U.S. Markets closed

Edited Transcript of 088350.KS earnings conference call or presentation 13-Nov-19 1:00am GMT

Q3 2019 Hanwha Life Insurance Co Ltd Earnings Call

Seoul Nov 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Hanwha Life Insurance Co Ltd earnings conference call or presentation Wednesday, November 13, 2019 at 1:00:00am GMT

TEXT version of Transcript

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

Corporate Participants

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

* Han Young-Man;Managing Director & Head-Financial Affairs

* Kyung-Geun Lee

* Sang-Wook Choi;Head of Investor Relations

* Sang-Wook Park

* Sung-Kyun Choi

Hanwha Life Insurance Co., Ltd. - Head of Product Development

* Yong-Ho Jung

Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management

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

Conference Call Participants

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

* Do Ha Kim

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

* Jiyong Im

Shinhan Investment Corp., Research Division - Research Analyst

* Jun-Sup Jung

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

* Myung Wook Kim

JP Morgan Chase & Co, Research Division - VP

* Seung-Gun Kang

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

* Taeho Yoon

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

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

Presentation

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

Operator [1]

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

(foreign language)

[Interpreted] 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 Third Quarter Earnings Results by Hanwha Life Insurance. (Operator Instructions)

Now we shall commence the presentation on the fiscal year 2019 third quarter's earning results by Hanwha Life Insurance.

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

Sang-Wook Choi;Head of Investor Relations, [2]

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

(foreign language)

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

Unidentified Company Representative, [3]

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

[Interpreted]

Good morning. I am Sang-Wook Choi, IR part leader at Hanwha Life Insurance. Consecutive interpretation in Korean and English is being provided for the earnings call for the third quarter of 2019, and the presentation materials are available on our IR website.

Today, Kyung-Geun Lee, CFO of Hanwha Life, will give a presentation, which will be followed by a Q&A session.

Now Mr. Lee will start the report.

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

Kyung-Geun Lee, [4]

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

(foreign language)

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

Unidentified Company Representative, [5]

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

[Interpreted] Good morning. I am CFO, Kyung-Geun Lee. First, I'd like to note that the presentation was prepared solely for the convenience of the investors in accordance with the separate financial statements under K-IFRS, and some numbers are subject to change after a full financial audit. Now I'd like to begin my presentation.

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

Kyung-Geun Lee, [6]

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

(foreign language)

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

Unidentified Company Representative, [7]

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

[Interpreted] Page 1 is on key financials. In the third quarter, the premium income and the total APE declined 1% and 2.3%, respectively. However, the protection APE recorded 9.8% growth year-over-year, thanks to the introduction of new products catering to market needs. The net income recorded a year-over-year decline of 57% due to a higher loss ratio and a lower investment yield. The crediting rate has fallen by 14 basis points, thanks to the structural improvement. The RBC ratio in the third quarter recorded 224.8% on the back of higher bond valuation gains resulting from falling domestic interest rates.

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

Kyung-Geun Lee, [8]

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

(foreign language)

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

Unidentified Company Representative, [9]

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

[Interpreted] Page 2 is on premium income and the APE. In the third quarter, the premium income and the total APE fell slightly by 1% and 2.3%, respectively, due to the slowdown in the sales of savings and annuity products. However, the proportion of protection-type income has increased to 56% of the total premium income. Also, thanks to the new products that cater to the market needs, the share of protection APE has further expanded to 62%. Hanwha Life will continue to pursue profitability-focused product strategies in order to respond to regulatory changes.

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

Kyung-Geun Lee, [10]

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

(foreign language)

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

Unidentified Company Representative, [11]

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

[Interpreted] Page 3 is on the APE breakdown by channel. We focus on the FPs as our main channel for a stable profit generation while using the GA channel and the bancassurance channel flexibly. The APE breakdown by channel in the third quarter shows that the FP channel accounts for 56%; the GA, 13%; and the bancassurance, 28%. The protection type accounts for 91% of the FP sales and 77% of the GA sales. While there is fierce competition in the GA channel, we will stay away from excessive competition based on incentives but focus more on selling protection products, mainly through large and efficient GAs.

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

Kyung-Geun Lee, [12]

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

(foreign language)

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

Unidentified Company Representative, [13]

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

[Interpreted] On Page 4, the 13th month persistency ratio was down 0.3 percentage points year-over-year, but the 13th month FP retention ratio continues to increase, thanks to more effective training for the FPs and their productivity improvement. As a result, the number of our tied agents has been on the rise. Our 13th month persistency ratio and the 13th month retention ratio are among the highest in the industry, and we will take advantage of this trend to fundamentally improve these indicators.

