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

[Interpreted] Yes, good morning, ladies and gentlemen. This is [ Shonan Kim ], head of the finance team at Samsung Life. Thank you very much for joining us, despite your very busy schedules, at Samsung Life Third Quarter 2021 Earnings Results Conference Call. So as previously noted, we will be proceeding with a Q&A session in the third quarter with members of management. And before proceeding with Q&A, allow me to hit on the highlights of the third quarter results, which I believe have already been shared. So as you can see in the highlights, on a cumulative basis up to the third quarter, our net profit [indiscernible] driven in large part by an increase in investment margin, recording KRW 1.294 trillion. So as you can see, driven by a rising rate -- [Excuse me.] Driven by rise in market rates and also solid sales in our health-related policies, value of new business grew by 26% year-on-year, recording KRW 1.238 trillion. And also despite the difficult operating environment, we recorded strong protection market share, up 25% (sic) [ up to 25.4% ]. And despite regulatory tightening, our RBC ratio as of the end of September stands at a robust 311%. And at the end of this year, we expect that our LAT surplus, which recorded KRW 23.6 trillion as of the end of the first half, will be even [indiscernible] we are still demonstrating the highest level of financial soundness in the industry. As you can see in the earnings breakdown, in the third quarter, our net profit recorded KRW 129 billion, which is a year-on-year decrease mostly due to an increase in variable guarantee loss due to weakness in the stock market, also other one-off factors such as increased provisioning or contributions toward the social contribution fund. However, we have started to see an improvement in our loss rates, starting the second half of the year; and these trends are being sustained into October. Also our strength is becoming even more reinforced in the health policy space and also in the nonexclusive distribution channels as well. And thanks to the rising rate environment, also expansion of alternative investments, we have seen an improvement in our negative [ spread ] margin, which narrowed by minus 1 basis points relative to the end of the previous quarter, underscoring very strong underlying fundamentals. Please kindly refer to the materials that we have provided in advance for further details. And please be advised that the outlook contained in today's conference call may be subject to change depending on both domestic and overseas market conditions and also changes in our operating environment. And thank you very much. We will now start with our Q&A.

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

[Interpreted] Yes. I have 2 questions. First, regarding value of new business, it seems that year-on-year it has gone up, but it does seem to be slightly down quarter-on-quarter. Margins are clearly improving, but I do imagine that there is some impact from the overall decrease in the new business APE that has been impacting the overall industry, so what is your outlook for value of new business going forward? In terms of growth drivers between volume versus margin growth, will you be more focused on the margin growth side to further scale value of new business? Also how much value of new business growth do you anticipate for next year? Second, regarding protection APE, it has grown year-on-year but does seem to be slightly softer quarter-on-quarter, so what are your plans in terms of protection market share going forward?

[Interpreted] Yes. This is head of the actuarial team. Let me take that question. So you are right. In the third quarter of this year, we did see an improvement in our value of new business, which recorded KRW 403.3 billion, up by KRW 56.5 billion from the previous year. So we saw solid growth in our higher-margin health-type policies, which was one driver of the improvement. And also change in assumptions due to rising market rates was also another driver that resulted in higher value of new business, but APE actually was KRW 723.8 billion (sic) [ KRW 665 billion ], so down by KRW 58.7 billion from the previous period. But still we are very healthy in terms of our overall product portfolio and also product mix within the broader portfolio. Our share of protection products is being maintained. And also, from the protection mix, we are seeing a -- very solid results from the health- or accident-type policies. And then due to rising interest rates, there was a change to our economic assumptions. Our NIER assumptions were raised by 50 basis points from 3.1% to [ 3.6% ], and this contributed to KRW 50 billion that added onto our value of new business. So value of new business on a cumulative basis up to the third quarter is KRW 1.23 trillion. For the full year 2021, we are expecting KRW 1.6 trillion. So this expansion actually will be driven in large part by improvement in the underlying new business margins, as we do very robust sales. And the higher-margin-yielding health-type policies new business margin, which was 48% last year, is expected to deliver above 60% level this year. So despite the difficult operating environment affected by COVID-19, we are still doing very strong sales operations obviously focused on our robust protection product portfolio, particularly the higher-margin protection-type products. And this remains a key part of our strategy. And we have every expectation that we'll be able to manage our new business margins at adequate levels, driven by improvements in our persistency rates and also ongoing cost savings on the [ loading ] expense side.

