Good day, everyone. Thank you all for joining this conference call. Now we will begin the fiscal year 2024 first quarter earnings results by Samsung Life Insurance. This conference will start with a short brief by Head of Finance and Accounting, followed by a Q&A session. If you have a question, please press star one, that is star and one on your phone during the Q&A. For translation, please press star two, that is star and two on your phone. Now, we shall commence the conference by Samsung Life Insurance.
Good afternoon. This is Kim Woojune, Head of Finance at Samsung Life. I would like to thank everyone for joining us today at the first quarter 2024 earnings conference call for Samsung Life, despite your busy schedules. As per our prior notice, today's call will focus primarily on a Q&A with members of management. Allow me to brief you on our first quarter highlights based on the materials that we provided in advance of this call. From the second half of last year onward, we pursued a core sales strategy geared toward expanding our market dominance in the health-related market with a company-wide focus on products, channel, and marketing.
As a result, the share of health from our total new business CSM increased significantly from 31.9% in the first quarter of last year to 53.5% this quarter, as we achieved visible outcomes in enhancing our position within the health space. Thanks to this boost in our health new business, we recorded new business CSM of KRW 857.6 billion in Q1. Going forward, we will continue to improve the underlying profitability of our overall system and infrastructure by upgrading the competitiveness of our products and enhancing the fee structure for both our exclusive and non-exclusive channels, among other efforts, so that we can achieve new business CSM above KRW 3 trillion per annum.
In the first quarter, we recorded solid net profit of KRW 622.1 billion, despite additional IBNR provisioning from regulatory changes, thanks to stable CSM profit and improvement in our investment profits. Net profit in the first quarter was below that of last year due to the high base effect from last year, when we had large one-off factors, including penalty gains from corporate pensions. But otherwise, when taking out the one-offs, we recorded a 9.1% year-on-year increase on a recurring basis. Although our K-ICS ratio is expected to decline slightly as of the end of March 2024 due to regulatory tightening, it is forecast to improve after the second quarter, driven by growing new business CSM and solid earnings.
Based on our improved fundamentals from net CSM and earnings growth, we are examining different measures for further improving our corporate value from multiple angles. We will continue to do our best to establish ourselves as a stable and sustainable dividend growth stock, so that we can gain fair valuation from the market, while also returning greater value to our shareholders. Please refer to the materials for more details on our performance. Please be advised that forward-looking statements mentioned at today's call may be subject to future change due to changes to domestic and global economic conditions and our business environment. Thank you. And with that, we will now begin our Q&A with management. Now, Q&A session will begin. Please press star one, star and one if you have any questions. Questions will be taken according to the order you have pressed the number star one.
For cancellation, please press star two, that is star and two on your phone. The first question will be presented by Myung-uk Kim from JP Morgan. Please go ahead with your question.
Yes. Thank you for the opportunity to ask two questions. First, is on your shareholder return policy. I think in one of the presentation slides, you note that you will examine different measures, within a reasonable solvency level. So what is the company's expectation in terms of what you see as the reasonable or adequate solvency level? In Q1, I think it was 210%. But if you are looking at a band of 200%-220% as being reasonable, I'm, I want to know whether you consider maybe the surplus capital to be a little bit on the tight side. So let me, I would appreciate if you could check that for me. Second, it seems that, your company-wide portfolio has actually been quite considerably changed, centering around health-related products.
At the time of sales of new health products, though, I'm wondering if you are reflecting conservative assumptions just in terms of your actuarial consumption or assumptions on loss rates. I ask because we continue to see CSM adjustments occur, and over different countries in Asia actually are seeing similar medical claim trends, where claims are on the rise and also living benefit loss rates also are on the rise. So if you underwrite a lot of new business at the time of sale, it's good for sales performance, but I am worried or concerned maybe that it could come back as risk later on. So if you could clarify?
Yes, I'm head of the RM team. Let me take your first question. So you are right. Our target case range would be between 200%-220%, which is consistent with the solvency level of triple A leading European players who apply Solvency II.