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

Kyung-Geun Lee, [14]

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

(foreign language)

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

Unidentified Company Representative, [15]

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

[Interpreted] Page 5 is on net income and core life insurance margin. The third quarter net income fell 57% year-over-year, mainly due to investment losses and equity impairment losses on the back of continued low interest rate trends. However, the interest margin at the core of our life insurance earnings has been showing a stable trend with average margin of KRW 200 billion per quarter despite increasing domestic and overseas uncertainties. Hanwha Life is committed to improving the quality of business focused on solid insurance margin and we're also reviewing a variety of strategies such as variable guarantee hedging system and the asset allocation improvement strategies in order to achieve a stable earnings trend.

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

Kyung-Geun Lee, [16]

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

(foreign language)

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

Unidentified Company Representative, [17]

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

[Interpreted] Page 6 is on the loss ratio and expense ratio trend. In the third quarter, the loss ratio was up 5.7 percentage points year-over-year, mainly due to the industry-wide growth in indemnity claims. Recently, living benefits claims payout has been constantly on the rise as a result of increased use of medical services, expansion of health checkups and simplification of medical indemnity claims process. Hanwha Life will continue our efforts to quickly stabilize the loss ratio trend by strengthening the underwriting process and improving the claims assessment capability based on big data analysis. The expense ratio was slightly up 0.9 percentage points, but the expense margin is managed at a stable level, thanks to the increasing flow of loading premiums on the back of robust sales of protection products in 2019.

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

Kyung-Geun Lee, [18]

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

(foreign language)

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

Unidentified Company Representative, [19]

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

[Interpreted] Page 7 is on investment. Our portfolio consists of 40% domestic bonds, 30% overseas bonds and 23% loan assets. Investment yields recorded 3.3% due to low interest rate trends and greater financial market uncertainties arising from the China-U. S. trade conflict. Going forward, we will flexibly adjust the portions of alternative assets and retail finance in order to defend the investment yield in the midst of falling market interest rates. Also, we have diversified into other currency bonds such as the euro-denominated bonds.

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

Kyung-Geun Lee, [20]

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

(foreign language)

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

Unidentified Company Representative, [21]

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

[Interpreted] Page 8 is on the bond and loan portfolios. As for bonds, 95% of the domestic bonds are rated AAA or higher and 95% of the overseas bonds are rated A or higher, which shows the quality of our bond portfolio. The loan portfolio is well balanced with 43% corporate loans, 30% policy loans and 27% retail loans.

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

Kyung-Geun Lee, [22]

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

(foreign language)

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

Unidentified Company Representative, [23]

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

[Interpreted] Page 9 is on premium reserves and solvency. The crediting rate posted 4.54%, thanks to the maturing of legacy policies and the reduced portion of fixed rate products. The duration gap increased year-over-year, but we will continue to manage the gap within 1.5 years by investing more in domestic and overseas long-dated bonds. Lastly, our RBC ratio recorded 224.8%, mainly on the back of bond valuation gains with lower interest rates.

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

Kyung-Geun Lee, [24]

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

(foreign language)

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

Unidentified Company Representative, [25]

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

[Interpreted] With this, I'd like to end my presentation for the third quarter 2019 conference call. Thank you very much for your time and attention.

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

Questions and Answers

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

Operator [1]

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

(foreign language)

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

Unidentified Company Representative, [2]

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

[Interpreted] (Operator Instructions)

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

Operator [3]

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

(foreign language)

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

Unidentified Company Representative, [4]

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

[Interpreted] The first question will be provided by Seung-Gun Kang from HI Investment & Securities.

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

Seung-Gun Kang, HI Investment & Securities Co., Ltd., Research Division - Research Analyst [5]

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

(foreign language)

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

Unidentified Company Representative, [6]

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

[Interpreted] Hello. I am Kang Seung-Gun from HI Investment Securities. Thank you for this opportunity. I have 2 questions. The first question is about the persistency ratios. When we look at the 13th month persistency ratio for the third quarter, it has gone down slightly. However, when you look at the 25th month persistency ratio, it was 63.6% in the second quarter, but in this quarter, it's 57.1%. So there is a significant drop in this indicator. So I'd like to ask you to explain about this and also your projection for the future.

