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 2020 First Half Earnings and EV Presentation. Today's call is scheduled for 1 hour and 30 minutes, starting with the earnings presentation 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. Let me address the main results of the first half of 2020. The company achieved solid first half net profit of KRW 679 billion supported by the improvement in insurance profit and recovery of variable guarantee P&L. Backed by the decline in loss rate and cost efficiency, the second quarter insurance profit reached KRW 449 billion, which is the highest amount since the second quarter of 2017, and the accumulated half -- first half insurance profit recorded KRW 850 billion. The first half protection market share reached 23%, and the company is maintaining differentiated level of market dominance with the number of policyholders reaching 8,070,000 as of June 2020, increasing by 40,000 from the end of last year. Despite the continuation of COVID-19 crisis, the company secured protection new business APE of KRW 979 billion, increasing 2% year-on-year due to the strengthening of untact marketing. As of the end of June 2020, the company is maintaining top-notch RBC ratio of 337%. Next, I will go over the net profit in more detail. Second quarter net profit attributable to shareholders was KRW 449 billion, improving 45% year-on-year from KRW 309 billion. On an accumulative basis, despite the fall in investment profit due to the COVID-19 outbreak, the company secured robust first half net profit of KRW 679 billion, affected by the improvement in both risk and loading margins. Next is our insurance profit. First half accumulative insurance profit was KRW 850 billion, with both the risk and loading margins reaching above exceeding our annual plan. Even considering unusual effects from the COVID crisis in the first half of this year, the company's annual insurance profit is expected to reach over KRW 1.5 trillion, which is at least KRW 100 billion more than the original target of KRW 1.4 trillion. Next, I will go over the loss rate in more detail. The second quarter loss rate dropped by 6.5 percentage points year-on-year to 78.9%. The main reason for such improvement is the fall in loss rate on living benefit due to the industry-wide decline in medical service usage and insurance claims after the COVID-19 outbreak. The loss rate on death benefit is also being maintained stably below 40%, backed by the decrease in accidental death claims. Next is our investment profit. The company's second quarter investment profit increased 41.8% year-on-year, with the recovery of the variable guarantee P&L marking KRW 161 billion surplus. However, despite the increase in disposal gains and consolidated profits from subsidiaries, the first half accumulative investment profit decreased 64 points year-on-year -- 64% year-on-year to KRW 135 billion. This is due to the loss in variable guarantee profit and loss, impairment loss and the widening of the negative spread. For your reference, the variable guarantee P&L recorded KRW 211 billion accumulatively in the first half of this year. That is minus KRW 211 billion. Considering the financial market development since June, we are not expecting any additional loss in the second quarter even after considering the effect of economic actuarial assumption changes at the end of the year. Next is our new business results. Although the company's first half total new business APE dropped to 1.7% year-on-year, protection new business APE improved 2.1% year-on-year. This is a solid achievement made possible through various untact marketing activities even under the challenging environment where face-to-face sales activities are restrained due to the prolonging COVID-19 crisis. Next is market share, number of policyholders and persistency rate. As you can see from the graph on the left, the company's protection new business market share in the life insurance market is being maintained at a solid level of 22.9%. For the health protection market, the company is securing a 6% market share, thanks to our market dominance enhanced for the past few years through new product launches and strengthened channel competitiveness. The rising trend of the number of policyholders is being accelerated this year, with the figure reaching 8,070,000 as of June this year. For 13th month and 25th month persistency rates for our protection policies are also being continuously improved. Next, I will explain the value of new business. Value of new business decreased 17.1% year-on-year to KRW 303 billion in the second quarter. This is due to the decline in new business and the share of health protection within our sales portfolio and a drop in NIER following the fall in noninterest rate. New business margin dropped by 6.6 percentage point to 48.9 -- 48.5% in the second quarter from the last year from the similar reasons, but the margin showed the signs of recovery in the second quarter. Next is invested assets. As of June 2020, the company's invested assets amount to KRW 234 trillion and increased by KRW 12 trillion from June last year. We have been expanding our investment in alternative assets such as beneficiary certificates and corporate loans to enhance investment yield while gradually increasing overseas investment at the same time. The company