Edited Transcript of 000810.KS earnings conference call or presentation 18-Aug-20 7:00am GMT

On Page 3, the auto insurance revenue was up 12.7% year-on-year, thanks to the growth in the direct channels. The combined ratio was down 3.9 percentage points year-on-year to post 100.1%. The loss ratio was down 2.8 percentage points, and the expense ratio was also improved 1.1 percentage points on the back of expansion of the direct channel and the efforts to cut expenses.

Turning to Page 4. General insurance revenue grew 7.6% year-on-year, thanks to the growth of the domestic revenue. And the net premiums earned grew 6.4%, but the underwriting profit declined due to some large claim events in Korea.

On Page 5, despite the decline in the running yield due to the low interest rate trend, the investment profit was up 1.4% year-on-year, thanks to the disposal gains related to equity and alternative investments. The investment yield is 2.9%, and the adjusted yield is 3.3%.

On Page 6, the asset liability spread margin as of the end of June was down 6 basis points from the end of last year to post 28 basis points and the duration matching ratio is 80%. The RBC ratio is down 34 percentage points compared to the end of June last year to post 319%.

Now I’d like to share with you our strategic direction for the second half of the year. First, we will accelerate the process of improving the quality of the insurance portfolio to drive profit growth. Specifically, as for long-term line, the company will continue to focus on quality growth to achieve a stable increase of protection premiums and recurring premiums, which are the basis for future earnings. To this end, we will expand the portion of high profit policies in the portfolio and improve persistency in all channels.

For auto insurance, we will continue to make efforts to increase the share of higher-margin direct channels and expand the portion of high-value covers.

Next, Samsung Fire & Marine will solidify the foundation for stable underwriting profit. In the long-term line, we will put stricter control on non-NHI covered medical costs for indemnity insurance and improved distribution cost efficiency. In the auto line, we will manage hospitals and repair shops more efficiently and provide active support for regulatory improvement initiatives in order to make the auto insurance business profitable.

In the general line, we will expand marketing on high-margin covers and continue to cultivate high-growth markets, including mobile phone insurance. We will also implement differentiation in terms of underwriting and pricing according to cover type and business type in order to stabilize the profit trend.

In terms of asset management, we will proactively manage risks in response to delayed economic recovery and greater market volatility and strengthen the portfolio centered on quality assets. In response to the recent decline in long-term rates, we will defend the investment yield through flexible management of the offer grades.

Finally, I’d like to share with you our view on the competitiveness of Samsung Fire & Marine in 3 domains, namely insurance business competitiveness, digital competitiveness and future business competitiveness.

First of all, Samsung Fire & Marine has competitive edge in conducting insurance business. While the market is highly interested in long-term risk loss ratio, our risk loss ratio, excluding IBNR, remains lower than the top 4 peers. The portion of medical indemnity in the risk premiums is 32%, which is 5.6 percentage points lower than the peers as a result of stricter risk management based on conservative product portfolio and underwriting.

Auto insurance loss ratio tends to be cyclical depending on rate changes, but we are now in the auto underwriting recovery cycle. And as such, we’re focusing on expanding profit base. Our market share in the direct channel remained strong at 30% despite new entrants, and our combined ratio trend is more stable than the peers, thanks to differentiated loss management.

Profitability of general insurance was negatively affected by large claims events last year, but thanks to the acquisition of high-quality policies, the loss ratio is still lower than the peers. In addition, profitability of overseas operation is stable, and we’re accelerating partnership for growth together with foreign partners, which I will elaborate more on later.

As for asset management, the portion of interest-bearing assets is 8 percentage points higher than the peers, and the portion of floating rate reserves is 74%, which is 24 percentage points higher than the peers. It means that the company has an investment structure that can generate stable returns while complying with the ALM principles. Also, in terms of the quality of investment income, unlike other companies that have sold off large amounts of assets, Samsung Fire & Marine is maintaining a decent spread margin.

Second, we are boosting digital competitiveness. Samsung Fire & Marine is promoting innovation seamlessly, not just to improve business efficiency, but to use innovation to create new business opportunities. Specifically, we are in the middle of innovating the entire insurance value chain, including distribution types and channels, underwriting and claims management, and we’re carefully studying cases like Walmart, where traditional companies have transformed themselves into digital enterprises.