The second question is about the LAT. And recently, the FSS announced the addition of a new item, reserves for financial solvency, and this is an effort to minimize impact on the capital reserves. However, this is only an accounting aspect and we will still have some burden on the LAT-related issues. So I'd like to ask you to comment on your forecast and projections for the year-end on profit and loss.

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

Sang-Wook Park, [7]

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

(foreign language)

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

Unidentified Company Representative, [8]

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

[Interpreted] I am Park Sang-Wook from the CPC Strategy team. Let me answer your first question.

As for the fall in the 25th month persistency ratio, we believe that there are 2 reasons. The first reason is to do with the overall macroeconomic slowdown in Korea, resulting in higher cancellation of insurance policies. And the second reason is that there was some decline in the 25th month persistency ratio in some channels. However, when we look at the October 13th month persistency ratio, it was higher at 83%, which is a good indication for the 25th month persistency ratio improvement. And our FP retention ratio is very high in the industry. So we have high expectations that the 25th month persistency ratio will continue to improve going forward. At the same time, we have been building our policy management modeling using big data and we have created a task force team to identify and improve the levers that can lead to better persistency ratios. And we are managing the GA channel. We're focusing on efficient and large GAs. And we are carrying out various campaigns to promote the persistency of the policies. And with these efforts, I believe that the indicators will improve going forward.

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

Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [9]

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

(foreign language)

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

Unidentified Company Representative, [10]

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

[Interpreted] I am Jung Yong-Ho from the Risk Management team. Let me answer your second question related to LAT. There were many media reports about the LAT recently and the basic idea is that, as we all know, there was a 1-year postponement of the existing road map. And because there is greater volatility in the interest rates in the market, the government decided to add some more flexibility in calculating the discount rate. And this is what I understand as the core of this policy change. And as you may know, there are many fixed rate and long-term policies from the life insurance industry. And with the global low interest rate trends, many countries are experiencing similar trends. And so there's a recognition within the industry and also the financial supervisory service that we need more time for companies to adjust to new policies.

So in 2019 and 2020, there may not be major issues related to LAT in the short term because FSS wants to give more time for companies to get used to or to be prepared for the new changes. However, we still recognize that there's a financial burden and impact on the financials. And the government wanted to prevent any outflow of surplus profit to the outside of the company, and that was the main idea for the addition of a new item provisioning for financial solvency. However, there were no details announced about this change, so we have to wait and see. And only when the details come out we will be able to fully understand their impact on our financials and on our provisions.

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

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

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

(foreign language)

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

Unidentified Company Representative, [12]

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

[Interpreted] I'd like to ask one follow-up question regarding the persistency ratio. You mentioned that in some channels there was a drop in the 25th month persistency ratio. Does it refer to the GA channel?

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

Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [13]

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

(foreign language)

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

Unidentified Company Representative, [14]

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

[Interpreted] Yes. As you mentioned, it is the GA channel. In the past, we sold some savings products and the annuity products through the GA channel, which led to the increase in the persistency ratio drop. And -- however, recently, we are selling more protection-type products in the GA channel. So I believe that the trend will improve in the future.

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

Operator [15]

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

(foreign language)

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

Unidentified Company Representative, [16]

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

[Interpreted] The next question will be provided by Jun-Sup Jung from NH Investment & Securities.

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

Jun-Sup Jung, NH Investment & Securities Co., Ltd., Research Division - Analyst [17]

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

(foreign language)

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

Unidentified Company Representative, [18]

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

[Interpreted] I am Jung Jun-Sup from NH Investment & Securities. Thank you for this opportunity. I have 2 questions.

The first question is that recently the media reported that the FSS has announced the QIS 2 results for K-ICS implementation. And I'd like to know your per cent or number. And if you cannot disclose that, can you tell us how much of capital -- additional capital you would have to acquire given the current interest rate?

The second question is that recently there were talks from the FSC that companies will be able to manage the duration using the financial derivatives. And I wonder if this policy is going to be materialized any time soon? And what will be the impact on your company? And will this lead to changes in your investment strategies?

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

Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [19]

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

(foreign language)

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

Unidentified Company Representative, [20]

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

[Interpreted] I am Jung Yong-Ho from the Risk Management team. Let me answer your first question.

