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

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 2023 Second Quarter Earnings Results by Samsung Fire and Marine Insurance. This conference will start with a presentation, followed by a divisional Q&A session. [Operator Instructions] Now we shall commence the presentation by Samsung Fire and Marine Insurance.

[Interpreted] Good morning. I am Chang Joon, Head of the IR team. Thank you for joining our first half 2023 earnings conference call. We will begin with the presentation on business and earnings highlights presented by our CFO and EVP, Kim, Jun-Ha, after which we will have the Q&A session with answers provided by our management team. The entire session, including the Q&A will last a total of 1 hour. Now, I will hand it over to our CFO, Kim Jun-Ha, for the earnings briefing.

[Interpreted] Good morning. I'm Kim Jun-Ha, CFO of Samsung Fire and Marine Insurance. I will present on the first half 2023 business results. Net profit attributable to majority interest for the first half of '23 was KRW 1,215.1 billion, up 27.4% year-over-year from last year's KRW 953.9 billion. Moving on to breakdown by each business. Long-term insurance reported insurance profit of KRW 861.6 billion, up 29.2% year-over-year. CSM volume, which as a source of future profit was KRW 12,654.9 billion as of end of second quarter of 2023, expanding KRW 453.5 billion compared to the end of 2022. Monthly average premium income for the protection new business reported KRW 14.7 billion, up 6% year-over-year on launch of new competitive product and continuous implementation of profit-centric portfolio enhancements. Particularly noteworthy is conversion multiple of 16.3x improving by a multiple of 3.8% year-over-year, with first half new business CSM reporting KRW 1,442.6 billion. First half experience variance was KRW 153 billion, up 7.7% year-over-year, continuing on a steady trend. While first half 37th months persistency ratio showed a significant improvement versus last year, 13th and 25th month persistency ratio dipped marginally, but we expect there to be year-over-year improvement on a per annum basis. In the second half, portfolio construction was focused on high-quality policies, and we will strengthen control over acquisition or onboarding of new business, which will bring improvement of efficiency metrics and which will help to secure stable sources of future revenue streams. Next is on the auto insurance. Despite pricing cuts and deepening competition for revenue in the market, supported by granular pricing and stronger marketing suitable for each distribution channel, auto insurance revenue in the first half reported KRW 2,781.1 billion, which is on par versus last year. Despite drive in accident rate following normalization post-COVID, first half loss ratio was flat year-over-year at 76.3%, while insurance profit was KRW 201.9 billion, down 6.6% year-over-year, yet still sustaining a steady level of profit making. Outstanding headwind from market competition, cost increase and shift to endemic, as well as typhoons and heavy snowfall expected in the second half, we are -- which are factors that may undermine profitability. We, at SFMI, will continue to improve the system to establish rational environment for running a business and improved claims efficiency and focus on scaling up loss management capabilities to solidify the foundation for a profit-making business. Next is P&C Insurance. Insurance profit came in at KRW 142.1 billion, up 10.8% year-over-year. Insurance revenue for the P&C commercial insurance in the first half reported KRW 710 billion, up 10.3% year-over-year on the back of market expansion for specialty and maritime insurance and global business growth. First half loss ratio was impacted by higher insurance revenue following top line expansion and decrease in high loss event, reporting 55.5%, down 0.3 percentage points year-over-year. In the midst of challenging business environment characterized by higher cost burden on the back of low growth and rise in reinsurance expense, we will continue to diversify product portfolio into specialty and maritime insurance, among others, and explore new markets under a profit-centric approach to pricing and underwriting. And through claims management that helped to prepare for large-scale loss events in advance and optimization of reinsurance policies, we will continue to ensure a steady stream of profit. Next is on Asset Management. Supported by efforts to increase running yield and thanks to agile response to market movements, we were able to increase first half investment yield by 0.75 percentage points year-over-year, reaching 3.14%. On an AUM basis, investment profit was KRW 1,208.8 billion, up 23.8% year-over-year. We expect financial market uncertainties, both internal and external to continue into the second half, impacted by high interest rates and tightening stance, real estate market slump and economic recession. But through stringent risk monitoring, we will manage asset quality, secure additional higher-yielding assets and through efficiency focused portfolio management and asset rebalancing will further solidify mid- to longer-term earnings basis. Under expanding financial market uncertainties, higher inflation and lower growth with challenging operational environment and accounting standard changes compounding such uncertainties, SFMI reported strong earnings performance for the first half. We expect challenging business environment to continue in the second half, driving stronger competition within the insurance market, which is also expected to lead to higher profit volatility. The company, nevertheless, will actively respond to changes in the regulation and market environment to drive growth underpinned by our fundamentals and achieve efficiency, innovation and risk management with a view towards expanding steady stream of profits. Thank you.

