China Life Insurance Co Ltd

SSE:601628

Earnings Call Transcript 2019-Q3

[Li Yinghui, executive]

Good evening, ladies and gentlemen. Welcome to China Life's 2019 Third Quarter Results Briefing. My name is Li Yinghui, Securities Representative of the company. Mr. Li Mingguang, Vice President, Board Secretary, Chief Actuary; Mr. Zhao Peng, Vice President; Mr. Zhan Zhong, Vice President; as well as heads of relevant departments are participating in the briefing.

Today's briefing will start with a 5-minute presentation on the company's third quarter results, followed by a Q&A session for about 20 minutes, during which our management will take your questions.

Now let me hand over to Grace, Head of the IR Division, for the briefing.

[Hou Grace, executive]

Thank you, Li. In the first 3 quarters of 2019, under the guidance of the strategic deployment of China Life Revitalization, we actively proceeded with all tasks according to the requirements for high-quality development and maintained leading market position with good development momentum.

Firstly, the company made steady progress in overall development, and our core businesses continued to grow. In the first 3 quarters of this year, the company achieved revenues from insurance business of RMB 497 billion, an increase of 6.1% year-on-year. And our first year regular premiums amounted to RMB 99 billion, an increase of 4.7% year-on-year. Renewal premiums amounted to RMB 334 billion, an increase of 5.9% year-on-year. Short-term insurance premiums amounted to RMB 61 billion, an increase of 31% year-on-year. And we want to emphasize short-term business is just the accidental and health business. It's not single premiums. For single premiums, we still maintained big negative growth rate as we have promised the market.

Secondly, the premium structure was increasingly optimized, and the protection-oriented business developed rapidly. During the reporting period, the percentage of first-year regular premiums of the company in premiums from long-term insurance of new policies was 98%, an increase of 8.45 percentage points from the corresponding period of 2018. The percentage of first-year regular premiums with a payment duration of 10 years or longer in first-year regular premiums was 51%, an increase of 15.72 percentage points from the corresponding period of 2018. The percentage of premiums from designated protection-oriented products in first-year regular premiums increased by 8.79 percentage points year-on-year. And during the reporting period, the surrender rate of the company was 1.67%, a decrease of 2.78 percentage points year-on-year.

Thirdly, the sales force steadily expanded with continuous improvement in quality. As at the end of the third quarter, the total number of sales forces from all channels was approximately 1.95 million, an increase of approximately 0.18 million from the end of 2018. In particular, the number of exclusive individual agents was 1.663 million, an increase of 15.6% from the end of last year. The quality of our sales force consistently improved, and the monthly average productive agents from the exclusive individual agent channel increased by 37.4% year-on-year. The monthly average number of agents selling designated protection-oriented insurance products rose by 49.2% year-on-year.

Fourthly, the company proactively took advantage of investment opportunities, and our asset structure was constantly optimized. As at the end of September, the company's investment assets reached RMB 3.44 trillion, an increase of 10.7% from the end of last year. We deepened the market-oriented reform of our investment management system, strengthened the management of assets and liabilities, seized the market opportunities to allocate to long-term fixed income assets and optimized the structure of equity portfolios.

For the first 3 quarters of this year, investment income from fixed income assets increased constantly, and the income from open-market equity investments grew significantly. In the first 3 quarters, the gross investment income was RMB 134.5 billion. The gross investment yield was 5.72%, rising by 231 basis points year-on-year. Our net investment income was RMB 113.9 billion, and the net investment yield was 4.83%, rising by 21 basis points year-on-year.

During the reporting period, our net profit attributable to equity holders of the company was RMB 57.7 billion, an increase of 190.4% year-on-year. And our value of new business grew by 20.4% year-on-year. The core solvency ratio and the comprehensive solvency ratio were 262% and 272%, respectively.

For the next stage, we will continue to adhere to the strategic deployment of China Life Revitalization, take proactive efforts to fulfill the overall tasks of the year 2019 and make scientific deployments regarding the year 2020. Moreover, we will consistently carry out various reforms in great depth, strengthen the sales force development, take lead in the large- and medium-sized cities, step up technology empowerment and innovation-driven development and also enhance risk prevention and control in a practical manner so as to move towards high-quality development. Thank you.

[Li Yinghui, executive]

Okay. Thank you, Grace. Now we will begin the Q&A session.

[Operator]

[Operator Instructions] Our first question comes from Scott Russell with Macquarie.

