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

Good afternoon, everyone. This is [ Min Jong Kim ], Head of Investor Relations. Thank you all for joining us today for Samsung Life's 2022 First Half Earnings Presentation. Today's call is scheduled for one hour, starting with the earnings presentation delivered by our CFO, Mr. Sun Kim and followed by your questions, which will be addressed by the members of our management team present here today. Please note that the figures in this presentation may be revised during the auditing process, any forward-looking statements, including the earnings outlook contained in today's conference call are subject to change depending on both domestic and overseas market conditions and operating environment. Let me now hand over the presentation to our CFO, Mr. Sun Kim.

Good morning. This is CFO, Mr. Sun Kim. Thank you all, our investors and analyst participating in today's earnings presentation. Let me now present to you the main business jobs in the first half of 2022. The company underwent a tough business environment under globally increasing financial volatilities, with worsening inflation due to the re-expansion of COVID-19 and supply chain disruption and potential economic recessions caused by global policy rate hikes. Despite such difficulties, the company laid solid earnings base that will show up in upper trend after transitioning into IFRS 17, with modest achievement in main business areas, including new business, insurance profit and asset management. Value of new business, which is our future profit index reached KRW 808 billion, increasing 11.1% compared to the first half of last year, thanks to the increased sales of high-margin protection products. Insurance profit recorded KRW 759 billion, increasing 18% following improved efficiency such as persistency rate and loss rate. Investment yield recorded as high as 3.4% with rising new money old, timely asset disposal and well-balanced risk management. Capital adequacy is solid as well with RBC ratio recording 249% as of June 2022 and KICS ratio estimated well above 200%. Let me explain the business results in details. First is net profit. The first half net profit reached KRW 425 billion and you can find the reasons in the graph on the right side. Both components of insurance profit, which is risk and loading margins achieved modest results increasing year-on-year. Investment profit, however, turned negative with variable guarantee option P&L incurring KRW 500 billion loss due to high volatility in financial market. The variable guarantee option P&L is calculated by evaluating the value of guarantee options provided for variable insurance products according to cost index and market interest rate, at the end of every quarter under IFRS 4. The P&L is accounting figure not reflecting the company's true fundamental values. Most of the value accumulated under guarantee option reserves is expected to translate into capital upon transitioning into IFRS 17. The company already secured enough derivatives to hedge 100% of the position under IFRS 17, so the variable guarantee option related volatility on our profit will decrease by a large extent after 2023. Excluding the variable guarantee option P&L, the investment profit in the first half recorded KRW 461 billion, increasing 32.9% year-on-year due to investment yield improvement. Next is interest profit. As you can find in the last graph, our interest profit has been improving since second half of last year. Especially in the second quarter, interest profit reached KRW 402 billion, increasing 53.2% year-on-year with big growth in both risk and loading margins. Risk margin reached KRW 210 billion in the second quarter due to 5.7% increase in risk premium following high-margin protection sales and persistency rate improvement and loss ratio as low as 82% following decreased insurance payment with reduced claims for cataract surgeries. Although, the medical usage, including health examination is expected to increase in the second half, the company will take necessary efforts to improve loss ratio on yearly basis by strengthening control on interest, fraud and faults and over-diagnosis. Next is investment profit. Investment profit recorded a loss of KRW 39 billion in the first half. The main reason behind the loss is variable guarantee option loss of KRW 500 billion following financial market volatility such as interest rate and cost to index. Except the loss from variable guarantee options, both interest and dividend income increased year-on-year, while disposal gain recorded KRW 375 billion, thanks to timely sales. Such achievement is shown in our investment yield, which recorded 3.4%, increasing 50 basis points year-on-year. The variable guarantee options P&L for the first and second half is hard to predict due to its close linkage with financial market conditions. But assuming the current market -- current financial market condition persist, we expect it to improve by large number with discount rate effect shown in the first fourth quarter. As long-term interest rate is expected to proceed at a high level globally, the company will strive to improve investment profit with certain interest income and timely asset disposals for the remainder of the year. Next is new business result. The company's protection new business volume decreased following industry-wide market contraction. As shown in the last graph, the company has been actively responding to such market changes by revising health and whole life products and launching new pre-conditioned products, which is shown in a rebound in protection new business APE since the second half of last year. The value of new business for the first half reached KRW 808 billion, thanks to improvement