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

Good morning, everyone. This is Ho-Seok Yoo, CFO of Samsung Life. Despite the tough business environment continuing throughout the first half of 2021 due to the prolonging COVID-19 pandemic, the company attained a favorable first half earnings results in terms of both business growth and profitability compared to the previous year. Our first half net profit recorded KRW 1,165 billion, increasing 71.6% year-on-year backed by the improvement in investment margin. Meanwhile, value of new business, which is the company's long-term profitability index, improved by 28%, showing double-digit growth, thanks to the favorable sales in health products. The company retained its market leader position by securing 25.2% of market share in the protection market, along with the growth of policyholders now reaching 8.2 million persons. Furthermore, our capital adequacy has maintained at a superior level. Next, I will go over the net profit in more detail. First half pretax income came in at KRW 1,556 billion, which consists of KRW 272 billion of risk margin, KRW 1,221 billion of investment margin, KRW 370 billion of loading margin and a negative KRW 308 billion of other income. The other income includes provision for immediate annuity lawsuit, which amounts KRW 278 billion after the first trial loss in court last July. As seen on the upper right-hand chart, the investment margin has shown notable year-on-year growth due to the Samsung Electronics' special dividend and an increase in equity method and consolidated income. In particular, equity method and consolidated income increased by 103% year-on-year to reach KRW 726 billion, which was backed by the favorable results from our beneficiary certificates and the financial affiliates, including Samsung Card and Securities. Next is our new business results. 2021 first half new business APE recorded KRW 1,451 billion, increasing 10.2% year-on-year. This was mainly due to 95.2% of year-on-year growth in annuity APE. Although protection APE increased by 6.8% year-on-year due to decline in whole life products, sales of high-margin health products increased by 12% year-on-year, expanding the proportion within protection products by 8 percentage points. Thanks to such results, our value of new business showed a notable year-on-year growth of 28% and, at the same time, new business margin recorded 56.3%, increasing by 7.8 percentage points. NIER assumption used to calculate the value of new business was raised by 39 basis points from the previous year's 3.1% to 3.49% to reflect the increase in market interest rate. Next is market dominance and efficiency index. As mentioned earlier, the company continued expanding its market dominance with a notable growth of market share in protection and annuity market during the second quarter. Meanwhile, such growth of market share continued on to the nonexclusive channels such as GA and bancassurance as well as exclusive channels. Also, the company has emphasized efficient operation before the adoption of IFRS 17, which realized an improvement in protection persistency rate for both 13th and 25th months. Next is asset management. In the low interest rate era, asset management as well as insurance sales has increasing significance to insurers. As of June 2021, the company's invested assets is KRW 247 trillion, where 78% of the total assets consist of bonds and loans, and we continued to expand investments in alternative assets. Backed by our superior capital adequacy, the company will put more efforts to enhance profit contribution from asset management business. Amid the increasing uncertainty in capital markets, we want to comment on the quality of our interest-earning assets. 80% of total bond assets, which amounts to KRW 101 trillion, consist of safe assets such as government treasury bonds and bonds issued by government agencies. The remaining KRW 26 trillion was corporate bonds and foreign currency bonds, whose rate is mostly above 8. As such, the company is confident in its superior quality. Loan assets amount to KRW 52 trillion, comprising evenly among residential, corporate and policy loans. Except credit loans for household and corporation amounting KRW 2.5 trillion, all are safe secured loans. Last is on the progress on our 2030 long-term strategy. The company designed the 2030 long-term strategy to overcome the limitation of domestic insurance market and secure long-lasting growth and profitability. At the heart of our strategy is to expand globally for both insurance and asset management businesses to secure future growth engines. We believe that we are the only insurance company who has enough capital to expand overseas business, and we plan to make, first, a success story in universes asset management business followed by overseas insurance area. Our recent investment in U.K. Savills IM last May will set a steppingstone to further successes in overseas investment, and we will try our best to continue the success story. This concludes our earnings presentation for the first half of 2021. Please refer to the attached slides for second quarter details and our ESG achievements so far. Thank you, once again, for joining us today. We ask for your continued support and attention towards Samsung Life. Thank you.

