China Life Insurance Co Ltd

SSE:601628

Earnings Call Analysis

Positive Q1 performance with strategic product mix improvements

In the first quarter, the company reported stable overall first-year premium (FYP) with a notable 20% increase in new business premiums for policies exceeding 10 years. This growth, driven by demand for long-term pension and life insurance products, reflects strategic optimization in the business structure. The company also reported improvements in the new business margin by approximately 5 percentage points, attributed equally to product mix optimization, channel expense control, and favorable interest rates. Despite concerns, the redemption of a CNY 35 billion bond had no impact on the core solvency ratio.

Steady Business Growth Amidst Market Fluctuations

During the first quarter, the company focused on high-quality development and achieved steady progress while maintaining stability in its business operations. Gross written premiums increased by 3.2% year-on-year, amounting to CNY 337.6 billion. Renewal premiums rose by 7.5%, reaching CNY 325.2 billion. Despite a decline in single payment business, first-year regular premiums also saw a growth of 4.7%, totaling CNY 74.8 billion. Importantly, first-year regular premiums with payment durations of 10 years or longer surged by 25.4%, amounting to CNY 25.2 billion.

Enhanced Business Quality and Structure

The company’s proactive approach to optimizing its business structure paid off, with the proportion of first regular premiums with payment durations of 10 years or longer increasing by 5.57 percentage points year-on-year. This shift towards more stable and long-term premium products resulted in the value of new business growing by 26.3% year-on-year. Furthermore, the surrender rate decreased to 0.26%, a reduction of 0.14 percentage points, indicating stronger policyholder retention.

Stable and Productive Sales Force

Throughout the first quarter, the sales force remained stable, numbering 679,000 agents. Efforts to enhance the professional competence and productivity of the sales agents resulted in a 17.7% increase in average first regular premiums per agent. New sales models and pilot programs were also introduced, demonstrating a commitment to innovation in sales strategies.

Investment Strategy and Solvency

The company’s long-term investment philosophy yielded a gross investment income of CNY 64.7 billion, an increase of 7.2% year-on-year. Despite a slight decrease in net investment income by 0.1%, the annualized net investment income remained at 2.82%. Total assets reached CNY 6 trillion, and investment assets were valued at CNY 5.9 trillion, marking a 4.6% and 4.8% increase, respectively, from the beginning of the year. The solvency ratio stayed robust, with the core solvency ratio at 154.97% and the comprehensive solvency ratio at 209.17%, showcasing the company’s financial resilience.

Future Outlook and Strategic Guidance

Looking forward, the company aims to maintain its customer-centric approach and adhere to guidelines promoting stability through progress. Initiatives to optimize services, facilitate integration, and cut costs are expected to drive high-quality development. The strategic goal of stabilizing business growth, increasing business value, and enhancing the sales force's quality remains a top priority. Key to this strategy will be strengthening the interaction between assets and liabilities, accelerating transformation, reinforcing cost management, and ensuring resilient growth amidst varying market conditions.

Earnings Call Transcript 2024-Q1

[Li Yinghui, executive]

Welcome to China Life 2024 First Quarter Results Briefing. My name is Li Yinghui, Securities Rep of the company. Today's briefing is being held online. Mr. Li Mingguang, President; Ms. Liu Hui, Vice President; Mr. Zhao Guodong, Vice President and Board Secretary; Ms. Hou Jin, Chief Actuary; and Ms. Yuan Ying, appointed person in charge of the finance. Mr. [indiscernible], General Manager of Individual Insurance Planning Department and heads of other relevant departments participate in the briefing.

We will start with a presentation on the company's first quarter results and followed by the QA session for about 20 minutes, during which our management will take your questions. Now let's have Ms. Hou Jue, head of the IR team to introduce the first quarter results.

[Hou Grace, executive]

Good evening, ladies and gentlemen. This is Grace speaking. I would like to report our first quarter results briefly.

So during the first quarter, focusing on high-quality development, we achieved a steady progress while maintaining stability in business development, consistently improved our business operations in terms of both quality and efficiency and further enhance comprehensive strengths with our market-leading position solidified.

Firstly, the company achieved a good growth in our insurance business. We saw continued growth in the insurance business on a high base for the corresponding period of 2023. Gross written premiums amounted to CNY 337.6, an increase of 3.2% year-on-year, of which renewal premiums were CNY 325.2 billion, an increase of 7.5% year-on-year. Affected by the decline in single payment business, premiums from new policies for CNY 112.4 billion, a decrease of 4.4% year-on-year. And first-year regular premiums amounted to CNY 74.8 billion, an increase of 4.7% year-on-year.

In particular, our first-year regular premiums, this payment duration of 10 years or longer were CNY 25.2 billion, an increase of 25.4% year-on-year. Short-term insurance premiums was CNY 34.8 billion, a decrease of 0.5% year-on-year and the surrender rate was 0.26%, a decrease of 0.14 percentage points year-on-year.