So your question was about the QIS 2 results for the K-ICS implementation. According to the original schedule, we were supposed to provide all the materials by the end of October. However, from FSS, there were some additional requirements and requests, so some materials have been already committed, however, I believe that most insurance companies will provide a final materials within this week. So it is too early for us to discuss any specific results.

Of course, the QIS 2 results may be interesting. However, we understand that this is going to be used as a basis for industry-wide discussions on the finalizing our K-ICS system in Korea. There have been many efforts to adjust some of the aspects of the K-ICS through QIS 1 and QIS 2 because we have to find and make something that is suitable for the Korean insurance industry. And also, as you may look at the case of Solvency II, there were many interim measures in order to help insurance companies to do soft landing, and that is what FSS is doing through QIS processes. And so it is not right for us to discuss any specific numbers at this moment. However, when we have an overall direction that is more clear, then we will communicate that to the market.

So far, Hanwha Life Insurance has been making a lot of efforts to respond to regulatory changes, for instance, by issuing our hybrid bonds and also by managing the risks in a more thorough manner, and we will continue to do so. And we're constantly looking at the changes taking place within the K-ICS and QIS 2 framework in order to respond.

As for your question about any specific plan to increase our capital, we don't have any specific plan for additional capital acquisition right now, but we will closely monitor the QIS 2 process and we will reflect these results in our strategies. Of course, there are so many talks in the media about the possibility of using derivatives or utilizing the joint reinsurance system and so on, and we will continue to follow up on all these discussions so that we can be fully prepared.

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

Unidentified Company Representative, [21]

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

(foreign language)

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

Unidentified Company Representative, [22]

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

[Interpreted] I am [Kwon Hang Geun] from the Investment team. Let me answer your second question.

I believe it was last Friday that FSC made an announcement about the use of derivatives for investment, and we consider this very good news. We've already done a lot of study on the possibility of using interest rate derivative products. And we have already done our own study on the benefits and the downsides or risks of using such products, including forward trading and the swaps between fixed rate and floating rate products. So far, we have done the study, but we were not able to do that because of regulatory constraints. But now with this announcement from the FSC, we have expectations that we will be able to utilize this kind of strategy for the duration management and also better asset investment. And if we are going to be allowed to do that, then we can add more variety of assets in our portfolio and utilize some more diverse investment options.

And so in this regard, I believe that what we need to do is to have very clear directions and strategies for investment for AUM purposes and investments for profit generation purposes. And we're going to revise and update our investment guidelines and investment policies so that we can better improve our portfolio based on the risk-based investment principles. And as early as sometime next year, we'll be able to utilize these investment strategies for better results.

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

Operator [23]

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

(foreign language)

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

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

Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [24]

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

(foreign language)

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

Unidentified Company Representative, [25]

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

[Interpreted] I am Kim Myung Wook from JPMorgan. Thank you for this opportunity. I have 2 questions.

The first question is about the loss ratio trend. In the third quarter, the loss ratio has gone up and you explained that it was mainly because of increase in medical indemnity claims. So if this is the main driver behind increasing the loss ratio, then what will be critical is to reflect the pricing error in your premium rate adjustments going forward. And I'd like to know whether this was simply because of the increase in medical indemnity claims or were there any other issues related to other types of products? And if this is mainly because of the indemnity claims, then is it -- are you going to be able to reflect and adjust your premium rates in order to stabilize your loss ratio?

The second question is about the duration gap increase between the assets and liabilities. And you mentioned, of course, about the possibility of using derivatives and other products. But if we assume that the interest rates will remain low next year in 2020, do you have enough plans to reduce this duration gap? How are you going to achieve this?

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

Unidentified Company Representative, [26]

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

(foreign language)

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

Unidentified Company Representative, [27]

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

[Interpreted] I am [Park Bong Soon] from the Claims and Investigation team. Let me answer your question related to the loss ratio trends.

As we have before mentioned in the presentation, there is industry-wide increase in medical indemnity claims, and this is the direct reason. There are more utilization of medical services and increased health checkups and also simplification of the medical indemnity claims process, and all of these have attributed

(technical difficulty)

to respond to this issue. For instance, we have analyzed all the medical indemnity claims cases in order to see if there were any excessive claims request from the policyholders and we have reflected them in our system in order to strengthen our claims assessment and adjustment process. And at the same time, we have been expanding our organization for the medical indemnity claims department so that we can better -- and improve our process and use our AI solutions so that we will prevent any excessive claims request for these benefits.