[Interpreted] Yes. I am from the CPC planning team. You did ask about the protection market share. So in terms of our outlook for next year, we do not anticipate any large growth necessarily in the broader protection market. That is why we want to remain focused on the higher-margin type products, health products, also accident coverage products. And we also want to continue our current efforts to recover the competitiveness of our whole life products to maintain [ our near-current ] market share levels. And if you look at large competitors, they have seen a big drop in their FC head count, whereas for us, our strategy of increasing our FC has just been quite successful. So they will provide a strong base to drive very solid business next year, which will allow us to achieve market share that is at least equivalent to this year's level in 2022.

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[Interpreted] Mr. Yafei T (sic) [ Ms. Yafei Tian ] from Citi.

There seems to be a bit of problem with -- finally, my line is open. So my question is really around the decline in loss rate in this quarter. And you did point out that October loss rate is seeing further improvement, so what is driving this? And is this something that is temporary because of COVID resurgence? Or it's something that can actually sustain for extended period of time. That's the first one. And the second one is around dividend policy. You did -- wanted to achieve about 50% payout ratio by 2023, so as we get close to end of the year, I wanted to understand what you're thinking around the payout ratio for this year.

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[Interpreted] Yes. This is [indiscernible] from the support team. Let me take that first question. So initially and especially throughout last year, due to COVID-19, there was a reduction in medical service usage, but starting this year, things turned around. More people receive medical treatment and services, and claims paid increased. However, with the resurgence and the other -- the additional COVID wave, we have since seen a drop in medical usage, also drop in claims paid, which in turn has resulted in improved loss rates. So there are still many uncertainties surrounding the COVID situation that can be a source of volatility. As we transition to "to live with COVID" mode, there are concerns that the claims paid rates may actually start to go back up like they did last year. So that is a concern. So our assessment right now is that possibly the loss rates may go back to around mid-80% level, which is similar to 2019 pre-COVID levels.

[Interpreted] Let me take your second question, regarding the dividend policy. I'm head of the finance team. So we intend to maintain our stance to continuously improve our payout ratio, assuming that there are no excessive risks or uncertainties on the market, unlike 2020, and assuming that current financial market conditions remain largely intact. So that was my answer. Thank you.

Yafei, do you have any follow-up questions?

Yes. Just wanted to follow up a bit on the dividend policy. So last year, the payout ratio was about 35%, 36%. And then there is still a bit of distance to your 50% target. Just wanted to understand what sort of payout you could -- you're thinking about for this year.

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[Interpreted] Yes. This is Head of Finance again. So as you know, there is significant fluctuation in our P&L depending on conditions in the stock market, also other factors like market interest rates, so I seek your kind understanding that, because of those fluid conditions, we're not able to specify a certain number right now.

[Interpreted] The next question will be provided by Seung-Gun Kang from KB Securities.

[Interpreted] Yes. So I have 2 questions. First, I would like to hear more about the company's view about the life insurance protection new business outlook for 2022. So I know that you are managing to boost your value of new business, but overall for the broader industry I think, centered around whole life CI, there is a general decline in terms of protection new business, which is a source of concern overall. You have stated that your plan is to maintain current market share, but as far as protection new business is concerned, likely the conditions are not going to be favorable next year, so is it fair to just understand that you intend -- you expect a reduction in volume but you will try to maintain value? So I'd appreciate the company's view. And then you shared your LAT surplus, and there is now talk about a further adjustment of the long-term forward rates. If we assume that the rates are reduced by 15 basis points, how much of an impact would that have on your stated -- or expected LAT surplus?