[Interpreted] I'd like to ask 2 questions. Ahead of introduction of IFRS 17, it does seem that the company is managing new business margin and persistency rates quite well. What other metrics or areas are you focusing on ahead of IFRS 17 launch? And once it is put into effect, what kind of changes do you think are likely in terms of your underlying financial structure, capital structure or earnings flow? I do know that it is too -- it may be a bit early on to say, but if you could share just your rough thoughts at the moment, that would be very helpful. And second, it seems that your insurance profits in the second quarter were a bit sluggish relative to Q1. What do you think the insurance profit flow is likely to look like into the second half of the year? And what kind of strategy do you have in mind?

[Interpreted] This is [ Chung-Yoo Kim ], head of the actuarial team at Samsung Life. Let me take you through how we are preparing ahead of IFRS 17. So we started -- well, actually, as of March 2020, we completed implementation of a new account closing system in anticipation of IFRS 17. And since April 2021, we have been doing trial calculations on a monthly basis to assess what kind of impact it is likely to have on our capital or financial structure, what areas of improvement are required in our system. Starting in May this year, we started reflecting the revisions to the IASB standards and guidance and also are working on a project to provide support for the early trailing accounting audit system that will also be introduced. And so this project will be ongoing until May this year. And so IFRS 17 will go live toward the end of 2021, and we will only be able to assess the full impact of IFRS 17 once the interest rates and all of the other conditions are confirmed at the time of launch. However, due to our full preparations, not only implementation of the system, we are very ready to provide a differentiated level of management post IFRS 17 launch, going beyond just writing of consistent financial statements but also in terms of the auditing trail system and also business management system. We are very confident that we will be able to really differentiate versus the other peers. So again, we have been running trial calculations over the past year or so. But again, things are still pending because we don't know what the interest rate or the institutional details will be like upon confirmation at the time of launch. So it's really hard to say exactly the full implications of IFRS 17 in -- very specifically. But just in terms of LAT, let me explain what the likely impact will be in terms of our capital and liability structure. So LAT testing, obviously, is a system intended to assess whether our LAT upon fair value valuation is sufficient relative to our reserves [ at cost ]. As of 2020, our LAT surplus actually is KRW 17 trillion, which is of a much higher magnitude versus any of the other larger-scale life insurance companies. So upon introduction of IFRS 17 at the end of 2021, we will be using that LAT surplus to offset the shortfall in terms of our fixed-rate reserves. And so at that time, there will be capital or P&L implications. And so toward the end of the year, there's likely to be an increase in fixed-rate reserves, but using our much superior LAT surplus, we can offset that increase and also manage our earnings positively to the extent that it does not impact our capital. So considering the current level of market interest rates, we do not anticipate any problem in terms of the IFRS 17 transition at the end of this year. But again, the various accounting policies and institutional details will have to be finalized later on. At that time, we will try to communicate that more fully with our investors.

[Interpreted] Yes. This is the CFO. Let me elaborate a little bit on the answer just now by the actuarial team head on the first question. So I think the point of your question was that post implementation of IFRS 17, that would be 2023 and beyond, what is likely to happen to our capital structure; and 2023 and beyond, what will the size of our earnings be like? Will that increase or decrease? So again, part of the standards have yet to be finalized. So I cannot be very firm on the specific numbers, but just roughly speaking. So the first part of my message is that based on the standards that have become available to date, there will not be any change or decrease to its capital base of Samsung Life. So that means that the one thing that really has been a pain point for Samsung Life is actually the loss on our high fixed rate reserves. But my first message is that, that can be entirely offset by our earnings gains from the floating rates. And then my second point is that on a normalized basis, taking out special one-offs like the special dividend payment from Samsung Electronics that we had this year, the size of our earnings actually will be bigger in 2023 and beyond versus the current level. But that said, the mix of our earnings may change from the current composition. Currently, we are more focused, of course, on the loading profit and also the mortality profit. But going forward, it is most likely to be centered around our investment profit. And of course, a key part of IFRS 17 is all about the fair value valuation of our liabilities. And as a consequence, that will mean greater sensitivity to changes in the underlying assumptions. So that's something that, of course, we are giving a great deal hard thought to, as it is key to really manage that sensitivity very stably. And it is something of a homework for us, and we will keep our investors up to date through our communications. And then last remarks, I do realize that you may have slightly more concerns for the life insurance companies versus the P&C. But I did want to leave off with a strong message that as far as Samsung Life is concerned, really, you do not have to be worried.

