Good afternoon. This is Kyung Sanghyun , Head of IR of Hyundai Marine & Fire Insurance. Let me first thank everyone for joining us at this 2023 earnings release conference call for, despite your busy schedule. This conference call will last for one hour with consecutive interpretation. The CFO will first deliver his greetings, followed by Executive Vice President Cho Yoon-Sang , who will present the results of 2023. There will be a Q&A session afterwards with all the executives in attendance. We will now begin the conference call on 2023 with a presentation on the 2023 earnings.
[Foreign language]
Good afternoon. I am Cho Yoon-Sang , the CFO of Hyundai Marine & Fire Insurance.
First of all, I would like to thank all of our investors and analysts for your interest in the company and also taking the time out of your busy schedule to join us in our 2023 conference call.
[Foreign Language]
I will first walk you through the year-end business results, which is 2023 highlights on page 4.
[Foreign language]
Consolidated net income in 2023 fell 37.1% to KRW 805.7 billion from KRW 1.2813 trillion YOY. Breaking down by insurance line, long-term and general insurance service results decreased YOY, which also reduced the overall income by 61.2% YOY to KRW 526.5 billion. Net investment income increased by 19.5% YOY to KRW 495.6 billion.
In Q4 alone, auto insurance service results grew YOY, but long-term and general insurance results fell, leading to decrease in net income by 95.5% YOY and 93.3% QOQ to KRW 19.4 billion.
[Foreign language]
Let me now turn to results by business unit. First is long-term insurance on pages five and six. Long-term insurance service results in Q4 fell 77.2% year on year to KRW 248.8 billion. While income from release of CSM, the basis for long-term insurance profit and loss, increased by KRW 169.7 billion YOY, gain on claim variance decreased by KRW 255.5 billion YOY due to higher loss claims for medical indemnity in the wake of rise in flu and respiratory disease cases in the first half of 2023.
While the loss from claim variance continued to improve since Q2, stopping at only KRW 8 billion in Q4, insurance service results fell by KRW 695.6 billion YOY due to rising losses on onerous contracts following adjustment in actuarial assumptions.
[Foreign language]
In terms of long term insurance acquisitions, the monthly average acquisition was KRW 12.6 billion, up by 6.2% YOY from KRW 11.9 billion. In particular, there was 15.4% growth in acquisitions YOY in healthcare with robust sales of simplified issue insurance targeting preconditions and elderly. Acquisition channels for long term insurance at the end of Q4 consisted of 51% GA.
Long term insurance persistency ratio at month 13 slightly fell YOY, remained on improvement trend at month 15.
[Foreign language]
Page six is long term insurance CSM. Remaining CSM at the end of 2023 was KRW 9.787 trillion, up 9.1% from KRW 8.3194 trillion YOY.
CSM multiple in 2023 or CSM to new business premium was 11.8x for healthcare. For new business in the overall long term insurance, the multiple was 11.1x. In Q4 alone, new business and healthcare fell by 15% QoQ, which also weighed down on new business CSM in long term insurance at KRW 357.1, a slight drop QoQ, but the CSM balance grew by 2.4% at the end of Q4, mostly due to the increase in experience adjustment following changes in actuarial assumptions.
[Foreign language]
Auto and commercial insurance on page seven. Auto insurance service results was KRW 2.012 billion. I'm sorry, sir, it was KRW 201.2 billion, a growth of 16.8% YOY. Improvement in auto insurance continued YOY despite the premium cut early this year and increased car use after the post-pandemic reopening. It is mostly owed to regulatory improvement and decreased seasonality. Commercial insurance service results fell 18.3% year-on-year to KRW 76.4 billion. There was a general decline in underwriting income from the rise in reinsurance costs due to high claim accidents like large fires.
[Foreign language]
Next is investment. In 2023, net investment income increased 19.5% YOY to KRW 495.6 billion.
