Edited Transcript of 601336.SS earnings conference call or presentation 26-Mar-20 1:30am GMT

Beijing Apr 2, 2020 (Thomson StreetEvents) — Edited Transcript of New China Life Insurance Co Ltd earnings conference call or presentation Thursday, March 26, 2020 at 1:30:00am GMT

New China Life Insurance Company Ltd. – CEO, President & Executive Director

New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary

New China Life Insurance Company Ltd. – VP

New China Life Insurance Company Ltd. – VP, CFO & Financial Controller

Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [1]

Ladies and gentlemen, good morning. Welcome to the 2019 annual results announcement of New China Life. I’m Gong Xingfeng, Vice President, Chief Actuary and Board Secretary. I will preside over the conference.

Firstly, I would like to present the management team. They are: Li Quan, CEO and President; Li Zongjian, Vice President; Yang Zheng, CFO and Vice President; Li Yuan, Vice President; Yu Zhigang, Vice President.

There are 2 sessions. The first one is the 2019 performance presentation. The second one is the Q&A session. We will provide simultaneous interpreting for friends online. (Operator Instructions)

Firstly, the performance presentation. Mr. Li Quan will present the overall operation in 2019. Mr. Yang Zheng will present the financials and investment. I will introduce the embedded value. And Mr. Li Quan will introduce the outlook and social responsibilities. Let’s give the floor to Mr. Li Quan.

Quan Li, New China Life Insurance Company Ltd. – CEO, President & Executive Director [2]

Ladies and gentlemen, good morning. Welcome to the 2019 annual results announcement of NCI. In 2019, the company adopted the growth pattern of volume and value growth driven by the dual engines of asset and liability. Put forward the 1+2+1 strategy where life insurance is the main body, wealth management, health and old age care as 2 wings and technology empowerment as the support for NCI’s distinctive and sustainable growth.

Asset and liability dual engines drove growth. To meet diversified market demands, the company further aligns liabilities with assets and achieved comprehensive development of volume and value growth through the dual engines. Management efficiency gradually enhanced. The adjustment in team structure brought better execution and market sensitivity. Also, the company unveiled and adjusted supporting policies. So the momentum in branches has been unleashed, and management efficiency significantly improved.

Sales team saw constant growth. The company established the operation strategy of team expanding before business growth. With special team-development programs, agent headcount exceeded 500,000, a historical high.

Customer service has been fully upgraded. Guided by customers’ demands, the company’s service saw sustained innovation, improved efficiency and optimized quality in reached content.

Risk prevention measures have been effective. The company continued to translate the concept of prevention first into action, put risk prevention into frontline sales, carried out tiered management of risks in branches, paid close attention to key areas, continuously deepened the compliance of business development to provide solid guarantee for the sound and steady development of the company. This is the NCI’s key business and financial indicators. We will elaborate later.

In 2019, the company responded to the internal and external situations. We have a GWP of CNY 138 billion with a growth rate of 13%. Thanks to the influence of multiple factors, the company achieved rapid growth of new business, among which the FYP from long-term insurance totaled CNY 25.4 billion, up by 22%, accounting for 80.4% of GWP. Premiums from short-term insurance reached CNY 6,900, up by 23.1% year-on-year. On the other hand, renewal business realized premiums of RMB 105.8 billion, up by 10.4% year-on-year, accounting for 76.6% of GWP, a stabilizer for sustained growth of GWP.

In terms of product structure, FYP from long-term participating insurance totaled RMB 6.5 billion, up by 114.9% year-on-year. FYP from long-term traditional insurance reached RMB 7.2 billion, up 30% year-on-year. FYP from long-term health insurance totaled CNY 11.6 billion, down by 4.8% with the support of renewal premiums. Total premiums from health insurance reached CNY 52.8 billion, up by 24%.

In terms of channels, individual insurance channel is a core channel. The premiums in 2019 reached CNY 108.5 billion, up by 9.4% year-on-year, taking 78.5% in the GWP. As an important channel, bancassurance channel realized premiums of RMB 27.3 billion, up by 31.2% year-on-year, accounting for 19.8% in the GWP. Group insurance channel realized premiums of RMB 2.4 billion, up 2.9% year-on-year.

In terms of individual insurance, it adopted the strategy of health insurance plus annuity insurance plus riders. The premiums exceeded CNY 100 million. FYP from long-term insurance reached RMB 15.2 billion, down by 5.5% year-on-year, accounting for 14% of premiums. Renewal premiums reached CNY 88.8 billion, up by 11.2% year-on-year, accounting for 81.9%. Thanks to the rapid development of riders. Premiums from short-term insurance business reached CNY 4.5 billion, up by 36.6% year-on-year.