has increased its acquisition of ultra long-term bonds to proactively prepare for the upcoming adoption of the new standards. Next is capital adequacy. The company's bond portfolio comprises mostly of safe assets such as government and government agency issued bonds and corporate and foreign currency bonds above Grade A. Loan portfolio consists mostly of low-risk loan assets such as policy loans that are secured by policyholder surrender value and mortgage loans that have LTV ratio of 50% on average. As for corporate and credit loans, the company has been focusing on securing high-quality investment opportunities, applying a strengthened risk management policy under the COVID crisis, and we have seen no signs of deterioration in our loan assets until now. Next is our reserve coverage. The split between our average reserve interest rate and yield on interest-earning assets widened by 7 basis points quarter-on-quarter to reach 102 basis points, and this is the result of the 10 basis points drop in our yield on interest-earning assets due to the redemption of higher building bonds despite the 3 basis points drop in the average reserve interest rate backed by the lowering of crediting rates. If the present level of market interest is maintained, we expect extra widening of the negative spread to be available in the near future. However, the company will continue to put much efforts to offset its negative impact on our P&L, financing new investment yield through securing high-yielding assets such as alternative assets and lowering the reserve rate -- our reserve interest rate via expanded sales of floating-rate products. Next is capital adequacy. As of June 2020, the company's RBC ratio is 337%, maintaining a differentiated level of capital adequacy compared to industry peers. Next is company's long-term strategy, Vision 2030, and our ESG activities. In response to dynamic changes in business environment, the management has established the 2020 long-term strategy. First, for the domestic insurance business, we'll renovate our customer channels under our customer-focused management system, and we will expand asset management overseas business in new business areas such as health care to set them as the core of our future profit generation. Furthermore, we will successfully complete digital transformation across the overall value chain to support the targeted changes for domestic insurance business and challenges for new growth. Currently, 85% of our total profit comes from the domestic insurance business. However, in 2030, due to the successful implementation of the aforementioned strategy, we are expecting to secure our diversified profit structure composed of 3 core areas: asset management, overseas insurance and domestic insurance. Let me further explain our growth and digitalization strategy. Based on our differentiated level of capital adequacy, we have concluded that our company owns sufficient capital strength to make new investments even under the upcoming adoption of the new accounting and capital standards. Based on this assessment, we are investigating opportunities for equity investment in global asset management firms in alternative asset areas such as real estate and infrastructure. For overseas insurance business, we are planning to expand our profit structure business areas by promoting step-by-step entry into new markets, focusing on emerging Asian market countries. For new business development, we will invest in start-ups with high potential via CVC fund, and we'll diversify product and channels through partnership with platform companies and joint investments. Lastly, for digitalization, we'll provide personalized products and services based on big data and substitute customer service and underwriting process with AI. Next is our preparation for the upcoming adoption of IFRS 17. The company, as one of the global 15 life insurance firms worldwide, has participated in the drafting of the IFRS 17 standard from the early beginning and represented the Korean life insurance industry in IASB. The company essentially completed the internal IFRS 17 system and started a pilot test of new accounting system. We expect that we can smoothly transition into the new accounting system scheduled in 2023. Next is sustainable management. The company, as the biggest domestic insurer, has devoted efforts to practice sustainable management that considers various stakeholders, including shareholders, customers and the local community. We have been performing responsible investment that considers social values as well as profitability. Especially, we are gradually increasing investment in renewable energy while reducing investment in vice firms, including tobacco, alcohol producers, and coal power generation at the same time. We have been doing it for the local community in social activities every year. In the first half of this year, we also actively participated in the overcoming of COVID-19 crisis while continuously supporting medical expenses for children and holding suicide prevention campaigns via SMS throughout the year. For further details, please refer to our annually published integrated report. This concludes our 2020 first half earnings presentation. Thank you once again for joining us today, and we ask for your continued support and attention toward Samsung Life. Thank you.

