Hanwha Life Insurance Co Ltd

KRX:088350

Earnings Call Analysis

Hanwha Life Reports Strong Growth in Protection Policies and Stable Income

In the first quarter of 2024, Hanwha Life Insurance showcased a remarkable 133% year-over-year increase in protection new business, driven by innovative products like The H Health Insurance. Consolidated net income reached KRW 368.3 billion, supported by key subsidiaries. The company maintained a 92.9% persistency ratio, enhancing sales efficiency. With a stable new business CSM of KRW 515.4 billion, Hanwha targets KRW 2 trillion for the year. Despite looming interest rate cuts, management expects a 10 percentage points increase in the K-ICS ratio, ensuring sound capital management.

Strong Growth in Protection Business

In the first quarter of 2024, Hanwha Life Insurance reported remarkable growth, particularly in its protection segment, with Annual Premium Equivalent (APE) for protection policies surging by 133% year-over-year, reaching KRW 900 billion. This aggressive growth is largely attributed to the introduction of new general protection products, notably The H Health Insurance, indicating a strategic shift toward a more robust insurance portfolio.

Solid Financial Performance

The company showed a separate net income of KRW 175.5 billion and a consolidated net income of approximately KRW 368.3 billion, driven by successful earnings contributions from key subsidiaries, including Hanwha General Insurance and Hanwha Life Financial Service. This aligns with a broader industry trend of leveraging subsidiary strengths for consolidated gains.

Improvements in Sales and Persistency

Sales efficiency was enhanced with a 14% year-over-year increase in the sales force, totaling 28,314 financial planners (FPs). The persistency ratio improved significantly, with the 13th month persistency rising to about 93%, a 7.3 percentage points increase quarter-over-quarter. These improvements signal a solid commitment to customer retention and sales effectiveness, vital in the insurance sector.

Stable CSM and Ambitious Annual Guidance

The company achieved new business CSM (Contractual Service Margin) of KRW 515.4 billion in Q1, suggesting a good start toward its annual guidance of KRW 2 trillion. The in-force CSM totaled KRW 9.2 trillion, indicating overall healthy business fundamentals despite market challenges.

Investment Income and Portfolio Management

Investment income decreased significantly from KRW 433 billion in Q1 2023 to around KRW 130 billion in Q1 2024, attributed to substantial one-off gains last year. Despite this drop, the investment yield increased to 3.96%, showing effective asset management amid market volatility, with a strategic reduction of high-risk assets.

K-ICS Ratio Management Strategy

The K-ICS (Korea Insurance Capital Standard) ratio stood at 183.8% in 2023. Management aims to maintain it above 180% by leveraging new business CSM inflow and proactive capital management strategies. Forecasts indicate a potential 10 percentage point increase in the K-ICS ratio throughout 2024, reflecting confidence in ongoing business strategies.

Dividend Policy and Future Outlook

While explicit guidance on dividends remains cautious, Hanwha Life is committed to enhancing shareholder returns, likely hinging on the outcomes of regulatory reviews about surrender reserves. Discussions are underway that could positively impact the available dividend payout resources by reducing required reserves. Investors can expect updates as these regulatory negotiations progress.

Challenges in Whole Life Insurance Profitability

The performance of the whole life insurance category came under scrutiny, reflecting declining persistency ratios and profitability tied to pricing strategies. Management expressed a proactive approach, pivoting from short-term to medium- and long-term policies to enhance profitability moving forward.

Addressing Regulatory Changes

Management acknowledges ongoing changes in regulations impacting various segments of their business, particularly how they account for CSM and surrender reserves. These adaptations are crucial for aligning operational practices with evolving market standards and ensuring sustainable profitability in the future.

Earnings Call Transcript 2024-Q1

[Operator]

[Interpreted] Good morning, and good evening. Thank you all for joining the Conference Call for the Earnings Results of Hanwha Life Insurance. This conference will start with a presentation followed by a Q&A session. [Operator Instructions]

Now, we will begin the presentation on Hanwha Life Insurance first quarter earnings results of the fiscal year 2024.