[Scott Russell, analyst]

Two questions if I can, one on earnings and one on new business. The earnings were up 190% for the 9 months in the third quarter. That means they're up 480%. You've called out the tax rule changes and strong investment income as being 2 reasons. But I'm asking for a little bit more detail on the core drivers of that very strong profitability? You don't disclose the impact of the change in reserving accounting estimates, but I assume that, that was maybe a one-off positive in the third quarter. And if we adjust for the taxes and we adjust for the strong investment income, it still looks like your underlying profits doubled in the third quarter. So I'd just like to understand what's driving that very strong release, maybe lower claims, lower expenses, whatever it might be, residual margin release picking up.

My other question is about new business, and it's just a simple one. Can you confirm that the third quarter's BNV (sic) [ NBV ] rose by around 15%, which is my estimate, which would imply a decline in margins for the third quarter given that the FYP seems to have been in the high 20s?

[Li Yinghui, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] Your first question is regarding the earnings. So we have introduced in our briefing of the third quarter results, and so if we take out the factor of the tax deduction policy, the main contributor from the earnings increase is the investment income. For the first 3 quarters, we have followed our core concept of asset-liability matching, and we have pre-allocated some fixed income assets. And we also seized the opportunities in the equity markets and realized some profits. That's the main reason for the earnings increase.

And for other indicators, we have disclosed it in detail in our third quarter report. So in the limit of time, I will not go into details, but no other significant factor besides it.

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] And for the NBV growth, we should say that for the first 3 quarters of this year, we have achieved NBV growth. That is a new metric. And the main reason is we have optimized our business structure from the end of this year, and that is the main contributor of the NBV growth.

On the -- starting on the second half of this year, we have -- we are more firm than ever to center on the customer demand. And for the seasonal change of the NBV margin, we should say that it may vary because of the customers who also are also different. And we expect that to follow in the first quarter and the next year. So we'll keep strengthening our strategy of customer orientation.

And for the detailed calculation, I do not have that here. So maybe next time you come to Beijing, we can give that detail to apply to your models, and we'll have further discussions.

[Operator]

And the next question comes from M.W. Kim with JPMorgan.

[M.W. Kim, analyst]

I have one question about the asset-liability management. Clearly, the company's liability duration is expanding very fast speed due to the product mix shift. So although recently, the China bond rate is actually delighting that probably be [ owed to the lift ], overall, the asset-liability matching ought to be more challenging and should be more sophisticated. So the question is, what would be your company's overall ALM strategy in 2020 under the low interest rate or the bond rate scenario? And also, could you make any comment on ALM strategy on the C-ROSS Phase II standard? Because on the debt scenario, probably this matching would be -- need to be more sophisticated.

[Li Yinghui, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] I'll also say you have made very good observations of our business structure. And we have optimized our business, and we have achieved good results recently.

For the gap in the assets and liability duration, we have seen a decrease by the third quarter compared with the first half. As for our business plan for the new year, we should -- we also have carried out detailed testing of effects on asset-liability management. And we pay attention not only to the cash flow but also to the asset duration and the matching between asset and liability side. For the liabilities, there's different duration. We have different measures on the asset side. Our core concern is to present the long-term uncertainty.

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] Currently, we have been actively participating in the second phase of C-ROSS. But for the specifics, we didn't -- they haven't been publicized to the market. So after they have been public, we will have detailed discussion and disclosure to the market.

[Operator]

And the next question is from Jenny Jiang, Morgan Stanley.

[Jenny Jiang, analyst]

This is Jenny from Morgan Stanley. Just a quick question on product side. Just for third quarter alone, what was the more popular product? Or maybe you can list 2 or 3 because your sales have been significantly better than peers. Secondly, we wonder if management had some statistics, like what percentage of sales are on existing customers and what percentage of sales are on new customers. For third quarter or for year-to-date trends are both okay.

[Li Yinghui, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] For your first question, we have accelerated the development of the protection-oriented product. And for the third quarter, we have seen more than 10 products that are very popular, and we sold them quite well.

The second question, starting from the beginning of this year, we have implemented the differentiated development strategy, different levels on the sales team and business and also on the product. So we want to sell different products according to different groups, customers' needs. So we have been selling to the new customers increasing in the total business.

[Operator]

And the next question comes from Kailesh with HSBC.