[Operator Instructions] The first question will be provided by Byung Gun Lee from DB Financial Investment.

Yes. This is Byung Gun Lee from DB Financial Investment. Thank you for your solid performance, and I have 2 questions for you. First of all, thanks in part to efforts by the company to deliver cost savings. It does appear that you have improved your loss rate, which would have contributed significantly to improve underwriting operating profit as well. So could you give us a breakdown of what the loss rates look like by category or product type, indemnity loss-type products, other coverage-type products, living benefits, death benefits and also your assessment on the impact from COVID-19? Also, your outlook for loss rates into the second half of the year also. Second, regarding assumed rates, a lot of the smaller-tier companies have already cut their assumed rate, or still some of the larger insurance companies are still maintaining assumed rates at around 2.3%, 2.4%. So I do understand that there is some burden on your part to additional cuts to assumed rates. However, given the current level of new money yield, your current level of assumed rates do appear to be still too high. So do you have any intention of lowering them further? And some are suggesting that your reduction actually should be more significant than the competitors. What is the company's view on that? And what is the impact of your lowered assumed rate thus far in terms of the profitability of your new business in the first quarter and also second quarter, please?

Yes. This is Jun-Kun Lee from the support team. Let me cover your first question. So let me give you a breakdown of the loss rates by product type or method type. First of all, overall loss rates for the second quarter was 78.9%. In terms of the death benefits, the loss rates were 39.4%; for the living benefit, 93.8%. And then the indemnity loss types are included within benefits. And for that, it was around similar levels to last year at around 121%. And in terms of the impact from COVID-19, generally speaking, there has been a decrease in payout for diagnosis or surgical procedures, which are, of course, examples of living benefits. Total loss rates of 78.9%, it's around 79% for the second quarter. We have been thinking that it would be a bit higher, 85%. So it ends up being about 6% lower than our expectations. It's hard to single out -- single cause as in COVID-19. But nonetheless, it is lower by around 6%. But then once the corona situation does become more stable, I think we will see people seeking out medical attention that has been deferred up to now, and we think that will be a factor that may lead to the increase in claims paid. So for the first half, overall, loss rates are around 82%. Given the current development and also the situation, we think potentially for the full year, it may end up being maybe 1 to 2 percentage points higher.

Yes. This is [ San Hee Go ] from the product development team. Let me answer your question on our expectations for further reductions of our assumed rates. So during the months of April and May, we actually preemptively considered future decreases in interest rates and lowered our assumed rates and also adjusted our guarantee commissions as well. But if you look at the actual reserve interest rates that are being applied on products made available to the market, they are actually the lowest levels in the industry. But there are possible concerns that there may be additional lowering of the interest rates going forward, and also the sensitivity to interest rate also varies depending on the different types of products. So we want to restrain from past practices where we force across the board a cut on assumed rates for all our products at once and try to differentiate by different product type. And so for fixed-rate type products where no guarantee fees are applied, assumed rates have already been lowered down to 1% level or so. For interest links or sensitive products, we are thinking to lower the assumed rate again by different product types. At the early end, some products, we see lower assumed rates as early as October this year. So we are observing the interest rate development and try to be flexible again by different product type. And then you asked about the impact of our prior reduction in assumed rates in April. So if you look at the sensitivity between lower rates and profitability, it comes down to a movement about 20%. So lowering the assumed rate by about 25 basis points will impact profitability by around 20%.

The next question will be presented by Jaesung Kang from KB Securities.

