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 Third Quarter Earnings and EV Presentation. Today's call is scheduled for 1 hour and 30 minutes, starting with 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 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 the presentation to our CFO, Mr. Ho-Seok Yoo.

Good afternoon. This is Ho-Seok Yoo, CFO of Samsung Life. Let me address the company's main business results. The company obtained a robust 9-month accumulated net profit of KRW 995 billion, supported by the third quarter's continuing trend of insurance profit improvement and variable guarantee P&L recovery. Backed by the decline in loss rate and increase in cost efficiency, the insurance profit recorded a solid result of KRW 1,260 billion, rising 23% year-on-year. The company secured protection new business APE of KRW 1,468 billion, increasing 3% year-on-year and rising for 3 consecutive years through the launch of new health protection products and the strengthening of untact marketing. Next, I'll go over the net profit in more detail. Third quarter net profit attributable to major shareholders was KRW 317 billion, improving by KRW 97 billion year-on-year. As you can see from the top right movement graph, the increase in net profit was backed by the risk margin improvement of KRW 97 billion, and investment margin growth of KRW 74 billion. Yet the positive impacts from such improvement were offset by the decline of loading margin and other factors, including corporate tax. Please note that some of these factors include one-off items, such as KRW 47 billion worth of provisions for the suspended redemption of some of the private equity funds sold by the company. On an accumulative basis, the company secured a robust 9-month cumulative net profit of KRW 995 billion, rising by KRW 18 billion year-on-year, thanks to the improvement of insurance profit despite the continued widening of negative spread. Next is our insurance profit. The company's third quarter insurance profit reached KRW 410 billion, rising 21.5% year-on-year, supported by the major improvement of risk margin, as you can find from the graph on the right. 9 months of cumulative insurance profit also demonstrated a solid result of KRW 1,260 billion, increasing 22.5% year-on-year. Next, I will go over the loss rate in more detail. The third quarter loss rate recorded 79.7%, supported by the decrease of medical service usage due to the second wave of COVID-19 pandemic in early August. The loss rate on living benefit is being maintained at the last quarter's level of early 90s and the loss rate on debt benefit is also being stably managed at the early 40 range. Next is our investment profit. The company's third quarter investment profit was KRW 95 billion, marking a major improvement from last year, with a solid consolidated profit from subsidiaries and the recovery of variable guarantee P&L following the rise of [ Cost P ] index. This was an achievement made without the realization of disposal gains of assets such as real estate. However, for the 9-month accumulated basis, the company recorded KRW 229 billion, dropping 41.4% year-on-year due to the accumulated loss from variable guarantee options and continuing burden from the negative spread. For your reference, the company is not expecting any additional loss from the variable guarantee P&L, assuming that the financial market conditions, including [ Cost P ] index and interest rates as of the end of September will be maintained. Next is our new business results. 9 months of cumulative new business APE recorded KRW 2,040 billion, rising 3.7% year-on-year. Such improvement mainly stems from the third quarter's new business APE growth of 15%, impacted by the continuation of solid protection new business results in the launch of a new annuity product targeting corporate customers in last July that recorded a solid sales achievement, mainly from the bancassurance channel. The company will further enhance the market dominance by maintaining health protection focused sales strategy and strengthening the product competitiveness of nonexclusive channels, including bancassurance and general agencies. Next, I will explain the value of new business. The value of new business increased 2.4% year-on-year to KRW 342 billion in third quarter. This achievement was backed by the 15% growth of new business volumes, despite the 6 percentage point drop of new business margin to 47.2% due to the drop in NIER and reduced share of -- protection shares within the sales portfolio. As a result, quarterly value of new business reached the highest amount since last year's second quarter as demonstrated in the bottom right graph. Next is market share persistency rate and number of policyholders. The company demonstrated a continuing growth of market share with the protection new business market share, recording 23.4% and health protection new business market share reaching 27%. Both the 13th and 25th month persistency rates are being maintained at a modest level, standing at early 80% and early 60% range, respectively. The company's number of policyholders continued to grow in the third quarter, reaching 8,100,000 as of the end of September. For your reference, the company holds not only the 8,100,000 policyholders, but possesses a total of 12,040,000 customers, which is a figure that includes the insured of -- the insurance policy and holders of noninsurance products like loans and corporate pension. The company will utilize the data of these customers as one of the key assets in promoting our mid- to long-term growth. Next is invested assets. As of the end of September 2020, the company's invested assets amounts to KRW 238 trillion, increasing by KRW 11 trillion from September last year. The company plans to continue purchasing ultra long-term bonds to improve ALM matching, while gradually expanding overseas and alternative assets investments such as corporate loans. Through these measures, the company aims to simultaneously improve both ALM Matching and investment yields. Next is our asset quality. The company's bond portfolio comprises mostly of safe assets with the government and government agency bonds taking up 81% of the portfolio and corporate and foreign currency bonds mostly standing above Grade A. Loan portfolio consists mostly of low-risk loan assets with the policy loans and residential mortgage loans occupying 61% of the portfolio. The company is devoting its efforts to asset risk management as it is demonstrated through the third quarter improvement of asset quality index, such as delinquency and NPL ratio shown in the bottom right brand. Next is our reserve coverage. The spread between our average reserve interest rate and yield on interest-earning assets widened by 2 basis points quarter-on-quarter to 104 basis points. Yet the widening speed has not been slowed down from last quarter due to the reduced redemption of high-yielding interest-earning assets. If the present level of market interest rate is maintained, the company expects the extra widening of the negative spread to be inevitable in the near future. However, the company will continue to put much effort to reduce the negative margin by enhancing new investment yield and expanding sales of flooring rate type policies. Next is capital adequacy. As of the end of September 2020, the company's RBC rate reached 345%, improving by 5% points year-on-year. This is mainly due to the KRW 3.6 trillion increase of numerator, which is available capital, while the denominator, which is required capital grew by 0.6 -- KRW 0.8 trillion. As it can be seen from the graph on the right side, the company is maintaining a differentiated level of capital adequacy compared to industry peers. Lastly, I'd like to introduce our new mobile contract application system launched this month. The company has been devoted to the execution of specific strategy tasks with the aim of enhancing customer satisfaction and innovating the sales and business management process through the digital transformation across the company's overall value chain. As part of this digital transformation strategy, the company has successfully launched a mobile contract application system this month, enabling our customers to apply for new contracts on their own smartphones. Introduction was highly welcomed in the field, where 10% of new business were settled via this mobile application system, improving customer convenience. These digital strategies are expected to enhance corporate value by working as the company's additional competitive edge in the untact era after COVID-19. Next is our preparation for the upcoming adoption of new institutions. Further IFRS 17 adoption, the company is expecting that the institution will be further elaborated in the upcoming year with the release of K-IFRS 17 revised draft in last October by the KASB and FSC. The company has been performing IFRS 17-based accounting internally since last April. And is closely preparing for the [ similar ] tradition into the business operation under the new accounting system. This concludes the 2020 third quarter earnings presentation. Thank you, again, for joining us today, and we ask for continued -- your continued support and attention for Samsung -- [Audio Gap]