[Foreign language]
So as of the end of March, the K-ICS ratio currently stands at around 210%, and up to the end of 2026, of course, there are planned reductions to the discount rates that will apply.
[Foreign language]
So however, the reduction in the discount rate will actually be phased in or it will be spread out up till the end of 2026. So likewise, the impact from reduced discounting rates will also be diffused on our end. And when we consider the increase in new business CSM, that will also come in, we believe that we will be able to achieve our target K-ICS ratio.
[Foreign language]
So we do not foresee the K-ICS ratio of our company to be any major issue in terms of our decision making.
In-cheol Byun, Actuarial Team Leader, answering the second question.
Yes, this is In-cheol Byun, Head of the Actuarial Team. Let me take your second question.
[Foreign language]
In terms of what assumptions we apply at the point of sales, actually, same set of consistent assumptions apply for both in force and new business.
[Foreign language]
So internally, we have a set of standard assumptions that are based on the KICS criteria that applied at the time of transition to IFRS 17, including the LAT requirement by the regulatory authorities.
[Foreign language]
Among the 13 assumptions, we apply a weighted average of 1 year for the expense, 3 years for the policy loans, and 5 years for other assumptions.
[Foreign language]
And so I can reassure you that we have the underlying statistics for assumptions, including the loss rates that you mentioned, and we feel that we are reflecting a appropriate level of future outlook that can be explained on a reasonable basis.
[Foreign language]
We believe that applying too conservative assumptions that are not backed by actual evidence, that also would be a problem.
[Foreign language]
However, the insurance companies overall are seeing CSM adjustments occur mostly because lapses actually have been higher than historical levels due to changing markets, competitive dynamics, also different economic factors that are at play.
[Foreign language]
Also in terms of loss rates, the claim payments, which actually have been a bit suppressed during the COVID period, actually are now increasing, on a temporary basis, we feel.
[Foreign language]
But if there is, further deterioration, for example, in the difference between assumed and actual or any, assumption in actual performance, in the fourth quarter, we do an adjustment to our assumptions, where they are converged to be closer to the actual. So, although that will take time, we believe that the assumptions that we apply at present are at an adequate, reasonable level. The following question will be presented by Hae-Jin Park from Daishin Securities. Please go ahead with your question.
[Foreign language]
Yes, thank you for giving me the chance. Also thank you for the good performance. I have three simple questions. First of all, it seems that in terms of your CSM adjustment this time, the minus adjustment actually was quite significant, I imagine, mostly due to an adjustment of the discount rate. But could you provide further details on the adjustment? The second question has to do with your investment profit, which seems quite good. I think at the last call, you mentioned that you want to improve your investment yield to help deliver stronger ROE I believe you mentioned. Is this the improved yield, is it due to any change to your portfolio, or are you planning to change your portfolio in any way going forward? The third question is regarding Samsung F&M.
I believe they have suggested that they will be announcing their company policies or measures for share buyback and also cancellations, I believe. And so, I understand that you also have a progressive approach regarding those types of capital management policies. So could you provide sort of some more color in terms of when we could expect that kind of announcement from Samsung Life?
Yes, this is Head of RM. Let me take the first question.
Oh, so sorry. I'm head of the actuarial team. So, CSM adjustment in the first quarter totaled KRW 360 billion, of which the portion that came from tightened discounting rates, from regulatory change was KRW 120 billion.
[Foreign language]
The remaining amount mostly is due to the difference between assumed and actual in the first quarter from rising lapse rates and also, valuation of liability at the end of the quarter, and also movement in the in force book.
[Foreign language]
Yes. So I'm the head of the strategic investment team. Let me take your second question regarding investment profit.
[Foreign language]
So based on our strong AUM principle, of course, we place first priority in increasing investments to long-dated bonds. However, for diversification purposes across more alternative investment assets, or actually, we are diversifying across more asset classes, including alternative investments, for the goal of improving our returns. And excuse me, for more diversification purpose as well.
