Good morning. I am [Kim Sung-jin ] from the IR team at Hanwha Life. Today's earnings call for the third quarter of 2025 will proceed through consecutive interpretation in Korean and English, and the presentation materials are available on our IR website. Today, CFO Yeo Jong-bo will first give a presentation, which will be followed by a Q&A session. Let me hand over to our CFO.
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Good morning. This is CFO Yeo Jong-bo. Thank you for joining our earnings presentation. Please note this presentation is based on K-IFRS. Let me begin the report on the earnings for the third quarter of 2025.
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Page one is on earnings highlights. In Q3, we achieved net growth of in-force CSM on the back of increase in protection new business APE, improved profitability of health and whole life insurance, and new business CSM growth. First, protection APE was up 13% year-over-year to KRW 879 billion, while multiples of health insurance and whole life insurance improved to 16.4 times and four times respectively. In-force CSM grew to KRW 226.3 billion won quarter over quarter to approximately KRW 9.1 trillion, supported by stable inflow of new business CSM of KRW 564.3 billion. We posted KRW 307.4 billion in consolidated net profit, thanks to a separate net profit of KRW 136.1 billion and strong earnings reported by domestic and overseas subsidiaries. Let me provide more details on the following slide.
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Page two is a new business APE and CSM. New business APE in the third quarter came in at approximately KRW 1.6 trillion, thanks to a 13% increase YoY in protection APE amid intense competition in the market. Supported by the strong growth of protection sales, new business CSM in the third quarter grew 4.1% to approximately KRW 1.5 trillion on a cumulative basis, adding more visibility to reaching a KRW 2 trillion mark for three consecutive years. Health insurance profitability improved to 16.4 times on the back of increased sales of high-margin new health insurance products, such as Lady H Insurance. Whole life insurance profitability also improved to four times through portfolio restructuring, focusing on medium and long-term premium pay policies.
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Page three is on sales organization. As of third quarter, the number of SPs was 36,487, maintaining the strongest channel competitiveness in the industry, while the SP retention rate improved to 55.5%. The 13th month persistency remains strong at 89%, and the 25th month persistency rose by 15.8 percentage points from the end of the prior year to 79.6%.
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Page four is on in-force CSM. In the third quarter, in-force CSM increased by KRW 226.3 billion quarter over quarter to reach approximately KRW 9.1 trillion, mainly due to solid new business CSM growth and gradual reduction in expense variance adjustments supported by improved persistency. We aim to manage in-force CSM stably through improvement in actuarial assumptions and persistency while continuing to pursue new business CSM growth based on high-margin protection product sales growth.
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Page five is on separate net income. Despite greater volatility in the insurance income due to the increase in claims paid across the industry, we posted ₩136.1 billion in net income on a non-consolidated basis, showing an improving trend quarter over quarter, thanks to the increase in investment profits supported by strong interest and dividend gains, as well as strategic asset management.
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On page six, we recorded ₩307.4 billion in consolidated net income, thanks to solid earnings reported by domestic consolidated subsidiaries such as general insurance, asset management, and securities, and the expansion of geography and business domain through newly consolidated overseas subsidiaries, such as Nobu Bank in Indonesia in June and Velocity Clearing in the US in July. Going forward, to become a globally competitive, comprehensive financial group, we will continue to strengthen our core business competitiveness and enhance both growth and profitability of domestic and overseas subsidiaries.
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Page seven is on asset management. To ensure stable medium and long-term returns, we are managing an investment portfolio focused on interest-bearing assets with 63% domestic bonds, 17% overseas securities, and 12% loan assets. In the third quarter, investment yields was up 26 basis points quarter over quarter to 3.43% on the back of the increase in valuation gains under the favorable global equity market circumstances and improved investment returns from overseas alternative assets.
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Regarding our bond and loan portfolios, please refer to the relevant slides for more details. Next, page 10 is on K-ICS and Duration Gap. Our third quarter K-ICS ratio is estimated to be 157% in consideration of the new business CSM inflow and effects of subsidiary acquisitions. Asset and liability durations are 11.93 years and 11.71 years, respectively, with a Duration Gap of 0.16 years. Recently, the financial authorities' measures to improve regulations on the last observed term-related discount rates have created a more favorable environment. Against this backdrop, Hanwha Life aims to manage the K-ICS ratio stably in the medium and long run by strengthening fundamental profitability through the expansion of new business CSM, in-force CSM, and net profit.
