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Edited Transcript of 000810.KS earnings conference call or presentation 9-Aug-19 7:00am GMT

Q2 2019 Samsung Fire & Marine Insurance Co Ltd Earnings Call

Seoul Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Samsung Fire & Marine Insurance Co Ltd earnings conference call or presentation Friday, August 9, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chang Joon

Samsung Fire & Marine Insurance Co., Ltd. - Head of IR

* Jeong Byung-rock

Samsung Fire & Marine Insurance Co., Ltd. - Head of Long-term product development team & Executive Director

* Tae-Yeong Bae

Samsung Fire & Marine Insurance Co., Ltd. - CFO, Senior VP & Director

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Conference Call Participants

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* Byung Gun Lee

DB Financial Investment Co., Ltd., Research Division - Team Leader

* Jin-Sang Kim

HMC Investment Securities Co., Ltd., Research Division - Analyst

* Myung Wook Kim

JP Morgan Chase & Co, Research Division - VP

* Sara Lee

Morgan Stanley, Research Division - Executive Director

* Seung-Gun Kang

HI Investment & Securities Co., Ltd., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good morning, and good evening. First of all, thank you all for joining this conference call. And now we will begin the conference of the fiscal year 2019 second quarter earnings results by Samsung Fire & Marine Insurance. This conference will start with the presentation followed by a divisional Q&A session. (Operator Instructions) Now we shall commence the presentation by Samsung Fire & Marine Insurance.

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Chang Joon, Samsung Fire & Marine Insurance Co., Ltd. - Head of IR [2]

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[Interpreted] Good afternoon. I am [Joon Chang Ho] IR part Leader at Samsung Fire & Marine. Thank you so much for joining our conference call for the first half of 2019. Today, CFO, Bae Tae-Yeong will give a presentation on the first half of 2019 earnings results as well as the future outlook, which will be followed by a Q&A session with the participating executives. Our CFO, Bae will start the report.

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. - CFO, Senior VP & Director [3]

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[Interpreted] Good afternoon, I am CFO, Bae Tae-Yeong. Let me start the report on the first half of 2019. On Page 1, the direct premium written grew 2.1% year-over-year to post KRW 9.3 trillion. The net profit was down 36% year-over-year to post KRW 426.1 billion. However, excluding one-off disposal gains of Samsung Electronics stake in the second quarter of last year, the rate of decline was actually 22.3%. The RBC ratio was up 33 percentage points year-on-year to record 353%, which is the highest in the industry.

On Page 2, the long-term line recorded a 17.7% growth year-over-year, driven by the balanced growth across the channels focused on the health insurance. The risk premium earned grew 6.1% year-over-year to post KRW 1.6531 trillion. Risk loss ratio in the first half of this year was up 3 percentage points to 81.9%. However, the risk loss ratio in Q2 was 81.4%, which was lower than 82.4% in Q1. Expense ratio was up 1 percentage point year-over-year to 22.5% for the first half of this year. However, the ratio in Q2 was 22.1%, which is down 0.8 percentage points from the Q1 figure.

On Page 3, in the auto line, the revenue from the online channel, which incurs lower combined ratio has increased. The loss ratio recorded 87%, up 6.0 percentage points year-over-year due to the increase in the loss per claim for 2 consecutive quarters.

Turning to Page 4. General Insurance revenue was slightly up 0.3% year-on-year but the recurring premiums grew 6.8% on the back of increase in inward business. The underwriting profit fell 63.9% year-on-year, mainly due to one-off events, including KRW 40 billion flood damages in the Middle East.

On Page 5, the investment profit decreased 12% year-over-year, but it grew 2.9% when excluding the one-off gains last year. The investment yield is 3.0% and the adjusted yield is 3.3%, excluding unrealized gains and losses on the book value.

On Page 6, the asset-liability spread margin as of the end of June was down 3 basis points from the end of last year to 36 basis points. The asset-liability duration matching ratio is 84%.

