Samsung Life Insurance Co., Ltd. (A032830) Earnings Call Transcript & Summary

Good afternoon, everyone. This is In Hwan Kim, Head of Investor Relations. Thank you for joining us today for Samsung Life's 2019 Earnings and EV Presentation. Today's call is scheduled for 1 hour and 30 minutes. Starting with the earnings presentation delivered by our CFO, Mr. Ho-Seok Yoo; and followed by your questions, which will be addressed by the members of our management team present here today. Please note that the figures in this presentation may be revised during the auditing process and any forward-looking statements, including the earnings outlook contained in today's conference call are subject to change depending on both domestic and overseas market conditions and operating environment. Let me now hand over to the presentation to our CFO, Mr. Ho-Seok Yoo.

Good afternoon. This is Ho-Seok Yoo, CFO of Samsung Life. This is my first call after taking this role in January, and I'm pleased to meet our analysts and investors today. I look forward to communicating further with the market through the coming conference calls and other IR events. Today, I'll begin with the 2019 financial performance and EV results and then go on to key strategic priorities for 2020. During 2019, the tough business environment continued, represented by the declining market interest rate, deterioration in loss rate and intensified market competition in the industry. Despite such market conditions, our health APE increased by 64% year-on-year, while value of new business, which is our long-term profitability index, grew 24% year-on-year to reach KRW 1.4 trillion. The company was able to achieve these favorable results by turning on sales strategy focused on profitability, backed by our strong exclusive channel and product competitiveness. Also, we managed to maintain our investment yield at 3.4%, thanks to the timely disposal of real estate to minimize the loss in the interest margin from the falling market interest rate. Lastly, we made efforts to enhance our shareholder value by increasing the dividend payout ratio to 37%, backed by our superior capital adequacy. Now I'll go over our 2019 new business results in more detail. Our 2019 value of new business increased by 24% year-on-year to KRW 1.362 trillion. This value of new business growth is a result of positive KRW 466 billion from product portfolio and mix changes due to the increased protection new sales for custom health products. Despite a negative KRW 123 billion from actuarial assumption changes, reflecting the deterioration in the expense ratio and the persistency ratio. A negative KRW 48 billion from economic assumption changes due to the downward adjustment of our investment yield and discount rate following the drop in market interest rate. At the same time, our new business margin improved by 11.3 percentage points to record 52.9%, thanks to the expansion of high-margin new business. Next. I'll go over our protection new sales in more detail. During the fourth quarter, our health insurance products continued their favorable new business growth and our annual health product APE grew 63.8% year-on-year. The favorable new sales of our health insurance was mainly due to our timely launching of new products, such as LTC Insurance. And the reinforcement of our product competitiveness by revising precondition and cancer products, which represents our efforts to correspond efficiently to the growing health insurance market. As a result, as you can see on the lower right-hand chart, our annual market share within the health insurance market, including the P&Cs, increased from 6.4% in 2018 to 8.5% in 2019. Next is our investment performance. For your reference, our asset management related metrics were calculated on a nonconsolidated basis. At the end of 2019, our invested assets reached KRW 231 trillion. Although the share of equity expanded to 15.8% due to the valuation gain of Samsung Electronics shares, we maintained our stable investment strategy with bonds and loans that are still taking off 76.4% over our invested asset portfolio. Meanwhile, despite the prolonging low interest rate environment, our investment yield came in at 3.4%, thanks to the stable interest income and dividend income earned from our affiliates as well as a timely realization of disposal gains. Next is our new interest-earning asset investments. Our fourth quarter new investment yield increased by 20 basis points quarter-on-quarter to record 2.7% due to the rebound of market interest rate and expansion of new investments in high-yield loan portfolio. In addition to our efforts to improve new investment yield, the company continued to increase the asset duration to 8.3 years in 2019 by buying ultra-long-term bonds under the ALM principle and reduce the interest rate sensitivity of our company value. Next is our reserve coverage. The spread between our average reserve interest rate and yield on interest-earning assets widened by 5 basis points versus last year to reach 92 basis points at the end of 2019. If the prudent level of market interest rate is maintained, we expect extra widening of the negative spread to be inevitable in the year -- in the near future. However, the company is putting much efforts to offset its negative impact on our P&L by enhancing new investment yields and increasing the earnings from noninterest earning assets. Now on to our key efficiency metrics, profitability and embedded value. First is our insurance profit. In 2019, insurance profit was KRW 1.394 trillion, increasing 2.1% year-on-year, backed by the 25.8% growth in our loading margin, which offset a decline in our risk margin from the deteriorating loss rates. In order to overcome the current low interest rate environment, the company conducted intensive cost-cutting activities by enforcing efficient usage of resources on a company-wide scale. As a result, the loading margin expanded significantly year-on-year. Our efforts to cut cost will continue in 2020, especially in the areas of utilizing IT technologies to improve efficiency and cutting fixed costs. Through these efforts, we will strive to additionally lower the expense rate from the current level. Next, I'll cover the loss rate in detail. Our loss rate, which spiked to 88.4% in the third quarter, declined 3.7 percentage points to 84.7% in the fourth quarter. As shown in the chart on the right, the main reason for the hike in our loss rate last year was an industry-wide deterioration in the loss rate of medical real-loss indemnity type products, which takes up 12% of our risk premium. On the other hand, fourth quarter's loss rate of our death and living benefits, excluding medical real-loss indemnity type products, substantially changed due to the revision in IBNR reserving standards and recategorization of CI benefits. For your reference, the normalized loss rate, excluding these revisions, is 40% on the death benefit and 94% on the living benefit, excluding real-loss indemnity. The company has raised the pricing of the medical real-loss indemnity type products by 9.9% earlier this year, but we do not expect an immediate improvement of our real-loss indemnity loss rate in the near term, considering the rising trend of claims. Nevertheless, the growth of our risk premium will continue backed by our expanding sales of our health products, and we will strive to improve our loss rate by making efforts to further raise the medical real-loss indemnity prices and preventing fraudulent claims. Next is our net profit. 