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 Annual 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 the presentation to our CFO, Mr. Ho-Seok Yoo.

Good afternoon. This is Ho-Seok Yoo, CFO of Samsung Life. 2020 was a very challenging year with the prolonged global corona pandemic together with deteriorating economic conditions and highly volatile financial market. Despite such a tough business environment, the company effectively adapted itself to the market changes by strengthening noncontact sales competitiveness and improving operational efficiency throughout the company. As a result, the company improved both growth and profitability year-on-year. Let me now address the company's main business results of 2020. First is on the net profit. In 2020, the company achieved net profit of KRW 1,266 billion, improving by KRW 288 billion from the previous year. Based on ordinary profit, it is the biggest profit we have achieved since IPO, excluding one-off items such as disposal gains and affiliate shares and gains from bargain purchase. Let me divide net profit into insurance profit and investment margin and explain each item separately. For your reference, insurance profit and investment margin are pretax numbers. First is on the insurance profit. The insurance profit of 2020 is KRW 1,605 billion, improving by KRW 211 billion from the previous year. The loading margin is stable at KRW 700 billion to KRW 800 billion level, with expense ratio staying at 80% level, as shown in the right-side graph. Also, the risk margin jumped to KRW 852 billion, with large improvement in loss rates as shown in the bottom right graph. Next is investment margin. The investment margin increased by KRW 255 billion from the previous year, reaching KRW 322 billion in 2020. This is due to a large profit from variable guarantee option following strong stock market, together with dividend income and disposal gains. Although the company is expected to receive a larger sum of special dividend from Samsung Electronics this year, investment margin is, by its nature, sensitive to changes in stock and bond market. Hence, the company will work hard on stabilizing the investment margin by realizing disposal gains appropriately and by adjusting its hedge position on variable guarantee option flexibly according to the financial market movement. Next is on the company's capital management policy. As we have disclosed in late January, the dividend per share for the fiscal year 2020 is KRW 2,500 with 35.5% payout ratio. The DPS of KRW 2,500 is slightly lower than the previous year's DPS of KRW 2,650. However, the DPS of the previous year includes special dividend of KRW 660 that is deferred from the disposal gain of SEC shares in 2018. After excluding this special dividend, the ordinary DPS was KRW 1,991, hence this year's DPS of KRW 2,500 is, in fact, larger than that of the previous year by KRW 510 in terms of ordinary dividend. The payout ratio of 35.5% is slightly lower than 36.6% of the previous year, but this was a very special decision due to the unprecedented COVID-19 prices together with the upcoming adoption of the new accounting system. The company's midterm capital distribution policy unchangingly maintains the gradual increase of payout ratio within 50% level. Next is new business results. The total new business APE of 2020 is KRW 2,727 billion, increasing by KRW 153 billion from the previous year. Annuity and savings as well as protection new business APE have increased. As you can see from the graph on the right-hand side, the protection APE is on increasing trend for the previous years and the sales proportion of health products, which have higher margin than other products, maintains mid-40% level within protection APE sales. Next, is on value of new business. Despite the increase in new business volume, the value of new business decreased by 3.2% from the previous year due to the deterioration in new business margin by 4.5 percentage points from 52.9% over the previous year. Nonetheless, the company's value of new business stays at -- as high as KRW 1.3 trillion for the past 2 consecutive years, and we expect the trend would continue to hold in the following years, thanks to our profitability-focused sales activities and continued improvement in operational efficiencies. Next is EV results. As of December 2020, the company's EV reached at KRW 43.6 trillion, marking a large improvement from the previous year. This is mainly due to the share price increase of Samsung Electronics, which lifted adjusted net loss by KRW 6.1 trillion to KRW 41 trillion. In addition, the value of in-force increased by KRW 1 trillion, reaching KRW 2.6 trillion due to the new business inflow. The main assumptions under the EV results are presented on the table on the right side. Information regarding movement breakdown and sensitivity is also presented in the later parts of the slide deck for your reference. Next is on the company's market dominance. In 2020, the company reinforced its leadership in the market by expanding its market dominance in all business areas, including products and distributional channels. The company's share in protection market increased by 0.6 percentage point from the previous year, marking 23.5%. The market share increase not only in exclusive channels, but also in nonexclusive GA channels. Albeit small size at the present, the online channel is expected to grow continuously in this with corona era, where the company has been dominating the channel with outstanding market share. Thanks