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

[Interpreted] 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 2022 second 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 morning. I'm [ Kim Jae Hoon ], Head of IR team. Thank you for joining Samsung Fire & Marine Insurance First Half 2022 Earnings Conference Call. We will begin with our CFO, Hong Seong-Woo's presentation on key earnings highlights and future business strategy, followed by Q&A, during which answers will be provided by the management team. The whole session will last around 1 hour. And now I invite our CFO, Hong Seong-Woo.

[Interpreted] Good morning. I'm CFO, Hong-Seong-Woo. Allow me to present on the first half 2022 earnings results. First half pretax profit reported KRW 128.6 billion, and net profit reported KRW 749.9 billion, which is up 0.8% year-on-year. On the back of recovery in off-line sales activities, we saw new business revenue grow around high CSM-yielding products like the health insurance and illness insurance, driving health insurance revenue, excluding medical indemnities, to recover above last year's level. Driven by efficient improvement efforts for value in-force policies, 25th month persistency ratio for the protection type was up 12 percentage points year-over-year and 37th month persistency ratio also improved 5 percentage points. Risk and Loading premium also was up 8.5% year-over-year. On the back of stronger rules by the regulators on excessive medical indemnity claims and claims review, which had a stabilizing effect on the risk loss ratio, Q2 loss ratio improved by 4.9 percentage points year-on-year and 3.6 percentage points Q-on-Q, while on a first half basis, there was 1.7 percentage point improvement year-on-year. In the second half, despite concerns over slowing of offline sales activities on the back of new wave of COVID, we were continuing to strengthen competitiveness of high-margin products and regain activity levels of the sales organization so as to sustain our top line and bottom line growth. For the auto insurance on the back of rise in crude prices and lower accident rate on the back of COVID, combined ratio improved by 2 percentage points year-over-year, reporting 92.3%. In the second half, there is a greater possibility of P&L volatility from heavy rain and snow and other natural disasters as well as higher inflation, leading to higher cost burden. Against this backdrop, we will fully prepare against such risks and secure a revenue stream by growing high-quality revenue so as to gain a steady base of profit. Next is the general insurance. First half direct premium written was up 10% on year and on the back of risk management efforts to ease P&L volatilities, loss ratio showed improvement of 3.2 percentage points, reporting 69.3%. In the second half, we will continue to strengthen competitiveness in terms of channel and product to sustain top line growth and at the same time, solidify a foundation for growth in our global business. We are driving revenue growth from the North American market through a close business cooperation with Canopius of U.K. as we continue to explore ways to create synergies and define mid- to long-term business strategy. Next is asset management. The financial market is experiencing greater uncertainties on sustained increase in interest rates and FX rates and growing concerns over stagflation. Under this market backdrop, investment profit for the first half was KRW 1,048.4 billion and investment yield was at 2.9%, which is down 0.3 percentage points year-over-year. But excluding the one-off dividend gains last year, there was investment yield improvement of 0.1 percentage points year-on-year. We, at SFMI will expand exposures to dividend-bearing assets and higher-yielding assets to secure profitability for the portfolio. While to prepare against growing market volatilities, we tightened quality monitoring of assets under management as well as risk management. Also, by setting strategies for each economic forecast scenarios, we will preempt market changes. So that ends the business highlights for the first half of the year. I will now run through an update on our digital business. Following last year's launch of daily life platform brand, Direct [ CHAC ], in April, we released personalized insurances, reflecting mileage driven and individuals' health conditions and also launched the [ CHAC ] series, including [ CHAC Drive ] and [ CHAC Walk ]. And as we acquire new customers through Samsung's integrated financial platform, Monimo, we plan to maximize synergies by leveraging its connection to our own direct app. Also, our health care management app Anyfit recently went through an upgrade from Anyfit Plus to Anyfit Pro becoming a new digital health care service that provides health risk analysis as well as personalized health care management. During the first half, despite continuing uncertainties, both internal and external, as SFMI was able to achieve results beyond what we've seen last year. We expect challenging environment of higher inflation and global economic slowdown to continue into the second half of the year, but we will continue to push ahead towards profit-driven growth and efficiency improvement so that we are equipped with solid profit base ahead of the adoption of IFRS 17. And we will also endeavor to implement our growth strategies to further enhance the company's future value. We will do our utmost to bring performance unparalleled by others and will also enhance our shareholder return. Thank you. We will now start with the Q&A. [Operator Instruction].

