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

Good morning, and good evening. Thank you all for joining this conference call for the earnings results of Samsung Fire & Marine Insurance. This conference will start with the presentation followed by Q&A session. [Operator Instructions] Now we will begin the presentation on Samsung Fire & Marine Insurance for the quarter earnings results of the fiscal year 2024.

[Interpreted] Good morning. I am Head of IR, Kim Chang Ho of Samsung Fire & Marine Insurance. Thank you for joining SFMI's Third Quarter Earnings Conference Call for 2024. Today, we will provide a short briefing on the company's earnings and set aside more time for the Q&A. I will now run through the business earnings of Samsung Fire & Marine Insurance. In Q3 of '24, SFMI reported consolidated pre-tax income of KRW 743.8 billion with KRW 554.1 billion of net profit attributable to controlling shareholders. While cumulative net profit came in at KRW 1,866.5 billion, up 13.8% year-over-year. Looking at the business breakdown. First, long-term insurance reported cumulative insurance profit of KRW 1,330.9 billion, up 2.9% year-over-year, on the back of increase in CSM amortization and steady level of experience variance. Grounded on stronger product competitiveness and proactive channel strategies, we managed to generate steady level of new business CSM with CSM volume as of end of Q3, recording KRW 14,181.3 billion, up KRW 878.5 billion year-to-date. For the auto insurance on the back of built-up impact of rate cuts and deepening competition for topline revenue, Q3 insurance profit was KRW 14.2, billion, down 66% year-over-year. But through managing claims efficiency, cumulative combined ratio came in and reported 96.1%, driving cumulative insurance profit of KRW 163.5 billion, sustaining the profit strength. Commercial insurance revenue posted 10.4% increase on the year following the growth of both domestic and global businesses. But due to high risk events, loss ratio increased 5.4 percentage points year-over-year, driving cumulative insurance profit down by 22.9% year-on-year to KRW 150.1 billion. Supported by efforts placed behind enhancing operational efficiency with a focus on expanding running yield and increase in valuation gains on alternative investment, investment yields came in at 3.46%, up 0.5 percentage points while cumulative investment profit was KRW 2,098.6 billion, up 23.9% year-over-year. This was a brief update on the company's earnings for the quarter. We will now move on to Q&A.

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

[Interpreted] I would like to ask two questions. The first one, I see that your company has maintained a very strong solvency ratio. But from the market perspective, it's very hard to have a visibility into next year regarding the dividend payout. So can you provide us with some guidance as to what your dividend payout picture would look like going forward? And I see that every quarter, we've seen the timeline in terms of communication of your shareholder return policy and value of disclosures have been changing. When would we be able to learn more about your value of disclosures and more specifics on the shareholder return position? Second question is on your channel and product strategy. We see a more heightened regulatory backdrop, and I think that's creating discrepancies and variances across different companies within this industry. So from your company's perspective, if you look out into next year, do you believe that the level of competition in the industry is going to weaken? And also, do you think that this industry backdrop is going to help you leverage your advantage that you have in the market? So in that regard what will be your strategies in terms of channel and product?

[Interpreted] This is the CFO responding to your question on our dividend policy and DPS. Over the years, the company has sustained its progressive shareholder return stance. And that positioning has not changed, and it is staying intact. You specifically said about the timeline, as we go through our book closing process, basically, our timeline will be in step with that process. And once we make a confirmed determination on the level of DPS, we will, of course, come back to you and provide that market disclosure. And as mentioned during the previous earnings call, our objective is to move towards the shareholder return rate of 50%, and it is based upon that level that we will be making an appropriate level decision when it comes to DPS. Moving on to the other part of the question on our shareholder return policy. As we've mentioned during the previous earnings call, we are focused on an efficient utilization of the company's capital. And for the benefit of enhancing the corporate value, we have set the mid- to longer ROE targets and solvency target, and we would utilize the excess capital and use that to expand on shareholder return and also to utilize it for business investments for both domestic and global endeavors. So we are in the process of ironing out the details of the next capital management plan. With respect to the amendments that needs to be made regarding the enforcement decree under the Capital Markets Act in relation to the treasury, the owning of the treasury shares, there has not yet been a confirmed decision or finalization of that enforcement decree. And also, the taxation-related aspects under the value up program had not yet clearly confirmed. So it is from that backdrop, we are, at this point, very closely, revisiting and reviewing different aspects of our mid- to longer-term capital planning. So inevitably, we were in a position where we had to slightly adjust the timeline. I just want to, however, highlight that although we are making some additional reviews on the planning, the previous shareholder return stance and position that we have has not changed, the overall direction that we've communicated to you has not changed. Once we arrive at a finalized plan, although I won't be able to -- it will be difficult to specify the exact date, we will come back to you with the value of disclosure as well as communications with the market.