[Interpreted] We will now begin the Q&A session. I would like to ask that you ask no more than 2 questions per person.

[Interpreted] [Operator Instructions] The first question will be presented by Sinyoung Park from Goldman Sachs Securities.

[Interpreted] I am Park Sinyoung from Goldman Sachs. My first question relates to your CSM multiple, it looks as if there has been a significant improvement. What does the company consider as the sustainable level of CSM multiple going forward? I know that the company will continue to endeavor to sell more of the higher-margin products, but you will obviously need to also consider for competition. So if you could provide some color there, that would be helpful. Second question has to do with the experience variance. I believe that there has been some improvement on the premium side, but there was a decline on the expense side. Can you provide a little more detail? And also in light of the quarterly trends that you've seen previous year, are you identifying any seasonality?

[Interpreted] Yes, I will respond to your first question. I am [indiscernible], VP of Long-Term Insurance Strategy. As you have mentioned, we've seen a significant increase in the CSM multiple. And the reason behind this has to do with the introduction or the selling of the no lapse policies through a more simplified screening process and new products that provide the age coverage and the sales of the health insurance. The age term insurance currently account for top 50% of the total base, and you see that over the first quarter and the second quarter, we've seen some improvement, and we think that this trend will continue. Yes, as you also correctly mentioned, there will be continuous market competition, which we will have to face, but we will definitely focus on ensuring profitability that will be our core policy or core approach upon managing and selling these products. The experience variance basically is subject to some sort of a variance because this explains for the difference between the assumption versus the actual. So you are right for our expense, there has been a slight reduction, but this is based upon the historical statistics. And so, there is a difference of the gap between the assumption and the actual numbers that is reported. And if we -- if you look at the assumptions, it is based on a yearly average. Hence, there is an element of seasonality, but it is not that big. So once again, because the assumptions are set based on annual average approach as we enter into the second half, if we see more seasonality, meaning if there is more fire accidents that may translate into more experience variance when it comes to the premium, but we will come back to you with the more, I guess, clear or the more detailed level later on.

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

[Interpreted] [Audio Gap] I am Kim Myung Wook from JPMorgan. I would like to ask you 2 questions. First has to do with the management KPIs. Since there has been a lot of changes versus last year in terms of the scope and the type of information that is subject to disclosure. I would like to understand as to how the management KPI is linked with the company's earnings and performance. And I would like to understand as to why this information is not included in your PowerPoint presentation? Second question has to do with shareholder return. Since the solvency capital has been upgraded to economic capital. And based on my assessment, I think that the company will be able to generate more than KRW 2 trillion on an yearly basis as a profit. And so, if we were to assume that you're not going to actually pay out a significant amount of dividend that's going to make your balance sheet more inefficient. So I would like to understand as to what the company's approach is when it comes to dividend policy for this year? And also in order to be more efficient in terms of capital allocation based upon your balance sheet. And I'm wondering whether you're willing to also provide more disclosures on the relevant information.

