Samsung Life Insurance Co Ltd

KRX:032830

Earnings Call Transcript 2023-Q3

[Operator]

Good day, everyone. Thank you all for joining this conference call. Now we will begin the conference of the Fiscal Year 2023 Third Quarter Earnings 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.

[Kyung-Bok Lee, executive]

Good morning. Thank you for taking the time to attend the 2023 third quarter earnings call for Samsung Life despite your busy schedules. As per our prior notice, this conference call will be conducted as a QA session with key members of management this quarter. But please allow me to first briefly outline the key highlights for Q3 based on the materials we have provided to you in advance.

Following IFRS 17 adoption, the business environment saw intensifying competition, notably for protection-type new business. But nonetheless, we were able to achieve solid results through timely launch of new health products that were well aligned to customer needs and through our differentiated sales strategy between our exclusive versus nonexclusive channels. And as a result, we were able to boost the share of high-margining health products to 40% of new business achieving KRW 956 billion in new business CSM in the third quarter, with cumulative new business CSM now totaling KRW 2.772 trillion between January up to September 2023.

Thanks to strong ongoing sales performance in high-quality new business as well as further efficiency gains in our in-force book, as of the end of September, our CSM balance, which is the source of future insurance service profit, now stands at KRW 11.7 trillion, which is a KRW 1 trillion increase from the start of the year. With transition to IFRS 17, our reserve interest on fixed rate policies has become significantly reduced, whereas our investment yield has improved from rising market rates and diversification of vested assets. As a result, we were able to achieve year-to-date net income of KRW 1.450 trillion as of September.

Building on our strong underlying fundamentals and solid capital position, which have become significantly improved under the new system, we intend to carry out our shareholder return expansion policies without setback. Meanwhile, as the representative insurer for Korea, even as we continue to enhance our competitiveness in our core insurance business, we'll also work to solidify the foundation for sustainable mid- to long-term growth, advancing into new business areas, including global asset management and health care, all the while continuing to strengthen our commitment to ESG management.

Please refer to the materials that we have made available to you in advance for further details on our performance. Please be reminded that forward-looking statements or future outlook we mentioned in today's call may be subject to change depending on changing economic and business conditions.

Now then we will continue with our Q&A with management.

[Operator]

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

[M.W. Kim, analyst]

First of all, in the opening statement, I think you did mention the company's policies toward shareholders. I think your solvency ratio right now is standing in a good position between 215% to 220% or so. So when you think about shareholder return policies for this year and into 2024, what kind of program do you think that we can actually look forward to? And last time, you did mention that you may consider possible share buybacks. So could you comment on that line of thinking further? And what kind of free surplus is the company thinking of? Out of your total capital base, what is the level of free surplus?

And second question regarding growth, I think this year, you have seen a very good growth in new business driven in large part by your health-related products, which seems to help in terms of your CSM multiple. When you think for 2024 and '25, what kind of growth outlook do you think would be reasonable for new business? What should be our expectation?

And the third question is regarding elderly care. It seems that many Asian insurance companies are actually providing elderly care plans or policies targeted towards the elderly. And I would think that this may be a reasonable solution or business model for Korea also considering our demographic profile. So do you also have plans for Samsung Life to expand into that kind of business?

[Kyung-Bok Lee, executive]

Yes. This is Kyung-Bok, the CFO. Let me take your first question regarding our capital management policies. So you mentioned the solvency, or K-ICS ratio, of 220% and whether this represents an excess surplus in terms of our capital position, so let me start there.

So in terms of our target capital adequacy level, we did communicate previously with you that we want to maintain, at a bare minimum, at least 180% plus, and the goal is to maintain at least 200% or 220% current like levels. So some may actually say or think that it is a little bit on the high side, if you just look at the number only. However, we are actually targeting the current level because we aspire ultimately to increase the level to be commensurate with the level of leading insurance players.

And also although the interest rates right now in Korea is quite high, in the event that there may be an abrupt drop in the interest rates, in that case, it would be hard to say that a lower level could still be a stable level in terms of capital adequacy. And also with adoption of IFRS 17, the K-ICS regime actually has been newly set up, but this may be subject to change depending on changing regulations. So with that possibility, we believe that our current level of 220% or so does represent an appropriate target. So we remain committed to ongoing [ LLM ] policies. And in the future, there may be different initiatives, for example, repurchase of existing policies if that becomes available.

