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

[Interpreted] Good morning. I am [indiscernible], Head of the IR team. Thank you for joining Samsung Fire & Marine Insurance's Q3 2022 Earnings Conference Call. We will begin with our CFO, EVP, Hong Seong-Woo's presentation on key earnings highlights and future business strategy, followed by questions, to which answers will be provided by the management team. The whole session will last around 1-hour, including the Q&A. I will now invite CFO, Hong, to present the earnings.

[Interpreted] Good afternoon -- good morning, excuse me. I'm Hong Seong-Woo, the CFO. Allow me to present on the Q3 2022 earnings results. Q3 pretax profit reported KRW 385.8 billion, while net profit was up 1.6% on year, rising to KRW 282.7 billion. On a cumulative basis, pretax profit reported KRW 1,414.4 billion and net profit KRW 1,032.6 billion, recording 13.6% rise if we were to exclude special dividend from Samsung Electronics last year. First, on the long-term insurance, long-term health insurance revenue has sustained growth since Q4 of 2021, and an improved portfolio around higher margin products, especially the children's insurance, we are laying a solid basis for profitability under the upcoming IFRS 17. Also, thanks to continuing efficiency enhancing efforts, 21st month persistency for the Protection line was up by more than 10 percentage points year-over-year and 37th month persistency improved by more than 6 percentage points, while Risk and Loading premium expanded by 8.4% year-over-year. Q3 loss ratio was 85.6% on the back of improvements and managing non-benefit items i.e., more rigorous review and screening of excessive medical treatment, improving by 2.5 percentage points year-over-year, while cumulative Q3 loss ratio posted improvements of 2 percentage points on-year. In Q4 and onwards, we will continue to drive long-term line growth, underpinned by differentiated strategies, including data-driven wealth management, upgrade of the underwriting system and offering of customized products. Next, for the Auto Insurance, on the back of heavy downpour and other natural disasters and rising accident rate as we are going back to normal, we've seen expanded loss ratio, bringing Q3 combined ratio reporting 99.1%, which is up 4.7% Q-on-Q. There is concern of higher loss ratio in Q4 on greater cost burden from inflation driven by seasonal factors such as cold wave and heavy snow. But the company will bring quality revenue and improved claims efficiency to gain steady source of profit and firmly establish a system of operations to generate earnings, so as to report underwriting profit for 2 consecutive years. Next is General Insurance. Q3 cumulative direct premium written was up 15.4% year-over-year. While despite an uptick of 5.9 percentage points year-on-year in loss ratio due to natural disasters, including heavy downpour and typhoon cumulative loss ratio reported 75.3%, flat year-over-year. For the general line, while maintaining our reinsurance strategy to downsize P&L fluctuations, we will endeavor to generate steady earnings by expanding high-quality revenues. We are also solidifying basis for growth in the overseas market as well with a combined business capacity of Canopius of U.K., we are cooperating to tap into the North American market and plan to actively expand the scope of such cooperation's going forward. Next is investments. Q3 investment yield was KRW 1,595.3 billion with 2.9% investment yield, which is flat year-over-year. But if we are to exclude last year's one-off dividend gains, investment yield improved 0.2 percentage points year-over-year. Recently, the financial market today is experiencing heightened uncertainties on the back of rising rates and deepening of inflation and depressed real estate market. In Q4, we expect as the prices to fall and the overall risk actually rise. And to respond to such market backdrop, we will be establishing a steady portfolio so that we could expand to liquidity and also be more stringent in managing our [indiscernible]. In the meantime, at SFMI, we are endeavoring our efforts to come up with new innovations and are not testing a new trials. We have introduced a Check Life services so that we could provide an opportunity for our users to set up a habit of safe -- a habit of safety, which is slated for November. And also, we are planning to introduce a metaverse service called [indiscernible] come November. Speaking also last November, we have designed a my insurance DIY product so that we can provide an opportunity for our policyholders for them to design the type of insurances that they get fit their needs. Continuously, we will try to develop a variety of products and services so that we may better satisfy the needs of our users. SFMI has been responding to the uncertainties both external and internal, we will continue to be trying to grow our profitability and focus on enhancing the efficiency do such efforts. Our objective is to achieve the record high profit this year. SFMI was thoroughly prepared against the upcoming IFRS 17, and we will focus our efforts to make sure that we secure a firm basis for earnings going forward, and we will do our utmost to bring the better performance and also to better provide shareholder return. Thank you very much. Next, we will begin the Q&A, and we would like to ask that you ask no more than 2 question per person.

