New Year. I have a question regarding your expense efficiencies. I understand that the amount of expenses have been declining because of the reduction in new business, and you're staying away from unnecessary competition. However, it does not seem to me that overall expense efficiency has been improving when we take a look at the percentage of the total sales and acquisition cost versus the amount of new businesses. Of course, your expenses and sales costs include sales expenses for general insurance and auto insurance. And when we look at the auto insurance sales expenses, there was an increase of KRW 30 billion, and this seems to be quite sizable compared to the size of new business. So compared to 2019, 2020 expense efficiency has -- seems to be worsening. So what is your understanding and evaluation of your expense efficiency? Do you think it has been improving? Or what's the situation now?

[Interpreted] I'm [ Lee-Won-Song ] from the Corporate Management Support team. And let me answer your question. As you can see, the expense ratio in 2020 was 24%, which was a 0.8 percentage point increase from 2019. And this is mainly due to the increase in sales expenses for the long-term line. But the main reason for the increase in the sales expenses for the long-term line is related to the new program that we introduced in the fourth quarter of 2019 to recruit new tied agents, and that is the only main reason. On the other hand, the expense ratio for auto insurance and general insurance has been on the declining trend, and I believe that this trend will continue in 2021. And also for the long-term line, in January and February this year, we have already seen the benefit of changing some of the policies and programs within the company for sales expenses. So we believe that the expense ratio for 2021 will improve.

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

[Interpreted] With no further questions, we would like to close the Earnings Conference Call for Fiscal Year 2020 of Samsung Fire & Marine. Thank you very much for your time. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]