2019 net profit attributable to shareholders was KRW 977 billion, decreasing 19.2% versus previous year's KRW 1.210 trillion net of one-off items such as disposal gain of Samsung Electronics shares and impairment losses on our affiliate stakes. The decline was mainly due to the loss from the variable guarantee option reserves, which dropped KRW 251 billion year-on-year. As shown on the table on the right, consolidated profit from our subsidiaries and beneficiary certificates as well as real estate disposal gains partially offset the loss from the variable guarantee options and the widening negative spreads. This year, the company plans to continue such efforts to minimize the negative impact from the deteriorating investment margin. Next is the LAT test results on our reserves and capital adequacy. At the end of 2019, the company had KRW 16 trillion surplus in the LAT test. In terms of the newly adopted financial soundness reserve standards, our surplus was still KRW 10 trillion, and we expect to have sufficient reserves ahead of the strengthening of reserve standards. Meanwhile, RBC ratio at the end of 2019 rose by 26 percentage points compared to the end of 2018 to reach 340%, maintaining a differentiated capital adequacy compared to our competitors. Next is the embedded value results. Embedded value at the end of December 2019 increased to KRW 36.5 trillion, and this is mainly due to the growth in our adjusted net worth from the rise in the value of our stake in Samsung Electronics following the rise in the share -- in its share price. Meanwhile, value of in-force came in at KRW 1.7 trillion, decreasing by KRW 3 trillion from the previous year's KRW 4.7 trillion, mainly due to the decline in economic assumptions following the decline in market interest rates and change in actuarial assumptions, such as a drop in persistency rate. For your reference, major changes in EV assumptions includes a 30 basis point lowering of NIER from 3.4% to 3.1%, a 100% basis point cut in the discount rate to 7.5% and other actuarial assumption changes from the revised experience data. Please refer to the following pages for the details of our EV movement and sensitivities. Next is our strategic priorities for the fiscal year 2012 -- 2020. This year, the company will continue its efforts to secure a solid profit base and accelerate its pursuit of growth engines and digital innovation. First, to secure a solid profit base, we will continue to grow our value of new business focused on profitability. As countermeasure to declining profitability from the falling interest rate, we seek to lower our pricing rate, put profitability at the center of our channel management and maintain the heightened 50% level of high-margin health sales proportion by actively launching new products. Furthermore, in order to improve the persistency rate, which is the key to securing the future profit base, we will realign our [ real ] system and restructure our sales organization to enhance our channel efficiency to generate higher loading margin and improve sales capacity at the same time. On the investment side, backed by our strong confidence in our capital adequacy, we plan to reduce the purchase of ultra-long-term bonds and instead, expand investments in high-yield assets and equity stakes to seek higher yields. The company launched a corporate venture capital fund in April 2019 in cooperation with Samsung Venture Investment. And this covered 4 start-ups with innovative technologies and service skills to invest KRW 10 billion. This year, we plan to strengthen our cooperation with the 4 startups to apply our technologies in our product development and the underwriting process. Meanwhile, we will continue searching for investment opportunities in other start-ups with bright prospects in 5 major areas, including insurance, asset management, overseas business, health care and new technology. We have seen successful running 2 asset management business lines, namely Samsung Asset Management and Samsung SRA. With the successful experience, we seek to add another line of asset management business, focusing on overseas investment so as to secure our future investment side benefits. In a similar vein, we are also reviewing equity investments in solid life insurance in Southeast Asia. Next is digital innovation. Last year, the company constructed tablet-based mobile sales system and increased the percentage of tablet usage in insurance selling process to reach 96%. In 2020, we will focus on creating more visible results based on our digital infrastructure. First, we are planning to open a new mobile app and website in March that allows customers to process business more easily and quickly. We are also expanding our mobile sales support system from FC to GA channel to increase both customer convenience and consultant productivity. Also, we'll continue to strengthen R&D capacity for our digital competitiveness by transforming all insurance transaction documents into digital forms and developing a virtual consultant pilot based on AI technology. Lastly, together with the BDA center, a big data analysis center that we newly launched last January, we will continue to enhance work efficiency and support new business opportunities. Next is our target for 2020. This year's insurance market environment is expected to remain tough due to the slowing economy, lower demand from the prolonging low interest rates and competition in the protection market. However, the company will utilize its superiority in the high-margin protection sales to achieve a higher-value of new business and expand our embedded value to KRW 38 trillion. In terms of insurance profit, we will generate over KRW 1.4 trillion through the aforementioned efficiency enhancement measures. Last is our capital management policy. On January 30, the Board of Directors set the dividend for the fiscal year 2019 at KRW 2,650. This is based on the medium-term capital management plan announced in February 2019 and is a result of applying 37% payout ratio up by 7 percentage points from last year's 30%. And adding the KRW 661 per share remaining deferred dividend from the SEC share disposal gain in 2018. As a result, we maintained the DPS at the previous year's level despite a decline in our net profit. In 2020 and 2021, we will continue to raise the payout ratio within 40% to 50% level based on our medium-term dividend policy. And make our best efforts to enhance shareholder value through solid profit management despite low interest rate environment. This concludes the 2019 annual earnings release. Thank you all for joining us today. And we ask for your continued support and attention towards Samsung Life. Thank you.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Byung Gun Lee from DB Financial and Investment (sic) [ DB Financial Investment ].

