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Edited Transcript of 088350.KS earnings conference call or presentation 20-Feb-20 1:00am GMT

Q4 2019 Hanwha Life Insurance Co Ltd Earnings Call

Seoul Mar 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Hanwha Life Insurance Co Ltd earnings conference call or presentation Thursday, February 20, 2020 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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

* Kyung-Wook Chong;Deputy General Manager

* Sang-Wook Choi;IR Head

* Seung-Ju Yeo

Hanwha Life Insurance Co., Ltd. - CEO, President & Inside Director

* Yong-Ho Jung

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

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Conference Call Participants

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* Byung Gun Lee

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

* Jin-Sang Kim

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

* Jiyong Im

Shinhan Investment Corp., Research Division - Research Analyst

* Jun-Sup Jung

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

* Sara Lee

Morgan Stanley, Research Division - Executive Director

* Seung-Gun Kang

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

* Sinyoung Park

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Yong Hoon Sung

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

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Presentation

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Sang-Wook Choi;IR Head, [1]

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[Interpreted] Good morning. I am Sang-Wook Choi from the IR part at Hanwha Life Insurance. We provide consecutive interpretation in Korean and English for the fiscal year 2019 earnings conference, and you can find the presentation materials on our IR website.

Today, CFO, [Lee Kyung-Geun] will give a presentation, which will be followed by the Q&A session. Now I will hand over to CFO, [Lee].

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Unidentified Company Representative, [2]

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[Interpreted] Good morning. I am CFO, [Lee Kyung-Geun]. I would first like to mention 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. I will now begin the report.

Page 1 is key financials. The protection and other protection APE grew 25.2% and 93.4%, respectively, driving the total new business APE growth. The net income fell 68.1% year-over-year, mainly due to additional provisioning for variable guarantee products in response to falling market rates. The RBC ratio stood at 235%.

Page 2 is on premium income. In 2019, the total premium income was down slightly due to the decline in retirement insurance sales, but the premium income in the general accounts posted a 2.5% year-over-year growth, thanks to the protection-type sales growth. In addition, as a result of consistent product strategies, centered on profitability, the share protection-type premium income in the general accounts was expanded to 60%.

Page 3 is our new business APE. The total APE grew 8.1% year-over-year and the share of protection, new business APE, increased to 65%. The profitability of new business value recorded 36.4%. In particular, other protection APE recorded a 93.4% growth year-over-year, thanks to the successful launch of new products such as dementia covers with long-term care benefits and special cancer insurance that cater to market needs.

On Page 4, the APE breakdown by channel shows that the type agent FP channel accounts for 59%; the GA channel 14%; and the bancassurance 27%. We're strengthening our channel competitiveness based on highly efficient and professional type agents. The portion of protection-type sales in FP and GA channels grew 91% and 76%, respectively. In 2020, we will continue to expand the portion of protection APE by introducing new products that offer differentiated coverage and benefits, including comprehensive health insurance with a convenient claims process and education insurance.

Page 5 is on sales efficiency, thanks to the efficiency improvement of the type agent FP channel, the 13th month FP retention ratio and the 13th month persistency ratio recorded 49.3% and 81.8%, respectively, which are among the highest in the industry. Also, the FP productivity improved 8.2% year-over-year. We will continue to promote efficiency by improving mid to long-term persistency ratios and tightly managing policies with termination risks.

Page 6 is on net income and insurance income. In 2019, the net income fell 68.1% year-over-year due to the accumulation of variable guarantee reserves in line with the declining market rate. The core insurance income remained stable at KRW 750 billion on a yearly basis on the back of expense margin improvement resulting from the increase of assumed expenses.

Page 7 is on the loss ratio and expense ratio. In 2019, the loss ratio was up 3.6 percentage points due to the industry-wide growth in indemnity claims. Recently, claims have been rising because of the greater use of non-NHI medical treatment, such as manual therapy, but we would do our best to achieve 80% loss ratio in the mid to long-term through higher sales of protection products stricter claims management and stricter underwriting. The expense ratio was slightly up, 1.2 percentage points year-over-year, due to the decline in premium income but the expense margin improved on the back of higher expenses assumed in line with new business growth.

