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

[Interpreted] Good day, everyone. Thank you all for joining this conference call. And now we will begin the Fiscal Year 2022 Third Quarter Earnings Call by Samsung Life Insurance. This conference will start of short brief by Head of Finance and Accounting, followed by a [indiscernible] dividend Q&A session. [Operator Instructions] Now we shall commence the conference by Samsung Life Insurance.

[Interpreted] Yes. Thank you for joining us at the Third Quarter 2022 Earnings Call for Samsung Life. This is [ Shonan Kim, ] Head of the Finance and Accounting team at Samsung Life. As for prior notice, this call will be conducted mostly as a Q&A with Mr. Dae-Hwan Kim, our CFO; and other members of management. Allow me to highlight key results for the third quarter based on the materials that we have already provided. In Q3, amid easing of COVID-19, everyday life was restored in large part across many parts of society. However, our business environment remains challenged with major economies accelerating their policy rate hikes and with ongoing strengthening of the U.S. dollar, the equity and bond markets have been displaying a high degree of volatility and a broad decline in value. Despite the difficult business conditions driven by widening uncertainty, we have achieved strong results with protection new business seeing continued growth starting from the fourth quarter of last year as we focused on timely supply of various new products responding to evolving customer needs. Also thanks to our efforts to boost business efficiency and achieve fixed cost savings, insurance profit grew faster versus the first half of the year, recording KRW 1.16 trillion on a cumulative basis, YTD. Investment profit saw a significant decline year-on-year due to an increase in valuation loss on variable guarantee reserves amid a continued drop in the equity market. However, with new investment yields now above 4%, we're seeing improved returns from our investment portfolio, leading to an increase in our recurring investment profit. In terms of financial soundness, our RBC and LAT surplus are both at top levels in the industry. And although there was an issue over PF loans recently in Korea, our PF loans are mostly composed of secured assets, and therefore, we expect very limited risk of any distress from our exposure. Ahead of the regulatory scheme that will be going into effect, we have completed the transition of our accounting settlement system as of the end of 2021, and we are now in the process of putting together a parallel financial statements based on IFRS 17. Upon completion and subject to resolution by the Board of Directors late November, we're planning to hold an Investors Day conference as well as analyst seminars sometime early in December to share further details on our findings and for stronger communication with market participants. Upon transition to the new scheme, we expect our differentiated competitive advantage to become even stronger as the flagship insurer representing Korea, we will build on our leadership role to shape the local insurance industry as we continue to improve on our underlying competitiveness. We're also committed to advancing our corporate value, driven by a strong pipeline of new businesses by taking our asset management business global and also pursuing new initiatives in the health care and digital space. Yes, please refer to the handout for further details on our performance, and please be reminded that all projections mentioned today are subject to change depending on changes to the domestic and global economic conditions and in the business environment. We'll start off our Q&A with management of Samsung Life [indiscernible]. Thank you.

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

[Interpreted] Yes. Thank you for giving me the opportunity to ask 2 questions. We're seeing widening volatility in the financial markets, and there have been adjustments to the solvency related schemes. And I would just like to ask you to remind us again on your dividend guidance for 2022. As far as I remember, I think you suggested that the payout ratio for this year might increase. So I thank you for reiterating your dividend guidance again. Second, there will be some revisions made to the disclosure scheme. But with increasing interest rates, you have seen a significant increase in your LAT redundancy or surplus at CNY 47 trillion. So I would like to know, assuming that current interest rates persist for the next 5 years or so, what are your projections in terms of the unwind to profit I would think that given current EV rate or the current scale of VV with rising interest rates, the value of in force will continue to increase and you may see a significant boost to your profit from the cash flow online. So assuming current interest rates, what scale of profit unwind do you foresee?

[Interpreted] So in terms of the dividends, I think it would be, of course, a function of how much full year profits are recorded at the end of this year. But we're already seeing signs of improvement for the fourth quarter with improvements to the overall business and financial environment. And so we have been working on improving the earnings expanding into certain businesses, for example, selling real estate property to REITs for disposal gains. So combined and in consideration of these efforts, we think that we will be able to achieve full year profit in line with average levels. So of course, the recent widening of volatility in the financial markets does weigh on us as a challenge. But based on what we have seen thus far, in terms of the orientation for dividend payments next year, we think that unless the business cycle or environment sees a material deterioration from current levels, we will be able to achieve a slight increase in the payout versus last year, and we are reviewing the options and also are committed to doing our best so that we can deliver stable dividends.

