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

[Foreign Language]

[Interpreted] Yes. Good morning. This is [indiscernible]. I'm Head of Samsung Life Finance team. Thank you very much for joining us today at the first quarter 2021 earnings call for Samsung Life.

[Foreign Language]

[Interpreted] And as we previously informed you, today's conference call will take the form of a Q&A session with the management team of Samsung Life. We will have an earnings call in the regular format of presentation followed by Q&A in August and February during our half year and full year earnings call.

[Foreign Language]

[Interpreted] And before we begin our Q&A session, may I outline some of the key financial highlights for Q1, which you will find in your materials?

[Foreign Language]

[Interpreted] So as you can see on the slide, we recorded outsized net profit of KRW 1.088 trillion in the first quarter based on stable insurance profit and a boost in investment margins, thanks in large part due to recognition of special dividends from Samsung Electronics and improvement in variable guarantee P&L, resulting in outstanding quarterly performance above the KRW 1 trillion mark.

[Foreign Language]

[Interpreted] Value of new business, which is an important measure of our future profitability, was up 19.6% year-over-year, recording KRW 384 billion. We feel this is a solid performance despite the difficult protracted COVID environment, achieved thanks to growth in our key [ SA ] and GA channels as well as our growing dominance in the high-growth health insurance market.

[Foreign Language]

[Interpreted] As of the end of March 2021, our RBC ratio recorded 332%, representing the highest level of financial soundness in the industry in spite of continuous tightening of regulations. We are making good progress in putting all the required business management processes in place ahead of the new regulatory scheme going into effect in 2023.

[Foreign Language]

[Interpreted] Please do refer to the materials that we handed out for further details. And please be advised that all forward-looking statements and projections at today's conference call may be subject to change in case of changes in the local and global economic and business environment. Now we will accept your questions.

[Foreign Language] [Operator Instructions] The first question will be provided by Jin-Sang Kim from Hyundai Motors Investment & Securities.

[Foreign Language]

[Interpreted] Yes. Thank you for delivering good performance. I have 2 questions. Overall, it seems your performance is quite solid. But if you look at your loss rate, it does appear to have deteriorated some. Of course, we are coming off of the low base of COVID-19. But even compared to first quarter 2019, it is a bit higher. So what is your outlook in terms of future loss rates? And what are your strategies to improve the loss rates going forward? Second question has to do with new business growth. It seems, overall, your key focus products like accident and health-type policies are showing good new business growth, whereas, overall, for protection policies, generally, there is a bit of a slowdown. So what is your outlook for that? And what are your growth strategies as well?

[Foreign Language]

[Interpreted] Yes. This is [ Jung Sun Lee ] from the management support team. Let me answer your first question.

[Foreign Language]

[Interpreted] So due to the protracted COVID situation or actually in spite of COVID, we're seeing an uptick in the use of medical services, which has led to an increase in claims paid. So overall, relative to prior years, also compared to 2019, as you mentioned, loss rates are up a bit at 86.1% but still within manageable levels.

[Foreign Language]

[Interpreted] And the biggest problem would be in the indemnity, medical reimbursement-type products, the loss rates there. However, if you take out those types of policies, our loss rates are actually comparable to prior year levels. As you know, in 2019, the loss rates were around 79.3%. So our loss on these types of products at 77.2% is an improvement versus 2019 and quite flat, very comparable to last year loss rates.

[Foreign Language]

[Interpreted] So I was speaking to the medical reimbursement policies, the loss rates. It is very important that we normalize the risk premium, the risk rates, cut back -- or excuse me, crack down on fraudulent claims in order to improve loss rates going forward.

[Foreign Language]

[Interpreted] So there are great uncertainties regarding the rest of the year in terms of how COVID-19 will play out. But generally speaking, there might be a recovery and pickup in the use of medical services like medical checkups that people have been postponing. So we think that, that kind of medical use is likely to -- excuse me, claims paid may likely increase.

