Hanwha Life Insurance Co Ltd

KRX:088350

Earnings Call Transcript 2023-Q3

[Operator]

[Interpreted] Good morning and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2023 third quarter earnings results by Hanwha Life Insurance.

This conference will start with a presentation followed by a divisional Q&A session. [Operator Instructions]

Now we shall commence the presentation on the fiscal year 2023 third quarter earnings results by Hanwha Life Insurance.

[Unknown Executive]

[Interpreted] Good morning. I am [indiscernible] from the IR team at Hanwha Life.

We are providing consecutive interpretation in Korean and English throughout the earnings call of Hanwha Life Insurance for the third quarter of 2023. The presentation materials are available on our IR website. Today, CFO [indiscernible] will first give a report, which will be followed by a Q&A session. Let me now hand over to our CFO.

[Kyung Geun Lee, executive]

[Interpreted] Good morning. This is CFO, Lee Kyung Geun. I would first like to thank you for joining our earnings conference call. Please note that today's presentation was [Audio Gap]

Page 1 is on the earnings highlights. We have secured sources for future profit through solid growth of new business sales. And our financials remained sound despite unfavorable financial circumstances.

On a cumulative basis, protection APE in Q3 grew 118% year-over-year, resulting in the growth of new business CSM by 49%. The number of FPs increased more than 37% year-over-year to approximately 27,000. And our cumulative net income in Q3 recorded KRW 577.9 billion.

Also, despite greater volatility in the financial markets, our K-ICS ratio is 182%, showing a continued trend of improvement. I would like to give you more details on the following slides.

First, new business APE. On a cumulative basis, our new business APE in the third quarter posted approximately KRW 2.6 trillion, up 87% year-over-year, thanks to higher sales of protection policies based on a larger sales organization. In particular, protection APE grew 118% year-over-year, driven by the increase in sales of high-margin general protection policies including an attractive new dementia insurance as well as our signature cancer insurance 3.0, a steady seller product.

Next is on sales efficiency. As of Q3, we have about 27,000 FPs, including those at Hanwha Life Financial Service, Hanwha Life Lab and People Life. Following the monthly average addition of 1,000 agents in the first half of the year, we added another 900 to our sales force in Q3 to grow the sales organization. The 13th month persistency ratio improved 1.1 percentage point Q-on-Q to record 83.1%, thanks to effective contract management policies and systems.

Page 4 is on CSM. In response to slower sales of whole life products, we actively promoted the sale of high-margin general protection products in Q3. As a result, new business CSM in the third quarter reached KRW 692 billion with a cumulative new business CSM recording approximately KRW 1.9 trillion, up 49% year-over-year.

Despite the application of new FSS guidelines, including changes to actuarial assumptions for medical indemnity insurance, our in-force CSM level remained stable at approximately KRW 9.8 trillion thanks to the growth of new business CSM.

On Page 5, cumulative net income in Q3 recorded KRW 577.9 billion, up 196% year-over-year based on IFRS 4. So it represents a growth of KRW 65 billion compared to the previously disclosed net income of KRW 513 billion in the first half of the year. However, if we recalculate the net income by applying the new FSS guidelines to Q1 and Q2 financial statements, net income in the first half of the year would increase by more than KRW 100 billion, while Q3 net income would be recognized as a loss. The reduction in net income for Q3 is mainly because of one-off factors, including the valuation losses of FVPL assets due to rising market rates and preemptive recognition of losses on overseas commercial real estate assets.

Going forward, Hanwha Life will continue to maintain solid earnings fundamentals based on stable insurance income.

Page 6 shows details on insurance gains and asset management. We continue to incur a stable amortization profit of around KRW 220 billion on a quarterly basis from our solid in-force CSM. Based on the amortization profit of KRW 761 billion, we recorded cumulative insurance income of KRW 565 billion. The investment income posted KRW 99 billion, thanks to stable interest gains despite unfavorable investment circumstances such as sharp increases in market rates.

Going forward, we expect volatility of investment income to be reduced because variable guarantee profit and loss will be adjusted within CSM with the transition from GM, general model, to VFA for variable guarantee valuation.

Next is on asset management. Our assets by account consists of 25% of FVPL, 33% FVOCI, 11% AC and 16% loan assets. In the general account, 91% of the invested assets are interest-bearing. The investment yield on the general accounts recorded 3.33%, thanks to higher new money yield despite greater financial market volatility.