In addition to that, there has been increased diagnosis of cancer and other critical diseases, which may have led to the increase in claims payout related to such benefits. However, that was not the main cause or direct reason for the loss ratio increase. It was mainly the medical indemnity claims increase, and we are working very hard to respond to this trend.

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

Sung-Kyun Choi, Hanwha Life Insurance Co., Ltd. - Head of Product Development [28]

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

(foreign language)

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

Unidentified Company Representative, [29]

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

[Interpreted] I am Sung-Kyun Choi from the Product Development team.

As for your question regarding whether we're able to reflect these losses in our premium adjustment, there are some constraints due to the regulations by the government regarding the premium rate adjustment for medical indemnity products. So it is indeed true that the current premium rates are not able to cover for the losses that we're experiencing. So both the life insurance companies and nonlife insurance companies have been making requests to the government regarding the regulatory changes. And depending on whether the policies would change or not, we will be able to consider this option of reflecting -- or adjusting our premium rates, but we have to wait and see.

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

Unidentified Company Representative, [30]

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

(foreign language)

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

Unidentified Company Representative, [31]

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

[Interpreted] I am [Kwon Hang Geun] from the Investment team. Let me answer your question regarding our strategies to reduce the duration gap.

So your question was mainly, given the very low interest rate environment, what kind of actions can we take to reduce the duration gap. To be honest, there may not be any significantly effective methods, but rather we just have to continue to invest more in long-term bonds in order to increase the asset-side duration. And at the same time, we have to find high investment yields or high-return investment assets at the same time so that we can maintain decent investment yield. So our plan is to continue to invest in long-term bonds in order to push up the duration -- the asset-side duration while utilizing the derivatives and other products.

So let me give you some details about our asset class allocation strategy. For foreign exchange-related aspects, we will diversify the currencies in our portfolio and also we will diversify our product and investments in the underlying assets. And we will continue to tap into and utilizing the overseas local platforms, including our legal entity in New York, so that we can have better access to quality investment assets. And for specific asset classes, we will take advantage of some timing where there will be market interest rates going up while the benchmark rates go down. So we will capture these opportunities to increase our exposure to domestic and overseas long-term bonds. And at the same time, for overseas markets, we will continue to increase our exposure to highly rated long-term corporate bonds. And for equity-type assets, we will continue to reduce the portion of equity stakes and we will pursue more highly profitable alternative investment and retail finance.

To be more specific about alternative investment, while we continue to utilize the traditional alternative assets such as offices and other backed securities, but also we will tap into more of real estate and other retail assets, which will provide us with higher yields. And in the advanced markets, we will not only invest in core infrastructure assets, but also continue to focus on senior loans and mezzanine investment opportunities.

And for the equity side, we will tap into the capital gains as they exit and also continue to invest in highly rated and equity assets by utilizing our leverage. And this will lead to a better interest gain.

And as for the retail finance, this is an area where we can expect higher investment return, but there are government regulations. So within the government ceiling or limit, we will tap more into the credit loans with our policyholders. And this will be linked to our marketing activities.

And as for the backed loans, we will focus more on the 30-year fixed rate loans, which will help us increase our asset side duration. And as I mentioned, we will have more clear direction for the ALM-related assets and the investment yield-related assets so that we can have clear strategies in the overall investment scheme, and we will continue to do our efforts to maximize our investment return.

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

Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [32]

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

(foreign language)

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

Unidentified Company Representative, [33]

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

[Interpreted] I have one quick follow-up question regarding health insurance. I remember our main conversations for the past 2 years of conference calls that Hanwha Life views low-priced health insurance to produce a better new business margin compared to whole life insurance products. Do you still maintain this view? Or has there been any change?

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

Sung-Kyun Choi, Hanwha Life Insurance Co., Ltd. - Head of Product Development [34]

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

(foreign language)

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

Unidentified Company Representative, [35]

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

[Interpreted] I am Sung-Kyun Choi from Product Development team. Yes, we are maintaining that view. So when we design and develop new products, our target margin for such health products is higher than the whole life insurance products.

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

Operator [36]

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

(foreign language)

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

Unidentified Company Representative, [37]

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

[Interpreted] The next question will be provided by Taeho Yoon from Korea Investment & Securities.

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

Taeho Yoon, Korea Investment & Securities Co., Ltd., Research Division - Research Analyst [38]

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

[Interpreted] I am Yoon Taeho from the Korea Investment Securities. I have 2 questions.