[Foreign language]
Yes. So we already have a very diversified portfolio across different asset classes, including real estate, private equity, retail loans, etc. The total balance stands at above KRW 50 trillion, which is about 29% of total invested assets.
[Foreign language]
We have been working on diversification of our portfolio starting late 2020. At that time, the share was 25.5%, but since it has increased significantly again to 29.4%.
[Foreign language]
You can check from the presentation material, but we have seen consistent increase in profit, particularly from our beneficiary certificate type investments, thanks to our greater diversified portfolio.
[Foreign language]
We intend to continue to pursue a mid- to long-term strategy of expanding our asset diversification, including alternative investments. We will be enforcing, of course, strict risk management of our held assets.
[Foreign language]
We will take your third question, the CSO.
[Foreign language]
Since the government made an announcement about the corporate value program last February, internally at Samsung Life, we have been examining various measures for further enhancing our corporate value.
[Foreign language]
So although the particular details have not been decided yet, we want to leverage our improved fundamentals from introduction of the new regulatory system and accounting system to examine multiple ways of delivering stronger total shareholder returns. Once things are finalized, we will communicate our findings with the market.
[Foreign language]
We are expecting solid net earnings growth, driven by new business CSM, which we expect to be over KRW 3 trillion per year, also helped by improved investment yield and also, solid consolidated earnings from our subsidiaries.
[Foreign language]
Despite the regulatory tightening by the authorities, we expect to be able to maintain our KICS ratio above 200%, and we will work hard to make sure that these fundamental improvements can be translated into enhanced corporate value.
[Foreign language]
I seek your kind understanding as we will not be able to specify when exactly we will be able to share further details with you, but it is expected to take some time. But certainly, we will communicate, back with you as soon as we formulate our plan to enhance corporate value in line with your expectations. [Foreign language] .
The following question will be presented by Lee Byung-gun from DB Financial Investment. Please go ahead with your question.
you mentioned the health insurance CSM margin. You said that when excluding the Golden Reinforcement product, the profitability was still maintained to some extent. For the decline in new contract profitability, I would like you to analyze how the main factors worked. Representatively, the things like the discount rate reduction mentioned earlier clearly must have affected the new CSM margin, I think. You mentioned the Golden Reinforcement product, but generally, when we say Golden Reinforcement, we understand it as having market competitiveness in the first quarter, whole life insurance, especially centered on short-term payments. So, in the case of health insurance, what kinds were the Golden Reinforcement products mainly, and so now dividing whole life and health, after the actual profitability changed, and after this quarter, what level of margin rate should we think of? Please tell us.
[Foreign language]
Yes, thank you also for delivering good results. I have two questions. First, on new business CSM, particularly CSM margin, I think, on page eight, you mentioned that, overall, the health CSM margin, with the exception of products where surrender value has been enhanced, you have maintained a level of margin. However, overall, what were the factors behind the decreased profitability of new business CSM? Certainly, reduced discounting rates will have had an impact, but if you could elaborate. And when you say products with enhanced surrender value, I think we may be thinking of whole life, short-term payment type products, where there was intense market competition. So in terms of health products, what type of products are you referring to more specifically?
If you could divide into whole life versus health products, which type of products actually saw the deterioration in the margin profile? What is your outlook for the margins going forward after the second quarter? Second question, it seems that in terms of your CSM amortization, last fourth quarter, it went up quite abruptly and then declined some in the first quarter. Page three and four actually does break down your CSM between new business versus in force, which actually is a little bit different from your presentation in prior quarters. So if you could elaborate a little bit more about the CSM amortization on page four.
[Foreign language]
Yes, this is Young-im Kwon of the product team. Let me take your first question.
[Foreign language]
So in the first quarter, we did see reduced profitability on a year-on-year basis due to changes to our profitability assumptions. Also, as we responded to market competition in the short-term payment type of or type space, and as we expanded our mix of health products.
