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1 Samsung Life Insurance 1H FY2012 Earnings Results (Transcript) November 9, 2012 Jungsun Lee, General Manager (IR Team): Good afternoon, my name is Jungsun Lee, General Manager at the IR team. I would like to thank the investors and analysts joining us today for our 1st Half earnings conference call for fiscal year Before we begin, I would like to introduce the management team present today for the conference call. We are joined by Mr. Namsooo Kim, CFO; Mr. Youngmuk Jeon, VP and Head of Asset Portfolio Management; Mr. Inhwan Kim, VP and Head of Overseas Business Planning; Mr. Byungik Cho, VP and Head of Corporate Insurance Business Support; Mr. Junkun Lee, VP and Head of Corporate Tax & Accounting; Mr. Yongsi Park, VP and Head of Individual Insurance Business Support; Mr. Yumun Yi, VP and Head of the Actuary Team; Mr. Ilrae Cho, VP and Head of Corporate Planning; Mr. Kyoungsun Kim, VP and Head of Product Development; Mr. Jinsup Han, VP and Head of RM Team; Mr. Taekyung Yoon, VP and Head of Family Office, Mr. Jemin Ryu, Head of Strategic Channel Support; and lastly Mr. Jeong Ho Hwang, VP and Head of Investor Relations. Mr. Jeong Ho Hwang will start offf today s presentation with the key highlights for the period, followed by a Q&A session. Today s presentation is scheduled for 1 hour, including your questions, which will be addressed by the members of management present today. Mr. Hwang will now begin with our 1st Half Earnings Results for fiscal year Jeong Hoo Hwang, Head of IR Team Good afternoon, my name is Jeong Ho Hwang, Head of the IR Team. Thank you for joining us today for our st Half earnings release. I will begin with the financial summary for the 1st Half of 2012, and then walk you through key business highlights, including new business APE by product and channel and our investment performance. I will then discuss our key financial performance metrics, including efficiency, profitability, and capital adequacy. First, the key financial highlights for the 1st Half. During the 1st Half, total premium surpassed 12 trillion Won, achieving a 25.4% year on year growth. New business APE recorded 2.2 trillion Won, rising by 18.6% year on year. Net profit came in at 502 billion won, a 56.8% year on yearr increase. 1

2 As of the end of September, 2012, total assets stood at trillion Won, a 14.3% growth over the year, while invested assets rose 14.1% to reach trillion Won. Shareholders Equity increased by 32.6%, exceeding 20 trillion Won, from increased profits and valuation gains on AFS securities. RBC ratio grew 63 percentage points year on year to record 428%. Meanwhile, value of new business (VoNB) for the 1st Half decreased by 3.6% year on year, to 521 billion Won. Next, I'd like to share our new business results for the 1 st Half in more detail. Our new business APE during the 1st Half recorded a monthly average of 363 billion Won, growing by 18.6% year on year. By products, protection APE decreased by 8.1%, while annuity APE showed a robust 24.2% growth. In particular, single premium annuity sales jumped by 271% year on year, reflecting the HNW retirees strong preference for the Samsung Life brand. New business APE in the 1st Half was primarily driven by annuity sales due to a rise in demand from the retiring baby boomers. There were two unusual factors that fueled this demand during the 1 st Half. The first was the revision of the mortality table. Annuity APE jumped in June due to a spike in demand for annuities prior to the new mortality table coming into effect in July. The second was the proposed changes to the Income Tax Act announced in August. Under the proposal, the financial income base above which becomes subject to comprehensive income tax will be lowered from the current 40 million Won to 30 million Won. Furthermore, the tax exemption benefit on immediate annuities will be reduced. This has drawn a big demand for immediate annuity products, which has resulted in a rapid growth in immediate annuity sales since August. The effect of these factors is also visible in the APE results by channel and product. In terms of channel, GA and Bancassurance sales achieved a notable year on year growth of 36.8% and 108.6% respectively, outpacing the 4.6% growth recorded by our exclusive channel. The aforementioned shift in market demand towards annuity products was the primary reason behind the relatively slower growth of our exclusive channel and, as such, new business APE for annuity products grew by 11.2% year on year, while protection sales experienced a temporary setback. The decrease in protection sales was a temporary setback, with protection APE regaining robust growth once again in the third Quarter. Protection APE has been showing solid recovery since July, and this trend is expected to become more apparent in the 3 rd and 4 th Quarters, resulting in a net positive growth for the fiscal year. Next I d like to briefly share our position regarding the risk profile of the protection product category. 2