[Interpreted] Yes. This is [ Sung-Yoo Lee ], head of the support team. Let me take that second question. So compared to Q1, yes, we did see a decrease in both loading and mortality profits in the second quarter. Let me explain the loading profit first. So what happened was that there was the renewed spread of COVID-19 starting November last year. And so we did experience a setback in our new business. Starting in the second quarter, we did engage in more aggressive marketing to expand new business to recover the new business, focusing mostly on health policies, actually channels that tend to incur heavier early on commissions, which, as a result, actually weighed on our expense profits -- or loading profits, excuse me. And then regarding the mortality profits, last year, people were discouraged from using medical services. So that actually was put off or delayed. But then starting this year, people started to get medical care, take medical exams more, and there was an increase in claims in the second quarter of this year, which, as a result, led to lower mortality profits. In terms of our projections for the second half of the year, we think that the loading profits will likely recover beyond the second half. As a matter of fact, new business actually has already started to improve and expand as of the second quarter. In addition to other efficiency gains, we have been implementing company-wide cost savings initiatives to drive up further efficiency gains, which will also help. We're expecting an increase in our assumed loading as well. And then likewise, for mortality profits, we are expecting a recovery in the second half of the year relative to Q2 because among -- amidst the renewed spread of COVID-19, there's now another reduction in medical service usage. And in fact, the number of claims that we are receiving from our policyholders is also declining. So things, of course, are still uncertain, but we think that the number -- the amount of claims paid will drop in the second half of the year.

[Interpreted] The next question will be provided by Byung Gun Lee from DB Financial Investment.

[Interpreted] I would like to thank you, first of all, for delivering good results. I have 2 questions. The CFO has already kindly provided a detailed explanation about IFRS 17, but I would just like to ask about the change in certain assumptions. For the purpose of calculations, you actually increased your NIER assumptions by some basis points. And I'm interested in the relationship or correlation between that and the discount rate assumptions. So I'd like to ask you about that. And then there will be changes to the calculation method for the policy reserves, I understand. My question actually is, in terms -- in order to understand the full implication of IFRS 17 or K-ICS, we right now have no option -- can only look at EV or LAT. And I would like to know how much your EV or LAT assumptions conform with the assumptions that shall apply for IFRS 17 and K-ICS. I only ask because other smaller life insurance players apparently are talking about so-called EV, but their underlying assumptions many times are actually entirely different from the assumptions that will apply for IFRS 17. So again, I'd like to ask about the assumptions and how consistent they are with K-ICS and IFRS. The second question is compared to other insurance players, it is certainly quite positive that you have been delivering better new business results. I think it may have, in part, been due to the dollar boom that we saw early on this year and also a result of the fact that you sold less zero-surrender value type of product versus your peers. If that is in fact the case, then I would assume that in the fourth quarter going forward, that should mean that your new business result should also be quite positive versus the peers. So what are your expectations on that? And I would like to ask about the mix of the non-surrender value products. So they may also be zero surrender value, but there are different degrees, 10% or 50%, no surrender value, those types of things. So I'd like to know about the mix of those types of different products. And then there are certain products that will be demarketed or discontinued this time. So of those specific products, how big a percentage they account for in terms of the overall mix?