in margin. For the second half of the year, the company will develop solid base to produce high-quality CSM under IFRS 17 by timely launch of new products resumed vitality in-person sales and active promotion of health asset campaign. Next is persistency rate. Since 2019, the company operated company-wide persistency management system to screen high-quality contracts and deter exit of in-force contracts. Thanks to such effort, the 13th persistency rate for protection recorded 87.5% in the second quarter, which is the highest level since 2016. The 25th persistency rate also improved by a large extent to reach 71.6%, such high rate is outstanding among peers in life insurance, since the persistency improvement affects the level and stability of insurance profit after IFRS 17 adoption in 2023, the company will strive to improve such efficiency measures going forward. Next is asset management. The company's invested asset recorded KRW 224 trillion as of June 2022, backed by outstanding financial stability, the company continues to expand investment in high-margin assets, including infrastructure, real estate and private agri to mark the proportion of alternative assets within total assets above 15% by 2025. However, considering the recent abrupt changes in financial markets such as interest rate hike and recession possibilities, the company has been taking more defensive approach in investment by reducing alternative investment plans and increasing low-risk asset positions with strengthened risk management practices. At the same time, the long-term interest rates stays well above 3.1%, which is a discount rate applied upon this transitioning into IFRS 17 as of 2021 year-end. Accordingly, the company has been increasing the acquisition of ultra long-term assets for ALM matching and the duration gap has been reducing faster than our initial plan. The company holds KRW 113.5 trillion worth of bond, which comprising 51.4% of the company's total invested assets. The bond holdings showed time natural well quality, most bundle holdings are either government treasuries or government agencies funds and for corporate bond holdings muster above A grades. The loan assets amount to KRW 54.5 trillion consisting evenly of corporate possible and policy loans. 61.1% of all loan assets are backed by collaterals, such as real estate or policy surrender values. The company recorded RBC ratio of 249% despite interest rate hike and Samsung Electronic share drop in the second -- share price drop in the second quarter. Compared to the first quarter, RBC improved by 3 basis points due to the reclassification of our bond holdings and regulatory easing. Considering further interest rate increase in the remainder of the year, KICS is estimated to stay above 200% level. [indiscernible] surplus recorded KRW 40.8 trillion as of June 2022, increasing by KRW 22.1 trillion compared to the 2021 year-end. The company expects to secure enough surplus before the adoption of IFRS 17. Next is the company's progress under the long-term strategy. First is healthcare service, under our slogan of the long-term strategy, life financial planner beyond insurance, secure customers' future financial future, the company launched the Health Asset campaign to secure customers' health, retirement and asset management. As part of the campaign, the companies cover investing and invest in competitive healthcare start-ups and developing specialized services targeting senior female children and chronic disease care service for diabetes and high blood pressure. In addition, the company launched the health care application, The Health last April, which showed a rapid growth attracting more than 110,000 subscribers as of early August. In terms of products, the company introduced health improved money insurance linked to smart watch last April and has launched new products, including childcare, annuity, cancer and whole life, while providing daily health care service and innovative insurance products. Next is our digital transformation. Digital transformation drove the whole value chain of insurance is an ongoing issue in the first half of this year. In the latter half of the year, we plan to continue in innovating our digital sales environment by providing mobile, as well as tablet device sales process and improving our smart matching function. Also using the Samsung Financial Networks integrated platform, [indiscernible] the company has been expanding exclusive product and services using customer data analysis. The company introduced group purchase function linked with Samsung Card last May and launched gift function for mini insurance last July. The company will continue to launch innovative products to secure 2040 potential customers. Last is our customer focus management and ESG strategies. To establish a green and responsible investment system, the company maintains KRW 8.1 trillion worth of ESG invested assets as of June this year and plans to increase KRW 1.5 trillion every year to reach KRW 20 trillion by 2030. Also, the company has been running Symbiosis system to support child education and strengthen customer rights and better communicate with variable various stakeholders. Such efforts are recognized by diverse domestic and global ratings institutions to achieve high grades for the company's ESG activities. This concludes our 2022 first half earnings presentation. Please refer to the accompanied materials for the detailed results. As things get clear regarding IFRS 17 and KICS, we will actively expand our communication with investors to clear uncertainties and enhance undervalued corporate value. Thank you again for all participating in our earnings presentation. We likely ask for your continued attention for Samsung Life. Thank you.

