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Edited Transcript of 079440.KS earnings conference call or presentation 15-Nov-19 8:00am GMT

Q3 2019 Orange Life Insurance Ltd Earnings Call

SEOUL Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Orange Life Insurance Ltd earnings conference call or presentation Friday, November 15, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Seung Hee Han

Orange Life Insurance, Ltd. - Manager of IR

* Young-Jung Hahm

Orange Life Insurance, Ltd. - VP & Head of IR

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Presentation

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Seung Hee Han, Orange Life Insurance, Ltd. - Manager of IR [1]

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Good afternoon, everyone. This is Stephanie Han, Manager of Investor Relations at Orange Life. Welcome to our third quarter 2019 earnings conference call.

On this call, we will reference our earnings presentation, which can be found on the Investor Relations page of our website. Today on the call, I'm joined by our Head of Finance and Investor Relations Office, Mr. Daniel Hahm. Daniel will start with our financial performance for the quarter, and we will be happy to take your questions after that.

Now I will pass the call over to Daniel.

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Young-Jung Hahm, Orange Life Insurance, Ltd. - VP & Head of IR [2]

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Thank you, Stephanie. Good afternoon, everyone. This is Daniel Hahm, the Head of Finance and Investor Relations Office.

Let me start from the Page 5, key financial highlights. Total APE during the third quarter went down by 50% year-on-year and 12% lower on a YTD basis mainly due to the 81% drop in Savings APE in the third quarter as we restrained new bancassurance savings business in response to the low interest rate environment. However, third quarter Protection APE rose 2.4% year-on-year, mainly driven by FC channel where the Protection APE grew by 10.2%. As a result, the YTD-based Protection APE went up 11.3%.

Value of new business went down 31% year-on-year and 22% on a YTD basis, mainly impacted by NIER assumption change due to interest rate decline with a deep APE drop during the third quarter. Despite lower interest rates, however, third quarter VNB margin rose from the previous quarter on the back of improved channel and product mix.

Operating result before tax increased by 0.3% year-on-year through stable mortality and morbidity margin as well as better expense and other margins. Unlike ORBT, profit after tax decreased due to lower net realized gains.

Following the inclusion into Shinhan Financial Group, IFRS 9 is applied on assets and shareholders' equity from January 1, 2019. Based on IAS 39 accounting standard, our total assets, invested assets and shareholders' equity grew by 4.3%, 5.9% and 9.8%, respectively. Despite share buyback and interim dividend payout, we maintained a strong capital buffer with an RBC ratio of 430%.

In Page 7, we put 2 market indicators, KTB 10-year yields and KOSPI, both of which actually affected our financial returns. KTB 10-year yields fell to an all-time low of 1.17% in August and dropped 90 bps from September 2018, which depressed the VNB and negatively impacted our P&L. The poor KOSPI performance also caused an impairment loss on our ETF assets and weakened the customer demand on variable-type products.

Now let me move on to Page 9 to explain our new business growth. Our total APE during the third quarter recorded KRW 125.7 billion, dropped by 50% year-on-year, mainly due to the reduction in our bancassurance savings volume. As you can see in the left-hand graph, bancassurance APE decreased by 77% as we held back from increasing new savings business in order to prepare for the low interest rate environment.

If you see the right-hand graph, which shows the quarterly trend of our bancassurance APE, you may find out that our BA Savings volume was increased a lot during the third quarter 2018 and started to be managed down continuously since then. Whilst we are reducing the sales of general savings, we have been trying to increase variable and foreign currency product sales in bancassurance, both of which have higher margins than ISP savings.

Now let me move back to the left-hand graph. The third quarter FC channel APE decreased by 26.2% year-on-year from KRW 94.1 billion to KRW 69.5 billion as the 10.2% growth in Protection sales cannot make up for the decrease in variable savings and annuities. GA APE dropped 11.9% year-on-year as we revised our growth strategy, considering a severe competition in GA market. We still maintained our strategy of focusing on Protection business, so Protection mix in GA rose to 99.9% for the quarter.

If you want to check our Protection APE by channel and product type, please see Page 11. As I mentioned, our Protection APE during the third quarter increased by 2.4% year-on-year, mainly driven by the 10.2% growth in FC channel. On a YTD basis, Protection APE grew by 11.3% with 16.9% growth in FC and 2.2% growth in GA.

If you see our Protection APE by product, you may find out that the Health product portion was increased because we focused on strengthening our FC channel by launching a dementia product during the first half of this year in order to support our financial consultant channel. However, from the third quarter 2019, we focused more on improving value of new business, mainly through Whole Life products, which enabled us to recover our Whole Life sales proportion within Protection mix to the previous year level.

Next page is for VNB growth. The third quarter VNB recorded KRW 20 billion, a decline by KRW 9 billion year-on-year, mainly due to the 26% decrease in FC APE and the negative impact from decreasing interest rate. On a YTD basis, VNB margin dropped by 1.9% -- 9 percentage points to 14.9%. The APE reduction and change in channel mix lowered the margin by 1.1 percentage points.

