Samsung Life Insurance Co Ltd

KRX:032830

Earnings Call Analysis

Samsung Life's Q1 2024 Results Highlight Strong Growth in Health Products

In Q1 2024, Samsung Life Insurance achieved a notable rise in the share of health-related products in its new business CSM, increasing from 31.9% to 53.5%. New business CSM reached KRW 857.6 billion, positioning the company to exceed a target of KRW 3 trillion annually. Despite net profit of KRW 622.1 billion being lower than last year’s due to one-off factors, it reflects a 9.1% increase on a recurring basis. The management expects the K-ICS ratio, currently at 210%, to improve post-Q2, driven by solid earnings and new business growth, fulfilling plans to enhance corporate value and dividend returns.

Transitioning Towards Health Dominance

Samsung Life Insurance recently shifted its strategic focus towards health-related products, reflecting a notable increase in the health segment's contribution to new business CSM, which rose from 31.9% in the first quarter of the previous year to 53.5% in the current quarter. This transition has resulted in a new business CSM of KRW 857.6 billion in Q1 2024. The company's commitment to enhancing its competitiveness in health offerings is clear, with ongoing plans to improve product structures and fee frameworks in both exclusive and non-exclusive channels.

Profitability and Margin Challenges

Despite robust sales performance in health products, Samsung Life encountered profitability challenges due to competition and changes in market dynamics. The profitability of new business CSM saw a significant drop in the health product margin, decreasing from 2,570% in the prior quarter to 1,740% in Q1. Meanwhile, the margin for new products introduced to address market demands averaged around 1,100%. Continuing ahead, the company anticipates a strategic rebalancing of its portfolio to counteract these margin pressures and enhance overall financial health.

Performance on Regulatory Landscape

The K-ICS ratio, a crucial measure for insurance companies, currently sits at 210%. Although this represented a decline from 219%, it remains within the target range of 200% to 220%, which aligns with the expectations set by leading European insurance players under Solvency II standards. The expected regulatory tightening on discount rates until the conclusion of 2026 could influence this ratio, but the company remains optimistic about its ability to maintain stability through strategic management of new business CSM.

Investment Strategy and Future Outlook

Samsung Life is committed to enhancing total shareholder returns through solid investment strategies focused on long-dated bonds and diversified asset classes, including real estate and private equity. The current goal is to bring forth a strong improvement in investment yields, with a current balance of diversified assets totaling above KRW 50 trillion. The company aims to invest between KRW 6 trillion to KRW 7 trillion annually in super long-dated bonds, which should help stabilize the duration gap caused by discount rate adjustments.

Guidance on Future Growth and Corporate Governance

Looking forward, Samsung Life aims to achieve an aggregate new business CSM target of KRW 3.2 trillion by the year’s end. Executives believe that introducing mid to higher-margin products will be pivotal in achieving these financial benchmarks. Furthermore, the company is reviewing various measures to bolster corporate value and enhance shareholder returns, which can include potential share buybacks or related initiatives, with specific details to be communicated as they materialize.

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] Good day, everyone. Thank you all for joining this Conference Call. And now we will begin the Fiscal Year 2024 First Quarter Results by Samsung Life Insurance. This conference will start with a short brief by Head of Finance and Accounting followed by a Q&A session. [Operator Instructions]Now, we shall commence the conference by Samsung Life Insurance.

[Unknown Executive]