[Interpreted] [Operator Instructions] The first question will be provided by Myung Wook Kim from JPMorgan.

[Interpreted] I would like to ask 2 questions. First question relates to the current quite unstable financial market backdrop. I would like to get some color as to what your plans are in terms of the dividend payout. Would you be maintaining your existing dividend payout policy? Or should we be expecting some changes? Second question, with the upcoming of IFRS 17 next year, the company is going to have a significant amount of economic capital, and we expect that will drive down your ROE. Since I would like to understand what company's view is regarding your capital -- regarding your growth of the company, the shareholder return as well as retaining as well as the overall capital return-related approach?

[Interpreted]. This is CFO, Hong. I will respond first to your dividend question. Regarding the overall dividend-related direction last year, we've communicated our DPS focused dividend policy, and we will be sticking to that position. And we will also consider the fact that market was a bit disappointed due to the dividend payout ratio, slight different the dividend payout ratio, so we will be considering both of those aspects. The payout ratio as well as DPS, dividend per share, when we make our dividend-related decisions. And on top of that, this year, we have outperformed our expectations in terms of the performance that we have reported. And of course, Q4, we do expect the market is going to be, there's going to be quite a bit of volatility that persists, so we would consider that as well when we come to a decision on the dividend payout, which will also well reflect the performance.

[Interpreted] I am Hee-Jong Cho, VP of Corporate Management Support team. I will respond to your second question. So with the upcoming IFRS 17 next year, I understand that there could be some confusion regarding the overall direction. First of all, in terms of the return for the insurance companies, we will see an upward movement. Now as you know, the biggest difference between IFRS 4 versus IFRS 17, it comes from the long-term business line. The amortization period, the deferral period of the new business expense is going to be more extended. Hence, that's going to be much more spread out. So that's going to have an impact of increasing the return, while on the capital side, our assessment as of the date is so that it will be quite flat on a year-over-year basis. And of course, as we go through the transition, there will be some other confusion between IFRS 4 versus 17. But just due to a simple accounting treatment changes, ROE is going to improve compared to the current level. Our CFO, who has just talked about our dividend payout approach, we are continuously really thinking very hard as to our future direction. But in terms of the shareholder return policy under the IFRS 17. What we can tell you very clearly is that we do not foresee or expect any significant changes to our shareholder return policy, we will continuously try to explore ways as to how best we could make use of the capital capacity that we have and use that for growth purposes. We will move on to the next question please.

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

[Interpreted] Yes. So I would like to -- I'm Jun-Sup Jung from NH Securities. I would like to ask 2 questions. First, there's been a recent press article about the cutting of the Auto Insurance premium. We did expect this to actually come, but it was actually the first time for us to see a specific number attached to it in a press article. So are you also planning to cut the premiums to that extent? Or do you have a different plan? And on the back of such request by the regulators. Now there is a concern that there would be adjustment in the medical indemnity rates at the end of the year. So I would like to understand what your thoughts are, and forecast is on that? Second question is, in Q3, it seems that the duration for asset and liability has both come down. And that's explained that's understandable based on the high-rate environment. So I'm wondering whether there is no issue in terms of your asset and liability matching ALM. And also -- with the adoption of IFRS 17 next year, we would now be applying the real durations. Now how would that change your liability duration?

[Interpreted] Yes. I will respond to your first question about the Auto Insurance. I'm VP of Automobiles Kim Il-Pyeong. In terms of this discussion about the auto premium cut, I can tell you that it is under discussion as we speak and we, at the company, have started to review this just starting this week. So I just hope you could understand that at this point, I won't be able to share any specifics. But in terms of the direction, we will -- if we will be fully considerate it of the fact that the rate cuts should not in any way undermine our business performance. That would be the extent to which that could be contemplated. And for next year, despite a very difficult operational backdrop, we will look into various different options that could help us prop up the performance, so that we would be able to achieve a performance that is on par with what we've seen this year.