Page 8 is on investment. In 2019, the investment yield fell 25 basis points year-over-year to close to 3.45% due to the low [marketing]. Meanwhile, as a result of increased investment in domestic and overseas long-dated bonds to respond to regulatory changes, the portion of long-term bonds in the portfolio that have more than 10 years of maturity has expanded to 51%. Unfavorable market conditions are expected to continue this year so we will keep purchasing long-rated fixed income assets, while flexibly managing the share of our turnover investments and retail finance in order to drive up the investment return.

Next on Page 9 is bonds and loans. In the bonds portfolio, 90% of the domestic bonds are rated AAA or higher, and 96% of the overseas funds are rated A or higher, demonstrating the quality of our fixed income portfolio. The loan portfolio is also well balanced with 43% corporate loans, 30% policy loans and 27% retail loans.

Page 10 is on premium reserves and solvency. In 2019, the crediting rate improved 14 basis points year-over-year to close 4.51%, thanks to the maturing of legacy policies and increased portion of floating rate products. The RBC ratio remained stable at 235% as a result of domestic hybrid debt issuance and growth in -- valuation gains of (inaudible) available for sale. The duration gap was up 0.6 years on a year-over-year basis, as a result of tightening in calculating a link liability duration. We will continue to manage the duration gap by increasing the portion of long-term fixed for income assets.

Let's see the outlook for 2020. This year, unfavorable business conditions are expected to persist in the life insurance industry, including aging population, low growth rates, low interest rates and increased market competition. In this context, Hanwha Life will focus on boosting core insurance income through expense management, growth based on the value of new business and loss ratio management. Also, we will effectively respond to regulatory tightening through active ALM activity and stable RBC management. Based on these efforts, we aim to achieve 15% expense ratio, 42% new business profitability, 80% loss ratio, 9.2 years of asset duration and the RBC ratio of 220%.

Finally, let me report on our mid and long-term shareholder return policies. As of 2019, our major shareholders include Hanwha Group with 45% stake, foreign investors with 14.1%, domestic institutional investors with 8.1% and individual investors with 9%.

Hanwha Life has been paying out cash dividends since the IPO in order to boost shareholder value. As for the dividend payout ratio, we have been maintaining about 20% in anticipation of regulatory tightening. Going forward, when the new regulatory regimes are established, the company will do it's best to actively promote shareholder return policies.

Dear investors, currently, the life insurance industry is going through very difficult time due to the deterioration of the business environment. However, in 2020, as we're celebrating the 10th anniversary of the IPO, we will do our best to make sure that this year will be the new year for creating a new growth momentum. Thank you very much.

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Questions and Answers

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Operator [1]

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[Interpreted] Now Q&A session will begin.

(Operator Instruction]

The first question will be presented by Byung Lee from DB Financial Investments.

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

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[Interpreted] I'm Lee Byung Gun from DB Financial Investment. I'd like to present 2 questions. The first question is that when you look at Page 10, it says that the liability duration was increased to 10.59 years I believe that it was mainly due to the changes in the regulations in calculating the duration of linked liabilities. And then later, you mentioned that your goal for asset duration is 9.2 years. Even without considering regulatory changes as currently the posted rates are declining, I believe that the duration for linked liabilities will continue to expand. So even though, you have this asset duration expanded to 9.2 years, you may not be able to fall in within the minimum interest range. So I'd like to know what is your ultimate goal of the asset and liability duration gap by the end of 2020? And what are your plans for the future? The second question is about reserving for financial soundness. And recently, a similar -- the trends were announced, and I understand that you did some simulation internally. So I'd like to know if you have any possibility or plans to reserve provision? These reserves for financial soundness this year or maybe next year? And if you do have such a plan, what will be the size of that?

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Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [3]

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[Interpreted] I'm Jung Yong-Ho from the Risk Management team. Let me answer your question regarding the asset and liability duration gap. As you can see, our liability duration has been expanded to 10.59 years, while the asset duration is 8.37 years. And this year -- and last year, for 2019, we were able to fall under this minimum interest risk range and as a result of regulatory changes, the liability duration was increased by 1.3 years last year. And we expect that such a trend will continue for this year as well, and we expect that the liability duration will be expanded by 1 -- about 1 year. And our target for asset duration is 9.2 years for 2020. And as for the asset and liability duration gap, our target is to maintain it within the range of 1.5 years. And we are devising and implementing various strategies to achieve this goal.