Next, on Page 8, for ALM purpose, our bond portfolio is mainly comprised of long-term bonds with more than 10 years of tenor, 76% of which are domestic bonds and 18% overseas bonds. The company is managing a high-quality fixed income portfolio, of which 96% of domestic bonds are rated AAA or higher and 99% of overseas bonds are rated A or higher.

Page 9 is on the loan portfolio. Our loan portfolio is well balanced with 51% alternative investments and 49% retail loans. Our loan quality has been well managed with delinquency rate of 0.38% and the NPL rate of 0.15%. We will manage loan assets conservatively in response to the sluggish real estate market and growing concerns over economic slowdown.

Page 10 is on best estimate liabilities or BEL. The Q3 BEL posted KRW 71 trillion, down KRW 2.9 trillion from the end of last year due to several factors, including the inflow of new business unwinding and the effect of higher discount rate on liabilities due to rising market rates. The credit rate remains the same as the previous quarter at 3.59%.

Finally, on K-ICS and duration gap. Even after the repayment of overseas hybrid debt and steep interest rate hikes, our K-ICS ratio at the end of the third quarter remained stable at 182% on the back of continued increase in new business CSM and mass lapse risk reinsurance.

Due to higher market rates, the duration on the asset side and the duration on the liability side are 9.58 years and 8.14 (sic) [ 8.16 ] years respectively, resulting in the duration gap of 1.41 years.

Please refer to Page 12 for the financials of Hanwha Life Financial Service. And this is the end of the earnings report for the third quarter of 2023. Thank you for your attention.

[Operator]

[Interpreted] [Operator Instructions] The first question will be provided by Byung Gun Lee from DB Financial Investment.

[Byung Gun Lee, analyst]

[Interpreted] I am Lee Byung Gun from DB Financial Investment. First of all, I would like to ask you to later provide us with details in terms of the guidelines because I see that there are some differences in the way you apply retrospective and forward applications in many areas, including real loss indemnity-related adjustment and the application of variable fee approach as well as the recognition of acquisition costs in your new business of CSM. So we would appreciate it if you could provide us with more detailed information on these areas later on.

And I would also like to know if you have any schedule for a plan to announce the recalculations of the previous numbers as has been done by other companies.

My first question has to do with your liquidity management. I understand that Hanwha Life has been doing well in terms of liquidity management. But this year, I noticed that there are quite a number of policies that lapsed as well as those policies that reached maturity, which may have led to difficulties in your asset management strategies. I can see that there is a sizable number of policies that will mature or have matured this year. So I'd like to understand how much will be the size of policies, especially savings-related policies, to mature next year?

The second question is also related to your asset management approach. Compared to other life insurance companies, it seems that you have a higher portion of FVPL in your assets for Hanwha Life. While there may be some other insurance companies that have higher percentage of FVPL, but when we look at the absolute amount of FVPL assets, it is about KRW 10 trillion, which is quite sizable, which may have led to difficulties in managing your volatility in your profit and loss from investment side.

So what is your plan for the size of FVPL assets going forward? And how are you going to manage volatility in terms of investment income from these assets?

[Unknown Executive]

I'm [ Kim Jeong Yi ] from the actuary team. Let me answer your question regarding the size of policies to mature going soon. As you may know, the size of the policies that have matured between 2021 and 2022 peaked at KRW 3.7 trillion. However, the number is going to decline to KRW 2.4 trillion this year. And according to our estimation, the number of policies or the amount of policies to mature in 2024 is going to be about KRW 2.2 trillion, which means that we will go back to the previous level and which also means that we will be able to manage our liquidity stably.

[Sang Wook Shin, executive]

[Interpreted] I am Shin Sang Wook from the investment strategy team. Let me address your second question regarding investment strategy. As you pointed out, we have a sizable amount of FVPL assets in our books and there are w main reasons for that. First of all, there are some assets that have failed the SPPI test, which are now classified as a FVPL and there are some other assets that are classified as this type for other reasons. And the second reason is that we have some beneficiary certificates that we have in our books as part of the alternative investments, and they are classified as FVPL.

So as you pointed out, we are closely monitoring and managing the sensitivity of FVPL assets to interest rate movement and stock price movement. And to address the situation, we are taking 2 main approaches. First of all, for assets that have failed the SPPI tests, we either ask for early repayment of these notes or we try to sell these assets in the market. And the second approach is to sell some of the bonds that we have classified as FVPL and then repurchase them and classify them as FVOCI.