Launched 11 years ago, our direct auto insurance has become a giant online platform that has 2.73 million in-force policyholders as of the first half of this year, 93% of insurance renewal rate, 160,000 daily visitors to Samsung Direct website, monthly revenue of KRW 210 billion and the market share of more than 50% in the pure online market. We will maximize the value of this platform.

Our strategy is to maintain and strengthen the absolute leadership in the industry in the post-CORONA era by expanding digital business and restructuring the organization to support digital transformation. As an industry leader, we will successfully respond to various types of competition that will be emerging in the future. Specifically, Samsung Fire & Marine will expand the scope and sophistication of Samsung Direct for auto insurance and any fit for long-term insurance. Also, new technologies and innovation developed by Korean and (inaudible) start-up companies invested through the CVC fund will be constantly incorporated in our core business competency. Likewise, we are pursuing differentiations in areas that our competitors find challenging.

Finally, let me report on future business competitiveness. Samsung Fire & Marine is attending Board meetings of Canopius, #4 Lloyd’s company, and specific discussions are underway to promote joint growth. We will actively seek opportunities for profit growth in the Lloyd’s market that is quickly becoming a hard market after COVID-19 outbreak. To overcome the limitation of the domestic general insurance market, we will implement a regional hedging strategy by constructing a triangular portfolio that covers the Lloyd’s, the U.S. and the Asian emerging markets. Also, we will promote a stable and sustainable profit trend by employing our portfolio approach to risk underwriting in Korea and overseas.

In conclusion, based on our competitive edge in core business — core insurance business, Samsung Fire & Marine will strengthen its digital and future business capabilities to achieve differentiation in Korea and solidify its leadership position in the middle of structural changes taking place in the insurance business environment. In doing so, we will continue to cultivate sustainable sources of competitiveness to produce solid business results.

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Chang Joon, Samsung Fire & Marine Insurance Co., Ltd. – Head of IR [4]

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[Interpreted] Now we will have a Q&A session. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(foreign language) The first question will be provided by Do Ha Kim from Cape Investment & Securities.

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Do Ha Kim, Cape Investment & Securities Co., Ltd., Research Division – Analyst [2]

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[Interpreted] I am Kim Do Ha from Cape Investment & Securities. I’d like to post 2 questions. First of all, I’d like to know how I should interpret the earnings results for Q2 which was about 10% better than the market expectation? In the past, Samsung Fire & Marine did not create additional disposal gains in the midst of low interest rate trend. And that was the stance that I understood. However, in Q2, there was a disposal gain of securities available for sale, which amounted to KRW 110 billion, which is much higher than the usual level of KRW 30 billion in previous quarters. So I’d like to know whether this was the result of your portfolio restructuring process? Or was there any reason behind this change? And at the same time, in the portfolio, the portion of fixed income securities has increased on a Q-o-Q basis. So I’d like to know a little bit more about the background behind these changes in your investment. Secondly, when we look at the direct premiums written for long-term insurance, there was a decline. Since 2018, Samsung Fire & Marine has recorded growth in new premium for long-term insurance. However, the growth has been declining in the past quarter. So I’d like to know whether this was related to the lower persistency, especially the 25th month persistency for long-term insurance policies? So my question is rather, your projection for the future of long-term business? And what is your strategy to bring about further growth of long-term line?

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Unidentified Company Representative, [3]

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[Interpreted] I am [Park Chang-Hun] from the finance planning team. Let me address your question on the disposal gains. In — like in the past, we did not dispose assets on purpose to drive up investment yield. But as you can see, the numbers for the first half of this year was higher, and there are 2 reasons. First of all, we disposed some equity stakes because there was a better stock market, and we wanted to benefit from that. So that was additional KRW 30 billion of equity disposal gains. And secondly, there were some disposal gains coming from the real estate property funds, which amounted to about KRW 30 billion. So to combining them together, there was an additional disposal gain of KRW 60 billion on a Q-o-Q basis. In the meantime, the disposal gains from the fixed income assets was similar to the previous quarter.

Also to explain the reason behind the increase of beneficial certificates in the portfolio, it was not direct lending, but rather, our exposure increased to loan funds.