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Kyung-Wook Chong;Deputy General Manager, [4]

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[Interpreted] I'm Chong Kyung-Wook from the IFRS task force team. Let me answer your question -- the second question regarding -- referring for financial adequacy, and I'd like to also comment on LAT. As you understand, for the past years, the regimes for LAT has been strengthening, but as was mentioned earlier, the new regimes would be postponed for another year and as a result, the LAT implementation schedule has been changed as well. As of the end of 2019, our LAT surplus was calculated to be around KRW 4.3 trillion, and this figure will be included in the business plan that we will disclose early March. So you can look into this report later on.

And you are also wondering what would happen to our financial solvency reserving for 2020 and 2021. Currently, we understand that the impact of regulatory tightening, according to the current schedule, and the surplus that's generated from new business each year is very similar. Therefore, at this current market rate level, there's not much burden for LAT. And the guidelines and the specifics for the financial solvency reserving has been finalized, and when these are implemented, starting from 2021, you will have to accumulate reserves based on the LAT calculations. Our calculation shows that as of the end of 2019, it's KRW 1.9 trillion, and at this current interest rate level, the surplus is small, but it's there. So I don't think there will be any major LAT related burden on our provisioning if the current interest rates are maintained.

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Unidentified Company Representative, [5]

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[Interpreted] I'm (inaudible) from Investment Strategy team. Let me add more comments on the part of asset duration. Our target for 2020 asset duration of 9.2 years is based on our plan to continue to purchase long-dated fixed income assets. However, in addition to that, we're currently discussing with the regulatory authorities about the possibility of utilizing interest rate, interest forward and IRS and other interest related derivative products. If these are allowed, then we will be able to increase our asset duration even further.

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Operator [6]

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

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Jin-Sang Kim, HMC Investment Securities Co., Ltd., Research Division - Analyst [7]

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[Interpreted] I'm Kim Jin-Sang from Hyundai Motor Securities. First of all, in Q4, you had to accumulate additional [terms] for variable guarantees. And other than that, were there any other one-off events that have impacted your P&L? And if so, then what will be the amount of such event. Secondly, because of the increase in the loss ratio, your insurance income has declined in 2019. And you mentioned that the loss ratio target for 2020 is 80%, and I understand that your mortality margin is going to improve. However, there is not much room for the expense margin to improve according to my understanding. So I'd like to ask you to give us some breakdown of your insurance income between mortality margin and expense margin. Thirdly, there was no mentioning about the value of new business in the presentation, and I believe that it was quite positive. So can you provide us with some numbers on a year-over-year basis? And what will be the prediction for the value of new business this year and next year as a whole?

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Unidentified Company Representative, [8]

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[Interpreted] I'm (inaudible) from the financial planning team. Let me answer this question. First of all, other than the additional provisioning for variable guarantee covers, there was no other major (inaudible). Now, I'd like to provide you with some breakdown for our insurance income for this year -- for last year and also this year. When you look at Page 6, you can see that our net income declined by 68% year-over-year to post KRW 115 billion. When we break it down to mortality margin, interest margin and expense margin. I'd like to give you some more details. When you look at the expense margin in 2019, there was an increase in sales for dementia products, cancer products and other protection products.

As a result, the assumed expenses were increased and, thereby, generating about KRW 50 billion of increase in expense margin, leading to the final expense margin number to be KRW 330 billion. There was a decline in the mortality margin and interest margin. First, let's look at the mortality margins. In 2019, there was a big increase in medical indemnity claims and other claims, resulting in the increase of such claims by KRW 60 billion year-over-year, and in addition, there was additional IBNR reserving of KRW 40 billion. As a result, the mortality gains were declined by KRW 78 billion, resulting in KRW 423 billion of mortality [profit]. And when you look at the interest margin, the market rates were falling, and there was some valuation losses under part of the reserves for variable guarantee products, which was about KRW 30 billion.

Going forward for the year of 2020, I'd like to share with you some of our projections. First of all, we will do our best to make sure that the expense margin will continue to increase. There was about KRW 60 billion of year-over-year growth from 2018 to 2019 when it comes to the expense profit. And we will continue to push forward this trend by tightly managing the claims and also make sure that there will be no increase in fraud cases. In 2020, when we look at the core insurance income, which was KRW 750 billion in 2019, we believe that this figure will be able to increase to KRW 800 billion for year 2020. And for interest margin area, we will diversify the asset portfolio by utilizing the expense reserves for the provisions, and so that we can make up for the negative spread margin, and in addition to that, we will actively utilizing hedging strategies in order to reduce variability in the asset portfolio, so that we can generate more stable interest margin.

