China Pacific Insurance Group Co Ltd

SSE:601601

Earnings Call Analysis

Revenue Up, Net Profits Down, Strategy and Long-term Focus Intact

In the first three quarters, the company's revenue increased by 7.4% to RMB 204.8 billion with contrasting fortunes between its divisions: CPIC P&C soared by 13.9%, while CCIP Life dipped by 5.2%. Surprisingly, net profit slid by 24.4% to RMB 23.1 billion, primarily influenced by unfavorable capital market conditions and new accounting standards. On a strategic front, leaps in healthcare innovation, digital transformation, and streamlined operations underpin their growth vision. Operationally, they tackled natural disaster impacts and sustained combined ratios despite catastrophe losses. Looking ahead, management is geared for the long haul, optimizing asset-liability strategies and adjusting product mixes to boost margins and yield, all while aligning with regulatory shifts that underline transparency and customer focus.

Overview and Financial Highlights

The company has maintained its commitment to pursuing high-quality growth, with a focus on enhancing value creation and driving strategic business development. Revenue grew by 7.4% year-on-year to RMB 204.8 billion in the first three quarters. Despite market volatility impacting the Property and Casualty (P&C) sector, it saw a 13.9% revenue increase, while the life insurance arm experienced a 5.2% decline. Net profit attributable decreased substantially by 24.4% due to downward trends in the capital markets along with adjustments from new accounting standards.

Strategic Initiatives and Performance

The company is accelerating product innovation, particularly in healthcare, demonstrating this through the launch of specialized plans and an experience store in Shanghai. There is a focus on Big Data and digital efforts, including the 513 projects designed to create synergy and empower innovation. Significant organizational restructuring has taken place, reducing layers by a third with intentions to enhance empowerment and streamline operations. Notably, the company's Gross Written Premiums (GWP) for life insurance and P&C increased by 6.2% and 11.8%, respectively, despite a highly challenging environment.

Revenue Generation and Product Mix

Agency channels are highlighted as a significant growth driver, with new agents' retention improving by approximately 10 percentage points to 30%. The company anticipates an ideal product mix, aiming for annuity products, traditional products, and Critical Illness (CI) products to constitute about 30%, 30%, and 40% of overall sales, respectively. This shift towards a more diverse product range could spread risks and enhance profitability.

Adaptation to Capital Market Pressure

The company acknowledges the pressures faced from capital market volatility but positions itself as a long-term player with a commitment to Smart Asset Allocation (SAA) and Tactical Asset Allocation (TAA). Through these strategies, the company aims to mitigate liability costs, a point of concern due to the lower investment returns relative to the previous year. There is also an intention to improve the New Business Value (NBV) margin through strategically enhancing the share of CI products.

Impact of Natural Disasters on Operations

Natural disasters had a significant impact on the company's financials, causing approximately RMB 4.3 billion in losses in the first three quarters, with an estimated annual total of RMB 4.8 billion. These events slightly increased the combined ratio by less than 2 percentage points, with agriculture insurance being hit the hardest. However, this was also an opportunity for the company to enhance customer relationships through efficient service and risk mitigation efforts during crises.

Regulatory Environment and Compliance

The management welcomes new regulatory requirements aimed at long-term stability and alignment with the company's overall strategy. Regulation shifts are encouraging more transparent expense reporting and alignment with compliant compensation schemes. These changes are viewed as positive for the company's long-term outlook and are believed to align with its 'Changhang' action plan, which is a transformative strategy aiming for long-term growth and customer centricity.

Earnings Call Transcript 2023-Q3

[Shaojun Su, executive]

Good afternoon, everyone. I'm Su Shaojun, CPIC, Group Board Secretary. Welcome to this presentation. We have with us Group President, Mr. Fu Fan; Group CFO and Chief Actuary, Mr. Zhang Yuanhan; and the Group Chief Investment Officer, Mr. Su Gang; and CPIC P&C General Manager, [indiscernible]. First, Mr. Fu will give us a presentation on the current performance of the first 3 quarters. Let's give the floor to Mr. Fu.