And in terms of our FVPL assets as part of alternative investments, some of the loans have been given in terms of beneficiary certificates, so they are classified as FVPL, which are exposed to greater volatility in terms of investment yield. However, these types of assets cannot be easily disposed of in the market. So instead, we will continue to manage them. And at the same time for new lending, we continue to do direct lending rather than beneficiary certificates so that we can reduce the size of FVPL.

And at this point in time, I cannot give you any specific target level of assets to be classified as FVPL, but what I can share with you with conviction is that we will continue to reduce the size of FVPL for bonds and alternative investment loans so that we can reduce volatility coming from these types of assets, and we will continue to reduce sensitivity of these assets to various variables.

You also asked about interest rate sensitivity for FVPL assets. While we try to, try to continue to the size of FVPL assets, they are still exposed to some volatility. And for alternative investment assets, when -- it is not easy to come up with exact level of sensitivity to interest rate movements, but according to our estimation, by the end of September, with 10 basis point movement of interest rates, the P&L sensitivity amount is about KRW 10 billion for securities and KRW 10 billion for alternative investments.

And as I mentioned before, we will continue to reduce the size of assets classified as FVPL, so we expect volatility to continue to decline.

[Operator]

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

[Seung-Gun Kang, analyst]

[Interpreted] I'm Kang Seung-Gun from KB Securities. As you may know, the guidelines have been applied, which have resulted in some significant changes to the numbers for the first half of the year. And if we are not provided with detailed information by categories, it is not easy for us to determine the state of the company and its business.

For instance, there were some significant changes to insurance income. But if you break that down, you can divide them into impact on the improvement on the difference between estimates and the actual and also an increase in other operating expenses. So for instance, I know that there was KRW 82 billion-plus on the insurance income side in the first half of the year, which is the result of the adjustment. And there were some changes to the investment income side as well. So we would like to know more details about these changes.

For instance, we'd like to understand the impact on, impact from the actuarial changes to medical indemnity and any changes to the recognition of CSM and the impact of variable fee approach and the impact of fee changes. So I would appreciate it if you could explain these types of impacts on both the insurance income side and the investment income side.

[Unknown Executive]

I'm [ Kim Jeong Yi ] from the actuarial team. I'd like to give you more details by breaking down the guidelines by different categories in terms of when we apply the new guidelines and what the impacts were.

As for the real loss medical indemnity, we started applying the different guidelines from the third quarter. And the impact is, for the CSM, negative KRW 750 billion, but it also led to the increase in the best estimate liabilities.

And secondly, for low to 0 lapsed policies as well as high assumed rate lapsed policy, we started applying changes from the second quarter, and the impact on the CSM was a negative KRW 150 billion. And so it has led to an increase in BEL and decline in CSM.

With respect to CSM amortization, the amortization amount was reduced as a result of new guidelines.

Now moving on to the RA amortization. We have already applied the guidelines for RA amortization. So there was no impact.

And finally, with respect to the impact of VFA application, we apply the retrospective approach and we have been doing accounting accordingly. And as a result, in 2022, the profit and loss from variable accounts when it was converted to CSM, the amount was KRW 425 billion. And by the second quarter of 2023, we recognized KRW 120 billion of losses from the variable guarantee accounts, so which has led to an increase in KRW 300 billion.

Finally, I'd like to give you a brief explanation on how the expense side has been changed. Previously, the expense side was accounted for in terms of the difference between the estimated and the actual, especially for commissions and other fees. But now they are part of the CSM amortization. So the reduction impact on the CSM side is about KRW 170 billion. However, this KRW 170 billion of reduction in the CSM is very small compared to the increase in the CSM, especially for whole life, thanks to the sales activities based on which commissions were paid.

[Operator]

[Interpreted] The next question will be provided by [indiscernible] from JPMorgan Asset Management.

Currently, there are no participants with questions. [Operator Instructions] The next question will be provided by Heewon Choi from Morgan Stanley.

[Heewon Choi, analyst]

I'm Choi Heewon from Morgan Stanley. I have 2 questions. First of all, when we look at your investment income for the third quarter and even before and after the application of the new guidelines, your investment income has not been very high. And in particular, I see that there is KRW 170 billion of losses from valuation as well as disposal. So can you break this down into bonds versus beneficiary certificates?