[Interpreted] I will respond to your second question. I'm the head of the long-term insurance products. Now with regards to the competitiveness and level of competitiveness within the industry, there are both factors, levers that could increase or that could lower the competition level. To be a little more specific, there are some positive levers or plus levers behind the competition, which is the expansion of the GA channel and also the potential entrance of life insurers into the healthcare insurance market. Some of the levers that will bring lower the level of competition will be the guidelines that the authorities have issued with respect to the coverage related to the healthcare insurances. So against this backdrop, I believe that the competitive advantage that SFMI has is in regards to the portfolio of its product and channel. So basically, across the 3 channels that we operate in, which is the tied agent, the GA and the digital channel, we will continue to employ the strategy so that we can provide a customized and bespoke product to our customer base. In particular, for the TA and the GA market, I believe that we will be able to drive both the bottom line and topline growth and strategies that will underpin that. And on the digital side, we will be able to make forays in 2 new business areas and focus on acquisition of new policyholders. Last but not least, we will be at the very forefront of the market by introducing innovative products that could create new markets.

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

[Interpreted] If you look at the Page 5 of the PowerPoint slide, you see risk loss ratio. And if you take away the impact of IBNR, you see that the loss ratio trend is going up. I understand that you are able to really defend the experience variance due to the changes and the basis for -- or relating to the date the accident had actually happened. And so going forward in the next quarter, and then I asked this question whether you will be able to further defend your experience variance because your loss ratio is going up. Second question is the authorities had made changes to the assumption and had issued a guideline. I would like to understand that if you change your lapse ratio model, what impact would that have on your CSM? Also for next year, first quarter of next year, what do you -- when you apply the age group-based loss ratio guidelines, how will that impact your CSM and the K-ICS ratio?

[Interpreted] This is [indiscernible], VP of long-term insurance strategy. Responding to your first question on the uptrending loss ratio. The loss rate uptrend is already captured in the previous assumption. So we see a bit of a spike in the third quarter, and this is attributable to one-off high-risk accidents and increases on the non-imbursement, relating to the medical indemnities. We are very closely and continuously monitoring these different indicators and also controlling the possible moral hazard related claims. And so we believe that we will be able to stabilize the trend going forward. So in terms of experience variance and P&L, we do not predict any big challenges. Regarding the impact from the changes in the guidelines, as we've seen last year, well, whenever there is a specific change in the guideline, for instance, relating to the medical indemnities and any revisions thereof, the financial impact that our company had gained compared to the overall industry was not that significant. So if you look at the lapse-supported product, we also expect the impact to be not great. But as of the end of the year, we are at this estimating an impact in the range of around KRW 100 billion. In terms of the age group-based loss ratio guideline, at this point, there is no detailed plan. However, based upon what we know, we believe that the impact will more or less is going to be this -- be flat as previous -- as was the case in the previous.

[Interpreted] I'm [indiscernible]. I am VP of RM. Responding to that part about the impact on K-ICS. As you know, with the changes in the actuarial assumption on the lapse ratio, it would need to be captured at the year-end figures. And -- but you also know that we -- there has been a change in the actuarial risk amount related assumption. And putting these together, we believe that the impact by the end of the year on our K-ICS is going to be around 1% or 2%, so not big. And as was mentioned by the previous speaker, the specific plan or guidelines regarding the age-group base loss ratio has not yet been finalized. And so we don't believe that this -- however, this change is going to have a big impact on us. But once we conduct a total analysis and assessment, we will come back to you.

[Foreign Language] The next question will be presented by Sinyoung Park from Goldman.

[Interpreted] I would like to know regarding your shareholder return objectives, I know that you're currently reviewing this, but I know that your mid- to longer-term shareholder return target is 50%, and your Samsung Life also has announced about the same level. But considering that SFMI solvency ratio is much higher, I believe that -- do you have plans to adjust this target upward? And also as part of your value up program, are you also considering buying back and canceling preferred shares?

[Interpreted] This is the CFO. On your first question, we've communicated that the excess capital above the K-ICS ratio of 220% will be used as resources for returning back to shareholders or for business expansion investments, both domestic and global. Looking at domestic business, we are looking into and carrying out different processes for additional risk taking. But when it comes to global business, it's very difficult to fix a certain timing. Now that is the basis. That is because that is the reason why we -- it will be difficult for us to make just apples-to-apple comparison with Samsung Life. I think that it's more important that we go through the process of further refining our capital plan. Regarding the question on canceling of the preferred shares, not recent, but some time ago in the past, when SFMI conducted share buyback and cancellation, the common shares as well as preferred shares we've done so in the same percentage. Now because this may bring about an equity-related issue or a fair treatment related issue regarding the common shareholders, at this point, we are not considering just canceling the preferred shares.