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. – CFO, Senior VP & Director [4]

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[Interpreted] I’m CFO Bae. Before we invite an answer to the second question, I’d like to provide some additional comments on our disposal gains from fixed income assets. The level of disposal gains from the fixed assets were similar to the previous quarters, as was explained. Let me give you some background about the reason for the fixed income disposal gains. In the midst of COVID-19 outbreak, we did not sell off these fixed assets to drive up the investment yield, but rather, in order to secure more liquidity as a result of our cash flow analysis, we decided to dispose some fixed income assets.

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Unidentified Company Representative, [5]

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[Interpreted] I am (inaudible) from the Marketing Planning Department. Let me comment on the question related to the 25th month persistency ratio decline. There were several reasons why there was such a decline for the 25th month persistency ratio. It was mainly due to some poor quality policies that have entered into our portfolio during the market competition in 2018 and 2019. However, as a result of improvement in the product portfolio and as a result of replacing in-force policies with better policies, there has been improvement. So going forward, in the future, while new business volume may decline slightly, we believe that quality of the portfolio will improve continuously. We will continue to replace lower quality policies with better quality policies. And at the same time, we will continue to manage the persistency levels. Currently, the second or to the 13th month persistency ratios are improving in terms of trend, and we expect that with the acquisition of better quality policies for this insurance portfolio, we believe that the longer-term persistency ratios will gradually…

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Operator [6]

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(foreign language) The following question will be presented by Kim Jin-Sang from Hyundai Investments.

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division – Analyst [7]

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[Interpreted] I’d like to pose 2 questions. The first question is related to the protection and health insurance growth trend. It was mentioned briefly in responding to the previous question, we can see that there has been a slowdown in the growth of protection and health insurance business for Samsung Fire & Marine. There may be some lagging effect for the expense ratio. But in the first half of the year, there was not a major improvement in the expense ratio as well. It’s still pretty high. You mentioned that the company is focusing on quality growth, but I believe that you still have a growth target for the protection business for this year. So please share that with us. What is your projection for this business going forward?

The second question is related to the long-term risk loss ratio. The industry is becoming more confident about managing the auto loss ratio. But when it comes to the long-term risk loss ratio, it is rather difficult to have some visibility, and there seems to be a lower level of confidence in conducting long-term insurance business. It may be quite difficult, but what is your projection for the future trend? The CFO mentioned in his presentation that the portion of indemnity premiums and indemnity reserves is lower than the peers, and he mentioned that it is an advantage for Samsung Fire & Marine. But it may have to do with IBNR, but I see that it’s not that lower than the peers. So what is your overall strategy and the projection for the trend going forward?

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Unidentified Company Representative, [8]

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[Interpreted] I am (inaudible) from the Marketing Planning Department. Let me comment on the first question on our protection new business target. As was mentioned previously, in the first half of this year, our protection new premium level was similar to the previous years, and we have been maintaining a similar market share. In the future, we don’t have a plan to push for a higher market share, but rather, we will go in line with the growth rate of the overall industry and the overall market. In case of fierce competition that may negatively affect our margin, we will not engage in such fierce competition. I’d like to make that very clear once again. But we will continue to monitor the market situation and respond accordingly.

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Jeong Byung-rock, Samsung Fire & Marine Insurance Co., Ltd. – Head of Long-term product development team & Executive Director [9]

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[Interpreted] I’m [Jeong Byung] from the Long-Term Profit Management Department. Let me comment on the projection for the expense ratio trend. As you may know, the portion of commissions for the long-term insurance takes up the largest portion of the expenses and the acquisition costs for long-term insurance are reflected in the initial months and initial years. And that is why there was an increase in the worsening of the expense ratio. Since the third quarter of last year, there was an increase in health insurance revenue, and that was the impact. And this year, in the first quarter and the second quarter, there was a decline of new business growth about KRW 15.2 billion to KRW 15.7 billion on a monthly basis. And going forward, I believe that the expenses will become more efficient. There was indeed the decline of expense ratio from the first quarter to the second quarter by 1.3 percentage points. And continue on with the future trends, we will focus on improving the quality of the insurance portfolio and try to improve the margin so that in the second half, there will be an improvement of the expense ratio going forward, which will become similar to the previous year.