And you also mentioned that you have preemptively recognized losses from overseas commercial real estate properties. I'd like to know how much that was? And was there any -- is there any additional losses that you are going to recognize this quarter or next year?

My second question has to do with the K-ICS ratio. There have been some changes to and there will be changes to discount rates and also a lapse risk and other factors. So I'd like to understand your K-ICS ratio sensitivity to these changes as well as interest rate movements.

And when you are making an outlook for your K-ICS next year and going forward, what is the level of interest rate that you have in your assumptions for interest rates by the end of this year as well as next year?

[Sang Wook Shin, executive]

I'm Shin Sang Wook from the investment strategy team. Let me answer your first question. So in the third quarter, we have recognized KRW 170 billion of losses, including valuation losses and disposal losses. These are from the general account, and I'd like to give you a breakdown.

As you may know, in the third quarter, the 10-year yield has gone up by about 35 basis points while stock prices have gone down. And these changes have been reflected in the valuation and disposal of FCPL assets. Now to give you more specific numbers, the impact were the loss from the beneficiary -- loss from the securities is about KRW 40 billion because of higher interest rates and lower stock prices.

And for alternative investments, because of the valuation losses, we have incurred about KRW 60 billion of losses. And for preemptive recognition of losses from overseas real estate properties, the size is about KRW 40 billion.

So in total, because of higher interest rates as well as preemptive recognition of losses for overseas properties, the total loss recognition for the third quarter is estimated to be about KRW 140 billion and for other losses that are related to other expenses and so on.

And regarding potential additional loss recognition for the fourth quarter as well as next year with respect to overseas real estate properties, we are not really able to give you any specific number at this point in time. Overall, the global overseas commercial real estate market is struggling so we do anticipate some valuation losses. However, the size of such losses is not going to be significant. It's not going to have a major impact on our overall investment income. So I believe that we are able to manage this. And if we get to know more details, we will be sure to communicate them with you.

[Unknown Executive]

I am [indiscernible] from the risk management team. Let me answer your question regarding K-ICS. First of all, the Financial Supervisory Service, FSS, announced a plan to revise changes -- make changes to mass lapse risk amount and they announced that they're going to apply differentiated risk coefficient, depending on product categories starting from February next year. However, the industry has been requesting the FSS to apply this by the -- or starting from the end of this year.

So we hope that we will be able to apply differentiated co-efficiencies for different product categories starting from the end of this year, which means that our mass lapse ratio -- or our mass lapse risk amount is going to be reduced significantly. And so we will not be able -- we would not have to have anything substantial in the fourth quarter if this happens.

And with respect to the announced plans to strengthen or increase the discount rate on liabilities, the FSS has announced that the changes to [ UFRE ] and reduction in the liquidity premium as well as the extension of the last liquid point will be applied for the next 4 years in a staged manner starting from 2024 until 2027. So this wasn't announced from the FSS.

We do see that the impact of changes to [ UFRE ]or LLP to be not significant. However, we do anticipate some impact coming from the lowering of the liquidity premium.

So it is our estimation that in 2024, when discount rates for liabilities get strengthened, there will be an impact on K-ICS to be negative 9 percentage points so K-ICS may go down by 9 percentage points because of this change. However, with our strength in acquiring new business CSM, this is going to lead to increase of K-ICS by 15 percentage points. Therefore, this reduction in K-ICS -- potential reduction in K-ICS can be covered by our increase in new business CSM. And our target K-ICS ratio by the end of 2024 is 190%, and this is what we're going to try to achieve.

Finally, on our interest rate assumptions. As you may know, there are big differences in interest rates between October and November. So we do expect some volatility in terms of interest rate trends in the fourth quarter. So in terms of K-ICS management, our interest rate assumption for the fourth quarter is between 4% and 4.3%.

Moving on to our interest rate assumptions for next year. Our assumption is between 4% and high 3% for a 10-year yield. And our K-ICS sensitivity to interest rate movement is for 10 basis points, the impact will be 2 to 3 percentage points.

[Heewon Choi, analyst]

[Interpreted] I have a follow-up question on your shareholder return policy. Your target K-ICS ratio for next year is higher than now, which is, 190% and there was recently an announcement to the revision to the commercial law regarding dividend payout for insurance companies.

So I'd like to understand what is the size of earnings that are subject to dividend payout by the end of this year? And I'd like to get an update on your dividend policy.