[Interpreted] I am [ Hee-Jong Cho ] will respond to your first question. I'm VP of Corporate Management Support. I'm sure you would also appreciate that because there is an accounting change from IFRS 4 to IFRS 17, we need to be able to work under a more optimized objective and goal under that changed accounting standard of IFRS 17. Under IFRS 4, new business revenue and relevant expenses are considered important. Under IFRS 17, CSM is what is more critical and also in line with the best estimate liability bill is considered important. So, yes, we are very much aware of the importance of balance sheet management as opposed to just P&L. The most changes will occur from our long-term insurance business. And, of course, starting this year, the management KPI also will be based upon the accounting standards that we are moving towards. However, we are not yet 100% completely over to IFRS 17. At this point, there is IFRS 4 element and 17 element that is being applied in parallel. But as we enter into the second half, unlike in the past, where the new business sales and revenue was considered important, the KPIs will be linked up with the new business, CSM, the efficiency measures, as well as the experience variance. Those are key indicators upon which the performance evaluation will be made. But the reason why these elements were not yet reflected in the PowerPoint document is because we would have to wait and see up until the end of the year to have all the relevant regulatory guidelines to be set in place, and it will be following that, that we will be able to apply that to the actual operations of the organization of the company. So it's up to that point in time, we will gradually be able to shift that approach.

[Interpreted] I'm the CFO. I will respond to your second question. As you know, this year, with the implementation of IFRS 17 and K-ICS regime, after the accounts were closed and the earnings were presented in Q1 in the industry and out in the market, there were some extent of confusion. So because of these confusions that were created, FSS has presented actuarial assumptions based on which will be applied in the account closings of the numbers, you'll be able to see that new guideline reflected in the numbers as of end of Q3. So once we close our account for the third quarter numbers, as well as end of the year numbers and once all of the guidelines and regulatory framework relating to IFRS 17 and K-ICS, are well established. Then we will have some leeway to make adjustments and set up plans for our dividend payout policies and capital plans, as well as how we will utilize that surplus capital. So once that point in time arrives, we will review various different elements, and we will sufficiently share with you all the details.

[Interpreted] The following question will be presented by Heewon Choi from Morgan Stanley Securities.

[Interpreted] In the third quarter, we will see the new FSS guideline be applied to the medical indemnity product. I would like to understand as to what your take is as to the impact this will have on your CSM, your long-term profitability, as well as K-ICS ratio? Second question is there has been heightened concern over overseas commercial real estate exposure, as well as domestic PF real estate exposure. I would like to know as to what the company's exposure is? And also what is the risk of delinquency or this turning into a bad loan?

[Interpreted] I am on [indiscernible], VP of Long-Term Insurance Strategy responding to your first question. Regarding the new guideline issued by the regulatory authority, we are in the process of redefining and resetting our assumptions and making changes to the model and making changes to the overall system. The time line for this is September, and this actually requires some physical changes to be made into the system. So we will be able to share with you as to the impact around that timing. So with the changes in the assumption, this will have impact on [ Bell ] and CSM, and we need to have those impacts in order to calculate the impact that it will have on the K-ICS ratio. So once we have more concrete numbers, we will come back to you.

[Interpreted] Yes, I will respond to your second question. I am [indiscernible], VP of Financial Planning. If you look at our real estate investment exposure, it's KRW 12 trillion, accounting for 16% of our total AUM. Out of this, KRW 10 trillion is senior loan that is domestic. So it's domestic investment or exposure. And in terms of the overseas real estate exposure, where we've seen some heightened market concern, it amounts to about KRW 1.4 trillion. So these are the high-level numbers that I just shared with you. And based upon the number that we've reported to the FSS for domestic PF project financing exposure, it amounts to about KRW 2.9 trillion. Majority of this is all senior secured loan and at this point, no delinquency. So no reason for us to be concerned. And overseas, commercial real estate exposure is KRW 1.4 trillion, as I previously mentioned, and this the breakdown is loans and equity investment. So all of these -- most of these assets are currently categorized as normal performing assets. But as you've seen from recent news articles in the U.S. and in Europe, the CRE segment, especially the office real estate. The situation is worse compared to domestic. So for the overseas real estate exposures, we are tightening our monitoring. The lending rates for these real estates have really shot up recently. So the types of adjustments that are monitoring that we're focusing on is, for instance, extending the maturity of those loans. But our exposure is not that significant for it to warrant any significant concern -- as any significant concern.