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Kim Jin-Sang from Hyundai Motor Company.

[Interpreted] Thank you for delivering this performance. I have just 2 very brief questions. First, regarding the distribution of certain private equity funds. I understand that in the third quarter, you had to do about KRW 47 billion in provisioning on that account. Apart from that, due to the suspension of redemption, are there any other special one-off factors that we should keep in mind? And also, to respond to the COVID-19 situation, of course, banks have been savings size, credit loss or loan loss reserves in advance. So compared to banks, of course, you carry much lower credit risk or assets soundness risk. But do you anticipate any further provisioning to be required in the fourth quarter? And the second question is, if you look at your loading margin, I think it has steadily gone up until the third quarter, but then as of the third quarter, it has decreased both on a quarter-on-quarter and year-on-year basis. So is there any reason why? And looking forward, how much of a contribution do you expect from loading margins toward overall insurance profits? If you could provide your outlook for this year and next year and also your idea for year-on-year growth of floating margin. I would appreciate it.

[Interpreted] Yes. Let me take your first question on the private equity fund. This is [ Kim Jong Min ] from the actuarial RM team. So regarding the suspension of redemption on the funds. Basically, there are 2 types of funds that issue in accordance to types of exposure. First, about KRW 53.8 billion for DLS linked type fund, KRW 42.2 billion for beneficiary certificate linked funds. So combined, it's about KRW 96 billion. To be conservative, we'd actually set aside KRW 47 billion in provisioning in this quarter and although there might be some minor factors along the way, there are not anything -- there are no major factors, and we do not anticipate further provisioning being required.

[Interpreted] Yes. I'm [ Igam Booh ] from the finance team. Let me just supplement that answer. So I think you're asking whether we are likely to do further provisioning until the end of this year. Well, basically, again, there are 2 funds that issue that have been experiencing some problem suspension of redemption mainly. So for the first of the 2, actually, it is now in the process of recovery. So we should watch the developments and then possibly upon closing in December, there could be additional provisioning maybe between KRW 10 billion to KRW 20 billion based on our current view. And then no other beneficiary certificates or fund type products are currently showing any signs of distress.