So overall, we think that there will be more stronger control against these types of volatility factors. And at that point, then we may have more headroom or headspace to consider lowering our capital adequacy target. And at that time, we'll be in a better position to think more progressively about our capital management policy to try to be as shareholder-friendly as possible even if it's a small event step by step.

Regarding possible shareholder return program, between share buybacks or other shareholder return policies, I think that other things being equal, increasing the dividend payout actually may be a more effective measure versus share buybacks. Perhaps next year, sometime next year or so, uncertainties regarding CSM or K-ICS may have become resolved. And at that point, we may have more leeway in terms of increasing our dividend payout. But that being said, at present, there are many of these regulatory uncertainties that still remain outstanding. So in the meantime, I think that potentially a mix of different shareholder policies, including a payout increase and a share buyback could offer, depending on the situation, a good alternative in terms of our shareholder return policies.

So I think it may be sometime next year when we are able to be more clear in terms of our communication with our shareholders regarding shareholder return policies. I think we should be able to provide greater clarity next year. And right now, we are talking mostly in terms of boundaries or ranges, in terms of how further we can improve our dividends in the mid- to long term. But again, I think we can provide more clarity to you next time regarding a dividend increase or share buyback, and we are right now in the process of having those internal discussions on exactly what we will be looking to do.

[Jin Sub Han, executive]

Yes. This is Head of CPC Planning, let me take your second question. So as you mentioned, after we had the short-term whole life type product become a big issue, since then, we have seen a lot of the insurance companies really shift more toward health-related products, mainly because of the big difference in margins. Health-related products have a much higher multiple at 26x versus just 13x for whole life, which is why we think that many companies are looking more as health products.

As you know, it is generally accepted that given the flat demographic trends and also sluggish economic conditions, it is not expected for the insurance market itself to grow in a big way. However, given that there is a recent increase in single-person households, also per-person medical expenditure is also on the rise, which is why we think that as we focus on the health insurance space, this part of the market will see a certain level of growth going forward.

So of course, health insurance is a market that is occupied by both life and nonlife insurers alike, so when we talk about the health insurance market, it's a combination of both sides. That is what we manage against. So in terms of numbers, this combined health insurance market was worth about KRW 72 billion as of 2020. This year, it has since grown to KRW 77 billion, and we expect it to grow further to about KRW 80 billion next year.

And lastly, again, because of rising per-person medical expenditure reimbursement cost, we do think that the health insurance market may grow at an annual rate of 3% to become a KRW 96 billion market by 2030. So we do see it as a viable market.

[Sang-Mook Lee, executive]

Yes, let me take your third question regarding senior care. I'm in charge of company-wide planning. So there was already mention of demographics, but just to briefly outline again, we think that by year 2024, there will be 10 million elderly persons in Korea above the age of 65. So there is growing life expectancy and longer periods where people have to live in ill health also arise in elderly single-person households, which is why on balance, we think that the senior care market has strong growth potential.

Regarding the regulations for senior care, this actually is a nationwide or national problem. It's a matter of national interest, which is why there has to be public sector intervention but also engagement by the private sector companies as well. So I understand that the regulatory authorities are actually contemplating on some institutional support to encourage more private sector insurance companies to go into the long-term care or nursing care service market for seniors.

And so riding this kind of trend, many insurance companies are looking at moving into potentially moving into senior care. And this applies to Samsung Life as well. We continue to monitor development of the senior care market and are preparing to review the market further because we do believe there is a connection already between our insurance business and the senior care business, and we already have secured the customer pool because many of our customers are already in the senior age segment, so we'll continue examining the potential.

And lastly, within our group, we have Noble County, which is a senior care facility that provides live-in support. So because we have that kind of experience, I think we will be in a better position to examine the business feasibility of senior care more closely and better compared to other insurance companies.

[Operator]

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

[Hye-jin Park, analyst]

Yes, I would like to ask two questions. In terms of new business, as you focused on health-related products, it does seem you have grown in terms of volume of business, but the CSM multiple appears to have gone down a bit. So what is the reason on that? And in terms of your CSM movement, it does seem that you did have a big drop from the CSM adjustments of KRW 0.9 billion, which is quite sizable, possibly from adjustments to your actuarial assumptions and maybe RA. So could you explain why there was this big CSM adjustment?

[Unknown Executive]

Yes, this is the Head of the Actuarial team. Let me take your second question regarding adjustments to some of our assumptions. So in the third quarter, yes, there was quite a sizable adjustment to our about KRW 900 billion. So one of the reasons was because of the FSS guidelines, which led to a revision regarding some of our real loss indemnity health products which led to a CSM adjustment of KRW 540 billion. But this was a one-off measure, so no further adjustments will be required due to indemnity medical insurance.