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Finally, page 11 is on AI and digital innovation. We are in the process of securing differentiated capabilities by strengthening core business competitiveness through the adoption of AI in the entire value chain, ranging from customer acquisition, underwriting to claims payment, and improving customer service experience through AI-supported sales and enrollment process improvement. We will transform ourselves as a life solution partner to cover the entire life stages of our customers by expanding the adoption of AI solutions in our business operations. Thank you.
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We will now like to have a Q&A session.
[Non-English content] . 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 cancellation, please press star two, that is star and two, on your phone. [Non-English content] . The first question will be provided by Joon-sup Jung from NH Investment & Securities. Please go ahead with your question.
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I'm Joon-sup Jung from NH Investment & Securities. Thank you for the opportunity. I would like to ask you two questions.
First of all, your investment profit for the third quarter seems to be quite solid. On the other hand, your insurance side, your profit and loss has been worsened, mainly because of the increase in experience variance adjustment, which seems to be a bigger increase than the industry average. I'd like to understand the reason behind this change in experience variance adjustment in the third quarter. Maybe you can give us some more information by giving us some breakdown by product types or other channel types. Going forward for the fourth quarter, you are going to go through the assumption update process, and this will have an impact on your experience variance adjustment to what degree to your CSM by the end of the year. If you can give us some guidance on the outlook for the fourth quarter and beyond, we will appreciate that.
The second question has to do with the potential acquisition of IGIS Asset Management. We've read it in the media. I understand that it's not been finally decided yet, but I'd like to understand the background or context in which you've decided to consider this deal. If this goes through, then what is your anticipated synergies that you would like to get from this deal versus some of the potential impact on your solvency ratio? Thank you.
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I am Jaemin Baek, the Head of the Business Management Team. Let me answer your first question on our experience variance adjustment. Recently, we've seen an expansion in experience variance adjustment, mainly because of the increase in our focus on health products. In particular, protection new business has been increasing. As a result, we have seen an increase in claims payout for living benefits, including surgeries, diagnosis, and hospitalization. This is a phenomenon or a trend that is prevalent across the industry, mainly because of increasing new sales for health insurance policies. It is also true that compared to the first and the second quarters, in the third quarter, we had more business days. As a result, we've seen an increase in claims payouts.
Recently, in order to respond to the increase in experience variance, on the preemptive side, we've been strengthening underwriting by lowering the limits on various benefits and riders. At the same time, we're strengthening the claims assessment process so that there will be no abuse of policy benefits.
Going forward, in the fourth quarter, with continuous efforts on our side, and also given the fact that we will have fewer business days in the fourth quarter compared to the third quarter, we believe that experience variance adjustment will be improving in the fourth quarter. Continuing on into 2026, we will continue to maintain preemptive and post-event management, and we're also expecting an increase in risk premiums as a result of updates to our assumptions. I believe that experience variance adjustment amount will be stabilizing in 2026.
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I am Kim Jun-il, Head of Actuary Team. Let me add some more information. When we look at the claims variance adjustment, the cumulative amount is KRW 269 billion, and of that amount, KRW 175 billion is for diagnosis and surgery-related benefits that have been paid, and KRW 64 billion for hospital visits. What we are focusing on in our review process is about KRW 40 billion that incurred from policies that were sold before 2018 regarding diagnosis and surgery benefits, and KRW 90 billion incurred from the more recent policies. In addition, KRW 50 billion from policies sold before 2018 regarding hospital visits and hospitalization. Regarding the KRW 90 billion, as was mentioned by the Head of the Business Management Team, there are some one-off effects, including the effect of underwriting and several one-off factors and the behavior of over-extensive medical services. These are rather temporary components.
The remaining KRW 90 billion — for that, we continue to review statistics and consider whether we need to go ahead with assumption updates.