[Interpreted] Good afternoon. This is [indiscernible], Head of Finance at Samsung Life.I would like to thank everyone for joining us today at the First Quarter 2024 Earnings Conference Call for Samsung Life, despite your busy schedules.As per our prior notice, today's call will focus primarily on a Q&A with members of management. Allow me to brief you on our first quarter highlights based on the materials that we provide in advance of this call.From the second half of last year onward, we pursued a core sales strategy geared towards expanding our market dominance in the health-related market with a company-wide focus on products, channel and marketing.As a result, the share of health from our total new business CSM increased significantly from 31.9% in the first quarter of last year to 53.5% this quarter as we achieved visible outcomes in enhancing our position within the health space.Thanks to this boost in our health new business, we recorded new business CSM of KRW 857.6 billion in Q1.Going forward, we will continue to improve the underlying profitability of our overall system and infrastructure by upgrading the competitiveness of our products and enhancing the fee structure for both our exclusive and non-exclusive channels, among other efforts so that we can achieve new business CSM above KRW 3 trillion per annum.In the first quarter, we recorded a solid net profit of KRW 622.1 billion despite additional IBNR provisioning from regulatory changes, thanks to stable CSM profit and improvement in our investment profit.Net profit in the first quarter was below that of last year due to the high base effect from last year when we had large one-off factors, including penalty gains from corporate pensions. But otherwise, when taking out the one-offs, we recorded a 9.1% year-on-year increase on a recurring basis.Although our K-ICS ratio is expected to decline slightly as of the end of March 2024 due to regulatory tightening, it is forecast to improve after the second quarter, driven by growing new business CSM and solid earnings.Based on our improved fundamentals from net CSM and earnings growth, we are examining different measures for further improving our corporate value from multiple angles. We will continue to do our best to establish ourselves as a stable and sustainable dividend growth stock so that we can gain fair valuation from the market while also returning greater value to our shareholders.Please refer to the materials for more details on our performance. Please be advised that forward-looking statements mentioned on today's call may be subject to future change due to changes to domestic and global economic conditions and our business environment.Thank you. And with that, we will now begin our Q&A with management.

[Operator]

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

[M.W. Kim, analyst]

[Interpreted] Yes. Thank you for the opportunity to ask 2 questions. First is on your shareholder return policy. I think in one of the presentation slides, you know that you will examine different measures within a reasonable solvency level. So what is the company's expectation in terms of what you see as the reasonable or adequate solvency level? In Q1, I think it was 210%. But if you are looking at a band of 200% to 220% as being reasonable, I'm -- I want to know whether you consider maybe the surplus capital to be a little bit on the tight side. So let me -- I would appreciate if you could check that for me.Second, it seems that your company-wide portfolio has actually been quite considerably changed centering around health-related products. At the time of sales of new health products, though, I'm wondering if you are reflecting conservative assumptions, just in terms of your actuarial consumption -- assumptions on loss rates. I ask because we continue to see CSM adjustments occur and over different countries in Asia actually are seeing similar medical claim trends where claims are on the rise and also living benefit loss rates also are on the rise. And so, if you underwrite a lot of new business at the time of sale, it's good for sales performance, but I am worried or concerned maybe that it could come back as risk later on. So if you could clarify?

[Unknown Executive]

[Interpreted] Yes. I'm Head of the RM team. Let me take your first question.So you are right, our target K-ICS range would be between 200% to 220%, which is consistent with the solvency level of AAA leading European players who apply Solvency II.So as of the end of March, the K-ICS ratio currently stands at around 210%. And up to the end of 2026, of course, there are planned reductions to the discount rates that will apply.So, however, the reduction in the discount rates will actually be phased in or will be spread out up to the end of 2026. So likewise, the impact from reduced discounting rates will also be diffused on our end. And when we consider the increase in new business CSM that will also come in, we believe that we will be able to achieve our target K-ICS ratio.So we do not foresee the K-ICS ratio of our company to be any major issue in terms of our decision-making. [Interpreted] Yes. This is [indiscernible], Head of the Actuarial team. Let me take your second question.So in terms of what assumptions we apply at the point of sale, actually a same set of consistent assumptions apply for both in-force and new business.So internally, we have a set of standard assumptions that are based on the K-ICS criteria that applied at the time of transition to IFRS 17, including the LAT requirement by the regulatory authorities.And among the 13 assumptions, we apply a weighted average of 1 year for the expense, 3 years for the policy loans, and 5 years for other assumptions.And so, I can reassure you that we have the underlying statistics for assumptions, including the loss rates that you mentioned. And we feel that we are reflecting an appropriate level of future outlook that can be explained on a reasonable basis.We believe that applying 2 conservative assumptions that are not backed by actual evidence, that also would be a problem.However, the insurance companies overall are seeing CSM adjustments occur mostly because lapses actually have been higher than historical levels due to changing markets, competitive dynamics, also different economic factors that are at play.And also in terms of loss rates, the claim payments would -- which actually have been a bit suppressed during the COVID period actually are now increasing on a temporary basis, we feel.But if there is further deterioration for example, in the difference between assumed and actual or any assumption in actual performance. In the fourth quarter, we do do an adjustment to our assumptions where they are converged to be closer to the actual. So although that will take time, we believe that the assumptions that we apply at present are at an adequate reasonable level.