[Fan Fu, executive]

Good afternoon, everyone. First of all, I will give you a presentation on the performance in the first 3 quarters. We remain committed to pursuing high-quality growth and enhancing value creation so as to drive business development and strategy. In first three quarters, our revenue was RMB 204.8 billion, up 7.4% year-on-year. Among them, CCIP Life produced RMB 63.9 billion, down 5.2% year-on-year. CPIC P&C delivered RMB 139.5 billion, up 13.9% year-on-year affected by the volatility of the capital markets. Our net attributable profit under new standards were RMB 23.1 billion, down 24.4%. In terms of our strategies, we accelerated the product innovation and service layout in healthcare. We upgraded our Home Security 2.0 for sub-housing applicants to offer more customers health protection options. We launched a service plan [indiscernible] growth for youngsters and unveiled its flagship experience store in Shanghai. We also set up a partnership with [indiscernible] and joint innovation center and jointly launched the first digital guarantee healthcare product. We have also completed a heavy assessment for CPIC Home, and we'll continue to strengthen our communities operation.In terms of big data, we launched the 513 projects with clearly defined well responsibilities to create synergy. And also, we are promoting big data benchmarking to empower the innovation of digital business to create digital productivity. For example, we have launched the digital auditing employees. We also promoted the closed loop management of enterprise-level architecture and the unified architecture management first and the strengthened intellectual property management and encouraged patent application for innovations.In terms of development in key areas, we continue to make breakthroughs in product innovation in the Bay Area and achieved great results in high-end customer business model and online and offline integration. We also mobilize the resources to boost in Chengdu, Chongqing region. And also with special funds for innovation, we focused on supporting the innovation in customer management, green insurance and digital income.On the last slide, we insisted on long-termism and customer centricity. We are pushing forward the Changhang action plan, focusing on organizational changes. In the first 3 quarters of 2023, CPIC Life recorded RMB 222.6 billion in GWP, up 6.2% year-on-year and business value it was RMB 10.3 billion, up 36.8% year-on-year. Our new business value was actually [indiscernible]. Our agency continue to promote transformation and our business quality continue to improve. Our 13-month persistency ratio reached 95.5%, an increase of 7.5% year-on-year.On the people side, the monthly production income per core agent improved a lot year-on-year, and our 13-month retention grew significantly. At the same time, we continue to diversify our channels to develop value-based bancassurance to focusing on value outlets and value product and high-quality team. In the first 3 quarters, bank GWP increased to 31.1% year-on-year, of which new RP premium increased by more than 289% year-on-year. For the PC side, the strengthened capacity building. In the first of 3 courses, PC's GWP was RMB 148.5 billion, up 11.8% of which auto insurance increased by 5.5% and non-auto increased by 19.3%.On the cost side, actually, our combined ratio was 98.7%, up by 1 percentage point year-on-year. We are guided by regulatory requirement to strengthen expense management and cost control, but also strengthen customer impact to offer differentiated product and service solutions also to improve policy renewals. At the same time, we have to risk reduction to offer better service in response to disaster and the safety resumption of work and production after the disaster so as to help the disaster stock organizations.In terms of asset management, we maintained our stability of our SAA based on our liability profile while actively allocating long-term fixed income assets to expand our asset duration and the leverage will also leverage tactical asset allocation to cope with the impact of the new accounting standards and also proactively manage our equity assets. By the end of the Q3, the group's invested assets amounted to RMB 2,172.7 billion, up 11.1% compared to the end of the previous year.The net investment for the first 3 quarters was 3.0%, down by 0.2 percentage points year-on-year. While total investment was 2.4%, down by 0.8 percentage points year-on-year. In the first quarter, despite those internal and external uncertainties, we will go all out to stick with long-term value growth to well stimulate operational momentum and continue to move forward in the direction of high-quality development leader for the industry. Thank you very much.Thank you for your presentation. Now we start the Q&A session.

[Shaojun Su, executive]

[Operator Instructions] First we have Sun Ting from Haitong Securities.

[Ting Sun, analyst]

Congratulations on your good performance. I'm Sun Ting from Haitong Securities. I have 2 questions. Number one, about the profit. Now you'll see a decline in profit in Q3, but compared to the China Life and the new CI, actually, they were producing losses in Q3. So you did better than your peers. And how about [indiscernible] payout policy for this year. Second question about the Life business. As I mentioned, you have the Changhang action plan 02. So phase 2 of Changhang action plan. So how is it doing? What's the progress? Now for Q3 new PV increased quite a lot in Q3. So given this kind of faster growth, will it present more pressure for the NEV growth for 2024? Those are my questions.