[Unknown Executive]

[Interpreted] Good afternoon. I am [ Kim Sung-Jin ] from the IR team at Hanwha Life. We are providing consecutive interpretation in Korean and English throughout the earnings call for the first quarter of 2024. The presentation materials are available on our IR website.

Today, CFO, [indiscernible], will first give a report followed by the Q&A session. Let me now hand over to our CFO. [Interpreted] Good afternoon. This is CFO, [indiscernible]. I would first like to thank you for joining our earnings call. Please note that today's presentation was prepared based on K-IFRS. Let me now begin the report on the earnings for the first quarter of 2024.

Page 4 is on earnings highlights. In the first quarter of 2024, Hanwha Life was able to strengthen its medium- to long-term earnings fundamentals by promoting continued growth of protection new business and improving sales efficiency through persistency enhancement. First, protection APE grew 133% year-over-year, sustaining a strong growth trend and the new business CSM posted KRW 515.4 billion.

In particular, the 13th month persistency ratio improved to around 93% and the sales force exceeds 28,000 FPs, thereby maintaining the strongest channel competitiveness in the industry. While the separate net income posted KRW 175.5 billion, the consolidated net income posted KRW 368.3 billion, thanks to sound earnings contributions by key subsidiaries, such as Hanwha General Insurance, Hanwha Life Financial Service and the Vietnam subsidiary. Let me give you more details on the following slides.

The new business APE grew 2.1% year-over-year, and the portion of protection policies expanded to 81%, contributing to quality improvement of the insurance portfolio.

Protection APE was up 133% year-over-year to post KRW 900 billion, driven by new general protection products, such as The H Health Insurance.

Page 6 is on sales efficiency. The sales organization grew 14% year-over-year to 28,314 by hiring around 1,200 FPs per month on average.

The 13th month persistency ratio improved 7.3 percentage points quarter-over-quarter to 92.9%, thanks to contract persistency management efforts and system improvements and the 25th month persistency ratio also increased by 2.6 percentage points. We will continue to reinforce effort to manage persistency to further improve the value of in-force business under the new regime.

Next is on CSM. We gained stable new business CSM of KRW 515.4 billion by making a shift to general protection products in response to the slowdown of the short-term premium paying whole life insurance market and secured visibility for achieving the annual guidance of KRW 2 trillion of new business CSM. The in-force CSM in the first quarter posted KRW 9.2 trillion.

Page 8. Our separate net income reported KRW 175.5 billion despite one-off factors such as the strengthening of the IBNR-related regulations.

Our consolidated net income posted approximately KRW 370 billion based on sound results of major subsidiaries, including KRW 125 billion from Hanwha General Insurance, KRW 14 billion from Hanwha Life Financial Service and KRW 18 billion from the Vietnam subsidiary.

Page 9 shows details on insurance and investment income despite one-off difference between the estimated and the actual due to stronger regulations on IBNR reserves, the insurance income posted KRW 91 billion based on amortization profits generated from our in-force CSM. Excluding the impact of one-off IBNR issue, the insurance income is approximately KRW 176 billion, which is similar as last year.

The investment income recorded around KRW 130 billion on the back of interest gains and disposal gains exceeding interest payments.

Page 10 is on asset management. Our investment portfolio mainly consists of interest-bearing assets and a portion of FVPL is reduced to 26% for strategic asset allocation.

The investment yield posted 3.96%, up 60 basis points quarter-over-quarter, thanks to flexible asset management in consideration of market volatility.

As for our bond and loan portfolios, please refer to Page 11 and Page 12. Next, Page 13 is on K-ICS and the duration gap.

Our tax ratio saw a quarter-over-quarter drop to 174% due to the strengthening of liability discount rates, but we are committed to managing the year-end K-ICS ratio to be above 180% by expanding available capital through stable new business CSM inflow and reducing required capital.

And the duration gap was reduced to 0.58 due to extended liability duration with changes to liability discount rates.

Finally, on Page 14. After turning into black in 2023, Hanwha Life Financial Service posted KRW 13.8 billion of net income in the first quarter, thereby maintaining the profit trends.

