U.S. Markets closed

Edited Transcript of 032830.KS earnings conference call or presentation 15-May-20 7:00am GMT

Q1 2020 Samsung Life Insurance Co Ltd Earnings Call

Chung-Gu, Seoul May 15, 2020 (Thomson StreetEvents) -- Edited Transcript of Samsung Life Insurance Co Ltd earnings conference call or presentation Friday, May 15, 2020 at 7:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Ho-Seok Yoo

* In Hwan Kim

Samsung Life Insurance Co., Ltd. - Head of IR

* Unkown Executive

================================================================================

Conference Call Participants

================================================================================

* Byung Gun Lee

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

* Myung Wook Kim

JP Morgan Chase & Co, Research Division - VP

* Yafei Tian

Citigroup Inc. Exchange Research - VP

================================================================================

Presentation

--------------------------------------------------------------------------------

In Hwan Kim, Samsung Life Insurance Co., Ltd. - Head of IR [1]

--------------------------------------------------------------------------------

Good afternoon, everyone. This is In-Hwan Kim, Head of Investor Relations. Thank you for joining us today for Samsung Life's 2020 First Quarter Earnings Presentation. Today's call is scheduled for 1 hour and 30 minutes. Starting with the earnings presentation delivered by our CFO, Mr. Ho-Seok Yoo; and followed by your questions, which will be addressed by the members of management team present here today. Please note that the figures in this presentation may be revised during the auditing process and any forward-looking statements, including the earnings outlook contained in today's conference call are subject to change, depending on both domestic and overseas market conditions and operating environment. Let me now hand over the presentation to our CFO, Mr. Ho-Seok Yoo.

--------------------------------------------------------------------------------

Ho-Seok Yoo, [2]

--------------------------------------------------------------------------------

Good afternoon. This is Ho-Seok Yoo, CFO of Samsung Life. Let me address the main results of the first quarter of 2020. During the first quarter, the company went through a tough business environment with the volatile financial market and nationwide social distancing practice due to the unprecedented COVID-19 outbreak. Despite the turbulence, the company achieved stable results, along with our continued efforts to improve corporate value through profitability-focused management. First, the value of new business, which shows the long-term profitability of our business recorded roughly the same level of the previous year. Insurance profit increased by 13%, reaching KRW 400 billion level for the first time since the fourth quarter of 2017. Investment yield achieved a modest number of 3.9% by timely sales of our investment assets, despite decline of interest rate and high volatility in stock market. The net profit for this quarter recorded KRW 230 billion, declined temporarily by 49% year-on-year, mainly due to the large loss from variable guarantee options and impairment loss from the falling stock market. But we are recovering from such losses as the financial market stabilizes in the second quarter and still maintaining the top-notch RBC ratio of 325% despite such losses.

I'll go over the value of new business results more specifically. The value of new business for the quarter recorded KRW 318 billion, declining 1.1% year-on-year. This is mainly due to the decrease of sales shares of high-margin health protection and a drop in net investment earnings rate despite the increase of both new business and protection APE. New business margin attained 45% -- 45.9%, decreasing by 1.6 percentage points year-on-year due to the drop in sales shares of health protection and the economic assumption changes.

Next I'll go over protection new business more in detail. Protection new business for the quarter increased by 8.8% year-on-year, which we consider a modest result given the tough sales environment caused by the COVID-19 outbreak. The company achieved results, thanks to our strong brand power and high-quality capital position, while utilizing a variety of untapped marketing tools such as online seminar amid the crisis. Looking more closely by product type, whole life increased by 21.6% year-on-year, thanks to the sales spike this quarter in the face of the upcoming decline in pricing rates scheduled in April. Accordingly, the company's market share in the whole life insurance market expanded to 23.1%, as you can see in the right -- upper-right figure. Also, we launched a new product called GI Insurance, an upgraded version of CI Insurance to better cope with the rising leading benefit market. The persistency rate for our protection policies increased by 2 percentage points for 13th month and 1.2 percentage points for the 25th month, reflecting an improvement in the quality of our in-force policies.