[Unknown Executive]

Let me answer the first question. In first 3 quarters, actually, our net profit dropped by 24%, mainly because of the capital markets going downwards and also because of the new accounting standards and it did not report [ regress to ] I-9. So actually the performance earlier was not low in terms of investment, so given this kind of a downward trend of the capital markets and our investment return was lower than last year. In terms of dividend payout for CPIC as a whole under the new accounting standards, we actually executed our target to perform stable growth. We will deliver long-term stable return to our shareholders, of course, also considering our company's performance and the cash flow situation, et cetera. So given all that, we will use the OPAT as a factor to decide our dividend level. At the same time, in Q3, in the first 3 quarters, we have quite stable OPAT.Let me answer your questions on Life. Now Changhang action plan Phase 2, it was actually started at the beginning of the last year. We believe the first 18 months has met our expectations, that is to say we focus on the channel transformation. So by the middle of this year, this June 30 of this year, we entered the second phase of Changhang action plan. It will be -- is kind of a deeper level organizational structure change. For example, we launched our agency outlets to be more independent in terms of operations, business operation. We believe we have finished with the high-level design on the [indiscernible], HQs and the [ volunteers ] are becoming more empowering and we are seeing more streamlined organizations with more delegation, more empowerment. Actually, we have cut down the layer of organization by 1/3.So you'll see this kind of streamlining at the branch level, provincial branch level. We are expecting to complete those streamlining by the end of the year. We believe the progress is on track. So in the following 18 months, we hope to see more progress in terms of the people, optimization, more empowerment and more autonomy for business outlets. So in the next year, we believe that all these initiatives will produce more results under the second phase of the Changhang action plan as there will be more matching between those and responsibilities and the performance.Now for Q3, recently, you can see that in the Changhang action plan in terms of the people transformation is producing results. So by the end of Q3, we have saw positive growth for 5 consecutive quarters meeting our initial expectation. Now we believe that is the result of a change of ideology or philosophy. It's not product-driven. It's more like a long-term career based development. You can see, first of all, we see the compensation scheme is renewed. Now agents feel like they are doing their own business for themselves. And also, we see progress in terms of quality recruitment especially in the second half of this year, we can see more progress. Even across in July, you can see the well termination of the 3.5% interest rate products, also actually spiked the sales for some time. It also made a contribution.Now you ask about pressure for next year. I believe it all boils down to the people's growth, I mean our capability is up building. We should not rely on products, we should not rely on context. If so, we will feel face pressure each year same anything year-on-year. As of now, we believe our core agents -- the number of our core agents are stabilizing. So we feel assured about our performance, secondly, actually contribution from new agents also grew significantly and retention of the new agents actually improved by around 10 percentage points to 30%. And there also we see better business mix. Actually starting from August, our sales of critical illness insurance [ plummeted ] and the share of the CI products is now more than 10%. So that is a good progress in product mix readjustment. Going forward, we are going to focus more on long-term power insurance to better improve our product mix. So I believe it's on track.

[Shaojun Su, executive]

Thank you, Mr. [indiscernible] and Mr. Zhang for answering to questions. Thank you for telling us about our profit and also how we are doing in terms of the Changhang action plan. Let's welcome the next question. The next question comes from UBS [indiscernible].

[Unknown Analyst]

I'm [indiscernible] from UBS. I have 2 questions. Number one, you mentioned that Q3 capital market is quite difficult. In Q4, the trend will continue. So given this kind of volatile capital market, how are you going to cope, especially in terms of the matching the duration management for assets and liabilities? So are you going to lower your cost of liabilities to better manage your risks because, actually, in the first half of this year, the industry as a whole, sold a lot of 3.5% products. Second question for Life. You see given this kind of regulatory requirements, new requirements. So how will these changes affect CPIC Life?