[Operator Instructions] [Interpreted]. The first question will be provided by [ Hong Dae Lee ] from Hyundai Motor Securities.

[Interpreted] I would like to ask you two questions, which relate to the overall regulation and rules. In terms of the low loss ratio of the auto insurance, because the loss ratio has gone down, there is a lot of discussion and talk about a rate cut. I'm wondering whether you are engaged in any discussions with the financial authorities in lowering the auto insurance premium. And if such premium cut does take place, how much of a cut would that be? Second question relates to the medical indemnities related regulation. In turn, would you be increasing the premiums for these medical indemnities in light of the loss ratio that we've seen in the third-generation medical indemnity product? And also, do you foresee any certain modifications or changes with respect to the rules that relate to the medical indemnities, for instance, an update of the business method standard?

[Interpreted] Yes, I will respond to your first question about auto insurance, I'm VP of Automobile Insurance Strategy, Kim Il-Pyeong. So to respond to your question, no, there is not any discussion that ongoing with the regulatory authority with regard to the premium cut. I do understand there are some press coverage with respect to the cut on rates. But I believe that right now, it's not the appropriate timing for us to provide you with any specific comment. One of the reason being is that the premium was cut back in April, and it only has just been about 4 months since that premium cut. And so we have not yet been able to even assess the impact that it had and the progressive impact that it had on our overall numbers. And also, as we've mentioned before, as we enter into the second half, the P&L uncertainties and volatilities are going to further heighten. And hence, I do not think that it is an appropriate timing for us to provide you with any specific guidance on that.

[Interpreted] I will respond to your question on the long-term insurance. I am [ Park Gun Bae ]. I understand that you have two questions. First, ratemaking for the third-generation medical indemnity product. And second, any possible changes to the business method standard, especially with regards to how to process and treat the non-benefit items. Responding to your first question first, the third-generation medical indemnity products are the ones that were sold around the timing of April of 2017 and it's been about 5 years. So we are now at a time where we cannot further delay or postpone the rate adjustments. For our company, we have originally set aside June -- end of June or July as our target to make that rate change. But at this point that had been delayed to December. The financial authority is clearly aware of the need to bring changes to the overall premium rate. And at our company, we will do our best to make sure that we can advance and apply that rate changes in the near future. Responding to your second question of how we are processing with some of the problematic non-benefit items as based on the standards defined as of the March basis, we are currently handling all the cataract-related claims based on the stringent review process. At this point in time, the financial authority is not considering reflecting the specific item on its business method standards or codifying that in the regulation itself. However, we do see the need, and we been guided by the authorities that providing prior notification information purposes to the customers will be required. And so that is an aspect that we are talking about at the working level, together with the authorities. I hope that answered your question. We now move on to the next question.

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

I have two questions. The first is that around the impact from this very terrible heavy rainfall that has experienced in Seoul last couple of days. So just wondering if management is able to provide any initial assessment of the potential impact to the P&L from this very unfortunate heavy rainfall? Secondly is that just looking at the asset liability management slide, the duration for liabilities has been falling quite a bit over the last year. There is a bit of mismatch in the asset liability at the moment. So just wondering what's driving that decline. And what would be the impact going forward in terms of asset and liability management?

[Foreign Language].

[Interpreted] Yes. I am Kim Il-Pyeong, VP of Automobile. I will respond to your first question. Regarding the impact from the heavy rainfall that we've experienced as of 7:00 a.m. today, the vehicles that have been damaged amount to about 3,167 cars. And on the automobile insurance, the expected loss that we will be impacted with is expected to be KRW 51.1 billion. So once again, that is an estimated loss from the recent flooding or inundation and submerging of these vehicles. But we do take out a reinsurance and we have an Excel 3D in place, which covers KRW 14.5 billion. So the impact that this damage will give us as a company will amount to that KRW 14.5 billion.