[Foreign Language] [Operator Instructions] [Foreign Language] The first question will be provided by Myung Wook Kim from JPMorgan.

[Foreign Language] I have 2 questions, first is regarding dividend. As the profit is going volatile, what would be your dividend guideline for the year '22? Considering the past, for example 2018, there was asset sales from -- for the Samsung Securities on Samsung Electronics shares. And there was disposal gain from that and that was considered as core earnings and which was used for dividend to pay out the dividend over a course of 2 years twice. In the future, if there are any affiliated asset sales, affiliated company asset sales or if there are any big sales of assets, how would the dividend play out? Could you explain? And my second question would be the overall, the guarantee type -- the protection-type, excuse me, the protection-type market seems not witnessing any growth. What would be the protection market size growth for what you foresee for the future 3 to 5 years? And next year, if there is transition to IFRS 17, what would be the protection contribution to the reserve -- CSM reserve? Also, could you explain the protection mid-market growth? Thank you.

[Foreign Language] This is CFO, Kim-Sun. I would like to answer your question on the dividend first. [Foreign Language] I'm sure that you must be very curious about our dividend guidelines -- dividend guidance. And there are reasons that we can't really say for sure because there are a lot of changes in the financial market and it is very difficult to forecast and predict the P&L -- how the P&L will play out. With the IFRS 17 introduction next year, there are possible environmental changes outlook and there is a need to check the dividend policy. This year around third quarter, we'll be able to witness a forecast for the P&L and then we'll be able to actively communicate with the market. Provided, however, the numbers, the clear numbers would be able to explain when the closing or settlement is finalized. However, our basic principle of -- to proactively provide dividend and pay out the dividend and considering the understanding or the stance of the investors is solid. As for the electronics equity sales, likewise, our asset sales or sales of other affiliated equities for equity shares, we consider it similar and important as the assets from the customers as well. And as a result, would be used as a source for dividend. If, however, if the source becomes too big and the asset size is too big, asset sales size is too big, we can't recognize it at one time, but could be split and recognized separately. Thank you. [Foreign Language] This is CPC Planning part leader. I would like to touch upon the market forecast, which is your second question. [Foreign Language] I would like to touch upon the market stance on the sales of new policies. Last year, with a lot of regulation and COVID-19, the protection sales was sluggish. However, this year, we expect to witness the sales of protection standing at KRW 54 billion. [Foreign Language] As a result to reinforce our sales forces, we -- the market size would be 25% for the protection and we expect to see MIP monthly premium at KRW 15 billion for us. [Foreign Language] Income for the midterm forecast over course of 3 years, we expect the market size to be KRW 54 billion. And as a result, we would like to continue our new business accordingly. [Foreign Language] This is our actuarial team head. Regarding the adoption of IFRS 17, I would like to explain the CSM for the protection market. [Foreign Language] First of all, the interest is high amid the high interest market, the protection that we are selling is focused on high-margin portfolio. So even if the forecast for the market is downsizing or downgrading of the protection sales, we expect to achieve good CSM for the new business. Thank you. Sorry, excuse me, I would like to correct the protection size not KRW 15 trillion, but KRW 12.5 trillion. Now once again, I would like to correct the protection size is not KRW 15 trillion, but KRW 12.5 trillion. Thank you. [Foreign Language] And also I have explained that in this year, in May, that with the transition to IFRS 17, the new business, CSM, would stand at KRW 3 trillion to KRW 3.5 trillion. This translates to if the volume decrease is about 10%, this would translate to a CSM reduction of 9% to 10%. Thank you.

[Foreign Language] The following question will be presented by Seung-Gun Kang from KB Securities. Please go ahead with your question.

[Foreign Language] My question is, there was a special Samsung Electronics dividend in year '21 and in year '22, you said there was asset sales and that was asset sales and the gains were used to stabilize the profit, as well as used for the source of dividend. There are growing concerns over the dividend because there are volatilities and in variable guarantee profit. In the second half of this year regarding the sales of asset sales gains, what would it be -- how would it be used to -- for the dividend and others. If you have any measures, please explain? And in the press and in the media, there were reports on the REIT building sales. Could you elaborate on that as well? And secondly, regarding the IR, as of June 1st, there was KRW 38 trillion of bond sales and as a result, this is assumed to improve the RBC. However, also, this would also improve your capabilities for dividend or dividend payout ratio? And if this is going to be used for that purpose, could you elaborate a little on that? Thank you. [Foreign Language] This is management support team head. I would first like to explain on the profit stabilization measures for the second half of this year.

[Foreign Language] In the first half, the financial market volatilities were severe and we had to recognize a loss for valuable variables guarantee. As the CFO said, in the second half of this year, there are a lot of measures to stabilize -- the financial market is expected to be stabilized in the second half. And we are enforcing -- we have set up and are enforcing various measures and plans to stabilize the yield for the insurance profit as well as our yield. The detailed numbers are not ready to share with you, but we expect our profit to stand at similar level or at a par against last year. Thank you. [Foreign Language] This is asset management strategy team leader. I would like to explain on the listed company sales. Thank you. In the mid-term -- for the mid-term strategy for asset management, we have -- we are focusing on the asset management business, focusing on [ Tan Zhong ] Asset Management, as well as Samsung SR based on our REIT. Recently, the REIT market is growing and based on our real estate holdings, we are preparing to get into this market REIT market. [Foreign Language] When we -- when REIT business is launched, we would like to continue our shareholdings or equity portion of the REIT's business and operations, so that we can maintain and persist our ownership. [Foreign Language] Regarding the target buildings or target property, as well as pricing, discussions are going on and we expect the listing or IPO to take place in the first half of '23. Thank you. [Foreign Language] This is [ RN ] team head. I would like to answer upon the reclassification of the bonds. [Foreign Language] In the beginning of June, I think with the bond reclassification, the available capital valuation loss was KRW 1.5 trillion, so which has defended the RBC drop by 10%. [Foreign Language] Regarding the size of drop, this would have a similar impact bond revaluation -- reclassification would have a similar impact on the dividend. So we have defended the dividend reduction or dividend cut by KRW 1.5 trillion, you can interpret it as this. So unless the interest hike is as high as 4% or exceeding 4%, the impact on the dividend would be -- would not be much. Thank you. So let me -- excuse me, let me correct. The bond valuation loss is not KRW 1.5 trillion, but the bond valuation has been defended, bond valuation loss has been defended by KRW 1.5 trillion. Thank you.