to the strengthened market dominance of the company, the number of policyholders of the company increased by 90,000 from the previous year, reaching 8,120,000. Next is on the company's financial conditions. First, the RBC ratio increased by 13 percentage points from the previous year, reaching 353%. The ratio remains at the differentiated level among the peers in the industry. Also, the LAT surplus recorded KRW 17 trillion as of December 2020. Despite the scheduled strengthening of the LAT valuation method at the end of this year, the company expects that it will secure more than KRW 9 trillion worth of surplus. Next is on asset management. Backed by superior financial strength, the company plans to enhance its investment yield. For the past few years, the company has focused on reducing the duration gap between asset and liabilities by purchasing ultra long-term bonds in large sum. Thanks to such efforts, the duration gap now stays at a relatively low level, and we are now shifting our efforts to enhancing the investment yield by expanding our investment in alternative assets and overseas bonds. In terms of asset quality, 53% of total invested assets, which amount to KRW 132 trillion, consists of government treasury and bonds issued by government agencies. For corporate bonds and foreign currency bonds, 96% of them are invested in financially sound companies whose bond grades are above A. Loan assets amounts to KRW 50 trillion, comprising evenly among residential, corporate and policy loans. In particular, secured loans such as residential mortgage and policy loans comprise 60% of the total loan assets. As a result, both delinquency and NPL ratios are at very stable levels. Next is 2021 strategy. The company announced its mid- to long-term strategy titled 2030 vision during the previous earnings presentation last August. In a nutshell, the goal is to diversify its profit portfolio away from the domestic insurance-focused business. 2021 is the very first year that launches our 2030 vision, and we plan to make the best efforts to smoothly [ start ] our projects in asset management, overseas and domestic insurance business and customer-focused business operations. I will back up with a detailed explanation in the following slides. The company set the asset management division as one of the core profit engines of the company in the long term. We plan to construct a multi-boutique structure, covering both traditional and alternative asset investments and increase its profit contribution to over 30% like global insurers. To achieve the goal, the company targets through M&A global asset management firms specialized in alternative assets such as real estate and infrastructure and are currently engaged in talks with several candidate firms for a deal. It's difficult to reveal the exact size of the investment and target nations, but we can say with confidence that we will close the deal for equity investment and business cooperation with certain asset management firm by the end of the year. From the equity investment, the company plans to grow its global business capabilities and secure control and ownership through M&A in later stages. For the global insurance business, the company will actively invest management resources in its overseas business in China and Thailand to propel their growth. As you can see on the graph at the bottom, both profitability and growth have been improving in a rapid pace in both China and Thailand, albeit relatively small sizes. The company's exclusive channel has been the center of its domestic insurance business till now, and we plan to push hard improving the channel's operational efficiencies in the coming years. FC activation rate of 90%, settlement rate of 50%, policy persistency rate of 90% are our ambitious goals. We also plan to reinforce our noncontact sales competitiveness through digital revolution. In specific, we expand usage of mobile application platform that we launched last year and enhance customer convenience using AI technologies. At the same time, the company has been expanding its presence in online channel to attain superior leadership in digitalized insurance market, cooperation with platform operators and launch of new digital health care services are underway. In addition, we will reinforce customer-focused business management. To this end, the company elevated customer protection team to division level directly under CEO earlier this year. The company, together with FCs, plans to systematically manage its customers with the customer protection division at the center and work hard on setting its customer-focused management culture throughout the company. The company will also strengthen ESG-oriented governance structure throughout the organization. Last year, Samsung financial companies jointly declared to exit core related businesses. Following this, the company established a broad and sustainable growth that will take care of all the ESG-related issues of the company by setting its ESH goals and action plans. Last is on the preparation for the new financial system such as IFRS17. For the upcoming adoption of IFRS17 in 2023, the company finished installing a new accounting system and has been working on stabilizing the rolling process. We expect that once the new systems are implemented, the superior quality of the company's financial strength can be shown more easily. This concludes the company's 2020 earnings presentation. Thank you again 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 Kim Myung Wook from JPMorgan.

