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

Good afternoon. Thank you for joining us today for Samsung Life's earnings presentation for the first half of 2023. Today's call is scheduled for 1 hour and 30 minutes, 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. [Operator Instructions]. Now let's begin the presentation.

Good afternoon, everyone. This is In Hwan Kim, Head of Investor Relations. Thank you for joining us today for Samsung Life's earnings presentation for the first half of 2023. Today's call is scheduled for 1 hour and 30 minutes, 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 and 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 afternoon. This is CFO, Sun Kim. I'd like to thank our investors and analysts for taking time out of their busy schedules to attend today's earnings call. Let me start with our key business results for the first half of 2023. First is the earnings highlights. In the first half of the year, our new business CSM exceeded KRW 1.8 trillion and we secured KRW 11.9 trillion worth of CSM, which is a source of future insurance service profit. We generated stable profit based on high-quality CSM and growth in ordinary investment income by which net profit for the first half of the year increased by 44.5% (sic) [ 54.5% ] year-on-year to KRW 974 billion. We are demonstrating stable solvency at the highest level in the industry such that K-ICS ratio at the end of June is expected to exceed 220%. In diversifying the asset management business to secure mid- to long-term growth engines, we are generating tangible results such as equity investments in global operators enhancing synergies with operating affiliates. In the first half of the year, we joined additional global ESG initiatives related to the environment and strengthened our ESG management framework by operating a subsidiary ESG Council. As such, we are committed to establishing a framework for sustainable growth as a leading company in the industry. Here are some key financial highlights for the first half of the year. At the end of June, consolidated total assets are KRW 300.6 trillion and invested assets are KRW 209.3 trillion, up 3.3% and 0.9% year-on-year, respectively. Consolidated shareholders' equity increased by 14.6% to reach KRW 41.7 trillion. Net income amounts to KRW 974.2 billion including insurance service profit of KRW 818.3 billion added by nonoperating income, including dividend income from financial affiliates and consolidation adjustments. I will continue to explain on further details of the statement of financial position and income statement. Let's start by explaining our [ statement ] of financial position. As shown in the next slide, our consolidated total assets of KRW 301 trillion at the end of June 2023 are comprised of KRW 209 trillion in general account invested assets, KRW 27 trillion in variable account, KRW 28 trillion in corporate pension account and KRW 37 trillion in Samsung Card and other consolidated subsidiaries and assets. Liabilities of KRW 257 trillion include insurance contract liabilities of KRW 181 trillion consisting of BEL KRW 166 trillion, RA KRW 3 trillion and CSM KRW 12 trillion. Shareholder's equity is KRW 44 trillion, including KRW 27 trillion in accumulated other comprehensive income and KRW 17 trillion in retained earnings. I'll share some little more detail on the change in shareholders' equity. Although market interest rate declined slightly over the year, the increase in financial asset dilution gains of KRW 5.7 trillion due to higher SEC stock prices and lower bond [ evaluation ] losses, offset a decrease in equity of minus KRW 0.7 trillion due to lower liability discount rates. As a result, our equity at the end of June increased by KRW 5.4 trillion to reach KRW [ 47.6 trillion ]. Next is the CSM movement. As mentioned earlier, KRW 1.8 trillion in new business CSM due to the strong sales in the first half of the year, together with minimized CSM adjustments led to CSM balance of KRW 11.9 trillion, which is up by KRW 1.2 trillion year-to-date. Next, I will explain the details on our profit. Consolidated net income for the first half of the year was KRW 974 billion comprised of KRW 818 billion in insurance service profit, KRW 191 billion in total investment profit, which is investment service profit plus dividend income from Samsung Card & Securities and KRW 305 billion in consolidation and equity method effect. Next is quarterly breakdown of our insurance service profit. Despite a slight decrease in CSM amortizing rate, second quarter interest service profit recorded KRW 400 billion level up from the previous quarter, thanks to new business CSM expansion and stabilized efficiency indicators. [ 1Q Base ] realize stable and predictable insurance service profits through thorough management of efficiency indicators and minimization of difference between the assumed and the actual. The following is a breakdown of investment profit. As you can see in the graph on the left, investment profit for the second quarter saw a significant decrease from the first quarter. But after excluding the base effect of first quarter and special factors such as losses on the exchange from low to high coupon bonds in second quarter, the decrease comes mostly from seasonal effects because dividend income from financial affiliates such as Samsung Fire & Marine, Card & Securities comes only at first quarter. Considering all