As for the sales force of Individual Insurance, the company had an operation of team expansion before business growth. Through the special team building program, Winning in NCI, sales team was expanded. By the end of 2019, the number of total agents had reached a new high, 507,000, up by 37% year-on-year. And the qualified agents monthly is 133,000, up by 3.5% year-on-year. The qualified rate was 33.1%, down by 5.7 percentage points. The comprehensive productivity per capita was CNY 3,387, down by 22.5% year-on-year.

The bancassurance channel met diversified insurance needs of customers, improved its product system and enlarged business volume in realized premiums of CNY 27.3 billion. FYP from long-term insurance business reached RMB 10.2 billion, up by 117%, accounting for 73 — accounting for 37.4%. Renewal premiums totaled CNY 17 billion, up by 6.2% year-on-year, accounting for 62.5% (sic) [62.4%].

The company’s strengthened management and deepened product transformation, business quality improved. 13-month persistency ratio was 90.3%, remaining the same with that of 2018. And 25-month persistency ratio was 86.2, up by 1.3 percentage points. Given the company has gone through the surrender peak of short-term and medium-term products, its surrender rate dropped 3 percentage points to 1.8%. That’s all for the insurance business.

Now let’s welcome Mr. Yang Zheng to introduce the financials and investment.

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Zheng Yang, New China Life Insurance Company Ltd. – VP, CFO & Financial Controller [3]

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Next, I will introduce the financials. Because of the improve of our business, insurance business and investment and our effective control of expenses as well as the benefit of the tax policies in 2019, the net profit of the company totaled CNY 14 billion, up by 83.8%, and the earnings per share increased accordingly.

For the investments, the investment asset of the company rose from about CNY 700 billion to CNY 840 billion in late 2019. The reason is that the company accumulated our business asset. And in our asset allocation, we have conducted short-term financing method. And for the investment yield, we follow the value investing — long-term investing, and the investment yield is sound. Total investment yield reached 4.9% and net investment yield reached 4.8% for the asset structure.

The company has the investment asset of CNY 700 billion, and the asset structure is stable. From the Page 16 of our PPT, you can see there’s minor changes in the structure. For the debt financial assets, we have strengthened allocation of interest rate bond, especially the long-duration local government bond, which fits our requirement. And for the equity investment asset, we have increased the allocation of equities and stocks.

For the nonstandard asset, in 2019, the nonstandard asset of the company totaled CNY 246 billion, accounting for 29.4% of the total asset, down by about 3 percentage points year-on-year. The structure of our nonstandard asset is stable. In 2019, we have allocated the collective trust plans and real estate investment plans with our ineligible returns. So the nonstandard asset has the accumulated results. We can see the quality of an asset is high and the risk is minor.

For the solvency, by the end in 2019, the solvency margin ratio is 283%, up by 14 percentage points because the company in the second half of 2019 redeemed our last subordinate bonds. So there’s no subordinate capital. The actual capital is equal to the core capital, so — which benefits your analysis.

Next, let’s welcome Mr. Gong Xingfeng to introduce the embedded value. Thank you.

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [4]

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Thank you, Mr. Yang. Next, I will introduce the embedded value. By the end of 2019, the EV of the company increased by 18.4%, rose from CNY 173 billion to CNY 205 billion. The value of in-force increased by 10%, increased from CNY 74 billion to CNY 82 billion. And adjusted net worth increased by 24% to CNY 122 billion.

Next, I will introduce the movement analysis of EV. The sources of the EV have 3 parts: First is the contribution of NBV expected return and economic experience brought by sound investment, which contributed the EV growth of 6%, 9% and 5%, respectively.

Next, I will introduce the NBV of the company. In 2019, the NBV of the company realized CNY 9.7 billion, down by 19.9%. The NBV margin based on FYP and APE recorded 30.3% and 36.5%, respectively. That is all for the EV.

Next, I will give the floor to Mr. Li Quan to introduce the outlook and social responsibilities.

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Quan Li, New China Life Insurance Company Ltd. – CEO, President & Executive Director [5]

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Thank you, Mr. Gong. For the outlook of the company, in 2020, NCI will follow the 1+2+1 strategy, continue to return to the assets of insurance to accelerate high-quality growth. Measures are that: First, we will strengthen the party building and party leadership.

Second, we will keep market benchmarking to grow the life insurance business. We will learn from our peers in improving specialization of channels, team development, customer management, policy guarantee, operations support, IT construction and industrial corporation to advance the balanced growth and steady growth of scale and value to enhance the comprehensive strength.