[Foreign Language]

[Interpreted] So again, in order to improve the loss rates going forward, we will focus on growing new business, improving persistency rates and, again, cracking down on questionable or fraudulent claims. We also tightened the discipline on the underwriting and screening process to ensure that claims paid, the amounts can be reduced.

[Foreign Language]

[Interpreted] So as things appear right now, on a full year basis, we may see an year-on-year increase in loss rates somewhat, but we intend to work very hard to make sure that they do not go back to pre-COVID levels.

[Foreign Language]

[Interpreted] Yes. This is [indiscernible] Lee from the CPC planning team. Let me take your second question.

[Foreign Language]

[Interpreted] So in the handout materials, you will see that in the first quarter, we did see about a 15% year-on-year drop in terms of protection, new business APE.

[Foreign Language]

[Interpreted] By product line, you see that APE for the health, accident-type policies has increased very significantly whereas whole life APE has gone down.

[Foreign Language]

[Interpreted] So in terms of the reason why, I would say that it's largely due to the low base effect coming off of last year where we did a markdown in our assumed rates. And so initially, it did go down in January and February but picked back up to prior year levels as of March.

[Foreign Language]

[Interpreted] So we see it as a transitory phenomena that happened primarily in January and February due to the protracted COVID environment. But again, starting in March and also into April, we are seeing recovery back to above prior year levels.

[Foreign Language]

[Interpreted] But going forward, we think that the current trend in insurance sales is likely to continue as we see a shift away from whole life-type products, more towards health coverage-type policies. So in keeping with these trends, we will expand our lineup of health-related contracts or policies and work to boost sales.

[Foreign Language]

[Interpreted] And within our protection portfolio, the health-related products tend to have the highest margins. So as we grow out our health care portfolio that will help improve the profitability of our company.

[Foreign Language]

[Interpreted] So as the pandemic situation stabilizes more, I think customers will see an increase in their health care-related needs. And we think that health care type products will likely drive future market growth. So we intend to focus on growing the health care portfolios even while -- or even as we also grow our whole life portfolio as well to keep balance between the 2 sites.

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

I have 2 questions. The first is to follow up on the loss ratio question being asked earlier. What is the trend like in the recent couple of months of April and May when you look at the loss ratio in the indemnity-related products? And along with that, would there be any premium adjustments or pricing adjustments to reflect the fact that these products are still seeing a very elevated loss ratio compared to other medical products? The second question is that last year, the dividend payment -- payout ratio is somewhat lowered. And this year, given a very strong quarter as well as very high RBC ratio, what's your guidance on dividend?

[Foreign Language]

[Interpreted] Yes, I'm head of the support team, again. Let me address that question on the indemnity loss rates.

[Foreign Language]

[Interpreted] So we do have the actual numbers out and available up to the month of April. So indemnity loss rates on average for the first quarter was 142%. But as of April, it has since gone down to about 128%.

[Foreign Language]

[Interpreted] So going forward, we will work together with other players within the industry to encourage or actually to persuade the financial authorities to allow a premium increase. And so we will be working toward a premium hike this year and also continue these efforts next year as well.

[Foreign Language]

[Interpreted] Yes. This is [indiscernible] Kim, head of the finance team. Let me talk about the dividend payout question.

[Foreign Language]

[Interpreted] So obviously, we had outstanding performance in the first quarter on the basis of very stable insurance profits. We had a special dividend payout of KRW 800 billion plus from SEC. Also, we had very positive variable option P&L and also a good equity method or consolidated gains from our affiliates as well.

[Foreign Language]

[Interpreted] However, given the prevailing volatility within the financial markets as an effect of COVID-19, it's really hard to gauge at this moment the direction of recurring earnings, both in terms of our variable option, business and also the direction of our risk margins going forward.

[Foreign Language]

[Interpreted] And last year, due to COVID-19, again, as a temporary measure, we did lower the dividend payout slightly. But again, this was just a temporary measure. And I must state that our company's mid-term guidance of gradually increasing our payout -- cash payout up to 50% remains unchanged.