this, ordinary investment profit remained stable. The loss on the exchange of low to high equipment bonds was a strategic choice by the company to capitalize on rising market rates by replacing low coupon bonds in mid-1% range with high coupon bonds within mid- to high 3% range. We expect this to contribute to stable investment profit in the medium to long term. We expect our investment income to remain robust in the future, driven by lower negative margin pressure by [ 2020 -- 2027 ] and stable affiliate dividend income and finally, reduce volatility in durable accounting P&L. In the following section, I will discuss our key operating results, including new business and asset management. First, new business performance. In the first half of the year, on the life industry as a whole, markets for whole life with short-term payment expanded significantly. By our active response to the market change, we saw a significant increase in whole life sales. As you can see from the graph, our new business APE in the second quarter was up quarter-on-quarter as a result of the strong growth in protection sales. Due to the expanded sales of protection, second quarter new business CSM grew 14.6% quarter-on-quarter to KRW 970 billion. The CSM rate, which represents the percentage of CSM over the first month premium recorded 1,245% in the second quarter which is a decrease quarter-on-quarter due to a decrease in [ death ] for the CSM rate following increased sales of short-term payment whole life in second quarter. In the second quarter of the year -- in the second half of the year, we plan to focus on selling health-oriented high-margin products to enhance our profitability. For reference, we launched a new health product in June. And in July, we expanded the proportion of health within protection to 40% which we expect to contribute to margin improvement. For reference, our CSM has grown from KRW 5.4 trillion at the end of fiscal year 2020 to KRW 11.9 trillion at the end of June with more than KRW 3 trillion of new business CSM added in amortizes and annually. This new business CSM is immediately recognized as profit from the current year and recognizing installments over the future policy period such that our profit from CSM amortization is expected to increase steadily. So following our sales efficiency metrics. Our protection persistency rate, the most important indicator of stable insurance service profitability be solid at 88% in the 13th round and 71% in the 25th round. Our persistent rate is relatively high in the industry, which is driven by our core competency, our exclusive channel. Our exclusive sales organization has more than 23,700 exclusive FCs at the end of June and approximately 30,000 in total, including subsidiaries and exclusive GA agents. They play a key role in securing quality profit-driven CSM. We'll continue to review various strategies such as GA Alliances, acquisition of Blue Chip GAs and active investments to further strengthen our industry-leading channel competitiveness. Next, let's talk about the trend in loss ratio. As you can see in the graph on the left, that increase of risk premium of over KRW 1 trillion per quarter continued to improve persistency rate and the expanded sales of protection. The loss ratio recorded is 78% in second quarter, following the improvement in loss ratio of living benefits. Going forward, we'll continue to stabilize our loss ratio in low 80s by controlling excessive medical expenses and responding to unfair claims. Next is on our asset management performance. As of the end of June, our invested assets recorded KRW 209 trillion in which interest-bearing assets, such as bonds and loans account for 68%. We are implementing an asset diversification strategy to improve investment yields under the ALM framework and by focusing on high-quality alternative assets through thorough risk monitoring, we plan to increase the proportion of diversified assets to 30% by the end of this year. Next is asset quality. Since the second half of last year, we have been conservatively managing our loan assets against the risk of increased market interest rate volatility and economic slowdown. As such, as of the end of June, our loan asset [ number ] stood at KRW 37.9 trillion, down from the end of the previous quarter. Amid rising delinquency rates across the financial sector, we also experienced a slight increase in our delinquency rate but remain among the lowest in the industry and below the long-term average. As such, we believe the likelihood sharp deterioration in our loan portfolio is very limited. Lastly is on the K-ICS ratio, we see an indicator of our capital strength. At the end of March, the K-ICS ratio increased by 10 percentage points year-to-date to 219.5%. And we expect the K-ICS ratio at the end of June, which will be published in September to be well above 220%, due to the new business expansion and the rise of the SEC share price and interest rate. For more information about our asset management diversification and ESG performance, please refer to the [ attached ] slide. We look forward to generating solid profits in the remainder of the year and continue to do our best to enhance shareholder value based on our strong capital position. This concludes our commentary in the first half of 2023. Thank you again for attending today's earnings call, and thank you for your continued interest and support for Samsung Life. Thank you.

