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

[Interpreted] Thank you for joining us today for Samsung Life's earnings conference call. [Operator Instructions] Now we will start our Samsung Life's 2024 First Half Earnings conference call.

Good morning, everyone. This is In-Hwan Kim, Head of Investor Relations. Thank you for joining us today for Samsung Life's 2024 First Half Earnings Presentation. Today's call is scheduled for 1 hour and 30 minutes, starting with the earnings presentation delivered by our CFO, Mr. Kyung-Bok Lee, 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. Kyung-Bok Lee.

Good morning, everyone. This is CFO, Mr. Kyung-Bok Lee. I would like to thank our investors and analysts for taking the time out of your busy schedules to attend today's earnings call. Let me start with our key business results for the first half of 2024. In the first half of 2024, our consolidated net profit recorded KRW 1,369 billion, having increased 40.5% year-on-year, backed by solid insurance service results and increased investment profit. Thanks to solid new business growth and company-wide efficiency management, we secured KRW 12.7 trillion worth of CSM, having increased by KRW 0.5 trillion year-to-date. With this growth trend carrying on to the second half, we expect our year-end CSM balance to exceed KRW 13 trillion. Furthermore, our Health new business CSM showed robust growth of 60% year-on-year, while the proportion of Health grew to 54%. This was possible by strengthening this product lineup to expand our dominance in the Health market and by focusing on our sales channel and marketing. Next is our financial highlights. First is the current status of our consolidated balance sheet. Our total assets came in at KRW 320 trillion as of June and is comprised of KRW 222 trillion in Invested Assets, KRW 28 trillion in Variable Account, KRW 29 trillion in corporate pension account and KRW 41 trillion in Samsung Card and other consolidated subsidiaries. Total liabilities came in at KRW 278 trillion with insurance liabilities recording KRW 197 trillion, including KRW 13 trillion accounted for CSM. Shareholders' equity recorded KRW 42 trillion. Next is the changes in shareholders' equity in more detail. Our shareholders' equity at the end of June came in at KRW 41.5 trillion [ and decreased by ] KRW 2.8 trillion year-to-date. The decline was mainly due to the FSS liability discount rate strengthening, which had a negative impact. Accumulated other comprehensive income came in at KRW 23 trillion consisting of KRW 8 trillion in insurance finance income and KRW 14 trillion in financial assets, including valuation gains from SEC shares and bond valuation loss. Next is the CSM movement. Our CSM balance at the end of June was KRW 12.7 trillion, which is a favorable result with an increase of KRW 0.5 trillion year-to-date. As mentioned earlier, this is the result of quality new business focused on health insurance in the first half generating KRW 1.6 trillion of new business CSM. It also reflects CSM adjustment and amortization of KRW 0.6 trillion and KRW 0.7 trillion, respectively. Going forward, we will increase our insurance profit by securing new business more than that of the first half level and by obtaining over KRW 13 trillion of CSM balance through improved efficiency and profitability measures. Now let me guide you through our consolidated net profit. Consolidated net profit for the first half grew by KRW 395 billion year-on-year to KRW 1.4 trillion. On a quarterly basis, net profit recorded KRW 746 billion in the second quarter, which is up from the first quarter, KRW 622 billion, thanks to both insurance profit and investment profit exceeding management's plan. Insurance profit reported KRW 712 billion, while investment profit reported KRW 1.1 trillion in the first half. I will go over the quarterly specifics in the next slide. Insurance Service results for the second quarter recorded KRW 444 billion, which was an all-time high since the adoption of the new accounting standard IFRS 17. The strong earnings were led by an increase in CSM amortization from a year ago, while operating variance remained positive only to improve efficiency. We will do our best to secure a robust insurance profits by increasing quality new business CSM and stringent efficiency management. Following is the breakdown of our investment profit. Investment profit in the second quarter reported KRW 555 billion (sic) [KRW 550 billion], showing a significant increase year-on-year from negative KRW 77 billion, which reflected one-off factors, such as loss from disposal of low-yielding bonds. Even after we exclude the one-offs from last year, normalized investment profit improved by more than KRW 300 billion, thanks to decrease in interest expense on liabilities and robust profits from consolidated subsidiaries, mainly from Samsung Card and Securities. Dividend income from beneficiary certificates through asset diversification of health. Despite the recent volatility in the financial market, we will continue to minimize any asset loss through stringent risk management in the second half and plan to secure stable investment profit by continuously increasing the return through selective investments centered on high-quality assets. Next, let me walk you through our business highlights and company