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Kyung-Wook Chong;Deputy General Manager, [9]

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[Interpreted] I am Chong Kyung-Wook from the IFRS taskforce team, let me provide an answer to your question on the value of new business. We provided you with new business margin only in the presentation, which increased by 2.5 percentage points to 36%. When I -- when you put it into actual number, it was an increase of KRW 95.7 billion from KRW 615.6 billion of 2018 to KRW 711.3 billion in 2019.

So there was an increase of about 15% in terms of value of new business. Our new business margin target for 2020 is 42%. And you can roughly say that 1% is equivalent to KRW 18 billion to KRW 20 billion in monetary terms. So on a yearly basis, it's going to mean that there will be additional KRW 60 million to KRW 70 billion of increase in the value of new business. And when you translate it into a growth rate, it's going to be about 8%. Hanwha Life will continue to practice various measures in order to increase the new business margin by utilizing and reshuffling our portfolio and by working with various assumptions.

(foreign language)

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Operator [10]

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

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

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[Interpreted] I'm Seung-Gun Kang from HI Investment & Securities. I'd like to ask you 2 questions. The first question is on yield for your investors -- for your asset management. In the fourth quarter, there was additional burden of provisioning for variable guarantee coverages. And after your account reclassification, you have to cover for that, partly by disposing some of your fixed income assets. And this was probably lead to a lower running yield for next year.

And you mentioned that you're planning to increase the asset duration to 9.2 years by continuing to purchase loans from bonds, but currently, the percentage of your overseas assets in the portfolio is nearing the max of 30%. So then your only option will be long-dated government and sovereign bonds, which have very low rates, and this would be another reason for the expectation of lowering -- running yield for next year. So what's the running yield for your assets in 2019? And what is your expectation for this year 2020? And the second question is about the EV movement. You didn't provide us with the EV number. So I'd like to ask you the question. You mentioned that the new business margin in the EV calculation was decreased from 36.5% to 39%, and I have to understand the movements behind it. Last year, interest rates and loss ratios, all of these were not favorable, but still, you were able to increase the new business target, and I believe that this would have to do with some changes in the mix. So can you provide us with some color on the movement?

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Unidentified Company Representative, [12]

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[Interpreted] I'm (inaudible) from the Investment Strategy team. Let me entertain your first question. As of the end of 2019, the investment yield was 3.35%. And going -- coming into this year in 2020, the interest rate situation is still unfavorable. However, to make up for this, we are focusing on investing in high-margin infrastructure and private debt and other instruments in order to expand in the running yield.

So in our overall asset management strategy, we will pursue 2 separate tracks. The first track would be that we'll continue to invest in long-term bonds, even though they are very low rates. And this would lead to a downward trend for new money yields. But still, this is something that we have to do to reduce interest rate risks. And at the same time, the other track is about pursuing investment in high-margin investment opportunities, including alternative investments.

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Kyung-Wook Chong;Deputy General Manager, [13]

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[Interpreted] I'm Chong Kyung-Wook from the IFRS task force team. Let me answer your question regarding the movement of the value of new business. This is mainly due to the impact of portfolio changes. As you can see in our presentation material, a portion of protection have increased from 56% to 65%, and this impact was about 6% and because of the falling interest rates, we downward adjusted the margin expectations from future investments. So this has an impact of about 2% on the APE margins. And regarding mortality and other assumptions, there were some changes in these assumptions, which led to the impact of 1.5%.

(foreign language)

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Operator [14]

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

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Jun-Sup Jung, NH Investment & Securities Co., Ltd., Research Division - Analyst [15]

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[Interpreted] I'm Jun-Sup Jung from the NH Investment & Securities. I'd like to ask you 2 questions. The first question is about the decline in the insurance income in 2019. Of course, this was mainly due to the additional accumulation of provisions for variable guarantee, but I believe that there was a large amount of equity impairment losses as well. So what kind of view should we maintain about 2020 in this regard? Were there any expected cases of losses or gains that you are forecasting for this year. The second question has to do with the investment that you have been making for several years in fintech. And considering all these investments, we would expect that some tangible outcome would be materialized later or soon. So were there any benefits of making such fintech investment in terms of expense savings or maybe some valuation gains or disposal gains of equity investment. Can you provide us with some color on that?