The company is expected to achieve cumulative breakeven point this year, and Hanwha Life Financial Service will maintain its #1 position in the GA market by continuing to strengthen its channel competitiveness.

Thank you for your attention.

[Operator]

[Interpreted] [Operator Instructions] The first question will be provided by Do Ha Kim from Hanwha Investment & Securities.

[Do Ha Kim, analyst]

[Interpreted] I'm Kim Do Ha from Hanwha Investment & Securities. I would like to ask 2 questions. First of all, when it comes to the impact of changes through the IBNR regulations on Page 9, you stated that there is an impact of KRW 88 billion. That is -- that has resulted in the difference between the estimated and the actual. I believe this has to do with the application of the accident date that was -- that came into effect in March. And I'd like to understand whether this has any impact on your onerous contracts as well and its impact on, not only your contracts, but also -- not on your profit and loss, but also your contracts in your portfolio.

Secondly, when we take a look at the new business or new contract margin multiple, this has gone down much more than expected, especially for protection policies as well. This may have to do with changes in your assumptions. But if you could provide us with more details on the reasons behind this drop in the multiple by breaking it into protection, as well as general protection policies? And I'd like to also understand what is your strategies to improve this multiple going forward?

[Unknown Executive]

[Interpreted] I am [ Kim Jeong Yi ] from the Actuary team. Let me answer your first question. As you pointed out, there were some changes to the IBNR reserving. So according to our initial business plan, it was supposed to be around KRW 85 billion. But when we closed the first quarter, it turned out to be KRW 88.3 billion.

This has to do with the recognition of damages and coverage that we have to provide as a result of the IBNR reserve increase. So to be more specific, it was KRW 84 billion for Bell and KRW 3.7 billion for RA.

And moving on to your question on our new CSM margin multiple. Despite many changes to the assumptions, as well as strengthening of regulations on discount rates that were applied last year, we were able to continue to increase our sales of general protection policies, including The H product, The H Health Insurance. Therefore, we were able to increase the sales of protection policies, leading to a similar level of margin year-over-year.

However, when it comes to whole life products, there were changes to loss ratio assumptions, as well as a lower rate of discount rates. So this had an impact on the sales of general protection. So overall, the percentage or the portion of general protection declined slightly. However, the margin or the profitability of general protection policies has maintained over 100% over APE.

While we anticipate some decline in the profitability going forward, we expect the sales volume of protection policies to continue to increase. Therefore, we believe that we will be able to achieve our initial or annual target of new business CSM for the year. [Interpreted] I am [indiscernible] from the Product Development team. Let me provide additional comments on your question. As for The H Health Insurance, this was a very popular product in the first quarter of this year as part of the general protection policy category. So to give you a comparison, in the first quarter of last year, the month initial premiums earned was KRW 4 billion, but this quarter in 2024, it went up to KRW 7.9 billion.

So in the process of increasing the sales volume, there was a slight decline in the CSM multiple. However, we believe that this is a temporary phenomenon because going forward, The H Health Insurance will serve as a platform for general protection covers, and we will be able to add more coverage on top of the basic coverage. So going forward, from the second quarter, we will be able to add various benefits in coverages, including common illnesses and other diseases, which have a higher CSM margin. So we believe that going forward, the CSM multiple for general protection policies will continue to improve. [Foreign Language] [Foreign Language]

[Operator]

[Interpreted] The following question will be presented by Hong Jae Lee from Hyundai Motor Securities.

[Hongjae Lee, analyst]

[Interpreted] I am Lee Hong Jae from Hyundai Motor Securities. I'd like to get more details on changes to the required capital size when it comes to your K-ICS ratio. We understand that there were some impact from strengthening of the regulations regarding discount rates. But if you could give us some more details, we would appreciate that. For instance, other companies provided some data on [ mass ] labs, risks and other factors. And also, if you can share with us the interest rate risk amount for the end of the first quarter versus the previous quarter? We would like to learn more about that.

And secondly, this is a similar question as to the previous question. There were some changes to discount rates, as well as long-term forward rates. So if you make a projection for the 2027, how long do you think your liability duration will extend? What is your estimation and projection given the current interest rate level?