Third, we will enrich our product supply to meet customers’ demand. We will enrich our product pipelines, covering customers’ whole life to meet their diversified needs in different regions and channels.

Fourth, we will strengthen industrial synergy to build a service ecosystem. On the one hand, we will combine the health and old age care and offer a package of solutions for customers. We’ll also improve the asset allocation to grow the liability.

Fifth, we’ll accelerate the technology application and empowerment. We’ll lift the position of technology empowerment in the company’s strategy to shift from the off-line service to online/off-line integrated service. From policy management to customer management, we will use the big data, computing, AI and other technologies to improve our innovation, management and marketing.

Sixth, we will follow the compliance and keep the bottom line of risk control. The company closely watches risking carriers, strengthen awareness of proactive prevention control, integrating internal control into all areas. We’ll accelerate the smart risk control system to keep the risk alert sensitive.

For the social responsibilities, NCI will actively respond to the calls (inaudible) for poverty alleviation. Use the NCI Foundation, we actively participated in the donations to students and the poor, health care, environment protection, et cetera. And we gradually formed a model of insurance products plus public welfare platform and the voluntary service, exploring a distinctive role of NCI social responsibility.

By end of 2019, NCI Foundation continued to donate accident insurance to sanitation workers, and the activity has been implemented in 102 cities, benefiting 750,000 workers with the sum insured over RMB 75 billion.

In 2019, the company focused on the poor areas and broader areas and large assessment programs. And the projects was carried out in 7 province and autonomous regions, benefiting over 20,000 poor people with sum insured totaled CNY 2.2 billion. With the advantage of the insurance industry, we contribute to the national’s targeted poverty alleviation.

In 2020, the coronavirus breakout. Facing the threats, the company has exerted efforts. We care a lot about our customers expand insurance coverage and shorter social responsibilities. By March 20, the money donated totaled CNY 6.1 million, good to note, worth CNY 966,000, sum insured totaled CNY 72.2 billion, which including the donation and care benefits to the staff of NCI and also the medical staff that work in fighting coronavirus.

Those is my introduction about the outlook and social responsibility. Thank you.

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Questions and Answers

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [1]

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Next, let’s move to the Q&A session. (Operator Instructions)

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Jing Jing Zhou, Changjiang Securities Co., Ltd., Research Division – Research Analyst [2]

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I’m Jing Jing Zhou from Changjiang Security. I have 2 questions. The first one is in the strategy of volume and value growth. In 2019, we had a very large increase of the headcount, but we also see that the qualified rate is dropping. What’s the company’s consideration? Some people think that in the expanding of sales force, the company’s sales force quality is dropping. What’s your explain on this?

And the second question is also the strategy is volume and value growth at the same time. What’s the KPI in this strategy? For example, the product strategy of health insurance or the goal for the business growth?

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [3]

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The second question — the first question will be answered by Mr. Li Quan.

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Quan Li, New China Life Insurance Company Ltd. – CEO, President & Executive Director [4]

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Thank you for your question. Firstly, about the qualified rate dropping. In 2019, we had a new management team and we set force the value and volume growth, the strategy. Of course, our team will be expanding first. The sales force exceeded 500,000 in 2019 and the qualified agents exceeded 133,000. Of course, there are 3 reasons for the dropping of qualified rate: Firstly, there are certain pace for the development of the sales team. If we had a very rapid growth of scale, then we will need time for the quality growth of the sales force. That’s the first reason.

And the second reason is, statistically, we can see that the historical data for the latter part of the year, the third and the fourth quarter, will be less than the first half of the year. So the headcount increased by a large margin in the latter part of the year, but they don’t operate on ground for a long time. So statistically, we can see that the qualified rate in the latter half of the year is less than the first half. So we can see that for the whole year, we had a relatively good qualified rate. Thank you.

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Yuan Li, New China Life Insurance Company Ltd. – VP [5]

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I’ll answer the second question about the overall development of volume and value. That is our goal, of course. From the jump start in 2020, we can see that the annuity insurance had a very good growth. But at the same time, we also pushed forward the development of a value-oriented product. But because of the outbreak of the pandemic, we had some influence — negative influence on our sales. But looking into the future, we will push forward the development of our value, especially in KPI for our sales team and for the management. We will increase the proportion of value. And on the other hand, in our products, we will shift to a more high-value and health-oriented insurance products as well as high-value annuity so as to further improve the value of the company.

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Unidentified Analyst, [6]

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I want to ask the impact of the epidemic because the sales of the peer company is not satisfactory. And I want to ask about the progress and impact on the NBV and the sales growth and what’s the recovery of the sales? The second question is, I want to ask about the housing insurance and can — is the market more interested in the health insurance product?