Let me explain the remaining amount, KRW 300 billion. So other than end of the period, during in quarters, we do not make changes to the assumptions. So any time there is a CSM adjustment during a certain quarter, this is mostly due to changes in the difference between assumed and actual policy loan, also, yes, differences in terms of our in-force contracts.

So in terms of our in-force contracts, let me explain further. So some of those contracts have good future cash flow. Others have less positive cash flow. So actually, those attributes, well, we do not actually apply granular distinction right now, depending on those two attributes. They are actually classified just at a high level. However, based on our own analysis, we have found that between the contracts that have good future cash flow versus those that do not, there has been a bit of a difference in terms of mortality and lapse rate. So it seems that mortality and lapse actually was a bit higher for the contracts with good future cash flow versus the contracts with less good cash flow.

So we are in the process of taking a more detailed look at exactly why the adjustment was more significant in the third quarter versus first or second quarter. And we're considering possible adjustments to the assumptions for the fourth quarter, for example, so that we can actually manage the quarterly CSM and CSM adjustments in a smoother way.

[Jin Sub Han, executive]

Yes. This is Head of CPC Planning. Let me take your question regarding the new business CSM. So if you refer to Pages 6 and 14 of the slides, you'll note that actually the health product APE actually went up from KRW 127 billion in the previous quarter to KRW 173 billion. And so as a consequence, you can see on Page 6 that the new business CSM actually changed significantly as well from KRW 291 billion in Q2 to KRW 381 billion in the third quarter.

And as you can see on the same slide, in terms of CSM multiple, it changed from about 2,630% in Q1, it went up to 2,740% in Q2 before coming back down some to 2,640% in the third quarter. So we do not look at that 100% point difference as being meaningful. We do think that it may be the result of some operational costs that we incurred as we try to shift the sales pattern away from short-term whole life, which became overheated in Q1 and Q2, more to focus on health policies in Q3. So we still think that the current multiple of 2,640% is still quite high. In fact, some non-life insurance companies have a multiple that's below 2,000%. So going forward, in order to boost health CSM, we will continue to manage our portfolio in terms of volume and also profitability. And continue to pursue our strategy of securing more health business.

[Operator]

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

[Byung Gun Lee, analyst]

Yes, this is Lee Byung Gun. I'd like to first thank you for continuing to deliver stable results. And I have two questions. First, you did mention the CSM adjustment, but I would like to know more in terms of how exactly the FSS guidelines impacted CSM. So you did mention the medical indemnity insurance, how there was a change there. But I think the guideline also covered or had some changes regarding the lapse rate. Also, the reversal of CSM and RA, the percentage may have been adjusted as well in the guidelines, which probably had an effect. I'd like to hear exactly what that effect was to your CSM and RA. Because although CSM has grown significantly, the CSM amortization and RA reversal actually appears quite down versus the second quarter, which I am thinking is due to the guidelines. If you could overall provide a breakdown about that impact.

Second, I can see that the company is managing very tightly, never overstretching itself. If you look at the savings type products, there actually has been a lot of contracts that expired upon arriving at maturity this year compared to last year. So some call this lapse, but I imagine more of that came from existing contracts reaching maturity. So if you look at the percentage of savings products that have reached maturity this year, how do you expect this trend to change next year? Will those types of contracts do you think could be similar next year? Or do you think that level will decrease next year?

[Unknown Executive]

Okay. I will take the first question. I'm Head of the Actuarial team. So in May, the FSS did provide a set of guidelines that covers 6 items. So you did ask for comprehensive explanations, and I will take you through the items then. So regarding the application of the guidelines, Samsung Life is adopting a proactive application method. So 4 out of the 6 items actually have been preemptively reflected as of the second quarter this year.

So in terms of what was already reflected in the second quarter, let me outline the 4 items. First was for the low to 0 lapse rate. Second, lapse rate for high-yielding or high assumed rate contracts, VFA for variable annuity and the adjustment to the CSM amortization rate. So in terms of the lapse rates applied for our low to 0 lapse products or for the high assumed rate products, we had already been applying levels that were consistent with the guidelines, so there was no impact. And then for the variable annuity products, by shifting from the prior PL methodology to the VFA model, as we previously explained, we think that the impact in the given quarter was about KRW 2 billion.