The business mix change, including lower proportion of Whole Life within Protection new business, lowered VNB margin by 0.1 percentage point. And the economic assumption changes caused by declining interest rate dragged down the margin by 0.8 percentage points. However, if you see our VNB margin by each quarter, actually, the third quarter VNB margin was improved to 15.9% from 12% to 12.2% in the second quarter.

In Page 15, you can see our VNB margin by each product and channel. Despite the increase in Whole Life competition in the third quarter, the higher mix of low-ticket test business during the first half of this year lowered our Protection VNB margin to 23.2%. However, our Savings margin improved by 0.3 percentage points due to higher sales composition of foreign currency products.

Variable margin also increased by 2.5 percentage points to 3.1%, backed by the pricing on our variable products. FC channel margin dropped to 24.3%, mainly due to the decrease in variable sales and lower Protection margin. And bancassurance channel also showed a slight decrease in VNB margin due to volume decline. However, repricing and product mix improvements lifted GA VNB margin by 4.9 percentage points from 8.8% to 13.7%.

Now I'd like to move on to premium income and profit. As the bancassurance channel sold less single premium savings products and some existing savings products switched to the maturity, our premium income declined 28.4% year-on-year and 9.8% on a YTD basis.

On the right-hand side, you can see our third quarter operating result before tax, which excludes market variance, stands at the previous year level. The profit after tax was lowered due to a decrease in net realized gains.

Let me explain more details in the next page, source of earnings. If we take the profit before tax break into source of earnings, the reduction in PBT during the third quarter mainly caused by the decline in investment margin. Our investment margin reduced by KRW 24.3 billion since net realized gains, which is capital gain minus impairment loss, reduced by KRW 16 billion for the quarter.

Mortality and morbidity margin dropped slightly due to an increase in morbidity claims caused by an increasing hospitalization and medical surgery claims payment. Expense and other margins improved by KRW 4.8 billion. There has been a KRW 11.5 billion increase in acquisition expense margin, but higher GMxB reserves lowered other margins.

Now let me move on to investment results. Even though our investment yield is still higher than industry average, the low interest rate environment weakened our new money yield, resulting an 11 bps drop in our third quarter investment yield.

If you see the right-hand graph, we have been lengthening asset duration while increasing yield-enhancing assets and foreign bonds. On a commitment basis, KRW 137.6 billion is being invested in overseas real estate and infrastructure funds and another KRW 37 billion in foreign bonds. However, domestic bonds account for 81% and loans account for 9% of our invested assets. Combining together, still, 90% of our invested assets are in interest-earning assets.

Looking briefly at reserves and crediting rate. Our crediting rate dropped to 3.9% as the average crediting rate on fixed guarantee reserves declined 4 bps from 4.93% to 4.89%, and the average rate on floating rate reserves reduced 13 bps from 3.01% to 2.88%. The mix of fixed and floating rate reserve stands at almost 50:50, while the share of high guarantee reserves with 6% or higher reduced to 9.8%.

During the quarter, our expense ratio went up to 6.1% as premium income was decreased by 28.4% even though the actual maintenance cost for the quarter was reduced. Our third quarter loss ratio recorded 76.5%, slightly up from 73.1% from a year ago, mainly due to a higher morbidity loss ratio. However, we still maintain very stable level of loss ratio given the industry-wide trend of a hike in the loss ratio.

Our 13-month persistency declined year-on-year due to increased variable product surrenders from the FC channel and the termination of high face amount policies sold by the bancassurance channel in third quarter 2018. 25th persistency also lowered by variable product surrenders as well as a continued early termination of policies sold through GA channel where we paid a high upfront commission over the first 2 years in year 2016 and '17 in order to enter into the GA market successfully. We expect a gradual improvement in the 25th persistency going forward based on our efforts of shifting to a more leveled-commission scheme for the GAs.

From a capital perspective, our shareholders' equity decreased after applying new IFRS 9 accounting standards with a onetime reduction of KRW 773 billion. Excluding this one-off impact, our shareholders' equity would have increased by KRW 400 billion.

YTD 2019 ROE was 9.0% based on average shareholders' equity by IFRS 9. And the adjusted ROE, excluding valuation gains on assets, was 11.2%. RBC ratio at the end of September stood at 430%, slightly decreased from a year before, but still remains at a strong capital position.

That brings me to the end of presentation on our third quarter results. Prior to the Q&A session, I'd like to give a short notice. As we already disclosed yesterday, BOD of Orange Life and Shinhan Financial Group both agreed on share swap for making Orange Life as a 100% subsidiary of Shinhan Financial Group. Please refer to the public disclosure and our IR newsletter in our website for more details.

For the Q&A session today, I'd like to politely ask you to give us questions focusing on our financial results and business.

Thank you again for your interest in Orange Life and your participation in today's earnings call.

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Operator [3]

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

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Seung Hee Han, Orange Life Insurance, Ltd. - Manager of IR [4]

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Since there are no questions at this time, this does conclude the Orange Life's Third Quarter 2019 Earnings Call. If any questions arise in the meantime, please reach out to our Investor Relations team. Thank you.