[Interpreted] [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 some questions. First of all, in your prior IFRS 17 info session, I think you explained how comprehensive equity, which is a combination of shareholder equity plus CSM would now be a main pillar in your corporate value. And you cited that as the [ grounds ] we're no longer disclosing the EV figures. But however, between market cap and the comprehensive equity number, I think there is quite a significant disparity, which is why I ask, what kind of additional thinking have you done perhaps on the asset side or regarding full year dividend payments for 2023? At this time, what is your thinking? How much are you ready to comment regarding your shareholder value return policies? The second question is also related. Now that for practical -- in practical terms, you are no longer disclosing your EV numbers. So it's quite questionable whether the current level of underwriting will equal to a certain level of free surplus, it's hard to be quite convinced. So would you be prepared to disclose other figures such as free surplus for better understanding? We would have to have a better idea of the cash-generative capacity of your business to be able to better assess dividends. So I understand that we're observing an increase in new business CSM but it's hard to calculate how much in terms of margin profile, the current level of underwriting will translate into because the current level of disclosure is actually a little bit on the short side. So could you comment?

[Interpreted] This is the CFO. Thank you for the question. Let me first take your question regarding dividend. Yes. So I don't know if anything in my answer will necessarily be new or different from the past. So I'm not quite sure that's my question -- my answer will necessarily satisfy your question. But our stance actually remains unchanged that we will maintain our dividend payout within a certain range and continue to provide continuous increase in the payout. So that in itself remains intact at this time. And I think we have received quite a lot of questions up to now regarding our guidance for full year 2023 regarding our dividend. But I think -- I suppose I would have to -- we would have to approach later timing when we are able to have a better idea of how full year earnings will shape up. I think at that time, perhaps I will be more ready to prepare to share more details with you. As there many pending outstanding issues. As you know, the FSS guideline issues. And so I think we'll have to observe how these issues play out and how, again, our full year earnings shape up before we will be able to later confirm our sense to you again at a later time. And also our shareholder value return policies, including share buybacks. Again, we will have to, again, see until we have a better idea of former stance regarding full year earnings to be able to prepare -- to share more with you on a gradual basis.

[Interpreted] Yes, I'm Head of RM. Let me take your second question regarding our free surplus and also cash generation outlook. So based on our planned assumption that we will be acquiring additional new business and also considering our ongoing plans to further diversify our investment assets we are assuming that we will be able to see about a 10 percentage point increase or continued upside in terms of our K-ICS ratio. So of course, the FSS recently has continued to make or take initiatives for institutional reform and improvement regarding [ system ] and K-ICS. So it will take more time for us to provide more stable state number in terms of what kind of K-ICS figure we expect, also our available capital trends as we have to reflect those kinds of institutional change. Our expectation is that even considering the institutional change, our K-ICS will range between 200% to 220%. And we also expect ongoing improvement and increase in our available capital as well. So with regard to your question in terms of the EV metric, I think you can actually refer to our available capital as reference.

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

[Interpreted] This is Kang Seung-Gun from KB Securities. My first question has to do with your assumptions in terms of new business margin. I see that you have actually sold a lot of short term payment whole life products, which has made a significant contribution to your new business, CSM and also APE this quarter. However, compared to your existing whole life type policies, I imagine that the short-term payment type product actually will have a different profile in terms of persistency rates, et cetera. So for your CSM calculation, what kind of different assumptions did you bake in when you try to measure the CSM for these new STP type whole life versus regular whole life just in terms of your actuarial assumptions, including persistency? And my second question is that between the first and second quarter, it seems that in the second quarter, you've seen an increased volatility in terms of your investment profit, which was the biggest driver of volatility for your overall earnings in the first -- in the second quarter. So you have been selling off and disposing of low-yielding assets in the second quarter. Is that exercise pretty much winding down and complete? Or do you expect it to be ongoing into the third and fourth quarter as well, which may result in additional costs? And I understand that there will be some adjustments of the scope of application for [ VAP ] . So was that also implemented as of the second quarter? Or is it planned for the third quarter? If so, what kind of impact do you expect in terms of P&L?

