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

[Foreign Language] Good day, everyone. Thank you all for joining this conference call. And now we will begin the fiscal year 2022 first quarter earnings call by Samsung Life Insurance. This conference will start with a short brief by Head of Finance and Accounting, followed by a Q&A session. [Operator Instructions] Now we shall commence the conference by Samsung Life Insurance.

[Interpreted] Yes, good morning. This is [ San Kim ]. I'm the Head of the Finance team at Samsung Life. I'd like to first thank you for taking the time out of your busy schedules to join us at the conference call for first quarter 2022 for Samsung Life. As we informed you in advance, today's conference call will mostly proceed in the form of a Q&A with members of management. Please refer to the handout materials. And I will touch on the key highlights for the first quarter before moving on to Q&A. Starting in this -- or excuse me, starting early this year, difficult business conditions persisted with growing global market volatility at home and abroad. We had a spike in Omicron confirmed cases and benchmark rate increases by central banks around the world, protraction of the Russia-Ukrainian crisis also weighed on the environment. However, we continue to perform well with improvements across our major management indicators, including new business sales, in-force book and asset management as well. And we recorded a significant increase in value of new business and also value of in-force as well, which are the source of future profit. Our consolidated net profit attributable to shareholders recorded KRW 270 billion, due to a decrease in investment profit from increase in variable guarantee P&L loss. For insurance profit, we recorded KRW 356 billion, which is actually the highest level since the first quarter of last year and sources of recurring investment profit actually were also strong as well, including disposal gains, dividends, consolidated income from affiliates. Our RBC as of the end of March 2022 did decline to 246% due to a decline in valuation gains on bonds amid a rising interest rate environment. However, our K-ICS ratio, which is calculated based on fair market valuation of our liability actually saw a year-on-year improvement based on our projections. So this signifies that we are likely to see our capital adequacy reinforced and even -- become even more solid ahead of the new solvency scheme. As a representative life insurance company of Korea, we seek to lead a new phase of growth in the insurance industry. We are taking care of our customers' life cycle needs, including good health, retirement planning and asset management as well as we seek to contribute to building a strong underlying safety net as we approach a super-aged society. Also, last April, we were the first in the industry to launch a health promotional product that is based on an app and linkable to a smart launch. So this was the first initiative of its kind. And to address the quickly evolving digital financial environment, even better, we launched the integrated service platform called Monimo, together with our financial affiliates within the Samsung Group. Based on customer data analysis, we continue to develop innovative products and service offerings to increase our lineup that can contribute to differentiated financial services for our users. Yes, please refer to the results handout for the details on our results. And please be reminded that the earnings outlook contained in today's conference call are subject to change depending on both domestic and overseas market conditions and operating environment. Now then we will move on to Q&A session with members of management.

[Foreign Language] [Operator Instructions] The first question will be provided by Sinyoung Park from Goldman Sachs.

[Interpreted] Yes. This is Sinyoung Park from Goldman Sachs Securities. I have 2 questions. It seems that some of your competitors have actually shared details on the expected size of their CSM, also the amortization rate that is expected to be applied. So if you could provide those types of details, I'd appreciate it. And regarding the investment spread or interest spread, according to the fact book, it seems that there was a slight increase in the reserve interest rate. So what was the reason behind that? And what is your outlook for this year?

[Interpreted] Yes. This is Head of the Actuarial team. Let me take your first question on our expected CSM size upon conversion to IFRS 17. And for your information, we are still in the process of settlement. So these are not confirmed final numbers. So please just look at them as reference only. Yes. So at the moment, we are looking at 1-year retrospective approach, which would bring expected CSM to around KRW 8 trillion at the time of conversion. So that would break down to KRW 5 trillion for contracts prior to 2020 and KRW 3 trillion for 2021 and '22. And then I think the second part of your question was regarding dividend policy. Although things have not yet been finalized, transition to IFRS 17, I mean, still, we do recognize the need to adopt some change to our shareholder return policy. However, because parts of the IFRS 17 and K-ICS scheme, which will be introduced going forward, have not yet been finalized. We do intend to start reviewing what kind of changes would be best for our dividend policy starting in the second quarter. And hopefully, once it is crystallized, we hope to get back to you before the year.