And then the adjustment to the CSM amortization rate, we explained previously that the adjustment for Samsung Life would be about 50 basis points. So that would take us about mid- to high 10% amortization rate. And then in the third quarter, again, there was the standardization of the valuation methodology for real loss indemnity products, which led to a one-off adjustment of KRW 540 billion in the third quarter. But again, this is one-off. There will be no further CSM adjustments due to this factor.

And then the last item regarding RA reversal, in the previous regulations, there were no clear standards in terms of reversal. And so different calculation methods were applied, but the guidance that we received from the FSS was to delay reversal as much as possible. So our reversal was about 19% in Q2. But as of the third quarter, it was lowered to about 11%. So although applying the guidelines did lead to a partial decrease in our net profit in the third quarter, with the reversal already implemented or once it is done, there will be no further CSM adjustments on the same account. And so overall, there will be, or there is no big impact to our company value.

[Unknown Executive]

Yes. This is Head of Management Support. Thank you for your good assessment of our management efforts today. I'd like to just share some comments about three things. First, the lapse trends that we have been observing, and then I would also outline how much financial type single-payment products were sold. These are the savings-type products that you asked about in 2012 and '13 and what percentage have arrived at maturity. The third part will be how we're managing at the moment.

So in terms of the lapse or the termination trend that we have been observing, as you may know, in the third quarter last year, the monthly lapse amount actually was about KRW 600 billion. And then in the fourth quarter, amid rising interest rate, it did climb to KRW 1.4 trillion. But since then, it has stabilized. As of the second quarter this year, it was back down to KRW 0.5 trillion. And as of the third quarter, the monthly lapse amount is back down to about KRW 600 billion. And just to add, relative to the size of our underlying reserves, we did not observe any anomalies that was brought to our attention. And unlike the broad market, which is seeing an increase in lapse for protection-type policies, we have not observed those kinds of trends at Samsung Life.

And then you mentioned that the amount reaching maturity has increased. Well, for these types of single-payment products, the financial-type products, in 2012, we sold KRW 6 trillion worth. In 2013, we sold KRW 4.9 trillion worth of these products. At the time, there were some restrictions or a cap placed on the tax exemption limit in terms of the tax incentives provided on these products. These are products that were sold about 10 years ago or so. And so with the passage of time, 10 years plus, they have now qualified for tax exemption benefits. Also with rising rates, both last year and this year, many of the contracts have, of course, reached maturity. The maturity amount actually was KRW 2.8 trillion last year, KRW 3.2 trillion this year. Fortunately, based on our expectations, we think the amount will reach or will have reached the peak this year and start gradually going down starting next year. So the maturity amount, we think will go down to KRW 2.2 trillion next year, KRW 1.8 trillion in 2025 and KRW 1.7 trillion in 2026, a gradual decrease.

So in terms of our countermeasures or how we intend to manage the situation, we think, ultimately, it's very important to secure a stable source of insurance income because that is what is used to fund our investments to deliver investment yield for us. So we'll make sure that sources of concern that may impact the insurance business side will be addressed so that we can continue to secure good incoming flows. We saw at the end of last year, amid abrupt rise in interest rates, that we could use our exclusive channel and also the bank assurance channel to secure a good-size amount of single-payment type product sales. And so we will continue to build out and manage our product portfolio strategically among many means to secure further liquidity. So we'll focus on the high-margining health-related products, also in the mid- to longer term, focus on expanding our savings and annuity portfolio as well, again, to secure a good base of incoming insurance business.

[Operator]

The following question will be presented by Mingi Jeong from Samsung Securities.

[Mingi Jeong, analyst]

Briefly, I would like to ask about your K-ICS ratio and interest rate sensitivity. So assuming that there is a drop in interest rates, what is the sensitivity to your K-ICS ratio?

And second, I think starting next year, there are some changes that are expected in terms of the interest rate term structure. So UFR, or liquidity premium and whatnot, there may be some changes to the term structure. So could you also share what the impact would be on your K-ICS ratio?

[Unknown Executive]

Okay. This is head of the RM team. Let me cover two or both of those questions. So in terms of the impact of lowering of interest rates on our K-ICS ratio, in terms of the volume of risk, particularly mass lapse risk, the interest rate applied, actually, it varies from one company to the other. So depending on the interest rate that is applied and how much of an interest rate drop there is, 50 basis points or 100 basis points, the results again will vary.

So in terms of what would happen if there was a 50 basis point drop in interest rates, so our K-ICS ratio that we shared today is current as of the end of the second quarter when the market rate was 3.7%. So if there is a 50 basis drop, then our K-ICS ratio would go down by about 6 to 7 percentage points. And then based on current interest rates, which stand at 4%, if there was a 50 basis point drop in interest rate, there would be no impact to our K-ICS ratio. If there was a bigger 100 basis point drop in interest rates, our K-ICS ratio would go down by 9 percentage points.