[Interpreted] Yes. I'm head of the actuarial team. Let me take your second question. So as you know, we will be transitioning over to the IFRS 17 accounting system starting next year. So you asked what if we assume that the current rate of interest rate increase will persist for the next 5 years? How the rising rates will result in a reduction of our liability. Well, any such reduction actually will be reflected in the OCI of our balance sheet under the equity or under the equity section. However, with rising interest rates, that will mean in the short term, an increase in interest income for us. So we do anticipate a certain improvement to our investment returns. However, although we are looking at the prospects in the longer term as we formulate our business plan going forward and even though we do anticipate a certain improvement, it's hard to specify the exact number because we are still in the process of calculating the numbers. Right now, though, we are weighed by the negative interest margin from past legacy fixed rate products. But with transition to IFRS 17, we think that the effect of rising interest rates will actually be more to our benefit than current levels...

Your next question will be by Yafei Tian from Citi.

I have 2, if I may. The first one is really around the current changing macro environment, as management mentioned earlier. So there seems to be somewhat of a deterioration in the asset quality environment in Korea broadly PF loans, et cetera. So just wanted to understand what would be the broader implication for Samsung Life from an asset quality perspective. We see a little bit of increase in delinquency this quarter. So I just wanted to see your projection on that as a quality trend, assuming that the interest rate would stay here for relatively long -- high for relatively longer time? And then second one is to, again, looking at Slide 22 of the presentation at the bottom right, the spread between reserves and earning assets. It seems that it's still widening this quarter. So that is a little bit surprising given the rising interest rate environment and the pickup in investment yield. So I just wanted to hear management guidance. When should we expect this spread kind of started to narrow.

[Interpreted] Yes. I'm Head of the Strategic Investment team. Let me take your first question. Well, as you mentioned, it is true that there has been widening of volatility recently across the financial markets. And also in the Korean markets, there have been increasing concerns over the real estate or property market, also certain assets like PF loans. So in terms of our investment portfolio, about JPY 37 trillion worth are allocated in alternative investments. And out of the 37 billion, 21 trillion are in senior type instruments. And of course, there has been recent increasing concerns over the property PF loan market. Our exposure is actually JPY 4.7 trillion. But again, we see very low to no risk of distress on those assets. Most of the assets are concentrated in the Seoul or capital region, and they are already sold units or otherwise backed by large construction firms or public institutions in Korea and so very secure. And so far, we have not seen any delinquency on the assets yet. So again, assuming that the current financial market conditions are maintained, we do not assume any high risk for loss on those assets.

[Interpreted] Yes. This is the Head of the Finance RM team. Let me take your question on the reserve coverage. So when interest rates go up, obviously, the new investment yield will also go up. So of course, it should be expected that, that would be favorable to our reserve coverage or the spread? But there are certain preconditions that actually have to be factored in. Recently, the speed of interest rate increase has been very high. So what's happening is that the interest on our reserves actually has been rising at a faster pace versus the interest on our new investments. However, after we passed this phase of very rapid increase in interest rates and once things stabilize, we think that we'll see gradual improvement to the negative spread as the reserve interest rate -- the pace of increase will slow down, whereas on a compound or a cumulative basis, the yield on our interest-earning assets will go up faster. And just one thing that this reserve coverage or the spread on investment margins, it only takes into account interest earning assets only. So it should not be seen as the only absolute criteria in terms of gauging the profitability of our investments. And then next year, after implementation of IFRS 17, there will be large adjustments to both metrics, the reserve interest rate and also the yield on interest-earning assets. So we think that starting next year, this metric itself should see a significant improvement.

The next question will be presented by Do Ha Kim from Hanwha Investment & Securities.

[Interpreted] Yes. I also have 2 questions. The first question, this is the interpreter. The sale was not very clear at my end, so I may have missed some. But the point was, you mentioned your commitment towards improving dividend payments. And although we also look at the consolidated results, you also will have to be mindful of the nonconsolidated performance results as well. And so although you foresee certain improvement to the variable guarantee type reserves in the fourth quarter of JPY 100 billion. I think still, that said, on a full year basis, we foresee that the net profit actually may go down by about JPY 200 billion versus this year. So taking that into consideration, how would that weigh on your decision-making in terms of the dividends? Second question regarding the Samsung Electronics shares. Next year, if IFRS 17 and 9 are both implemented, how would the allocation of the PEA or policyholder equity adjustment; B, will there be some allocation to valuation gain or loss as is the current case...