[Interpreted] Yes. This is [indiscernible] from the CPC planning team. So the first question was about our view of the life insurance protection market itself. So in terms of our outlook for the overall protection insurance markets next year, even if the COVID situation does ease somewhat, we don't think it's likely that the protection market may see any abrupt type of growth. So in the past, there were many low- or 0-surrender-value whole life-type products that were sold into the market, many of which were low performing or low margin yielding, but they have since been stabilized after tightening of regulation. Say, for health-related policies, initially there was an increase in sale of the lower-margin type products, also new products that offer protection for Alzheimer's, for example, but since then, that has also become further eased now. So given the situation, we intend to maintain our strategy to obtain and maintain an adequate level of market share within the protection space, with focus placed on the higher-margin-yielding type products. So this will inform our product or marketing strategy next year, and we intend to proceed in a way that continuously adds to our corporate value.

[Interpreted] And let me take the other question, on the LAT surplus. I'm from the actuarial team. Yes, in terms of the LAT surplus amount, we have seen an increase of KRW 7 trillion from the end of last year. So at that point, it was KRW 17 trillion, but as of June this year, it is now KRW 24 trillion. So in terms of the interest rates, 10-year KTB yield has gone up to 2.5%. As of today, it is actually 2.4%, but for the purpose of my answer, I will assume that it's set at 2.5%. So to share my conclusion with you, first, LAT surplus, which is KRW 24 trillion as of June, is expected to enlarge to KRW 26 trillion by the end of this year. And toward the end of the year, there will be further tightening of related regulations, so there will be certain changes to measurements methodology, for instance, for LAT, shifting from the [ P55 ] method to an averaging method. So to explain further: [ P55 ], it's based on a set of 200 different interest rate scenarios. And it actually refers to the 110th in terms of the reserve amount in ascending order, whereas the averaging method, yes, applies a simple average of the 200 different interest rate scenarios. So this averaging method actually starts to kick in and have effect somewhere around the [ P60 ] level. And then another institutional change that we expect toward the end of the year is further reduction in the UFR by 15 basis points. So the impact from the institutional strengthening will impact our LAT surplus. It will detract by about KRW 6 trillion. So KRW 24 trillion as of end of June will be reduced by KRW 6 trillion down to KRW 18 trillion as the effect of these institutional changes, but that is offset by the increase in interest rates. KTB 10-year yield, 2.1% in June, is now up to 2.5%. And so the -- that will add KRW 8 trillion to our LAT surplus. And so the net effect will be an addition of KRW 2 trillion in our LAT surplus. So due to the institutional changes, surplus will go down by KRW 6 trillion, but due to rising interest rates, it will go up by KRW 8 trillion. The difference on a net-net basis is KRW 2 trillion.

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[Interpreted] The next question will be provided by Myung Wook Kim from JPMorgan.

[Interpreted] Yes. I would also like to ask about 2 questions or so. First, in your presentation deck you do mention different new initiatives that you have been working on, like ESG or asset management type business, but I noticed that there are no further updates on IFRS 17 or your Chinese business, so are there further developments underway that you can share with us today? And second, I understand that, for the purpose of calculating new business, you did adjust some of the underlying economic assumptions. NIER assumptions actually have consistently been increasing. It was around 3.1% last year. It improved to 3.4% by the end of the first half and now it's at 3.6%, so what is the reason for this consistent increase in the NIER assumptions? I'd like to know. So first, do -- are you adjusting the discount rates? That's one thing I would like to know. And if not, why? And second, the value of in force as of the end of last year stood at KRW 2.6 trillion. If you apply the current set of assumptions that you have defined, what do you think that number will look like by the end of this year? And third, there are lots of concerns over inflationary pressure. I understand that for expensing you're assuming an inflation rate of about 2% or so. So is there -- is any change to that 2% assumption likely?