And regarding your second question, as you mentioned, in July, the authorities announced that they would be lowering the discount rate that is applied in valuation of liability. So as you know, the authorities will be increasing -- will be allowing the UFR to be lowered by a greater amount on an annual basis. The liquidity premium would be lowered. And then the LLP, or the last liquid point, would be extended from 20 years to 30 years. So all the 3 items, the change to the UFR adjustment level and also LLP, actually, is not expected to have a big impact, whereas for us and all other insurance companies, I think the adjustment to the lowering of the LP would be the one that has the biggest impact.

So regulatory authorities do recognize that this may actually have a big impact, which is why they will not be asking the companies to apply it all at once, but have outlined a sequential adoption schedule up to the year 2027. However, I think we will be able to cover and make up for those adjustments every year with new APE or new business that we write. And so we expect our K-ICS ratio to be able to maintain the mid-220% level going forward. .

And just lastly, on a cumulative basis, we think that the lowering of the liquidity premium will have a cumulative effect of lowering our K-ICS ratio by 10 percentage points, but again, that will entirely be able to be covered by our new business.

[Operator]

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

[Jaewoong Won, analyst]

Yes. Thank you for achieving good results despite the difficult working environment. I have some questions regarding your new business CSM and also CSM adjustment. I think earlier this year, you stated that you expect to be able to secure KRW 3.2 trillion in additional CSM on an annual basis for several years ahead. And so I think you are very likely to achieve good results this year. But what about next year? Do you think that, that kind of guidance will be sufficiently achievable? Or are there any changes to your plans? I'd like to hear about that.

Second, regarding CSM adjustment, it seems that although the size of your indemnity insurance products actually is less versus the non-life insurance companies, the CSM adjustment, due to the indemnity product, the valuation method, actually, it seems quite significant at KRW 540 billion. So when you compare the indemnity products provided by the life versus by non-life P&C, are there any differences in terms of, say, adjustments? Or what kind of difference is there? And it seems that although your new business CSM was very strong, it's too bad that the CSM adjustments actually took away from that this year. But as you look out to the fourth quarter and next year, are there possible factors that may result in CSM adjustments that we should keep an eye out for?

[Unknown Executive]

Okay. This is Head of the Actuarial team again. Let me briefly answer the two questions. So in terms of new business CSM, we expect to achieve KRW 3.5 trillion this year and then next year thereafter, consistently accumulate new business CSM of KRW 3 trillion or above. That is our target.

And our Head of Planning previously mentioned how we are expanding our health lineup, also managing an optimal product portfolio based on the margin profile of different products. We're also looking at the different channel strategy, reflecting market conditions. So on balance, we believe that we will be able to achieve consistently KRW 3 trillion or above new business CSM every year in order to be able to achieve our overall new business CSM targets.

And then your second question regarding the indemnity products, how there may be a difference between life versus non-life insurance companies, particularly in terms of applying the FSS guidelines. Actually, there are two or three factors that actually undermine direct comparability between life versus non-life, it does not make for direct apple-to-apple comparison. So these are two, three factors that have not been confirmed, but these are just my thoughts.

So there are different generations of indemnity-type products from first generation up to now fourth generation. So it depends on the particular mix of products that a life or non-life insurance company may be holding, the extent of the products that will make a difference in terms of the impact. And then the loss rates also will be different for every company depending on the generation of product. Also, the combined loss rate that also incorporates the loading expense will also be different. So even if it's the same volume of product, the valuation results may vary. And this is, again, another reason why direct comparison between life and non-life is actually challenging.

And regarding CSM adjustments, so there are basically two types of adjustments that can occur in or within a certain quarter. So the first reason for in-quarter adjustment would be institutional change. So the regulatory authority guidelines, the instructions were to reflect all of the required changes by the third quarter this year, which has been done. So going forward, there will be no further adjustments to CSM due to institutional or regulatory change. And the second factor that may result in quarterly adjustments would be the difference in the in-force book, depending on the different time periods. We will do more micro, very calibrated management of the different portfolio of in-force contracts by different underwriting years, and we will prepare to communicate those results more with the market.

[Operator]

This concludes the Q&A session.

[In Kim, executive]

Thank you very much for joining us at the 2023 third quarter earnings call for Samsung Life. Please contact us at the IR team if you have any more questions. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]