This has been the report on the first half earnings results. And now I would like to move on to the future outlook. The long-term line growth will continue to be centered on health insurance new business. For this, we will pursue a balanced growth across different channels and enhance the competitiveness of the existing products. Also we will strengthen medical indemnity claims adjustment to manage the loss ratio.

In the auto line, we will continue to focus on high-quality customers, while presenting loss ratio increase by effectively reducing excess claims and securing sufficient margins.

As for general insurance, we will continue to advance into fast-growing markets, such as policy insurance and mobile phone insurance. Also to secure a stable source of profit, we will offer differentiated products and underwriting by region in the overseas markets.

The asset management strategy will center on diversifying the portfolio by increasing exposures to dividend assets and corporate loans, in order to respond to greater market uncertainties. Finally, I'd like to add a point, I believe that Samsung Fire & Marine is similar to a bicycle instead of a unicycle. A bicycle has 2 wheels and here the 2 wheels refer to on one side the market dominance and on the other side profitability. Driving 2 wheels at the same time requires much more management capabilities than riding a unicycle and it will guarantee us future sustainability in our growth. So we will do our best to drive the 2 wheels in a balanced manner going forward.

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

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [2]

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[Interpreted] I am Byung Gun from DB Financial Investment. It was quite impressive that you compared Samsung Fire & Marine as a bicycle instead of a unicycle. So in this regard, I'd like to ask you 2 questions. The first question is that when you look at the first quarter, monthly average for health insurance revenue it was KRW 13.8 billion. However, in Q2 it was KRW 12.7 billion. And when you look at the month of July, it was KRW 15.4 billion. So this was smaller than the rest by about KRW 200 million, according to the media report. So starting from the end of July, Samsung Fire & Marine has been selling coverages related to the brain diseases as well as cancer products. So according to the media reports, these products have been selling pretty well in August. So my question is that it seems that the competition in the industry is continuing as was before. And you mentioned that Samsung Fire & Marine is putting priority on maintaining market leadership. And that was the answer you provided in the first quarter earnings conference. However, the market is concerned about overheating of the competition in this industry. So when we look at the kind of products you are selling mainly in July and August, it seems that these coverages would lead to higher loss ratio because of the characteristics of the coverages. And then when we look at these products alone for July and August, can we say that these will have a substantial impact on your loss ratio?

The second question is that you said that you are emphasizing the maintenance of market dominance and market leadership. Does it mean that when the competitors are continuing on with this type of competition in the third quarter, are you planning to push for new business growth as you did in July? And are you planning to continue to use your expenses for this regard?

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Jeong Byung-rock, Samsung Fire & Marine Insurance Co., Ltd. - Head of Long-term product development team & Executive Director [3]

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[Interpreted] I am Jeong Byung-rock from long-term product development team. Let me answer your first question. As we pointed out since last year, there has been a lot of market competition, which is related to underwriting. As per your question, the kind of coverages we are underwriting are indeed the kinds of risky coverages that we refrained from telling in the past.

And as per for the sales of the coverages that I just mentioned and the limit of underwriting, there were some changes in July. And there are 2 reasons. First of all, we, of course, had to respond to the competition landscape in the industry. However, we also realized that for were areas where we were not utilizing our strengths enough.

And to further elaborate, Samsung Fire & Marine has been taking conservative stance in terms of setting the risk levels for these coverages. So while we have conservative stance on risk profile allocation for the coverages, we have been maintaining a similar underwriting limit similar to our competitors. However, after internal review in July, we have upwardly adjusted this limit.

However, just because we increased the underwriting limit, doesn't mean that we used it to the full capacity because right now the utilization rate is about 50%, which is similar to market average. At the same time, we have been effectively utilizing the risk-taking approach using reinsurance.

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Unidentified Company Representative, [4]

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[Interpreted] I am (inaudible) from product customer planning department, let me answer your second question. It is my understanding that you want to know Samsung Fire & Marine's approach when the competitors continue on with their channel strategy and underwriting strategy in the third quarter.

And as for Samsung Fire & Marine, we're not just competing in terms of revenue size or market share, but rather we are trying to cater to market customers' needs in terms of channels. It is true that there has been increasing market demand for high-risk coverages and as a result, the competitors are acquiring new customers in this domain.