[Operator]

[Interpreted] The following question will be presented by Hye-jin Park from Daishin Securities.

[Hye-jin Park, analyst]

[Interpreted] Yes. Thank you for the good performance. I have 3 simple questions. First of all, it seems that in terms of your CSM adjustment this time, the minus adjustment actually was quite significant. I imagine mostly due to an adjustment of the discount rate. But could you provide further details on the adjustment?And the second question has to do with your investment profit, which seems quite good. I think at the last call, you mentioned that you want to improve your investment yield to help deliver strong ROE, I believe you mentioned. Is this the improved yield? Is it due to any change to your portfolio? Or are you planning to change your portfolio in any way going forward?The third question is regarding Samsung F&M, I believe they have suggested that they will be announcing their company policies or measures for share buyback and also cancellations, I believe. And so, I understand that you also have a progressive approach regarding those types of capital management policies. Could you provide sort of some more color in terms of when we could expect that kind of announcement from Samsung Life?

[Unknown Executive]

[Interpreted] Yes. This is Head of RM. Let me take the first question.Sorry, I'm Head of the Actuarial team. So CSM adjustment in the first quarter totaled KRW 360 billion, of which the portion that came from tightened discounting rates from regulatory change was KRW 120 billion.The remaining amount mostly is due to the difference between assumed and actual in the first quarter from rising lapse rates and also valuation of liability at the end of the quarter and also movement in the in-force book. [Interpreted] Yes. So I am Head of the Strategic Investment team. Let me take your second question regarding investment profit.So based on our strong ALM principle, of course, we place first priority in increasing investments to long-dated bonds. However, for diversification purposes across more alternative investment assets -- or actually, we are diversifying across more asset classes, including alternative investments for the goal of improving our returns and for more diversification purpose as well.Yes. So we already have a very diversified portfolio across different asset classes, including real estate, private equity, retail loans, et cetera. And the total balance stands at above KRW 50 trillion, which is about 29% of total invested assets.So we have been working on diversification of our portfolio starting late 2020. At that time, the share was 25.5%, but since it has increased significantly again to 29.4%.And you can check from the presentation material, but we have seen consistent increase in profit, particularly from our beneficiary certificate type investments, thanks to our greater diversified portfolio.So we intend to continue to pursue a mid- to long-term strategy of expanding our asset diversification, including alternative investments, and we will be enforcing, of course, strict risk management of our held assets.

[Kyung-Bok Lee, executive]

[Interpreted] I take your third question, the CFO.So since the government made an announcement about the corporate value-up program last February, internally at Samsung Life, we have been examining various measures for further enhancing our corporate value.So although the particular details have not been decided yet, we want to leverage our improved fundamentals from introduction of the new regulatory system and accounting system to examine multiple ways of delivering stronger total shareholder returns. Once things are finalized, we will communicate our findings with the market.We are expecting solid net earnings growth driven by new business CSM, which you expect to be over KRW 3 trillion per year, also helped by improved investment yield and also a solid consolidated earnings from our subsidiaries.And despite the regulatory tightening by the authorities, we expect to be able to maintain our K-ICS ratio above 200%, and we will work hard to make sure that these fundamental improvements can be translated into enhanced corporate value.I seek your kind understanding as we will not be able to specify when exactly we will be able to share further details with you, but it is expected to take some time. But certainly, we will communicate back with you as soon as we formulate our plan to enhance corporate value in line with your expectations.

