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

[Interpreted] Good morning. I am Joon Chang Ho, Head of the IR team. Thank you for joining Samsung Fire & Marine's Third Quarter 2021 Earnings Conference Call. We will begin with our CFO, Hong Seong-Woo's presentation and key earnings highlights and future business outlook, followed by a Q&A during which answers will be provided by our management team. The whole session will last around 1 hour. I now invite our CFO, Hong Seong-Woo.

[Interpreted] Good morning. This is CFO, Hong Seong-Woo. Allow me to present on Q3 2021 earnings results. Q3 '21 pretax profit reported KRW 377.7 billion, while net profit was up 42.2% on year to KRW 278.1 billion. Q3 cumulative pretax profit reported KRW 1,388.4 billion, with net profit at KRW 1,022.2 billion, which is up 62.5% year-over-year. First, on the back of margin-focused, qualitative growth, long-term insurance saw its risk and loading premium expand year-over-year from new sales, which make up sources of our future profit. Also through enhanced product competitiveness and commission structure and higher efficiencies from value in-force business, we were able to derive visible results, including growth in high-quality new businesses and improved persistency ratio. 13th month persistency ratio for protection type was up 3.6 percentage points year-over-year and 25th month persistency ratio improved 2.3 percentage points year-on-year, driving the size of risk and loading premium out of the total recurring basis. However, considering Q4 seasonality of higher medical usage, we expect risk loss ratio to go up from medical indemnities and diagnosis related expenses. Samsung Fire & Marine will drive reasonable rate hikes, supported by our loss ratio profile, and will continue to strengthen activities towards claim loss control. And in preparation for IFRS 17 upcoming in 2023, we will realign the portfolio around high-margin products and continue to explore products and services that best meet customer needs, so as to bring forward-looking growth and not short-term results. With the auto line on rise and quality revenue from growth from policies with higher coverage and more efficient claims process on site as well as lower accident rates underpinned by rule changes, combined ratio on a cumulative basis improved by 5.9 percentage points, reporting 94.4%. In Q4, loss ratio is expected to rise on seasonal factors, i.e., cold weather and heavy snowfall, an increase in repair costs as well as increase in mileage driven on the back of normalization of COVID-related restrictions. Despite all this, however, we will continue to enhance claims processing efficiency. And through close collaboration with other partners, we will thoroughly prepare against rising accident rates so that we may sustain our bottom line. For the general line on top of revenue growth from the domestic market by downsizing on risk retention, which supported volatility management, on a cumulative basis, there was 6.4 percentage point improvement year-over-year with loss ratio coming in at 75.2%. We will solidify cooperation with our agent and broker channel and proactively respond to the new markets and risks arising from changes in the environment so as to expand our domestic market revenue and generate steady profit. We have embarked on a full-fledged cooperation with Canopius of U.K., starting with the U.S. market, expanding the business. And joint venture with China's Tencent is almost at the final stage of government approval. So for these overseas endeavors, we will continue to push forward to bring tangible results from equity investments and business cooperation in upcoming 2022. Next is on investment. On special dividend from Samsung Electronics in the beginning of the year, and higher dividend income from alternative investments as well as gains from sale of shares, Q3 cumulative investment profit was up 9.3% on year to KRW 1,659.3 billion, with investment yield at 2.9%, which is up 0.1 percentage points. We expect to enter a rate hike cycle going forward and plan to leverage this upcoming cycle to enhance bond yield and expand higher-yielding assets, including alternative investment. Also to counter possible changes in the environment, such as sluggish domestic market and regulations on household loans, we will manage risk rigorously. Last but not least, regarding our digital business. SFMI is transforming into a service platform, tightly coupled with people's daily lives, redefining itself from simply being an insurance seller to one that provides everyday services with a strong pivot on customer care. Last month, we launched a new brand, SFMI Direct [indiscernible] to provide personalized insurance offerings underpinned by AI technology and services that help with our daily lives such as safe driving and health care management so that we may expand our positioning as a flagship digital insurance platform that customers feel close to and find comfort in. Under the uncertain time, Samsung Fire & Marine Insurance, through continuous endeavors for profitability focused growth and efficiency improvements, which enabled a solid bottom line. In the remaining months, we will solely prepare against expected upcoming changes and further solidify company's revenue stream.