Next is invested assets. The company's total amount of invested assets is KRW 227 trillion as of March 2020. We maintained a stable management policy with interest-earning assets, such as bond and loans taking up 79% of total invested assets. For the past few years, the company reduced the asset

(technical difficulty)

duration gap by massively purchasing ultra long-term bonds in preparation for the adoption of IFRS 17 and KICS. This year, the company turned its attention to investing in high-yield assets under the judgment that it has secured a strong capital position compared to industry peers. As you can see from the figure on the right, the amount of ultra long-term bonds the company purchased in the first quarter is KRW 2.4 trillion, decreasing by KRW 400 billion from the first quarter last year. And the amount of alternative investment, including project financing and real estate financing increased to KRW 21.5 trillion.

Next is asset quality. The company's bond investment was KRW 131 trillion, where bond investments in government probably -- government agency takes up 82%. The rest consists of corporate bonds and foreign bonds, mostly with grades above A. Loan assets were KRW 48 trillion, where 61% of the total loan assets have low-risk with 32% of policy loans backed by surrender value of the customers' insurance policies and residential mortgage of average LTV at around 50%. Corporate loans, which is a part of our alternative investment, take up 36%. Although we consider these loans having as low-risk as household loans, we plan to maintain a more conservative stance in acquiring these type of assets to select only high-quality ones, given the economy is deteriorating following the COVID-19 outbreak. Also, the company has preemptively strengthened its blending standards for household credit, since March, to prepare for worsening financial markets. As shown in the delinquency and LPL trends on the bottom right-hand side, there hasn't been any sign of deterioration in our loan quality, and the company will keep a close eye on risk management to defend against a further slowdown in the economy.

Next is investment income and investment yield. The company's first quarter investment yield improved by 20 basis points to 3.9% despite the KRW 89 billion of impairment losses in securities following the volatility in the stock market. The favorable results was obtained -- were obtained, thanks to the timing disposal of real estate and securities on top of our stable interest and dividend income. For your reference, most of the realized gains and losses and derivatives within our investment income, which is characterized as disposal gains is incurred through our hedging activities against variable guarantee option and is offset by the reserving for the options. Thus, we have excluded the amount from our investment yield calculation. Please refer to the table on the right side for the breakdown of yields by each as a type.

Next is our reserve coverage. The spread between our average reserve interest rate and yield on interest-earning assets widened by 3 basis points quarter-on-quarter to reach 95 basis points. And this is the result of the 7 basis point drop in our yield on the interest-earning assets due to the resumption of higher-yielding funds despite a 4 basis point drop in average reserve interest rate affected by the lowering of crediting rates. If the present level of market interest rate is maintained, we expect extra widening of the negative spread to be inevitable in the near future. However, the company is putting much effort to offset its negative impact on our P&L by enhancing new investment yields and increasing the earnings from noninterest earning assets, such as disposal gains and dividend income.

Next is our insurance profit. In the first quarter, insurance profit was KRW 401 billion, increasing 13.2% year-on-year. Loading margin was KRW 241 billion, increasing 20.4% year-on-year due to the solid growth of our loading premium backed by the improved persistency rate as well as our cost-cutting efforts. Risk margin was KRW 161 billion, growing 4% year-on-year due to the decline in medical service usage following the COVID-19 outbreak.

Next I will cover the loss rate in detail. Our loss rate declined by 0.3 percentage points to 84.7% in the first quarter. And considering the extra 3 working days compared to last year, this is an improvement of over 3% points. The main reason is that the industry-wide decline in insurance claims during the COVID-19 outbreak. Looking at the detailed breakdown of our loss ratio on the right side. The loss ratio on our leading benefit was 99.9% falling below 100%, and the loss ratio on our debt benefit was stable at 44.9%.

Next is our net profit. First quarter net profit attributable to shareholders was KRW 230 billion, decreasing 48.6% year-on-year from KRW 447 billion. As explained previously, insurance profit of KRW 401 billion was secured, growing 13% year-on-year, yet net profit decline was mainly due to negative investment profit of KRW 27 billion, arising from financial market volatility. Other profits also dropped from last year due to the one-off items such as social contribution funds of KRW 43 billion. For the details of changes in investment profit, there was an increase in loss from variable guarantee option to KRW 398 billion, along with the increase in impairment loss of KRW 86 billion and a decline in profit from consolidated subsidiaries and beneficiary certificates to KRW 68 billion, yet the company partially offset the losses with disposal gains of real estate and bonds. As the financial market stabilizes since April, the company's investment profit, including return on variable guarantee option began to recover. We will give out our efforts to securing solid profits through the realization of over KRW 1.4 trillion insurance profit and timely disposal of invested assets. For your reference, the company's return on variable guarantee option has been showing fluctuations, in line with the volatility in financial markets, such as stocks and bond market.