[Kailesh Mistry, analyst]

A couple of follow-up questions. First one is, you talk about the percentage of protection has gone up by 9 percentage points. What proportion is protection as a contribution to new business profit or APE? That's the first question.

And second question is, can you just talk a little bit about your first quarter 2020 Jump-start campaign? What are the type of products you're targeting? And are there any sort of targets for growth, whether that's in terms of volumes or also new business value?

And actually a third one, what is the impact of the new critical illness pay rules that are due to come in, in the coming months?

[Li Yinghui, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] We saw that after several months of hard working, the proportion of protection-oriented business now accounts for a higher percentage in our new business. And we are in very good preparation for the first quarter Jump-start next year.

And our general guideline is still the asset-liability management, and we want to sell diversified products and achieve growth in both NBV and our sales force productivity.

And regarding the change of the morbidity table, we should say that for the EV appraisal as well as our profit measurements, there will not be very much impact from the revision because the new table is only -- serves as a fundamental table, and different companies can refer to their own experience.

[Operator]

The last question comes from Steven Lam with Bloomberg Intelligence.

[Steven Lam, analyst]

Just a couple of follow-ups. On the investment side, just curious, did you -- or how much stock did you increase in 3Q, if any, excluding the market value gains? Like how much billion yuan you have added? And have you also done that in October so far?

And sort of similar question is, you mentioned numerous times that you seized opportunities to invest in long-term bonds. We've had various episodes of bond yields going up and down in the recent months. So for example, October, there's another rally. Did you seize opportunity this time as well? If so, could you tell us roughly how much you have added?

And you've also mentioned about on the nonstandard asset investments in recent months or since the beginning of this year. Could you give us some color in terms of the return profile or the duration profile of these investments or maybe in what kind of assets you've invested?

And then sorry, a last one on the agent side. So based on my understanding, your level right now, it's above 1.6 million for the exclusive agents. That's sort of back to the 3Q '17 level. Are you comfortable with that? I just want to get a sense of whether you still need to have more head count. Now you've mentioned about the productivity has increased. Could you give us some concept in terms of the percentage of your active agents out of the total or productive agents? If so, could you tell us the definition of those?

[Li Yinghui, executive]

[Foreign Language]

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] About your first question, which was open-market equities, our general guideline is to maintain a reasonable exposure. And this [ market is too weak ]. So for the first 3 quarters of this year, we seized some opportunities to allocate it through some high-dividend stock. And we also seized opportunities to be balanced, that is to realize some of the gains, and also control the risk exposures. For open-market equity, our guideline is to maintain about 10% of our total assets.

And secondly, about the long-term bonds, for the first 3 quarters of this year, we have seized some time window that's favorable in Q3, and we allocated some long-term bonds, especially the government bonds. We have newly added more than RMB 120 billion in government bonds. And at the same time, we also allocated to bank, negotiated some deposits and also nonstandard fixed income to also increase the yield and also control the risk.

And about the nonstandard assets, our guidelines on the percentages of controllable risk -- controllable credit risk, we want to enhance the allocation of nonstandard assets. For the first 3 quarters of this year, the main sectors we allocate are from transportation and also publicity and comprehensive sectors. We also invested in the top enterprises, both nationally and locally. We want to increase the duration and also the investment yield through issuing nonstandard assets.

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Interpreted] About the agent force, we have made very careful observation about our bigger time window. As we mentioned for -- by the end of the third quarter, our total agents in the agent channel amounted to 1.66 million. That is an increase of 15.6% from the end of last year.

And for the total -- for the whole market, we have seen differentiated development momentum regarding the agent force. For China Life, we have achieved our growth from the beginning of the year regarding the agent force expanding. And for the future, we will stick to the strategy of improving the quality and enhancing the sale of -- or the scale of the sales force. And we expect the total sales force for the whole industry will have lower increase in the future.

So on the basis of stable increasing, we want to achieve more and more quality improvement of the agent force. So we have made lasting efforts to increase the productivity of our agent force. Like I have mentioned before, we will put more emphasis on recruitment of the sales force and to select more high-quality agents. And we will strengthen the training and education of the new agents and to provide more and stronger supporting tools to the agents so that they can enhance their capability of sales.

[Unknown Executive]

[Foreign Language]

[Li Yinghui, executive]

[Foreign Language] Thank you. Oh, this brings us to the end of the briefing.

If you have any further questions, please feel free to get in touch with our IR team at any time. Thank you for participation. Bye.