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [7]

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Excuse me, can you repeat your question?

I will answer your question. Generally speaking, the coronavirus has a negative impact on China’s economy and the industry. For us, in the short run, we think the impact of the epidemic is inevitable. Traditionally, the sales of insurance products is a face-to-face model. We visit and write policies face-to-face. And for the insurance industry, the sales of new policies dropped, especially in February. And in this process, the company took following measures to reduce the impact of the coronavirus. We explore the potential of online training, online service and we hope to transfer these risks into opportunities.

In the past, the sales team is not good at online service and online training, online sales. So this epidemic shocked us in these terms. And we have put effort in this regard and improved a lot. And we can see the online sales has increased a lot. The traditional face-to-face morning meeting has canceled, but we have conducted online training and online meeting to supervise and check the performance of the agents, which has laid a solid foundation for the future growth. Now we can see the sales is recovering, especially for some provinces. With the recovery of the work, the communication with customers is recovering. But the process is slowing down, which cannot meet our expectations. It’s less than the business sales in last year. And the epidemic has nurtured our ways of sales practice, and it is time to shift to the online customers into our real customers. So we have donated a lot of insurance policies.

For the short-term accident insurance and the medical insurance product, we have expanded coverage, which will improve our service and the connection with customers. We feel that in this process, the customers have risked their awareness of health and protection. And at first, they may concern more about the epidemic. And with the further control of the epidemic, with the situation getting — gets better, we believe the health insurance has great potential. The company, just like Mr. Li Quan has introduced, will seize the opportunities and strengthen the sales of health insurance product, providing comprehensive service to customers.

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Quan Li, New China Life Insurance Company Ltd. – CEO, President & Executive Director [8]

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Just now you’ve mentioned the distribution channels. I want to give you an example. So in February because of the coronavirus, the sales agent cannot come in face-to-face with the customer. But in February, we have introduced a lot of service on WeChat platform. So the improvement realized in the WeChat platform reached CNY 81 million, increased by over 80%. We have provided elected security insurance products to customers and sold on WeChat so we provide over 100,000 insurance products to the customers.

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Shengyu Tao, Huatai Securities Co., Ltd., Research Division – Research Analyst [9]

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I’m Tao Shengyu from Huatai Securities. My question is about the reserve and the bancassurance. About the reserves, we can see that compared to your peers, the reserve is relatively high. So have you adjusted your assumptions? The second question is about bancassurance. We can see that it has grown since the last fourth quarter. And what’s your goal in the scale in this year? So do you focus on regular or single premiums? And what’s your sales number now?

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [10]

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I would like to answer the first question about the reserves. Basically, the valuation of the reserves hasn’t changed over the last years. But of course, every year, some assumptions will change based on our experience about the surrender rate and the mobility rate. We will do some adjustment and tracking.

From the business performance of 2019, the valuation change comes from 2 aspects. The first one is the discount rate of the traditional insurance. The scale is minor. But at the same time, we also adjusted the spillovers. The main source of reserves influence comes from the mobility rate. From the third quarter of 2019, we have changed the assumptions of mobility rate. We have a negative expectation to the mobility rate. We downgraded our assumptions so that it can be conservative enough. And that is the same with our peers. In the end of 2019, we continued to — this policy. So there was no change in the end of the year.

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Yuan Li, New China Life Insurance Company Ltd. – VP [11]

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I will answer the bancassurance channel question. In 2020, the bancassurance is set as an important channel of NCI. Our goal is both in single premiums and regular premiums. And our path is that the 2 kind of premiums should be combined and the single premiums should promote the sales of regular premiums.

And our strategy are as follows: firstly, we should build the channels because channels are very important for bancassurance. So the cooperation with banks, because NCI is a very long history insurance company, we have a very deepened cooperation with the 6 biggest state-held banks. And at the same time, in 2019, apart from the 6 state-held banks, we also cooperate with other banks and we have customized products for different banks.

And the second one is the team building in channels because we have 2 channels in the bancassurance channel. The first one is bancassurance and the second one is the wealth management team. In 2019, we have — our sales team trained as — the trainers as well as the distributors. Our key is to increase the productivity and their income.

And the third one is our customer building. We combined different efforts. We provide — we find customers through single premiums, and then we push forward the sales of regular premiums. Thank you.

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Quan Li, New China Life Insurance Company Ltd. – CEO, President & Executive Director [12]

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I would like to add something. In bancassurance, especially in products through — we will change the product and also issue some high-value products in accordance with the operation and the overall economic situation. Thank you.