Ms. Tian, do you have any follow-up questions?

I'm sorry, may I just follow up on the dividend. Would the special dividend from SEC be considered as part of the payable earnings to shareholders?

[Foreign Language]

Yes. This is head of the finance team.

[Foreign Language]

[Interpreted] So let me start my answer.

[Foreign Language]

[Interpreted] So in the first quarter, we did have a very big dividend payout from Samsung Electronics. It did come all at once, but this was a part of the shareholder return policy of Samsung Electronics. Rather than choosing to pay out the dividend separately over the past 3 years, for the past 3 immediate prior years, they actually chose to bring all the dividend surplus, the resources together for this big special payout.

[Foreign Language]

[Interpreted] And so we, of course, will take the dividend income as part of our recurring earnings and profit payable to fund -- or payable as dividends to our shareholders. We are not considering installments or split dividends at the moment.

[Foreign Language] The next question will be provided by Byung Gun Lee from DB Financial Investments.

[Foreign Language]

[Interpreted] Yes, this is Byung Gun Lee from DB Financial Investment Securities. Thank you for delivering good results. May I ask 2 questions? I would like, first, to ask you to explain in greater detail about the market conditions. We did hear from other companies that did the earnings call earlier than Samsung Life about certain drivers for first quarter results. They did mention the regulations that were implemented last year regarding 0 surrender rates or low surrender products and also talked about the base effect from last year. They talked about -- they also mentioned how general protection-type policies, new business saw an increase to help improve profitability. For Samsung Life, I think you also saw an increase in your general protection-type sales, also value of new business whereas volume-wise -- and also volume-wise, you saw less of a decline versus the competitors. So could you -- and also you saw brisk sales through your bancassurance channel, particularly in the first quarter. So can you just explain the overall market situation, whether you believe that those developments in the first quarter are likely to continue into the second quarter? And the second question is, up to now, Samsung Life has always said, you want to focus on profitability as your key metric. So rather than focusing on volume growth, first month monthly premium growth, is it correct to assume that value of new business is your more high priority KPI going forward?

[Foreign Language]

[Interpreted] Yes, this is the head of the CPC planning team. Let me address your questions.

[Foreign Language]

[Interpreted] So as was mentioned earlier, if you look at the life insurance market, we saw a 24 percentage point contraction in the market in the first quarter of 2021 relative to the first quarter of last year.

[Foreign Language]

[Interpreted] So this was mostly due to 2 reasons. First, the rapid spread of COVID-19 towards the end of last year led to a drop in performance in the early months of this year, January and February.

[Foreign Language]

[Interpreted] And then second, as you mentioned, are those regulations pertaining to policies with low to no surrender value. The regulations do have the effect of contract -- it did lead to a contraction in sales.

[Foreign Language]

[Interpreted] So for those 2 factors, though, we believe that they will largely be resolved with time.

[Foreign Language]

[Interpreted] However, even amid this backdrop, our dominant share of this market continues to grow year-on-year. It was 21.9% as of 2019, going up to 23.5% last year and higher now at 23.9%.

[Foreign Language]

[Interpreted] And when you take out January for February and March, our dominant share in terms of new business, APE, is slightly higher at 24%.

[Foreign Language]

[Interpreted] So although the overall life insurance market saw a temporary setback overall, for Samsung Life, we are actually using it as an opportunity to solidify our dominance.

[Foreign Language]

[Interpreted] And as you mentioned, not only are we working to become more dominant in this space, we're also, of course, always trying to grow value of new business.

[Foreign Language]

[Interpreted] So as you can see from the materials, although our protection first month monthly premium did contract, still value of new business saw a 20 percent point increase year-on-year.

[Foreign Language]

[Interpreted] So because we saw early on that there was a general shift in the local insurance market away from whole life type protection to more of the health type protection, we actually anticipated this shift 3, 4 years' back.

[Foreign Language]

[Interpreted] And in order to keep aligned with this shift, we have been developing many new types of health care products to meet the growing or evolving needs. We are also providing many different forms of support to support the activities of our FCs as well.