And going forward, we will continue to exercise our leadership and also channel policies in order to cater to changing our customer needs by utilizing our reinsurance strategy as well as -- to an extent where it will not have negative impact on our embedded value. However, if the competitors in the industry continue on with very high-risk coverages or take actions that will exceed our risk appetite, we will have internal consideration and review in order to seriously deal with the situation.

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Byung Gun Lee, DB Financial Investment Co., Ltd., Research Division - Team Leader [5]

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[Interpreted] I have one quick follow-up question. As for your level of spending on promotions and incentives and commissions, is it correct for us to understand that you will continue to maintain the similar stance?

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Unidentified Company Representative, [6]

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[Interpreted] I'm (inaudible) from the marketing team. Let me answer your question once again. As for our promotion and commission spending since 2017, when you look at the details of this book, there has not been any substantial change. Of course, when you look at the trend over time, there were sometimes and segments where we temporarily increased the promotion spending. However, when you look at the total amount and the total pattern, it has been similar.

We are complying with the guidelines provided by the Financial Supervisory Service. And as for competitors who are spending a lot more on promotions and incentives to acquire new customers, we have been prudent and cautious in responding to the heated competition, and we will continue to follow-on with our internal regulations.

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Operator [7]

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[Interpreted] The next question will be presented by Seung-Gun Kang from HI Investments & Securities.

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Seung-Gun Kang, HI Investment & Securities Co., Ltd., Research Division - Research Analyst [8]

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[Interpreted] I'm Seung-Gun Kang from HI Investments & Securities. I have questions related to medical indemnity and long-term risk loss ratio. Compared to the other players in the industry, Samsung Fire & Marine has been managing the risk loss ratio pretty well. However, when you look at the recent trend, the increase of risk loss ratio has been quite concerning. And I'm sure you have had many internal discussions, but it is hard to make a prediction on the second half of this year. So what is your outlook on the second half of this year? So that's my question -- the first question.

And the second question is, in your presentation, you mentioned that you will strengthen the medical indemnity claims adjustments and you will do your best to reflect cost increase in your pricing. However, there are some concerns as to whether premium hikes would be possible in January next year. So given the current loss ratio trend and profile, do you feel that there is a need for premium hikes? And if so to what extent premium hikes would be necessary? And if you are preparing for that. What is the timing? And what is the scope of this premium increase?

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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-rock from long-term product development team. Let me answer your question regarding real loss indemnity. Well, the recent long-term risk loss ratio increase has been mainly driven by the increase in the loss ratio for medical indemnity. And for us as well, it has increased by about 10 percentage points year-over-year.

Now this can be mainly attributed to the fact that pricing for medical indemnity will follow what's actually happening in terms of its structure. However, due to policy regulations, we have not been able to increase our premium rates or would have to lower them. And as for pricing adjustment last year, we reflected the increase in loss ratio, and we also reflected in the changes in the protection coverages. The stance for this year is going to be similar to what we had last year. So what is currently going on is that we are checking on and making a review on the impact of protection strengthening that we implemented last year. And this year, as the industry as a whole, the companies in this industry has made a recommendation to the government in order to reflect the elements of loss ratio increase in the pricing.

So contrary to what the market may be concerned about, there may not be any major differences between last year and this year. However, when it comes to the timing, the timing of the final details are being decided for the reflection of pricing for this year may be postponed compared to last year.

And right now, there are many policy discussions going on, and there is a lot of communication happening between the industry and the government authority. So we hope, and we believe that there will be some rational ways to reflect these increases in our pricing.

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Unidentified Company Representative, [10]

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[Interpreted] I'm [Choi Bu Gyu] from long-term insurance support team. Let me answer your question regarding the outlook on the loss ratio.

As was already mentioned, in the first half of this year, the increase in the long-term risk loss ratio was mainly driven by the increase in the medical indemnity loss ratio, which is 117%. When we consider that the share of this portion is about 30%, we can say that the increase in the long-term risk loss ratio was mainly driven by medical indemnity loss ratio growth.