[Interpreted] Yes. I'm Head of the RM team. Let me share with you our company outlook in terms of the interest spread. So in terms of our yield or carrying yield, I think it's fair to say that it's nearing its lowest point because we're seeing near conversion. The yield upon maturity and the new money yield approaching state of equilibrium. So for this quarter, you will notice that our interest spread margin actually has widened by 3 basis points. This is because our reserve interest rate actually has gone up by about 3 basis points. as there was an increase in our crediting rate following the increase in market interest rates. So the crediting rate on these products, actually, the crediting rates actually increased faster than the market rate, which had the effect of pushing up our reserve interest rate. So going forward, we expect the interest spread margin to continue to cover as the yield upon maturity continues to go down, whereas new money yield continues to climb. So we think that we will be back close to prior year levels by the end of this year. And starting next year, the pace of recovery for our interest spread will become faster.

[Interpreted] I had a follow-up question. You gave us an estimate of the size of CSM upon conversion to IFRS 17. So just to clarify, how much of the -- how much is the incremental CSM on top of new business? APE?

[Interpreted] Yes. I'm the Head of the Actuarial team again. So I think you're asking about the projected size of CSM for 1 year new business. Because we do sell still a high proportion of protection products in our portfolio, right now, the estimate is between KRW 3 trillion to KRW 3.5 trillion. That, as we mentioned before, there may be certain change because some parts of the institutional scheme, also some of the underlying assumptions have not yet been finalized.

[Foreign Language] The following question will be presented by HeeYeon Lim from Shinhan Financial Investment.

[Interpreted] Yes. So just to clarify, earlier you mentioned the expected CSM size totaling KRW 8 trillion, plus KRW 3 trillion to KRW 3.5 trillion for 2022 new contracts, which add up to somewhere between KRW 11 trillion to KRW 12 trillion. So is that a fair understanding to say that the expected total CSM in aggregate would be somewhere around that range? And you also -- regarding the negative margin, you said starting next year as the reserve interest rate goes down to 3.1%, you should see narrowing our resolution of the negative margin issue. However, because fixed rate contracts will remain on your books, they do not all roll off. Will you continue to be exposed to interest rate volatility on the market. And depending on interest rate movement, is it possible that even if the negative margin is narrowed, at one point, it could widen back again? Is that possible?

[Interpreted] Yes. So I think the timing that you are asking is January 1, 2023. So is that total number what we expect for CSM as of January 1, 2023? Well, to clarify, it's not just a matter of simply adding the 2 components, KRW 8 trillion at time of conversion plus the other KRW 3 trillion to KRW 3.5 trillion for the 2022 new contracts. We have to be mindful that at the end of 2022, there could be certain changes due to changing assumptions, change in our in-force book, also CSM amortization as well. So likely, we may be beginning 2023 with CSM around KRW 10 trillion to KRW 10.5 trillion. And you asked about the likely impact on our equity, whether we expect our equity to go down. Actually, the policyholder, the PEA, the policyholder equity adjustment portion will not be classified as a liability, but it will be classified under capital. So in fact, our capital is expected to increase slightly.

[Interpreted] Yes. This is head of RM. Let me talk more about the negative margin. So we communicated with you earlier that we expect reserve interest rate on our in-force contracts to be somewhere around 3.1% with adoption of IFRS 17. So when we say 3.1%, the meaning is as an average. So the expected negative margin on the high fixed rate legacy contracts that remain on our books plus the future profits that we expect on profitable contracts. So between the 2 sides, the aggregate average interest that we are projecting is 3.1%. And to clarify, your comment is right. It is true that the high rate legacy contracts will not be entirely rolling off of our book. That's true. So hypothetically, if there is a significant drop in interest rates and the investment yield goes down significantly, then potentially there could be reverting back to negative margin conceivably. However, if you look at the composition of our book, we have already transitioned significantly away from fixed rate products mostly toward floating rate products and through effort on our part, we have significantly narrowed the duration gap. So even if there is a drop in interest rates going forward, we do not, in any way, expect an increase in negative margins like what we saw in previous times. So actually, just with our interest-bearing assets alone, we expect that after conversion to IFRS 17, our interest spread will -- the gap will narrow down to 10 basis points. And even that minus 10 bp can be managed or offset by our investment yield on capital type assets as well. So we see the likelihood of negative margin becoming an issue to be very low. And -- however, to address any potential issues regarding negative margins that may arise after adoption of IFRS 17, we have been making effort preemptively. For example, removal of the general accounts is one. And so we will, again, in no way be exposed to large swings as before from impact -- or only to impact from negative margins.