[Su Gang, executive]

Now in terms of the capital market, we believe everyone faced the same pressure. But insurance company is unique in that we are even for the long run, we are long-term investors. Of course, liability side, we will, of course, see some pressure. But the key for us is to, for the long term, I mean, how can we use SAA to go through these cycles to remediate. Well, you see, for the last few years, we stick with the dumb-bell asset allocation, which we more refined allocation actually, more refined management. If we see our past few calls, we believe this kind of strategy is working. So despite these volatilities, we believe actually, it might as well be more of an opportunity rather than a challenge for long-term investors. For example, if you look at the -- actually look at the news, you can see actually the market, especially the insurance found actually expressed optimism for the long-term development of China's capital market. We believe the capitalization for level for the current market is low. So as long as we sit with long-term investments at last week we can actually remain or stick with our investment strategy we believe compared to peers, we will achieve a relatively better investment yield. But of course it's also challenging to manage our liability costs.In terms of managing our liability costs, we are making active efforts to monitor and manage it. For example, in the 3.5% product to 3.0% product, we are communicating to the industry association. So this is just the beginning. I mean, in this kind of the lowering on the crediting rate is giving us a very good opportunity to actually improve our product mix.So this kind of lowering of the guaranteed rates, we actually share the risks with our customers and also share yield or return -- investment return with our customers. As I mentioned, the share of our sales of CI products actually is increasing. NBV of our CI products actually amounted to around 30% of the total. So going forward, we hope that the share of the [indiscernible] will be around 30%, traditional products about 30% and the CI products around 40%. So this kind of a mix would be ideal for an insurance company.

[Unknown Executive]

So let me answer your question about liability costs. About the new regulatory requirements regarding the retirement or the grand opening. First of all, we actually welcome the regulatory changes on this issue. Actually, this is a move towards long-term management, long-term development. I believe we have basically -- we have finished the communication and the product filing regarding this kind of consistency between what you reported to the regulator and what you actually did. Will you actually do -- how do you actually do it. So actually -- that would actually help us to focusing more on long-term service provision and long-term business development. Actually, we believe, for the next year, we will see more initiatives under these changes for agency channel, we believe it is aligned with the strategy of our Changhang action plan. For agency channel, we don't have any under the table costs, I mean, we will go everything by the book by our compensation scheme or what we call the basic law. We're actually starting from last year, we said we don't do grand opening. Everybody is a grand opening. So we need to visit our customers 3 times each day. So we will wait to not have this kind of normalization of our business. So if you look at this year's business, we believe you can see the business is quite spread out evenly across the year without a specific spikes and the patterns.So this aligns with, I mean, the new regulatory changes aligned with our strategy for the agency. We don't believe it will be a lot of impact for our business for next year. We will continue to focus on the transformation on good recruitment on improving our product mix, improving our productivity. Of course, with still a lot of room for improvement. Our productivity is still lower than our benchmark than some of our strong peers, be it the productivity for agents and the pace side. So there's still a long way to go.

[Shaojun Su, executive]

Our CIO answered the question about our asset allocation strategy. And Mr. [indiscernible] answers the question and talked about how to actually improve our product mix, how to -- and what kind of impact will the new regulatory changes have on our business. Well actually, it's good news for CPIC. Let's welcome the next question. Well, the next question comes from CICC, Mao Qingqing.

[Qingqing Mao, analyst]

I'm Mao Qingqing from CICC. I have 2 questions. Number one, about agency team. You mentioned -- well, your agency sales force is stabilizing with improving KPIs. No, that's good news for us. So the question is, how do you view this trend? Is it because of your Changhang action plan or is it because of the improving market situation? Now how's your prediction about next year? Secondly is about PMC. Now of course, CPIC we had another flooding and the natural disaster but your performance is quite stable in Q3. So if we exclude this natural catastrophe impact, how will it be for your PC business?