This is Byung Gun Lee from DB Investment Securities. Thank you for the opportunity to ask 2 questions. There were initially some concerns about dividends given your performance, but I do thank you for maintaining DPS, consistent with past levels. On Page 25, you did outline the dividend payout. But purely based on 2019 results, anyhow, dividends are slightly under KRW 2,000 and payout is -- would be fair to say around 30% based on 2019 results strictly. So it seems that net profits are not really likely to increase significantly going forward, which means that if you were to maintain those types of DPS levels, you would have to anticipate a significant increase in payout. So you did mention your policies regarding payout, but could you provide additional guidance about DPS? DPS for 2020 and then perhaps 2021. Could you share with us the company's view that at the very least, you do not intend to lower DPS? Or you would not to incrementally increase DPS, that sort of thing, to give us added color? And the second question is that you did mention that it may be inevitable that the negative interest margin may widen going forward. And I expect that your assumed pricing rates are likely to be adjusted downward. I understand that, that was already done in the month of January as far as your GI products were concerned, but the assumed pricing has not yet been hiked down yet, at least for your main flagship products. So could you give us a sense of when that kind of reduction in assumed pricing is likely for your main products? And then what kind of a decrease would you be thinking about? And then regarding discontinuous marketing that you did have in the past. Could you provide us with more details in terms of the company's position about what you think of this type of marketing practice? And then in connection, could you also give us some additional details about product strategy?