[Interpreted] We will now move on to the Q&A session. For the benefit of the participants, I would like to ask that you ask no more than 2 questions per person.

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

[Interpreted] Thank you very much for the good results. As the CFO has just mentioned in the presentation, we've seen loss ratio profile for auto insurance quite positive. But I understand that there is an upward cost pressure as well as the fact that we are returning back to the pre-COVID world or the post-COVID environment is upcoming. So there are different factors that's currently conflicting in terms of the pressures against the rate adjustment. Can you provide some color as to what the authorities or the direction of the authorities that you are currently sensing? And what is SFMI's internal, I guess, positioning on the changes on the auto premium adjustment or rate? Now also, if you look at your medical indemnities, and if you refer to Page 2, the health insurances, excluding the medical indemnities, there will probably be also an increase in the rates in the upcoming -- in the next year. But it will, of course, not be the extent that we would be, I guess, satisfied with. But I would like to understand what the company's position is on the rate adjustment for the medical indemnities. And also, what do you think is going to be the market share? We see that your market share for the health insurance is quite high, excluding the medical indemnity status. I think this is based on the strategic decision of the company. What is your outlook for market share for such product category? And do you have a target?

[Interpreted] Yes, I am Kim Il-Pyeong. I'm the Vice President of automobile insurance strategy team. I will respond to your first question. Well, as of now, there has not been any announcement of official position of the regulatory authority with respect to the auto premium. But as you would also know, in terms of our insurance underwriting profit, the figures are quite positive. So in managing the ratemaking related policies, we have to admit that the situation is quite difficult and not all that easy. And so there are some of the pressures and the burden that we are feeling with respect to ratemaking and rate adjustment. But such good underwriting profit from auto business, there is also an impact from the COVID-19 pandemic. So we cannot presume that this level of profit is business as usual. So the -- so at this point in time, it will be quite difficult to apply any other different types of measures. And also, there will be new factors and new variables that will come into play as we enter into Q4. So we will monitor those situations and appropriately reflect that to our ratemaking strategy. So to provide a little more elaboration on what I have just mentioned, because the uncertainties relating to COVID pandemic is not fully eliminated, at this point, it's very difficult to put our foot down and tell you that there is a specific percentage that we are working towards. What our plan today is that we will be fine-tuning aspects of the rate structure, for instance, giving a bigger tiering between the quality policies and the bad-performing policies. For the bad-performing policies, we will try to secure as wider cost base as possible. So our stance as of today is that we expect there to be much change upcoming for the next year compared to what we've experienced this year. So starting Q3, we've been really improving the quality of our policy portfolio, and we've been making adjustments at that policy contract level. So based on these endeavors that we've put in so far, next year, we will continue to further enhance the quality of our policy portfolio and to make sure that we have an ample basis of -- ample cost basis that will provide us with stability.

I will be responding to your question about the medical indemnity product. I am [ Seok-Hyeon Kwon ], Vice President of Long-term Product team. As you would appreciate, if you look at the rates of the medical indemnity products over the past 2 years, only a handful of upward factors were actually reflected in the actual premium and actual pricing. So for this year, we believe that -- and so on a year-over-year basis, there still exists some of these elements and factors that will drive up -- that is supposed to drive up the level of the rates for the medical indemnities. As is the case for our company as well as our peers, we have not yet decided on the extent of how much to actually reflect in the increase of the rates. But if some of the factors that is not really fed into the increase in the rates for the medical indemnities, then that creates a bigger impact the following year. So we are currently in the process of very closely discussing with the government authorities to try to reflect those upward factors on to the pricing. If you look at medical indemnities products, this has been subscribed to by about KRW 39 million, including the group insurance. Currently, even the government authorities, FSC, has set up a council to really discuss the sustainability of such medical indemnity products. We believe ensuring sustainability is very important, and we need to normalize this product category. So within the FSC Sustainability Council, we plan to deeply discuss all the effects of the nonreimbursement items as well, so -- and in that process, really proactively try to reflect our positioning in the overall discussion process. And we are in close talks and cooperation with the authorities.