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I am Lee Sang-hee, Head of the Product Development Team. Let me add some more. There is an increase in health policy sales across the industry. The loss ratio has been worsening as the latest trend. However, we have been taking a number of measures to improve the product design. In particular, we've already started excluding some of the coverages that induce or encourage adverse selection, and such measures have already been implemented from August to September in our product design and sales. In addition, we are in the process of restructuring and improving the product structure or pricing structure so that we will be able to secure more risk premiums. Overall, while we will continue to push forward with the sales of health and protection policies, we hope to be able to stabilize the loss ratio trend.
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I am Chung Hyun Oh from the Corporate Planning team. Let me answer your question on our potential deal with IGIS. Currently this whole process is ongoing, so please understand that I won't be able to give you any specific details. However, what I can say is that Hanwha Life Insurance has been exploring diverse strategic directions to build and expand our foundation for sustainable growth. As part of this strategy, we've seen that IGIS has a very good portfolio of real estate assets and alternative investment assets that have sizable growth potential. IGIS Asset Management has strong asset management capabilities. We are considering potential long-term synergies that we can create. If there's any decisions to be made in the future, we will make sure to communicate this with the market in a transparent manner.
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I have one follow-up question. In the fourth quarter, we are going to update your set of assumptions. To what extent can we anticipate change to your experience variance?
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I'm Song Junil from the Actuary Support team. Let me address your question. We're now in the process of reviewing assumption updates for the end of 2025 in consideration of market interest rate changes as well as experience data. We are trying to do this in a rational manner to produce positive results. We are planning to make assumption changes based on various statistics and basic assumptions so that they will have a positive impact overall. However, with assumption changes, there may be some downward impact on the CSM, but we are currently in the process of getting all these internal verification, and later we'll get accounting audited. Please understand that we won't really be able to mention any specific financial impact.
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[Non-English content]. The following question will be presented by Heeyeon Lim from Shinhan Investment & Securities. Please go ahead with your question.
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I'm Heeyeon from Shinhan Investment & Securities. Thank you for this question. I have just one question. When we look at your new business CSM on a YOY basis, we've seen an increasing trend, but there is a downward trend in your health and protection CSM or new business CSM. I'd like to understand if there is any particular reason. Maybe it is because of your product portfolio adjustment or something else. If you can give us some color, we would appreciate it.
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I am Baek Jaemin, the Head of the Business Management Team. Let me address your question. In the third quarter, we've continued to launch new products and revised existing products, as well as promoting the sales of health policies in order to maintain a sizable monthly initial volume and drive up profitability. Recently, thanks to the increase in sales of policies with longer term premium paying, we were able to increase the multiples for whole life policies as well. In driving up sales for health policies, we are trying to increase their contribution to new business CSM while continuing to improve profitability. However, as you can see, there was some downward trend in our health policy sales in the third quarter, but this trend will be reversed in the fourth quarter.
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Going forward in the fourth quarter, we will continue with our strategy of profitability-focused portfolio management by continuing to sell medium and long-term premium paying whole life policies and health policies. We believe that we will be able to meet our target of new business CSM of ₩2 trillion this year as well. Our guidance for next year in terms of new business CSM is also more than ₩2 trillion. At the same time, we will continue to improve the profitability so that we can improve CSM multiples as well.
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I actually was caught off because of the microphone issue, but I'd like to ask another question. I believe you are in the process of developing your business plan for 2026. Compared to your peers and competitors in the market, what are you going to do to differentiate yourself in the market? Maybe in terms of product strategies and sales strategies. If you can share with us some of these, we would appreciate it. [Non-English content] .