We will make further explanations in the following page. Concerning return on variable guarantee option, it has showed fluctuation in every fourth quarter due to the changes in economy, actuarial assumption changes at the end of every year. Yet changes in the reserve for variable guarantee option still exert their effect -- their impacts on profit and loss in the first to third quarter. And we have introduced our net profit sensitivity to 100-point cost in movement to stand at around KRW 40 billion to KRW 50 billion. However, unusually high level of volatility in stocks, interest rates and relevent financial derivatives prices during the COVID-19 crisis in March, raised the profit sensitivity to KRW 70 billion level, thereby causing the first quarter return on variable guarantee auction to deteriorate more than expected. If the market volatility found in March does not reoccur after the second quarter, the sensitivity is expected to fall back to KRW 40 billion to KRW 50 billion level. And return on variable guarantee option has already been recovering since April. As the real economy indices, such as experts, employment rates begin deteriorating in full scale in May. And the number of newly confirmed COVID-19 cases rises to double-digit number, uncertainties in business environment are still prolonging. The company will devote our capacity to minimizing risk in business performance, utilizing our loan accumulated proficiency in risk management. Moreover, we will also make our efforts to enhance shareholder values by achieving the dividend payout ratio of 40% to 50%, as presented in the beginning of the year.

Please also note that the in face of the recent COVID-19 upgrade, the company is continuing our efforts to fulfill our social responsibility as the industry's top life insurer. Our employees both dedicated and active cooperation made our countermeasures against the pandemic possible, including thorough disease control activities, wearing of mask, workplace separation of some major departments, work-at-home practices and also led to our voluntary fund raising for providing medical supplies to Jeju and Chungcheong region.

This concludes the 2020 first quarter earnings presentation. Thank you once again for joining us today, and we ask you for your continued support and attention towards Samsung Life. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question will be by provided by [Ji-Young Kim] from [Honda Motor Securities].

--------------------------------------------------------------------------------

Unidentified Analyst, [2]

--------------------------------------------------------------------------------

I have 2 questions for you. First is on a quarter-on-quarter basis, your new business margin has declined quite significantly due to changes to your economic assumptions and also adjustments to your product portfolio themes. In the past, it has stood out that Samsung Life compared to other insurance companies, had a higher new business margin that was trending upwards, and that represented your comparative edge. But going forward, do you think that current levels are -- represent normalized levels, which will persist in the future? Or do you see further upside going forward? And in the same context, let me ask my second question. Regarding your insurance profit, there's been quite a while since you surpassed the KRW 400 billion mark, but you achieved that again in the first quarter, which is quite positive. But still it seems that you're maintaining your full year guidance of KRW 1.4 trillion. Does that suggest that in the quarters ahead, do you see downside for your insurance profit? Is it that there was a slight upside due to the corona one-off issue, but then if it lead to normalize at a lower level. What is your view?

--------------------------------------------------------------------------------

Unidentified Company Representative, [3]

--------------------------------------------------------------------------------

This is (inaudible) from the product team. Let me address your first question on the new business margin. So in the first quarter, we did see a slight decrease in the new business margin, mostly driven by changes to our economic assumptions or assumptions overall. There was an increase in sales of whole life policies ahead of the change in pricing scheduled for April, which resulted in a slight decrease in margins. But the product portfolio has been normalized after the pricing adjustments in April. And after the pricing rate was lowered in April, margins have largely improved across all product categories. So as a combined effect of a normalized portfolio plus improved margins overall, we think that we will be able to normalize that to levels that will offset the decrease that we saw. Yes. So as you have seen, we have delivered a quite strong performance with insurance profit reaching more than KRW 400 billion in the first quarter. I think this the result of our ongoing efforts and commitment to improve the underlying profitability of our insurance products. And then also in part due to reduction we have seen in claims on account of the corona outbreak, which did lead to an improvement in our mortality or risk margins. If we fall back on past experiences, for example, the MERS outbreak, we did see early on a reduction in medical claims overall in the beginning, but we did see the claims climb back up later on. And so it is based on this type of past historical experience that we are rather on the conservative side in terms of our projections for risk margins. However, for the loading margins, we foresee that the robust upside that we have seen so far will be sustained. So with the sources of volatility still remaining, I don't think we're in a position to say specifically more about guidance. But I will say that we stand by our stock commitment as a company to be fully responsible for delivering insurance profits between the range of KRW 1.4 trillion to KRW 1.5 trillion.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question will be presented by Byung Lee from DB Financial Investment. .