[Operator]

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

[Byung Gun Lee, analyst]

[Interpreted] Yes. Thank you also for delivering good results. I have 2 questions. First, on new business CSM, particularly CSM margin. I think in -- on Page 8, you mentioned that overall, the health CSM margin with the exception of products where surrender value has been enhanced, you have maintained a level of margin. However, overall, what were the factors behind the decreased profitability of new business CSM? Certainly reduced discounting rates will have had an impact. But if you could elaborate. And when you say products with enhanced surrender value, I think we may be thinking of whole life short-term payment type products where there was intense market competition. So in terms of health products, what type of products are you referring to more specifically? And if you could divide into whole life versus health products, which type of products actually saw the deterioration in the margin profile? And what is your outlook for the margins going forward after the second quarter?Second question, it seems that in terms of your CSM amortization, last fourth quarter, it went up quite abruptly and then declined some in the first quarter. Page 3 and 4 actually does break down your CSM between new business versus in-force, which actually is a little bit different from your presentation in prior quarters. So if you could elaborate a little bit more about the CSM amortization on Page 4?

[Unknown Executive]

[Interpreted] Yes. This is [indiscernible] of the Product team. Let me take your first question.So in the first quarter, we did see reduced profitability on a year-on-year basis due to changes to our profitability assumptions also as we responded to market competition in the short-term payment type of -- type space and as we expanded our mix of health products.So first, for the short-term payment whole life products, we were responding to market dynamics. And in the process, saw a decrease in the margins.And in terms of the profitability of health products, it's decreased from 2,570% in the prior quarter to 1,740% in Q1.So this drop actually was primarily due to our push in new product sales as we targeted a greater presence in the health space. So we introduced certain health products with higher surrender value, which on average had CSM margins of 1,100%. However, for our mainstay high-margin products, the margins are still quite solid at 2,130%.And you also asked what type of product we mean specifically as we mentioned products with enhanced surrender value. Well, previously, for whole life -- previously, they would have been pure net cover or short-term payment type products that offered a refund of cash value at the end of the -- or excuse me, that would offer some kind of a refund. And then on the health products side, if there was no diagnosis or treatment incurred, then those products actually would expire after a due term with no refund provided. So predominantly, these 2 types of market -- products were on the market.However, among the general population and customers, life expectancy has increased, and there is a rising need for hybrid-type health solutions where based on concerns that conventional health products do not provide permanent coverage as it expires after a due term. So there was a need to have health cover plus the need to continue to maintain the contract so that while being guaranteed a certain refund in the event that they have to terminate the contract due to economic difficulty, for example. So it is in response to these rising needs for a hybrid solution that we have come up with the so-called enhanced surrender value health products.So again, as we enhance the competitiveness of our product lineup, not only for whole life, but also the higher margin in health products. And as we introduce new products with greater surrender value to address these new emerging needs, we did see our margins go down. However, this was quite strongly offset by increase in volume, and we were able to secure new business CSM of above KRW 280 billion.So we will continue these efforts after the second quarter to, again, improve the competitiveness of our health products and boost sales and introduce different risk profile type products, low and -- low, mid-margin products as well to attain our quarterly target of KRW 270 billion and for full year CSM target of KRW 3.2 trillion. [Interpreted] Yes. Let me take your second question.Yes. So let me explain about the difference in CSM amortization from KRW 381 billion in the fourth quarter last year, down to KRW 351 billion in the first quarter.So the 38 -- excuse me, KRW 381 billion in CSM amortization in the fourth quarter reflects KRW 40 billion in one-off gain. So what happened was, there was a one-off factor of accrued interest on policy loans that expired that were reflected upon closing our books at the end of 2023. So this one-off gain actually was classified under other profit and reflected into CSM amortization.So to just share with you some time series trends, there was some impact last year from the first to the second quarter from the FSS guidelines and [ techniques ] discount rates. So CSM did see a slight decline then. But ever since from the second quarter last year up to Q1 of this year, with the exception of that 40 -- when taking out that KRW 40 billion in one-off in Q4 last year, we have consistently seen incremental increase in our CSM on a quarterly basis.And why we broke down the CSM amortization between new business and in-force? Well, this was just for the purpose of greater transparency in our communication. If you look at the second line, it's CSM loss and reversal. So we actually have 144 GOCs or group of contracts for our in-force contracts -- in-force policies. And some of those groups are loss-making contracts, so in the event that there is a change to the assumption or difference between assumed and actual, then that will be accounted for as a CSM loss for the given quarter. And so, of course, the loss-making contracts carry no CSM.So just to recap, for the fourth quarter last year and the first quarter this year, there was a significant CSM loss or recovery. In the fourth quarter, it was due to a one-off reflecting recommendations by the FSS to reduce our margins on fixed rate policy loans. And in the first quarter this year, it was due to the compulsory reduction in discounting rates also enforced by the FSS.