As to the differentiated ways of managing our risk premiums in our portfolio compared to our competitors, there has been a growing gap between Samsung Fire & Marine and the competitor's in terms of loss ratio.

In order to manage the loss ratio, we have been strengthening the review process for NHI noncovered items for medical indemnity and also for other kinds of coverages.

So in addition to medical indemnity, where we strengthened review on non-NHI covered items but also we have been strengthening claims adjustment for death benefits and other high ticket claims. And also when it comes to property damages, we have been strengthening our process.

So thanks to these efforts to manage the loss ratio and the differentiated coverage portfolio, we believe that we can manage the long-term risk loss ratio to be around 82% by the end of this year.

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Seung-Gun Kang, HI Investment & Securities Co., Ltd., Research Division - Research Analyst [11]

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[Interpreted] I have a follow-up question. You mentioned that there may be some postponement in the reflection of pricing for medical indemnity, does that mean that the timing of premium hike would not be January next year, but it could be later than that?

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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'm Jeong Byung-rock from long-term product development team. What I meant by that was not what you just said. Rather when you look at our situation last year, the impact of increased coverage from the national health insurance was calculated pretty early. It was 6.15%. And only when we have this figure, we can decide on the expense of the premium hikes. And for this year, there is a process going on to determine the impact of NHI coverage expansion on the insurance companies. And only then we'll be able to reflect that in the premium hikes.

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Operator [13]

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[Interpreted] The next question will be presented by Jin-Sang Kim from Hyundai Motor Securities.

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [14]

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[Interpreted] I'm Kim Jin-Sang from Hyundai Motor Securities. I have 2 questions. The first question is related to pricing. Currently, the industry is arguing that there is a desperate need for increase in medical indemnity and auto premium rate. However, it is our understanding that the financial authorities and the governments are asking for the insurance companies to try to cover for such issues internally and only if these are not possible, then they may allow some price increase. So in terms of auto insurance premium adjustment and medical indemnity pricing change, in your view, do you think that the government will approve our price adjustment soon? What is your internal view or opinion on the government's stance on this issue? Do you think that the government will postpone the timing and will ultimately allow insurance companies to increase premium rates or do you think it may not be possible? And if the government does not allow companies to increase their premium rates, what are your ways of covering for these kinds of issues internally? And you mentioned, of course, in your presentation that you're trying to improve your processes and you're trying to take action internally. So based on your internal efforts, how much of your loss targets you have internally set for yourselves?

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Unidentified Company Representative, [15]

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[Interpreted] And as for your second question, because your second question was indeed was one-off issue on the Middle East flood damages. But what are the one-off issues related to the investment side in the second quarter? I'd like to know whether you're asking for any one-off issues in terms of the asset management for second quarter?

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [16]

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[Interpreted] When I said one-off issues, they are not necessarily related to investment only, for instance, for your auto insurance, there may be some high-claim events that you had to deal with so including them because for me though financial markets are struggling and there are many kinds of issues happening. So there may be some equity-type losses or there may be some valuation gains from the bond side because of the interest rate changes. So if possible, can you share with us any one-off issues that you have been recognizing?

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Unidentified Company Representative, [17]

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[Interpreted] I'm (inaudible) from the corporate management support team. Let me answer your second question first.

So from the investor's perspective, I understand that your question is whether there are any other one-off -- major one-off issues other than the flood cases in the Middle East in the second quarter. And as far as we understand, there has not been any major one-off issue.

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Jeong Byung-rock, Samsung Fire & Marine Insurance Co., Ltd. - Head of Long-term product development team & Executive Director [18]

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[Interpreted] I'm Jeong Byung-rock long-term product development team. Let me answer your question regarding medical indemnity. First, I'd like to say that there are key difference between real loss indemnity and auto insurance. As you know, our auto insurance is mandated by the government.

Because there's coincidence in terms of timing of premium hikes for the second half, we both have issues related to medical indemnity and auto insurance. And that is why you're asking this question because you want to know the implications of these.