[Interpreted] Yes. This is the CFO. Let me take your first question. So again, this is the head of the finance accounting team, not the CFO, sorry. So despite improvements in various efficiency measures, overall, given the extreme volatility that we have seen on the financial markets, it is true that on a cumulative basis up to the third quarter this year, we have seen about JPY 650 billion in cumulative loss from the variable guarantee option type products that has weighed on our profit. Yes. So barring any further extreme volatility on the financial markets, we do believe that we will be able to achieve our target in terms of the variable guarantee P&L. Internally, when we determine the level of dividend payout, the basic standard, of course, is the consolidated results, while we do also consider and keep in mind the nonconsolidated results as well. And then regarding the specific projections for the fourth quarter, I will pass it on to the head of our support team. So again, this is Head of the management support team. In terms of our earnings projection for the fourth quarter, we are actually foreseeing an improvement of about KRW 600 billion to KRW 700 billion. So for example, we mentioned how we want to expand our usage of REITs. And so we think that disposal gains from REITs will add up to about JPY 450 billion. And also, we expect disposal gains on equities of about JPY 150 billion. So combined, that's about JPY 600 billion in disposal gains in the fourth quarter. And then for the variable guarantee P&L in the fourth quarter, we are expecting an upside of KRW 100 billion from the effect of increase in the discount rates. And then the insurance P&L is actually very strong as well, is expected to be very strong in the fourth quarter as well, following the trends from the third quarter. So as a combined effect, we think that for full year 2022, we should be able to achieve a level of profit at or above that of 2019 or 2020.

Okay. Let me take your second question. I'm the Head of the Finance team. So I do know that there was a news article that was published today. But I would like to clarify that a lot of those suggested facts are, in fact, not true. Because what we are doing is classifying the Samsung Electronics shares as available-for-sale securities and any valuation gain or loss from the SEC stake are accounted for under OCI. And even with transition to IFRS 17, this will be the consistent practice, same as now where the stake will be classified as OCI asset, and therefore, will not affect our P&L. And then regarding the allocation to policyholder equity adjustment, this is not on -- this is not determined by any accounting or any difference in accounting treatment, but it is done in clear compliance with the relevant insurance business at and also the regulatory standards as well. So even with a transition to IFRS 17, [indiscernible].

The next question will be presented by Jun-Sup Jung from NH Investment & Securities Co.

[Interpreted] Yes. So I would also like to ask 2 questions. First of all, it has to do with your previous answer. It may be due to my lack of understanding, but I would like you to elaborate a little bit further. You mentioned even with transition to IFRS 17, your SEC stake will be classified under OCI. So even if there are changes to the value of the stocks or any valuation -- or changes to the valuation gain or loss, it will not have a bearing on your P&L, even if the shares are disposed as an OCI asset, it would also not impact our P&L. But supposing that after next year, there is an event where for different reasons, you choose to do a partial sale or a partial disposal of the SEC shares. In that case, would there be anything for the existing shareholders or the participating policyholders to gain upon that kind of sale of SEC shares? Second question, the situation actually is the same for the overall industry, but with interest rates rising very quickly, the other players have also seen a rise in the labs or surrender on lots of the savings type products, whereas the lump sum or onetime payment type of products actually have increased in terms of sales. So I'm wondering what the situation is at Samsung Life. What do you think the direction will be going forward? And how will you respond?