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Also, I would like to ask follow-on questions about -- which asked earlier. So there is, of course, great interest from the market about what kind of impact you have seen from the corona outbreak. According to another company that did its earnings call yesterday, they did try to update us about current developments in their business up to April. So could you take us through what kind of development or trends you have seen in the months of March through April, if you could break it down between living benefits versus mortality benefits? That would be quite helpful. And do you think those trends are likely to be maintained going forward through May and also June? And you did also mention the impact of a reduction in claims. According to results, apparently in March, hospital revenue overall dropped by about 30%. Do you think that the reduction you have seen in claims is in large part due to reduced use of hospital services overall? Or do you think it's a function of just overall reduced activity amongst the population? And how did those trends or how were they reflected in your company results in March and April? Second question has to do with your adjustments to the guarantee fees and also your adjustment of the pricing rate. So assuming that the product mix itself is kept the same, what kind of an impact -- the adjustment to your guarantee commission on the one hand and your adjustments or reduction of your assumed pricing rate have on the profitability of your new business. And of course, current interest rate projections, it's not very clear at the moment. But do you foresee that it would be possible to lower any NIER further within this year? Assuming the current level of interest rates are maintained?

--------------------------------------------------------------------------------

Unidentified Company Representative, [6]

--------------------------------------------------------------------------------

Yes, let me take the first question, I'm head of the support team. So you have actually seen the results for January through March. But for April, in terms of our overall loss rates, the loss rates have gone down to 76%. If you break it down into mortality benefits versus living benefits, it's 37% for mortality and down to 91% for living benefit. And then if you look at what has happened in terms of the number of claims. In the month of March, on a year-on-year basis, we did see a 10% reduction in claims. But then starting in April, it started to pick up again. And as a matter of fact, on a -- if you look at the average number of claims for April, it's just 1% lower than the same period last year. And so ultimately, as you asked, we believe that the reduction we have seen in the number of claims is associated and linked with the overall drop in hospital service usage. But again, towards the latter half of April, we did see the number of claims climb back up again. And I think it's just a combined effect, lower claims was a combined effect of lower hospital usage in the first place. And then even when people are using hospitals or visiting hospitals, the number of claims did go down in the first quarter.

--------------------------------------------------------------------------------

Unkown Executive, [7]

--------------------------------------------------------------------------------

Yes. This is (inaudible) from the product team. Let me ask -- or answer your question on what kind of impact our adjustment to our guaranteed fee and our pricing rate has had on the profitability of different products. And so given the following interest rate environment, we did make an adjustment to our guarantee commission or fees and also lowered our assumed pricing rates in April to address the falling -- the drop in margins we have seen in different products. It's hard to say just in a singular way because the impact of these adjustments vary by product type. But on average, it's fair to say that since the 2 measures have been implemented, we have seen about a 10% to 15% improvement in the profit margins, the profitability of the products that were adjusted and the newly sold in April. So if you wanted attribution as to what kind of impact the adjustment to the guarantee fee had versus the impact the change to our assumed pricing have had? I think rough -- it's fair to say, roughly it has have because we do try to enforce pricing so that it's even across those 2 categories. So as I mentioned, we have seen that kind of upward adjustment in our product margins. And if we temporarily correction we saw in the first quarter for personal accident or health policies is normalized in the second quarter and beyond, we think that we should be able to go back to the mid-50% profitability range that we have seen after the second quarter of last year.