I am [indiscernible]. I'm Vice President of CPC Planning team. I will respond to your second question. As you know, to prepare against the upcoming IFRS 17, the new regime, we have already been putting efforts towards policy efficiency management. So we've been strengthening the efficiency. And also with the new businesses -- and we are really focusing on inflow and onboarding of high-quality new businesses and new policies. Therefore, continuing on to 2022, we will continue to focus on high-margin products so that we may further enhance our competitiveness and expand on the distribution of these products. Together with our efforts to expand distribution of such product for policies where we think that we'll entail high level of loss ratio or persistency ratio, we will make sure that we limit excessive competition in underwriting. As per Slide 2 of the presentation, since Q4 of 2020, our market share has been gradually expanding. Now as of today, if there is no overheating of competition by the players to excessively expand their top line revenue or to trigger any excessive competition in terms of the underwriting process, I believe that our market share trend of gradual expansion will continue on. So all in all, in time for the upcoming IFRS 17, we will continue to stick to 2 very important pillars, which is expanding high-quality new business as well as strengthening the efficiency from value in force. And on top of that, when it comes to high-margin products, we will continue to employ a strategy whereby we will expand our market.

[Interpreted] I hope that answers your question. So we have many people in the queue to ask questions. So I would like to ask that the answers be quite simple -- be provided in a simple form.

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

Recently, there's been a -- there's been some move by some of the insurance companies changing their pricing scheme. There's a concern that this may actually trigger a competition in the market, just as we've seen back in 2019 around the new business growth. So I would like to understand what the company's take is on this. And also with the IFRS 17 upcoming in 2023, in that new backdrop, is new business growth more important or is maintaining your persistency ratio more important? I think depending on which is -- has more weight, I think that will have implication on -- and the sensitivities of that would have implication on the company strategy. So how does the company view this overall situation?

[Interpreted] I'm Vice President [indiscernible] of CPC Planning. I will respond to that question. End of this month, some of the insurance companies made adjustments to their insurance rates. And within the market, both internal as well as external, they've considered the premium rate of that -- of those specific companies to be relatively higher. And I understand that, that company had felt a sense of urgency with respect to their declining market share in the GA channel and that adjustment in the rate was only specific to certain number of covers and coverages. And that adjustment in the rate basically is converging with the average premium rate of the industry. And so as such, we do not expect this is going to create overheating of market competition. Second question, under IFRS 17, which is more important, new business or value in force? It is very hard to make that distinguishment. They are both equally important. So the company for the new business, we will have emphasis on high-margin products for value in-force. Our focus will be enhancing efficiency as we prepare for upcoming IFRS regime.

The following question will be presented by Jun-Sup Jung from NH Investment & Securities.

I am Jun-Sup Jung from NH Securities. I would like to also submit 2 questions. First is, now we've seen interest rates cycle -- in a hiking cycle. If you look at the book yield, it's currently 2.9%, but I believe there is more room for increase or the growth of that yield. But your overall asset investment yield has not really been elevated. So I would like to understand what your outlook is for your asset investment yield. And since IFRS 17 is upcoming, I would also like to further understand what your asset management strategic direction is for next year and for upcoming years. If you could also share with us your investment yield target or guidance, that would also be helpful. Second question, you did mention about your digital initiatives. But with the emergence of new technologies such as NFT, we see many industries like game industry, fashion industry, they're really adopting the use of this new technology. So not limiting to NFT per se, do you, as an insurance company, also -- are you making preparations to adopt and apply these upcoming technologies in your product and service offerings?

Yes. I will respond to your first question. I am [indiscernible] Vice President of Finance Planning. Yes. As you've correctly pointed out, with the interest rates going up, it is true that the overall asset management and investment backdrop is becoming positive. However, our new money yield is not that high as compared to our book yield. So from a short-term perspective, we think that it will not be that easy for us to see an about face change in the trend of our investment yield. Having said that, as we've done in the past, we will continue to expand on investing into higher-yielding assets so that we could really defend our book yield, our running yield. So it may not be that easy for us to bring about a significant turnaround come next year. But in 2 years' time, we believe that we will be most likely able to. And also in terms of our outlook for investment yield, this year, there was a special dividend that we will pay for Samsung Electronics. Next year, we do not have that one-off factor. So it will not be easy for us to remain or retain a flat investment here on a year-over-year basis, but we believe we will be able to report investment yields that commensurate to 2020 level. Last point, with option of IFRS, there is going to be a heightened volatility in terms of P&L. So to respond to that, we will form our asset portfolio in a way that could actually minimize that volatility.