Excluding net insurance finance expenses, net investment income reached KRW 1.2791 trillion with an investment yield of 3.22%. In Q4, total net investment income increased 22.4% YOY as stabilization in market rates led to a gain on valation of FVPL assets. Turning to capital and our 2023 return to shareholders on page 10. Shareholders equity decreased due to the application of FSS actuarial guideline for medical indemnity in Q3, and a reduction in other comprehensive net income due to lower market rates in Q4. Solvency ratio also decreased slightly YOY to 173.2% as a result of capital decrease and the guideline. Dividend for 2023 is planned at KRW 2,063 per share, increase of 5% year-on-year.
Although profitability declined due to higher losses on long term claim variance, the company decided to increase the total dividend payout to maintain consistency and predictability in our shareholder return policy. Let me now move on to our business strategy and outlook for 2024. In addition to ensuring IFRS 17 application in 2024, the company will go all out to solidify our fundamentals for future profitability by improving key indicators like loss ratio and expense ratio. We plan to increase corporate value by maximizing performance in each business line under the strategy of strengthening profit generation capability, strengthening efficiency driven sales competitiveness, and growing together with customers. Let me now explain our business strategy and outlook for long term insurance on page 13. New business in long term insurance is expected to decline slightly YOY.
CSM multiple will improve YOY, thanks to strategic pricing such as experience risk adjustment in April 2024. In 2024, instead of focusing on short-term size growth, the company plans to keep increasing the overall CSM by improving the CSM multiple by increasing the share of high CSM products like precondition and no surrender value insurance and adjusting the experience risk ratio. We expect long-term claim difference to improve year-over-year. Expected claims will increase by applying more conservative loss ratio. At the same time, we plan to curb the growing trend in actual claims by strengthening efforts to prevent claims leakage, including more rigorous claims handling against excess claims under medical indemnity. That the claim variance can be meaningfully improved.
[Foreign language]
Next is auto insurance. Auto insurance revenue is expected to increase slightly year-on-year. Internet only auto insurance, which has an excellent combined ratio, will maintain its growth trend from the previous year. For auto insurance service results, it is expected to decline YOY due to the premium cuts and rise in costs such as components and repair. The company will maintain its profitability trend with improved expense efficiency led by CM channels and the expected continuation of stabilized accident ratio.
[Foreign language]
Next is commercial insurance on page 15. Commercial insurance revenue is expected to increase slightly YOY. Net income is expected to improve YOY, mostly due to the base effect in 2023 or the high claims catastrophes. The company plans to improve underwriting income by driving revenue in high margin products like casualty and marine insurance, while increasing business in force by improving reinsurance terms.
[Foreign language]
Next is investment. Investment income, excluding insurance finance costs, is expected to decline in 2024 YOY. Interest income is expected to continue its growth from 2023. There is also the base effect of gain on valuation of FVPL arising from the fall in market rates. There is now a bigger need to improve our retained yield after market rates turn to a declining trend in the second half of last year. To strengthen our ALM management, the company will maintain the investment principle centered on domestic long term bonds, while trying to improve retained yield by increasing the share of high quality corporate bonds and corporate loans.
[Foreign language]
This concludes my presentation on 2023 business results and 2024 outlook. Thank you very much for your attention.
[Foreign language]
We are now ready to take your questions. For the sake of efficiency, we would like to limit the questions to two per person.
[Foreign language] Now, Q&A session will begin. Please press star one, that is star and one, if you have any questions. Questions will be taken according to the order you have pressed the number star one. For translation, please press star two, that is star and two, on your phone. [Foreign language] The first question will be provided by Seung- Gun Kang from KB Securities. Please go ahead with your question.
[Foreign language]
Thank you very much for taking my questions. We see that the company's earnings in Q4 had fallen far short of expectations. Also, the dividend payout was determined at a lower level than had been expected. In terms of the causes of this, I would presume that it is because of the sizable losses on onerous contracts. Starting with the guideline, whenever there are these unexpected factors arising, then it seems as if there is a tendency for the values of the company to keep fluctuating. I wonder, what was the reason for the sizable losses on the onerous contracts that occurred in the Q4 last year? Also, in relation to this, I also see that the CSM adjustment for the company was smaller than for other companies.