Yes, this is [ Chung-Yoo Kim ] from the actuarial team again. Let me take the first question. You asked about how we come up with NIER and our discount rate assumptions for the purpose of easy calculations, I believe. For NIER, the concept for us is the total investment yield that we gain overall as a company. So we do actually do risk weighting of the different asset specific returns proportional to their weight within our overall investment portfolio. So if you look at our investment portfolio, 60% are comprised of bonds. And as of 2021 to date, our return on bonds actually has increased by 53 basis points versus the end of last year. Loan assets, which account for 25% of our invested assets, the returns have actually increased by 19 basis points versus end of last year. So as we saw this increase in investment returns on the different asset classes, this has in turn led to an increase in value of new business. Now when it comes to discount rate, however, we do apply the CAPM model. So in terms of the CAPM model, it does in part factor in the market rates. However, it also applies the beta value, which is specific to Samsung Life, which is quite consistent and not subject to very abrupt change. So overall, within the CAPM model, the discount rate actually does not change very easily or quickly. So although in the current quarter we did see an increase in our investment returns or NIER due to overall increase in interest rates, we are still applying the same discount rate for the reason that I just explained. And the second question regarding the underlying assumptions. So you are correct that there should be consistency and little discrepancy between the different set of underlying assumptions for IFRS 17, LAT and also EV calculations. For LAT reserves, the calculation method is actually prescribed by the authorities and a set of calculation methodology regarding those assumptions. So again, the calculation methodology and also setting of the assumptions are prescribed in the regulations and also in terms of the number of product families or product groups that the LAT surplus regime will apply are also different from the assumptions that apply for IFRS 17. Under IFRS 17, the concept of group of contracts will start to be implemented. And so for assumption setting, that will be the basic unit. And also, there would be categorization of the policies into profitable policies versus loss-making policies. Loss-making policies shall be recognized effective immediately whereas profitable policies are recognized in deferred installments. So that means that the assumptions for IFRS 17, obviously, will be more detailed and more calibrated. And also, the sensitivity or impact to P&L will also become more magnified. So as our CFO has mentioned, we do anticipate greater sensitivity to changes in the assumptions, which is why we are examining the assumptions in great detail. So to just quickly recap, for LAT assumptions, it would be fair to say that they are on par with the industry average, whereas for IFRS assumptions, they are more specific to our company and reflect the judgment -- the discretion of our company in the interest of minimizing volatility to our bottom line, also minimizing the difference between expected versus actual. And so overall, in terms of the level of calibration that we are seeking for our assumptions, we want to be more detailed than the regulated assumptions that apply for LAT to assess the impact from IFRS 17 on our P&L.

[Interpreted] So this is the CFO, again. I'm just checking to see whether your first question was fully answered. Are you okay with the answer?

[Interpreted] Yes. I think that was a full enough answer for me.

[Foreign Language]

[Interpreted] Or I think we may need to address the second question before moving on.

[Interpreted] Yes. I'm in charge of the product team. Let me take your question earlier on the zero to low surrender value products. So in terms of this type of product that is currently being sold by Samsung Life, within the whole life category, we only sell low surrender value -- surrender charge products. For health products, we do have zero surrender value products. So as of the second quarter this year, we sold a total of KRW 6.4 billion in terms of whole life policies. And of that, 60% were the low surrender value type. And then also as of the second quarter, we sold KRW 6.7 billion of health policies. And of that, 20% were the zero surrender value. And then you asked about a certain type of product that is now being demarketed within the industry. So during the first part of the policy's life, it's zero surrender value, but towards the end of the policy life, there's a 10% refund of the surrender value. Well, actually, we do not -- we have not sold that type of product. There's just a handful of P&C players that have been marketing this type of certain policy. So the financial regulatory authorities have actually been cracking down on these types of products sold again by the nonlife insurance companies because of their very low refund rate of 10%. They saw it as a dumping practice. So again, there will be no impact on our side from demarketing of this particular type of product. And so as you saw previously in the second quarter, our protection APE was KRW 14.2 billion, which represents 7% increase from the first quarter of this year, and we believe that this upward trend will likely continue, not due to any demarketing issue but due to the underlying power of our sales, operation and franchise.