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Unidentified Analyst, [13]

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I have 2 questions. First, in 2020, the market is concerned about the premiums. That is not about the volume, it’s more about the value margin. In 2019, we can see the VNB margin dropped. And how do you view on the NBV margin and well-designed products? And how do you access the VNB margin? And what’s your lowest balance?

And the second is about these 3 channels. In 2019, we can see the agent headcounts increased a lot in individual insurance channel. And I wanted to know their performance and productivity and the following retention and the performance rate? And what’s your expectation? In the past, you’ve mentioned that you want to realize 600,000 agent headcounts. And what’s your plan in the third and the fourth quarters?

And thirdly, I want to ask the question about the asset. With the drop of the interest rate, I want to know your duration and maturity of your assets?

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [14]

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First, I will answer your first question about the values. The company has adopted a strategy of value and volume growth driven by asset and liability tool engines. That’s a new model. And for our company, the balance is focused on both value and volume. It’s not the pure volume growth and margin growth. So we want to strike a balance, like we want to increase the volume and maybe the margin may decrease, but we want to improve and strive a comprehensive development. We will not focus on just one indicator and one product. We hope to realize the overall growth of value and volume. That’s what we want to improve and maybe the concern of the investors.

During this process, while improve the volumes, how to view the drop of the VNB margin is a question. We can see the data of the VNB margin based on APE and based on FYP, the margins are different. The VNB margin based on FYP dropped larger than the APE, that is because we’ve just — we made adjustments on the FYP. But if we look the NBV margin based on APE, the decrease is smaller, that’s because we have the business with high values. To strike the balance of the volume and value, we have made an arrangement in our business structure. Based on the market and the team development in different stages, we made different arrangement in our business operation to realize a balance between the volume and the VNB margin.

Generally speaking, while designing the products, we have requirements on the VNB margin, but that for different products and channels, we have different requirements. But generally speaking, we hope to have the overall arrangement of the increase of VNB and the VNB margin, and in line with the competition, market and business growth and to strike balance between the benefits.

Thank you. Mr. Li Yuan will answer the question about the agents.

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Yuan Li, New China Life Insurance Company Ltd. – VP [15]

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For 2020, the — we hope to maintain our agent headcounts and realize the high-quality growth. And generally speaking, we want to first grow the agent headcounts; and second, make the team grow stronger. You’ve mentioned the — some indicators for the agent like this rotation rate and performance rate. And specifically, we hope to ensure the recruitment will help to grow the team. And at the same time, we want to build 3-high team. And the 3-high team have new meanings: First is high productivity, the second is high perform — high retention rate and the third is high quality.

Especially for high quality, there are different meanings in 2020. We want to — we want our team to be younger and have better quality. In the past, lots of our agents are the 1960s and 1970s. And now we hope our team will shift more to 1980s, so the team will be younger and build the team with high quality. The second is we want to consolidate our team structure. We want to build a large group and a large team and outperforming agents. The third is the technology empowerment. Just now, an analyst has mentioned the epidemic. Because of the coronavirus this year, the strategy of our agents has changed because of the coronavirus epidemic. For us, just now, Mr. Li Quan has added that we want to build our team.

And in 4 lines, we have made adjustments. First, for the sales practice, we have shifted the offline sales practice into online, and we have donated insurance policies totaled 5 million policies and — which will give about 10 customers and information — information about 10 customers for our agent, which can provide opportunities for sales. And the parent company and the branches coordinate in conduct online promotion activities. The second is recruitment lines, which is conducted online. We write policies and conduct promotion activities on the Internet. The third is the management of training and meetings. The meetings has shift to online too. The last is training. And the training also has been shifted to the online platforms. And the last is policy support. Maybe you’ve noticed that we have started the sales centers in 4 distribution regions, which will benefit our management and service. We hope this will strengthen our management of our team. Fifth, we want to strengthen the training, including the trainings for high-performance agents and the second is training for the managers.

So in conclude, we have made a lot of efforts in team building in 2020. Thank you.

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Zheng Yang, New China Life Insurance Company Ltd. – VP, CFO & Financial Controller [16]

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Just now you have 3 questions. The third is about asset and investment. You want to ask about the duration of our assets now the interest rate is dropping? Yes, this trend has shown close for about 3 years, but if you look into the investment yield of NCI and the insurance industry, it’s not that closely related to the drop of the interest rate. The industry, including NCI, has made effort in investing our efforts. And our asset that is not correlated with the interest rate make up for the decrease of the interest rate. So the allocation of the asset is more important.