I’m once again Jeong Byung from the Long-Term Profit Management Department. Let me give you an answer to the long-term risk loss ratio related question. In the second quarter, the long-term risk loss ratio was 89.2%, which was 3.8 percentage points higher, but this was mainly due to the additional IBNR reserving. And if we exclude the IBNR effect, the loss ratio is about 78.4%, which is similar to the level of the previous year. As you may be well aware, there’s still a substantial gap between Samsung Fire & Marine and the peers when it comes to loss ratios for both indemnity and non-indemnity covers. For the COVID-19 outbreak, the loss ratio was declining slightly. But in the post COVID-19, we believe that there will be additional usage of hospital medical treatments. And in the second half of the year, we expect that the loss amounts for the long-term line, especially the medical indemnity losses are going to increase.

So as I mentioned, we expect the loss ratio to be possibly worsening in the second half of the year as more people will utilize hospital services. And in response to these expected trends, we have 2 specific strategies. First of all, in terms of new business acquisition, we will continue to sell higher-margin covers and policies, especially non-medical indemnity policies such as best benefits and driver’s insurance in order to improve the quality of the portfolio. So the second strategy is about tighter claims management. We will closely monitor and put more stricter control on non-NHI items such as nutritional supplemental claims. And we have a separate organization, dealing with investigating any moral hazard issues that may arise as a result of indemnity services. And by implementing these strategies, we are going to improve the loss ratio. And we believe that the second half of the year, the loss ratio will be managed similar to the first year — first half.

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Operator [10]

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(foreign language) The following question will be presented by Seung-Gun Kang from KB Securities.

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Seung-Gun Kang, KB Securities Co., Ltd., Research Division – Research Analyst [11]

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[Interpreted] I’m Kang Seung-Gun from KB Securities. I have 2 questions. First of all, with the COVID-19 outbreak, the competitors have benefited from the COVID-19 outbreak because their long-term risk loss ratio has improved. But for Samsung Fire & Marine, even though we exclude the IBNR effect, the benefit was much smaller than the peers. So what is your understanding of the reason behind this difference? The second question is related to the RBC ratio. When we look at Page 6, there is the marking of the duration based on the internal guidelines, but when we apply the RBC guidelines, your liability duration is longer than 10 years. With the changes to the way interest rate risk loss rate — loss amount is calculated, your overall risk amount has increased, and that was the reason why your RBC ratio has declined. Normally, to respond to this change, companies may decide to increase the asset duration. Samsung Fire & Marine has not taken that route. So I’d like to know what was the reason behind this decision? And what is your target for the asset duration?

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Jeong Byung-rock, Samsung Fire & Marine Insurance Co., Ltd. – Head of Long-term product development team & Executive Director [12]

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[Interpreted] I am Jeong Byung from the Long-Term Profit Management Department. Let me answer the first question. Our long-term risk loss ratio has increased by 3.8 percentage points compared to last year. But excluding the IBNR, the figure comes down pretty substantially. I’d like to point out that companies have different timing of recognizing the IBNR additional reserves. For Samsung Fire & Marine, we recognized additional IBNR reserves in the second quarter. That was the reason why you may think that the improvement of the loss ratio was not substantial. But excluding the IBNR effect, the loss ratio is 78.4%, which is similar to the previous year. We still have a comfortable gap with the peers. And to give you some more specifics, the loss ratio for non-indemnity covers is 61.1%, and the loss ratio for medical indemnity covers is 111 — 115.5%. And in — so in both areas, we have a substantial gap between the peers.

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Che Bu Gyu, Samsung Fire & Marine Insurance Co., Ltd. – Executive Officer [13]

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[Interpreted] I’m Che Bu Gyu from the actuarial RM team. Let me answer your question on the RBC ratio.

As you pointed out, there were some regulatory strengthening measures. So the RBC ratio as of the end of June last year, which was 350%, has gone down to 319% by the end of June this year. It was mainly due to the changes to the way interest rate risk amount is calculated. As we have a higher portion of floating rate reserve, this was a bigger impact on us.