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Unidentified Company Representative, [16]

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[Interpreted] I'm (inaudible) from the financial planning team. Let me entertain your first question. As you pointed out, in 2019, there was additional reserving, but at the same time, there was a large amount of equity impairment losses, yes. But will this trend continue into this year? We do not expect that to happen?

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Unidentified Company Representative, [17]

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[Interpreted] I'm (inaudible) from AI Plus task force team. Let me answer your question regarding fintech and its investment. Hanwha Life Insurance has been pursuing open innovation and various collaborations with AI and fintech companies. These initiatives on big data and AI and other new technology are not only focused on improving insurance business, but also we are collaborating with them in order to, maybe, design and consider launching of many insurance or other new products. However, I'd like to say that the fintech industry itself when it comes to insurance, it's rather in an early stage. And even though there are many initiatives underway, these may not result in immediate outcomes in the short term. But we are making all these efforts in order to provide new services and technologies for the future.

(technical difficulty)

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Yong Hoon Sung, Hanwha Investment & Securities Co., Ltd., Research Division - Analyst [18]

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I'm Sung Yong from the Hanwha Investment & Securities. I'd like to ask you 2 questions. The first question has to do with expense margin. Your competitor disclosed their efforts to improve the expense margin, and they shared with us the targets for this year. So I'd like to ask you to provide us with some more information about the expense margin target because this is maybe the only kind of margin that you can control internally through strenuous efforts. The second question may be overlapping with the previous questions, but it has to do with the new business value and new business margin, and you provided also some assumptions, but I understand that in calculating new business margin that you shared with us, this would probably be based on the print value and meeting the time serial, that is how you could calculate that. But I'd like to know what the amount or the number for new business value of the past policies, or using the current assumptions, and I'm sure that there will be a negative variance. So what's the size of the negative variance and what is the figure for that?

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Unidentified Company Representative, [19]

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[Interpreted] I'm (inaudible) from the financial planning team. Let me answer your first question. As you pointed out, the expense margin is something that we have been putting priority on, and we have been implementing various measures to improve the expense margin. When you look at the situation in 2019, we were able to increase the assumed expenses because there was an increase in sales of other protection products. And at the same time, starting from January this year, across the company, we have been implementing various measures for expense and cost cutting. Not only reducing one-off expenses but also introducing more automation and work efficiency so that we will be able to maintain a constant improvement in the expense management, and I believe that this will lead to a better profit generation in the future. As for the specific target of the expense margin last year, the amount -- the amount was KRW 330 billion last year, and for this year, we expect an increase of at least KRW 20 million to KRW 30 billion in addition.

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Kyung-Wook Chong;Deputy General Manager, [20]

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[Interpreted] I am Chong Kyung-Wook from the IFRS task force team. Let me comment on the question related to the variance in terms of new business margin. I don't have the past figures right now with me, but I can share with you my view on the overall variance aspects. As was mentioned in the IR presentation, there was some adjustments or changes in terms of mortality and expense margin related assumptions, but these movements were not very big. So there was not much variance in these aspects. And when it comes to the interest rates, as you may know, for the past years, market rate has been falling constantly. So investment-related assumptions and economic assumptions have been -- have resulted in some variance, in my opinion, but when you look at the product mix, which is related to economic assumptions. You can see that there is a very large portion of floating rate products. And even for fixed-rate products, they may include some other protection products and some riders. They are sold at fixed rates because they do not have much burden on additional provisioning. So all in all, I do not think that there will be any major variance in these regards as well. And if necessary, I will communicate with you through the IR part in the future.

(foreign language)

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Operator [21]

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[Interpreted] The next question will be presented by Sinyoung Park with Goldman Sachs.

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Sinyoung Park, Goldman Sachs Group Inc., Research Division - Equity Analyst [22]

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[Interpreted] I'm Sinyoung Park from Goldman Sachs. I have a quick question. The first one is that, in your presentation, you mentioned that you will consider promoting shareholder return, even though I understand that it is not easy to secure additional capital internally. So what are some of the options that you consider to increase shareholder return? Secondly, this is a suggestion, I'd like to ask you to include some numbers for interest-bearing assets in your portfolio in the presentation. This will help us a lot in analyzing your company.