I'm Lee Sang-hee, the Head of the Product Development Team. Let me comment on our product strategy for 2026. From the perspective of CSM, it is very important to increase the volume of health products. But in the health insurance market, competition has been intensifying. For our product strategy for 2026, we would like to respond to the recent trend of integrated or comprehensive health insurance policies or products that have been mainly led by P&C companies. We would like to strengthen our competitiveness in designing and selling comprehensive health insurance products. On top of that, this year, we've secured six types of exclusive use rights for Hanwha Life Insurance, and likewise, we would like to continue to maintain our product design leadership. In order to maintain our leadership, we will develop new health insurance covers going forward. [Non-English content]
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Hanwha Life Insurance is a strong leader in whole life products, but its contribution to CSM is rather lacking. In order to respond to this, we've already introduced the new Hanwha whole life product, and likewise, we will continue to develop and sell whole life policies with medium and long-term premium paying design so that we can improve our portfolio. In this way, whole life policies will also be able to make meaningful contribution to CSM. Likewise, we will move in a direction that will drive up new business CSM and strengthen our product portfolio.
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I'm [Song Jong-hyuk], Head of Marketing Enhancement Team. Let me comment on our sales strategies for 2026. We will continue to expand our sales organization to reinforce our market leadership by increasing the FP organization. Compared to the end of 2021, our sales organization or the number of FPs in 2025 is increased by 59%.
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As for Hanwha Life Financial Service, in order to respond to regulatory changes, starting from 2026, we will continue to recruit and train and retain excellent productive financial planners.
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We will diversify our sales portfolio, focusing on medium and long-term premium paying whole life policies and high-margin health policies.
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We will maintain the current sales volume while driving up profitability. Our sales strategy will be focused on profitability. Thank you.
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The following question will be presented by Dan Wang from JP Morgan. Please go ahead with your question.
Hi, good morning, and thank you for taking my question. I have two questions. The first one is related to the co-capital. We know that in Korea, the regulator intends to introduce a co-capital regime for the career insurance, probably next year. What is their current co-capital level based on Hanwha Life estimates? And if their capital adequacy might face some certain pressure, what kind of their solvency management tools does their company plan to boost their co-solvency? That's my first question.
The second one is also about the dividend proposal. So far, we know that the regulator gives a preferential treatment on the surrender value reserve provisioning, depending on the individual insurer's K-ICS ratio. From the stance of the management, what can we expect the dividend proposal happening? Maybe not this year. What is the company view maybe next year? Can you give the management view on this? Thank you.
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I'm Park Soo-Won, Head of the Risk Management Team. Let me address your first question on our core capital ratio. As of the end of June of 2025, our estimated core capital ratio is 59%, while the Korean financial authorities have announced a plan to introduce core capital regulation. The timing or the recommended levels have not been decided yet, and it is the position of the government that they will engage with the industry in an extensive manner to increase the acceptability of this new regulation among the players in the industry. They are also planning to ensure a soft landing by providing a long period of grace.
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In order to strengthen our core capital ratio, on one hand, we will continue to increase available capital through profit generation from our business operation and efforts to reduce required capital. We are also utilizing our core insurance schemes and continue to strengthen our duration gap management and utilize a process for internal control model. Going forward, we will continue to make efforts to strengthen our core capital ratio, believing that the regulation will be implemented in a gradual and long-term manner. At the same time, we're consulting with the government authorities and have been communicating to the government that under the Europe Solvency II model, CSM is recognized as part of core capital. Thank you.
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I am Kim Dong-yup from the Finance Team. Let me address your question on our dividend proposal. Currently, we've been communicating to the financial authorities about improvement in regulations regarding surrender value reserving, and recently the government has been considering measures to rationalize or to improve regulations on surrender value reserving requirements. If such a regulation is revised in a more favorable manner, we believe that we will be able to pay dividends this year for 2025. Thank you.
Do you have any further questions?
That's very clear and very helpful. Thank you very much.
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The following question will be presented by Theo Hadijaja from JP Morgan Asset Management. Please go ahead with your question.
Thank you very much for taking my questions. I have two questions. The first one is a follow-up on the question on the potential acquisition of IGIS Asset Management. Can you share how you plan to fund this acquisition, and what would be the impact to your K-ICS solvency ratio? The second one is, I think as of the second quarter, your target K-ICS ratio for the year is in the mid 160%. Is that still the goal? And given that in the third quarter the K-ICS solvency ratio was 157%, what is your plan to increase to mid 160% by the end of fourth quarter? Do you need to issue sub-debt to enhance your K-ICS ratio? Thank you.