The portion of the floating rate reserves is more than 70%, which is the highest in the industry. However, in calculating the RBC interest rate risk and the RBC duration, there were some parts or sections where the floating rate reserves have higher risk amount compared to the fixed rate reserves in some portions, and that was the reason why there was some decline in the RBC ratio. However, our ratio is still higher than 300%. And when the K-ICS is implemented in 2023, there will be a more accurate reflection of the sensitivity to interest rate changes to each company, and this issue will be resolved.

As of today, we do not see any need for substantial changes to the ALM principles that we’re implementing in response to the K-ICS and in managing the RBC ratio. However, if we see that there is a substantial decline anticipated in our RBC ratio due to interest rate changes or stock price changes, then we may consider the option of introducing an internal model suggested by the FSS.

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Operator [14]

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(foreign language) The following question will be presented by Aditi Joshi from JPMorgan.

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Aditi Joshi, JPMorgan Chase & Co, Research Division – Analyst [15]

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This is Aditi Joshi from JPMorgan. I just have 1 question. Now the global bond yield, including the Korean bond yield is staying at very low levels, so that puts pressure on the solvency as well as on the earnings. So given Samsung Fire & Marine has a decent surplus amount in the LAT. So under the K-ICS, would it stay above the 100% level? If so, what would be the company’s broad estimation on free surplus amount? And also, will this surplus be included as part of the shareholders’ fund? Or will it still be the part of the liability reserves even after 3 years from now?

(foreign language)

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Che Bu Gyu, Samsung Fire & Marine Insurance Co., Ltd. – Executive Officer [16]

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[Interpreted] I am Che Bu Gyu from the actuarial RM team. In responding to your question, we do occur — we do incur the LAT surpluses right now. And even when the K-ICS and the IFRS 17 are introduced, we believe that the surplus level will be maintained or increased.

Even though the interest rates in the market are continuing to be very low, we still are maintaining the spread margin of 30 basis and by effectively managing the offered rates and other rates, we are going to manage the spread margin.

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. – CFO, Senior VP & Director [17]

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[Interpreted] I’m CFO. I’d like to give you some comments on our shareholder return and dividend policy. The K-ICS and IFRS 17 related details have not been finally decided yet. But if these new regulations are introduced as scheduled as announced and when these new regulations are applied to all the P&C companies, then this will have some impact on the solvency regulations. And at that point in time in the future, Samsung Fire & Marine will have to conduct a comprehensive review of the capital policy and the shareholder return policy. So I can only answer in principle that we will review our capital policy in a comprehensive manner in responding to the regulatory changes.

I hope that I have answered your question.

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Operator [18]

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(foreign language) The following question will be presented by Sinyoung Park from Goldman Sachs.

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Sinyoung Park, Goldman Sachs Group, Inc., Research Division – Equity Analyst [19]

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[Interpreted] I’m Park Sinyoung from the Goldman Sachs. I have 1 question. When I look at the loss ratio trend for general insurance, it sometimes goes above 80%. In the past, we had good amount of captive volume, but we don’t really have that as much as we had in the past and the market has become softer. So these may be the reasons why we have some loss ratio issues here. What is your projection going forward? For instance, the combined ratio trend for the general insurance and the contribution of general insurance to your insurance income?

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Hee-Jong Cho, [20]

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[Interpreted] I’m [Cho Hee-Jong] from the commercial lines support team. Let me address your question. The loss ratio for general insurance has been trading a little over 80% recently. And as CFO mentioned, in the recent months, there were some large claims events, especially in the property insurance in Korea that have led to the increase in the loss ratio.

It is our view that such high claims events are not a trend but rather several one-off issues. In order to manage the loss ratio trend of general insurance in this economic downturn period, we are implementing active risk management and actively reviewing reinsurance policies to manage the loss ratio.

When we look at the loss ratio trend for the past 5 to 10 years, it was in the mid-50%. But due to the recent high claims accidents and events, it has gone up to early 70%. Our target for the combined ratio, that includes both the loss ratio and expense ratio is 85% because that is similar to the average level for the past 5 to 10 years.

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Operator [21]

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(foreign language) Currently, there are no participants with questions. (Operator Instructions)

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Chang Joon, Samsung Fire & Marine Insurance Co., Ltd. – Head of IR [22]

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[Interpreted] With no further questions, we would like to conclude the earnings conference for the first half of fiscal year 2020 for Samsung Fire & Marine. Thank you very much.

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