Hyundai Marine & Fire Insurance Co., Ltd. (001450.KS) Earnings Call Transcript

[Interpreted] I'm [indiscernible] in charge of Investor Relations at Hyundai Marine & Fire Insurance. Thank you so much for taking time out of your busy schedules to join us here today at our 2025 fiscal year-end earnings conference call. This conference call will be conducted with consecutive interpretation in both Korean and English and is expected to last approximately 1 hour, including time for Q&A. We will begin with a presentation walking you through the 2025 financial results and a 2026 business outlook, followed by a Q&A session with our management team present here today. So without further ado, let us dive into the review of our fiscal year-end financial results and our outlook for the future.

[Interpreted] Good afternoon. I am Kyuwan Jeong, CFO and Head of the Corporate Planning and Management Group at Hyundai Marine & Fire Insurance. At the outset, I'd like to extend my deepest gratitude to the investors and analysts for joining our conference call today. I will now present our financial results for the period. Please refer to the summarized financial results on Page 3. For 2025, net income on a separate basis recorded KRW 561.1 billion, representing a 45.6% decline year-on-year. Looking at the details, our insurance service result decreased across all business lines, including commercial, long-term and auto, specifically due to the deterioration of long-term insurance performance and the automobiles segment swinging to a loss, the total insurance service result reached KRW 396.1 billion, a 62% decline compared to the previous year. Net investment income recorded KRW 330.3 billion, down 6.2%. In the fourth quarter alone, we recorded a net loss of KRW 73 billion as the deficit widened Y-o-Y. However, our new business CSM multiple reached 15.9x, an improvement of 3.1x year-on-year, driven by proactive rate hikes as well as sustained efforts to optimize our product and coverage portfolios. In Q4, the multiple recorded 15.8x, slightly lower than the previous quarter. This was primarily due to the industry-wide discontinuation of drivers insurance products in December, which possesses relatively lower multiples. Nonetheless, our multiple remained the highest in the industry. And finally, our K-ICS ratio or solvency ratio rose significantly by 33.1 percentage points to reach 190%. This achievement is attributed not only to macroeconomic factors such as rising market interest rates, but also to our internal asset liability management or ALM improvement efforts as well as successful institutional updates regarding insurance risk calculation standards. Now I will discuss our performance by business segment, focusing primarily on the Q4 results. For the full year 2025, the insurance service result for long-term insurance recorded KRW 338.1 billion, representing a 60.9% decrease year-on-year in the fourth quarter. And in the fourth quarter alone, results deteriorated by KRW 131.5 billion year-on-year. To give you a little bit of context into the reasons behind this, while CSM amortization income increased by KRW 15.3 billion Y-o-Y and the negative gap in claims experience variance remained similar to the previous year, expenses related to onerous contracts rose by KRW 146.4 billion. This increase was driven by the best estimate assumption updates, which reflected rising loss ratios and medical indemnity. And in fact, medical indemnity accounted for 90% of our total claims experience variance. Now regarding persistency, the 13-month ratio recorded 86.6%, down 0.6 percentage points, while the 25 months ratio remained on par Y-o-Y. Looking at sales, the monthly average for new businesses for long-term insurance recorded KRW 10.7 billion, a 9.8% decline from KRW 11.9 billion average in 2024. New business for health care insurance averaged KRW 9.8 billion, a 9.3% decline. Strategically, we are increasing the proportion of no lapse products, which offer higher CSM multiples while expanding the share of year-term policies to enhance our management of interest rate sensitivity. As of year-end 2025, our CSM balance stood at KRW 8.9 trillion. Despite robust inflows from new businesses, the balance declined 7.5% compared to the previous quarter, a drop from around KRW 9.2 trillion. This is due to negative experience adjustments, including the upward revision of loss ratio assumptions and the impact of the education tax rate hike. By channel, we achieved improved new business CSM multiples in both our Tied and GA channels. Moving forward, we will strengthen sales in the highly profitable tied channel while focusing on enhancing efficiency within the GA channel. Moving to the Auto and Commercial segments. In auto insurance, the cumulative effect of previous rate cuts led to an insurance service loss of KRW 90.8 billion, resulting in a swing to a deficit. Our commercial insurance service results stood at KRW 148.8 billion, a 6.1% decrease Y-o-Y. Although the frequency of large-scale claims such as the Kumho Tire and [ Eland ] fires increased in 2025, we maintained relatively solid performance by growing our retained premiums in high-quality lines. Notably, our overseas branches in Japan and the U.S., among others, are showing synchronized growth in both scale and profit and their contribution to our bottom line is steadily increasing. However, our retention rate temporarily took a dip due to a rise in reinsurance premiums following these large-scale accidents. Next, I will cover asset management. As a result of our sustained ALM efforts throughout 2025, the weight of domestic bonds in our portfolio increased to 43%, while the proportion of loans and alternative investments decreased. For the full year 2025, net investment income recorded KRW 330.3 billion. Excluding the deduction for net insurance finance expenses, investment profit slightly increased to approximately KRW 1.218 trillion. However, interest expenses rose by KRW 31.7 billion to reach KRW 880.1 billion, causing total net investment income to decline 6.2% Y-o-Y. This increase in interest expenses stems from the reclassification of the experience