--------------------------------------------------------------------------------

Unidentified Company Representative, [8]

--------------------------------------------------------------------------------

Yes. Let me take your last question. I'm (inaudible) from the Actuarial RM team. So 5-year Korean treasury yield dropped by 17 basis points from 1.47% to 1.3% in the first quarter this year. And as a result, NIER was lowered or it dropped from 3.1% to 3.0%. So again, there was a 17 basis point drop in interest rates. But if you look at our asset mix, more than 80% of our assets are interest-bearing IT type assets with the remaining being capital gain assets. So although the drop in interest rates was 17 basis points, there was only a 10 basis point drop in the NIER. So if you look at where the interest rates are presently, well, as of March, it was 1.3%, towards the end of April, 1.2%. Now about 1.1% to 1.2%. So it's a similar drop from the previous circumstance. So I think, overall, we can say there's scope for perhaps further 10 basis points drop in the NIER.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

The next question will be presented by Myung Wook Kim from JP Morgan.

--------------------------------------------------------------------------------

Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [10]

--------------------------------------------------------------------------------

Yes. So let me ask you several questions. It seems that if you look at your share prices, since the IPO, it appears that perhaps this year, it may be at the lowest level yet. So given how low the share prices have fallen and given your strong capital position, are you giving some more serious thoughts to be more proactive or positive in terms of your shareholder return or capital deployment policies, that's my question. Of course, you did mention how you intend to be stable in your dividend policies. But given how there's greater volatility to profit and loss in 2020, there are concerns in the market whether we will be able to look forward to sufficient dividend yields. So that's my first question. And second has to do with the profitability of your personal accident and health policy products. So if you look on Page 12 in your presentation, it does seem that the loss rates, especially for the living benefits on these types of products are not that great. So the more -- the strategy to sell more of these types of health or accident products, will it really be accretive to boosting value of in-force for the company over long? Can it actually boost operating or can it actually increase operating variance? Of course, given the current calculation criteria, margins self -- the margins itself appears high, but could you possibly bring added volatility to your operating variance. So I'd like to hear more about that? And also, given the low interest rates, when we assume that you will be achieving your business plans and projected new business goals stated in those business plans, if that's the case and if we assume that current interest rates are maintained, how -- what are your projections in terms of value of in-force for this year or next year? Do you have some kind outlook or projection internally at the company?

--------------------------------------------------------------------------------

Ho-Seok Yoo, [11]

--------------------------------------------------------------------------------

Yes. This is Ho-Seok Yoo, the CFO. Let me take your first question. Yes. So of course, as the CFO of Samsung Life, I would like to first state that I feel the weight of great responsibility, and I feel quite apologetic for where the current share prices are at, at the moment. So I do know that there is great interest among the investors toward our shareholder return policy. Regarding treasury shares, share buybacks could be one possibility. But as we mentioned previously, in 2017, also at the start of this year, we have determined that share buybacks in themselves are not to the benefit or in the interest of shareholder. And so rather than doing buybacks, we have determined that we should try to return value to our shareholders, centered around cash dividend payment. Another option concerning the treasury shares is retirement of those shares, which is an option that we are entirely open to examining quite progressively, in fact. However, as you all know, we have the IFRS 17 adoption ahead, which will also -- which is also going to be accompanied by introductions and new capital regulatory system in Korea, but then those regulations are yet not entirely clear. So until the murky fog clears completely, we are not in a position of reviewing those options. But certainly, once the fog is cleared, we can look very positively and progressively to possibility of retirement of treasury shares. It's just unfortunate that given current circumstances, it is still quite foggy at the moment, which is why it is not under current review. And of course, first and foremost, in your mind of course, with the dividends. I am well aware that it is your #1 priority. And we -- but we intend to center our shareholder return policies around cash dividends, again, rather than share buybacks. I do want to say one thing, though, that as of the end of March, valuation gains, capital gains, in fact, are surpassing KRW 35 trillion. So this will include, in large part, Samsung electronic shares fell. So other share in securities and real estate assets, I would say, in terms of possible valuation gains, we have the highest level in the industry. So I think that using as a possible disposal gains proactively, we will be able to sufficiently live up to the dividend expectations of our investors. Although I cannot present concrete numbers at the moment, I seek your confidence on that. Thank you. That was the CFO, again.

