China Pacific Insurance (Group) Co., Ltd. (601601) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. I'm Pan Feng from CPIC Group Investment Relations Department. Welcome to this conference. As we know, the C-ROSS Phase 2 was launched in September last year. And actually, the Phase 1 was launched over 4 years ago. And the Phase 2 was also launched informally last year. Now it's officially kicked off. So at this juncture, we are glad to have this sharing session with you. And of course, we will give a presentation on C-ROSS II regarding the general situation. And also, we will have a Q&A session afterwards. First of all, I will introduce the executives for this event. They are Mr. Zhang Yuanhan, CPIC Group Chief Actuary and Head of Finance; and also Mr. Su Shaojun, CPIC Group Board Secretary; and also Mr. [indiscernible], General Manager of the CPIC Group Asset Management Department. First of all, Mr. Zhang will give you a presentation on C-ROSS 2, and then we will have a Q&A session. I'll give you the floor, Mr. Zhang.

Well, good afternoon, everyone. First of all, I'd like to say a few words on C-ROSS II, the main changes. Now if you look at C-ROSS Phase 2, we will see that, first of all, the change lies in the most stringent requirement regarding the recognition of capital. That is to say, there will be -- the residual margin will not be counted 100% into the core capital. Only 35% of the residual margin will be counted into the core capital. And also, there will be a tiered recognition scheme. And also, there were improvements regarding the recognition standards of investment property, long-term equity investment, et cetera. Second change is high requirement regarding the minimum required capital calculation. That is the increase of market risk and the capital risk on a look-through basis. And there will be a more -- an increase in the scope of the interest rate asset calculation. And thirdly, improvement regarding the requirements and assessment for solvency management -- solvency risk management with improved standards and more requirements regarding the newly added capital. And fourthly, improvement regarding the insurance group, regulatory requirements to enhance the regulation for insurance groups. So regarding the overall changes, we believe that should be newly changes -- the new changes actually leads to a more risk-oriented management for solvency ratio. Now regarding the impact for the Phase 2 of the C-ROSS. Now first of all, our core and comprehensive solvency ratio both declined to different degrees. Now that's mainly because of the life and also P&C arm. Now that's mainly because of the risk side of the life insurance. And thirdly, in terms of P&C, on the C-ROSS II, our core ratio and the comprehensive solvency ratio both declined, and that's mainly because of the adjustment of the risk factors. And also regarding insurance risk and the market risk and credit risk, all these risks were increased in new scheme, but the structure change remained stable. For life, we see the core ratio dropped considerably because -- mainly because of the cap of the residual margin continuing to the core capital. As I mentioned, the 35% of the residual margin can be accounted into the core capital and also because of the tiered scheme for capital recognition. So our life comprehensive solvency ratio dropped a little bit. And the minimum required capital also dropped. Now that's because of the decrease in the interest rate risk capital. But market risk and risk -- insurance risk increased a little bit. So the whole C-ROSS II actually have -- I would say, would make capital more important in terms of constraining the life -- the business of insurance companies. So of course, companies which have good -- with good management of capital and the insurance business would benefit. So going forward, we are going to further enhance our management capabilities, especially for solvency management.

Well, thank you, Mr. Zhang for the general introduction. Now we will enter the Q&A session. [Operator Instructions] Now let's welcome the first question.

[Operator Instructions] Now the first question comes from Sun Ting from Haitong Securities.

Thank you, Mr. Zhang for your introduction. I'm Sun Ting from Haitong Securities. First of all, Thank you, CPIC, and I'd like to thank the company and the managers and also the team for conducting this meeting in a very timely manner because investors, we are discussing ourselves about the impact of C-ROSS Phase 2. Now the first question, we talked a lot about the impact on the asset and the liability side. But in 2016, when we launched the C-ROSS 1 -- Phase 1, I believe we faced the impact in terms of EV, embedded value. Now what will be the impact for EV this time? Secondly is on investment side. Now regarding the market risk calculation, so a lot of you mentioned the adjustments to risk factors, increase of risk factors. So what about that? What about your asset allocation, especially equity asset allocation? Were you going to lower your asset allocation in equity investment?