[Interpreted] Next, I will respond to your question about the long-term product rates. My name is [indiscernible] Now regarding the rate schemes that will be applied for the Generation 2 and Gen 3 products are -- which will be applied in January is ongoing. The company has a great level of interest on the rates for the Generation 3 products. And as you know for these Gen 3 medical and energy products, we were trying to increase the rate back in July, but that was extended or delayed up until the end of this year by about 6 months. Now this Generation 3 products since it was adopted in 2017 April. For about 6 years, the rates have been either frozen or it had only gone down. So internally, our loss ratio has shown a very steep price. And this is the fact that the regulators are fully aware of. So when we come to a stage where we are determining on the rate, we will fully consult this together with the regulators. But at the same time, on controlling the loss ratio side, as we have been able to prove that we were successful in managing and controlling the loss ratio that was attributable to excessive cataract surgeries. Just as we have this experience next year, we will also very rigorously manage our loss ratio so that we can control on the claim's payment side as well, so that we could continue to have a very tight grasp on the loss ratio management for our long-term business and contribute to stabilization of such loss ratio trend.

[Interpreted] I will respond to your question about the duration. I am VP of Actuarial RM team, Che Bu Gyu. Now as you have correctly mentioned, our ALM, which used to be 100% as the interest rates on top of the ALM matching ratio has gone down because our company, our portion of the floating rate liabilities less compared hence, the fall in the liability duration was bigger. This duration that I'm talking about is based off of K-ICS our internal standards. And so with regards to the upcoming regime change, we believe that, that impact is already reflected. Yes, there has been some impact on the asset side and liability side. However, we are still maintaining a quite steady level of interest rate risk. So based on the current environment where we are seeing high volatility in the movement of the interest rate, we are going to stay away from any sudden swift or sudden change from our current ALM strategy, but under a mid- to long-term interest rate target. For instance, by expanding the offering of the age turn insurance products, which will help us expand the duration, we will be gradually improving on the matching rate.

[Interpreted] We will move on to the next question.

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

I have a question on the investment side and other on the auto side. On the investment side, the -- we can see that there has been a bit of increase in the overseas allocation over the year. So just wanted to check with you, what is the longer-term strategy in your allocation to overseas investments? And how do you manage the currency risk in that portfolio? Along with that, another part of the investment question is on the asset quality. I also noticed there is a little bit of increase in the delinquency ratio based on your disclosure, given the uncertainties in the project finance market, can you help us to understand what is your exposure to project finance-related loans? And how do you expect the NPL relating to trend going forward? The second question is to follow-up on the auto premium cut. Given the potential improvement in profitability next year following IFRS 17 implementation. So I just wanted to understand if the regulator would actually suggest the industry to take further cuts to Auto Premium.

[Interpreted] I am Song Ho Baek, VP of Finance Planning. I will respond to your first question. So regarding the first question, first off, the reason why we are seeing an increase in exposure to overseas investment is because we are actually gradually expanding that exposure because within the Korean market, there is a limitation in terms of the assets and items that we could invest and also there's a fiercer competition in the domestic market. In terms of the type of investments that we are making, they are higher profit and dividend paying investments, including investments in infrastructure, real estate and PF, and also regarding hedging, the currency risk. Basically, our principle is to do a full hedge. So we have a hedge against the principal investment. Regarding the slight uptick in the delinquency rate, it's mostly our mortgages for the retail market, and there has been a slight increase in delinquency for the mortgages. However, compared to other financial institutions or the commercial banks at rate delinquency rate is not as not high, so we do not consider this as a problem at this point. Regarding the PF project financing, our total exposure is about KRW 3 trillion. Basically, our investment are ones that are already guaranteed and for projects where the apartment lots have been already sold out. So regarding the PF-related issue that you are seeing in the market at this point, it is not applicable to our company.

[Interpreted] I am Che Bu Gyu, VP of Actuarial RM team. Let me just provide some more information on that. Just wanted to add by saying that you just heard that we are doing a full hedge of our currency positions. But on top of that, we also do a rollover hedge, and we diversify the durations to more than 1-year. So we have a diversified exposure in terms of the period.