variance related to dividend cash flows from net income to other comprehensive income. Following the FSS's unification of accounting standard, KRW 66.4 billion was reclassified from net income to OCI at the end of Q4 2025. And consequently, our investment yield recorded 2.66%, a 15 bps decrease compared to the previous year. Now turning to our capital and solvency position. Our K-ICS ratio reached 190.1% at year-end 2025, reflecting the successful outcomes of our capital enhancement measures. Similarly, core capital ratio has maintained a steady upward trajectory after bottoming out in Q1 of last year. This improvement in our solvency metrics is primarily due to our narrowing of the duration gap achieved by increasing the weight of long-term bonds in our asset portfolio and the share of year-term products within our liabilities. Our duration gap, which stood at approximately 3.2 years in Q1 2025, improved significantly to 0.7 years by year-end. And consequently, our K-ICS sensitivity to interest rate shifts has stabilized, now reaching 4.4 percentage points per 50 bps, a marked improvement from the 11 percentage point level recorded at the end of 2024. I will now outline our key management strategies and outlook for 2026. Regarding the overall insurance landscape, we anticipate heightened interest rate volatility throughout the year. Furthermore, with the implementation of the actuarial supervision advancement plan scheduled for Q2, we expect the volatility of our best estimate liability to increase due to updates to the loss ratio and expense ratio assumptions. Conversely, there are clear positive catalysts for our bottom line, including the introduction of managed benefits, the launch and contract transition of fifth generation indemnity insurance and the regulatory reform of the auto insurance system regarding minor injuries. And in this environment, Hyundai Insurance will concentrate its main corporate resources on further strengthening our capital position and recovering our earnings generation capacity. By business segment, first and foremost, in commercial insurance, we will maintain stable earnings power by focusing on portfolio optimization within high-quality lines. Specifically, we will leverage our strengthened partnerships with Hyundai affiliates to solidify our performance in marine insurance while continuing to rebalance low-quality contracts to accelerate structural improvements. And in auto insurance, we project a performance turnaround in 2026 compared to the previous year. Driven by the base rate increase in February and the adjustment of premiums for riders, we aim to increase earned premium per policy. By combining the minor injury system reforms such as those regarding estimated future treatment costs with our internal efforts to curb rising compensation costs, we are focusing our capabilities on entering a meaningful insurance service result improvement cycle starting this year. Finally, in long-term insurance, our top priority is the sustained enhancement of new business profitability. In order to achieve this, we will continue to expand the sales mix of year-term simplified health products, which offer both robust margins as well as low interest rate sensitivity. Regarding loss ratios, we are seeing improvements in our first and second underwriting year loss ratios. We plan to maintain this trend through 2026 to steadily increase the proportion of high-quality new business within our in-force portfolio. For medical indemnity specifically, we forecast loss ratio improvements driven by the launch of the fifth generation product and the implementation of managed benefits. Supported by our concerted efforts to tighten claims review and audits, we are committed to achieving a meaningful improvement in our experience variance results this year. And next is asset management. In 2026, we will continue to refine our ALM by increasing the proportion of long-term bonds and expanding bond forward volumes to steadily increase the interest rate sensitivity of our assets. Given the recent rebound in market interest rates, we project that investment profit will increase year-on-year, driven primarily by interest income as the yields on interest-bearing assets continue to improve. Even under our strengthened ALM stance and position, we will maintain diligent in sourcing high-yield assets to further enhance our overall investment yield. And lastly, I will discuss the direction of our capital policy, its strategies and allocation plan. Leveraging our improved capital position, we will strengthen our core business competitiveness to drive profitability. For the K-ICS ratio, we aim to achieve higher Y-o-Y levels by expanding available capital and minimizing duration gap mismatches. Regarding the core capital ratio, we plan to reach the regulatory recommended level early on by managing risk amounts and improving earnings capacity based on the full recognition of surrender value reserves as core capital. Regarding shareholder returns, we plan to implement the phased cancellation of our existing treasury shares. A portion of these shares will be reviewed for use as employee performance compensation to align long-term corporate value with talent retention. However, this will be managed from a long-term perspective to minimize any shareholder dilution. Once distributable income is secured in the future, we plan to gradually expand shareholder returns through accelerated share buybacks and cancellations alongside cash dividends to resolve the current undervaluation of our stock. Ultimately, once we have sufficiently visibility regarding a sustainable return policy, we will establish and share with you and communicate our midterm corporate value plan with market. And finally, in an effort to strengthen our communication with the market, we are planning to expand our earnings conference calls to a quarterly basis starting this year. Through our proactive IR activities and communications, we will continue to enhance the transparency and timeliness of the information that we provide. This concludes my presentation on the 2025 financial results and 2026 outlook. Thank you very much.