Perhaps that has to do with the loss ratio trend, from the first generation to the third generation. Still, I would like to gain a better understanding on the reason for the smaller adjustment on CSM for the company than others. The second question is, again, now in relation to the factors that had led to fluctuations in the numbers for the company, I wonder whether the company believes that the factors will be stabilized in 2024. If you could give us some guidance for 2024.
[Foreign Language]
Thank you. This is Kim Kyung-d ong, Certified Senior Actuary, responding to your question, in the order of the losses on onerous contracts and the CSM adjustments.
[Foreign language]
Now, when it comes to the losses on the onerous contracts, I would say that there are largely two types. One is, there is the new inflow of onerous contracts, and the second cause is the rise in the losses due to the changes in the assumptions that are related to the contracts. In our case, in other words, the sizable losses arising from the onerous contract at the end of last year is due to the second type of the reason.
[Foreign language]
The reason for this is, in other words, the steep increase in the losses at the end of last year is because of the rise in respiratory illnesses. The loss ratio had been flattish during the COVID period. Now, starting last year, the cases of respiratory illnesses spiked up, which had then worsened the loss ratio for the medical indemnity of the third generation. This ended up driving up the best estimate liabilities, or BEL.
[Foreign language]
Having said that, the large loss at the end of last year that led to increase in the liabilities would actually serve as a positive factor for the company in 2024. On one hand, it will serve to drive up the expected incurred claims for in the analysis of the claims variance. Second, the 3rd generation medical indemnity insurance policy is renewed every year, meaning that these policies would also be renewed throughout the year. As they are renewed, then the next premium rate hike would be reflected. Then, in the course of this, the losses that were recognized last year would be reversed this year, meaning that much of the losses that have been recognized last year would be reversed throughout the year. Next is about the CSM adjustment.
Again, for the CSM adjustment, there are largely two causes. First is on a recurring basis or ordinary basis, and second is because of the changes in the assumptions at the end of the year. In terms of the changes in the assumptions, that is because of the changes in the best estimations. The best estimations might change because we have to reflect the latest statistics or because there is a change in the criteria for calculating the estimations. For the company, we have already applied the estimations by the FSS to our estimations in the third quarter of 2023. In terms of, for example, the performance incentives being reflected into the CSM that had already been reflected prior.
There was no change on that front. In terms of the basis for the calculation, there was no change except that we had to reflect the latest statistics. Now for the company, the CSM adjustment did not end up negative because there were offsetting effects because of the different items in the adjustment. For example, the surrender rate did go up, which was a factor that pulled down the CSM, but also the loss ratio for the old Sickness Indemnity went up, which actually increased the CSM. In other words, these different elements offset each other. Now, then for the CSM adjustment in 2024.
As I explained in the course of the loss, in the course of explaining about the losses on the honors contracts as well as its impact related to the third generation of the policy. I would say that we are looking ahead to a similar benefit to be gained for the CSM as well for the first generation products, because the first generation products are now due to be renewed this year. The first generation products, from which were signed in 2009, many of them would be renewed in the first half of this year, upon which time the premium hike would be reflected, which would then improve the CSM.
We believe that this is going to be enough to serve as a buffer against any impact on the CSM coming from the changes in the assumptions that would be applied at the end of this year.
[Foreign language] The following question will be presented by [Foreign language] from HSBC. Please go ahead with your question.
[Foreign language]
I also have two questions. Now, in 2023, perhaps because of the changes in the regulations and also rise in the loss ratio. The company's earnings did fall short of expectations. Also in terms of the dividend payout, the increase or the increment dividend payout was smaller than what we have seen from other companies. Coming into this year, of course, there were some explanations about the first generation medical indemnity coming up for renewal this year, and also the third generation of products also being renewed every year. As a result of this, much of the loss from last year would be reversed this year. This probably means that there is going to be a bump in the company's profitability this year.
My question is then, will this be duly reflected into the dividend payout decision this year? In other words, when were the company had fallen a bit short of other companies in terms of increasing the dividend payout last year. Now, if the company were to see a relatively higher growth in profitability than other companies, then will this be then accordingly reflected into the dividend payout decision this year? The second question is, now the company K-ICS ratios are also a bit lower, and that has been a cause of concern in terms of the dividend payout as well as shareholder return policy.