Yes. I will respond to your second question. I'm [indiscernible], Vice President of Digital Business Promotion team. So there are multiple number of companies who have announced that they will set up a digital -- an online P&C insurance company and also the incumbent non-life insurance companies have also significant level of interest in the digital business. So under that backdrop, please understand that I am under a constraint in sharing with you all the specific details of the items that we are currently planning. Not restricting to NFT, which you've mentioned, Samsung Fire & Marine is making thorough preparations in order to apply and embed different types of newly emerging digital technology in its insurance product and service offerings. So just to share with you, just at a conceptual level, for our auto insurance customers, we are developing a certain product and technology, which we could actually use to automatically analyze the driving habits of that person -- policyholder and really provide a specific service that would drive or that will entice that driver to express a very positive driving habit. Same for health management. We will be providing specific services and products that will really induce a positive health-related habits of an individual. And also based on location technology, we can provide a specific service and product for the parents so that they don't have to be worried about the whereabouts of their children and such product could also help them when they go abroad for travel. So when these products are ready to be launched, at the timing of the release, we will be able to share with you more detail.

[Interpreted] The following question will be presented by Yafei Tian from Citi.

I have 2. The first one is on IFRS 17 implementation. We discussed this last quarter. So I just wanted to understand if you have any further updates on when would we able to get a comparative P&L and capital for IFRS 17. And along with that, how does that affect your dividend policy this year? That's the first one. And secondly, just to follow up on the digital comments you made earlier. In South Korea, there's quite a number of digital insurance like [indiscernible] and maybe Kakao Pay would launch its digital insurance as well. So what's your thoughts on the competitive landscape as more and more users are shifting towards digital channels? And how is this going to impact your market share and profitability?

[Interpreted] Yes. I will respond to that question on IFRS. I am Che Bu Gyu, Vice President of Actuarial RM team. So Samsung Fire & Marine, we actually completed our systems development back in 2020. And this year, we have conducted multiple analysis in terms of our financial impact with regards to all the different accounting-related rules and principles. So within the CEO, we will be making finalized decisions on our accounting-related policies. And starting Q2 of next year, we will conduct preaudit and after which, we will be able to provide comparative reporting. So in terms of the specific figures, please understand that we are currently in the process of calculating and analyzing those numbers. So please understand that I won't be able to share with you any specific figure as of today.

I'm CFO, and I will respond to the part about dividend. So any impact from IFRS 17 on our dividend payout policy, you will actually be fed through starting 2023. So back in 2019, we announced our 3-year dividend payout plan and that is lasting until 2021. With the delay and pushback of IFRS 17 schedule, basically 2022 dividend policy, we will be announcing that in the upcoming quarter. In terms of the IFRS 17 and its impact on our overall dividend plan, once the IFRS framework is completely finalized and the relevant laws and regulations are put in place, we believe we will be able to announce to you that dividend plan subject to IFRS 17 come next year. I just want to emphasize one more thing, is that our basic philosophy underpinning dividend payout policy is that we will adopt a shareholder-friendly positioning, that is not changing at all. Once all the details are finalized, we will be sharing with you the specifics.