[Operator Instructions] [Interpreted] The first question will be provided by Do Ha Kim from Hanwha Investment & Securities.

[Interpreted] I have 2 questions for you. One is on onerous contracts and the other is on CSM. Number one, we are in the position where we can compare with peers the onerous contract figures. And even if we take into consideration everything that you have explained, if we compare the 5-year moving average of before, which stood at KRW 150 billion loss, this still is a 2x increase. And to just say that this is because of 1 or 2 factors such as pediatric ratio is a little bit too much and excessive. So if you could provide any other reasons behind this big jump and variation, that would be great. And if you could also give us a little bit of color on the outlook for the figures as of the end of 2026, that would also be very helpful in terms of the 5-year moving average that you foresee. And number two, regarding the minus 1.15 variation, the adjustment that you said referring to the education rate tax cuts and the rate cuts. Could you provide a little bit more color and detail on the reasons why we reached this figure?

[Interpreted] I'm the Chief Actuary. First, I'll address your question about the onerous contracts. If you look at the figures that you referred to in terms of the onerous contracts, there was an increase of KRW 140 billion in terms of the expense, but of that, KRW 100 billion was a one-off expense. And so if you exclude the one-off expenses, the figures are on par with what you've seen before. And in terms of the expenses, you will also see KRW 150 billion in losses that was incurred from the third-generation medical indemnity. And the policyholders of this third-generation medical indemnity were previously in non-schooling age years. However, they will now be entering schooling years, which will help us forecast a decline in the loss ratio and we will even be able to see some reversals or write-backs as well. And next, regarding your question about CSM adjustments. As of the end of last year, there were adjustments made from assumption changes that amounted to about KRW 1 trillion. Of this KRW 1 trillion adjustment, about 70% stem from first and second-generation medical indemnity and 30% from simplified health insurance. And regarding the first and second-generation medical indemnity, we forecast that we will see a turn to the positive in terms of our experience variance because of the sufficient provisioning that we have done before and also as well as the implementation and introduction of managed benefits. And next, in terms of the simplified health care insurance, once the loss ratio assumption guidelines are introduced this year, the simplified health insurance loss ratio will become an issue. However, for our company, what we are doing is we have separate loss ratio assumptions for simplified health insurance. And that is why we forecast that the shock from the loss ratio assumption guidelines that will be introduced this year will have already been sufficiently absorbed within our company with the practice measures that we have implemented as well as the stringent measures that we have implemented regarding UI, which will pan through this year. I hope that answered your question.

[Interpreted] Could you also give us a little bit more detail on the one-off expense?

[Interpreted] That is something that is related to the change in the RA system before specifically when calculating the adjustment rate assumption that is included before with the renewal premium that change the ratio is now calculated by the company itself to the ratio proposed by the Supervisory Commissioner. And from our view, this is an area where we require institutional improvements and revisions, and that is why we are communicating that ask to the authorities. That is it for my answer.