[Unknown Executive]

I'm [ Kim Jeong Yi ] from the finance team. Since December last year, with the introduction of IFRS, we have been demanding a revision to the commercial law so that we can have a larger base for dividend payout. And such a revision was announced by the government on October 27, which is basically about changes and allowing the offset between unrealized gains and unrealized losses. And so we believe that we have a sizable pool of earnings that can be used for dividend payout for the third quarter and the fourth quarter.

We expect that the revision to the commercial law will be completed by the end of December, so we believe that we have a good enough of a size of earnings for shareholder return.

However, the financial authorities guidelines on dividend policy as well as our year-end earnings have not been finalized. Therefore, I won't be able to give you any specific number in terms of dividend payout plan. However, we will continue to pursue a shareholder-friendly policy in managing our capital. Thank you.

[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. I have 2 questions. The first question is related to your new business, CSM. From the first quarter all the way to the third quarter this year, I can see that there was a big improvement in your new business margin, and overall volume of new business CSM has continued to increase. So going forward into the 2024 and 2025 horizon, do you believe that you can maintain this level of CSM growth as well as CSM or new business margin?

And I would also like to know what is your new business CSM margin target as you continue to manage your new business -- or new policy portfolio? It is -- I'm asking this question because I have seen some larger change or volatility in your new business margin on a quarter-over-quarter basis in the past.

The second question has to do with your dividend policy, which is related to your -- the previous question. For the past 2 years, Hanwha Life has not given out payout -- dividend payout. And for the past 2 years, during conference calls, the company has continued to express will and intention to provide shareholder return in various forms, including dividend payout.

So at this point in time, I would really appreciate it if you could give us some more color on your dividend policy because other companies have been talking about increasing the DPS and other dividend policy, but I'd like to know more about Hanwha Life's policy.

[Chung-Ho Shin, executive]

[Interpreted] I'm Shin Chung-Ho from the product development team. I'd like to comment on our new business CSM target margin. Each year, especially also for this year earlier, we came up with a plan and strategy by product group. So for whole life compared to month initial, we targeted tenfold increase, while for health a 15-fold and for general protection 25-fold. And based on these assumptions, we planned out strategies for sales and marketing. And this year, in particular, there was some new opportunity with respect to whole life products with shorter premium paying term, which we did not anticipate when we're developing a business plan for the year.

So as a result, there was a big increase in the new business CSM. And next year, we will go through the same process in developing our business plan, and we do not expect any major downward trend for our new business CSM.

[Unknown Executive]

I'm [ Kim Jeong Yi ] from the finance team. As you pointed out, for the past 2 years, we have not been able to pay out dividends to our shareholders because we focused on improving our financial fundamentals with the introduction of the new regimes.

But now we are anticipating a revision to the commercial law and we expect that we'll be able to manage our K-ICS ratio in a stable manner. So all the barriers to dividend payout have been removed.

So we will take a look at the net income for the fiscal year 2023 as well as payout -- dividend payout trends of the industry so that we can come up with a very active shareholder return policy by the end of the year.

[Operator]

[Interpreted] Currently, there are no participants with questions. [Operator Instructions] The following question will be presented by Sinyoung Park from Goldman Sachs.

[Sinyoung Park, analyst]

[Interpreted] I am Park Sinyoung from Goldman Sachs. I have a follow-up question on your dividend policy. You mentioned that you're going to look at the industry trend in terms of dividend payouts, but what kind of companies are you going to refer to because in the case of Samsung Life or Samsung Marine and -- Fire & Marine [indiscernible] so they are presenting and offering a very high level of dividend payout.

So in order for us to help understand the kind of level of dividend payout that you have in mind, if you could mention some companies that you would consider in reference would be very helpful. Because your earnings have some volatility and you still have some valuation losses to be recognized in the future, so I would like to kind of get the idea of your medium- to long-term level of dividend payout going forward?

[Unknown Executive]

[Interpreted] I'm [ Kim Jeong Yi ] from the finance team. We do not yet have a finalized earnings for the whole year 2023, and the financial authorities have not yet provided us with a guidance on dividend policy. So please understand that I won't be able to give you any more color on -- in terms of our dividend policy. But when it comes to the industry trend, please understand that these include life insurance companies in Korea.

[Operator]

[Interpreted] Currently, there are no participants with questions. We will wait for a second until there is another question.

With no further questions, we would like to end the conference call for Hanwha Life for the third quarter of 2023. Thank you so much for joining us. And if you have any further inquiries, please contact the IR team. Thank you.

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