[Operator]

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

[Jaewoong Won, analyst]

[Interpreted] Yes. Thank you for the good results despite the difficult environment. I also have a question on CSM margins. In your materials, you do not show us your total new business CSM margin. So what was the level for the first quarter? In terms of future trends, some companies are expecting upside, whereas others are expecting to maintain current levels. So what is -- if you could share your thoughts, I would appreciate it.Second question is that, I understand usually in the first quarter, there is some seasonality in terms of difference between assumed and actual. But, in fact, for you, it seems that it was actually better than expected. So were there any one-off factors at play this time? Or do you think that going forward we will be able to start off the new year with a low difference between assumed and actual in the first quarter?

[Unknown Executive]

[Interpreted] Yes. This is the Head of the Actuarial team. Let me briefly answer your second question first.So regarding the -- why we had a bigger difference between assumed and actual in the first quarter of last year, I think I did explain multiple times through our IR sessions, but there were some one-off factors regarding our operating expense. So every 2 to 3 years, we would make an adjustment for our internal company welfare fund, also an adjustment on taxes. So that led to some movements. That was a one-off.So I think the difference between assumed and actual that we recorded in the first quarter of this year is closer to the more actual number versus last year. As we mentioned in the beginning, after COVID, there was an increase in claim payments, and we did see a slight increase in the difference between assumed and actual for the claim payment side. However, by enforcing stricter claim management, our goal is to maintain this variance at close to 0. So I think the difference that you saw in the first quarter, I think you can consider it to be sort of the yardstick or the standard level for our company. [Interpreted] Yes. This is Head of the Product team. Let me take your first question.So as I explained earlier in an answer to a prior question, yes, in the first quarter this year, we did see a decline in margins relative to last year. As we responded to rising competition in the market for greater refunds in the whole life space and also, likewise, as we enhance the competitiveness of our products for the health category as well and increased the proportion of new products in our overall product portfolio.And just for your reference, I think it's Page 1-5 of the fact sheet that provides a detailed breakdown of the CSM.So after the second quarter, as we expect volume to be reduced as competition in short-term payment type products ease, we will actually be focusing on expanding and managing our portfolio centered around high-yielding or higher-margining products to boost CSM margin in terms of the percentage, while also expanding the aggregate CSM balance as well.So, again, in the first quarter, there was heightened competition for refund rates in the market for short-term payment whole life products, and we responded to the competitive dynamics by introducing our happy short-term payment products, which weighed on our margins. But going forward, from the second quarter, we will be improving our margins, introducing mid- or higher-margining products.And also for the higher-margining health-related products, we will enhance our competitiveness against non-life players by developing new types of coverage and products to again boost, not only margins, but also the aggregate volume as well.So through the strategic management of our product portfolio and by boosting overall volume, we are working to achieve our aggregate CSM target of KRW 3.2 trillion.

[Operator]

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

[Do Ha Kim, analyst]

[Interpreted] Yes. Thank you for the opportunity to ask 2 questions. I think in your slides, you mentioned the impact from reduced discount rates, also the introduction of new base assumptions. And just to have a greater -- or just to inform our projections in terms of what kind of impact other planned regulatory changes may have. Could you mention, for example, the asset, liability side duration? So how -- as discount rates are tightened further up to the year 2027, how much do you think the asset duration side is going to increase by? Or could you provide more color on the duration?Second question, it seems that a big part of your improved performance this quarter is due to reduced interest liability from your general account. So it seems that there was about a KRW 70 billion decrease on a year-on-year basis. So why was that? And other than discount rates, are there any other factors that should be considered?