[Interpreted] The following question will be presented by MW Kim from JPMorgan.

[Interpreted] So I have 2 questions for you. First, covering long-term insurance profitability and the second regarding core capital ratio. Number one, regarding long-term insurance, I would like to ask you about the long-term risk loss ratios, including IBNR. And if you could give us a little bit of color on the yearly trend that you forecast, that would also be great. Although you did give us a little bit of outlook in your presentation. If you could give us a little bit more detail on the extent of the improvements that you forecast and foresee in the next 2- to 3-year time line, that would be much appreciated. And number two, regarding the core capital ratio. On one hand, you did state in your presentation that you are committed to continue to strengthening the core capital ratio. However, as you continue to underwrite new contracts and policies, this might become a little bit of a challenge. In the past couple of years, of course, the company has managed very efficiently required capital. What is the required capital level that you forecast for this year? And also, what is the basis in terms of the new businesses that you assume when you come up with this required capital ratio?

[Interpreted] I am the Head of Long-term Insurance division. First, let me address your question about long-term insurance. First, let me address your question about the long-term insurance loss ratio, including IBNR last year was -- last year, the ratio was 101.8%, while this year was 101.2%. And on an absolute sense, if you look at those figures alone, they may seem high, but you do have to take into account the industry figures, which in terms of Hyundai Insurance, we were able to record the lowest increase in terms of the loss ratio at 1.7 per accident whereas industry-wide, the increase in loss ratio stood at from anywhere from 3.5% to 4.9%. So all in all, we have been making consider efforts and committed to managing and maintaining a healthy loss ratio, but there was a slight increase. And we believe that the inflection point for the loss ratio going down for Hyundai Insurance is this year. So this year is going to be our inflection point year. And we talked about the 0.6 percentage point in terms of the retained contract loss ratio target that we are working to achieve. And based on the efforts that we have made in January and February thus far and the results that we have seen coming from that, if we annualize that throughout the year, then we are confident that we will be able to overachieve the target that we have set. And therefore, in the next 2 to 3 years, we forecast that the loss ratio will continue on a downward trend.

[Interpreted] I am the Head of the Risk Management division. Allow me to answer your question about the core capital ratio. Of course, the difficulties in maintaining required capital related to the core capital ratio that you alluded to in your question is an area of potential concern. However, we do need to take into consideration that when we implement and when we bring in new businesses, we also make sure that we strengthen the management of the first year to third year loss ratios in terms of the first year and second year UI loss ratios in particular, and this will translate into lower insurance risk loss ratios as well. And you have seen in our performance of last year that our proportion or weight of year-term insurance increased to a maximum of 56% in our portfolio. And this is part and parcel of our efforts to make sure that we improve the interest rate sensitivity in terms of our long-term insurance portfolio. That stance is going to continue into this year with us making continued improvements in strengthening our asset liability management efforts as well as making sure that the interest rate sensitivity of our assets continues on a downward trend. And so all in all, to summarize and give you an answer to your question, in terms of the new business segment, we will continue to make sure that we strengthen our management so that we can continue to increase the CSM margin while making sure that we adhere to the capital requirements through managing our ALM at more stringent levels so that everything that we do is value-centric and value focused.

[Interpreted] The following question will be presented by [ Jay Han Bang ] from Goldman Sachs.

[Interpreted] I have 2 questions regarding your capital policy. Number one, if the surrender value reserve is 100% recognized into core capital at the end of 2027. What is the Tier 1 ratio that you expect after this change? And is there any company-wide targets that you have set internally? And second, my question regarding capital is once this change is implemented, what is the dividend that you forecast will be available for dividends?

[Interpreted] I am the Head of the Risk Management division. Allow me to answer your question on the capital policies. For the capital -- core capital, currently, the proportion of the surrender value reserves that are not recognized as core capital, if that is all recognized as core capital with the changes in the policies that will be implemented by the financial authorities, then on a before-tax basis, there will be a total of a KRW 1 trillion increase in our capital, which represents a 10 percentage point improvement as per our forecast. Once these changes are implemented and are in place, full-fledged as of March of 2027, we forecast that our core capital ratio will hit 80% or above. However, with that said, the supervisory authorities policies have not yet been finalized, which is why we are a little bit cautious in our projections. However, we will continue to manage our capital ratio so that we will be able to maintain at least a core capital ratio of 80%.