strategy. In the first half, our new business CSM recorded KRW 1.6 trillion. We have been pursuing a product portfolio strategy to expand the sales of high-margin health products since the second half of last year. This resulted in the proportion of health products in the New Business CSM to continue to rise and record 54%. In addition, we launched health product securing high surrender value in the first quarter to respond to market demand. As a result of profitability indicator, CSM rate decreased, but the monthly premium increased significantly, leading to continuous growth in health new business CSM. Going forward, we will continue to allocate more corporate resources to expand sales and generate more than KRW 3 trillion in new business CSM annually. Next is our distribution channel. Our exclusive channel plays a major role in securing quality new business, which generate excellent profitability and efficiency results compared to our other distribution channels. It accounts for 73% of our new business APE in the first half of this year. As of June, there are roughly 32,700 agents in our exclusive channel. As such, the exclusive FC channel saw a net increase of 2,300 agents year-to-date maintaining our industry-leading position. Next is our major efficiency trends. Protection persistency ratio, which is one of the most important metrics in managing CSM improved to 92% in the 13th month while staying similar at 68% for the 25th month. Loss ratio improved driven by the Living Benefit segment and recorded 75% in the second quarter. We believe this was partially driven by the slowdown in claims owing to the prolonging medical strike. Moving forward, we will stably manage our annual loss ratio by expanding our risk premium, strengthening our underwriting and by managing fraudulent claims. Next is on our asset management results. As of June, our invested assets recorded KRW 222 trillion, of which interest-bearing assets such as bonds and loans account for 65%. We were able to secure a stable dividend income from our equities assets as KRW 49 trillion out of the KRW 51 trillion account for stocks for affiliates. If you look at the graph on the right-hand side, investment yield for the first half recorded 3.3%. This result was achieved by -- with not only improvement from the interest-bearing assets such as bonds and loans but also with the diversified assets such as beneficiary certificate and equities improving evenly. Next, I will talk about the details of our diversified assets and asset quality indicators. As of June, our diversified assets totaled KRW 34.8 trillion (sic) [KRW 54.8 trillion], which accounts for approximately 29% of our total invested assets. With concerns related to the domestic PS market and overseas real estate increasing in the first half, new investments have been delayed and our overall diversified asset has decreased slightly year-to-date. However, going forward, we intend to maintain our trend in expanding our diversified assets by continuing selective investments centered on high-quality assets. Our delinquency ratio and NPL ratio recorded 0.25% and 0.21%, respectively, a bit elevated compared to the beginning of the year. Despite such, we still maintain one of the lowest level in the industry and we will do our best to prevent further deterioration through risk management. Next is our K-ICS ratio. As of June, our K-ICS ratio is expected to be in the range of 200% to 210%. Despite the increase in available capital, our K-ICS ratio is expected to be lower than 213% as seen in March due to the drop in interest rate and decline in liquidity premium on the back of strengthened discount rate guidelines. Please refer to the table on the right for details regarding our March K-ICS ratio. We will continue our efforts to manage the volatility in our K-ICS ratio and maintain adequate capital by reducing the duration gap through increasing ultra long-term funds and by seeding financial reinsurance. Lastly, I will go over the direction of our corporate value-up enhancement plan. As I mentioned during the earnings presentation this February, we are currently in the process of discussing the detailed plans regarding the corporate value-up program to meet market expectations. With the adoption of IFRS 17, our fundamentals have improved. And with that, we aim to enhance our shareholder return policy by targeting global top tiers payout of 50% in the mid to long term. We will comply with the disclosed guidelines by the SEC and come up with a detailed plan. We plan to expand our presence in the high-margin health market, improve our ROE based on recurring profit growth and keep an upward trend in the shareholder return while maintaining adequate capital. We plan to actively participate in the program, and we'll communicate with the market as soon as we are done evaluating our plan. We are confident that the value-up program will be a good opportunity to show our competitive advantage and attractiveness as a dividend growth stock. This concludes our presentation on our first half 2024 earnings results. Thank you for attending today's earnings call, and we appreciate your continued interest and support for Samsung Life.

[Interpreted] Now Q&A session will begin. [Operator Instructions]. The first question will be provided by Hye-jin Park from Daishin Securities.