Similarly, if there is improvement in CSM as well as profitability, and also, if there are improvement in the application of the UFI and LFR, then does the company believe that there is room for the K-ICS ratios to keep improving?
[Foreign language]
This is the CFO responding to your question. First, about the potential increase in profitability in 2024 and whether that would also be duly translated into higher dividend payout for this year. The company has maintained the principle of cash dividends. In 2020, up until 2023, the company's net income had continuously improved. Also the company's dividend per share, or the DPS, had also improved according to our improvement in the net income.
[Foreign language]
Now coming into 2024, as was explained by the certified senior actually earlier, we will go all out to improve our profitability. If that is successful, then we will also make sure that that is duly reflected into our shareholder value as well.
[Foreign language]
This is Hong Sa-Gyeo ng of Risk Management Division, responding to the second part of your question, and that is about the impact of the stronger liability management and also how the company intends to deal with this.
[Foreign language]
In terms of the insurance liability discount, now, as a result of this, the VFR, lowering of the VFR in 2024. In relation to the liquidity premium as well, in 2024, the VFR is expected to drop by 7%. In 2024, again, by about 5.5 percentage points. In 2026, within one percentage point. In 2027, again, because of the fall in the liquidity premium, the drop would be within around 5%. In total, the drop would be about 20%.
Now, because of the new business in the long term insurance, now, as a result, the K-ICS is now standing at around 183%. Also because of the continued new business, there is going to be an increase by about 2%, but then the shareholder return and dividend payout would pull this down by 1%. The business in force and also our investment income would drive it up by about 5%. Overall, there is an expected around 5% increase every year. Now of course, they are subject to change depending on the changes in the actuarial assumptions like the loss ratio, as well as depending on the changes in the market rates.
The company intends to keep it at, mid 170% level by even strengthening our management of the required capital.
Thank you. We will take the next question.
The following question will be presented by Dan Wong from JP Morgan. Please go ahead with your question.
Thank you for taking my question. I have two. The first one is following up on the K-ICS ratio. Just to double confirm on the previous question. The management thinks like for the K-ICS ratio, by the end of 2024, we can expect around 5% increase every year. Meaning that this will be 180 level of a K-ICS ratio by end of 2024. That's the first question. The second one is in the slides we mentioned, you mentioned about in the longer, long-term line. You plan to increase the new business CSM by expanding the sales of higher CSM healthcare products.
My question would be, what's your, what's from the perspective of the company, what's your guidance of the new business CSM targets in 2024? If you can provide any more guidance on the ending balance of CSM by 2024, it would be better. Thank you.
[Foreign language]
[Foreign language]
Now, this is Hong Sa-Gyeong of Risk Management Division. I would respond to your question about whether there is going to be a 5% increase annually for the KICS ratio.
[Foreign language]
Now let me clarify. Because of the strengthening of the insurance liabilities discount between 2024 to 2025, there is going to be the effect of lowering the ratio by five to seven percentage points. This would be offset by the new business as well as the business in force. The net is going to be about 2% lower. From 2027 and on, we believe that there is going to be an increase by five percentage points every year.
[Foreign language]
This is Park Jaekwon, Senior Vice President of Long Term Insurance Product Division, responding to your the second question about the CSM size for a new business.
[Foreign language]
In 2024, the revenue from new business is expected to slightly fall YOY. That is the target, meaning that the revenue coming from new business is likely to fall. For the CSM multiple for the new business, because of the change in the product portfolio and also because of the upward adjustment in the experience risk ratio, the CSM, so in this, because of this, the premium is going to be increased, meaning that the CSM multiple is also going to be higher. This means that although the revenue from the new business is likely to drop, the CSM multiple coming from new business is likely to be higher because, and because of the changes in the portfolio.
This means that overall the CSM is expected to be considerably higher YOY.