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

[Interpreted] I have 2 questions I would like to ask. First is regarding your new business, since you've mentioned that you expect your CSM multiple to continue on at the current level. In the first half, we've seen the age term and the no lapse age coverage policies at quite elevated levels. Do you think that you will be able to continue this level of multiple in the second half of the year? And also in so doing, what would be your key strategy for your new business? Would you focus on growing the portfolio size? Or would it be more on the quality side? And also second question is related to the actuarial assumption changes that the FSS is going to -- as newly issued under IFRS 17. What are some of the other areas where you, as a company project that there could be some new guidelines that is upcoming?

[Interpreted] I am [indiscernible], VP of Long-term Insurance Strategy. I will tackle your first question. Under IFRS 17, new business CSM is a key factor. Hence, we continuously endeavor to further increase that. Just as we've done in the first half, we will continuously launch the age term, simplified screening products, age term products, as well as no lapse or lapse-supported products so that we will be able to continue on with the level of portfolio that we have seen in the first half. So on top of such product strategy, we will drive both the quality, as well as quantity improvements as we try to do acquisitions mostly focus on higher-quality customers. Continuing to respond to your second question. So under IFRS 17, in the first half, there was 5 new guidelines that were released by the FSS and the impact -- the biggest impact that we are seeing are from medical indemnities. The authorities have hinted that there will be similar guidelines that is upcoming, but they have not yet shared or disclosed any specifics. So the expected guidelines that are upcoming going forward would be on the guideline or the criteria upon which the RA is calculated, as well as the incurred event-related liabilities. And once those guidelines do come out, we will make more thorough assessment and review and analyze the impact that they will have and will sufficiently share that information with you in advance.

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

[Interpreted] I would like to ask you 2 questions. First is on K-ICS, second is on the profitability of your new business. In terms of the new business volume on a Q-on-Q basis, the size has been more or less flat. But in terms of CSM, there has been a significant increase. And hence, I assume that there has been quite a bit of change in the way your portfolio is made up. And if you look at the multiple, if you look at the previous year's second half figure, it was 3.9 something and then it fell to about 3.3. I would, therefore, think that the premium payment period for specific products, for instance, the age term product because the contract period or the policy period is much longer that the paying up period has also gotten extended. So my question relates to how the -- each of the components that make up your new business portfolio has changed versus the past? Because compared to APE, if you look at present value of future premiums, now these types of products entail a longer duration. So I would like to understand as to what changes you are seeing in terms of these types of products in your portfolio, for instance, children's drivers, or the simplified products, the way it comprises your portfolio, if you look at the margin and the present value of future premiums, there we see a very different profile. So if you could provide some explanation regarding that, that would be helpful. And then relating to K-ICS, looking at comparing these numbers between this quarter and Q1 disclosed figures. For long-term, the risk charge amount has increased by about KRW 241.3 billion. Market risk is KRW 682.9 billion. So I would like to understand as to when it comes to sales of these new businesses in the first quarter, it was about KRW 100 billion, the long-term risk that is. And as your value in force, as the duration elapses, of course, that amount of risk amount is, of course, going to come down. So in light of the new business that you have acquired for over Q1 and Q2, how much of K-ICS risk have you seen being added?

[Interpreted] I am [indiscernible], VP of Long-Term Insurance Strategy. Yes. As you correctly mentioned, in Q1 -- over Q1 and Q2, the new business volumes have stayed the same, but the new business CSM has gone up. And the reason is because the company has sold more of such age coverage policies with no labs, but not just the age coverage, we've also sold quite a bit of no lapse products. So that -- the share of that within the portfolio has increased. As you can see from our slides, our age term products out of the health insurance new business accounts for 57%. For no lapse coverage in Q2, the percentage was 40%. So compared to 4% of last year, there has been a significant rise. Regarding the present value of future premiums, as we see increase in the portion of aged term insurance products, present value of future premium also gone up -- went up. And later on, once we have the portfolio will stabilize, we will come back to you with more detail.