[Unknown Executive]

Let me answer your first question about the trend for these agency team. In terms of the total number of agents, it was down -- it's starting, but it's slowing down. The case is slowing down. We believe the total number of our agents will go down further. We will remove some of those poor performing or fake agents, so it will be still ongoing, I mean, going forward. So the team will become more stronger and stronger. So compared to the total industry, the whole institute will see further drop on total number of agents. But this is not necessarily a bad thing. Actually, we believe the quality of the sales force is improving. If you look at the activity is improving, we believe, especially the conductivity of our core agents will improve steadily. And now this is because thanks to the activity management and also improving product mix. Because now they are not selling product one policy at a time, it's more like new based [indiscernible]. Families would need not only health but also in life, but also CI, the retirement, et cetera. So our agents, they will sell multiple policies. And thirdly, our agents, they have better skills.For example, they are now better at a selling CI products, selling long-term product 23 products, 33 products and also, as we can see better recruitments will produce momentum, better recruitment, better trend, you can see our number of new agents grew double digits and the 30th month retention also improved quite a lot. The health next year, well, first of all, on one hand, improve the quality of our new agents and also improve the total number of our new agents and the hope, I'm very optimistic. Now second question may be Mr. Zhang wants to answer it.

[Yanyan Zhang, executive]

On the P&C side, you can see for Q3, we didn't have a lot of natural disasters. For example, if you can see it moves across the east and the western region of China and also cover both Southern and the Northern part of China, it's quite really seeing actually in China and [indiscernible] For CPIC, we actually improved our efforts to cope with these disasters. So actually you can see our senior executives standing with us, we actually went to where the disaster struck going to the front-line, we actually we improved our efficiency. We were there -- we're there with our customers. We provided fast-track claims payout. We helped our customers to reduce risks. So if we look at the results, of course, there's quite a lot of pressure there. You can see in the first 3 quarters losses from catastrophe would be about RMB 4.3 billion. And for the whole year, it will reach about RMB 4.8 billion. So the impact on the combined ratio would be around 1 to 2 percentage points is more or less than 2% for combined ratio. If we look at our business line for auto insurance, the disaster loss would be about RMB 1 billion, nonauto, RMB 1.5 billion and the agricultural insurance, RMB 1.8 billion to RMB 1.9 billion. For Q3, agriculture insurance was particularly impacted by the natural disasters.But in Q3, our auto insurance see a combined ratio of lower than 100%. The nonauto just above 100% for Q3. Now agriculture insurance is 101% combined ratio. As we mentioned at the CPIC [indiscernible], on the whole for Q3, a single quarter, our total of overall combined ratio is 100.1%, up a little bit. So you can see we did have quite a lot of losses from natural disasters. That is thanks to our good management of our business quality. And for auto business loss would be about EUR 1 billion. So the impact is smaller. We are quite experienced with the traditional costs or combustion internal combustion costs rather than new energy vehicles. Well that's basically it.

[Shaojun Su, executive]

Let's welcome the next question. Well the next question is [ Qi Leon ] from Daiwa Securities.

[Unknown Analyst]

I have 2 questions. Number one, as Mr. Fu Fan mentioned about [ SAA ] management, we would consider the new accounting standards to actively manage equity efforts with a lot of affinity for the capital market. So our Life business, how much is your equity or what is the strategy for equity investment for different lines of the business for Life business? And also NBVs growth hike is good. But for the Life business, you can see new business margin is worsening. So what's your take on this year? Next year, are we going to see NBV growth or NBV margin growth?

[Unknown Executive]

Now your question is a very good one. Now obviously SAA or TAA, now insurance company is unique, how to actually adapt to the new accounting standards. Now actually we have a dumb-bell asset allocation. On one hand, we enhance our government bond asset allocation and also pursue some more attractive yields in terms of equity investment. How? Now, of course, we always will be guided by the retirement of new accounting standards. That is how to actually affect more allocation from this kind of high yield, high dividend payout equities, high dividend payout ratio so as to enhance our net investment return and also better manage the volatility, its volatility on our P&L. So for this year, we stick with this strategy, and we did see some results -- good results in terms of stabilizing our investment return. We will stick with this strategy going forward.To answer your question simply, I believe we don't need to wait until the next year. Our NBV margin, new business margin already improved. But in terms of strategy, we actually -- we will not actively manage the margin intentionally because NPV is the KPI here, stable growth of NPV. But of course, on some level, the margin, NB margin, it is to know that would mean the channel is losing its touch in terms of spending products to some degree. I mean, if you are able to sell profitable high-margin products, it means that you have very good selling skills. So if you are only able to sell short-term products, savings products, then your agency channel is becoming more and more like bancassurance.So that's the rationality I mean it would be bad for the industry, for the agency channel. So next year, as I mentioned last year and this first half of this year, we focus on the transformation of the channel. Next, we are going to focus on transforming the product. CI, you can see starting from September, we see more sales of CI, more NBV coming from CI that is share of CI. That's good news. So our agents need to improve their skills to sell protection products to spend long-term saving products. That's their key competitiveness. So you see we need to be able to compete in these areas. So that is to say margin -- yes, we do want better margins. The same goes for bank channel, maybe the one bank channels to sell more protection products, more long-term products. So on top of this year's progress, we plan to further improve our margin.