Secondly, the quality of our business development was enhanced steadily. We continue to strengthen asset liability management, proactively pitch forward construction of our product system with diverse form, durations and cost compensation and continuously optimize our business structure, that's further driving up the quality of our business development.

The proportion of first regular premiums with payment duration of 10 years or longer in the first regular premium was 33.67%, which was up 5.57 percentage points from the corresponding period of 2023. Driven by the rapid growth of mid to long-term regular premium business as well as the cost reduction and efficiency enhancement, the value of new business for the first quarter achieved the highest growth in recent years, reaching a year-on-year increase of 26.3%.

Thirdly, our sales force remains stable with in-house quality. We steadily proceeded with sales team reforms and made consistent efforts to enhance the professional competence of our sales force, as a result of which the quality of our sales force continue to improve.

Now our total sales force has reached 679,000, of which the number of agents, the individual agent business sector was 622,000 and a set of the sales force remained stable. Meanwhile, the quality of the sales force was significantly improved with an increase in base number and proportion of high-performance agents.

The productivity of the sales force realize the continued growth on the high base with the monthly average first regular premiums per agent, rising by 17.7%. Also, the pilot program of new sales models was [ advanced ] rapidly, and the Seed Program was rolled out on the pilot basis in provincial branches such as Yangzhou, Guangdong and Shenzhen.

Fourthly, the company maintained consistency in long-term asset allocation. Aiming the downward trend of the benchmark interest rate in the first quarter. The Asian market experienced the fluctuations at low levels with continued structural differentiation. The company upheld the philosophy of long-term investments, value investment and prudent investment and adopted multiple measures to stabilize our investment income.

In the first quarter, we achieved a gross investment income of CNY 64.7 billion, an increase of 7.2% year-on-year on a like-for-like basis and the annualized gross investment yield was 3.23%. The net investment income was CNY 42.7 billion, a decrease of 0.1% year-on-year under the same basis, an annualized net investment income was 2.82%.

Meanwhile, our total assets and investment assets reached CNY 6 trillion and the CNY 5.9 trillion, respectively. An increase of 4.6% and 4.8% from the beginning of 2024. The solvency ratio continued to remain at relatively high levels. Core reached 154.97% and comprehensive reached 209.17%. We took active actions to strengthen our underwriting capability and stabilized investment income. Net profit was CNY 20.6 billion, demonstrating our strong resilience in development.

We will pursue the customer-centric approach, adhere to the guideline of seeking progress while maintaining stability, promote stability through progress and establish new growth drivers before abolishing the old one.

We will practice the 3 consistencies, meaning strengthening [ capacity ] building, promoting reform and governing against the rates. The 3 enhancement names stabilizing business growth, increasing business value and improvising our sales force. And 3 breakthroughs, mainly optimizing services, facilitating integration and cutting costs.

We will strengthen the asset liability interaction, accelerate transformation upgrading, in-house customer services, carry out in-depth resources integration, reinforced cost management control and hold down to the bottom line with a view to driving high-quality development to a new level. Thank you everyone.

[Li Yinghui, executive]

Now let's begin the Q&A session, which will be conducted in consecutive interpretation. [Operator Instructions] Let's invite the first question, please.

[Operator]

[Operator Instructions] The first question comes from MW Kim of JPMorgan.

[M.W. Kim, analyst]

I have 2 questions. One is about the new life growth. So there was a very strong new business by growth in Q1 '24. And the company also commented agent productivity increase. However, there was limited data on the quarterly announcement. As there are many moving parties in the product mix and also the macro trend. So I just want to learn whether new business by your product margin in Q1 '24 was higher than Q1 '23 level?

My second question is about the solvency capital sensitivity. Could you please share your the core solvency capital sensitivity against 50 basis point decline on China 10-year bond rate. I'm trying to understand that what level of the solvency the company could maintain even under the more pessimistic bond rate the scenario?

[Unknown Executive]

[Foreign Language] Kim, could you please repeat your second question?

[M.W. Kim, analyst]

Yes. So my second question is about the solvency capital activity. So the pure insurance company provided, solvency capital sensitivity against a 50 basis point change on the interest rate or the bond rate movement. So I just want to understand that, at what level of the solvency capital we would actually expect if that China, the bond rate actually goes down another 50 basis point and stay at that level until the end of the year?

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] On first question, there is no doubt that the NBV margin in the first quarter is increasing. That is because of 3 reasons. First, the company took initiative to optimize its business structure. The proportion of regular payment business with payment duration of 10 years and longer is increased by 5.6 percentage points in total FYR period. And secondly, we actively control the costs and enhance the efficiency, and we took initiatives to reduce the cost in the bancassurance channel that leads to the decrease in the cost. And thirdly, we took the initiatives to control the interest rate cost. That is to control the guarantee rate for the traditional products as well as the crediting rates for the participating and universal product.