[Foreign language]
So first, for the short-term payment whole life products, we were responding to market dynamics, and in the process, saw decrease in the margins.
[Foreign language]
In terms of the profitability of health products, it decreased from 2,570% in the prior quarter to 1,740% in Q1.
[Foreign language]
So this drop actually was primarily due to our push in new product sales, as we targeted greater presence in the health space. So we introduced certain health products with higher surrender value, which on average had CSM margins of 1,100%. However, for our mainstay high margining products, the margins are still quite solid at 2,130%.
[Foreign language]
You also asked what type of product we mean specifically when we mention products with enhanced surrender value. Well, previously, for whole life, previously they would have been pure death cover or short-term payment type products that offered a refund of cash value at the end of the, or excuse me, that would offer some kind of a refund. And then on the health product side, if there was no diagnosis or treatment incurred, then those products actually would expire after a due term with no refund provided. So predominantly, these two types of market products were on the market.
[Foreign language]
However, among the general population and customers, life expectancy has increased, and there's rising need for hybrid type health solutions, where, based on concerns that, conventional health products do not provide, permanent coverage as it expires after a due term. So there was a need to have health cover, plus, the need to continue to maintain, the contract, so that, while, being guaranteed a certain refund in the event that they have to terminate the contract due to economic difficulty, for example. So it is in response to these rising needs for a hybrid solution that we have, come up with the so-called enhanced surrender value health products.
So again, as we enhance the competitiveness of our product lineup, not only for whole life, but also the higher margining health products, and as we introduce new products with greater surrender value to address these new emerging needs, we did see our margins go down. However, this was quite strongly offset by increase in volume, and we were able to secure new business CSM of above KRW 280 billion. So we will continue these efforts after the second quarter to, like, again, improve the competitiveness of our health products and boost sales and introduce different risk profile type products, low- and mid-margining products as well to attain our quarterly target of KRW 270 billion, and for full year CSM target of KRW 3.2 trillion.
Yes, let me take your second question. Yes, let me explain about the difference in CSM amortization from KRW 381 billion in the fourth quarter last year down to KRW 351 billion in the first quarter. So the 38, excuse me, KRW 381 billion in CSM amortization in the fourth quarter reflects KRW 40 billion in one-off gain. So what happened was, there was a one-off factor of accrued interest on policy loans that expired that were reflected upon closing our books at the end of 2023. So this one-off gain actually was classified under other profit and reflected into CSM amortization. So to just share with you some time series trends.
There was some impact last year from the first to the second quarter from the FSS guidelines and tightened these discount rates. So CSM did see a slight decline then, but ever since, from the second quarter last year up to Q1 of this year, with the exception of that forty... when taking out that KRW 40 billion in one-off in Q4 last year, we have consistently seen incremental increase in our CSM on a quarterly basis.
[Foreign language]
And why we broke down the CSM amortization between new business and in force? Well, this was just for the purpose of greater transparency in our communication. If you look at the second line, it's a CSM loss and reversal. So we actually have 144 GOCs or group of contracts for our in force contracts, in force policies, and some of those groups are loss-making contracts. So in the event that there is a change to the assumption or difference between assumed and actual, then that will be accounted for as a CSM loss for the given quarter. And so, of course, the loss-making contracts carry no CSM.
[Foreign language]
So, just to recap, for the fourth quarter last year and the first quarter this year, there was a significant CSM loss or recovery. In the fourth quarter, it was due to a one-off reflecting recommendations by the FSS to reduce our margins on fixed rate policy loans. And in the first quarter this year, it was due to the compulsory reduction in discounting rates, also enforced by the FSS.
[Foreign language] . The following question will be presented by Jae-woong Won from HSBC Securities. Please go on with your question.
[Foreign language]
Yes. Thank you for the good results despite the difficult environment. I also have a question on CSM margins. In your materials, you do not show us your total new business CSM margin. So what was the level for the first quarter? In terms of future trends, some companies are expecting upside, whereas others are expecting to maintain current levels. So what is... if you could share your thoughts, I would appreciate it. Second question is that I understand usually in the first quarter, there is some seasonality in terms of difference between assumed and actual, but in fact, for you, it seems that it was actually better than expected.