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I'm Song Hyun-woo from the Corporate Planning Team. Let me comment on your question on our IGIS Asset Management related situation. No specifics have been decided when it comes to pricing and conditions of acquisition. Please understand that I won't be able to comment on any specific funding plans or other matters specifically related to this deal. Please understand.
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I'm Park Soo-won from the Risk Management Team. Let me comment on your K-ICS related question.
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Regarding our K-ICS outlook for the end of 2025, interest rates have been going up since September, which is a positive factor for our K-ICS ratio, but we will have to wait and see how interest rates will be set around the end of the year. In the meantime, for the fourth quarter, we are continuing to boost new business CSM, and we're trying to minimize claims variance adjustment amount. Our year-end K-ICS target is around 155%, and we don't have any plan to issue any sub debt.
Do you have any further questions?
Thank you. Maybe one follow-up question from me is, I appreciate that you cannot share more details about the funding plan on potential acquisition of IGIS, but maybe if you can share your philosophy on solvency ratios and maybe core capital ratio. Do you want to pursue the acquisition with the assumption that you will maintain certain minimum K-ICS ratio and also minimum core ratio? And going forward, I understand that as of the second quarter, your core ratio was 59%. Do you have any target in terms of what core capital ratio that you would like to maintain, maybe over the next one to two years?
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I'm Song Hyun-woo from the Corporate Planning Team. Let me supplement additional information. As you mentioned, we are now in the process of going through this particular deal. Regarding IGIS Asset Management, we cannot really disclose anything about our funding approach. Once again, we will consider a number of factors, including our core capital situation and other financial potential impacts on our capital adequacy. What I can say is that as soon as a decision is made, we will make sure to communicate this with the market in a transparent manner.
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From the Risk Management Team. Let me comment on your question regarding our K-ICS ratio and core capital ratio management. Recently, the financial authorities have announced the plans to revise, to adjust the liability discount rates tightening program. We have less burden on our K-ICS ratio management as of now.
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Regarding the introduction of core capital-related management, timing and levels have not been decided yet, but we are now in the process of considering various potential scenarios. In particular, we are planning to continue to strengthen our core capital levels in the medium and long term by improving the available capital through more profit generation and by reducing required capital. Our long-term core capital target is 100%.
Does that answer your question?
Yes, it did. Thank you.
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The following question will be presented by Jane Chen from China Life Franklin AM. Please go ahead with your question.
Hello, managers. Thank you for taking my call. My question is mostly answered by the previous investors already. But I have a follow-up question on your potential inclusion of CSM into the core capital ratio. Could you elaborate more on this understanding? And have you communicated with the FSC already on this matter? And what is the potential procedure that they will adopt? Because it sounds likely that will help really eliminate part of this core capital ratio pressure on our 2026 numbers. Thank you. [Non-English content]
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I'm [Park Soo-Won], the Head of the Risk Management Team. As far as we understand, the financial authorities are currently considering specific ways as to how they are going to introduce core capital solvency regime, but no details have been communicated to the industry as of now. However, what we've been doing is that the Life Insurance Association has already submitted an opinion to the financial authority saying that under the European Solvency II regime, CSM is included as part of the core capital. So our opinion was that Korea should also consider this approach as well.
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Currently under the K-ICS regime, CSM is recognized as part of available capital, but it's not really core capital, but supplementary capital. However, under the European Solvency II regime, CSM is included as core capital. So if this approach is adopted in Korea, this is going to help boost our core capital ratio. However, it does not make any change to the available capital size in principle. No discussions or open discussions have been made between the industry and the authorities. So if there are more official discussions that begin in the future, we will actively suggest and make recommendations. Thank you.
Does that answer your question?
Thank you very much.
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[Non-English content] . The following question will be presented by Slava Shilin from ANZ. Please go ahead with your question.
Good morning everybody. I have one question and one follow-up, please. The question is, what has been the trend in terms of policy surrenders in South Korea life insurance sector generally, and what Hanwha Life's experience has been so far this year? And do you think that this is something that could potentially impact the profitability of life part of the P&L for Hanwha Life going forward?