[Interpreted] This is Myung Wook Kim from JPMorgan. I'll be asking about 2 questions. First, going forward, how do you intend to manage the volatility that has been observed in your earnings? The last couple of years now, there has been a lot of quarter-on-quarter change, especially in terms of your variable guarantee reserves, making quarter-on-quarter projections actually quite difficult. So could you talk to us about how you intend to perhaps reduce volatility of your earnings, also to improve the predictability of earnings going forward? Anything that you're considering in terms of macro hedges or regarding your variable reserves, I'd like to hear more about that. And the second question has to do with your China plan. I think it's been -- well, actually, it's the first time in a long while where we have seen some details from the company regarding your China market plans. We do see that China is increasingly opening up and lots of foreign invested companies are looking to increase their interest in the Chinese market, going beyond the 50% ownership cap towards 100% mark. So you have a JV there right now. Do you have any plans to significantly boost your interest in China and that if you intend to go through a partnership structure, how exactly do you intend to build up and grow that business? And is that in the mid- to long-term business plans, ultimately, you want 30% of total profits to come from your overseas insurance business? And for that to happen, I would imagine you'd have to deploy significant capital to a big market to grow that business. So more on those plans would be appreciated.

[Interpreted] Yes, this is [indiscernible] from the RM Team. Let me take your first question regarding reducing the variable volatility. So we have consistently been increasing the percentage of hedges based on our variable guarantee reserves for better management of volatility. Out of our total variable annuity reserves of KRW 32 trillion, 61% or KRW 20 trillion worth are currently hedged as of the end of last year. And ahead of adoption IFRS17, we're incrementally increasing the use of derivative products for hedging purposes, 75% currently of share prices are hedged, 90% of interest rates. And for the share price hedging, we took it from 30% to 75% towards the end of last year. So we're going to consistently incrementally build up that percentage ultimately to 100% before full-fledged implementation of IFRS17.

[Interpreted] So this is [indiscernible] from the Global Business team. Let me take your question on China. If you look at the ownership structure of our joint venture operation in China, 31% is held by the Bank of China, 25% by Samsung Life and 24% by China Air. And so as Bank of China became the majority shareholder of the JV, we have been able to take advantage of its nationwide distribution network to achieve high rates of growth driven by that channel coverage. We intend to build up into other non-bank channels as well going forward. And we've been consistently providing support so that we can achieve balanced growth across multiple channels in China. So collaboration has been working well between the JV partners. So we intend to maintain the overall stance for the time being. Of the 3 shareholders, of course, China Air is a nonfinancial entity. Although there are no firm plans in place at the moment, potentially, there can be further expansion of that interest. And then in terms of our strategy going forward for overseas insurance business, I think it is supported by 2 main pillars or strategic pillars. The first is to continue to focus on our existing overseas operations in Thailand and China to boost stable growth there in our existing markets; and then second is to look to advance into new markets to grow the portion of overseas profits. And in terms of target countries or markets that we would be looking at, mostly the high growth, high profitable -- high profitability markets within Asia, that would be the emerging market side. In terms of how we would invest, mostly be in the form of minority interests.

[Interpreted] This is the CFO. Let me just add one thing about the overseas business side. So in line with our 2030 strategy, if we want to achieve the business plan, we do drastically have to increase the proportion of profits generated from outside of Korea. And we are forecasting that, that will involve injection of a significant amount of capital. So although the exact amount is not decided, our internal conclusion has been that we are in a position where we could inject a significant amount of capital given our financial position. So we are looking out the next 10 years, this year included, to determine the timing of the capital deployment and also the size of the capital that will be involved as we look at that timetable. And we're running projections right now, but as soon as we are able to share further details, perhaps we will be able to do that at the next session.

[Interpreted] May I ask one further question regarding the overseas side?

Yes.

[Interpreted] Yes. Just to clarify, I think earlier, you answered that you want to first look at the Asia and emerging markets first. Is it that it's just a matter of priority where you look at Asia and emerging markets first and then you may look beyond them elsewhere? Is that the plan? Or do you intend to focus primarily just on Asia only? When we look at the potential market size within emerging markets in Asia, I think there are certain restrictions in terms of new business potential. So as to how significantly it can contribute to your earnings, I think we'll have to watch and see. But just to clarify, in terms of overseas, are you looking just within Asia, the emerging markets or also beyond?

Yes. I'm from the Global Business team again. So the ultimate goal of expanding to the overseas insurance market will boil down to boosting our bottom line earnings. So when we look at potential target markets, we would primarily be looking at drivers of profitable growth and profitability will come foremost. So management stability, business capabilities, established market presence, channel competitiveness, these drivers of profitability are the primary factors that we are on the lookout for. And then I mentioned Asia and emerging markets that we would be looking at first. In terms of the potential growth, macroeconomic conditions and also demographics. But we will not be limited, of course, to just Asia and emerging markets. And we're actually examining multiple pools of potential markets at the moment to see also from the advanced market side where we can look for contribution to our earnings.

[Foreign Language] The next question will be provided by Kim Jin-Sang from Hyundai Motor Investment & Securities.

[Interpreted] So thank you for delivering the good performance. I would like to ask 2 questions. First of all, in terms of your insurance profit, if you look just at the fourth quarter results, I think that in terms of your risk margin, it has improved, but the loading margin actually went down compared to the previous period, which I imagine may be for some one-off issues that happened within the fourth quarter. So if you could explain further, I would appreciate it. And then how much further growth do you foresee for insurance profit this year? And the second question is in terms of your investment yield. If you look just at your interest returns. Of course, it's due to the falling interest rates in part, but it does seem to have the yield or the returns also appeared to have gone down. So when we assume that there will be consistent dividend payments from Samsung Electronics and there was a special dividend payment this year as well, that is certainly likely to help. But looking out for the remainder of this year and also beyond, how much do you expect in terms of your investment yield for this year, including the special dividend from SEC? And then beyond 2021, when we look out to the coming years, do you think that, that investment yield will be consistent? What kind of levels are you expecting?