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Han Young-Man;Managing Director & Head-Financial Affairs, [23]

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[Interpreted] I'm Han Young-Man from the finance team. Let me answer your question regarding shareholder return policy. This is mainly going to be focused on dividend payouts. We have been paying out dividends to our shareholders in consideration of the regulatory changes, the issuance of hybrid funds. The dividend payout conditions of the competitors as well as shareholder value. And we understand that low interest rate environment and increasing claims will continue to impact the life insurance industry as a whole for this year. Nevertheless, within the conditions that we have to deal with, we will do our best to maximize the shareholder value by providing you with appropriate dividend. For your information, for the past 3 years, the average payout ratio was about 20%, and the final payout ratio for 2019 will be determined at the regular board meeting, which will be disclosed later.

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Sang-Wook Choi;IR Head, [24]

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[Interpreted] I am Choi Sang-Wook head of the IR part. Thank you very much for your suggestion. We will consider that in our future preparation. Thank you for your interest.

(foreign language)

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Operator [25]

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[Interpreted] The next question will be presented by Jiyong Im from Shinhan Investment.

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Jiyong Im, Shinhan Investment Corp., Research Division - Research Analyst [26]

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[Interpreted] I'm Jiyong Im from Shinhan Investment. I would first like to express my gratitude to the IR team as well as the management for providing us with this opportunity to communicate with you on a quarterly basis by having this conference call. It was quite surprising that there were no reports on these EV results in your presentation, and I understand that there was a reasonable background as to this decision was made, but the lack of EV data in the presentation could lead to some unnecessary misunderstanding. So I'd like to ask you 4 questions. The first question is that, can you provide us with the numbers for the value of new business, the value of in-force business as well as the adjusted net worth. And also, I'd like to know whether any major changes in the actuarial assumptions in the economic assumptions, were there -- would they be pretty conservative or not. The second question has to do with the fintech investment. Are you planning to pursue? Or are you planning to get a Mydata business license? And there are many talks about open banking and fintech initiatives, and I'd like to know specifics about the trends that you have in this area. The third question is about RBC. And you said that for 2020, your RBC goal is 220%, which is actually lower than the RBC figure for 2019. So I'd like to know behind this target setting. And I understand that the bonds that were classified as held-till-maturity were all converted into available for sale. So what was such actions impact on your RBC ratio? And I'd like to know if you could share with us the results of the QIS 2.0, if possible? The final question is about your company's vision and the DNA. I'd like to know what kind of strategies you're preparing for this year? It seems that there are some discrepancies between the market views on Hanwha Life and what the management is thinking about this company. As you may know, investors, and the market overall, has very low interest in life insurance, and it seems that Hanwha Life has not been (inaudible) , because -- maybe because of the lack of definite characteristic of Hanwha Life as a business.

When you look at other competitors, some have strong capital strength, and some has clear dividend trend and others may have some strong performance in terms of variable and retirement policies, so these have been forming some positive impressions about these companies, but at the same time, when I think about Hanwha Life, we understand that its business is relatively sensitive to interest rate movements, and as you're not really able to cope with macroeconomic changes and interest rate environment, your stock price has been falling. And it is crucial to defend this stock price movement by telling the market and communicating to the market what your business is all about. So I'd like to know what the management is thinking about this company and its business.

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Kyung-Wook Chong;Deputy General Manager, [27]

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[Interpreted] I'm Chong Kyung-Wook from the IFRS task force team. Let me answer your question regarding EV. I would first like to apologize that we did not include the EV results in our presentation this year. Ever since our IPO, we have been announcing the TEV results on a yearly basis. But this year, we decided to exclude that after much consideration. There are several reasons why you may understand that I've been involving in doing this for the past 4 to 5 years. And I came to realize that -- as all of us came to realize that TEV is not the best indicator to reflect the true value of our business.

And so there was a discrepancy between TEV and the stock price movement as well. And that is maybe why in Europe and other areas, there are other methods being proposed including NCB and also IFRS, Solvency II and K-ICS and all these initiatives in order to make up for some of the limitations that TEV has. As far as I understand, TEV is only used in Asia ex Japan and many listed companies are recognizing the limitations of using TEV as an indicator of corporate value, and they're gradually excluding them and/or replacing them with other indicators. And that is why even in Korea, some companies are not announcing EV results any longer. I believe that we are now in a transition period where new regimes are being devised and new methodologies are being more sophisticated, and we're now in the middle of finding a better way of representing our value.