And for the duration of the asset with our adjustment of business structure and returning to the protection, the duration of the liability side has been prolonged. The average duration of the asset after liability succeed 13 years. And for the asset side, the duration is half about the duration of liability, about 6 and 7 — 6 or 7 years. In recent years, we have strengthened the allocation of the high-quality asset like the interest rate bond, local government bond, which has a long term duration. So the business and the duration structure of our asset is about 7 years.

And you also mentioned about net standard asset. Because the environment for the large-scale allocation of net standard asset has past and we have allocated asset several years ago and grabbed the opportunities, the duration of the net standard asset is less than the duration of our asset. It’s less than 5 years. Thank you.

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Unidentified Analyst, [17]

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I’m (inaudible) from (inaudible). I have 2 questions. The first one is about channel and the second one is about the assumptions. The first one, you had a channel shift and you have taken some measures. From the annual report, we can see and also Mr. Li Quan said that we will fulfill the goal that we have said in the beginning of the year, looking out to the future. Will there be any stimulus plan?

And the second question is, I want to ask Mr. Gong Xingfeng. We can see that the operational variance is positive. So it is better than the assumptions that we’ve made, but — and in this kind of situation, why do we still have to adjust the assumption? So we can see that the assumption has a negative impact in the EV this year. So I want to ask what’s the base or the reason or the model for the assumption changes.

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Yuan Li, New China Life Insurance Company Ltd. – VP [18]

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I will answer the first question about channel. It’s a very good question. Just now we mentioned our expectations. The COVID-19 has a very big influence on us in fulfilling our goals. Just now, Mr. Li Quan said our goal will remain. But our sales team, because of the growth of the scale, now we are standing at 500,000 platform. But how do we increase their quality?

In the development of our sales team, we have taken the following measures: Firstly, we have invested more in the sales team. We had an operation campaign in winning in NCI. It is an expansion plan. And also, it has been expanded to the first half of this year. From the third quarter of last year until now, it has a very good impact to the expansion of our sales team. And the second one is in product. We have — we enriched our product portfolios. You understand that for the last several years, our product — health product had a very [long foot] development, but because of the sales of the last several years, the ticket size has decreased as well as the productivity per capita. But after the reelection, the new management team proposed that in both asset and liability, we should become — we should set them as 2 engines. We should emphasize both on health insurance and annuity. So in products, we will have a very rich portfolio. Based on the house insurance sales for the last several years, this year, we will issue a whole life annuity. And the margin of this kind of product is relatively high. So we will provide tools, products, support for our sales team so as to satisfy the demand of our customers.

And the next one is about the policy support. The basic law of our sales team had some change for this year, and it will be issued in July 1 of this year. So the allowance for the beginners in the new basic law is back now. So the investment to our sales team is now bigger and it is of very high quality. From the first quarter until March 15, we can see that the new policies of the individual insurance is ranking high among our peers. So it’s of good effect.

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [19]

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I will answer your second question. From the embedded value change analysis, we can see that from — for the whole year of 2019, it is of a good growth, but we can see that the main source come from the NBV and the expected return. About the variance, it’s about CNY 1.5 billion. It is relatively small compared to the overall figure. It’s a minor proportion. The operational variance is a very limited influence and the source is very limited. It’s mainly come from the mobility rate and the modality rate.

Overall, we can see that in 2019, the variance — the negative — the positive side of it is that our surrender rate had a very large drop. In 2019, the overall business quality has been improved. The surrender rate had a very big drop. So now we are in the average level of the whole industry. So it had a very good influence to our total return. But the figure is still limited, so the influence is limited. We can see that from the operational assumptions, we see a very big risk. In the future, our long-term mobility rate will increase.

In the whole industry, we had a lot of discussion about this and the COVID-19 outbreak give us another lesson. Old diseases such as cancers — keloids, cancers, they have higher mobility, but new diseases are emerging. So we had — we think that illness will become even worse in the future. So we had a deterioration factor add to the assumption. That’s why we had a negative impact of the operational assumption. That’s the main source. Thank you.

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Unidentified Participant, [20]

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Next is (inaudible) from HSBC.

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Unidentified Analyst, [21]

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I’m (inaudible) from HSBC. I have 2 questions for Mr. Gong. They’re about the NBV. First is the NBV margin for individual insurance channel, we can see the margin drop a lot in 2019. And what’s the reason for that? Is that because of these business structure changes or expenses assumptions changes? And what’s your expectation for NBV margin this year?

The second is the NBV for the overall business. Before the coronavirus epidemic, I wonder what’s your expectation about NBV growth for the whole year. Since the outbreak of the epidemic, did you adjust your outlook and expectations?

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Unidentified Participant, [22]

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Mr. Gong is — will answer the question.