Thank you. I'll answer your question regarding EV and NBV impact from C-ROSS Phase 2. Now for NBV, of course, NBV is very important indicator. On the Phase 1, EV and NBV actually included the required capital. And on the Phase 2, the minimum required question regarding -- I mean there will be changes regarding the EV and NBV in terms of the ROE in place. So there will be some impact. And we conducted assessment. And we did some research, and we worked with a consultant -- consultancy firms regarding the assessment. Now in terms of the impact on our product, we believe protection-type product will have a higher value than saving-type products. But the gap will be narrow -- will be narrowed. We believe the impact will be very limited for NBV as well as EV, and that is a very slight decline for NBV. No, I'll answer your second question regarding investment. Now of course, the C-ROSS Phase 2 increased actually the risk factors for high-risk investment, for example, nonlisted equity investment, real estate investment, et cetera. Now for these high-risk assets will be under more constraint. Now our solvency on the Phase 2 -- on the Phase 1, there is not enough constraint. Now there will be more constraint. But the impact for CPIC will be limited because, first of all, our allocation into those assets are limited. And both our life and P&C arm have adequate solvency ratio. So I don't believe the impact will be big for CPIC. And also on the backdrop of declining interest rate, we will continue with our dumbbell-type investment. So for us, we did a lot of calculation. So even with C-ROSS Phase 2, our solvency ratio will remain stable. So you will not -- well be a -- well, impede our investment into equity assets. It will not be a barrier. So I believe on the whole, the impact will be limited. Let me just add a few more words. Now in Phase 1 -- on the Phase 1, on the solvencies, comprehensive solvency ratio was the main constraint. But on the Phase 2, we believe the core solvency ratio will be the main constraint, the main factor. But previously, the number is 100%. Now it's only 50%. So it's lower now. And also on the C-ROSS, the logic for value assessment will also be changed to some degree. So that is why based on our projection, we believe the gap between different products will be narrowed further. And there will be some non-C-ROSS-related factors involved. So I believe yes, that's my additional comment.

Well from Li Jian of Huatai Securities.

I have two questions. Number one about the business strategy. As we noticed, the calculation of risks and for both life and P&C have changed. For example, with the due margin will not be 100% counted into core capital. And for P&C, also insurance, we also will have some changes regarding this calculation. My question under this backdrop, what will you -- what will be the changes regarding your business strategy for both life and the P&C business? And the second question. We believe solvency ratio will jump on the whole across the industry, especially for life companies. So -- but the CPIC relies a great deal on life. So will this impact your dividend payout to investors?

Thank you. Now, I'll answer your first question. And our Board Secretary, Mr. Su will answer your second question. Now regarding the first question in terms of business strategy for a company like CPIC, there will not be a great change. For life side, we will continue to become customer-oriented. And you see savings products. Well, we see a big demand for savings-type products, but we [indiscernible] NBV greatly. Under Phase 1, actually, NBV required capital was already included. But then for protection, actually, what is not changed is protection product still is more valuable than saving product. So for us, on the C-ROSS Phase 2 for a company like CPIC, we will continue to conduct regression analysis of our product, product strategy to meet -- continue to meet customer demand, customer requirements. And for P&C business, our core solvency ratio and the comprehensive solvency ratio both dropped a little bit, but still very healthy, very stable. And on the Phase 2, capital will become a big constraint for insurance companies. But for CPIC, we will look at the risks for all types of products on the Phase 2 compared to Phase 1. And then take into consideration other factors, for example, capital utilization and capital occupation and customer strategy, market strategy, et cetera, to determine our product strategy. So for P&C business, we will refine -- further refine our business strategy. But on the whole, our big strategy remains unchanged.

Actually, your second question regarding the life company's dividend payout. Now for the CPIC gross dividend payout, we continue our strategy that is stable return for our investors. And so our strategy -- our dividend payout would consider the requirement for business development and also investors' requirement. So we believe C-ROSS Phase 2 will not have a sustained or continued impact on our dividend payout. So for life business, we believe the solvency ratio can be maintained at a stable or healthy and upward trend while making stable dividend payout. And for P&C business -- actually, for non-life business, the regulators would want the insurance companies to return to the fundamentals of insurance. For example, there will be a specific -- for example, changes regarding the distinction between different regions for catastrophe insurance and agriculture insurance and also new changes for auto business. So given these changes, we will continue to improve our business mix, enhance our cost control, enhance business quality and enhance our efficiency for operation so as to better meet new requirements from C-ROSS Phase 2. Regarding our strategy for products, we will better consider the capital utilization for our products, for our nonauto insurance.

Let's welcome Jessica from Crédit Suisse.

I have actually two questions. I have two questions. Now, actually, you mentioned that there would be a decline for comprehensive and the core solvency ratio for both life and the P&C. Now so my question is, this impact compared to your peers, is your impact bigger or smaller than your peers? So that's my first question. The second question, as you mentioned, the dividend payout. We hope there will be stable or sustain the growth regarding dividend payout. But I wonder -- I'm wondering, is there going to be a one-off impact regarding dividend payout? Or are you going to issue some debt or some other kind of financing maneuvers?

Well, thank you for your question. Now on the Phase 2, looking at our peers, we believe we -- we will predict that the impact for the peers would not be considerably different barring very special cases. And also on the Phase 2, the management of capital -- I mean requirement for capital management will be more and more stringent. So we, of course, are looking at more ways to supplement our capital from a regulator's perspective. Actually, last -- in November last year, there were -- they released various documents or draft documents. So we are responding to those drafted documents. But of course, those documents have not been finalized yet. So we're still waiting for the final words. We are making the preparation. So that's 1 thing. And for life company, as I mentioned, there will not be sustained impact. There might be a one-off impact. But now we are considering -- we believe there will be -- there will not be a big impact on our dividend payout.