[Foreign language]
For the adjustment in the experience risk ratio, this is expected to be undertaken in April this year. As we speak, the work on the risk ratio is ongoing. I cannot specify the number at this time. From what we can see at this point, it is highly likely that there is going to be a considerable improvement from the second quarter, meaning that we can expect a considerable increase YOY.
{Foreign language]
Thank you very much for your question. As it happens, we actually have a lot of questioners in queue. To make this more efficient, we would now like to limit the question to one per person. We will now take the next question.
[Foreign language]
The following question will be presented by Lee Byung-gun from DB Financial Investment. Please go ahead with your question.
[Foreign language]
Now for the company's net income or profitability, I believe that the biggest factor, the most important factor would be the loss component. Now of course, for the loss component, I would assume that perhaps in the 3rd quarter it was about KRW 1.1 trillion, coming from the long-term insurance, I believe. Can the company provide a breakdown of the loss components in greater detail? I would imagine that most of them are arising from medical indemnity. Can we also get a breakdown between like a 3rd generation or the 4th generation? Just to find a breakdown. Also for the loss components, I would assume that they don't last forever, meaning that after some time they could also be turned into revenue.
Given the fact that the, for the third generation products, the renewal cycle is quite short, that probably means that the time that they remain the last component is going to be short. There is probably some kind of a timeline or schedule on how they would be reflected into the financial statement. I would like to know, for the loss components for the third generation insurance products, what is the timeline as per the financial statement? Thank you.
[Foreign language]
This is Kim Kyung-d ong again, responding to your question. Yes, for the last component, it was KRW 1.1 trillion, and by the end of the year, it shot up to KRW 1.7 trillion. Given the fact that now we have accumulated quite a sizable liabilities, this is going to be reflecting positively to the company's financials this year, either in terms of the claim variance analysis or the reversal of the losses. You also asked about the timeline. 80% of these loss components belong to the third generation medical indemnity. The third generation medical indemnity, the coverage period is 15 years. You can assume that they have over 10 years left.
[Foreign language]
I would say that, there is quite an ample time left, for the loss to be reversed.
[Foreign language]
[Foreign language] The following question will be presented by Aditi Joshi from JP Morgan. Please go ahead with your question.
Yes, thank you for taking my question. My first question is related to the CSM and the persistency. If you look at the persistency ratios further, it has been falling. I just wanted to understand what is your modeled assumption for persistency ratio in the new business CSM? As in, do you reflect last three years experience or do you just reflect last one year's experience in the persistency ratio when you model the new business CSM and the CSM? The second question is very quick one. Can you please share the sensitivity of CSM balance when with respect to changes in the interest rates? That's all. Thank you.
[Foreign language]
[Foreign Language]
This is Kim Kyung-d ong, the certified senior actuary, again, responding to your questions. First, in calculating our surrender rate, we apply the past five years experience statistics. Second, about the sensitivity to the interest rate, for the new business CSM. Well, I cannot specify I cannot remember the number at the top of my head right now, as far as I remember, up to change by about quite a large extent, by about 100 basis points, the new business CSM does not change much. Again, I would have to go through the communications team to give you the more specific response later on.
[Foreign language]
We'll take the next question.
[Foreign language] The following question will be presented by Yong- Jin Seol from SK Securities. Please go ahead with your question.
[Foreign language]
Thank you for taking my question. I also have a question about KICS. I understand that there are some adjustments regarding KICS that are coming, and I wonder whether that would be applied in the first quarter or the fourth quarter of this year. The targets that the company had explained earlier. I wonder whether that is reflective of the adjustments to be made this year or not?
[Foreign language]
This is Hong Sa-G yeong from the Risk Management Division. In terms of the surrender risk coefficient easing, this was already reflected in the fourth quarter. This was also reflected into the KICS ratio as well.
[Foreign language]
Thank you very much for the question. We will take the next one.
[Foreign language] The following question will be presented by Teikiran Kanaluri Magesh from White Oak Capital. Please go ahead with your question.