[Unknown Executive]

[Interpreted] I am risk management [indiscernible], and let me answer your question. Compared to December, by the end of the first quarter of this year, the required capital is expected to increase by KRW 400 billion. So for interest risk, the amount is KRW 200 billion. And to be more specific, for lapse risk amount is KRW 170 billion, and our market risk amount is KRW 100 billion, in particular, related to the equity side compared to the business plan, there is an increase of KRW 200 billion.

And as for the operational risk amount, as of March 2024, the basic assumption risk will be incorporated. And given this change, we do not anticipate any increase in this risk category for March of 2024.

As for your question on the anticipated duration gap for 2027, given the continued strengthening of the liability discount rate related regulations, currently, as of the end of March, our duration gap is 0.58, which means that we have longer asset duration than the liability duration. However, when we assume that regulations will continue to strengthen by 2027, the duration gap will be negative 0.7, which means that the liability duration will be longer than the asset duration by 0.7 years.

[Hongjae Lee, analyst]

[Interpreted] So 1 quick follow-up question. What was the impact of changes to discount rate on your interest rate risk amount?

[Unknown Executive]

[Interpreted] As of December 2023, the interest rate risk amount was KRW 1.2 trillion. But as of March 2024, it is estimated to be about KRW 1 trillion, which means that there is a decline of KRW 200 billion, and this is mainly because of the reduced duration gap compared to the end of December.

[Operator]

[Interpreted] The following question will be presented by Jung Hyun Lee from Hana Securities.

[Jung Hyun Lee, analyst]

[Interpreted] I'm Jung Hyun from Hana Securities. I'd like to ask 2 questions. You mentioned that your K-ICS ratio level that you would like to manage by the end of the year is 180%. So I'd like to know your strategy, how you're going to manage your K-ICS ratio? Because while you have a good new business inflow of CSM because of the adjustments of the increase is not likely to be very big. So what is your overall K-ICS management strategy?

Secondly, there was a news report about your investment in Nobu in Indonesia. So can you explain your overall overseas business strategies? And when are you anticipating a positive impact of such investments on your profit and -- profit going forward?

[Unknown Executive]

[Interpreted] I am [indiscernible] from the Risk Management team. Let me answer your question. First question on our K-ICS management strategy. In 2024, we will continue to drive the increase of new business CSM to increase available capital. So given our projections for the second quarter, third quarter and all the way to the fourth quarter, we believe that new business CSM inflow will lead to an increase of K-ICS ratio by 10 percentage points. That is our conservative expectation. And at the same time, given the continuous [ tightening ] of the liability discount rates, we will try to manage the duration gap. Currently, our asset duration is longer than the liability duration by more than 0.6 years. So we will continue to manage our duration gap so that we can use the capital size volatility. And at the same time, we will utilize investments to be able to have enough capital buffer.

[Jong Guk Yoon, executive]

[Interpreted] I'm Yoon Jong Guk from the Business Planning and Administration. Let me address your second question on our investment in Nobu Bank. So as you may know, this is a bank affiliate of Lippo Group, which is the sixth largest conglomerate in Indonesia, and the bank is ranked around 30 in the industry, and its asset size is KRW 2.3 trillion with the paid-in capital of KRW 300 billion and its income is about KRW 12 billion, and the BI ratio is 23.5%, which is much higher than the regulatory level. So it has an overall sound business structure.

And as for the type of management of Nobu Bank after we complete our investment, it is expected to be a joint management between Hanwha Life and Lippo Group. And the Nobu Bank will continue to focus on its core banking business model of utilizing the spread margin between interest for lending and interest for deposits. And at the same time, we are going to identify and explore new growth engines by applying our advanced digital technology. And you also asked a question about the financial impact or contribution from this investment, we expect that our investment is going to be completed in mid-2025 and our target equity stake is about 40%. So when there are earnings generated from Nobu Bank, these will be counting -- these will be recognized based on the equity method. So if they have net income of KRW 12 billion, then 40% of that will be recognized as part of the consolidated earnings.