[Interpreted] Yes. I would like to update you on the IFRS 17, first. So actually, by the end of this year, we will be ready to transition over to IFRS 17. And in fact, the interest rate prevailing at that time will have actually the biggest impact in terms of how we work that transition. So according to the IFRS 17 standards, there are certain provisions that are set out regarding the retrospective approach. So either the full retrospective approach; or the modified approach; or the fair value approach which is available just for onetime application only, only in the event that there is no historical data. So these types of options are stated in the standards. So at Samsung Life, we are currently in the process of preparing for this transition. We have a transition team -- or project underway. So this is meant to reflect the revisions made to the IFRS standards. And once the system is complete and in place, then we will have to determine how we will go about the retrospective approach and the scope of possible applications. So the interest rates at the end of this year will be very important because it will be key in determining whether we decide to apply the retrospective approach for 1 year or otherwise choose another of the available options. And our decision, of course, will also be mindful of the K-ICS regulations as well.

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[Foreign Language] And for your information, the FSS, the financial authorities of Korea, will recognize or acknowledge different retrospective approaches. Either not retrospecting at all; or 3-year, also 5-year, retrospective approach is accepted by the FSS. So we will have to review together, also look at the interest rates level at the end of the year to determine the details, which we will then share with you.

[Interpreted] And then the second question, regarding the economic assumptions. So for the discount rate, we actually do onetime update at the end of each year. So we choose to do this just one time a year to reduce any fluctuation that could happen if we were to do that on a more frequent, quarterly basis. That said, for our NIER assumptions, we actually make quarterly updates. So as you have said, as of the end of last year, our NIER was 3.1%, but as of the third quarter this year, we applied a NIER assumption of 3.6% when we were calculating value of in force. So it did in fact increase by 50 basis points. So NIER, actually it's an indicator of the investment returns for the entire company. So by different asset types, different weightings are approached or applied, depending on their share against the total investment portfolio. So we look at the KTB 5-year spread in the immediate prior year: So if you look at our total investment portfolio, as of the end of September, 60% are comprised of fixed income or bonds. And the investment yield on those bond holdings is actually 2.49%. So this is a increase by 67 basis points compared to the 1.82% bond yield applied at the end of last year. And so again the assumption is determined based on the spread from the immediate prior year; and we continue to see an increase in investment yield, also market rates as well. So when you're talking about the spread across 1 year, initially it may be larger. And then even if it does contract, because we apply the full year average, on balance, it have a favorable impact in boosting our bond investment yields. And then further, on our [ corporate value ]. So there are many different moving parts, so it's hard to say definitively. We'll have to see what the interest rate looks like in the fourth quarter. And the discount rate also will be determined as a function of that interest rate also, but tentatively we believe that net asset value may be [ about ] KRW 37 trillion. Value of in force may be KRW 9 trillion, so combined, we are expecting a total of KRW 46 trillion. But just one disclaimer: The EV or the corporate value amount that I just stated is based on or as of the end of September. So from this point on, other factors like interest rates may later have to be factored in. So it could lead to a difference.

[Interpreted] Yes. Let me talk about the Chinese business initiatives. This is [ Jun Yoo Park ] from the global business team. So our Chinese operations actually have seen very high, solid growth ever since we established a joint venture with the Bank of China in 2015. We were able to grow by leveraging the bancassurance assets owned by BOC.

2020 -- [Foreign Language]

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Sorry. Our revenue actually has grown significantly, as also premium income to KRW 2.2 trillion, so compared to pre JV, we have seen 13x growth.

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So sorry. Revenue as of 2020 was very strong at KRW 2.4 trillion; premium income, KRW 2.2 trillion. In terms of profitability, we turned around [ to plus ] as of 2017 and have since consistently recorded positive profits.

[Interpreted] And just the first 9 months of this year have also seen very strong growth. Premium income is now KRW 2.25 trillion or so, up 32% year-on-year. And also, profitability-wise, we expect to turn positive profits this year as well. So going forward, the goal for our Chinese operations is to continue very high rates of growth using the branch network owned by Bank of China, our large majority shareholder, to use the bancassurance network to grow very strong new business growth. Yes, so we will take advantage of the sales, physical branch assets of BOC. And also the bancassurance network continues to be expanded. And we will leverage those assets to gradually expand the franchise coverage to nationwide coverage. We will focus on higher-margin product sales, long-term payments-type schemes; and also continue to work to achieve further savings gain to continue to drive an increase in pretax income. So as a partner to BOC that is specialized in life insurance, we are providing different forms of management support, particularly for the individual channel. And we will continue to provide that kind of backing. So that was my answer. Thank you.