[Interpreted] Responding to your second question, I'm VP of Actuary RM team, I am Che Bu Gyu. Responding to your question as to the comparison between Q1 and Q2 for our long-term insurance, the interest rate risk and market risk. Yes, there has been an increase in the risk amount and as was driven by interest rate hikes which drove CSM increase, as well as increase in the lapse risk, which all pushed up the overall risk amount. For the market risk, there was a rise in the interest rate, which worked as a risk and also a rise in the electronics, Samsung Electronics share price. So those worked as a driver behind rise in the market risk. Compared to the overall industry, we have a bigger portion of renewal coverages, which translates into a lower risk for disability and disease coverage-related risk. And hence, compared to our peers and the industry, our risk exposure for the [ living ] benefit and the long-term side is lower compared to our peers. And also because we sold more of age coverage policies, the risk that we are bearing is comparatively lower. So as the duration is relatively shorter, under that backdrop, we are able to control and manage our long-term insurance risk. And because our age term coverage portion is higher, this works to our benefit. And on top of these higher portions of age coverage policies, as well as no labs or lab supported products, we believe that that would eventually be also be quite positive for our K-ICS ratio. So with the increase in the CSM, the available capital can also go up. That, of course, in line could actually inch up our life and long-term insurance-related risk amount. However, as our liability duration increases, we can actually improve on our overmatching position, which will work as a positive for our K-ICS, as well as our capital management.

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

[Interpreted] My first question is on CSM movement. Second is on the guideline. First, asking about the guideline. Since you are making calculations based upon the guideline, you must have decided on the methodology that you would use in terms of either forward-looking method or retroactive or modified retroactive methodology, which of these methodologies have you chosen? And then on CSM movement, if you look at first half figure, there is the new business and the CSM unwind as well, which increases the size of the CSM. But then there is CSM amortization and release, which will then bring down the level of CSM. So for the first half, I see that the net additional amount is KRW 860 billion. And then there's another category of CSM adjustment, whereby there has been about KRW 400 billion downward impact. From a mid-term perspective, I think that the CSM adjustment item will have a big impact on your overall CSM volume. So can you explain as to the details behind the CSM adjustment? Why have we seen this significant amount during the first half? And over Q1 and Q2, we've seen that figure dip for the second quarter and what is the reason behind that?

[Interpreted] Responding to your questions, I am [indiscernible], VP of Long-Term Insurance. Regarding the FSS guideline and the methodology that we will choose, we plan on using the forward-looking method as under the accounting standard. Second, on CSM movement. So the CSM adjustment arises from a difference between the assumption and the actual. Once again, the assumption is set based off of multiple years of statistics. And hence, there is a discrepancy or difference with the actual performance that we book for that period. So this variances can be explained by the efficiency. And as the assumptions are updated, we will also enhance the accuracy of these efficiency measures, and that will enable us to reduce the difference of the variance between assumption and actual.

[Interpreted] The following question will be presented by Yong Jin Seol from SK Securities.

[Interpreted] A follow-up question on your AUM. You've mentioned your CRE exposure is KRW 1.4 trillion. Can you break that down into senior mezzanine and subordinate exposure? And also, aside from commercial real estate for SoCs, including your overseas alternative investment, what is your exposure?

[Interpreted] I'm [indiscernible], VP of Finance Planning, responding to your question. In the category of alternative investment, which includes real estate and infrastructure together, that amounts to KRW 20 trillion. So out of that, our overseas real estate exposure, as I've mentioned previously, is KRW 1.4 trillion, whereas infrastructure is KRW 2.7 trillion. So overseas alternative investment all put together is KRW 4.1 trillion. And more than 60% are loan assets in the fund in the portfolio and majority of them are senior loans and some are mezzanine.

[Interpreted] Well, thank you. This brings us to the end of the Q&A session and also apologies for the technical difficulties that we experienced during today's earnings presentation call. Ladies and gentlemen, thank you for joining us. This brings us to the end of first half 2023 earnings call for SFMI. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]