[Operator]

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

[Jun-Sup Jung, analyst]

[Interpreted] I am Jung Jun-Sup from NH Investment & Securities. I'd like to ask 2 questions. The first question is about resources that you can use for dividends in the first quarter. Given the new business CSM inflow, can you share with us some numbers on reserves for surrender, as well as resources available for dividend payout by the end of the year? And I'd also like to understand whether there has been any progress at the regulator's level in discussing improvement of regulations regarding surrender reserves.

And secondly, it was reported in the media that the regulators may consider the validity or effectiveness of CSM amortization rate. So I'd like to know whether there was any discussion on this matter? And what kind of changes are you expecting from the regulators?

[Unknown Executive]

[Interpreted] I'm [ Kim Dong Yi ] from the Finance team. Let me address your first question. They are going to -- they are expected to -- there is an expectation of increasing surrender reserves in the first quarter of 2024. However, currently, there is a task force team operating to include this regulation. So we expect that there will be some resources available for dividend payout. When it comes to the current status of the task force team's operation, we have been working on this task force team since March, together with lifers and non-lifers, as well as the association and the overall direction is to reduce surrender-related reserves in order to increase the base for corporate tax revenue.

Please understand that we are not able to share with you any specific amount as per how much we can attribute to dividend payout at this moment. But we believe that we will be able to secure enough funds for dividends by working through the task force team to reduce surrender-related reserves going forward. [Interpreted] I am [ Kim Jeong Yi ] from the Actuary team. Let me give you more details on the progress of the task force team, as well as our own surrender-related reserves.

So the task force team, 3 options were considered. First of all, the first option was to relax some criteria for surrender reserves. And secondly, there was a recognition that initial reserves for surrender payments for new business was too large. So there were discussions and improving on this aspect. And third, there was a discussion of allocating a portion of the reserves for additional provisioning.

Among these 3 options, the third option was preferred according to some reports. However, this is not finalized yet, so we need to go through further discussions before finalizing an option.

And moving on to our own reserve structure for Hanwha Life. When we look at import policies before 2023 and new business or new policies in 2023, the changes are quite similar at their level. So there may be some impact of increase in new business sales, but overall, the changes are similar.

And given the contract volume in the first quarter and given the changes expected through the reduction of surrender reserves at the beginning of the contract period, we expect an increase of about KRW 1 trillion. [Interpreted] I'd now like to address your second question on the guidance by FSS.

There are 3 main topics that are under discussion at the FSS, but these are not necessarily called guidelines, but these are activities that are done by the FSS to understand the current situation in the industry at the working level.

The first topic is related to the accounting of future changes to announce rates as for floating rate policies. So whether they should be accounted based on the net profit and loss or as part of the comprehensive -- other comprehensive income.

And secondly, there are discussions on how to recognize other comprehensive income that has been accrued when contracts expire. And the third topic is about CSM amortization-related changes. However, nothing has been completely finalized, but these are discussions at the working level, and this is basically about getting input from the industry regarding methodologies.

[Operator]

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

[Byung Gun Lee, analyst]

[Interpreted] Okay. I am Lee Byung Gun from DB Financial Investment. I would like to ask 2 questions. My first question has to do with -- getting more details on the impact of new business or profitability adjustments on your whole life category. As far as we know, the single or short-term premium paying whole life, there were some competition in the first quarter, especially in January. This may also have to do with a worsening of the profitability for your whole life products. And as you mentioned already, there were changes to discount rates. There were changes to lapse rate. These may have an impact on your whole life profitability. So what was the overall impact on your whole life performance? And if you can carve out the single premium payment or a short-term premium paying whole life as well, then this would be really appreciated. And because there were some changes, as I mentioned, to discount rates and lapse rates, and this may have an impact on your profitability, not only this year or the first quarter, but also last year. So I'd like to understand the mechanism as to what happened to your long -- whole life product performance?