[Interpreted] I will be responding to your second question on digital business. I'm [indiscernible], Vice President of Digital Business. Now we believe that going forward, the competitive landscape for the insurance industry would be such that there will be companies like us, the incumbent Samsung Fire & Marine. There will be new entrants in the digital insurers -- as digital insurers as well as big tech and fintech who have a massive basis of users. So the market will be led by these 3 parties. Though cautious, I believe, a company like us, we consider the biggest threat to be from platform companies, the likes of Kakao, Naver and Toss, who generate significant amount of traffic, who also have high level of monthly active users and who are equipped with technology. However, if you look at auto insurance, this business entails an extensive claims infrastructure. And if you look at long-term insurance, basically, you need to be paying up your premium over a long duration of time, and long-term insurance entails hundreds of different coverages. So the product itself is very complicated. So in these 2 categories, I believe that it will be difficult for these new entrants to actually bring about a short-term performance. So in the shorter horizon, I think for the digital insurance market, these products that are introduced in the market will be more small ticket as well as short-term and general type products. For general line products, because the ticket size of the policy is relatively very small, it's not going to be very easy to be profitable. So in consideration of all of the factors that I've just mentioned, even if in the digital insurance market competition really is triggered and it really takes off a company like Samsung Fire & Marine, who already has an unrivaled market share in auto -- in the auto insurance market and -- as well as the extensive nationwide claims network, we believe that we will be able to maintain our upper hand. Now having said that, there are some weaknesses that we have compared to these big techs as well as fintechs in the areas of data analytics, IT capabilities and UI/UX development. So in order to further up our capabilities, we are recruiting the relevant talent so that in the near future we will be able to catch up with these other big techs and fintechs in data, IT and UI/UX.

[Interpreted] Hope that answered your question, Yafei?

Yes, that's very helpful.

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

I am Lee Byung Gun from DB Securities. I just would like to ask very specific -- 2 very specific questions. CFO, you mentioned repair. I understand that there will be a sort of negotiations with these repair shops starting December. So can you share with us how that progress is going to actually develop. And when will that whole negotiation end and then when will we start to actually see that come into play because we would need to know that timing for us to cost analysis. So when that repair cost change actually gets fed through, how much of a price hike or price increase should we expect? And also with regards to medical indemnity, when we are projecting for medical indemnity, aside from the COVID impact, there is also a significant impact from the Moon Care, the health care policy of the government. And there is quite a bit of confusing aspects to it. For instance, if you look at 2019, the non-reimbursable item, the spinal cord MRI, the size of that was 434 billion. And basically, this currently is under the table, was up on the table for discussions under the Moon Care regime. And the co-payment portion is quite high for that item. So aside from the spinal cord MRI, are there any other items that will be in the size of 50 billion to 100 billion, where the co-payment aspect once this gets actually switched to a benefit or reimbursable item. We think that, that's going to have an impact of about 0.5 or 1.5 percentage impact on the loss ratio. So does the company have any scenarios or guidelines in place in the face of such increase in the coverage benefits that would be following the national insurance regime.

[Interpreted] I'm Kim Il-Pyeong, Vice President of automobile insurance. I will respond to the first question. So already, it is predetermined that come December, the repair cost is going to actually go up by 4.5%. And out of the total cost basis, the impact that this will have on the premium or the pricing will be in the extent of 0.6%. So we are basically going to take a 2-track approach. The first, the cost base is going up, but it's not an all at once increase. It is actually subject to negotiations with individual repair providers. So we will be able to leverage our bargaining power against those repair shops, and we will try to limit that increase to about 0.4%. And most of these increases relate to our product damage liability as well as vehicle damage liability, and we actually have treaties in place for it, so we could actually increase the treaty premium, treaty rate, and that will be able to help us cover 90%. So in terms of when then the rate hike would actually take place, it's hard to give you a definitive answer, but according to -- under our plan, basically, we think that after we go through these individual discussions and negotiations with the repair providers, we will more or less finish it by Q1 of next year.

[Interpreted] I'm [ Seok-Hyeon Kwon ], Vice President of Long-Term product. I will respond to your second question. So your question related to the impact of Moon Care, how changing from non-reimbursable item to a benefit item, what impact that will have, what scenario we have within the company. I would have to first apologize the Vice President who's in charge of long term and claims actually is not present here today. So it will be difficult for me to provide you with a specific figure. So the Moon Care initiative changing from non-reimbursable to reimbursable, that will entail a multifaceted impact just as we've seen from our previous case for cataract, even if that is changed to a reimbursable item, it doesn't -- it's very difficult to make a prior prediction on how lower the loss ratio could go down because of the impact of balloon effect. So just as for the spinal MRI that you've mentioned, we would also have to consider for the ballooning effect as well as many other factors. If our long-term claims team have any thorough analysis on this, we will make sure we share that information with you later on.