Yes. Let me, as the CFO, take that first question. So it is our company plan to deliver insurance profit of KRW 1.4 trillion or above on a consistent basis going forward. However, in terms of investment or interest margins, it is exposed to various externalities and external factors that right now, it is hard to say what kind of magnitude this impact is likely. But -- so it is a little bit premature to say or to commit to a certain number in terms of what kind of DPS we want to deliver. So I think you're understanding on that. But I will say that we have been acting preemptively ahead of implementation of IFRS 17 or KICS to strengthen our financial soundness above and foremost. And so we've been making steadfast efforts and relative to the rest of the industry, I would say that we take great pride in our differentiated, robust financial position and soundness. So as we explained, starting from a payout of 37% this year, we intend to steadfastly increase it going forward, up to 40% to 50%. And I do believe that we do have that scope for that upside to boost payout going forward. So that's my answer as far as DPS is concerned. And then we also add, as a last note, that as we see it and also given our strong capital position and our underlying earnings fundamentals, I would say that we want to -- we will deliver very strong shareholder returns. At least as strong, if not stronger than in the past. And so that much I can commit to you.

Yes. So let me take that question about the product strategy and the adjustment to this assumed pricing. So in terms of our markdown of assumed pricing, we have been actually doing that consecutively or sequentially starting from February before our main whole life products. The adjustment will be done in 1 undertaking as of April 1. So in terms of the level of decrease of assumed pricing, we are planning about 25 bp in downward adjustment, but then for areas where that -- it would not be enough, we can also do additional measures, for example, increasing the guarantee fee, for example. And so on balance, we want to make sure that the effect, the lowering of the reserve interests that we have as a company have to bear all that will be by a margin that's larger than 25 basis points. So until the -- across the board, assuming price decrease takes place in April up to the end of March, anyhow, that will mean that we will be selling prices or we'll be selling products where the assumed pricing has not yet been adjusted. But for these problems, the problem is lower margin, yes, but still, they are not negative products in the least. So we do not intend to engage in any artificial marketing pushes or any measures to suppress sales until the end of March. We will just continue with our sales operations, as business as usual, while maintaining adequate product portfolio.

The next question will be presented by Seung-Gun Kang from HI Investment & Securities.

Yes. Thank you for giving me the opportunity to also ask some questions. My first question has to do with loss rate. On Page 14, you do outline your loss rates overall and also loss rates, excluding -- or excuse me, your loss rates for living benefits, excluding real-loss indemnities and the loss rates for real-loss or death benefits. So it does seem to me that for 2019 from the first to the third quarter on a year-on-year basis, the loss rates for the nonreal-loss indemnity, the living benefit policies has increased quite significantly. But being that, combined with the increase in loss rates you saw on your real-loss indemnity products, added up to this year's results, where you did see a deterioration of your loss rate. So in order to stabilize risk loss rates going forward. I think, ultimately, the mix between death versus living benefits would be very key. So you did already explain the proportion of risk premium for 2019. But could you break it down in terms of the mix between death versus living benefits, because if we were to see that the living benefits actually as a proportion was growing faster, then that may mean we may have to lessen or lower expectations of improved loss rates going forward. So I'd like more of a breakdown on that. And then my second question has to do with assumed pricing again. So in the past, historically, assumed pricing always used to be about 50 to 100 basis points lower than 10-year Korean treasury bonds, but it's long since actually have been reversed. And you're talking about lowering the assumed rates by about 25 bp or so. But given how the 10-year treasury bond is trading at around the mid-1% level, my question is, how low would the assumed pricing ultimately has to go in order for you to be able to secure an adequate level of margins?