[Interpreted] This is Kim Il-Pyeong again to respond to your question about Auto Insurance. If your question relating to whether due to the IFRS because the profit is going to go up, would there be a possibility of an additional pressure on the rate cuts for the Auto Insurance. But if you think about how the rate is made, the ratemaking calculation process, it is dependent on the business performance of the Auto Insurance, so even if there is a demand from an actuarial perspective, it will be difficult for us to just accept that on that pure basis.

[Interpreted] We now move on to the next question.

[Interpreted] The following question will be presented by Sinyoung Park from Goldman Sachs.

[Interpreted] I'm Sinyoung from Goldman Sachs. My question relates to the risk loss ratio, the trend for your medical indemnity products. Under the long-term line, I think this loss ratio was very well controlled, probably thanks to a very targeted claim control on the efforts put on by the industry as well as the cooperation from the government. So it was well targeted. So if you look at the claims up trend in Q2, it was year-over-year 3%. And this quarter, it was about 6%. So I think it's showing a stabilized trend. So do you think that this is a normalized level? And is there any particular trend that we should also take note of when it comes to the overall claims' trends? And also, I would like to ask you about the -- up to Q3 cumulative loss ratio update. And also in light of those cumulative amount of losses, what do you think is the appropriate level of the rate hike for the medical indemnity?

[Interpreted] This is [indiscernible], I'm VP of Long-term Product Development. I will respond to your question. Yes. As you have mentioned, we've seen a very effective control over the cataract compared to Q1 and Q2 and Q3, we've seen the claims amount and the loss amount to really go down quite steeply and rapidly. So if you look at the amount of the losses that were recorded for cataract on a daily average basis, before, it was around KRW 1 billion. Whilst after the adoption of this system, we've seen that go down below KRW 100 million. So we will continue to see put on efforts as we've seen in the -- for the cataract as well. Internally, we've identified about 10 different items that needs to be closely observed and monitored. So for us to early identify any potential signals of any abnormal claims. So we have listed up 10 different nonreimbursable medical items to make sure that there does not trigger or there does not exist any excessive claims for payment. Regarding the loss ratio, this is on a cumulative basis, and it excludes IBNR, and it is around 118%. So thanks to our efforts on, for instance, like cataract, we have seen a slowing down of the loss ratio rise. So that is positive. However, we are also continuously monitoring the Gen 3, the third-generation loss ratio, the medical indemnity products because their loss ratio is quite elevated at around 118%. Although we do not yet have the accurate number that's calculated. But internally, in light of the current loss ratio trend, regarding the application of the new rates for second and third generation products, there are factors that will justify around 10% rise in the rates. But once again, I have to take another accurate figure. But once we get that accurate figure, we will come back to you and communicate that to you.

[Interpreted] we will take the next question.

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

[Interpreted] So I would like to ask 2 questions. You've given us a breakdown between overseas and domestic for the loss ratio for your commercial line. In Q2, I think that it's been about 20 percentage points rise. I would like to understand if there was any specific driver behind that. And have you seen any changes in your retention policy? Second, and this question is due to the fact that I do not clearly understand your structure, but I see that your investment gains have been -- have just gone up. And one aspect, of course, is the fact that the book yield has gone up by about 20 basis points. But also on the FX derivatives side, I understand that your performance or the figure that we are seeing is about KRW 120 billion better than the past. So because of the rise in the FX rate, I've heard from one of your peers that their hedging position is open and also their rollover duration is much short. So that explains why there would be a gain from the FX side. But considering that you are fully hedged, and you have a much longer rollover duration. How is this possible? So maybe this is due to my lack of understanding of the overall structure of the company, but could you provide some more color there?

[Interpreted] I am [indiscernible], VP of Commercial Lines. I will respond to your question about the commercial and the general lines loss ratio. Yes, to look at the breakdown between overseas and domestic, domestic on a Q3 basis, cumulative 78.8%, which is a year-over-year rise, while for overseas and global, its year-over-year decline at 62.1%. So the reason why we've seen a rise in terms of loss ratio for domestic is because of the heavy rainfall that we experienced in August as well as Typhoon Hinnamnor that hit Korea in September. And this is a factor that is common across all of the insurance companies, not just at SFMI. So the fact that we had such a large-scale loss event due to natural disasters was a negative factor. But if you look at small to midsized loss event, there was a decline there. So despite this extensive loss event, we did not see the loss ratio rise as much as we had expected. Now regarding the overseas loss ratio dip, there is, once again, not any significant loss event. But on top of that, as we mentioned during the previous earnings call, this is due to some of the shifts in our overseas business portfolio. Next, I will respond about the reinsurance strategy. So recently, if you look at the overall characteristics of these large loss events, the frequency has not gone up, but the severity has been heightened. So we will continue on with our previous year's approach of not expanding the retention. So the purpose of having this reinsurance strategy is to maintain and control the fluctuations in the P&L. We will be very consistent in the direction that we have taken so far and be diversifying the risk profile of the company, and so that we can make sure that we don't experience that big fluctuation in P&L.