The second question has to do with the increase in -- or increasing new patient CSM versus in-force CSM. You provided us with the in-force CSM movements, and there may be several reasons why, but it seems that in the first quarter, the new business CSM did not increase substantially. When we exclude online, new business CSM is KRW 515 billion, but there was so much adjustment applied to that. So practically speaking, CSM didn't increase that much. So I'd like to understand the reasons why there were such big adjustments, especially when it comes to your [ constant ] adjustment.

[Unknown Executive]

[Interpreted] I am [ Kim Jeong Yi ] from Actuary team. Let me answer your question on the profitability of whole life category. As you mentioned, there were some changes to the persistency ratio and also surrender rates and so on. So whole life portfolio performance declined.

In particular, 30% is [ high ] over APE and 340% over a month initial. And this is mainly because of short-term premium paying whole life policies depend on interest spread or difference between the interest rate. However, because of the decline in the persistence ratio, the whole life, especially a short-term premium paying whole life policies lost their profitability.

In recognition of this issue, we have been actively restructuring our portfolio and changing our attention from whole life to general protection policies starting from the first quarter of this year. So we believe that we will be able to meet and secure enough CSM inflow for the entire year.

Moving on to your second question on our CSM movement.

Okay. And in the first quarter, the outstanding CSM stands at KRW 9.24 trillion, and there was an increase of KRW 510 billion, thanks to new business CSM, and there was a drop of KRW 135.8 billion because of unwinding and the CSM amortization rate was 9.3%.

And -- when it comes to the details regarding the experiential adjustments applied to the CSM, starting from the first quarter of this year, there were changes to discount rates, especially for variable policy block. So this led to some changes in our actuarial assumptions. And these are rather one-off and the amount is KRW 200 billion.

And usually, general protection policies are recognized and treated as part of [ OTI ], but for variable policies, we use VSA methodology.

And the remaining changes are rather ordinary on a quarter-over-quarter basis and because of the difference between the estimated and the actual and because of the changes in the nature of contracts in our portfolio, there was a negative impact of KRW 150 billion.

Overall, we believe that our new business CSM inflow was sufficient to cover for any concerns related to downward interest rate movement. And as we mentioned during discussions on K-ICS, the duration gap management will continue to be able to offer or protect us from any regulatory changes. [Foreign Language]

[Byung Gun Lee, analyst]

[Interpreted] I would like to make 1 suggestion and 1 follow-up question. As for my suggestion, I would appreciate it if you could carve out the portion or movements related to a variable fee portion. You mentioned about VSA methodology, and this doesn't really necessarily mean any adjustment to CSM. And if you just look at the general model, the results would look different. So if you can carve that out as part of your assumption changes? This will help us better understand your performance.

Moving on to my follow-up question. When I asked a question about your whole life margin or profitability performance, it has actually gone down by threefold, and this, I believe, is mainly due to the surrender rate-related issues. And my question is, I know that you will continue to sell whole life products going forward because that is one of the major product categories in your portfolio. So what's the kind of level of profitability should we anticipate? Do you think that the current margin level will continue for some time? Or what will be the appropriate level of profitability of whole life products?

[Unknown Executive]

[Interpreted] I am [indiscernible] from Product Development. Let me answer your question regarding whole life. As we mentioned, the CSM multiple for whole life is extremely very low right now. And we understand that there is a concentration in our whole life portfolio towards a single or short-term premium paying whole life policies through product development and sales, we're going to address this.

And starting from the second quarter, we are going to make a shift from short-term premium paying policies to selling more of a medium- and long-term premium paying policies, and we will continue to launch new protection covers that can be placed on top of whole life policies. Indeed, we are making a shift to a more high CSM margin policies in our portfolio. For instance, in April, we've added some protection or health-related benefits on top of the whole life policies, and this is the shift of strategy that we're implementing, and we are producing some tangible results. So going forward, we will continue to diversify our whole life portfolio. [Interpreted] I am [ Kim Jeong Yi ] from the Actuary team. Let me comment on your follow-up question. We are well aware of the point that you made about variable products and the changes or movements of the CSM. However, I'd like to explain that the reason why we did not provide a breakdown is because the impact of cancellation or surrender under VSA, the impact is very minimal on our net income or net profit and loss, and the impact is around KRW 10 billion.