[Foreign Language]

[Interpreted] So from the second quarter onward, we will continue with this type of 2-tier strategy, working, on the one hand, to solidify our market dominance while also boosting value of new business by expanding sales of health, accident-type products.

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

[Foreign Language]

[Interpreted] Yes. This is Myung Wook Kim from JPMorgan. I have 3 simple questions. First, I think one of your slides showed a time frame in terms of adoption of IFRS. And so does this mean that by 2022 next year, we will be getting access not only to your existing financial reporting but also will get access to the company's CSM, real operating profit, required capital and available capital based on K-ICS requirements? Will that start to be available starting next year? And second, as the market interest rates are trending upward, I'm interested in what kind of risk you see in terms of the reserve interest rates. As yield on interest-bearing assets remain flat, is there potentially a risk that your reserve interest rate might increase? Third, regarding value of new business, thank you for delivering very solid numbers. But as the loss rates on the indemnity-type products deteriorated and as market rates increased, I do know that you adjusted your NIER assumptions, which did actually have the effect of boosting the value of new business somewhat. So my question is the operating variance, is it moving along as largely expected by the company, so it's not something that you're concerned about? It's just adjustment of the various economic assumptions, is that the case?

[Foreign Language]

[Interpreted] This is [indiscernible] Kim. I'm Head of the actuarial team.

[Foreign Language]

[Interpreted] So in terms of what we have been doing to prepare ahead of IFRS 17...

[Foreign Language]

[Interpreted] So we actually finalized development of the system as of 2020, and we had a pilot run of closing our books month-to-month based on that system.

[Foreign Language]

[Interpreted] So as we prepare for this new scheme, things -- of course, many things are underway. But a lot of things are quite fluid at the moment and will be determined only toward the end of the year when the accounting policies are fully finalized. For example, our P&L, our capital position, et cetera, will only be fixed at that point.

[Foreign Language]

[Interpreted] And so again, once the interest rate and our company accounting policies are fixed at the end of the year, at that point, we do finalize our profit and loss income statement and balance sheet as of the end of 2021.

[Foreign Language]

[Interpreted] And so in the course of this work, as we head toward the end of the year for things to be finalized, if there are different pieces of information that we can share with you, we will follow up through our IR team.

[Foreign Language]

[Interpreted] And regarding required capital, available capital under the K-ICS scheme, since this system itself will go into effect in 2023, we will be preparing for full-fledged adoption in the later years and perhaps ready to share more information and color after next year.

[Foreign Language]

[Interpreted] And then your third question regarding some actuarial assumptions.

[Foreign Language]

[Interpreted] So for the purpose of first quarter, we only updated the economic assumptions.

[Foreign Language]

[Interpreted] And then the actuarial assumptions will be updated at the end of the year, including lapse rate, claims paid.

[Foreign Language]

[Interpreted] But our actual experiential data in the first quarter regarding these actuarial assumptions and metrics, well, in order to have some statistical significance, we do at least have to have 6 months-plus accumulation of the data for it to have that kind of statistical effect.

[Foreign Language]

[Interpreted] So we will actually have to observe how the experiential, the actual rates play out after the second quarter to assess how they will be factored into the changed actuarial assumptions toward the end of the year.

[Foreign Language]

Yes. This is [indiscernible] from the RM team. Let me take your question regarding the negative spread and what will happen amid rising interest rates.

[Foreign Language]

[Interpreted] So I think you were asking because you were concerned about the time delay effect between increase in market rates and the return on our investments.

[Foreign Language]

[Interpreted] So in terms of the formula that we use to calculate our crediting rates, it's actually the average of the market interest rate and actual return on investments achieved. But that's not the only factor that we look at because we do reflect various circumstances and conditions as well.

[Foreign Language]

[Interpreted] And in order to boost our yield on interest-bearing assets, we are actually investing into more higher-yielding assets overall, including ultra-long forwards and other higher-margin instruments.