The first question is about the variable annuity products and reserving for the variable annuity products and what is the current trend.

And the second question is related to the LAT. And if there is going to be any impact on the surplus -- earning surplus, then this may have impact on your dividend policy. So what is your view on this?

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

Unidentified Company Representative, [39]

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

(foreign language)

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

Unidentified Company Representative, [40]

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

[Interpreted] I am [Nam Gong Yoon] from the Financial Planning team. Let me your -- let me answer your question regarding variable guarantee reserves.

In the third quarter, the additional reserving amounted to KRW 2.8 billion. And by the end of the fourth quarter, the starting interest rate was fixed at 1.31%. So we will have to make additional reserving for variable guarantee products. However, for the remainder of this year, there is likely to be some change depending on the margin changes of the variable guarantee products and also the volume of the new business coming from the variable guarantee products. So to achieve this, we have launched new variable guarantee products in October and November of this year, and there is a sizable premium income coming from these products. And at the same time, the [cost fee] has been improving recently, leading to better yield from variable guarantee operations. So we believe that the amount of additional reserves for variable guarantee by the end of this year is going to reduce. Right now, the quarterly average core interest margin is about KRW 200 billion. And we continue to work to increase our premium and insurance income so that we can make a surplus in the fourth quarter going forward. Thank you.

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

Han Young-Man;Managing Director & Head-Financial Affairs, [41]

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

(foreign language)

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

Unidentified Company Representative, [42]

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

[Interpreted] I am Han Young-Man from the Finance team. Let me answer your second question.

So the impact of reserves for financial solvency on our dividend policy, that was the question. Our accumulated profit surplus is KRW 3.3 trillion, so we do have the capable -- capability to pay out dividends to our shareholders. However, the reserving amount for our financial solvency has not been determined yet, so we cannot assess the direct impact on our dividend as of today.

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

Operator [43]

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

(foreign language)

[Interpreted] The next question will be provided by Do Ha Kim from Cape Investment & Securities.

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

Do Ha Kim, Cape Investment & Securities Co., Ltd., Research Division - Analyst [44]

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

(foreign language)

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

Unidentified Company Representative, [45]

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

[Interpreted] I am Kim Do Ha from Cape Investment & Securities. I have 2 questions.

The first question is about the RBC-related issues. Thanks to the lowering or falling market interest rates, your RBC has been boosted a little bit. But when you look at the denominators and the numerators, you can see that there was a 5% increase in the required capital on a quarter-on-quarter basis, which is a slightly higher trend compared to the other Q-on-Q figures. So what was the area where there was increase in the risk, which led to increased required capital?

The second question is about foreign currency hedging. Recently there have been a worsening of U.S.-Korean won swap rates. And I understand that you're increasing your exposure to euro-denominated bonds, but still overall in your portfolio, the percentage of dollar-denominated assets is not very changed -- not changed much. So my question is, what is the average hedging maturity for euro-denominated assets? And all about -- also about the dollar, recently people say that a shorter hedging maturity for dollar will be more favorable, maybe less than 1 year. But in the future, the hedging maturity was -- that is less than 1 year, will lead to increased market risk. So this may not be a smart choice. So what is your overall strategy for hedging duration for euro and the dollars?

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

Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [46]

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

(foreign language)

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

Unidentified Company Representative, [47]

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

[Interpreted] I am Jung Yong-Ho from the Risk Management team. Let me answer your first question. Simply put, it was mainly the interest rate risks. The other risks were pretty similar. But with the market rate going down, there was some impact on the duration of the rate indicated or rate-linked products. And this is because this is affected by the disclosed rate. And this is the main area where there was increase in risk.

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

Unidentified Company Representative, [48]

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

(foreign language)

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

Unidentified Company Representative, [49]

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

[Interpreted] I am [Kwon Hang Geun] from Investment team. Let me answer your question regarding the hedging strategy.

Compared to the beginning of this year, there were improvements of hedging conditions, hedging funds for the dollar, while there were worsening of conditions for the euro-related hedging. So basically, in our portfolio the main currency is, of course, the U.S. dollar, while we have continued to utilize the flexible exposure increase or reduction to the euro. And while the improvement for hedging of U.S. dollar continues, we have adjusted our proportion. So compared to the beginning of this year, the share of the euro versus the dollar has not changed much.