The second question is, we're honestly really confused about this CSM question. We've just been pulling out all the regulations of IFRS 17, European Solvency II, and it clearly states that in Europe, CSM is not recognized as part of core capital, it's part of liabilities. We are just trying to figure out what exactly is available to Hanwha Life to boost its capital ratios going forward, because it's clearly on a declining trend, right? And as distinct investors, we just do not have the comfort of feeling how can you manage it on your own, even forgetting all the regulatory potential changes. If you could give us any specific indication of how exactly can the company turn around the trend, that would be really appreciated. Thank you.
Can you clarify on the first question? What was the trend that you wanted to know about?
Policy surrenders in life insurance.
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I am [Park Soo-Won], the Head of the Risk Management Team. Let me first comment on the relationship between CSM and liability or K-ICS solvency, how CSM is treated under two separate regimes. Under the accounting regime in Europe and Korea, CSM is, of course, liability. But under the solvency regulatory regime, which is K-ICS in Korea, the CSM is categorized as supplementary capital. Under the Solvency II regime, CSM is part of the core capital.
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Moving on to your second question on our own efforts as to managing our solvency ratio. We will continue to strive to increase our core capital ratio and the K-ICS ratio. To do so, we need, on one hand, to continue to generate more profit, and on the other hand, we should work to reduce required capital. Our priority right now is on reducing the required capital side.
Now, in preparation for potential falls in interest rates, we will increase the portion of core insurance so that this can lead to less burden on the liability side. At the same time, we will continue to hold the sizable holdings in our portfolio for long-term bonds or long-tenured bonds so that we can manage the duration gap more effectively. In addition, the government has already announced that it will soon introduce the internal model approval system, which is similar to Solvency II. We are planning to utilize this internal model approach, and this will lead to a positive contribution to our solvency ratio by reducing the required capital. At the same time, to reduce investment-related risk amount, we will continue to strengthen our risk management on certificates of benefits, including utilizing a look-through approach.
I am [Song Jong-hyuk], the Head of the Marketing Enhancement Team. Let me comment on the surrender trends. In the third quarter of 2025, the 13th-month persistency ratio was 89%, which is far above the industry average, both life and non-life. For our 25th-month persistency ratio, thanks to the improved persistency of policies for health insurance and annuities, the persistency ratio has improved by 15.8 percentage points from 2024. From the very beginning of solicitation and customer acquisition, our number one priority is to minimize surrender and maximize persistency. That's what we've been doing to improve the 13th-month and the 25th-month persistency ratio.
We've been building a foundation for long-term maintenance of these insurance policies because long-term persistency has a contribution to increase CSM. At the same time, we will continue to promote complete sales for customer preferences and enhance their customer service so that our customers can better satisfy with our products.
I am Kim Jun-il from the Actuary Team, and let me comment on the impact of potential increase in surrender rates on our financials. If the surrender rate increases, it will lead to an adjustment to experience variance, and it will have an impact on the valuation of the in-force CSM or in-force policies. This is what we call the experience variance adjustment. When surrender rates go up, there will be more adjustment to the CSM, which will lead to a smaller CSM size, therefore, having a negative impact on our net profit. As was mentioned previously, our persistency has been improving. As our CFO mentioned, experience variance adjustment has been on the decline. I believe that this will have a positive net effect on our recurring CSM.
Any further questions you have?
No, all good.
Thank you.
The following question will be presented by Jason Tan from LG Asset Management. Please go ahead with your question.
My question is on your K-ICS ratio again. I just want to understand a bit more about your Q-on-Q movement for K-ICS ratio. Are you able to explain what are the drivers that led to a net -4% points move downwards in your K-ICS ratio for this quarter? That's the first question. My second question is on your use of internal model. I spoke to some of your team before, and you mentioned that it would add 10% points to K-ICS if it's approved. Can we get an update on this number as well as any timeline for implementation? Thank you.
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Yes, this is the Risk Management Team Leader. First, let me tell you the main reasons for the increase and decrease in the K-ICS ratio in Q3. The K-ICS ratio is expected to drop by 3.6% from 160% in June to 157% in September. The main negative factors are the impact of experience variance adjustment, which reduced the K-ICS ratio by 3%, and an increase in required capital due to insurance risk, which reduced it by 2%. In addition, the impact of Velocity Clearing on value-at-risk reduced it by 1.5%. Interest rates rose between June and September, but the increase in 10-year yields was smaller than that of longer-term products such as 20-year yields. This difference had a negative impact of 1.5% points.