[Interpreted] This is Hye-jin Park from Daishin Securities. My other question, it seems that you have seen a decline in terms of both margins and revenue. In the first quarter, I believe the reason was strengthening of refunds-type products. What was the reason for the decline in the second quarter? And what are your second half of the year plans in terms of margin management and also how you intend to manage the aggregate CSM balance? Second question is, it seems like you have actually seen a significant negative CSM adjustment in the second quarter. So what is the reason for that? And third question is on your value-up program. When would be the expected timing when a disclosure is likely to be filed? I do understand there are different outstanding issues currently pending, but just an idea of when you'll be ready.

[Interpreted] Yes, I'm Head of CPC Planning. So let me briefly answer the first question on the reason for the decline in our topline and margins. So in terms of the margins on the products that we market and sell relative to the first quarter, there was some deterioration in the financial environment in the second quarter with a decline in the interest rate. So year-to-date, we have seen a significant decline in the interest rate. And so not just for Samsung Life, but across the industry overall, there's been a 15% to 20% decline in the yield. So that was a decline in margins, excuse me, not yield. But as the CFO mentioned in the presentation, the proportion of our health policies against the total ag has been increasing from 31% up to 42% and 54% in the second quarter. In terms of the aggregate CSM balance for health policies, it's also gone up from KRW 56 billion up to KRW 89.4 billion. And so as a result, we have seen a significant improvement in our CSM multiple for all products, which is 13.4x in the first quarter. It is now up to 15.2x. And in the first quarter, the CSM total balance was KRW 1.6 trillion. Although we have not filed disclosure yet, we do actually have the actual performance for CSM in July and August, which is -- which adds up to KRW 607.6 billion. And so our guidance in terms of total CSM was KRW 3.2 trillion. We believe that we are on good track to achieve at a minimum KRW 3.2 trillion, more likely KRW 3.3 trillion by the end of this year.

[Interpreted] Yes. This is Head of the Actuarial team. Let me take your second question regarding the CSM adjustment. So in the first half, we saw about KRW 600 billion in total CSM adjustments for 2 reasons, which I'll explain. So the first reason for adjustment to CSM and this applies to any insurance company is due to cancellation or termination of existing policies. So for us, this amounted to KRW 500 billion in adjustment. And then the second reason, which is already known to the market is the consequence of the regulatory authorities measure to gradually lower the refund ratio. So the liquidity premium or LP has gone down quite significantly, which resulted in a CSM adjustment of about KRW 200 billion in our variable account portfolio. However, this should be recognized as a one-off factor. And so we believe that the adjustments will be less in the second half versus the first half of this year.

[Interpreted] Yes. Let me address your third question on the value-up program. This is the CFO. So I know that you're very interested in when we will be ready to disclose our corporate value-up program. If we are to go ahead with the filing, we have to finalize our plan in terms of the company's underlying fundamentals, including our earnings and ROE and also our company policies in terms of shareholder return. So in terms of the fundamentals, we are seeking to achieve more than KRW 3 trillion in annual new business CSM, and we continue to see a steady rise in our in-force CSM as well. And we're also seeing a steady improvement in the yield on our invested assets, also, have very stable earnings from our subsidiaries and also consolidated profit. So we are expecting more than double-digit growth in terms of our earnings growth under IFRS 17. And so thanks to the stable growth in our earnings, we expect continued upside in our ROE as well. And despite the regulatory tightening by the authorities, we expect to be able to continue to achieve K-ICS ratio comparable to that of the leading companies globally. And so based on this kind of expectation on our company's fundamentals. We are reviewing gradual improvement of our shareholder return up to 50% and also are preparing our disclosure filing in accordance with the value-up guidelines that have been provided by the Korean Stock Exchange. In terms of the timing, well actually the revision to the enforcement decree to the Capital Market Act is still pending. So perhaps once that is finalized, we will be ready to provide further details in terms of our value-up program, including our plans in terms of share buybacks and treasury shares. So while the timing of the disclosure may also be important, we think more important is the fact that we have already set our direction in terms of the directionality of value-up for our shareholders as we move ahead to gradually achieve that 50% shareholder return ratio. And so we have been expanding our returns steadily starting this year.

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

[Interpreted] My 2 questions. I have one recommendation as well. First question has to do with your whole life insurance. It seems that there is a significant difference between companies in terms of the margins. Do you expect to be able to maintain second quarter like margins for your whole life products going forward? And what would be the drivers behind the change to those margins? Is it on account of marketing, product design or assumptions regarding life expectancy or interest rate changes. If you could provide more detail, that would be very helpful. Second question, if you look at the bar chart on Page 14, you do state that you want to gradually improve your shareholder return. So how much do you think it would be fair to expect in terms of the share order return increase? Third is a recommendation. If you look at the practice of leading global and Asian insurance companies, since the earnings conference call is actually the most credible event, if you will, which engages the most number of stakeholders that are interested in the company. Usually, it is the CEO that hosts the conference call and directly provide answers to the questions. So as the representative insurance company or one of, I would be thankful if you could take that into consideration.