--------------------------------------------------------------------------------

Unidentified Company Representative, [12]

--------------------------------------------------------------------------------

Yes. This is (inaudible) from the product team. Let me ask -- or answer your question on the profitability of the accident and health policies. So in terms of our expected margins on personal accident and health policies overall, of course, it will vary by different type of products. But overall, it's around 30% to 50%. And these are margins related to risk margin, claims payment margins. So it may appear that the loss rates on the living benefit type products are not doing that well on past sold products. But we believe if we push it too much to boost new business margin in the immediate terms, that potentially, there is an inherent risk that we may miss or our future projections actually may not materialize. So we are managing these types of accident or health type coverage products within controllable and well-manageable levels, trying different coverage mix with LTC and Alzheimer's coverage, for example, selling an appropriate level of renewable type policies and then seeding certain riskier products to reinsurance companies, for example. So although there might be slight deviations from future projections going forward. I don't think it will be as larger miss as we have seen in the past. And I think even if it's slightly off the projection, it will be entirely coverable by the expense loading margins, which account for more than 50%. So I don't think you have any reason to doubt the profitability of these types of health or accident products.

--------------------------------------------------------------------------------

Unkown Executive, [13]

--------------------------------------------------------------------------------

Yes. I'm Head of the Actuarial RM team. Let me take your last question. You asked that with interest rates having fallen so low, if we assume that we achieved the business plan and also the new business goals, how -- what kind of projections do we have for value in-force. So as has already been disclosed value in-force -- value of in-force as of the first quarter is KRW 700.3 billion, which is KRW 0.7 trillion. And then new business, we can do KRW 1.2 trillion. So combined, we were thinking value in-force would be close to KRW 2 trillion by the end of the year. But as you mentioned, interest rates are continuing to fall, and there is potential scope for a further lowering of the NIEL assumption by another 10 basis points toward the end of the year. So if that is the case, that will cancel out the effect of the increase in new business. And so we think that the value of in-force, current as of March, is likely to stand at the end of this year.

--------------------------------------------------------------------------------

Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [14]

--------------------------------------------------------------------------------

Yes, I would like to ask one more question on those sets of products. So, yes, thank you for your detailed answers. Your projection of 30% to 50% margin on the personal accident and health policies sounds quite appropriate given future volatility. But that has to do with the risk margins. I'd like to ask about these products from the loading margin perspective. It does seem that these types of products do carry quite significant or high levels of expense loading. So potentially, the current pricing structure, could it be exposed to regulatory risk going forward? Because with such a high proportion of loading margin as a percentage of the total profit mix is -- could there possibly be some risk on the regulatory side for the purpose of customer protection, for example?

--------------------------------------------------------------------------------

Unidentified Company Representative, [15]

--------------------------------------------------------------------------------

So if you look at the total -- the margin structure of these accident and health type products, there is a high proportion of expense margins. But it's not that we charge high assumed loading on these types of products or assume high expense rates above and beyond our competitors. It is just that we have a very cost-efficient exclusive channel that we use mainly as a -- mainly for the purpose of driving sales rather than the very high cost-intensive GA type of channels. Sales through GAs for us is very low. And through cost-savings,measures, we have achieved a certain degree of economy of scale, which is why we have been able to achieve the high expense margins that we have. Again, it's not because we charge excessively high assumed loading on these products. Of course, it's fair to expect that there will be some regulations pushing down on expense loading for insurance overall. But we think that it will be kept within manageable levels.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

The next question will be presented by Yafei Tian from Citi.

--------------------------------------------------------------------------------

Yafei Tian, Citigroup Inc. Exchange Research - VP [17]

--------------------------------------------------------------------------------

For variable guarantee option product. So when I look at the movements for last year, even when the cost was going up, there was a negative provision. And this year, obviously, the losses made an even bigger impact. It looks like both cost be as far as interest rate seems to have somewhat of an impact. So just wanted to understand the sensitivity. And is it possible, assuming cost is going to stay stable around the current level, how much further provisions related to variable guarantee option products do we have to make from here? So that's the first question. And second is really to pick up on your earlier comments and also the fact that there are some disposal gains in this quarter. This seems to be a little different to the past practices where Samsung Life seems to not realize a lot of gain and losses. Is this a change in mentality when it comes to supporting the bottom line when the underwriting profit has come under pressure to higher disposable gains. Does that mean assuming that Samsung Life stay at pace or target towards a 50% payout ratio. There is goal for DPS to go up in this year and next year?