[Interpreted] This is the head of the Actuarial team. Let me cover questions number 1 and 3. So regarding the first question, you asked about some of our actuarial assumptions for the short-term payment whole life products that were sold in the first half. You asked about lapse rates, I believe, and persistency. So just to explain at a high level first, we actually do distinguish in terms of our lapse assumptions applied at the time of payment versus the first payment versus at the time of final full payment. So in terms of the lapse rate, there is a bit of a difference in terms of when you are talking about. Is it immediately before final payment period, for example, in the last one year before a final payment. Usually, there is almost no lapse because you're near almost approaching the peak in terms of the accumulated reserves or the highest yield, whereas after a final payment is fulfilled, then as the yields actually hit the highest level possible. At that time, we do tend to see more lapses of those contracts. So we have actually reflected that kind of difference in calculating the CSM for our whole life product. So we actually used past historical 5-year statistics to -- as the baseline for our assumptions in calculating the CSM. And so we do think that there may be this kind of variation in loss rates as different contract approach the final payment period also for these short-term payment whole life products. And because the historical statistics are baked in, we expect a soft spending, if you will, in terms of the assumptions that are applied. And then regarding changes to the accounting treatment for variable products. So for Samsung Life, we had actually been managing against earnings volatility by applying the regular P&L method and 100% hedging for our variable whole life and variable annuity products. So pursuant to the guideline by the FSS, we have actually extended the scope of [ VFU] applications to now include all variable accounts. And so between the existing P&L and 100% hedge method versus the newly standard [ PSA ] method, there really is not any difference in terms of the volatility to our earnings. So of course, last year and into the first quarter this year, there was certain volatility in terms of the market interest rate. So this was a source of a slight bit of volatility to our variable P&L. However, as the market interest rate stabilized in the second quarter, I think you will find that the earnings volatility for our variable products actually is now more stable than prior to IFRS 17, I think this will support greater predictability for the market.

[Interpreted] Yes. So let me address your second question real quick. I'm head of the asset management team.. Yes. So as our CFO has previously explained, yes, in the first half, we did engage in switch trades, switching from lower yield assets to higher-yielding assets in the interest of boosting our investment yield into the mid to long term. However, we do not have further plans or additional disposal of low-yielding assets in the second half.

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

[Interpreted] Yes. So I have a question regarding one part of the FSS proposed guideline regarding the RA reversal. I understand that between the different methods that can be applied, you currently are applying the method that is used by a minority of the insurance companies. So if you do change and apply the standard method, what kind of impact will they have -- will that have on your RA reversal? You can explain it in absolute value terms or percentage.

[Interpreted] Yes, let me answer that question. I'm head of the actuarial team. Yes. So the potential RA adjustment is actually planned to be adjusted or applied starting in the third quarter this year. So right now, we have started work to calculate the expected impact from that kind of change. We are now defining the logic and sorting out the system to try to calculate the expected diffusion effect that may have based -- or on a case-by-case basis depending on risk type. We are currently working on the impact calculation just in terms of running the estimations to come up with a rough figure. But I don't think that they are accurate at this point and perhaps we should wait until the third quarter to share more accurate numbers with you. But in terms of our estimation for the RA reversal that would be recognized at the end of this year, certainly, there might be a reduction in the RA reversal for the current period. However, at the end of each quarter, there is the CSM adjustment that can play an offsetting effect. So on balance, in terms of the total value of Samsung Life as a company. We do not expect a big difference. But again, reduced RA reversal can have the effect of deferring or postponing earnings.

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

[Interpreted] This is Lee Byung Gun from DB Financial Investments. I think this question actually has come up several times before, but let me ask again and I'm interested in hearing more detailed numbers. It seems that certainly in the current quarter, you did sell a lot of the short-term payment STP-type whole life products. And so that was one reason why your CSM versus APE actually has gone down. Wondering relative to regular whole life products, is there a possibility that relative to the present value of future cash flow expected from those policies, the CSM margin also may have declined? So I would like to clarify whether that is the case. Also, let me ask about some numbers if you could go through them one by one. So as a percentage of total, debt cover type policies, what percentage did the 5-year payment term products and 7-year payment products account for in the first quarter and second quarter? Also, just in terms of the CSM margin as measured against the present value of future expected cash flow how much lower of a CSM margins you expect for these STP whole life products versus regular whole life death products. I believe that was the question. Third question is, what is your outlook for APE and CSM after the third quarter and beyond? So as the proportion of short-term payment products increases, as a percentage of new business, I think it will be quite natural to expect a decline in the APE even if you maintain the current level of CSM. So do you expect that CSM levels will continue to maintain second quarter levels? Because certainly, it does appear to have been oversold to a certain extent in prior quarters. Fourth question is regarding ALM and liquidity management. Potentially, I think the STP whole life price could weigh negatively. So what is your stance in terms of managing duration or liquidity for these new types of whole life products?