[Interpreted] Yes, I am from the support team. Let me address your second question. So if you look at our presentation deck, you will notice that compared to the third quarter last year, we did see a drop in our loading margin by about KRW 25 billion. This is obviously for 3 reasons. And the first of the 3 reasons is that we did see a significant increase in new business volume relative to the prior year. So with new business being sold, that does increase our acquisition expenses as we do have to pay out certain conditions of funds. And also, second, in the interest of onboarding, high-quality planners and FCs, we did revise our commission scheme in the second half of the year. So that was another factor. And third, to help address the challenges faced by the sales side in August, as there was a second spread of COVID-19 are in Korea, we did have a transitional or temporary increase in certain sales support expenses as well. But on a full year basis, we think that loading margin on balance will be maintained at similar levels to last year. And this will -- and we think that it will be stable going forward as well, thanks to our company-wide cost efficiency measures, management, efficiency boosting activities as well as we try to improve our persistency rate as well.

[Foreign Language] The next question will be presented by Myung Wook Kim from JPMorgan.

[Interpreted] Yes. I also have two questions. I think if you look at your overall performance, especially for new business, I think we could affirm that your strategy is centered around protection and also we could see that you were focused on reducing the duration gap from the ALM management perspective. I'm curious to know more about your strategy for liability management. If you look at the trends in terms of funding cost, I don't think that they're necessarily improving at a faster fee. So given the protracted low rate environment, I'm interested in the company's plans and views in terms of how more aggressive you intend to move on in terms of managing your liability. Perhaps do you have any plans to further lower the crediting rates on existing policies, for instance, or for new products that will be sold in the future, do you intend to adjust those rates. So I do know that in terms of your overall reserve mix, the fixed rate portion of the liability fees will also improve. But apart from that, do you have any plans to be more aggressive in terms of managing the floating rate part of your liability mix? So do you have any of those management plans in mind? And the third question or the last question has to do with your payout policies, dividend payout policies for both this year and next year. So is there any change? And what kind of payout ratio do you think would be reasonable for next year?

[Interpreted] This is [ San Hee Go ] from the product development team. Let me take you through the first question on the crediting rates and our plans. So in terms of the crediting rates, they are not only applied to new policies that are sold, but they're also applied to our existing policies as well. And we have promised our clients, our policyholders from the get-go that we will manage our pricing rates based on balanced view between the markets, interest rates and also the returns that we gain on our asset investments. So we have been aligned to that commitment, and we have been gradually lowering and reducing the crediting rate. So we -- or that stands basically remains in place, and we will continue to gradually move the crediting rate downward. However, in order to reduce the reserve interest rate burden, we are currently working on adjusting the assumed pricing by about 25 basis points. This actually does vary for different products. For some it has already been lowered as of this month. For other products, it will be gradually implemented between December this year up to March next year. And so hopefully, we believe that this will contribute to lowering our reserve interest burden.

Yes. This is Ho-Seok Yoo, the CFO. Let me address the question on the dividend. So with the end of the year approaching, I could imagine that there's great market interest in terms of our dividend stance. So it has already been announced, but let me just recap our company policy in terms of dividends. So we have always said that our payout guidance will be between 30% to 50% of our normalized profits. Taking into mind both our underlying fundamentals as a company, which points to earnings structure, plus our capital position. And so in keeping with this commitment, we have already established plans to gradually increase our payout over the next 3 years, and we have been implementing in accordance to that commitment. So the plan for this year has not yet been finalized. So it's hard for me to say definitively. But just to give you an idea compared to last year when payouts was 37%. We do have plans to deliver a payout this year that is higher than last year's level. I can't say exactly what the dividend payout amount will be necessarily. In the fourth quarter, we may anticipate a little bit more volatility to our bottom line because we do have valuation of our variable guarantee options expected for the fourth quarter. So although I cannot specify the amount right now, I will say that at the moment, we are thinking of payout, that is higher or greater than last year's 37%. And also, I'd like to make a final comment that we remain committed to our policy to continuously expand our returns to shareholders based on a policy of cash-based payout.

[Foreign Language] The next question will be presented by Jun-Sup Jung from NH Investment & Securities.

