New China Life Insurance Co Ltd (01336) Q2 2021 Earnings Call Transcript

New China Life Insurance Co Ltd (SHA:01336) Q2 2021 earnings call dated Aug. 26, 2021.

Corporate Participants:

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Li Quan — Chief Executive Officer and President

Yang Zheng — Vice President and Chief Financial Officer

Li Yuan — Vice President

Analysts:

Jun Zhong — Chow Sang Securities — Analyst

Yu — FAST Securities — Analyst

Junhua Mao — CICC — Analyst

Li Dan — CLSA — Analyst

Chow — Ocean Securities — Analyst

Zhang — — Analyst

Zhou Jing Jing — Changjiang Securities — Analyst

Sheila — — Analyst

Presentation:

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Ladies and gentlemen, good morning. Welcome to New China Life’s 2021 Interim Results Announcement. I’m Gong Xingfeng, Vice President, Board Secretary and Chief Actuary of the Company, also today’s moderator.

First, please allow me to introduce the management team here with me today. They are, CEO and President, Mr. Li Quan; Vice President, Mr. Chaojun; Vice President and CFO, Mr. Yang Zheng; Vice President, Mr. Li Yuan; and Vice President, Mr. Yu Zhigang. Today’s results announcement has two parts. The first is the presentation on the first half performance. And the second is Q&A session. Simultaneous interpreting will be provided. [Operator Instructions]

Now let’s come to the presentation part. Mr. Li Quan will brief you on the H1 performance and future outlook. Mr. Yang Zheng on financials and investment. I will introduce the impact of latter part. Now the floor is yours, Mr. Li Quan.

Li Quan — Chief Executive Officer and President

Thank you, Mr. Gong. Ladies and gentlemen, good morning and welcome to NCI’s 2021 Interim Results Announcement. First of all, I’d like to brief you on the overall performance in the first half, although we were encountered a lot of headwinds, NCI still achieved some highlights. First, the GWP was RMB100.6 billion, up by 3.9%, rose steadily and the 25 months persistency ratio remained flat at 85.8%, up by 1.2% points. Embedded the value RMB250.7 billion, up by 4.2% compared to the end of last year.

Total assets, RMB1.02 trillion, up by 1.8% compared to the end of 2020. Net profit attributable to shareholders RMB10.5 billion, up by 28.3% year-on-year. Annualized total investment yield remains trailing, was — it was 6.5%, up by 1.4 percentage points. When developing life insurance business, we also actively shouldered our social responsibility. For environmental protection we adopted a low carbon approach to address climate change and promote ecological civilization. In office decoration, we follow the principle modest decoration and the energy saving all aspects to improve efficiency and reduce consumption. In our daily operating multiple steps, were taken to cut emission and safe food. In the business conducting we used mobile platforms for marketing, operating and customer service to cut to the pay-per-use. Also, we are actively fulfilling our social responsibility. In July this year, a torrential rain and a flood hit Henan to help them with relief and the post disaster reconstruction, we decided to donate RMB1 million.

In H1 to rejuvenate country side, we spent RMB8.3 million in Guizhou, Shibing. Also in the first half, we provided nearly 840,000 plantation workers with insurance. From 2017, total claim payment reached RMB22 million. In the second half of this year, under the guidance of high quality party building we will remain true to the essence of the insurance continue to optimize products and services strength in technological empowerment and strictly control risks to steadily advance annual targets. For us to accelerate the transformation of our teams, to improve the quality, ensuring the quality of new recruitment and continue to recruit more qualified agents. We will also provide more tools, training, policies and take other measures to cultivate high quality teams.

Second, optimize product offering and improve coordination, adopting a customer-centered approach we continue to optimize product mix and align the resources for old aged care and health care industry to expand our service scope and also to improve the product attractiveness. Third, faster innovation and strengthen technological support. We stepped up research and business innovation and application to gain more support for our technology — technological tools and to improve the operation and management capability. Fourth, strengthen the risk control and practice compliance operation. Prevention comes first in risk control. We strengthened the compliance culture education and the supervision also to make every one play its part and play its role, to improve our capability to monitor identify and to firmly control the risks.

Next is the insurance business part. In the first half, we tried to seek progress while ensuring stability, made efforts to build professional distribution network and enhance the risk prevention, all types business remain on track. FYP for long-term insurance business, RMB32 billion, up by 0.5%. Renewal premiums RMB66.9 billion, up by 6.9%, accounting for 6.6% of GWP. This is a solid foundation for rapid premiums growth, premiums from short-term insurance business RMB3.6 billion, down by 16.3% by different channels in the future insurance channel contributed to RMB69.9 billion premiums up by 5.5%, Bancassurance RMB28.9 billion, down by 0.7%, accounting for 28.8% of GWP.

Group insurance channel RMB1.8 billion, up by 21.5%. For Individual insurance channel it stepped down average in customer management explore the ways to support marketing FYP for long-term insurance business RMB10.2 billion, down by 1% renewal premiums RMB57.6 billion, up by 8.6% premiums from short-term insurance RMB2 billion down by 28.8%. For the agent in building — the traditional marketing model get fumbled in the insurance industry, we actively explore the transformation of such models and this means that the unqualified agents, the agent headcounts 441,000 down by 16.2% monthly average number of qualified agents 105,000 reduced about 22%, monthly average of qualified rate 19.1%, down by 7.3 percentage points. For Bancassurance channel we deepened cooperation with important partners and posted the growth of regular business.