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[Interpreted] Yes. So if we could just hear about my question about the inflation assumption.

[Interpreted] Yes. I'm head of the actuarial team. So as we look ahead toward implementation of IFRS 17, we are reviewing our inflation assumption, but for the purpose of stability, right now our thinking is that, rather than changing that assumption every year, it may be better to go with a longer time line in terms of outlook. So I think you can think of it more or less around 2%. So this is in line with the projection provided by the Bank of Korea.

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[Interpreted] The next question will be provided by [ Hong-Jin Li ] from Hana Financial Investment.

[Interpreted] Yes. My -- I also have 2 questions or so. It does seem that in the third quarter you had a lot of one-off type expenses. And could you explain more about that? And also I understand that, due to the weakness of the KOSPI, you did incur losses on your variable guarantee products, but it seems to be more so than expected, so could you explain why? Also, in terms of the long-term forward rates, if you assume current interest rates of 2.5%, what would be the bottom line in terms of how much further the LTFR could drop but still remain manageable for Samsung Life? So what would be like that underlying threshold level for LTFR?

[Interpreted] Yes. Let me answer that first question. I'm head of the business support team. So in terms of the reason why we have seen a decline in our net profit in the third quarter, I think the biggest attribution factor is the decline in the variable guarantee profits or namely the loss we saw in variable profits. Other than that, in terms of one-off factors, there's just mainly 2: KRW 20 billion contribution to, as we said, the social contribution fund; also KRW 10 billion in additional provisioning done in the third quarter regarding the immediate annuities, but otherwise there are no other one-off factors.

[Interpreted] Yes. This is head of the actuarial team. Let me explain further about the variable guarantee business. So in the third quarter, we recorded a loss on our variable guarantees of KRW 91.7 billion. The biggest reason is that the value of the reserves actually decreased on rising interest rates and also due to a fall in stock prices. So what happens is, when there is a drop in the value of the reserves, this leads to an increase in the valuation amount for the guarantee reserves, which in turn leads to loss. And just for information: The KOSPI was trading at 3,069 points as of the end of September. So this is down by 228 versus June. And the 5-year KTB yield was 1.93% as of September. So this is an increase of 19 basis points versus June. So again, in the third quarter, the drop in the KOSPI index was one factor. And also, due to rising interest rates, there was an increase in valuation loss on the bond holdings. That's the second. So in terms of the full year value of the variable guarantees, we will have to wait toward the end of this year because that's when the value of in force is finalized and also when the actuarial and economic assumptions will also be complete or confirmed. However, based on the current development as of November, if we assume that the 5-year KTB yield will be about 2.25% and the KOSPI indexed around 3,000, assuming that these levels are largely unchanged, we think on a full year basis we may be looking at variable guarantee profits of KRW 62 billion. [Thank you.] And for your information: On a full year basis, again our outlook for the variable [ guaranteed ] profit is a plus figure, plus KRW 62 billion. So that's -- will mean fourth quarter will also be plus KRW 80 billion.

