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Edited Transcript of 079440.KS earnings conference call or presentation 13-Aug-19 8:00am GMT

Q2 2019 Orange Life Insurance Ltd Earnings Call

SEOUL Sep 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Orange Life Insurance Ltd earnings conference call or presentation Tuesday, August 13, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ick Jin Park

Orange Life Insurance, Ltd. - Executive VP & CMO

* Young-Jung Hahm

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

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Presentation

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Young-Jung Hahm, Orange Life Insurance, Ltd. - VP & Head of IR [1]

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Good afternoon, everyone. My name is Daniel Hahm, Head of Investor Relations for Orange Life. Thank you for taking your time to listen to our second quarter 2019 earnings conference call. The second quarter earnings results will be presented by CFO, Ick Jin Park, and we'll take questions at the end of the presentation.

Now I'd like to hand over the mic to our speaker, Mr. Ick Jin Park. Please go ahead.

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Ick Jin Park, Orange Life Insurance, Ltd. - Executive VP & CMO [2]

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Good afternoon from my side. This is Ick Jin Park, CFO of Orange Life. Thank you for joining our quarterly earnings results call.

Now let me start from Page 3, second quarter's snapshot. Our RBC ratio remains strong at 428% after interim dividend and strong sales growth continued in second quarter. APE grew 21.7% and Protection product line diversified from whole life to fresh business, and it revitalized our FC channel by boosting their productivity. Let me explain this in more detail later.

And year-to-date, the Board of Director of Orange Life decide on interim dividend of KRW 800 per share. And as a new member of Shinhan Financial Group, we initiated a strategic discussion to leverage group's large customer base.

If we move on our key financial highlights. Total APE rose 21.7% for the quarter and 21.5% on year-to-date basis. Protection APE was 12% higher, and Savings APE, 83.9% higher from strong bancassurance sales. And this value of new business declined by 3 -- 33.9% for the quarter and 17.8% lower on year-to-date. This is largely due to an increase in the sales mix of low-margin product, including bancassurance savings product, was the decline in margin from various sales initiative and Protection product portfolio changes. And also, there was a downward adjustment of our investment return assumption for VNB calculation. Operating results before tax decreased due to low investment income and additional GM expenditure, and net profit was further lowered as net interest gain decreased. As you may remember, new IFRS 9 accounting has been applied since January 1, 2019, after the inclusion into the Shinhan Financial Group. Based on the IAS 39, total assets, invested assets and shareholders' equity are up 7%, 8.7% and 10.8%, respectively. And last, as I mentioned, RBC ratio remained very strong at 428%.

Okay. In Page 7, before we go into the detail, we want you to remind the financial market development during last year. Second quarter 2009 (sic) [2019] 10-year KTB yield almost 100 bp lower compared to second quarter 2018, and solid 5 bp decrease since the beginning of the year. As you know, this low bond yield depressed the value of the new business and also negative impact on P&L.

In the right-hand side, you can see Korean stock market was still on the downward trend in second half of 2018. This weak Korean equity performance has led to impairment on our ETF assets and higher GA expenditure.

Okay. Let's move to new business growth at Page 9. As I mentioned earlier, total APE rose 21.7%. FC channel's total APE reduced by 6.6%, and bancassurance channel grew almost 90%. It contribute to KRW 30 billion APE growth year-on-year. But as you can see in the right-hand side, this strong growth is attributable to low baseline in second quarter 2018. GAAP increased 14.6%, almost 100% Protection product. In the right-hand side, you can find new business trend of bancassurance.

Bancassurance volume in first half 2018 was held back as the large players heated up market competition. And from third quarter 2018, crediting rating competition eased and we jumped back into the Savings business. But from June 2019, we managed to lower Korean won Savings sales. We are expecting a significantly lower APE -- bancassurance APE in the remaining year because, last month, we cut the credit rating of the Savings product by 9 bp and we plan to do more in the coming months.

Page 11 is about the Protection new business growth. From early this year, there was a company-wide effort to increase our customer base and revitalize our FC channel. We pushed the new Protection sales growth with a diverse product offering, such as dementia and new cancer product. As a result, second quarter Protection APE grew 12% and, year-to-date basis, Protection APE grew 15.5%. And in the right-hand side, you can see health proportion grew within Protection line. This health business was 14% in second quarter 2018 and is now is 36% in second quarter 2019. And first half 2018, was 13%, and now it's 38%.

Page 13 is about VNB growth. Second quarter VNB growth -- VNB KRW 10.5 billion lower. As I mentioned, total APE grew 21.7%, but high-margin FC channel APE dropped by 6.6% and whole life product mix has declined within Protection line.