Hi. Thank you for the opportunity. I just want to understand your the preference between the the products within healthcare in your business. We see a lot of peers talking about drivers insurance being the profitable product and, you know, focusing a lot on that. While I think in our discussions it looks like Hyundai Marine & Fire focuses more on aging. That seems to be the product you like. That's the one that's expanding in new business premiums. I wanted to understand your product preferences and the the relative profitability profiles of the different healthcare products. Thank you.
[Foreign language]
[Foreign Language]
This is Park Jaekwon of the Long Term Insurance Product Division.
Now for the company in terms of the new products, we have children's insurance or the juvenile insurance. In this market, we actually enjoy an overwhelming market share, and we are now trying to gain more contracts based on these children's insurance. On top of this, our plan this year is to roll out new products that would appeal to different age groups or the different generation groups in the market. For example, for the cancer insurance or the SI that have a stable loss ratio and high margins, we have already rolled out new products in January this year to favorable response. Down the road, we are also planning to increase the share of high CSM products like the no surrender value insurance up to the appropriate level.
In addition, we are also planning to introduce, more products that would reflect the population aging trend as well as the advancing medical technologies and also the, what we see as a new promising market segment, the pet insurance. We also intend to introduce more products on these segments so that we can keep improving the CSM. Thank you. We will take the next question.
The following question will be presented by Kim Do Ha from Hanwha Investment & Securities. Please go ahead with your question.
Thank you very much. I'll be brief. For the PF in real estate and also for the overseas real estate, what is the company's exposure and what is the provision at the beginning of the period and at the end? About the real estate PF exposure, the real estate PF loan exposure, it's about KRW 1 trillion, so that's about 2.5% of our total investment asset. For the PF, we have two presale types in Daegu, and for this we have about KRW 3.8 billion in provision. We also have the PF in Seoul. In total, for the PF, our provision is about KRW 13.7 billion. Our total provision for corporate loans is KRW 17.7 billion.
For the offshore real estate, it's about KRW 1.6 trillion, so it's a bit over 3% of our total investment assets. It has a diversified portfolio. The geography is mostly in the U.S. and Europe. In terms of the portfolio, it's quite diversified office, logistics, a blind fund and so forth.
[Foreign language]
In terms of the loss and valuation, in the fourth quarter because of various reasons, including vacancy of the offices. It was about KRW 49 billion in loss. For 2023 it was about, minus KRW 30 billion, in terms of the valuation loss for the domestic, real estate.
[Foreign language]
Thank you for your question.
[Foreign language] The following question will be presented by Siny oung Park from Goldman Sachs. Please go ahead with your question.
[Foreign language]
Now my question is, now it seems that the company's earnings as well as the dividend payout do fall a bit short of expectations. Also then, because of various reasons, it seems as if there is not going to be a dramatic improvement in the capital ratios either. I wonder if the company has any plans for the share buyback or the treasury share cancellation. Perhaps, if it is done already, then it would have no financial impact. I believe that it would still send a very strong message to the market about how the company is committed to enhancing shareholder value. The government is also recommending a stronger disclosure on either holding or disposal of share of treasury share.
I wonder whether the company has any such plans.
[Foreign language]
Thank you for your question. This is the CFO, Cho Yoon- Sang.
[Foreign languiage]
Our shareholder return policy has been centered on cash dividend payouts, and the company's treasury share is about 13%. At this time there is no plan to cancel or have further buyback of the share.
[Foreign language]
For this year, as was explained earlier, we will focus on improving profitability across our business lines. Each business line will go all out to improve profitability. As a result of which there is also going to be a corresponding improvement in the shareholder return. Also what you have alluded to about the company, value up project that I believe is going to be announced sometime next week. We would have to wait and see what the government announces, and then we would also watch the market's reaction as well as the trends or movements in other companies. Then we would also take this into consideration inside the company.
[Foreign language]
Thank you. We'll take the next question.
[Foreign language] Currently there are no participants with questions. Please press star one, star and one to give your question.
[Foreign language]
If there are no further questions, then we would conclude the conference call at this point.
[Foreign language]
Please contact the IR managers any time for further questions and comments. Once again, we thank all the investors and analysts for your time.