As I mentioned before, when you look at the structure of premium rates for medical indemnity, they usually follow what already happens in the market. So in order to manage the loss ratio, insurance companies in the industry have been making a lot of efforts internally. And for the remaining portion that cannot be covered by internal efforts, there should be regulatory changes.

What I mean by regulatory changes, they include the IT system introduction for claims processing and also improving the infrastructure for non-NHI items. And when it comes to the premium adjustments, the premiums for medical indemnity have always been adjusted after reflecting the loss ratio. So the approach for last year will be the same as the approach for this year. There are talks about the strengthening of protection coverages and also the ballooning effect. But basically, the pricing is basically the settling after kind of approach, and this approach will be used for this year as well as last year.

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Unidentified Company Representative, [19]

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[Interpreted] I'm [Young Teh] from Automobile Insurance Product department. Let me answer your question related to auto premium hikes.

There have been talks about the third round of premium hikes for auto insurance, and officially, the government has not yet prevented us from doing so.

However, internally, we are concerned about burdens that may be imposed upon consumers if we increase premium rates one more round. So internally, we have been focusing on acquiring high-quality customers and managing the losses and also managing the cost of our expenses. And we do not have yet the specific figures to share with you.

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Unidentified Company Representative, [20]

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[Interpreted] Before we receive the next question I'd like to ask for your understanding that there are many people who are waiting in line for questioning opportunities. So I'd like to ask you to limit your questions to one per person.

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Operator [21]

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[Interpreted] The next question will be presented by Myung Wook Kim from JPMorgan.

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Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [22]

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[Interpreted] I am Kim Myung Wook from JPMorgan. I'd like to ask a question regarding your dividend policy. The earnings for the first half of 2019 have gone down significantly, and we do not know yet what will happen in the second half. But when we look at the overall trend, we expect that the earnings for the whole year are going to be lower than last year. You already have high dividend payout ratio and even if you increase the ratio further, we believe that dividend per share will have to go down. So what is your specific target for DPS for this year? And we understand that there are a lot of uncertainties regarding earnings results for the whole year, but you already have enough capital adequacy. So do you have any plans to introduce the progressive dividend policy? And also because the stock price right now is pretty low, I wonder if you have any plans to buy back some of the treasury shares in order to give back to the shareholders?

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. - CFO, Senior VP & Director [23]

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[Interpreted] I am CFO, Bae Tae-Yeong. Let me answer your question. As we are announcing the results for the first half of this year, I believe it is a little too early for us to discuss the specific dividend related figures, which will be decided next year. However, what I can say is that we will continue to consider the 3-year dividend policy we announced earlier this year as well as the expectations from the investors and the shareholders before we make the final decision on the dividend side. And overall, we have the -- and when it comes to the dividend and the capital policy, we already announced earlier this year about the 3-year dividend policy and approach already. And by the time the 3-year period is finished, we will consider various options, and we will consider various situations, and we will announce the midterm dividend policy once again then.

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Operator [24]

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[Interpreted] The next question will be presented by (inaudible) from Chase Investment & Securities.

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Unidentified Analyst, [25]

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[Interpreted]

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Operator [26]

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(foreign language) The next question will be presented by [Amit Mehra from Hermes Investment & Management].

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Unidentified Analyst, [27]

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I just wanted to ask 2 questions. The first question, I just wanted to understand is the trade-off that you're willing to take in terms of market share and having returns in operating profit losses across all businesses, except for now your general insurance, how sustainable is this? And how long do you think the capital ratios for your industry can sustain this as well, given that you're better capitalized than your peers? And then the second question is, can you just talk me through how your capital has improved year-on-year, despite your profits going down. Just to understand that how that has occurred in terms of any kind of changes in capital risk rates, et cetera for your business?

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Unidentified Company Representative, [28]

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[Interpreted] I am [Kim Woo Suk] from actuarial RM team. Let me answer your second question first.