[Interpreted] Hello, I am in [ Kim Jun-Ha ]. I will provide you with some details on the commercial line with regards to the rainfall impact. Now on the general line, the amount that we have received as a claims report as 16th -- 4:00 p.m. yesterday amounts to less than KRW 1 billion. Now, but if it is a large workplace, for instance, it does take time for that site to assess the amount of damage. So there will be some time duration that will be required for us to get the exact amount of loss, but we believe that the amount of loss that's been incurred for the general lines of product is not going to be that significant.

[Interpreted] I'm VP of Actuarial RM Team, Che Bu Gyu, I will respond to your second question because of the rise in the interest rate on a year-over-year basis, we've seen a significant decline in liability duration. So with the increase in the interest rates, the liability duration fell, the reason because the portion of policies that have the minimum guarantee interest rate the mix actually declined. Meaning if basically, if it's a policy with the guaranteed minimum interest rate, if it goes over a certain level, then basically, you move from a fixed interest rate to a floating interest rate, which has an impact of reducing the duration of the liability. So yes, you are right. The duration gap did widen. But because of the improvement in the RBC rules, which took place in June of 2021, there is no big change in our RBC ratio. And under K-ICS, although the duration gap did widen, the overall exposure size did decline, so there is not that big of an impact on our side. So as we are in a cycle where there is higher interest rate volatility, we are not going to just suddenly change our ALM management strategy or policies. What we will do is we will set our target interest rate and manage our asset and liability matching very gradually within that limit that's been set.

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

[Interpreted] I just have one very quick question. We see that your business results in Q2 following Q1 was quite positive. On a per year basis, we, therefore, expect a rise in profit compared to previous year. Can you provide any color on your dividend stance because at the beginning of the year, you said that you will focus on DPS stability. But as the overall profit has actually increased, would there be any chance that you would be upping or increasing DPS?

[Interpreted] This is the CFO, Hong Seong-Woo, I will respond to your questions. Now in 2021, when we explained to you as to why we were shifting focus, payout ratio to having a steady DPS was due to higher uncertainties in the overall operational backdrop and P&L volatility. As mentioned during the first quarter's earnings release, in order for us to further expand the dividend per share or DPS, the company will focus on strategies that will enable that. Now as you know, our second quarter results have outperformed expectations. But as mentioned, there still exist uncertainties as we enter into the second half regarding pressures for an auto premium cut, the COVID pandemic, as well as risk of stagflation. We will do our best to make sure that if we are able to gain an higher profit on a year-over-year basis to be able to achieve that outperformance so that we may further push up and expand our DPS.

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

[Interpreted] I would like to ask two questions. First, we see that for your long-term business in Q2 risk loss ratio profile has been quite good. And you've mentioned the cataract as well and that obviously would have had an impact. Now you've provided us with a risk loss ratio outlook for your long-term business, but I would have to think that, that outlook also went through some changes. So can you give us an update as to what your forecast is for the second half? It will also be helpful if you could also specifically talk about medical indemnities as well. Second question relates to IFRS 17. It's only about 4 to 5 months away. And considering that investors for insurance equities are more of a long-term holders, I think we are well overdue in needing a clearer guidance as to what you expect or how you expect your business profiles to be displayed under IFRS 17. I believe that there would be some updates that you could share with, considering also that there was a recent revision of the relevant tax laws. Can you give us a more -- a bit of more color on the guidance as to regarding your business under IFRS 17?