So we will first try to improve our business value and manage volatility and variability. I'm referring to the new regimes that will be introduced and later, we will do our best to make sure that there will be another set of indicators that can better represent the company's business value. And we will continue to communicate with the market using new regimes such as NCB and IFRS 17 and other methods. You asked a question about specific figures. We actually did calculate the EV and in 2019, the total EV is KRW 9.250 trillion. And the net worth is KRW 9.880 trillion, and the ROEV is 12.7%.

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Unidentified Company Representative, [28]

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[Interpreted] I'm (inaudible) from the AI Plus taskforce team. Let me answer your question. The second question related to digital transformation. Hanwha Life has been working on Mydata and open banking and other digital transformation, we believe that Hanwha Life has strength in terms of product, channel management and asset management. And by using digital technology, we are planning to offer more convenience and innovative services and products in the future. We recognize that society is changing, there is an increased popularity of sharing economy, mobile environment and the young generation's lifestyle is changing rapidly.

And Hanwha Life is almost the first insurance companies in Korea to invest in big data and digital transformation by utilizing our plus brand. And we are -- have been working with external parties for Mydata and FSS and other digital initiatives. All in all, I'd like to mention that there are 2 major initiatives that we're pursuing for 2020. The 1 -- the first initiative is improving insurance efficiency and operation. The second initiative is about launching new digital business. Now to give you more details about the first initiative, it's about automating and improving efficiency in our day-to-day insurance business by utilizing big data that we've been accumulating for a long time and artificial intelligence, and we will do our best because there are several projects underway that will actually be to some meaningful impact on our P&L. The second initiative is about providing new, all kinds of services and products. We have been building up a large amount of data, which you can consider as ingredients, and it is crucial to cook them and prepare good meals, and so that we can utilize these ingredients well. And to provide -- to have a good group of chefs that can cook these ingredients in 2019, we increased the staff.

So we hired new people from Line and (inaudible) and the (inaudible) and other tech companies so that we have a group of talented people who are able to do so. And so now we have this internal strength and manpower to do so in 2020. Towards the second half of this year, we're going to be able to offer new digital services.

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Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [29]

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[Interpreted] I'm Jung Yong-Ho from the Risk Management team. Let me answer your third and fourth question. The RBC target for 2020 is 220%. It's not necessarily because we had any one-off issue that will pull down the RBC ratio by 15 percentage points, but there are 2 main reasons to provide some output. The first one is that we believe that this 220% of RBC ratio is the minimum level of RBC that we can maintain in response to the interest rate volatility. And the second reason is that we want to be fully prepared for the introduction of K-ICS. As you may understand, there are some major differences between the RBC and the K-ICS, and there are different mixes of indicators that we have to manage for the solvency related aspect. So in preparation for K-ICS, we will make sure to try to meet this target of 220% by this year.

And you asked about the impact of account reclassification on the RBC. Rather than giving you a breakdown, I'd like to combine the 2 major factors. One is account reclassification and the other is the impact of interest rate declines. And all in all, if you combine the two, the increase of the expected comprehensive or accumulated surplus is KRW 2.600 trillion of increase year-over-year, and I believe that there will be maybe 50-50 breakdown between the 2 factors.

And your -- another question was about the quantitative results from QIS 2.0. Currently, I understand, there are many processes underway to adjust and revise the specific criteria for K-ICS methodology. So I believe that it's not appropriate for me to share with you any specific quantitative figures from QIS 2.0, I'd like to ask for your understanding?

But let me ask that sometime between April and June this year, the third QIS -- the third round of QIS is steady, and we expect that there will be increased synchronization between the Korean criteria and the international norms. And we believe that this will become a more reasonable guideline in consideration of the domestic financial environment.