When you look at our capital adequacy, the RBC ratio has increased by 33 percentage points to 353%. I can say that there are 3 reasons why we were able to be -- default our capital adequacy. First of all, the first one is related to interest rate fall. Because when you look at the 5-year sovereign bond rate, it went down from 2.4% to 1.5%. So there was a drop of 84 basis points. As a result, we were able to benefit from this falling interest rate, thus resulting in KRW 1.7 trillion of bond valuation gains.

And the second factor is that there was an increase in the bond exposure in our asset portfolio. As a result, there was a slight increase of risk by 0.3 percentage points.

And another negative factor was coming from the regulatory strengthening. The government has been strengthening the RBC regulations in preparation for the introduction of K-ICS. As a result, there was an increase in market and credit risk for retirement insurance, which had a negative impact of 8 percentage points.

In preparation for the introduction of IFRS 17 and K-ICS, Samsung Fire & Marine has been evaluating our capital adequacy using our own internal method, which is similar to the fault. So as a result of this internal calculation, our adequacy ratio is 250%, and we are continuing to make efforts to maintain this level that is similar to the global top tiers.

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. - CFO, Senior VP & Director [29]

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[Interpreted] I am Bae Tae-Yeong, CFO of Samsung Fire & Marine. Let me answer your first question. You asked about the trade-off between market share increase in the growth and the capital and the profit. We believe that using our expenses and making investments to grow our presence in the market will not necessarily hurt our capital spending. Of course, when you look at the overall trend in shorter time span, you may see that there are some negative impacts temporarily due to actuarial calculations. However, when we see Samsung Fire & Marine as going concern with the sustainable business model, when we continue to make investments and implement our costs in order to increase our market share in the health insurance and grow our new business, we'll further strengthen the market dominance. And as a result, we will be able to manage our recurring premium income, and we manage the persistency ratios. And overall, these will have positive impact on our capital and our profitability. So I do not think that there's any major trade-off issue in terms of sustainability and the capital spending. Does that answer your question?

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Unidentified Analyst, [30]

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Yes. I'm just conscious of how long you are willing to write business on combined ratios that are above 100%. So I appreciate in the longer term you can make money by your capital position and strength and hopefully underwriting coming back to you. Can you just give us a perspective on duration because, from this call, I get the impression the ability to raise prices is difficult? There could be some delays in 2020 from what you're telling us. And the competitive environment is still willing to underwrite more given what you've expressed about capital, you've seen for yourself has risen. So that gives these players longer to keep writing weak business. So can you kind of give us some time frame on the number of quarters or do you expect these combined ratios to be sitting above 100%?

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Unidentified Company Representative, [31]

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[Interpreted] I fully understand the intention behind your question. Unfortunately, when we are looking at the situations going forward, I do not think that we can talk about a specific time frame as to how many quarters or what year of this will continue because there's so much uncertainty in our operational environment. And the challenges that we're going through and not continue -- concerned about Samsung Fire & Marine but also other P&C companies in the industry. So there are constant discussions with the authorities and also with the consumer side, we have to take into consideration. So I wish I could tell you how many quarters this would go on or will be able to go on. But unfortunately, I will not be able to do so and I hope you will understand.

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. - CFO, Senior VP & Director [32]

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[Interpreted] I am once again CFO, Bae Tae-Yeong. Let me add a few points. When we look at the situation that is divided between medical indemnity and auto insurance. First, auto insurance, as you may know, is cyclical in terms of underwriting. So this year, we are making a lot of internal efforts to improve the margin and improve the profitability of auto insurance, and we believe that starting from next year, 2020, there will be the start of the upcycle in terms of auto underwriting cycle.

For medical indemnity, you talked about the combined ratio above 100% and that part, I understand. But at the same time, Samsung Fire & Marine increased volume and size from -- coming from the long-term line, especially health insurance are expected to have positive impact on our P&L as well as our business. Of course, it may lead to some issues related to combined ratio. So that type could be negative. However, we believe that there is much longer-term positive impact coming off of increased volume from the long-term line.

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Operator [33]

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[Interpreted] The next question will be presented by [Kim Hyun-Jong] from Hanwha Investment & Securities.