Yes. This is [ Jung Jun Lee ] from the support team. Let me take that first question. So yes, in terms of our loss rates, even if we take out real-loss indemnities and we take out the one-off factors that had a big impact in the fourth quarter. It is true that overall for living benefits, loss rates were around 98%. So yes, it is true that it is slightly higher on a year-on-year basis. So it's mostly due to an increase in the use of medical services that led to increased losses for both real-loss indemnities and also for living benefit type policies. There are these upside factors that are at play. However, in contrast, if you look at the lower line, for the death benefit, you see that loss rate actually are improved on a year-on-year basis at just around 40%. And then -- so I think it's safe to say that given the mix of our in-force policies at present, it is not likely to deteriorate further from current levels. But I don't have the risk premium right now for just the new policies or the new business that you asked about. But just in terms of the trend, as a percentage of total new protection sales, I'd say the split is about half-half, half for living benefits, half for death or whole life benefits. So it's not as if we're seeing a significant increase of living benefit policies as a percentage of the total. And for the new living benefits coverage products that we are newly selling compared to our in-force policies that have previously sold, they are structurally improved in terms of the underlying profitability, we have adopted different measures, for example, using reinsurance. And then let me elaborate more about how much of a decrease in assumed pricing is required. Also, our company, we do sell as a main product, floating rate type whole life products where we do charge guarantee fees. And then like the GI plus whole life type of products that we introduced earlier in January, there are certain products where we do not charge guarantee fees, but then they promise fixed rate. So I need to differentiate between the 2 different types of products. For the floating rate -- or excuse me -- for the type of product where we do not charge guarantee fees, the assumed pricing, the assumed rates have already been significantly lowered earlier to 1.9% or so. For the other type of floating rate product, where we do not charge on guarantee fees, we will be, as we explained, lowering the assumed rates by about 25 basis points. But because the guarantee fees will be increased, on balance, the actual interest that has to be assumed on part of the company actually will be kept at manageable levels within 10-year Korean treasury bond yields. So in terms of the coverage of the guarantee fees that I'm talking about, it does vary between type of product or the underlying assumptions, but just generally, coverage would be around 50 to 60 basis points. But if assuming that interest rates will continue to go down, then it's maybe unavoidable that the gap against the Korean treasury bonds is likely to narrow, which would mean that the company's estimate or assumed margins are likely to be lowered somewhat. However, we think that we will be able to more than sufficiently offset that effect through other cost-cutting measures, which will be able to boost our insurance profit. And so that said, we think that we'll be able to maintain current levels of profitability going forward.

The next question will be presented by [ Jin-Sang Kim ] from Hyundai Motor Securities.

So thank you for the detailed presentation and answers. I have 2 questions. It seems that for this year's underwriting or insurance profit, you said that compared to the previous year, it is higher. But given the overall flow of the presentation today, I think my sense is that generally, the loss rates have deteriorated, but there was a slight decrease in the expense ratio. So it sounded to me like perhaps the expense ratio would be more of a stronger buffer, buffering up insurance profits going forward. So maybe I'd like to hear more details about your views about the loss rate and expense ratios and also persistency rates as well, which I think it sounded to me that you're expecting persistency to deteriorate some. So could you give us some outlook? If they could be quantified a little bit more, that would be very helpful. And then -- so when can we expect more return to normalcy. So I think this year, you said was -- represented subnormal conditions. So in terms of loss rates and whatnot, by what time do you foresee or return back to more normal recurring level? And the second question is quite simple question about your dividend payout, which you did mention. So if you look at banks, many of them actually are deciding to cancel, retire their treasury shares, which at one point did sound very unfeasible. But I think now is the time where we really need to think about different ways of really delivering or returning better value to the shareholders in the interest -- in terms of capital management. So you did do some treasury buybacks in the past. But going forward, do you have any plans for perhaps further buybacks or canceling of shares? Measures other than dividends, do you have anything in mind to further boost shareholder returns?