In the right-hand side, you can find the VNB margin development. The year-to-date VNB margin declined by 7 percent point to 14.6%, 2.9 percent point from channel mix changes and 3.3 percent point from product mix change versus dementia and also higher FC channel expense. And we updated our investment assumption for VNB calculation. NIER assumption, net investment earning rate, is a lower 2.65% in second quarter 2019. As far as we know, NIER assumption is 50 to 70 bp lower or more conservative than our peers.

In Page 15, you can find the VNB margin by product and channel. Protection VNB margin dropped to 23.5%; and Savings, 3.4% and variable margin is 3.5%. In the right-hand side, you can see channel -- VNB margin by channel. FC channel's VNB margin declined to 25.9%; and bancassurance, 2.7%; and GA channel, 12.6%.

So please move to Page 17, it's premium income and profit. Premium income of 0.5% in second quarter, and year-to-date basis, 2.5% higher. Operating results before tax, which include market variance, such as net realized gains and impairments, was KRW 32.1 billion lower. Let me explain profit in much more detail in Page 19.

The source of earnings. As you can see in the left-hand side, the investment -- low investment margin is the main driver of low profit. Investment margin dropped by KRW 18.7 billion from low interest rate and also KRW 5.3 billion low net realized gain. And last year, we had a one-off dividend income from the -- from a fund recreation. So I'd like to say it's around KRW 10 billion of one-off impact are included here.

And regarding the mortality and morbidity margin, it reduced by KRW 7.5 billion. There was a KRW 5.1 billion of net IBNR impact. And regarding the expense and other margin, it declined by KRW 11.1 billion. It includes KRW 3.3 billion of additional GA expenditure and KRW 4 billion -- KRW 4.1 billion of advertising cost.

So please move to Page 21, investment results. Our investment results maintained at 3.9% level, which is above industry average. And in the right-hand side you can see the investment asset portfolio composition. Our duration is 10.4 years. This is a duration based on the total asset base. Our fixed income ratio is 10.6 years. And yield-enhancing assets was 5.1% of our investment asset. And foreign bond was 2.6%. As you know, our loan portfolio is mostly policy loan.

Page 23 is the reserve and credit rating. It's not much change, it's our crediting rate reserve. Credit rating is 4.9%, and floating rating reserve is 2.93% So mix of floating credit rating reserve increased slightly due to increase of the -- due to higher new business volume sales from bancassurance channels. Understand, there's not much change.

Page 25 is about liability adequacy test. As you know, we wish to disclose LAT results twice a year based on the scenario from regulator. Second quarter 2019 LAT results show we are having KRW 5.4 trillion of surplus. This slide is showing that we expect LAT surplus drop KRW 188 billion at the end of June because of the low interest rate. But according to the new scenario from financial -- FSS, our LAT surplus even increased because of the FSS change in the Ultimate Forward Rate from 4.2% to 5.2%.

So Page 27 is about expense ratio, loss ratio and persistency. Expense ratio increased to 5.9% mainly due to advertising costs for the quarter. Year-to-date expense ratio was 5.5%, so we are on track. And second quarter loss ratio hiked to 78.2% as morbidity loss ratio was higher due to IBNR reserve but mortality loss ratio was lower for the quarter. So year-to-date, loss ratio was 7 -- 77.7%. I would like to say we are on track. But in terms of persistency results, a little bit disappointing. 13th month persistency dropped because of the higher volume of Protection products and also high sales coming from newly joined FC channels in their 20s. 25th months persistency is lower, it's mainly due to higher surrender from GAs, which we've been able to took action in mid-2017.

Page 29 is about the capital adequacy. If we take out the onetime impact from IFRS 9 accounting changes, shareholder equities would have increased by KRW 416 billion. And as I mentioned earlier, RBC ratio is at 428%. And before interim dividend, it was 435%.

Okay. Page 31, this is the last slide of my presentation. I'd like to brief our business and value steering direction in second half this year. You can find in the bottom is the active FC ratio and number of FC and number of in-force policyholder trend. The trend in third quarter 2018 of lower activity and second half number of FC has bottomed up. And we -- new product launches led to an increase in number of customer. In second half this year, we are going to focus offering to new customer and focus on increasing value of new business by improving Protection margin, also offer diversified product with higher margin. And last but not least, we are going to closely monitor highly volatile financial market and proactively fuel our strategy.

This is the end of my presentation. Thank you for listening. Now let me hand over to Daniel.

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Young-Jung Hahm, Orange Life Insurance, Ltd. - VP & Head of IR [3]

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Thank you for the presentation, Ick Jin. Now we'd like to begin a Q&A session.

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Operator [4]

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(Operator Instructions) Currently, there is no participant with questions, we will wait for a second until there is another question.

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Young-Jung Hahm, Orange Life Insurance, Ltd. - VP & Head of IR [5]

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If there are no further questions, I would like to end the conference call now. We look forward to speaking to you again sometime in the future. If you have any further questions to ask us, please contact any of our Investor Relations team. Thank you very much. Bye-bye.