Ge Yuxiang from Shenwan Hongyuan Securities.

I'm Ge Yuxiang from Shenwan Hongyuan Securities. Two questions from me. First of all, regarding CPIC. And the second question might be a technical question. For CPIC, we believe in 2020, we actually issued the GDRs. Now for Phase 2, that will be inquired for all companies. So my question is that with the [indiscernible] with GDR, were you going to use it domestically? Second question, you mentioned there will be a grace period for various companies. So are you going -- is CPIC included in this grace period on individual basis?

Now let me answer your question. Actually, in 2020, we issued the GDRs in London Stock Exchange. So at that time, actually, we actually included in the prospectus about how we are going to use the proceeds. So we mentioned that we are going to use it in the new areas in terms of fintech and health insurance, healthcare sectors. We are following up on the utilizations, and we are making preparations. And we believe those new areas are going to be the driving engines for our business. So we will stick with what we mentioned in the prospects in terms of how we are going to use the GDR proceeds. Now as Mr. Zhang mentioned, there are other kinds of supplementary rules for Phase 2, including, well, the grace period. So we are going to utilize those rules to better use our GDR proceeds. Now about the grace period question. Now of course, this regulator is saying grace period can be applied on a company-by-company basis, then the CPIC is talking to the regulators. So we are in the process of communication. There is no final word yet. So we are making preparations on both fronts. So please rest assured.

Ms. [indiscernible] from Guotai Junan Securities.

I have two questions here. The first one is for Mr. Zhang regarding product side -- product questions. For critical illness product, there is an increase of the morbidity-worsening factors. So the value of the margin for CI product might decrease. So will there be any changes regarding your strategy for CI products? Or how will the CI margin change in the future? Second question regarding long-term equity investment for the new rules. Now for the noninsurance long-term equity investment, the risk factor will be higher -- will be increased. Now we noticed that the CPIC has been making investment in various industries, sectors. So how will this impact to your solvency or your capital conditions?

Now first, regarding the margin -- product margin question. Now our logic for business is we will become customer -- we are customer-oriented. We meet customer needs. So this remains unchanged. So that is to say, on the current conditions, our CI products actually is giving us good margins. Even on the C-ROSS Phase 2, the margin for CI products will be very high. There may be a slight impact, but very limited.

Now regarding long-term equity investment, as we mentioned, for life -- for insurance subsidiaries, and the risk factor increased, and the nonlisted equity actually -- risk factor increased to a 41 -- 0.41%. But you see on the whole other type of subsidiary investment, the risk factor increased to 100%. But we actually basically have no such investment. But for other type of equity investment, the risk factor increased to 30% to 40% something. So based on our calculation, our life core solvency ratio is very adequate. So it can support our equity investment for now and even support our increase in equity investment. So there will not be pressure in this regard.

Given the interest of time, we will only have time for the final question.

I'm Leon Qi from Daiwa Securities. I have two questions. Number one, the new agent remuneration scheme or basic operation rules because you mentioned the margin might drop a little bit and so how about the impact for the commission rate to our agents. So is there going to be any changes? And the second question regarding the investment for green bond, there will be a 10% discount. So are you going to increase allocation in this regard?

Okay. Let me answer your first question regarding the margin and the agent's remuneration scheme. Now as I mentioned, based on our calculation, static calculation, there may be a slight decline. But in terms of our business management, dynamic management, it will be unchanged. So the agency -- the agent remuneration scheme will not be impacted. So there will not be a very strong correlation between the margin's changes to the agent remuneration scheme. There is not a fixed or rigid correlation between the two. So there will be no impact for the agent remuneration.

The second question, let me repeat the second question. On the Phase 2, there will be a 10% discount for the required capital regarding the green bond. So what's your allocation in green bond? And are you going to increase your allocation in green bond in the future because given this kind of a 10% discount?

Now honestly speaking about the green bond, actually, the whole industry -- we don't have a standard calculation criteria for the green bond. I cannot give you a specific number for how much green bond we hold. We only have our own internal formula. So if there is this kind of a 10% discount for green bonds, there must be a specific or unified standard for calculation or definition for green bond.

Now let me just add for Mr. Su. Now the regulators and the government are pushing for the green financing. So CPIC is following the trend closely. Actually, last -- at the end of last year, we actually signed the eMPR, the international protocol. And ESG investment will also be included in our overall management scheme and also embedded into our investment process. So whatever the definition of the green bond, I am confident that we are going to increase our allocation in green bonds.

Well then, thank you for the presentation and answers and also thank all the investors for the questions asked. Now, actually, we have a lot of investors joining the event. Because of the time constraints, we cannot answer all the questions. But well, it will be okay. You can contact us afterwards. Thank you very much for your time. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]