[Unknown Executive]

[Interpreted] Kim, I want to make sure that your focus -- your scenario is about the interest rate rebound that 50 bps or both rise and decrease 50 bps.

[M.W. Kim, analyst]

Yes, I want to learn about the scenario that interest rate going down another 50 basis points from here. So that is actually the main scenario I want to know.

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Secondly, about sensitivity to the interest rate decrease. If there is another decrease of 50 bps into the year-end, the impact on the solvency ratio will be determined by the following 2 reasons: Firstly, all the assets and liability is matching in terms of duration.

Currently, the duration gap of China Life is slightly over -- slightly over 4 years. Because of the duration gap, if the interest rate goes down, the actual capital will go down. However, the slightly more than 4 years, duration gap is one of the shortest within the whole industry.

And secondly, it will depend on the factor on the asset side. That is how much fixed income asset is calculated under the market value. Is the proportion larger the smaller the impact will be by the downward interest rate trend.

[Operator]

Your next question comes from Rick of Morgan Stanley.

[Richard Xu, analyst]

And my question is more focus on the liability side. First, we see our overall FYP was quite stable in first quarter and the new business with payment period over 10 years, up 20% from around CNY 200 billion to CNY 205 billion. So what kind of these products are and they are more long-term loan payment period, [indiscernible] product or traditional savings or whole life of protection? And also was the driver behind it? It is more due to high demand or more from our proactive push optimization on the payment period.

And also, the second question is follow-up this one, more focus on the protection product and do we see a positive signals of increased demand on BI and other protection products? Or when can we -- might see the trends?

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Indeed, in the first quarter, we took the initiative to optimize the business structure and increase the proportion of regular payment business with duration of 10 years or longer. And for this part of long-term business, we have the diversified strategy that is we developed annuity that is mainly focused on the pension function and life insurance products that is based on the test and survival protection as well as the critical units, as you mentioned.

We should say that in the first quarter, there is more demand from the pension business than the health-related business that is actual situation for the market demand in the first quarter. So in -- so in general, the proponent of critical units or health-related long-term insurance business still had relatively low percentage in first quarter, and we will enhance that part in the following 3 quarters of the year.

[Operator]

The next question comes from [indiscernible] of Bloomberg Intelligence.

[Unknown Analyst]

I want to follow up on -- firstly, on the solvency ratio. I think during the Chinese call, we mentioned the reason of a sequential decline. And I just wanted to double check that I think the last point about the redemption of the CNY 35 billion bond, is that the most important part that was driving the decline?

Based on my rough calculation, I think that may have probably cost anywhere between 6 to 7 percentage points. So I guess what I'm trying to say is if we take that out, can we basically ignore the drop in core solvency ratio?

And on top of that, I was under the impression that if your duration gap is improving and then the equity market was better in the first quarter, that should have very good positive contribution to your core solvency ratio. Could you maybe give some numbers around that, so we can put them into context? That's the first question.

And then second question, I just want to follow up on Rick's question about the margin improvement in the first quarter -- new business margin improvement. So based on my rough calculation, it's probably an increase of a few percentage points, call it, 5 percentage points. Is it possible to help us understand the breakdown of the margin improvement? How would you break those into, say, the product mix improvement, the channel fee reduction and the pricing interest rate changes?

And if I can squeeze the last one. I think in the Chinese call, you also talked about the net profit by the tax issues. Could you remind us the details of the tax changes?

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] About the solvency ratio change. Firstly, the redemption of CNY 35 billion capital supplementary bond does not impact the core solvency ratio.

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] And the improvement in the duration gap is definitely beneficial to the solvency ratio. And it is also related to the value creation and the risk prevention and Ms. Hou Jin, the Chief Actuary, will elaborate on that.

[Jin Hou, executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] Well, the duration impact, actually, the decrease in the duration app will naturally decrease the occupation of the interest rate risk capital, and that will enhance the solvency ratio. And certainly, about the equity market development. If the equity market value increases, it will have 2 impacts. First, the actual capital will increase. And secondly, the exposure to the equity risk will also increase. So the impact on solvency ratio will depend on the actual range on these 2 assets.

[Unknown Executive]

[Foreign Language]

[Unknown Executive]

[Interpreted] And about the improvement in the new business margin, we mentioned there were 3 main reasons. The product mix optimization and the channel expense control as well as the interest rate impact, we think there are basically equal impacts from each of these 3 categories.

[Hou Grace, executive]

Okay. Now this brings to the end of 2024 first quarter results briefing. If you have any further questions, please feel free to contact the IR team at any time. Thank you for your participation. Goodbye.

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