[Interpreted] I just want to give you a comment. Later on if you could just share with us what the company analysis on and on what the outcome of your simulation is, that would be helpful because the government as well as Association of Korean Medical Doctors project that the impact of the spinal MRI turning reimbursable is going to be in the amount of KRW 480 billion to KRW 1.4 trillion. So that's quite a significant impact. So I'm sure you must have some internal reports. So do share that with us later.

[Interpreted] Yes, as earliest as possible, once we get our hands on the relevant information, we will make sure we share that with you through appropriate channels.

[Interpreted] The following will be presented by Myung Wook Kim from JPMorgan.

[Interpreted] Yes, I have 2 very quick questions. First, my take is that the company was very confident in previous quarters when we asked your questions about the rate, the auto premium related questions. But this quarter, you seem a little bit reserved or a bit cautious. So I would like to know whether there are any reason or any concerns that you have that's making you a bit more cautious with regards to the rate hike cycle for the auto insurance. And also across the world, we see a secular trend in the decline of the auto accident rate. Do you think that this type of a trend will be supportive to the auto business? Second, for the general line, your retention rate has gone down. The company actually has quite a significant amount of capital and you're able to post a turnaround. I would like to understand what the company's retention-related strategies are.

[Interpreted] Yes, I am Kim Il-Pyeong, Vice President of automobile insurance. So your comment on the fact that I felt -- you felt that I was a bit reserved in making projections. It's not because of any other reason. It's just that this year has been the most difficult year to make a good projection. The reason is because of this unexpected variable, which is COVID-19. This is very uncertain, and it's making it very difficult for us to make projections for next year or the upcoming 2 years. So maybe that's why you got the impression that I was a bit reserved or that I was a bit cautious. What -- I mean, as of today, we do not know whether next year, COVID is going to be completely eliminated or whether there will be new waves or whether COVID will really reemerge. Having said that, the company does have multiple scenarios as well as multiple strategies that will be aligned with those possible scenarios. So second question, the secular trend of the accident rate coming down. In the DM, the developed countries, yes, the accident rates are gradually coming down. And the same for Korea as well. Overall, we see that in terms of severity of accidents that entail significant serious injuries, that severity accident is plummeting quite significantly. Most of the accidents that we see these days are light accidents. So also, Korea adopted a speed limit of 50-30 and that really had some impact on lowering the accident rate. We are tracking and monitoring the accident rate, and we've seen a salient decrease. Our transportation and safety culture research center ran a simulation. And from that speed limit, 50-30 new rule, accident -- there was an impact of a downward impact of a 2% decline in accident rate. But once the people actually feel this, feel the difference, we believe that, that decline will start to narrow.

Hello. I am [indiscernible], Vice President of Commercial Line. I will respond to that second question. Thank you for the question. In terms of the retention rate last year, it was in the early 70% for the underwritten insurance retention. This year, we were able to lower that to mid-60%. So as mentioned during the earnings call for Q1 and Q2, in line with our business strategy to really make our bottom line more stable, our net retention had been lowered down by KRW 10 billion from KRW 30 billion as well as taking on a strategy to really focus on the quality policies and to adjust downwards the retention that had been our strategy so far. In terms of frequency and severity, although we can't make perfect predictions on the frequency aspect, in terms of severity, we are endeavoring to make sure that we narrow that gap or the extent of fluctuation as much as possible. As you've mentioned, by leveraging the strong capital base that we have, we will fully utilize it, and we will use our strength in terms of sales and distribution so that we can continue to expand on the retained premium. So just to note, even though the retention rate itself has declined due to a top line revenue growth, the leverage -- or the utilization of our capital has become much more solid. Going forward, we will continue to take a stance of efficiently utilizing the capital by really strengthening our underwriting capabilities.

[Interpreted] I hope that answered your question. Thank you. We are now up for time. If you have further questions, do contact our IR team, and we will provide you with the adequate answers. Thank you very much. This brings us to the end of Samsung Fire & Marine Insurance's Q3 2021 Earnings Conference Call. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]