[Interpreted] Yes. This is the Head of the Finance team. Let me take your first question. Upon transition to IFRS 17, if the Samsung shares, which are currently held under OCI, are sold, then the realized gain or loss from the sale would not be accounted for under P&L, but it would actually go under retained earnings. So in the event that there is a disposal of those shares, the disposal gains will again go to the retained earnings part of equity, and so they would be available for dividend payments with no problem in terms of dividends being made available. And also for the policyholders allocation, we would also make the distributions out pursuant to all the relevant laws [indiscernible]. So this is a head of the support team. Let me take your second question regarding liquidity-related issues. So as you mentioned, within meta abrupt rise in interest rates nowadays, a lot of the insurance companies and financial institutions have been experiencing liquidity challenges. And so some actually have been trying to raise more liquidity through high rate savings, lump sum type products. So as you mentioned, there is a rise in labs or surrenders, and we also have seen an increase in those metrics. But we think the level of the labs contracts and also the level of liquidity are within controllable with are all within a controllable scope. And the reason why we feel this way is because we have significant liquidity at around KRW 2 trillion and also sufficient bond holdings as well. And so we'll be able to cover further liquidity needs through disposal, if required. So we have no plans to do what the other insurance companies are doing, resorting to selling more the high rate savings type products, which actually has the effect of raising their reserve interest rate. So we are trying to not resort to that kind of practice and have no plans at no such plans at present. However, potentially, if the volume of lapses goes up versus current levels significantly or if the lapse period actually becomes protracted, it could potentially impact our bottom line, in which case -- or actually to prevent that we have been closely monitoring market developments and our status as well. And then given the current situation, rather than short-term savings side products, which could continue to see lapse upon lapse, we actually have been focusing on annuity type products, which are more true to insurance or in nature, more closer to true insurance products and trying to prepare to attract further inflows.

The next question will be presented by Hongjae Lee from Hyundai Motor Securities Co.

[Interpreted] I will also ask 2 questions. In terms of your floating rate reserves, I would like to ask whether you could provide sort of a breakdown of the mix. So by, I guess, minimum guaranteed rate line or by range, what would be the split or the breakdown? And then second, I don't think the issue maybe pertains in a large way to Samsung Life, but just for -- to inform us in terms of overall guidance going forward, are there any developments in terms of legal reserves to boost the profit base available for dividends or any type of those developments, I think that is the question.

[Interpreted] Yes, I'm Head of the Actuarial Team. Let me answer your first question. [indiscernible] And so over the last 5 years or so, we have been applying minimum guaranteed rates between 1% to 2%. So out of that total of JPY 120 trillion in floating rate reserves, JPY 40 trillion are the reserves where this minimum guarantee rate applies the remainder JPY 80 trillion, again, the floating rates just track or are linked to the crediting rates...

[Interpreted] Yes. Let me take your second question. I'm the Head of the Finance team. So in terms of our retained earnings available for dividend payments, as of the end of last year, on a separate basis, the total is KRW 13.5 trillion. But within that total, there is no sizable amount of legal reserves that would be big enough to really have an impact. So overall, given the current status, we have sufficient capacity to make dividend payments available.

Yes. This is the Head of the Actuarial Team again. Let me just supplement the second question answer. Yes. So as our finance team had just explained, as of this year, where IFRS 4 still applies, we do not have any legal reserves that could impact dividend payments to our shareholders. I think you're asking what the situation may be post transition to IFRS 17. Actually, relevant bills regarding these items actually are still pending at the national assembly therefore, are not finalized, but let me just give you a little bit of color in terms of what we know to date. The variable guarantee reserves, for example, or the difference between the surrender reserves versus the mark-to-mark reserves at the time of transition, et cetera, how that can impact shareholder dividends. So regarding these 3 types of reserves that I just mentioned, I will first say that none of those reserves actually will be stated or accounted for under retained earnings. So I will clarify each one, one by one, and I mean after transition. So in terms of the surrender reserves or the difference versus the mark-to-market reserves because our company will only see a slight increase in liabilities, mark-to-market liabilities, there will be no statement under retained earnings. And then regarding the variable guarantee reserves. So upon transition to IFRS 17, 100% will be hedged and pursuant to regulatory standards, when we fulfill certain conditions, we are not required to stay under retained earnings. So that applies to us. And then regarding the guaranteed reserves against the variable [indiscernible] excuse me, the variable guarantee reserves because the reserves actually will increase versus the current reserves based on IFRS 4, we will also not be required to state or make a statement under retained earnings. However, in the future, if there is an additional increase in interest rates or elevated interest rate levels persist for attractive term, there can be certain changes that are required, and we will communicate that to you through the IR team.

Currently, there are no participants with questions. [Operator Instructions] With this, let us conclude this conference -- this Q&A session. Thank you very much. With that, we will conclude the third quarter 2022 earnings call. Thank you.