So were there any one-off factors at play this time, or do you think that going forward, we will be able to start off, the new year with a low, difference between assumed and actual, in the first quarter?
[Foreign language]
Yes, this is the head of the actuarial team. Let me briefly answer your second question first.
[Foreign language]
So regarding the why we had a bigger difference between assumed and actual in the first quarter of last year, I think I did explain multiple times through our IR sessions, but there were some one-off factors regarding our operating expense. So every two to three years, we would make an adjustment for our internal company welfare fund, also an adjustment on taxes. So that led to some movement that was a one-off.
[Foreign language]
... So I think, the difference between assumed and, actual that we recorded in the first quarter of this year is closer to the more, actual number versus last year. As we mentioned, in the beginning, after, COVID, there was an increase in claim payments, and we did see a slight increase in, the difference between assumed and actual for the claim payment side. However, by enforcing stricter, claim management, our goal is to maintain, this variance at close to zero. So I think, the, the difference that you saw in the first quarter, I think, you can consider it to be sort of the, yardstick or the standard level for our company. Yes, this is our head of the product team. Let me take your first question.
So, as I explained earlier in an answer to a prior question, yes, in the first quarter this year, we did see a decline in margins, relative to last year, as we responded to rising competition in the market for greater refunds in the whole life space. And also, likewise, as we enhance the competitiveness of our products for the health category as well, and increased the proportion of new products in our overall product portfolio. And, just for your reference, I think it's page 1-5 of the fact sheet that provides a detailed breakdown of the CSM.
So, after the second quarter, as we expect, volume to be reduced as competition in short-term payment type products ease, we will actually be focusing on expanding and managing our portfolio centered around high yielding or higher margining products to boost CSM margins in terms of the percentage, while also expanding the aggregate CSM balance as well. So again, in the first quarter, there was heightened competition over refund rates in the market for short-term payment whole life products, and we responded to the competitive dynamics by introducing our happy short-term payment products, which weighed on our margins. But going forward from the second quarter, we will be improving our margins, introducing mid or higher margining products.
Also for the higher margining health related products, we will enhance our competitiveness against non-life players by developing new types of coverage and products to again boost not only margins but also the aggregate volume as well. So through the strategic management of our product portfolio and by boosting overall volume, we are working to achieve our aggregate CSM target of KRW 3.2 trillion.
The following question will be presented by Doha Kim from Hanwha Investment and Securities. Please go ahead with your question.
Ne, good morning.
... Yes, thank you for the opportunity to ask two questions. I think, in your slides, you mentioned the impact from reduced discount rates, also the introduction of new base assumptions. And just to have a greater or just to inform our projections, in terms of what kind of impact other planned regulatory changes may have, could you mention, for example, the asset liability side duration? So how as discount rates are tightened further up to the year 2027, how much do you think the asset duration side is going to increase by, or could you provide more color on the duration? Second question: It seems that a big part of your improved performance this quarter is due to reduced interest liability from your general account.
So it seems that there was about a KRW 70 billion decrease on a year-on-year basis, so why was that? And other than discount rates, are there any other factors that should be considered? Yes, let me take your question regarding our KICS ratio. I'm Head of RM. So let me explain the factors behind the drop shown on page 13, I believe, from 219% to 210%. So the impact from the lower discounting rate on liability is 13-15 basis points. And then the new base assumption risk actually does not make much difference, so I think the impact on our lower KICS ratio is maybe just a one percentage point only.
But, the increase in new business CSM, also higher interest rate and stock prices, can have a +7-9 basis points positive impact. So on balance, we were expecting a 9 percentage point decrease in our KICS ratio. And in terms of the reduction to the discount rate, the reductions are planned, up to the end of 2026. But as we continue, to see an increase in new business CSM, this will add to our available capital, which is why we expect our KICS ratio to be around 210% or so. And, upon, the conclusion of the discount tightening starting in 2027, we expect our KICS ratio to continue, to increase. And then let me explain on our asset liability duration.