[Interpreted] Just a quick follow-up. I think you mentioned CSM amortization rate expected at about 10%, which does seem a little bit high. So could you explain?

[Interpreted] So I think it was at a previous IR session that we did mention 10% amortization for CSM that was just to give you an overall indication for the entire company. So for in-force contracts prior to 2020, the CSM amortization rate will be lower than 10%. We believe it will be around 8% to 9%. For the health-related policies that we have sold in more recent years, they tend to have shorter maturity and contract periods, which will mean CSM amortization will be higher than 10%. So on balance, that's why we indicated overall for the company, we're thinking of around 10%. But again, it's inclusive of -- its inclusive of the entire company.

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

[Interpreted] Yes. I have 2 questions. On Page 4 of the distributed materials, on the bottom, it seems that the value of in-force actually has gone up significantly just in 3 months, moving from KRW 8.6 trillion to KRW 16 trillion, whereas in the same time period, value of new business did not increase by that big a margin. So could you explain the movement in VIF, breaking it down into economic assumptions and operating assumptions as well? And second, it seems to me that perhaps it's because of your variable guarantee reserves and reserve requirements, that is leading to greater volatility in terms of your quarterly earnings. So do you have any particular solution in mind at the company level to somewhat reduce that kind of volatility regarding your GMAB exposure? And under IFRS 17, what do you think the impact on the variable guarantee reserves will be in terms of your earnings visibility? Will it likely contribute to bigger swings? Or will it be the other way around? I ask because it's hard to project how much dividends are likely to be available. And other companies actually have been examining different strategies, choosing to dispose of, for example, their variable guarantee-related business, for example. So is that something an option that you are open to reviewing as well?

[Interpreted] Yes. This is the Head of the Actuarial team. Let me take your first question, explain the reasons behind the increase in value in force from economic assumptions point of view. So in the first quarter this year, there was a significant increase in market interest rates. So as a consequence, the NIER assumption that we apply actually increased by 64 basis points compared to the NIER applied at the end of last year. And then you asked about any other operating assumption changes. But as a matter of fact, when we calculate quarterly value in force, we only apply adjustments to the actuarial assumptions only or excuse me, the economic assumptions only. So it would be the NIER. We do not adjust any other actuarial assumptions. And then let me elaborate further, in terms of new business, there was a partial decrease in APE. However, margins went off. So let me explain. In the first quarter, we did introduce new protection-type products, providing stronger cancer protection, for example. So these would be whole life type protection products, which have greater margins. So these are the effect of boosting overall profitability by about 10% to 15% versus last year. So although in terms of APE volume, there was a slight decrease, because we boosted sales of these higher-margin products, the new business margins actually went up from 51% to 65%.

Yes. This is ahead of the RM team. Let me take your question about the volatility induced by variable guarantee reserves. So right now regarding our variable guarantee P&L, we do apply a 2-tier differentiated accounting system where we treat the hedge portion differently with the nonhedged portion. So 60%, we apply hedging accounting versus 40% nonhedged. So for the hedged accounting treatment, certain movements in interest rates or share prices do not have a big impact on the earnings. However, it is only in situations where there is an abrupt movement in interest rates or share prices that there might be a gap versus hedged, which then -- which would be the case where we would have a slight impact on our earnings. So for the nonhedged portion, it is calculated based on a set of assumptions provided by the FSS, the financial authorities, which are changed only one time a year. So although we are exposed to interest rate or share price movement, there is a difference again between the hedged and non-hedged portion. Early in the year, there would be no big difference between the 2 sides, but it's only in November -- or excuse me, September when the FSS determines its assumption that there might be a big difference in terms of the impact to earnings, again from the hedged versus non-hedged portion. In the case where there is a dramatic or abrupt change in either interest rates or share prices, then both the hedged and non-hedged portions would see a big impact to earnings. So right now, the current circumstances are consistent with that kind of scenario. So in terms of the level of hedging, the current level has been calibrated so that we can achieve 100% hedged upon conversion to IFRS 17. So after transition, certain changes to interest rates or share prices, we believe will have almost no impact on the earnings. In the event, of course, that there is an unexpected dramatic swing in interest rates or share prices after IFRS 17 is introduced because of the hedged margin of error that I mentioned, there could be the potential of certain impact to the P&L. However, the discount rates variation will be much reduced. So any volatility that we do see in our earnings will be greatly scaled down, perhaps to less than 1/3 of current level.