[Interpreted] Yes. Let me answer your question regarding whole life margins. This is Head of CPC Planning. So I think the reason why you are asking the question is because some of our competitors have recently announced what were very low margins. And in comparison, are about 10x in multiple. So the first reason that applies to all companies is the impact from the reduction in interest rates. For whole life type products, usually, that translates into a 20% decrease in the margins. And then there, of course, has been very intense competition in the market and a lot of promotional marketing spend as well, which directly impacts or lowers the profitability. So again, the changes to the margins are mostly on account of interest rates and marketing spend. But we actually were quite mindful of the possible changes to the interest rate environment. Also, we wanted to address the low margin issue for whole life starting last year. So we have now been classifying our whole life related products into 3 categories. First is health. Second is whole life with special earmark for specific purposes. And then the third category is regular whole life. So it happens among the 3 types, the second one, the special purpose type whole life actually carry very low margins. So if you increase your sales of that particular product that will definitely lower your margins, which is why we are focusing on expanding sales of the third type, the regular whole life product instead. So while we do carry all types, we're going to focus on the regular whole life type to defend against any further decline in margins. So just to recap, although there are certain issues outstanding regarding interest rates and also marketing expenses, that notwithstanding, we plan on continuing to manage very strong margins next year, focusing on our high-margin product portfolio.

[Interpreted] Okay. So this is the CFO. Let me take your second question regarding our future next year plans for dividends. And then regarding your recommendation as well. So right now, it is actually quite difficult for me to say definitively what next year's dividend rate, also the dividend amount will be. But still, as you have seen in our strong first half performance, we continue to expect upside in terms of our P&L earnings, and we see sufficient room for year-on-year growth versus last year. And as we have shared previously, in the mid- to long term, our goal is to improve our shareholder return to 50%. So this is part of our approach to gradually enhance our shareholder return. And regarding your recommendation about a participation by the CEO, we will certainly take that into consideration and see if we can make that happen.

[Interpreted] The following question will be presented by Jaewoong Won from HSBC.

[Interpreted] Yes. So thank you for delivering a very good performance despite the difficult conditions. I have 3 questions. It seems that as you explained, because of the interest rates, CSM margins actually have gone down. It seems overall compared to life insurance companies, which has seen a bigger impact. The non-life insurance companies actually haven't seen that big impact on their CSM margin from interest rates. So how much impact did you see in your sales and margin on account of interest rates? Second, it seems that between the exclusive agencies and exclusive FCs, you've seen very rapid increase in the exclusive FC headcount. So whereas the other companies are focusing on building their GA channels, you seem to be focused on expanding sales through the exclusive FCs. So could you elaborate more on your channel strategy? Third question, you said in terms of fair value program, you have to wait and see whether the enforcement decree to the Capital Market Act actually is approved or not before you are able to finalize and share. Is it because of the pending provision in the enforcement decree that set certain disclosure requirements in case treasury shares account for more than 5%, for example? Or is there any other potential issue regarding that amendment bill that could potentially have an impact on your value-up program?