[Operator]

[Interpreted] The following question will be presented by [indiscernible].

[Unknown Analyst]

Yes. By the way, can you hear me?

[Unknown Executive]

Yes.

[Unknown Analyst]

All right. Great. Yes, I have a couple of questions. The first part is with regard to the investment results. So I note that the investment profit has declined quite a lot on a year-on-year basis. So could management provide some comment on this decline and whether an analyst should be worried about this performance?

And the second question is, in anticipation of any rate cut by the Central Bank in, let's say, the second half of this year, what would the management think of any potential impact on the product development or investment outcome as a result of that rate cut and any response in the future that we should anticipate?

[Foreign Language]

[Unknown Executive]

[Interpreted] I'm [ Shin Sang Wook ] from the Investment Strategy team. Let me answer your first question on our investment performance. In 2023, the first quarter, the investment income was KRW 433 billion. And compared to that, in the first quarter of this year, the investment income was KRW 130 billion. So you may think that there was a big decline. However, back in 2023, there were many trading of replacing short-term bonds with long-term bonds, as well as account reclassification. And that is why there was a large amount of disposal gains that we recognized for the first quarter last year. So on a year-over-year basis, you may think that the investment income declined dramatically. However, this was -- this is mainly because of the base impact from the first quarter of last year was disposal gains.

And moving on to your second question on anticipated rate cuts, both in Korea and overseas. The market is expecting about 1 or 2 rounds of rate cuts within this year. And this 1 or 2 rounds of rate cuts have already been reflected in the market. And given the fact that we have longer asset duration than the liability duration and given the structure of our investment portfolio, if there are some moderate rate cuts going forward in the second half, this may have actually a positive impact on our investment performance. So we do not anticipate any major negative impact on our investment portfolio with respect to rate cuts. Okay. Was it enough for your question?

[Unknown Analyst]

Yes. Just one follow-up question on the investment performance. So with regard to the variable profit and the retirement profit, I also note that there is also a decline. Could you explain a bit more on these movements?

[Foreign Language]

[Unknown Executive]

[Interpreted] Once again [ Shin Sang Wook ] from the Investment Strategy team. Let me address your follow-up question. As for the variable site performance, it's nothing really to do with the operation itself, but with respect to the hedging. And as was explained by the Head of the Actuarial team, we're utilizing VSA model for variable account. And when you look at our P&L statement, you can see that the P&L volatility has actually been reduced. And we believe that this level will be maintained throughout the year.

And as for the retirement accounts, just like the general accounts, there was a reclassification activity that went on in the first quarter of last year, and this resulted in a large amount of disposal gained in the process of replacing some of the assets in the portfolio. So because of the base effect, you may think that there is a big difference. However, on a year-over-year basis, on an annual basis, you can see that there is a reduced volatility. Do you have any other questions?

[Operator]

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

[Do Ha Kim, analyst]

[Interpreted] I'm Kim Do Ha from Hanwha Investment & Securities. I would like to ask 2 follow-up questions. First of all, when there was a question about the expected duration extension by 2027, given strengthened regulation, you just answered in terms of the duration gap. So I'd like to understand to what extent your liability duration is going to increase by 2027?

And the second question has to do with the decline of your K-ICS ratio on a quarter-over-quarter basis by 10 basis points. And if you could give us a breakdown of which factors contributed to 10 percentage point decline in to what degree? We will appreciate that.

[Unknown Executive]

[Interpreted] I am [indiscernible] from the Risk Management team. Regarding the duration gap related to the K-ICS ratio, as for the asset side, the asset side duration is based on the assumption that our asset management activities will be pretty much the same as the previous years. So we did not take into account any possibility of increasing certain categories of bonds in our portfolio.

And as for your second question, the drivers behind the 10 percentage point decline in the K-ICS ratio on a quarter-over-quarter basis. So on a quarter-over-quarter basis, there was a negative impact, a 14 percentage point decline on the K-ICS ratio because of the interest rate increases, as well as strengthening of the discount rates. And there is a positive contribution coming from the new business to CSM of KRW 500 billion, and this boosted the K-ICS ratio by 4 percentage points.