[Interpreted] I am a Song Ho Baek, VP of Finance Planning. I will respond to your second question. As I explained previously, when we do an overseas investment, we do a full hedge on that position. So if the FX rate goes up, on the spot level, there's going to be a valuation gain from FX translation. But on the derivative side, there is going to be a valuation loss. So there's going to be a profit on the top and loss at the bottom. So from an overall P&L perspective, there is no big difference. As our actuarial hedge has previously mentioned, yes, we do a full hedge as well as a rollover hedge as well. So we really don't get impacted significantly when there is a steep price in the FX rate. But some of our P&C peers because they take out a short-term hedge when the FX rate shoots up, there is a need for additional injection of funds. Hence, creating some liquidity-related problems. So just to summarize that, in terms of our overseas investment, there is going to be just a flat impact on the FX line items.

[Interpreted] We will take the next question.

[Interpreted] The following question will be presented by HeeYeon Lim from Shinhan Investment and Securities.

[Interpreted] I would like to ask SFMI, I guess, future direction in terms of your overall structure and your strategy in terms of underwriting, asset management and risk management and how you're going to differentiate yourself against your competitors under this new environment. If you provide us with that insight, that will be quite helpful for us in analyzing your company.

[Interpreted] This is CFO, I will respond to that question. We are, at this point, drafting our business plan. And as you will fully appreciate, next year, there's going to be quite a bit of uncertainties in the economic backdrop. Now in terms of underwriting activities, under IFRS 17, we have built a model where we could very steadily attain efficiency gains as well as trigger growth. Underwriting market, we do not expect the backdrop is such that we will see growth going forward. So our assumption is that the market environment will be more or less the same as this year, and we are really thinking hard as to how we could expand our business within that given market environment. And as I've mentioned during my opening presentation, we now believe that the individuals have now segmented needs and what we need to do is to be able to provide the most appropriate products and services that satisfied the very granular needs, so that we can gain more customers. Especially it's been around 2 years since we set up our digital headquarters, and we are now seeing more visible direction for the future, which is giving us quite a bit of hope and expectation. We are making a lot of preparations for next year so that we could play our part as and role as a platform-based company. For example, by offering new insurance products as well as the metaverse products that I talked about at the beginning, the [indiscernible] brand, which is for companion pets. So we have high expectations a company who will become more platform-based in digital -- in the digital market. In terms of the overall operations of the company, the asset management backdrop is going to be quite fluctuating. So this next year as well, we will have a strong focus as we did this year on the stability aspect. For instance, regarding the reinsurance strategies for our commercial line and the efficiency enhancement and also the efficient management of expenses and operating cost. So these cost efficiency efforts, we believe, would have to be much more rigorous and stronger come next year. In terms of asset management, because of volatilities, we really do need to be very nimble and agile and responding to this market environment. And because these factors have overall impact across the industry, the regulators are issuing multiple measures. And of course, we will be in compliance with that and focus on stable management of our assets. So lastly, next year, the market can become quite difficult. But at the same time, we believe that we can find opportunities in the midst under which we would -- we are, at this point, really thinking of ways for us to employ strategies where we could use our capital and make appropriate investments. So all in all, next year, uncertainties are going to abound. And under that, we will focus on a steady efficiency management in terms of on top of that, if there are good opportunities, we will be quite proactive in making the investments so that we could grow the size of our business. Thank you very much. Now we've answered all of the questions. If you have additional questions, please feel free to contact us at the IR team. Well, that brings us to the end of the Q3 2022 SFMI's earnings presentation. Thank you very much once again for joining us this morning. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]