[Interpreted] Yes. This is [indiscernible] from the RM team. Let me answer your question about UFR. So right now we have very -- we have a very strong position in terms of RBC and LAT, so we really do not have to be concerned or thinking about the correlation between that and any adjustment in UFR. However, starting at the end of next year, when the K-ICS system starts implementation, at that point, there may be impact on our side from adjustments to the UFR. So if the UFR is decreased, then there can be an impact in terms of the valuation on our ultra-long dated liability. So on average, if you look at our total in-force book, the average maturity on our liability is around 30 years or so, that -- so that -- the impact from the ultra-long liability side is really not as large as many may be thinking. So there are currently discussions about further decrease in the UFR, but we think that the impact from those UFR adjustments to our capital adequacy will be contained to less than 5 percentage points, so it's not something that we think should be the source of any big concern. And even in the longer term, even when we assume that the UFR is decreased every year by 15 basis points, even then, we think that kind of effect will largely be offset and will not result in a significant burden for the company because we have been consistently applying ALM -- matching and also consistently improving the structure of our products and value in force. And we are seeing the results, the improvements from those efforts come through. So the UFR is not only applied in Korea but applied globally as well: In terms of global comparison, we are slightly higher in Korea. If the UFR was reduced immediately to be close to global levels, in that case, that may weigh on the company, but if it's a global convergence closer towards the global level, then because we are -- have been working ahead of that in time and prepared ourselves, we do not foresee problems.

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[Interpreted] The next question will be provided by Do Ha Kim from Hanwha Investment & Securities.

[Interpreted] Yes. So this may be a bit of an overlap, but I would like to ask more about your variable guarantee profit and loss. I think, if you could break down the components, that would be very helpful, into reserves, hedging and fee. You said KRW 80 billion profit is expected for the fourth quarter. I think on average -- the average level [ is close ] -- the fee profit on average is about KRW 60 billion, so that means that reserve and the hedging components do not add up to anything higher than or above KRW 20 billion or KRW 30 billion. That may be because of the rising interest rates. I know that you apply a lot of hedging, so you do not have very high sensitivity to any changes in the interest rates, but still I'd like to have more color on the different components that make up the variable guarantee profits. You've provided a lot of the context, so if you could just specify the numbers, that would be very helpful.

[Interpreted] Okay, this is head of the actuarial team. Let me take that question. So as I explained, in terms of the actual amount of variable guarantee profit, that will be a function of the exact value-in-force number. Also our economic and actuarial assumptions will have to be finalized to get the final number. Assuming that current 5-year KTB yields of about 2.25% are maintained, assuming that KOSPI continues to trade around 3,000, on a full year basis, our outlook right now is around KRW 62 billion in full year variable guarantee profits. For the fourth quarter in particular, our outlook is variable guarantee profit of KRW 81.9 billion. So out of the KRW 62 billion in profit, full year profit, if we break that down into hedged versus nonhedged components, nonhedged account for KRW 140 billion, hedged minus KRW 80 billion. [ So of course ] [indiscernible] these are outlooks. Compared to last year, actually the interest rate sensitivity actually have gone down because we have increased hedging and also because of the overall increase in the stock index. So in terms of sensitivity, previously for interest rates, a change of 10 basis points was associated with minus KRW 20 billion, but that sensitivity actually have been reduced by half, so it's now minus KRW 10 billion for 10 basis points move in interest rates. Also we saw similar reduction in stock price sensitivity. So for every 100 points drop, it was correlated with KRW 100 billion, but that sensitivity also have gone down to KRW 60 billion. Of course, another possible factor could be the change to the actuarial assumption. Compared to the previous year, we do not anticipate any large changes, so any impact on our P&L from those changes will be very minimal.

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So again because the actuarial assumptions will not have a large impact, it will be a function of the actual value-in-force amount at the end of the year, also the changes to the economic assumptions related to interest rate, also stock prices. So these assumptions that are [ defined and set ] in September will be applied at the year-end. So on that basis or applying these assumptions, that's how we came up with the fourth quarter profit outlook of KRW 82 billion.

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[Interpreted] So then it's hard to get a further breakdown of just the third quarter profit or loss, the components.

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[Foreign Language] Okay, so the KRW 62 billion outlook was in terms of profit. To break it down further: The fee side is KRW 60.5 billion. There was a KRW 130 billion increase in reserves and also loss on derivatives of KRW 22.3 billion.

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[Interpreted] Thank you very much. We will now conclude Samsung Life's Third Quarter 2021 Earnings Results. Further questions, please contact us at the IR team. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]