On the positive side, the increase in new business CSM led to an increase in the K-ICS ratio by 4% points, and earnings related to capital increases for subsidiaries such as Hanwha Investment & Securities were about 1% point up. [Non-English content]
Regarding the situation surrounding internal model adoption, we are focusing on using an internal model for insurance risk calculation. Currently, the authorities are in the process of revising the relevant regulations to introduce the internal model system. According to our own check, it seems that the government is preparing to revise the regulations by the end of this year. However, we will have to wait and see whether this will actually happen. If the regulations are indeed revised, starting from 2026, we believe that the government authorities will have prior consultations with insurance companies that are interested in applying for the internal model approval.
After such consultations are done, I believe the entire process of receiving applications and reviewing them and granting approvals will go ahead from the beginning of 2026 until the end of next year. As for its potential impact on our K-ICS ratio, the number that we communicated earlier was based on our own internal calculation. However, we have to wait and see because all the details are now in the making regarding the internal model approval system. We won't be able to give you any specific potential impact on our K-ICS ratio as of now. Overall, if our internal model is approved, this will have an impact of lowering required capital, which will have a positive impact on our K-ICS ratio in the future.
Okay. Any further questions?
No, thank you.
The following question will be presented by Heewon Choi from Morgan Stanley. Please go ahead with your question.
I am Heewon from Morgan Stanley. Thank you for taking my question while this has been over time than scheduled. I have a question regarding surrender value reserve related regulation. You mentioned that if regulations are changed in a more favorable manner, you will be able to resume dividend payout from 2025. But I'd like to understand in more specific detail as to what degree of regulatory improvement you need to be able to resume dividend payout to your shareholders from 2025. For instance, how much of a reduction in reserving requirements for new business or new policies versus the current level, and to what extent regulatory improvements are needed to secure distributable earnings according to the commercial law?
The second question is that I've seen a significant increase in your disposal gains and valuation gains from the general account in the third quarter. I'd like to understand if there's any portion of one-off gains.
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I am [Kim Dong-yup] from the Finance Team. Let me address your first question regarding regulatory changes. Currently, works are underway regarding regulatory improvements, so please understand that I won't be able to give you any specific details. I am Ichandru from the investment planning team. Let me address your second question.
As for our income gaining assets for the ANF purposes, in the first half of this year, we made preemptive investment in long-term funds. Also, as we issued overseas hybrid funds in June to match with this debt, we also increased the holding of overseas funds as well. There was some valuation gains from alternative assets and disposal gains from equity holdings. To manage our duration, there was some trading or replacing of domestic bonds with different tenors. In this process, disposal gains incurred. However, there was no one-off gains that we incurred from the third quarter.
The following question will be presented by Xiaoji Chi from Nikko Asset Management. Please go ahead with your question.
Can I check, for your CSM, if it were to be included in core capital, roughly what extent of impact can we expect? Thank you.
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I'm the Head of the Risk Management Team. If CSM is included in the core capital, it very much depends on whether the entire amount of CSM or part will be recognized, or partially. It's not easy, or as of now, it's not possible to give any specific impact. But what you can do is you can refer to our disclosed information, including the fact that our required capital today is about ₩13- ₩14 trillion. When you think about the size of CSM, then you can make an inference. But we'll have to see how this new policy will actually be implemented, in what manner.
Do you have any other further questions?
In terms of your K-ICS outlook for the year, I think previously it was 165% and now it is 155%. Can I know what is the reason for reducing it?
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I'm the Head of the Risk Management Team. The difference between what we shared with the market about our target K-ICS ratio for 2025 versus what we just mentioned today, yes, there is a difference. It's mainly because of the realization of experience variance or claims variance impact. Such an increase in claims variance has not only had an impact on our P&L, but also on our solvency ratio under the solvency regime, because we are supposed to set aside required capital for the experience variance risk amount. There is this impact of risk variance coefficient on our required capital side, which has led to a lowering of our K-ICS ratio.