[Interpreted] Hello. I am [ Park Gun Bae ] , VP of Long-term Insurance Strategy, I will respond to your first question. I am from long-term business, [ Park Gun Bae ] I will respond to your question, the loss ratio. Yes, as you've mentioned, the Q2 '22 loss ratio did decline by 4.9 percentage points year-over-year, reporting a loss ratio of 84.5%. And as mentioned, yes, it was quite largely also impacted by cataract-related over claims. And so as well as impact following the rule changes regarding medical indemnities. Now if you look at our outlook because that was also a question that you asked, as we enter into more of an endemic although recently, we've seen new wave of COVID. But as we enter into a period of endemic, there will be higher usage of health care services as well as potential stipulation that may be upcoming. So there are these uncertainties that still exist. So despite this overall backdrop, we will do our best to make sure that we control any insurance payment-related leakages and also bring about a sustained trend of stability in terms of loss ratio by stringent control and management of claims payment. Now looking at the denominator impact, we will continue to develop and sell more of a high-margin product and also will continue to improve our persistency ratio so that we can have a very firm base of sound profit. Now having said that, for the medical indemnities, if you look at its loss ratio on an absolute basis, it is still quite elevated. Also, if you look at diagnosis and surgery-related payment, in the first year, there's been a slight uptick. So all in all, in consideration all of this situations, we're not yet in a position where we're thinking of changes in the rates on the back of such stability and loss ratio.

[Interpreted] once again, this is Che Bu Gyu, VP of Actuarial RM team. I will respond to your IFRS 17 question. So at the company, we were first complete the preaudit that's ongoing by the end of this month, and then we will come up with the transition balance sheet as well as account closings for 2022. If you look at the greater industry, other countries, I understand, are doing their validation for assumptions as well as preaudit in the second half of the year. You did mention that things has been quite delayed in terms of time line, but for us to gain a more insight and the overall P&L impact under IFRS 17 at the -- in the industry-wide perspective, we do need some more time. For our company specifically, there has not been any significant changes that we could actually update you on compared to what we communicated in April.

[Interpreted] Just a follow-up question on my first question, because at the beginning of the year, you shared with us a quite conservative outlook for risk loss ratio trend for your long-term line. But having seen the good performance of the second quarter, I'm wondering whether you have changed your guidance or outlook regarding the risk loss ratio for the second half of the year. It would be helpful if you could provide more color on that.

[Interpreted]. I will provide you with a follow-up answer to that. The company maintains the same strategy when it comes to managing the risk-loss ratio.

[Interpreted] This is the CFO. I will also provide you with some more information there. So the changes that you see on the loss ratio for long-term line is mainly on the back of changes in medical indemnity related policies, which had an impact of driving down the loss amount and that being reflected on the loss ratio trend. So aside from medical indemnities, the loss ratio trend and the loss amount trend that we are seeing from other coverages are more or less within the baseline of our projection that we made at the beginning year. So with regards to the loss ratio projections or the rates for the long-term product, the company does not have any changes in its stance or policy relating to those.

[Interpreted] The following question will be presented by Jaewoong Won from HSBC.

[Interpreted] All of my questions that I wanted to ask have been previously answered. So just one additional question I want to ask. Even with the lifting of social distancing in April, we still see the loss ratio for auto below 80%. And of course, recently, there's been the heavy rainfall damage. But setting that aside, do you believe that because in the second half of the year, we usually see high seasonality for loss ratio. But because of a lot of the efforts that you've put in for instance, the increase in the premium, changes in the policies and the regulation and also your focus to gain more high-quality insurance policies, do you think that you will be able to see some positive trends in terms of loss ratio just as you've seen in the first half, also in the second half of the year?

[Interpreted] This is Kim Il-Pyeong, VP of Automobile. I will respond to your question. What I can tell you is that auto insurance environment is as uncertain as what -- its most uncertain compared to what we've seen all across the history. If you look at people's driving patterns, now we are seeing patterns that we have never seen before. They are unprecedented. So we are using various different ways to make projections for the future, but nobody can put their foot down and be certain as to how things will play out. So we have to maintain a very cautious position. As you've mentioned, look at our past track record, yes, there is higher loss ratio usually displayed in the second half versus the first half, so we do expect there could be a slight uptick in loss ratio. We've done many forecasts and predictions and so there will be a rise, but it will not be as steep a rise as we've seen in the past. So even if it does slightly, we think that we will be able to finish the end of the year at a not-too-bad level.