[Interpreted] So from your answer, it seems that the biggest driver of the increase in value in force was due to the interest rates. So given how the risk-free rate actually has increased, perhaps it's time to adjust your discount or your risk discount rate as well. So have you applied an adjustment already? And if not, any reasons why?

[Interpreted] So this is Head of the Actuarial team. So as I mentioned, recently because of the increase in interest rates, we saw an improvement in our investment yield which led to improvement in value in force. At present, we have not applied any adjustment to our discount rates yet. But if the rate continues to climb, we intend to examine a possible adjustment perhaps on a half yearly or half year -- excuse me, at the mid part of the year perhaps or the end of the year, perhaps.

[Foreign Language] The following question will be presented by Yafei Tian from Citi Group.

I have a few relatively simple questions, some are follow up from earlier. The first one is on the variable guarantee option for this quarter, the impact is relatively sizable. Would you be able to give us a little bit more granular breakdown, how much of that came from interest rate and how much is from the equity market movement? And do you mind reminding us again the activity for interest rate and equity for that variable guarantee option book. That's the first one. And then the second one is that the total economy opening up, can you give us some color on your trajectory of the growth ratio going forward? And finally, just to double check if I heard you correctly, on the capital comments with IFRS 17 implementation, do we expect the overall solvency ratio to be largely similar to the current level?

Sorry, the audio feed was not very clear. So may I clarify if I understood the questions properly? So the first question is impact from variable guarantee options divided into interest rate versus equity price movement. Was that the first question?

Correct. Yes. Correct.

And the second question, loss -- expected loss ratio from economic opening? And what was the third question? Capital?

Yes, the solvency ratio on the IFRS 17, is it going to be similar to current levels?

[Foreign Language].

[Interpreted] Yes. Let me take the first question. I'll try to break down the drivers between interest rate versus share price movements. So in terms of the first quarter, the variable guarantee loss was KRW 170 billion due to rising interest rates and falling share prices, which both had the result of a reduction in valuation gains on our bond holdings. So in terms of the contributing factors to the loss, there was 85 basis point increase in interest rates that was responsible for about KRW 40 billion of the loss. The share price was down by about 250 basis points, leading to a loss of about KRW 70 billion. So it's a combined effect. Those 2 factors led to first quarter variable guarantee loss.

[Interpreted] Yes, this is head of the RM team. Let me take your question on the loss rate. So first, if you look at the loss rate number for first quarter this year, it does show a slight improvement versus the prior year. So actually, we think that the loss rate that we saw in the first quarter does, in part, still reflect the effect of reduced use of medical services due to the spread of COVID-19. So obviously, with COVID, we did see an improvement in loss rates. But recently, due to more people getting cataract surgery procedures the improvement actually was a bit eroded. So in the end, the improvement to our loss rate was, as you can see in the number, just at a slight level only. So after April, there was a significant reduction in COVID cases and there was, in turn, an increase in the use of medical service. And so we do expect that claims paid will increase. However, this will largely be offset after April, we believe, because the financial authorities actually have been tightening restrictions on the cataract procedure. Also, we have been tightening our claims management process as well. So we think that the impact of the cataract issue will be dramatically reduced. So in terms of claim payments, they are both additive and deductive factors at play, which will largely be offsetting each other, and we expect the level to be similar to current levels. And then our expected capital adequacy. So the new K-ICS scheme will be adopted or go into effect next year, but still it has not been fully finalized and confirmed. It uses the same future expected cash flow approach as IFRS 17. And since we're still in the process of working on the IFR settlement, it's very difficult for us to say at this point what kind of K-ICS capital adequacy ratio we expect next year. It's hard to say at this point. However, our expectation is that barring a scenario where there is a dramatic fall in interest rates, otherwise, we will be able to maintain a solid capital adequacy level at above 200%.

Yafei, do you have any follow-up questions?

Yes. There was. Just one on the variable guarantee option. Just remind us what is the current sensitivity for that going forward from interest rate and equity market movement.

[Foreign Language]

[Interpreted] Yes. I'm head of the Actuarial team. So in terms of the interest rate and also share price sensitivity for our variable guarantee options for interest rates, for every 10 basis point change in interest rates, the impact would be KRW 10 billion. For share price, change of 100 points would be equal to KRW 60 billion to KRW 70 billion sensitivity.