[Unknown Executive]

[Interpreted] Yes. Let me take your question regarding our K-ICS ratio. I'm Head of RM.So let me explain the factors behind the drop shown on Page 13, I believe, from 219% to 210%.So the impact from the lower discounting rate on liability is 13 to 15 basis points.And then the new base assumption risk actually does not make much difference. So I think the impact on our lower K-ICS ratio is maybe just 1 percentage point only.But the increase in new business CSM also higher interest rate and stock prices can have a plus 7 to 9 basis point positive impact. So on balance, we were expecting a 9 percentage point decrease in our K-ICS ratio.And in terms of the reduction to the discount rates, the reductions are planned up to the end of 2026.But as we continue to see an increase in new business CSM, this will add to our available capital, which is why we expect our K-ICS ratio to be around 210% or so.And upon the conclusion of the discount tightening, starting in 2027, we expect our K-ICS ratio to continue to increase.And then let me explain on our asset, liability duration.So currently, our duration gap is 1.3 years, with liability duration 10.3 years, asset duration 9 years.So although in reality, the discount rate that will apply for liabilities will be gradually reduced up to 2026. If we assume the full-on impact just in one go, we expect the liability duration side to increase by 1.4 years.So the discount rate tightening actually was introduced or announced in the second half of last year. And so, from that point onward, we had set our plan to invest in about KRW 6 trillion to KRW 7 trillion in super long-dated bonds every year.So if we are able to execute as planned, then we will be able to reverse the duration gap that resulted from the lower discount rate for liability side back to 0.And otherwise, we are continuing to look into different ways to further reduce our duration gap further, utilizing bond forwards, government bond forwards or increasing our allocation to super long-dated bonds, also seeding contracts to coinsurance or taking out coinsurance, for example. [Interpreted] Yes. This is the Head of the Actuarial team. Let me answer your second question.So let me explain 2 factors behind the reduced interest liability. First, there was KRW 1.5 trillion reduction in terms of liability on the general account side from immediate annuity products that we sold in the early 2010 and also on account of liability at cost, exposure from liability at cost due amid increased lapse rates.And, of course, as you know, the discount rate reduction by the FSS had the effect of lowering our reserve interest by about 5 basis points. So on a mid- to long-term basis, we expect our interest liability to come in consistent with first quarter levels.

[Operator]

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

[M.W. Kim, analyst]

[Interpreted] Yes. So I actually have another follow-up question. I think earlier you said that in terms of managing your K-ICS target, you apply Solvency II standards. If I recall correctly, I think many European insurance companies consider anything above 150% to be excess capital in their capital management policy. So is there this kind of a reference capital ratio that Samsung Life applies? Or should we be looking at the K-ICS band of 200% to 220% as that sort of threshold? I asked because previously we had thought that Samsung Life was carrying quite significant excess capital, whereas today's material suggest actually the amount looks more reasonable or adequate. So if you could clarify?

[Unknown Executive]

[Interpreted] So let me cover your questions.So you mentioned European insurance companies that apply Solvency II. So we understand that for the AAA insurance companies, their solvency level is equivalent to 210% to 220% based on our K-ICS ratio. AA+ are managing their solvency at around 200% equivalent level.So I think you're suggesting that for those insurance companies, anything in excess of 150%, they are using to fund dividend payments and other capital deployment.There are some differences from one company to the next. But as far as we have been able to verify, for the high credit rating companies, usually, the threshold is maybe 190% or actually 195% or above. Anything in excess of that level, they would use for dividends. That is the internal policy that we have been able to check.So we actually have been communicating to you using a range from 200% to 220% because we feel that we may need a buffer, given changes to the interest rate movement, also regulatory change and tightening that we see that is ongoing even today.So we believe that once the regulations become more stabilized, we will be able to narrow the range further in our communications with you.

[Operator]

[Interpreted] The following question will be presented by HeeYeon Lim from Shinhan Investment & Securities.

[HeeYeon Lim, analyst]

[Interpreted] Yes. Thank you for the good performance. I actually would like to ask for a favor rather than asking a question. Could you consider maybe changing your Q&A session to simultaneous translation instead of sequential? Because it is distracting hard to concentrate in a lot of repetitive questions taking up a lot of time. So for better efficiency, would you consider changing to simultaneous translation mode, be better use of time. And thank you for reflecting our recommend or our suggestion regarding the fact sheet last time.

[Unknown Executive]

[Interpreted] We will see internally if that is possible to change to simultaneous.Thank you very much. We will now conclude the first quarter conference call for Samsung Life. Please contact our IR team if you have any further questions. Thank you very much.[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]