Yes. This is Jaesung Kang from KB Securities. What may be a bit of an ambiguous question given where you stand now, but as you know, Samsung Life share prices actually have gone up quite significantly. It was, of course, due in part to the [ earning the price ] in the second quarter, I imagine. But there's a lot of speculation and talk on the market about what you will do with your Samsung Electronic share holdings, how it has been tabled for discussions at the Political Affairs Committee and the National Assembly. So there's a lot of media exposure via article speculating on that as well. So I do understand that probably nothing has been decided, and it may be difficult for you to explain your position clearly. But I would like to hear about the company's stance. Given the current circumstances, supposing if you did go ahead and dispose of those shares, just overall, what would be the impact in terms of your dividend? What's the basic company position may be? If you could sort that out, I think it would be very helpful in stabilizing what is a bit of confusion on the market right now.

Yes. This is the CFO, Ho-Seok Yoo. It is a difficult question, but I will try to answer. So right now, it is true that an amendment -- a proposed amendment to the Insurance Business Act is currently pending and is being discussed at the National Assembly. It does propose to change the standard for valuation of affiliate shares from the acquisition method to the mark-to-mark -- market valuation method. So we are watching the situation at the National Assembly, and nothing is decided at the moment. So we are watching development at the National Assembly. And given the fluid circumstances for the company to speculate or to even comment on how we intend to respond, I think it may be very inappropriate. But basically, our basic position, and regardless of what happens, we will make our decisions that are directed toward enhancing shareholder value. That much will remain unchanged. So the share price increase that we have seen yesterday and today, I do think it's partially a function of the market's reaction to the proposed revision to the Insurance Business Act. I can firmly state that irregardless of the Samsung Electronics shares, I think what we have seen is a turnaround of our share prices from abnormal levels to normal levels. We're observing kind of a regression, which is backed by our financial soundness, our absolute #1 market dominant position and our very solid earning structure despite the negative split issue.

The next question will be presented by Myung Wook Kim from JPMorgan.

Yes. This is Myung Wook Kim from JPMorgan. I have 2 questions for you. I think you earlier explained the company's midterm strategy. And if you look at your 10-year road map or so, it seems that you intend to do a lot of business transition where you will be doing a great part of your business through overseas insurance companies, overseas asset management companies. And so I'm curious to know what kind of capital deployment budget you think will be necessary to enforce that kind of extensive change in your business and change in your underlying business revenue stream. So what is your budget in terms of the capital that will have to be deployed? And I want to know further details about the actual budget deployment as well. Because looking out 10 years from now, I think that possibly your negative spread margin, the block will largely improve by then. But still, the [ kicks ] that can lead to additional reserving burden in the next 3 to 5 years and other factors. I'd like to know more about your budget plan and budget allocation. And second question is to also with the negative spread block. If you look at Samsung Life's earnings structure, it is very stable and backed by the underwriting profit, but it is still weighed by a negative spread block. The current government actually is pursuing different initiatives to improve the underlying liability on capital structure of insurance companies seeking to use group collective reinsurance into [indiscernible]. So what is the company's view on those types of activities?

Yes. This is Ho-Seok Yoo, the CFO. Let me cover that question. So already, we have a presence in overseas markets, like China and Thailand, where we are currently running an insurance business locally. But given the size of our company on that, it's not at a satisfactory level yet. So with the 2 pillars being asset management and insurance, we intend to seek further overseas investment going forward. So currently, we think that building a successful case study, a success story is key. So in terms of sequence, it will be asset management first and then insurance next. So as referred to in our presentation, we would be first looking at equity-type investments in an overseas asset management company as we're interested in real estate or infrastructure-type investments. And then as a next step, then we could look to equity investments or acquisitions of insurance operations. So I can probably state that of the local insurance companies here in Korea, we have the biggest or the strongest capital position that positions us very well in terms of moving abroad. So given the current RBC standards, our capital adequacy is close to 340%. And even assuming that the new system [indiscernible] we assume that we'll be well above the 100% threshold. And we have ample capital surplus that we can use to fund further investments. So every year, we have a buildup of surplus between KRW 0.3 trillion to KRW 0.5 trillion after payout of dividends and after paying income taxes. So we do have ample pool for investment. And if you're interested in the scale of future investments in the next 10 years or so, I do want to say that it will be likely quite significant. Because the details are being worked out at the moment, I cannot specify the exact investment targets or the exact timing, but I can say, in terms of scale, it will certainly be significant. And then let me also briefly cover the second question. So it is true that many local insurance companies are being weighed significantly by the negative spread issue on account of legacy high-yield, fixed-rate type products previously sold. And we understand that the regulatory authorities are also giving a lot of hard thought to how to spin off that kind of negative spread margin through reinsurance. So internally, as of the last -- we have also, on a previous occasion, reviewed that possibility. But the issue of whether reinsurance will be adequate for these hedging purposes or not, we found that additional costs that would be involved would be too excessive and therefore would not be of merit. So our company strategy is, instead of looking to use reinsurance for hedging purposes, we want to increase our profitable floating rate portion of our reserves, so then naturally, the negative spread will be clearer.