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What I would also like to mention is that there was this big experience variance risk that we had to take into account in our required capital. But in the third quarter as well as the fourth quarter, we continue to make various efforts to reduce the experience variance and its risk. It has actually been on the decline from the fourth quarter, and I believe this trend will continue into next year. Its impact on the K-ICS ratio going forward is expected to be quite minimal.
Does that answer your question?
Yes. Thank you.
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The following question will be presented by Cheryl Cho from CHK AM. Please go ahead with your question.
Hello, management. Can you hear me?
Yes, we can hear you.
My question is also surrounding the K-ICS ratio as well. From my understanding, the previous few quarters, the K-ICS ratio has been on a downward trend, and part of it is attributed to the liability adjustment impact by where the discount rate has been strengthened given that it is required by the regulator. How should we expect this factor to impact your K-ICS ratio going forward? I realize there's some relaxation that's been put in place back in October this year. That's my first question.
My second question is regarding the recent Lotte Capital hybrid instrument, which has experienced some scrutiny because they have skipped coupon payments recently due to capital ratio not reaching the required threshold. Are you worried that post your acquisition of IGIS Asset Management, there would be further scrutiny by the regulator on how you service your hybrid debt coupon? That's my second question. My third question is around the asset quality of your investment. I see the delinquency ratio of your loan investment has been worsening. Can I understand more about this decline? Thanks.
I'm the Head of the Risk Management Team. Let me answer your first question. The original plan of the government was to extend the last observed term from 20 years to 30 years in just three years, the three-year window from 2025- 2027. That was the initial announcement, but recently the FSC decided to relax it a little bit so that the ultimate 30-year last observed term will be achieved not by 2027, but by 2035. It will not only benefit Hanwha Life, but also most insurance companies in the industry. With that in mind, we will continue to do our best to manage our K-ICS ratio in the medium and long term. Moving on to your second question regarding Lotte.
All we know is actually from the media reports, but as far as we understand, Lotte was given an order from the regulatory authorities to improve the management situation immediately. According to a standard hybrid debt issuance contract, you can see that if there is such an order granted from the government, imposed from the government to the issuer, then coupon payment will be deferred. That is the standard term of the contract.
The reason why it was imposed, the immediate correction measure from the government, according to what the media has reported, is that as a result of their management situation audit, it turned out that their capital adequacy level, as well as the capital adequacy management, is far below what was recommended. It is specific to this particular company. For us, we've been managing our K-ICS ratio and the conducted risk management under the government's rules, and such a situation is not applicable to Hanwha Life.
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I'm Lee Seung-Woo, Head of the Investment Planning Team. You mentioned about some decline in asset quality for our investment, but this is not sizable at all, and it is temporary per se, because we're in the process of working with various asset managers in managing our asset quality. We've been introducing and utilizing a very extensive credit screening process for loan assets as well, so that we can acquire high quality customers while strictly managing less performing assets. This is not going to continue as a trend. Do you have any further questions?
Thank you very much.
The following question will be presented by Theo Hadijaja from JP Morgan Asset Management. Please go ahead with your question.
Thank you very much for taking my question again. Can I ask in terms of your thoughts on the credit ratings currently? I think the ratings are at single A from the three agencies. What's your intention in terms of the credit ratings? Do you see these single A ratings as the ratings that you would like to maintain at minimum?
Thank you for the question. I am the IR team head, and so we've got A+ from Fitch and Moody's, and A positive from S&P. For the remaining agency, S&P, we will soon be able to work to upgrade our credit rating so that we can maintain a good level of credit rating going forward. Do you have any further questions?
Is that the minimum credit ratings that you would like to maintain, so you don't want downgrades from your current ratings?
Of course, we are aspiring to get a higher rating than what it is. When you look at the historical trends for Hanwha Life, we used to be rated A+, and then there was some dip in our rating, and recently we're able to normalize it to the previous level. And we will continue to manage our profitability and growth potential so that we can upgrade our credit rating in the long run. Does that answer your question?