[Operator]

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

[M.W. Kim, analyst]

[Interpreted] I'm Kim Myung Wook from JPMorgan. First of all, your earnings for the first quarter are not as big as others. And so, I'd like to understand the overall guidance on your dividend policy because some other companies provided guidance on their dividend policy for the year. So given your capital level and given a lot of factors taking place, what will be the reasonable anticipation of the dividend level that we can expect from Hanwha Life? So we would appreciate some guidance.

Secondly, you mentioned already about the potential interest rate cuts going forward in the year. So if the interest rate is down by, let's say, 10 -- let's say, by 100 basis points, what will be the impact on your K-ICS ratio? And what will be your capital contingency plan that you have internally?

And third, your CSM balance doesn't seem to be moving substantially. So I wonder if you have calculated EV of the new policies that you're selling these days. And I'd like to know whether the policies you're selling will bring about surplus or pocket for your business because the CSM margin seems pretty okay, but what will be the future profitability of the product, the policies that you're selling right now.

[Unknown Executive]

[Interpreted] I'm [ Kim Dong Yi ] from the Finance team. Because we just passed the first quarter, it may be too early to disclose our full year earnings. However, we believe that we will be able to produce tangible earnings results for our investors and shareholders. And as for the dividend payout ratio or the policy, we are going to follow the guidance of the government in promoting the benefits for the shareholders and shareholder returns. So we will do our best to expand funds available for dividend payouts to our shareholders. [Interpreted] I am [indiscernible] from the Risk Management team. As for your second question on the impact of interest rate cut by 100 basis points on our K-ICS ratio. To give you a reference, for the government treasury tenure yield going down by 10 basis points. This will have a negative impact on our K-ICS ratio by 0.5 percentage points, but this is on a 10 basis point movement. So if you apply 100 basis points, you cannot just multiply it by 5, but rather the impact is expected to be a little larger than 5%, so somewhere between 5% to 8%.

And as for the contingency plan, we do not consider a 100 basis point cut as the contingency situation because what we mean by contingency internally will be much more than that and a little lower than 2 percentage point change in the interest rate. So given such a scenario, we will continue to maintain our bond duration to be longer than the liability duration. And we will consider options such as core reinsurance to be prepared for the period where interest rates continue to get lower. [Interpreted] I am [ Kim Jeong Yi ] from the Actuary team. As for the EV valuation or EV perspective of estimating or calculating profitability, this is something that requires internal discussions whether we're going to disclose this or not. But to give you some reference, since last year, we have been calculating and announcing profitability of our business under the new regime.

There are 2 main points that we are going to consider internally. First of all, there are some issues or controversies over the methodology of using EV as an approach. And secondly, in calculating EV, there's a capital charge, and that level of capital charge has not been agreed on a broader basis. So these are the 2 points that will need to be discussed internally.

So we will see when and how such a consensus on these 2 aspects will be reached. And then we will see what we can do at that point. [Interpreted] With no further questions, I would like to invite back our CFO for his closing remarks before we end today's conference call. [Interpreted] Since the introduction of IFRS 17, Hanwha Life has been pursuing profitability-oriented management strategies focused on protection-centered insurance portfolio and enhancing sales efficiency. And we have been demonstrating strong growth trends through continuous organization expansion.

While unfavorable business circumstances continues, such as sharp interest rate movements and high inflation, we're committed to making company-wide efforts to reinforce our core competitiveness in terms of insurance operation and asset management so that we can share the benefits of enhanced corporate value with our investors.

In 2023, we recorded pretax income of KRW 753.4 billion and a net income of KRW 616.3 billion, and our K-ICS ratio was 183.8%. In 2024, we are implementing optimal strategies to exceed the profitability and the soundness results that we achieved in 2023. So we would like to ask for your continued support and interest, and we will make sure that all these earnings and results will be actively reflected in our shareholder return policy. And I hope that today's earnings call was a valuable opportunity for you to better understand our business. Thank you for your attention.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]