The next question will be presented by Do Ha Kim from Cape Investment & Securities.

Yes. This is Do Ha Kim. I have 2 questions for you. First, I'd like to have more detailed numbers in terms of your loss rates for certain months. For example, April through June, July, if I could have more color on the loss rates because I imagine you must have benefited in part from the corona situation in the first quarter, but I'm interested in knowing more about the second quarter. And then what about the level of loss on your nonparticipating-type contracts? If I could also have further details on that. Yes. So we did have an idea of the size of your participating-type policies, but I'm interested in knowing how it has since changed. And I ask because in the event that you do dispose of the Samsung Electronics shares, that will determine how much is returned back to the shareholder as part of the participating-type policies. So if I could have a rough idea of what the size of those contracts were. I do have the number for 2018. But since then, last year and more recently, what is the number? And there's a policyholder share as well, but I'm interested in knowing whether possibly there can be more dividends payout to the shareholders versus policyholders' portion. That's why I asked about the product-type policies.

Yes. Let me cover that question. I'm from the support team. So let me give you a monthly breakdown of the loss rates first. So in terms of our overall loss rates, it stood at 85% in March, went down to 76% in April, 75% in May. But then as of June, it has gone back up to 85%. And then regarding your second question on the loss on our participating-type policies, it stood at around minus KRW 700 billion as of last year. We think this year, it may likely be about minus KRW 800 billion.

[Operator Instructions] The next question will be presented by HeeYeon Lim from Shinhan Investment.

Yes. I'm HeeYeon Lim from Shinhan Investment. First, I want to ask about your variable guarantee reserves. Were there any reversals on those reserves? And if so, what was the amount? And then looking out to the fourth quarter, I do know it's quite early on to say, but do you foresee any additional reserving being required in the fourth quarter? And the second question has to do with your investment returns. They do appear to be low. Were there any particular issues in terms of your asset management? If you could cover them, that would be -- I would appreciate it.

Yes. This is [ Jong Min Kim ] from the actuarial RM team. So as you know, in the first quarter, there was a significant drop in both interest rates and share prices amounting to a loss of about KRW 350 billion. But in the second quarter, share prices did improve or recover, and there was a reversal of about KRW 144.6 billion. And then it's too early on to share specific numbers with you for the full year. But as far as long-term interest rates are concerned, actually, the drop in the long-term rates was not as steep significant as we had originally expected. So as the CFO has explained previously, we do not anticipate further loss from current levels.

This is Hyan Kim from the asset PS management team. Let me cover your second question. So we did see a slight drop in the investment returns, and I can explain this on 2 reasons, mostly. So the first reason is, obviously, the overall drop in the market interest rates. We primarily invest in fixed income, bond holdings, and the new money yield on the new bond investments actually was quite low. In fact, [indiscernible] to about 2.35% as of the second quarter. And then the second reason is a one-off factor that was specific to the first quarter. We did see an impairment loss of about KRW 89 billion on equity shareholdings. However, this is actually a temporary phenomenon, and share price has been rallied back, so it is in recovery.

Thank you very much. We will conclude as there are no further questions. Please direct any further inquiries to the IR team. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]