[Foreign Language] The following question will be presented by Byung Gun Lee from DB Financial Investment.

[Interpreted] This is Byung Gun Lee from DB Investment Securities. I also have 2 questions. The first question is mostly requiring some fact checking. I understand that towards the end of March, I believe the FSS did provide an illustrative indication of the discount rate that could be applied under IFRS 17. So based on that discount rate, the policy reserves that can be calculated compared to your current surrender value reserves? Is it any greater or smaller. So if you could compare the size, I would appreciate it. And then under IFRS 17, what kind of KPIs do you intend to track and manage in terms of profitability, the market is mostly talking about the absolute size of the CSM, but I have serious questions about whether that would be an appropriate indicator or not, given risk amount also being subject to different volatility factors. Also, you use VoNB under your EV calculations, but I would question whether that would also be an appropriate measure for profitability because the assumptions are different versus K-ICS or IFRS 17, also the timing difference as well. So how -- what kind of KPIs will you be tracking under IFRS 17?

[Interpreted] Yes. So I'm the Head of the Actuarial team. The discount rate under IFRS 17 was actually confirmed and set at the interest rate as of the end of 2021. So the increase in our reserves based on that calculation would be slightly above our current reserve level.

[Interpreted] Yes. This is Head of the support or Business Management support team. Let me take your question on the KPIs. So rather than speaking specifically about just profitability measures. Let me explain overall our KPI management approach. So under the new scheme, the approach to writing up the financial statements will be changed in terms of sales, earnings, also capital. So we believe that tracking the different metrics should require another -- a different approach as well. Well, let me explain how we will be managing across the different components, sales, earnings, assets, et cetera, and starting with profitability because I think that was what you were most interested in. So in terms of new product development and launches, previously, we applied EEV-based profitability hurdles. But going forward, we will be comparing that versus the accounting CSM or assumption-based CSM amount and perhaps applying them both together in the second half of the year to just -- for comparison purposes, as we intend to focus more on future profits going forward. And previously, we managed the profits depending on the different buckets. However, going forward, we will be managing by CSM also the difference between the expected assumptions versus actual cash flow. And then in terms of the operating efficiency, we will not be looking just to manage the performance of that given period only, but we will be tracking a broad set of efficiency measures, including persistency rate, retention rate for the FCs, other productivity measures as well. Yes. In terms of assets ahead of adoption of both IFRS 17 and K-ICS, we will be focusing our efforts on capital and assets soundness as well. And ALM management will be very important in terms of fair market valuation of liability, so that will also be measured as our key KPI as well. So the work to incorporate these into our business plan will start -- starting in August of this year.

[Foreign Language].

[Foreign Language].

[Foreign Language].

[Interpreted] So just to clarify the previous answers. For the first question, is the timing as of the end of December. Is that correct? And the key part of what I was asking regarding the KPIs was whether you intend to track and manage KPIs that factor in the total risk exposure amount because VoNB under EV, for example, I don't think incorporates that risk amount. So that was the key point of my question.

[Interpreted] Yes. I'm Head of the RM team. So to clarify the first question -- or the answer by our Head of the Actuarial team, yes, you're right, was as of the end of December. And then regarding our profitability KPIs. So next year with adoption of IFRS 17, obviously, we will be tracking CSM as a key KPI because it will form the underlying basis of our accounting profit and loss. However, in parallel, we also continue to manage against the EV as a key measure of the actual value of our contracts. Yes. So however, the method of calculating the EV will be changed. We will not be adopting or apply the TEV method under IFRS 4, but the MCEV method that is more consistent with IFRS 17 and its cash flow-based method and approach. And so in terms of the cost of capital or risk charge, we'll also be applying the level of required capital under K-ICS. So again, we will be managing both CSM and MCEV together in parallel. So right now, we're doing a pilot test of the new EV calculation. And as the head of our management support team earlier said, we will be tracking the new EV measure to monitor and track our progress next year against our annual business plan. It will be a key quantitative measure that we use next year.

[Foreign Language] Now we will end the Q&A session.

[Foreign Language] [Interpreted] And thank you very much. With that, we'll conclude the first quarter earnings call for Samsung Life. Please contact us at the IR team if you have any follow-up questions. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]