Currently, our duration gap is 1.3 years, with liability duration 10.3 years, asset duration 9 years. Although in reality, the discount rate that will apply for liabilities will be gradually reduced up to 2026, if we assume the full-on impact just in one go, we expect the liability duration side will to increase by 1.4 years.
[Foreign language]
The discount rate tightening actually was introduced or announced in the second half of last year. From that point onward, we had set our plan to invest in about KRW 6 trillion-KRW 7 trillion in super long-dated bonds every year.
[Foreign language]
So if we are able to execute as planned, then we will be able to reverse the duration gap that resulted from the lower discount rate for liability side back to zero.
[Foreign language]
And otherwise, we are continuing to look into different ways to further reduce our Duration Gap further, utilizing bond forwards, government bond forwards, or increasing our allocation to super long-dated bonds. Also ceding contracts to co-insurance or taking out co-insurance, for example.
[Foreign language]
Yes, this is the Head of the Actuarial Team. Let me answer your second question.
[Foreign language]
So let me explain two factors behind the reduced interest liability. First, there was a KRW 1.5 trillion reduction in interest liability on the general account side from immediate annuity products that we sold in the early 2010s, and also on account of liability at cost exposure from liability at cost due amid increased lapse rates.
[Foreign language]
Of course, as you know, the discount rates reduction by the FSS had the effect of lowering our reserve interest by about five basis points. So on a mid- to long-term basis, we expect our interest liability to come in consistent with first quarter levels.
[Foreign language] . The following question will be presented by Myung-uk Kim from JP Morgan. Please go ahead with your question.
[Foreign language]
Yes. So I actually have another follow-up question. I think earlier you said that in terms of managing your KICS target, you apply Solvency II standards. If I recall correctly, I think many European insurance companies consider anything above 150% to be excess capital in their capital management policy. So, is there this kind of a reference capital ratio that Samsung Life applies, or should we be looking at the KICS band of 200%-220% as that sort of threshold? I ask because previously we had thought that Samsung Life was carrying quite significant excess capital, whereas today's material suggests actually the amount looks more reasonable or adequate. So if you could clarify?
[Foreign language][Foreign language]
Yes. Let me cover your questions.
[Foreign language]
... So, you mentioned European insurance companies that apply Solvency II. So we understand that for the AAA insurance companies, their solvency level is equivalent to 210%-220%, based on our KICS ratio. AA+ are managing their solvency at around 200% equivalent level? So I think you're suggesting that for those insurance companies, anything in excess of 150%, they are using to fund dividend payments and other capital deployment? There are some differences from one company to the next, but as far as we have been able to verify, for the high credit rating companies, usually the threshold is maybe 190%, or actually 195% or above.
Anything in excess of that level, they would use for dividends. That is the internal policy that we have been able to check. So, we actually have been communicating to you, using a range from 200%-220%, because we feel that we may need a buffer, given changes to the interest rate movement, also, regulatory change and tightening that we see, that is ongoing even today. So we believe that once the regulations become more stabilized, we will be able to narrow the range further in our communications with you.
The following question will be presented by Lim Hee-yeon from Shinhan Investment and Securities. Please go ahead with your question.
Uh,
Yes, thank you for the good performance. I actually would like to ask for a favor rather than asking a question. Could you consider maybe changing your Q&A session to simultaneous translation instead of sequential? Because it is distracting, hard to concentrate, and a lot of repetitive questions taking up a lot of time. So for better efficiency, would you consider changing to simultaneous translation mode? Be better use of time? And thank you for respecting our recommendation or our suggestion regarding the fact sheet last time. Yeah, thank you. We will see internally if that is possible to change to simultaneous. Thank you very much.
We will now conclude the first quarter conference call for Samsung Life. Please contact our IR team if you have any further questions. Thank you very much!