[Shaojun Su, executive]

Let's move on to the next question. We have next question from [ Zheng Jisha ] from China Securities.

[Unknown Analyst]

First of all, on product side, you mentioned you're going to improve the sales of annuity products, power and energy products, but we see this is quite hard from the efforts from peers. Now maybe, say, sales skills issue and also maybe because the customers don't want this kind of a par Life product. So what is your forecast for this? I mean, when are you going to achieve 1/3 share of annuity products? Second question about regulatory changes. Now how are you going to focus on the CPIC Life side? And how do you think why the regulator launched these new changes? Is it because we want to better control expenses or to crack them under the table expenses? I know CP actually did very well in terms of not giving under the table money, the expenses that's [indiscernible] Anyway, what's your take on this?

[Unknown Executive]

Now the first question on product is on par Life product. Now actually, we are going to have a launch ceremony for Life product. It's really hard to compare the product on its own. We must have a overall packaged solution. So it's not about the product itself, it's more about solutions to our customers, especially this kind of long-term savings par life product. So I believe this this long-term par life is better than long-term fixed rates products because for the longer run, you set easily at a rate, a very low rate guaranteed rate for our customers for the long term. But it will not be as good as offering a par life for the long term with some low guarantee trust. It would be chaos. You mentioned right, there are some other peers, they have promoted this par life, but didn't see very good results. I believe it will take some time. maybe it takes about 2 or 3 years to bring the share of a par life to 1/3. We still believe this huge impact, a huge demand for -- from the customers.The second question about the new regulatory changes, consistency in terms of expense reporting, we believe the direction from the regulators is very clear. First of all, the control of the sales channel. How can we better utilize the expenses for sales? And secondly, to crack down on this kind of fierce reckless competition in terms of expense or commissions, under the table payment to be flat. And thirdly, the regulator would want to see better and more transparent expense management.So we believe, given this kind of guidelines, the agency channel, I mean, we'll also benefit under the table expense should be eliminated. They shouldn't leave all these altogether, otherwise, there will be lots of customer complains. So with our new compensation or the basic law, we already see a lot of improvement in this regard in terms of compliance, in terms of legitimate expense utilization, effective utilization. We will become more compliant and more effective going forward. So we welcome these new regulatory changes.

[Shaojun Su, executive]

I believe the question is really hot topic. Well, on the face of it, you can see that, well, it is a crack down on this under the table illegal maneuvers or behaviors. However, it's a signal from the regulators that we're going to better protect the rights and interest of our customers and the consumers, we would want more transparency. All these is conducive to the long-term healthy development of the whole industry and aligns with the direction of our Changhang action plan, our transformation. In the interest of the time, we will have the last question. The last question from Wang Tom from Goldman Sachs.

[Thomas Wang, analyst]

I'm Wang Tom from Goldman Sachs. I have actually accounting-related question. Now our net assets decreased this quarter are the comprehensive gains, well, further they didn't grow much. But I don't know how to understand these numbers because the interest rate didn't change a lot in the third quarter. So that liability increased net assets decreased.

[Unknown Executive]

First of all, interest rate assessment curve is 50 days average. So it didn't go down a lot. So it's actually stabilized towards the end of the quarter. Previously, it dropped quite a lot. So when you see the other comprehensive income under the financial assets, fair value, the contract insurance contract fair value change is mainly affected by the movement of our interest rate curve.

[Shaojun Su, executive]

Well, thank you. Thank you all for your attention and the questions. If you have follow-up questions, please contact our IR team after the meeting. Thank you very much. That's the end of the meeting. Thank you.