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [23]

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Just now, there is a question about this problem. As I answer that, we want to improve the overall values. We are not just maintaining our VNB margin, contributors for VNB are that — first is business growth. The second is VNB margin. Those 2 factors determined the VNB growth.

Just now you’ve mentioned, the VNB margin is dropping. In 2018, the VNB margin of the company reached a phasic high. I mentioned at that time that the pure increase of the VNB margin has limited or later contribution to the VNB growth. The market competition is severe, focusing on the major contributor of the VNB. The competition on the health insurance business is severe, which pose threats to the VNB growth for our company. The critical illness insurance is a major contributor for VNB growth, but we also want to have a balanced growth and provide a service for customers covering their life, death, illness and disability.

So in 2019, we promoted the sales of annuity insurance products and made efforts on that. So the growth of the VNB margin is our expectation. Yes, the VNB margin of annuity insurance is less than that of health insurance. We hope in this process we can adjust our business structure, maintain a sound and a stable VNB margin. And on the other hand, through our constant promotion of sales and management, the growth of agent force and innovation of products, we can strike a balance between health insurance and annuity insurance business and promote combo sales. So we hope this strategy can benefit the balance of value and volume and improve the value of the company.

And for the impact of the coronavirus. In the short run, the impact is inevitable and obvious that for NCI, we are striving in realize our annual target. Now we haven’t loosened our pursuit of annual target and we didn’t make an adjustment on our annual target. Before the epidemic, on the development of the company, we have made full preparations for 2020. How to strike a balance between volume and value? We have some discussions and results. So the business performance in January is satisfactory. But in February, the business and the team building has been impact. Now the resumption of works depend on the control of the epidemic. So we have a sound beginning, but at the same time, we’ve also faced threats. So in this process, with our regular policies, operations, service and the supporting technologies, we want to — we want our team use the new technology and technology applications to improve the productivity so as to contribute to the growth of the value of the company. So for the outlook of the value of the company, we believe there are challenges, but we are working on that and promoting our annual target. Thank you.

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Unidentified Participant, [24]

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I’m [Julie Yang] from the Southern Metropolis Daily. I have 2 questions. The epidemic outbreak is now — had a very negative influence on the global financial market. What’s the company’s perspective on the foreign investment?

And we can also see from the actuary is now dropping by a very large margin and it is very difficult now to invest in the Hong Kong market. I want to ask about the management perspective on the equity market. And will you increase your investment in the Hong Kong market?

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Quan Li, New China Life Insurance Company Ltd. – CEO, President & Executive Director [25]

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I will answer the question. This year, because of the epidemic, the global financial market is fluctuating. It is very rare in history, including the U.S., and its increase and growth since 2008 is now dropping. Domestically, we can see that we had a relatively stronger capital market, but because of the epidemic, we also was influenced. From the global financial market, the fluctuation are having realistic and also philosophic influence in our customers.

There is no standard or valuation system for the financial capital market. For some institutions, I believe that they should interest in some main capture — of capital market. For NCI, we believe that we’re influenced by the global market. In the start of this year, we had a relatively good momentum in investment, but because of the epidemic, we are affected in the investment yield. Also, we cannot see the bigger impact of it until now, especially in the figures after March.

At the same time, the interest rate is dropping because of the epidemic, both domestically and globally. Many assets has now become our liabilities. But at the same time, the fluctuation of the capital market, especially for the insurance institutions, will have some positive influence. With the big slump of the capital market, the risk is unleashed. Some people said that the insurance asset, investing in foreign capitals, they see opportunities. The epidemic has alerted us that we can overcome our fears to invest in foreign markets.

About our observations about the Hong Kong market, we believe that the investment is of high value, especially for big institutions such as insurance institutions. From a long-term perspective, we see that in the downside of interest rate, and the interest rate now is approaching 0. So for big institutions, it is very good for the risk prevention. For Chinese banks and insurance institutions, we believe that the payout ratio has — for some institutions has exceeded 6% to 7%, and PB is even lower, 0.5, 0.4. So it is a very high investment value. So even in the big fluctuation of the capital market, we are overcoming our fears and increase our positions in certain investment. Thank you.

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Unidentified Analyst, [26]

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I have 2 questions. First is about the actuarial assumptions. Recently, the industry has talked about the amendment to the definition of critical illness. And what’s the progress and impact on the policies for premiums per policy and what’s the impact on the value margin?

The second question is, last year, in November, there is the video and audio measures in writing new policies and what’s this impact. Do you think it will be promoted nationwide? And also, I want to ask that for the investment, the financial asset value on fair value has increased to CNY 11.4 billion. And what’s the reason for that?