[Interpreted] Yes. I'm Head of CPC Planning. Yes. So let me answer what was a very long question in no certain -- no set order. So actually, in the first half of the year, we actually did KRW 19 billion in terms of first month monthly premium. Of that, short-term payment premium was about KRW 10 billion. So it was about 50% of the portfolio. In fact, this is a very low percentage relative to the broad market because we continue to make consistent efforts to sell other regular type of whole life and also health-related policies. So as you have seen in our disclosed numbers, we actually significantly overachieved against our monthly CSM target that was reflected in our business plan. The target was KRW 230 billion, but our multi CSM was by far larger at KRW 400 billion. This was made possible not only because of a very big increase in the short-term payment whole life but also driven significantly by our other products, including health and regular whole life policies. So compared to other companies, I would say that as the marketing already know, Samsung Life actually was not very aggressive in pushing the STP Whole Life products. In terms of the margin profile, so actually, the margins are directly impacted depending on the promotional sales costs that are incurred at the time of sale. And in terms of the CSM, usually, it's 1,200% relative to monthly premium. For regular whole life for references between 2,500% to 3,000%. For health, it's higher at 4,000%. So you can see that actually, excluding the short-term -- short-term payment whole life, which actually have lower -- has lower CSM rate at 800%. Actually, the profitability is much higher for our other whole life type products. I think the concern behind your question is that once the push or the sales of the short-term payment products dissipates, you are concerned that our new CSM inflow may lose momentum. But again, we have a very full diversified portfolio of different products. And the percentage of STP whole life as of July, August was very low at less than 50%. And so internally, we're actually expecting to match first half results in terms of monthly CSM, somewhere around KRW 400 billion, again driven by the strength of our health and other regular whole life products as well.

[Interpreted] Yes, let me take your other question. So in terms of ALM management, actually, the short-term payment whole-life products in itself as a single product actually, it does not have an impact on our overall ALM strategy. But because it is a component, making up our total liability, we will continue to apply our consistent ALM strategy on this product as well. Yes. In terms of liquidity management, we have already established a significant liquidity buffer to fully back the claims payments and also to manage the lapse or surrender rates as well. And for all insurance liability, including the short-term payment, whole life liability, depending on the different structure of the policy, there may be certain liquidity type events that may occur at a certain expected timing. So we have already done a preemptive scenario planning to address those types of potential liquidity events well in advance.

[Interpreted] The following question will be presented by Heewon Choi from Morgan Stanley Securities.

[Interpreted] Yes. So I have a question regarding the health-related protection policies in the second quarter. I think you recorded mid-single-digit growth, and that was a key part of the increase in the CSM rate, I believe. So in terms of these health-related products, was there any change to the product mix or the profitability profile of these types of health policies in the second quarter? And I think you said in the second half of the year, you expect monthly CSM to achieve around KRW 300 billion. Sorry, the trend that I misspoke earlier when I said KRW 400 billion, but the company expected KRW 300 billion versus the originally planned KRW 230 billion. But there are concerns that for both life and nonlife insurance alike, as we move into the second half and the effect of these STP type products dissipate, there likely may be more intense competition centered around health type policies. So against that background, how do you intend to differentiate in terms of the product side?

[Interpreted] Yes. I'm Head of the product team. So let me take your first question. You asked about how the CSM rate actually improved in the second quarter versus Q1. Yes, it is -- actually, it was boosted in large part by our health-related products. There were new product releases. Of course, the new releases are planned for the second half. But actually, in the second quarter of H1, we also had some new product launches, for example, in March and also June. So the percentage of health products in our overall protection portfolio increase and the health-related products actually deliver solid performance, so this had the effect of boosting our CSM rate slightly Q-on-Q. The second question regarding the expected intensifying of competition in the health product space. You asked about how between life and nonlife insurance companies that may be likely to happen. Actually, in the second half, for whole life products, we intend to focus more on the higher yielding type short-term payment type, whole life products. And then let me explain our policy for health products. Yes. And then in terms of how we intend to respond to the health insurance market, while we had several new product releases already in June. And in fact, last week of August, so we will continue to deliver increasing performance from the health policies because as we expand the health portfolio. So not only will we be coming up with new products, but also revamping existing products as well, which is expected to help deliver higher CSM rate and also increase our volume.

[Interpreted] This concludes the Q&A session. Yes, please contact us at the IR team if you have any additional questions. Thank you very much. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]