[Interpreted] Let me answer your question on the CSM margin and the exclusive channel. This is the Head of CPC Planning again. So I think I provided a similar answer before. But for the whole life type products, they're obviously a refund type product. And so that will mean reserves are impacted significantly by changes to the interest rates. In terms of the interest rate sensitivity, if you look on Page 8, for death benefits, the amount actually is KRW 635 billion. So it actually would have been 15% to 20% higher, the CSM margin if there was -- if there hadn't been that decline in the interest rates. So although the actual impact may vary between companies, overall, I think we are seeing 10% to 20% interest rate sensitivity on margins overall this year. So in terms of the -- again, the sensitivity of our whole life products, a 10 basis point drop in interest rates is associated with a KRW 2 billion to KRW 3 billion drop in our margins. But the non-life insurance companies are not impacted because they do not provide that kind of refunds of reserve functions. And so previously, the percentage of whole life type products was quite high at 70%. But while expanding shares of health-type policies, we've been reducing the whole life portion now down to 30% to 40% precisely to decrease our exposure to the interest rate sensitivity. So in terms of the interest rate sensitivity to CSM margins, again, the refunds type whole life products have high sensitivity, whereas it is very low for health-related products. So we are again focused on stable management of our product portfolio oriented around high margin, low sensitivity type products. Regarding the second question on the increase of exclusive FC. So as you have correctly said, we have seen a significant increase in the headcount. So internally, we now have more than 20,000 exclusive FC agents. It's more than 30,000 when we include the external agents as well. So this is a significant increase similar to what we may have seen maybe 10 years ago when the life insurance industry actually was very robust. One reason is that with the economy actually quite bad, especially for self-business owners. We have seen a significant shift of those self-business owners who are now going into insurance. And so we have been recruiting from that pool, and we have been enrolling about 1,000 agents per month. Other market players actually have been focusing on their GA channel amid separation of product manufacturing and distribution. Whereas for us, we felt no need to go into or expand further into GA because if you look at the per person productivity, assuming that we sell 200,000 worth -- KRW 200,000 in policy, we're achieving income of above KRW 500,000. So we will continue to focus on strengthening our exclusive channel, not -- rather than the GA channel.

[Interpreted] Yes. This is the CFO. Let me elaborate again regarding your value-up question. First of all, we are quite sorry for the delay in the disclosure of our value-up program. So we are quite appreciative of our investor expectations and we are well aligned with the government's commitment to advance the local capital market. And so we continue to make every effort as the leading company in the industry to fulfill our due role. And so we are in the process of preparing our disclosure in line with the plan -- the value-up planning guidance provided by the exchange. As you mentioned, currently, the enforcement decree to the Capital Market Act is currently pending. But when it is approved and goes into effect, there will be disclosure requirements that apply to companies holding more than 5% treasury shares. They have to disclose the purpose of the holdings, also their disposal plans for anything in excess of the 5% threshold. And another reason for the delay is that there are lots of implications in terms of the cancellation of treasury shares, in terms of our consolidated subsidiaries or change to the interest ownership. So because of lots of items that have to be considered, there has been a bit of a delay. So again, while the timing of when we actually come out with the value-up program, although that is important. I think today, we have shared the directionality of our overall program already. We're expecting more than double-digit growth in terms of our company earnings this year as well as we strive to gradually improve our shareholder return to 50% in the mid to longer term. So on account of everything said, I think we can expect a significant increase to our dividend -- or excuse me, in terms of our shareholder dividends compared to the previous year.

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

[Interpreted] Yes. This may be a bit of a repeat, sorry about that. We do understand the overall orientation or the direction for your shareholder return policy. We do understand that you have to consider some moving parts because you may include your share buyback plan as part of your value-up program eventually. But we want to have more color in terms of the expected timeline. You say mid- to longer term. So would you be looking out the next 3, 5 years? What is that timeframe so that we can understand better because in terms of the overall direction, increase we had taken as a given. So can you provide more detail in terms of the expected timeline?

[Interpreted] Okay. Let me take that question as the CFO. So our presentation slide shows the overall direction of our corporate value-up program. And while we will, of course, share the finalized version with you at the time of disclosure, the 50% commitment in the mid- to longer term actually is targeting the next 3, 4 years. So starting this year, we will continue to gradually and steadily increase the shareholder return. And I think that would be a fair understanding.

[Interpreted] The following question will be presented by Jun-Sup Jung from NH Investment & Securities.

[Interpreted] Yes. I also have a question on your value-up program. So previously, in terms of your shareholder return policy, you had committed to a annual gradual increase in your dividend per share, and you shared your payout target of 35% to 45%. So compared to that prior communication, is your value-up program actually quite different? Or how do the two link up? So the payout target 35% to 45% versus the shareholder return target of 50%, is it different? Or are they consistent? If you could provide further detail? And also the gradual increase to dividend per share. Is that still in place or intact?

[Interpreted] Yes. I will take that question. This is the CFO. Yes. So as you mentioned, you are correct. Our prior communication in terms of shareholder return policy was consistent annual increase to our dividend per share and dividend payout between 35% to 45%. In terms of our plan going forward, we want to further increase the payout target up to 50% as we seek continued upside. And, we continue to see solid improvement to our company earnings. Obviously, as we increase our payout, our dividend per share will also likely increase.

[Interpreted] This concludes the Q&A session.

This concludes our conference call for Samsung Life. Further questions, please contact us at IR team. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]