[Foreign Language] The following question will be presented by [ Tae Jeong Lee ] from DB Financial & Investment. Please go ahead with your question.

[Foreign Language] Sorry, excuse me, I would like to correct, it's not the dividend gain that's KRW 1.5 trillion, but its dividend capabilities. Now let me explain the question. On Page 9, the alternative investment in there is that local real estate investment would witness a 10%, the plan is to reduce 10% and overseas real estate investment to be increased by 11% and infrastructure investment domestically would drop as well as increased overseas. So overall, the shares of AI would increase. In the long term, as the long-term bond interest rate is rising, is this a better investment in AI increase than bonds? And considering -- that is my first question. And second, with the composition of the overall investment, the overseas investment is being increased focused on AI against local investment. Under IFRS 17, irrelevant of the perfect match between asset and liabilities matching ALM, wouldn't be that aside wouldn't be the currency -- foreign exchange currency risk an issue? Could you explain the -- why the AI investment and overseas investment is attractive? Next, on Page 19, regarding the sales gains trend, you mentioned that local -- the [indiscernible] one bond valuation have been dropped from KRW 1.2 trillion to KRW 96 trillion. Is this a simple valuation gain loss or a reduction amid the rising interest rate trend? And the bond yield has been 2.9% and 3.1% in the first -- in Q1 this year. There has been a difference of 30 bps. It seems -- is this just because of the yield -- interest-bearing yield? Or is it anything to do with the sales gains? It seems like to me, from 2006, the 20-year bond maturing in 2026 is being managed and handled. So could you explain on that as well? If are there any policies or any plans to manage the maturing bonds? It seems like on the bonds, there is the duration play or duration management with the sales gains. Are there any risks in terms of adjustment?

[Foreign Language] This is asset management team head, let me explain your question. Thank you. [Foreign Language] The first question was with the interest rate hike of the super long-term bonds, are we going to increase investment in AI? [Foreign Language] As the CFO mentioned previously, the interest rate amidst the super long -- super high long-term interest rate for the bonds, this is for the long-term bond focus. Is it -- however, we are focusing on long-term bonds. However, AI investment, increasing AI investment is for the mid to long term and we have a stance to flexibly manage depending on how the interest rate plays out. Let me clarify, so as you correctly mentioned that the long-term interest rate are increasing these days. So currently, we will increase our investment in the bonds. What we mentioned about increasing our alternative assets is our long-term asset management plan, but with the -- according to the recent changes, we have been revising our asset management plans by increasing bond holdings. [Foreign Language] Regarding AI investment, the question was focused on whether we are going to increase our exposure overseas exposure. As we are aware, AI market locally is very small. So for diversification or profit to diverse our profit, we need to turn our eyes to overseas market. [Foreign Language] Regarding expanding our overseas investment in AI, the question was on whether we are exposed to the exchange risk. However, we are 100% hedged with a maximum term of 5 years and depending on the maturity, the ones that mature are rolled over. Thank you. [Foreign Language] Your last question was -- my understanding of your last question is regarding the bond management, whether we are rebalancing and selling some of our portfolios? [Foreign Language] Regarding the sale gains, it was KRW 370 billion, out of which bond sales accounted for a very small portion of KRW 60 billion. So in sales gains, this bond sales gains does not account for big. Thank you. [Foreign Language] Also for the bond sales gains, which I mentioned that it's KRW 60 billion. This year, the maturing -- the maturity of the bonds would fall all between September to October. So for the bonds, which have a remaining term for maturity, which is like 3 to 9 months, in the first half of this year to diversify the maturity, we were rebalancing such bond. Thank you.

[Foreign Language] The following question will be provided by [indiscernible] Tong from NH Investment & Securities. Please go ahead with your question.

[Foreign Language] My question is on the variable guarantee. Of course, the market wasn't very good for the second quarter of this year, but the variable gain loss seems like a little bit bigger than the competitors as well as market size. Why is it so? Please explain.