Our basic hedging strategy is 100% hedging. And the overall principle is to have the maturity or hedging maturity to be less than 15% on a quarterly basis. And with this principle in mind, our average hedging period is 2 to 3 years.

As you mentioned, there are risk charges to shorter hedging period. So our goal right now is -- I think it's a good time for us to diversify our maturity schedules. So when we look at the distribution of hedging maturities, we're trying to diversify and even it out so that we can more balance the hedging schedule. And with these specific strategies, we will implement them next year.

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

Do Ha Kim, Cape Investment & Securities Co., Ltd., Research Division - Analyst [50]

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

(foreign language)

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

Unidentified Company Representative, [51]

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

[Interpreted] So I have a follow-up question. You mentioned that the average hedging period is 1 to 3 years. Can you break it down between euro and dollar?

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

Unidentified Company Representative, [52]

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

(foreign language)

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

Unidentified Company Representative, [53]

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

[Interpreted] And regarding that, the IR team will check the data and get back to you.

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

Operator [54]

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

(foreign language) [Interpreted] The next question will be provided by Jiyong Im from Shinhan Investment Corp.

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

Jiyong Im, Shinhan Investment Corp., Research Division - Research Analyst [55]

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

(foreign language)

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

Unidentified Company Representative, [56]

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

[Interpreted] I am Im Jiyong from Shinhan Investment. Thank you for the opportunity. I have 3 quick questions.

The first question is, in the third quarter, what were the one-off items? And what were the amounts of these one-off items?

And the second is that I can see that the trend for risk premium is going down. So there has been slowdown in the growth of risk premium. So what is Hanwha Life's plan to respond to this?

The third question is that currently, the investment yield is continuing to decline. And so do you think this trend will continue? And what will be the year-end projection for the interest margin?

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

Unidentified Company Representative, [57]

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

(foreign language)

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

Unidentified Company Representative, [58]

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

[Interpreted] I am [Nam Gong Yoon] from the financial planning team. Let me answer your first question. In the third quarter, one of the one-off items was the 4 -- was the losses from the equity impairment and also some disposal of equity that we had. So this led to KRW 40 billion of losses. And also, when you look at the third quarter in 2018, there were additional -- there were recounting of guaranteed -- variable guaranteed reserves, which was about KRW 30 billion. But this year, we added additional reserves to our variable guarantee, which was KRW 2.8 billion. So there was net of about KRW 30 billion. So these were the one-off items.

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

Sang-Wook Park, [59]

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

(foreign language)

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

Unidentified Company Representative, [60]

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

[Interpreted] I am Park Sang-Wook from the CPC team. Let me answer your question regarding the risk premium trends.

Currently, we are making various trends to increase our premium -- risk premium income. First of all, we have established a task force team to push up the long-term persistency ratio by different channel. And this task force team is identifying areas where we can make improvements. And we will soon implement action plans.

Secondly, as for the performance assessment of sales, we will move away from the -- using only the indicators of initial premiums, but rather look at the quality of insurance accounts. This will be a way to improve our performance evaluation.

The third effort is that we understand that the protection-type business will bring about more risk premium income. So we will push for other protection-type product sales, GI and CI product sales and also developing -- designing and developing new writers that can bring about more risk premium income. So we are now in the process of setting targets for risk premiums next year, and we will do our best to improve our result.

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

Unidentified Company Representative, [61]

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

(foreign language)

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

Unidentified Company Representative, [62]

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

[Interpreted] I am [Kwon Hang Geun] from the Investment team. Let me answer your question about our investment yields, which is currently in the middle of 3%. And as we all know, interest rates have been very low. And so it was unavoidable that investment yields was going down. But by the end of this year, when we expect that there could be some issues or some events or given the remaining duration of this year, we see that the investment yield is going to be similar to what we have, mid-3%.

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

Unidentified Company Representative, [63]

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

(foreign language)

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

Operator [64]

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

(foreign language)

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

Unidentified Company Representative, [65]

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

[Interpreted] Currently, there are no participants with questions.

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

Operator [66]

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

(Operator Instructions)

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

Unidentified Company Representative, [67]

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

(foreign language)

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

Unidentified Company Representative, [68]

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

[Interpreted] With no further questions, we would like to end the earnings conference call for the third quarter of 2019 of Hanwha Life Insurance.

I'd like to thank you all for your participation. If you have any additional inquiries, please contact the IR team. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]