3 Among protection products, whole life death benefit consistently exhibits long term profitability. Health insurance products that cover diseases such as cancer and dementia can initially display low loss rates. But because the loss ratio can escalate in the long run as a result of longer life expectancy and advancements in medical technology, these products have high inherent risk. In order to hedge this risk, Samsung Life only offers health benefits that are re priced every few years. In addition, most of our products offer limited coverage period up to age 80, and we do not offer certain high risk health products. Meanwhile, because whole life death benefit products tend to be more expensive and require sophisticated financial planning skills from the agents, companies without a high caliber exclusive agent channel face difficulty in selling them. In reality, this leaves insurers with weak exclusive channels to focus on higher risk health insurance in order to grow their protection portfolio. This is in sharp contrast to Samsung Life, as we have built a product portfolio with whole life death benefit products taking up 73% of the entire portfolio. It is this product composition that enables us to generate stable mortality gains. Now, I d like to discuss our distribution channel competitiveness. The number of agents in our Exclusive channel, the main channel for our Protection sales, continued to grow over the past year, increasing by almost 2,100 to reach a total of 32,867 at the end of September. Our exclusive channel is composed of FCs who are predominantly female, SAs who are mostly males with previous work experience, GFCs who are former corporate officers, and Univ agents who are young college graduates. Among them, the number of GFCs many of whom had previously worked as corporate executives and target corporate clients, as well as the number of Univ agents fresh college graduates that target the younger customer segment, has been steadily increasing. We are continuing to strengthen the competitiveness of our exclusive channel by diversifying our recruiting pool. The GFCs and Univ agents are unique organizations that only Samsung Life can create thanks to our brand strength. They help to differentiate our exclusive channel, and will play a crucial role in our strategy to target the corporate market, HNW market, and customers in the 20s 30s age group. In addition, our exclusive GA channel is continuing to expand. The number of our exclusive GA agents reached a total of 9,287, while the number of partnered independent GAs also grew from 237 to 313 over the last year. Now I would like to move on to our performance in the retirement market. As mentioned earlier, the proposed amendments to the Income Tax Act, expected to take effect next year have led immediate annuity sales to grow significantly. Monthly average premiums escalated to 118 billion Won in the 1 st Quarter and 583 billion Won in the 2 nd Quarter, from a monthly average of 67 billion Won during the fiscal year

4 Immediate annuities generate a positive up front loading margin, as well as steady investment margin over time as we continue to lower the crediting rate for both new and existing policies. It also contributes in improving our overall reserve composition, while helping to secure a high quality customer base. Meanwhile, deferred single premium annuity sales also jumped 83% from 66 billion Won in the 1 st Quarter to 121 billion Won in the 2 nd Quarter. As deferred single premium annuities will continue to retain the tax exemption benefit, we anticipate that the current demand for immediate annuities will shift towards deferred annuities from next year, providing a continuous growth trend. On our corporate pension side, our reserves grew to 7.8 trillion Won, with a market share of 14.1% as of the end of September Next is our performance in the HNW market. The HNW market is a lucrative growth market that is being targeted by the entire financial industry. Samsung Life is currently generating significant progress in this market based on product and service competitiveness backed by the strong Samsung brand. As of the end of Sept 2012, over 103,000 customers pay monthly premiums of more than 2 million Won per month and over 33,000 customers paid a single premium of more than 100 million Won. In terms of total premiums, the monthly average sales of large sum monthly premiums exceeding 2 million Won amounted to 6 billion Won, having grown 54% year on year. Single premium sales exceeding 100 million Won averaged 470 billion Won per month, growing 313% year on year. Single premium sales was particularly strong, as sales for large sum premiums exceeding 300 million Won grew 357% to reach a monthly average of 297 billion Won, while sales for premiums exceeding 1 billion Won grew over five folds to average 123 billion Won. What is also noticeable in our HNW market performance is the rapidly increasing sale of large sum whole life insurance. Whole life insurance sales with a death benefit in excess of 1 billion Won generated on average 1.12 billion Won in monthly premiums during the 1 st Half of FY2012. This is an 88% increase from a year ago. And large sum whole life insurance sales with a death benefit exceeding 3 billion Won grew 137% over the past year. This is testimony to the increasing demand for whole life death benefit insurance commensurate to the level of one s wealth. We believe large sum whole life insurance sales will increase further in the future for the following reasons. First, 80% of the wealth owned by Korea s affluent is concentrated in real estate, but many of them are unprepared to fund their inheritance tax liability in case of an unforeseen event. Second, in Korea the highest inheritance tax bracket is 50% and the maximum tax deductible amount is capped at 3.7 billion Won. As a result, the effective tax rate increases in line with the amount of inheritable wealth. This underscores the growing inheritance planning needs of the wealthy in Korea. 4