--------------------------------------------------------------------------------

Unidentified Company Representative, [18]

--------------------------------------------------------------------------------

Yes. So sorry, we do not have the audio feed earlier for the first part of your first question. Was the question, assuming that current cost be and interest rates are maintained -- what was -- what is the company's view on how it impact variable guarantee options. Could you repeat the first question, sorry?

--------------------------------------------------------------------------------

Yafei Tian, Citigroup Inc. Exchange Research - VP [19]

--------------------------------------------------------------------------------

Yes. The question is assuming that the interest rate, the 5-year KTB rate is staying broadly at the current level and also assuming that cost fee is around the current level. Would there be any further PL-related provisions related to variable guaranteed option products?

--------------------------------------------------------------------------------

Unidentified Company Representative, [20]

--------------------------------------------------------------------------------

Yes. So I'm head of the Actuarial RM team. Let me take your first question. I think the gist of your question is, given how much share prices and interest rates have fallen and the fact that we saw 350 -- yes, KRW 350 billion in impairment losses in the first quarter on account of the variable guarantee options, what are our projections overall regarding these options on a full year basis. So after we did incur the KRW 350 billion in impairment loss on account of these equity securities, since then, there was a significant rally in share prices. And so we think that, that will translate into about KRW 100 billion improvement in the guarantee returns. However, at the time of assessment in the first quarter, the drop in interest rates compared to the start of the year is not reflected. So that will be later reflected in the discount rates at the end of the year. So actually, there will be a trade-off for an offsetting effect of certain losses incurred through -- due to a drop in interest rates, but they'll be offset by the share price movement. So on balance, because of the debt effect we think that current return on the variable guarantee products, around KRW 300 billion to KRW 4 billion at present, are likely to be maintained at the end of the year. So it's likely that they will stay where they are with no additional loss, that is my point.

--------------------------------------------------------------------------------

Yafei Tian, Citigroup Inc. Exchange Research - VP [21]

--------------------------------------------------------------------------------

That's clear. And the second question?

--------------------------------------------------------------------------------

Unidentified Company Representative, [22]

--------------------------------------------------------------------------------

Yes. Hello. This is (inaudible) from the Asset Management Team. Let me take your second question about our asset portfolio. So as you know, the centerpiece of our assets or investments management policies is ALM. So we're always investing from a long-term perspective. And up to now, it is true that we have refrained where possible from realizing disposal gains. So we will stand by, in principle, this same stance going forward. But as you know, we have the introduction of IFRS 17 ahead in 2023. And upon adoption, it will require that all assets and liabilities are subject to fair market valuation. So in line with our overall principle, disposal of debt securities, for example, for reinvestment, we do not think it will trigger big changes in our company value. So that said, we will always be considering the circumstances, the financial market conditions, our company conditions also to manage our capital gain assets, more flexibly and more proactively. So to -- just to recap my conclusion, again, in the big frame of things, we stay aligned to our broad ALM strategy. However, given financial market conditions, given our earnings, given the requirements at the moment, if required, we may be looking to realize valuation gains on our capital gain asset holdings where necessary. Again, it could be for different purposes. For example, liquidity management or whatever requirement we see at the time.

--------------------------------------------------------------------------------

Ho-Seok Yoo, [23]

--------------------------------------------------------------------------------

So this is the CFO, let me just add to that. One thing. So you asked whether this signifies a change to our underlying stance. And so my answer would be, yes, there is a slight change to our stance. So we are mindful in considering our earnings, for example, we would be open to making more proactive use of the valuation gain type assets that we currently hold.

Yafei Tian, do you have any follow-up questions? .

--------------------------------------------------------------------------------

Unidentified Company Representative, [24]

--------------------------------------------------------------------------------

Thank you. So with that, we will conclude our earnings conference call for the first quarter 2020 for Samsung Life. Additional inquiries, please contact us at the IR team. Thank you very much.