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

[Interpreted] I have two questions. I see that there were a bit of a factors that actually impacted on CSM adjustment for this quarter compared to the previous quarters. Can you elaborate as to what those factors are? And despite the fact that your company usually has good profitability in terms of our auto insurance business, we see that now you're moving towards closer to the breakeven point. Is there any talk about the adjustment in the auto insurance rates in the industry? Or are you looking forward to possibly a rate hike next year?

[Interpreted] I am [indiscernible], VP of long-term insurance strategy, responding to the first question on, first, on the CSM adjustment. Compared to the previous quarter, there was an increase of about KRW 50 billion. In terms of the so-called recurring adjustment items, for instance the persistency ratio related to the experience variance, it was more or less the same on a Q-on-Q basis. But in Q3, there was an update in the expense-related assumption. Usually, when it comes to the distribution-related cost, the assumptions were adjusted on a yearly basis, once every year that is. [ FSS ], recently, however, came up with the guideline to shorten that cycle, and that had some impact.

[Interpreted] this is [indiscernible]. I'm VP of automobile strategy, responding to your second question. As you've correctly mentioned, yes, across the industry, the loss ratio for the auto business is inching up and the size of profit of the auto insurers is being scaled back. So over the past 3 years, the basic premium rate has been coming down. And in Q3, there was also an impact of natural catastrophes or natural disasters, which had an impact of increasing the loss ratio. At our company, we're focused on cost efficiency in terms of the expense ratio and so that we can minimize any erosion into our profit. So in the fourth quarter, we are going to defend well so that we can continue on with our profit-making streak. So it's hard to say whether we can expect rate hike come next year because across the industry, the market growth rate has been in the negative domain. The profitability has been eroded. So there really is not much leeway and buffer for the companies to handle a lowering of the rate. Regarding the increase in the hike in the premium rate, it's something that requires discussions and consultation with the regulatory authority. And we will see how things go and we'll -- then that decision most likely will be made at the end of the year.

[Foreign Language] The next question will be by Yong Jin Seol, SK Securities.

[Interpreted] I see that there is a bit of a loss from disposition of financial products on the investment side. Can you elaborate as to what that is? And also, I see that there's a bit more increase in the income from the insurance financing products, can you also explain what that is?

[Interpreted] Yes. Responding to your question, I am [indiscernible] from the Finance Planning team. On a cumulative basis, there has been a marginal increase from the disposition of the financial products. Last year, we shifted our bond portfolio and we incurred some of a loss from disposition of those bonds. This year, we continue to shift our bond portfolio and which generated loss. But compared to last year, we were able to downsize on the size of that loss. So on an all-in all basis, there was a disposition gain. On a year-over-year basis, an increase of KRW 150 billion. So there is no particular or extraordinary factor that impacted this figure. It was that based upon the interest rate environment and the fixed income market situation, we adjusted on the size of the bond portfolio shift, and we were able to reduce the amount of loss that was incurred in the process. You also asked about the income relating to the insurance financial product. This is attributable to the differences in the accounts. I believe that regards to the specifics, I think it will be best if we could take this offline, and we'll provide you with more details later.

[Foreign Language] The next question will be presented by Heewon Choi from Morgan Stanley.

[Interpreted] My question relates to your medical indemnity product and the potential expenses that may arise from the onerous contract. What is the loss ratio trend like for each of the generation of medical indemnity products? And second part of this question is that the government is undertaking healthcare, industry-related reform measures, and they are trying to improve on the guidelines regarding the medical indemnities product. If there are certain guidelines that are either changed or newly introduced, what impact do you foresee will happen on your business?

[Interpreted] Yes, I will respond to your question on medical indemnity loss ratio. I'm from the long-term product team. Back in 2022, there was certain revisions to the guidelines on the cataract procedures, and that had an impact of lowering the loss ratio. And as we come into 2023, the loss ratio trend was flat. So for each of the generation from generation 1 to 4, the losses are above 100% level. Particularly for generation 3 and 4, there was delay in rate hike, which created losses. So we are looking into key levers behind the loss ratio, creation of the loss ratio, and we are putting in effort to talk to the authorities regarding reflecting these factors as a way for us to get an increase in the rates. Responding to the question about improvement and the overall medical indemnity related guidelines, I understand that the authorities approach in improving the overall regulatory basis for the medical indemnities is to normalize the non-reimbursable medical items, basically doing away with and eliminating the unnecessary healthcare and medical services. The financial authority is holding the insurance reform council meetings with a view towards stabilizing the medical indemnity market and the industry is also participating in that effort.

[Interpreted] Since there are no more questions, we would like to end the Third Quarter 2024 SFMI's earnings conference. If you have more questions that you would like to ask, please contact us at the IR team. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]