5 Samsung Life will continue to grow the sales of large sum whole life insurance to HNW individuals by stepping up inheritance planning efforts of our high performing FCs and FP Centers, as wells as through the Samsung Life Family Office, which targets ultra HNW clients. Next is our value of new business. Due to the drop in the share of protection products as a percentage of our total new business sales, and the decrease in new business margin for certain products as a result of the adoption of the new mortality table, value of new business generated in the 1 st Half decreased by 3.6% from last year. Our new business margin for the 1st Half also decreased slightly because of the expansion in annuity sales. That said, our value of new business for the 2 nd Half of this year is expected to recover along with the rebound in our protection sales. The value of new business created for the full year is expected to be larger than that of last year. The next section is our investment performance. Our total invested assets at the end of Sept 2012 was 140 trillion Won. Of that, 80% was composed of interest earning assets, with 59% in bonds, and 18% in loans, in line with our overarching ALM strategy. In the prolonged low interest rate environment, we endeavored to pick up incremental yield by managing our loan book primarily into policy loans, and selectively diversifying our bond portfolio into highly rated corporate bonds, agency bonds, and Korean MBS. As a result, despite the sharp fall in market interest rates, we were able to attain an adjusted investment yield of 5.2%, which is 0.2 percentage points higher than the 1st Half last year, due to stable interest income, increased rental and dividend income, realized gains and valuation gains on derivatives. Next I will talk about our interest earning assets. At the end of Sept 2012, our bond portfolio was worth 82 trillion Won. Of that, 66.6 trillion Won were Korean government and agency bonds. The corporate bonds that we hold are all rated single A and above, and we continue to maintain a high quality bond portfolio. The size of our total loan book was 24.6 trillion Won. Of that, policy loans, which are virtually risk free since they are backed by the surrender value of the policy, comprised 13.7 trillion Won or 56% of our total loan book. Our loan to value ratio is being maintained at 42% despite decreasing housing prices. And our household credit loans accounted for only 0.9 trillion Won or 0.7% of our entire investment portfolio. We make sure that even those are from highly credit worthy customers. Next I will discuss our improving reserve composition. 5

6 Ever since we shifted to floating rate products back in 2001, the share of our fixed rate reserves has continued to fall to reach 54% at the end of September this year. Thanks to this year s growth in immediate annuities, that figure is expected to fall below 50% by the end of 2013, sooner than we had originally expected. Due to the decrease in the share of fixed rate reserves, our average reserve interest rate is expected to fall by 20 basis points this year. By continuing to lower our crediting rate, the speed at which this rate falls will further accelerate. The spread between our yield on interest earning assets and our average reserve interest rate has widened slightly due to the sharp fall in market interest rates and the lowering of interest rates on our policy loans. That spread can widen a bit more till the end of this year due to the time lag of crediting rate adjustments. But if the long term interest rate remains at the level it is today, we believe this gap can be stabilized during fiscal year Meanwhile, we continue to generate positive aggregate investment profit. That is because when we include our non interest investment income such as rental income, dividends, and various fee income our investment yield over reserves is consistently higher than our average reserve interest rate. Next I will go over our various performance metrics including expense rate, loss rate, persistency, as well as profitability and RBC. First is our key efficiency metrics. Our expense rate came in at 13.4%, which is 1.7 percentage points lower than a year ago. That is because our total premiums grew by 20% but our actual expenses incurred grew by only 6.7%. Our loss rate increased 0.1 percentage point to 85.9%. Going forward, our loss rate is expected to gradually improve with the increase in risk premiums from expanding protection sales and the increasing proportion of renewable benefits. Next, despite the rest of the industry experiencing higher lapses and surrenders due to the economic downturn, we maintained stable 13th and 25th month persistency rates, recording 87% and 68.5% respectively for the last Quarter. We will continue to strengthen our customer retention management to progressively improve our persistency track record. Next is our profitability and capital adequacy. Net profit for the 1 st Half increased 56.8% year on year to 502 billion Won. The increase stems from a low base a year ago when our net profit was unusually depressed from valuation loss on derivatives. By contrast, there were no extraordinary items in the 1 st Half of this year and our insurance profit grew at a healthy rate year on year. 6

7 Going forward, our investment profit may vary if instability in the global financial markets continues and the current low interest environment persists. However, our insurance profit will continue to maintain steady growth. Meanwhile, our RBC ratio at the end of September rose 63 percentage points to 428% because of the increase in our net profit and valuation gains on AFS securities. This was achieved in spite of the recent RBC regulation change that no longer recognizes excess capital of subsidiaries as the parent company s own available capital. On the back of our capital strength, we will further bolster our market position and continue to manage our capital to enhance shareholder value as we have done since our IPO. Looking back on the 1 st Half, financial instability across the globe continued to linger, market interest rates reached historical lows, and our sales were impacted by the inaccurate reports on variable annuity investment returns. Despite that backdrop, Samsung Life exhibited strong resilience, achieving high APE growth, strengthening market position, and generating stable earnings. In the 2 nd Half, we expect our protection sales to recover and record positive growth. Accordingly, we believe our new business margin will improve and as a result, achieve substantial growth in value of new business. In addition, in spite of low interest rates, we will strive to consistently generate earnings through stable insurance profit and enhanced investment returns. That concludes our 1 st Half Earnings presentation. Thank you. 7