[Foreign Language]

[Interpreted] So the effect of rising interest rate may be reflected in narrowed negative margin on a lagging basis, which means that the effect will be noticeable later on. While that is true, I don't think we should be too concerned about rising interest rates leading to temporary widening of the negative interest spread.

[Foreign Language]

[Interpreted] So I have one added or follow-on question. When you are calculating EV for 2021 and in terms of the assumption, the actuarial assumption for the claims payment rate, do you use the past historical 3-year number or 5-year figure? If I remember correctly, I think for the expense ratio, you used historical 1 year figure but a longer duration for the claims paid. And I asked because I think there's greater than 50 bp interest rate sensitivity for the claims rates.

[Foreign Language]

Yes. This is head of the actuarial team.

[Foreign Language]

[Interpreted] So with the exception of business expenses, other actuarial assumptions, including lapse rates or claims paid rates are all calculated based on 5-year historical data.

[Foreign Language]

[Interpreted] So what happens is, say, we have a particular experiential data for this year, but that is not 100% reflected into our actuarial assumptions for next year, just 1/5 of this year's movement will be reflected in combination with the historical average of the 4 prior years before this year. So it's not that the course of what happened this year will be reflective 100% in the immediate following year. So our sense right now is the impact to changes in our actuarial assumptions may be slightly lower than 50 bp in terms of the interest rate sensitivity.

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

[Foreign Language]

[Interpreted] Yes. I just have one question regarding the overall shift that we have been seeing within the broader life insurance market, as you mentioned, away from whole life toward more health-related policies. But I do think that there is a bit of an overlap in the health care products by life insurance companies with the personal protection, the health care coverage provided by the non-life P&Cs. You delivered good sales in the first quarter, but I understand that in March, some of your competitors like Hanwha and Mirae have been stepping up, establishing a subsidiary to boost their engagement. And so likely competition may become more intense going forward. So what are you thinking in terms of your channel strategy for these types of health products? Right now, it's mostly exclusive channel center, but could you consider that kind of a subsidiary-type distribution model like your competitors? Do you have any plans to tie up with other digital platforms? Have those types of ideas been reviewed?

[Foreign Language]

[Interpreted] Yes. Let me take that question. I'm the head of CPC planning.

[Foreign Language]

So certainly, in the last 2 to 3 years, there's definitely a shift in the life insurance space away from whole life coverage to more the health-type products.

[Foreign Language]

[Interpreted] So first and foremost, we would need to really boost the competitiveness of our product offerings, offering really different types of benefits in order to succeed against the competition.

[Foreign Language]

[Interpreted] And it's important for us to also enhance the competitiveness of our exclusive channel, the FCs, because they are a central part of our distribution platform.

[Foreign Language]

[Interpreted] And in particular, after the outbreak of COVID, a lot of the FCs are actually reaching out to the customers through mobile means. So we are providing a lot of that kind of back-end support to support the activities and engagement of our FCs.

[Foreign Language]

[Interpreted] In terms of our channel strategy, we will continue to use our exclusive FCs as a central driver for growth. And also, the GA market is also seeing growth. That will be another pillar of our growth.

[Foreign Language]

[Interpreted] Regarding possible tie-ups with digital platforms, we are examining various options. But right now, I don't think it's been established firmly as a key distribution channel yet. And so right now, we're more focused on providing digital tools, different forms of support for our FCs.

[Foreign Language]

[Interpreted] And there's no telling what direction we will see play out in terms of distribution channels. So we'll continue our efforts to develop multiple channels that are viable. And we will, of course, enhance the competitiveness of our product offerings as a baseline and use these types of health, accident-type policies to really grow further dominance within the market.

[Foreign Language] There are no pending questions at this time. [Operator Instructions] [Foreign Language] Thank you very much. With that, we will conclude the first quarter 2021 earnings call for Samsung Life, as there are no pending questions. For further inquiries, please do contact our IR team, and we'll be happy to follow up with you. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]