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

[Interpreted] I have two questions as well. First relates to your risk loss ratio. If you look at the trend for the company, it seems like the company's efforts are paying off. We see high level of persistency ratio for your protection type and also, we see more high-margin protection products being sold through your new business effort. So it seems like all of the company's efforts are feeding and shown in the risk loss ratio trend. So looking out 3 years in time, what is your projection? Due to the change in the product mix and all of your efforts, do you think that the risk loss ratio trend will stabilize at the current level or because of uncertainties relating to medical indemnities, do you not foresee any improvement? Are you taking on a more conservative stance? Would like to gain your insight on how you see this go forward if we think about 3 years down the road. Second question, your asset and liability spread is improving. I'm wondering whether the -- whether with the continuing rate hike environment, do you think that there is room for further widening the asset liability spread? What is the company's forecast on this?

[Interpreted] I'm VP of Long-term Insurance [ Park Gun Bae ], I will respond to the first question. As you've mentioned, yes, the company had really put in a lot of effort to maintain elevated level of persistency ratio for our protection product and also to improve quality of the new businesses written and to make sure that we have a strong earnings base and earnings source through the recurring premiums. Now just forecasting for this year only, we expect the risk loss ratio to stay at the current level more or less. But there could be an event like what we've seen regarding cataract in March, we think something like that could always emerge. Regarding what our projections are 3 years down the road, whether we would have a conservative stance or whether we would have a positive stance, it's too premature for us to give you a definitive stance on that. But having said that, the company will do its utmost to make sure we have a secure earnings base in terms of gaining risk premium and through a very stringent exit management, we will make sure that we continue on with a steady loss ratio trend.

[Interpreted] Just to add on that, I'm the CFO. Now it will be quite difficult for us to provide a very definitive picture of what the loss ratio trend would look like 3 years down the road. But having said that, what I can tell you is that when it comes to medical indemnities, we will probably not see decline in number of people submitting claims for payment of medical indemnities. So what's quite important is how quickly we will be able to narrow the gap between that trend versus how quickly we could ratchet up the rate, the premiums of the medical indemnities. But in consideration of that, I believe that the trend would be more or less towards improvement. On the health insurance side, even if there is a certain event, it seems like the long-term new business market doesn't necessarily grow that significantly. If you look at non-life insurers, there has been a fierce competition across the insurance companies to grow the market for coverages that insured -- for insured coverages that have high level of risk. And that ended up being more burdensome in terms of the loss ratio that the companies had to bear. But considering that the market size is not going to significantly grow going forward, we expect there will be much stringent risk management around the current portfolio of products. So in that light, we believe that the other long-term insurances, excluding medical indemnities, loss ratio, in general, its stability that is more likely to show improvement going forward.

[Interpreted] Yes, this is Che Bu Gyu VP of Actuarial, I will respond to your question about the spread. So as you can refer to the presentation material, the spread margin between asset liability has been continuously going up. So with the rise in the interest rate, not only the yield from the invested assets rise, but also on the liability side, the disclosed rates also actually go up. So again half there could be a slight increase.

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

[Interpreted] Just one question. There was a mention of a, I guess, modification of the relevant tax laws, where the IFRS 17 converted profit, there would be a taxation, a special exemption cause that would be included and also the inclusion in the expense deduction regarding the surrender reserve. Now I believe that with the application of these, the distributable income, the amount, the resources for distribution or dividend is not going to be much different as compared to that amount calculated under the current accounting standard. Is my understanding correct? Or if that is not the case, could you provide some more detail regarding that?

[Interpreted] I'm VP of Corporate Finance and Accounting, and I'm [ Ryu Shin Nam ]. As you've mentioned, with the recent revision of the tax law, basically, the reserve for the surrender benefit, as under IFRS 4 and IFRS 17 -- well, under the new accounting standards, it will be recognized as a deduction to expense. So as a result, correct, we do not foresee any significant changes or impact that will have on the distributable resources.

[Interpreted] Well, since we do not have any more questions on the queue, we would like to close the earnings presentation of Samsung Fire & Marine Insurance's first half 2022 earnings presentation. Thank you very much for joining us. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]