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Unidentified Analyst, [34]

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[Interpreted] I am [Kim Hyun-Jong] Hanwha Investment & Securities. I have one simple question related to medical indemnity rate adjustment. You mentioned that you're now in the process of calculating the extent of premium hikes for medical indemnity for next year. I remember that in the past, when the mundane care is introduced and when there is expected balloon effect, you may -- you are planning to implement the provisional reserves for this part as well. So is this something that you're considering in order to manage your loss ratio?

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Jeong Byung-rock, Samsung Fire & Marine Insurance Co., Ltd. - Head of Long-term product development team & Executive Director [35]

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[Interpreted] Jeong Byung-rock from the long-term product development team. Let me answer your questions. And yes, so we kind of talked about this in the past, however, when it comes to the impact of strengthened protection coverages for national health insurance, there are some talks about ballooning effect and also when it comes to the actual impact of non-NHI items on the loss ratio increase, these are the kinds of things that are under discussion right now. And this is indeed a matter of the impact, the net impact of the policy introduction on the loss ratios of the insurance companies. I understand that there is research going on commissioned by the government to a national research institute in order to calculate statistically the impact of policy introduction on the loss ratios of our industry, and we will have to see what the outcome of this research would be because right now, it is not easy for us to discuss the specific impact of the policy and the expected policy changes on our business operations.

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Operator [36]

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[Interpreted] The next question will be presented by [Amit Mehra] from [Hermes] Investment & Management.

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Unidentified Analyst, [37]

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What I wanted to also understand is the distribution channel. So your premium for the long-term insurance has increased significantly from the general agent. And I know that you've actively shifted to increase your penetration from that base. So a, I assume that is impacting your expense ratio, why that's going up year-on-year. And secondly, can you comment on the underwriting or the loss experience through that channel compared to your tied agent? So I'm just trying to understand are losses increasing as a result of the change in the distribution or is it just a general trend across both the tied and general agent that you're seeing? And I'm just -- if you can help on that. And then I know I did ask slightly the question on the peers. But are the peers not facing any capital pressure where they have to show more discipline on pricing?

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Unidentified Company Representative, [38]

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[Interpreted] I'm [Julie Smith] from the Channel Product Customer Planning Department. Let me answer your question related to the GA channel. Well, as for the industry as a whole, the portion of GA revenue has been growing. And of course, internally, when we look at the breakdown of channels with Samsung Fire & Marine, the portion of GA has been increasing. However, build of share of GA for us is much smaller than the ones of our competitors. When you look at the industry average, in the first half of 2019, for health insurance, for instance, the GA channel accounts for about 43% as a whole in the industry, but the figure for us is 23.6%. It is mainly because Samsung Fire & Marine has been relying mainly on the profitable GA channel. And of course, we have to respond to the market competition in the GA channel. However, we have not been as aggressive as other players. And going forward, we will continue to maintain a similar stance, we will respond to the market situation, and we will also cater to consumer needs, but we will not increase the portion of the GA channel dramatically going forward.

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Unidentified Company Representative, [39]

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[Interpreted] I'm [Choi Bu Gyu] from Long-term Insurance Support Team. Let me answer your question related to the expense ratio and the loss ratio from the GA channel. There was a prior mentioning of the portion of GA channel in our breakdown. As you can see because of the increase in protection-type new business coming from the GA channel, our expense ratio increased from 21.5% to 22.5%. When you refer to our presentation materials, the direct acquisition costs increased, however, the persistence management of maintenance cost has been slightly down. Because we have a smaller portion of GA in our business, the GA channel increase has relatively small impact on our expense ratio compared to the peers in the industry, and we are executing our expenses according to our annual plan. Well, let me now comment on the loss ratios by channel. As for Samsung Fire & Marine, there is no substantial difference in terms of loss ratio between the GA channel and the TA channel. Indeed, the loss ratio from the GA channel is slightly lower than that of the TA channel. It has much to do with legacy policies that we have been holding in our portfolio.