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Unidentified Company Representative, [30]

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[Interpreted] I'm CFO, [Lee Kyung-Geun]. I'd like to first thank you for giving us this opportunity to share with you the vision and the characteristics of Hanwha Life. I'd would like to first comment on our vision. Secondly, what kind of company we want to be. And thirdly, what specific strategies we are implementing in the mid to long term. First of all, it's our vision. Hanwha Life wants to be the financial service provider so that our customers can enjoy economic prosperity, and they will be provided with life solutions from Hanwha, that's our vision. And secondly, we want to be the comprehensive financial service provider. We want to be the company that provides financial technology, and we want to be a global company. Third, I'd like to talk about some specific strategies that we are pursuing from mid to long term. There are mainly 3 strategies. The first strategy is to improve the value of our insurance business. To do so, specifically, we are promoting value-based growth, and we are increasing competitiveness in our channels, and we are doing our best to increase cost efficiency. And then we will continue to look for new growth opportunities. The second strategy is to become a leading digital platform provider in response to the changes they are taking place in the future.

Specifically, we have been implementing big data solution platform strategy. We've been also working to internalize the capabilities of new technologies such as blockchain and digital technology. The third strategy is to -- is mainly aimed at becoming a global fintech enabler, and in order to achieve this strategy, we have been providing differentiated growth strategies for our overseas subsidiaries in consideration of their regional characteristics. And we're also implementing various strategies to promote open innovation in our overseas subsidiaries. So all in all, with this vision and strategy, we will do our best to better communicate our vision. And our strategies with the customers and with the investors, so that all of our initiatives and efforts will lead to a better financial outcome.

(foreign language)

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Operator [31]

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[Interpreted] The next question will be presented by Sara Lee from Morgan Stanley Research.

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Sara Lee, Morgan Stanley, Research Division - Executive Director [32]

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[Interpreted] I'm Sara Lee from Morgan Stanley Research. I'd like to ask you 2 questions. The first question is that you said you have accumulated more reserves for variable guarantee, and they have a sensitivity to interest rate movements. And I'd like to know the sensitivity of interest movement and variable guarantee reserves on your earnings, and I'd like to ask you to provide us with some guidance. Secondly, it's about the payment -- the dividend payout ratio, as your earnings were declining, if you are to pay out dividends to the shareholders, the payout ratio may have to go up. So in calculating your dividend, DPS, Are you going to use the recurring earnings as the base or just the headline peers? And finally, this is a suggestion it's rather unfortunate that you decided to omit the EV results, while there was no other -- there was no other indicator that could replace the EV. And for us, it's very challenging to analyze your business without the EV figures. I understand that it was because mainly of the low interest rate environment, but for continuous understanding of your business movements, I would like to ask you to include EV results next time.

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Yong-Ho Jung, Hanwha Life Insurance Co., Ltd. - MD & Head of Risk Management [33]

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[Interpreted] I'm Jung Yong-Ho from the Risk Management team. Let me answer your question related to the variable guarantee products and sensitivity. In 2019, there was additional KRW 340 billion of reserving for variable guarantee products. And this was mainly due to the impacts of interest rate scenarios because the starting rate was 2.2%, but the end rate was 1.3%, which is a drop of about 90 basis points. And you can translate that about KRW 35 billion part 10 basis point decline. And in order to respond to these changes, these situations, we have been implementing [different] testing strategies for variable guarantee policies, we've already completed a system for this at the end of 2019. And so starting from December 2019, we have been utilizing these testing strategies to minimize the impact on our P&L.

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Unidentified Company Representative, [34]

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[Interpreted] I am (inaudible) from the financial planning team. Let me answer your question related to the basis for dividend calculation. As you may understand, the basis for our dividend calculation is the net income for the given period of time. And of course, the losses from the variable guarantee were already reflected in our net income, which will be the basis for dividend calculation. So we do not have any plans to exclude them because, currently, these variable guarantee policies that generate losses. But in the future, when interest rates go up, they will provide us with profit. So we would like to maintain consistency in calculating our dividend because each good leader have the potential of having a positive impact on our P&L.

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Sang-Wook Choi;IR Head, [35]

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[Interpreted] I am Choi Sang-Wook head of IR part. As for specific speakers and data the IR team will work on them and communicate to you. And I'd like to thank you for giving us the suggestion about EV, and we will internally consider this. Thank you.

(foreign language)

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Operator [36]

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

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Seung-Ju Yeo, Hanwha Life Insurance Co., Ltd. - CEO, President & Inside Director [37]

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[Interpreted] So no further questions, we would like to end the 2019 earnings conference for Hanwha Life Insurance. I'd like to thank you all for your participation. If you have any additional inquiries, please contact the IR part. Thank you.

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