[Interpreted] Yes. This is Jun-Sup Jung from NH Investment & Securities. I have 2. I think first one has to do with recent development. I think we heard through the media that there was a court ruling in favor of policyholders for immediate annuity products. So what is the company's view on this issue? And what is the potential exposure amount or maybe the maximum exposure amount also? Second. I would think that there will be a lot of distribution channel change going forward in the insurance industry. You did mention in your presentation a bit about your digital transformation. But could you explain more as we're seeing trends of digitization or platformization of the industry? What kind of other changes do you foresee? Other companies, for example, have adopted some new ideas like Life MD by Hanwha Life, for example. So what is your view on digital or platform business? And what kind of channel or changes do you expect to your channel going forward?

[Interpreted] Yes. I'm form the finance team. Let me explain more about the ongoing litigation surrounding immediate annuities. So currently, we have 4 litigations pending that involves Samsung Life. Two of those, we cautiously anticipate that there will be a court ruling coming out in the first quarter of next year, possibly. So you did -- we all did see through the news that Mirae Asset Life actually lost in the lower court. It was for the first instance. But our understanding is that they will appeal the decision at the higher court. And if you look at what happened last year in September -- or last September, there was an absolute ruling in favor of NH Life for a similar case. So the core decisions at the lower court level have been mixed up to now. So I think we'll have to wait cautiously for the court rulings on our cases. And so because -- to date, the lower courts have been delivering mix decisions about essentially the same case. I think it will take some time. We'll have to see as to how is the legal issue plays out concerning the immediate annuities. You asked about potential impact or our exposure. I think the amount actually will be quite different from the numbers that we have been seeing through the press. And we'll actually have to wait for the actual court ruling because that, of course, forms the basis of the calculation. And so we'll have to have the final ruling before we're able to assess the full impact to our company. And overall, as far as the media annuity issue is concerned, we do not think that there will be a major impact because the exposure or the amount that is being discussed, it includes not only the amounts that have already happened or occurred in the past, but it's inclusive of amounts going forward, it's actually inclusive of both past and future liability. So I think -- and the future portion actually will be part of the claims paid, that will be executed in time. So again, we don't think that there will be any major onetime big impact to the company. Yes. And let me take that question about your distribution transformation also channel strategy. So as we experience the COVID-19 outbreak, I think we now appreciate more than ever before, the importance of enhancing the digital capabilities of our FCs. And so in the presentation, we explained how we developed a new mobile contract application system. And apart from that, we've really been seeing a lot of digitization already among RFPs in terms of training or their touch points with customers, using digital technologies or non based interaction. Overall, through the course of COVID-19, actually, they have become much more familiarized to things that are digital, above our expectations. And so I think a key learning through this process is that we will adopt both face-to-face and non face-to-face digital engagement method for our exclusive channel going forward. So they will no longer be just a simple face-to-face only distribution channel, but they will be much more versatile, moving back and forth freely between face-to-face and digital contactless engagement as well. And then we also have a growing online business as well. Size-wise it's not that big yet, but we have actually seen 30% or so annual growth in sales from our fledgling online channel. So we intend to continue to grow that space so that it can become a main distribution channel for the company going forward. We have identified certain project initiatives to improve the products, the sales process and also the back-office support function, and we'll be working on that in the mid to long term. As we have continuously been strengthening our collaboration with platform players, and we are internally testing out new initiatives, one that combines our noninsurance products like corporate pensions or loan business with the distribution or digital distribution side.

[Interpreted] Yes. This is the CFO. Let me add a little bit about digital transformation. So the initiative that we have explained actually pertain to digital transformation within our internal value chain. I think another pressing issue that we have to address is the movement by FinTech or Tech Fin companies into the insurance industry. So to respond to this growing trend, we have been thinking that rather than working just on our own, it would be best to work through what we explained earlier what we call CPC funds, which were launched in April last year. So through the CPC fund, we've been increasing our investments into Tech Fin or FinTech companies. So the first of the CPC funds, the total amount rate so far is KRW 50 billion to date, but we are reviewing possible plans to dramatically increase that after next year or so. So although I cannot provide more details yet. I can say that through our CPC fund investments, we're very committed to continue to build out our collaborations with other businesses and players and also to work toward increasing our company competitiveness.

[Foreign Language] The next question will be presented by Yafei Tian from Citi Securities.

I have 2 quick ones. The first one, is it possible to give us an update, the progress on the insurance law regarding holding of subsidiary companies like Samsung Electronics. So if Samsung Life is forced to sell some of Samsung Electronic stakes, what would be the gain as of third quarter? And how is the management thinking about allocating that additional gain in terms of investment, distribution to shareholders, et cetera? And then secondly is on the risk margin. It has seen a very gradual improvement over the years, and that's very encouraging. Just wanting to understand how should we think about risk margin going forward into next year.