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Unidentified Company Representative, [40]

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[Interpreted] I'm [Kim Woo Suk] from the actuarial RM team. Let me answer your second part of the question. The previous answer was about the loss ratio and expense ratio from the GA channel, let me now talk about the EV side. The TA or the tied agent channel accounts for about 9% of the EV and GA channel, the rate would be 1% to 3% for EV calculation. So we're not expanding into the GA channel while sacrificing or compromising on the TA channel. Rather, while we maintain the TA channel, we increase the dominance or our presence in the GA channel, which will all lead to a greater embedded value for the company. And secondly, your question related to the heated competition in the industry having negative impact on capital of various players in the industry. With aggressive underwriting in the industry, of course, it will have a substantial negative impact on the P&L. And the impact will become much larger when the K-ICS and IFRS 17 are finally introduced. As for Samsung Fire & Marine, we have been implementing a strict ALM policy. So we have less impact coming off from the declining interest rates. So when you look at the asset liability spread margin as of the end of 2018, it was 38 basis points. And now it is in the range of 36 to 38 basis points. But when you look at the other companies in the industry, the spread has gone down by almost 1/3. So this means that there is a huge impact on other peers. And while we have heated competition going on with the new regulations introduced, those that have weaker capital position and weaker capital adequacy will struggle much more. I hope that has answered your question.

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Unidentified Analyst, [41]

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Just on the capital of the peers. I mean I understand your point they should be weaker, but why is that not impacting competition for underwriting?

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Unidentified Company Representative, [42]

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[Interpreted] To respond to your question, I'd like to just share with you my own personal view. Once again, this is my personal view. And I understand that the market itself right now is pretty competitive. And I think it's competition concerning who will be -- who will take the #2 position in the industry. And in the short term, this may bring about some positive impact. But in the long term, this would definitely burden on their capital. So I understand that different companies have different philosophies and different management approaches, but it's just my personal opinion that it may have substantial impact.

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Unidentified Company Representative, [43]

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[Interpreted] [Kim Woo Suk] from actuarial RM team expressed his own personal opinion, that does not represent the position of Samsung Fire & Marine. We are currently having a conference call for Samsung Fire & Marine, first half of this year. So I hope that there will be no questions related to our opinions on other companies in the industry. I hope you understand. I hope that has answered your questions.

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Operator [44]

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(foreign language) The next question will be presented by Sara Lee from Morgan Stanley Research.

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Sara Lee, Morgan Stanley, Research Division - Executive Director [45]

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[Interpreted] I'm Sara Lee from Morgan Stanley Research. Well, it may be too early to talk about earnings potential for the second half of this year. However, when we look at the current situation compared to last year, if the current trend continues, I believe that there is a substantial downside risk on your earnings. So in order to support the DPS level, you may possibly consider the options of gaining some capital gains by disposing some of your assets. So I'd like to know the management spends on these kinds of possibilities. In other words, you may not be able to increase the payouts coming from the earnings, but maybe to make up for the shortfall, you may consider some options.

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Tae-Yeong Bae, Samsung Fire & Marine Insurance Co., Ltd. - CFO, Senior VP & Director [46]

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[Interpreted] I'm CFO, Bae Tae-Yeong. I understand where your concerns are coming from. Samsung Fire & Marine has been doing the P&C insurance business for more than 60 years, and we believe that we have been walking the right path for all these years. There may be ups and downs in terms of earnings, however, the current issues are not just relevant to the Samsung Fire & Marine, but when you look at the medical indemnity issues and auto insurance issues, these are all affecting P&C companies in Korea as a whole. So therefore, we believe that selling some assets in order to make up for the EPS level is not one of the right path that we would like to walk. So we are not planning to dispose of any assets that are not part of the management plan that we set up for the year, just in order to return to the shareholders because this is only a time gap measure. And this kind of approach is not something that our long-term shareholders will appreciate. So we will take step by step in the right direction as we have been doing so far. (foreign language)

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Operator [47]

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(foreign language) There are no participants with questions. (Operator Instructions)

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Unidentified Company Representative, [48]

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[Interpreted] With no further questions, we'd now like to end the conference call for the first half of 2019 for Samsung Fire & Marine. Thank you so much for joining us.

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