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [27]

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I will answer your first question. The redefinition of critical illness is a big issue for the industry. It has been 3 years since the establishment of the program and it’s the end — the later period for the redefinition. And a lot of industrial associations and government institutions have participated in the discussions. Now we can see the redefinition of critical illness has — is discussing the release and specific time table for the redefinition. For us, we think the redefinition of the critical illness has positive impact on the industry. For the illness that is high occurrence rate but is — has low risks such as cervical cancer, there are adjustments. So for the actuarial association of China with — we are making adjustment to the occurrence rate of the critical illness. So from the regulations to the industry, we are making effort in the redefinition. We believe the introduction of the new definition of critical illness will benefit the insurance industry. But now it’s hard to say the specific impact on the premiums per policy, the prices per policies and the VNB margin because we can’t know the exact content of the redefinition.

Then Mr. Li Yuan will answer the second question.

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Yuan Li, New China Life Insurance Company Ltd. – VP [28]

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Taking video and audios while issuing policies is gradually promoted. And now it has been conducted in Jiangsu, Dalian and Ningbo. Generally speaking, taking video and audio while writing policies will have impact on our sales. It will need the insured and agencies in a scene. And also, it required in Mandarin to answer questions, which would change the sales practice and habits of our agents. So it needs time for the agents to get used to it, but taking video and audio in sales practice has good impact. This will record the scene of the sales practice, protect the benefit for both the insurance companies and customers and avoid the conflicts. So it’s a good aspect in this terms. So we recognize and agree with this method.

So based on this new situation, our sales practice has changed for our company. We’ve made efforts in AI and IT building. And also, we post higher requirement for that, including the standard. So we have made effort. And in terms of innovation and the investment to the technology and issued more measures and tools for the agents because the — in short — and the agents has to be in the scene. So this problem has been solved. And for the promotion of the policy, it is what we decided about SCB [RRC]. So maybe we can wait for the regulator later. Thank you.

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Zheng Yang, New China Life Insurance Company Ltd. – VP, CFO & Financial Controller [29]

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The last question is about the financial assets calculated with the fair value. So we call it other trading asset. Since the end of 2018, it increased from CNY 18 billion to CNY 20 billion. The trading asset account for a minor proportion in our invested asset, accounting for less than 3% of the invested asset. It’s not a major item. But you can see in 2019, the market is going up in volatility, which provides space for the asset allocation. So there is increase in this items, but it’s not a strategic change. It’s a result of our existing investment.

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Unidentified Participant, [30]

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Due to time limits, that’s it for the questions online.

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Xingfeng Gong, New China Life Insurance Company Ltd. – VP, Chief Actuary, Board Secretary & Joint Company Secretary [31]

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Last year, we have issued an announcement in the website of the Shanghai Stock Exchange to ask about the questions of minority investors. After we issued the announcement, we have received many questions from our minority investors to ask about the operation and development about the company and also they raised some questions about our annual reports. Some of the questions have been answered in the Q&A session just now. And now I will choose 2 questions, what’s most concerned for the minority investors to answer.

The first question is, recently, the stock price of the company is dropping. What’s the management perspective on this?

Recently, the dropping of the stock price is mainly influenced by the slump of the global financial market. And at the same time, the whole society is having doubt about the development of the epidemic, COVID-19. The company’s most important concern is to be delegated to the high-quality development and provide long-term value for our investors. That’s our starting point.

The management team is very concerned about the trend in the secondary market. Through the results announcement, the corporate day, we have been active in communicating with the market. We put forward the volume and value growth through the dual engines of asset and liability. We hope that through the model, we can improve the image of the company. And also through a coordinated development of asset and liability, we can improve the quality of business of the company so that we will rank among the top in our peers and build the confidence of our investors to our company. Through our business performance, we hope that our investors will pay more attention to our company. And in the future, we will further enhance or communicate with the capital market so as to build our investors’ confidence and provide even larger value for our investors.

And the second question is whether the company will increase the payout ratio or is there any stimulus plans to the stock price?

And now the company’s payout ratio is 30%. We think this ratio is in line with the company’s development phase and also in line with the regulation. In the future, we will increase the pace of our development, improve our product structure and increase the business scale so as to increase our value and pay back to our investors and customers.

Thank you for the minorities — minority investors’ trust to the company.

Of course, we have received many questions. I will not answer them one by one because of time limit. If you have any other inquiries, we will issue the answer on our website.

Thank you all for your questions. If you have other questions, you can contact our Investor Relations team.

That’s the end for the 2019 annual results announcement of NCI. Thank you.

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

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