FYP from long-term insurance business RMB4.7 billion, up by 28.5%, renewal premiums totaled RMB9.3 billion, down by 2.6%. From different product the participating insurance contributed RMB36.3 billion, down by 9.3%, accounting for 36% of GWP. Health insurance, RMB33.3 billion, up by 4%, accounting for 33% of GWP and then traditional insurance RMB29.9 billion, up by 26.9%, accounting for 29.7% of GWP for the business quality, the quality remained stable in the first half — the 13th month persistency ratio of 88.8%, 25 month persistency ratio 85.8% down by — up by 1.2 percentage points this around the right 1% up by 0.3 percentage points. That’s all for the insurance business.

Now, I’ll give the floor to Mr. Yang Zheng to introduce the financials and investment part.

Yang Zheng — Vice President and Chief Financial Officer

Thank you, Mr. Li Quan. Next, I will introduce the financials and investment of the company. First is the revenues and the revenue of the company is RMB130 billion, up by 12.3% net written premiums and policy increased about 4.1% to RMB99 billion influenced by the increase of investment yield which is up by 47.2%, the investment income increased by 12%. The expenses was in line with the company’s business and net profit totaled RMB10.5 billion up by 28.3%, earnings per share was RMB3.38.

Next, I see the investment performance in the first half the company in this was the complex and severe market conditions, the investment focus on our core business indicators and the realized certain results. Firstly, the investment asset reached RMB979 billion, up by 1.4% compared with the end of last year. And the annualized total investment yield was 6.5%, up by 1.4 PT annualized net investment yield was 4.5%, down by 0.1%. Next, let’s see the investment portfolios. Our asset allocation of the company compared to last year remained stable, we can see 40 changes of various items is within a 1% change. The term deposit accounting for13.3% up by 0.6 PT, the debt financial asset totaled RMB559 billion, accounting for 57.2%, a slight decrease. This is the major asset allocation of our company.

The bonds, trust products, debt plans and asset funding plans are all stable, at the same time, the company’s strengthen the research of the debt products, the overall credit is within control and the equity financial asset reached RMB280 billion accounting for 21.0% of total investment asset maintained flat. The company focus on value investing and absolute return graphs the structure opportunities to realize the sound yield and for the next asset investment the company has shared our investment philosophy was the investors we have continued to stabilize our investment asset but the volume and proportion has decreased. The total investment asset totaled RMB227 billion, a slight decrease portion in the investment asset, the debt investment accounting for 71% and equity investment accounting for about 30%.

The company has good quality of the investment asset with the credit within control. Next, I like to show the solvency margin ratio of the company by end of June, the course on consumption margin ratios companies 260% down by 10.75 PT, the comprehensive of the same margin ratio hit 269%, down by 8.17 PT. That’s all for the financials.

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

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Thank you, Mr. Yang Zheng. Next I’d like to introduce the embedded value of NCI. By end of June this year, the EV of the company continue to raise, increased by 4.2% from RMB240 billion to RMB250 billion among those value of in-force business increased about 2.1% up from RMB93 billion to RMB95 billion at the chart. The adjusted net worth grew from RMB147 billion to RMB155 billion up by 5.6% for the analysis of the EV we can see in the first half this year the major contributors to the growth were NBV and expected return, which contributed 2% and 4% to EV growth respectively.

Next, let’s go to the VNB. And the first half, the VNB of the company totaled RMB4 billion down by 21.7%, FY VNB margin was 12.2%, APE VNB margin was 21.2%. That’s all for the embedded value. Thank you.

That’s the end of the presentation part. Let’s come to the Q&A session. [Operator Instructions] Now we are ready to take your questions.

Questions and Answers:

Operator

Ladies and gentlemen, this is the Q&A session. [Operator Instructions]

Jun Zhong — Chow Sang Securities — Analyst

Thank you, management, I’m Jun Zhong [Phonetic] from Chow Sang Securities. First, congratulations on the management results. I have two questions, the first is on the liability side. As you mentioned in the presentation part, the insurance industry against encountered some headwinds, I want to ask about the agent development since you achieved a lot of head count growth last year, but this year we see a huge drop in the head counts. What’s your outlook in the recruitment in the future and what measures will you take to prevent the further drop of the head count.

The second question is about the asset management. The H1 performance is quite sound and good but we can see, there are some diverging trend in asset markets and the sectors. So what’s your, how do you turn to the equity markets investment. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Mr. Li Quan please answer the first question.

Li Quan — Chief Executive Officer and President

Thank you for your question. In the H1 indeed the whole life insurance industry had good start, but a disappoint trend especially in the April, May and June, we think there are several reasons. The first is the recovery from the pandemic is lower, slower than expectation. It hit hard on the life insurance industry and the second factor is the stringent regulation. China’s regulatory authorities put higher bars and standards on the agents building and the third is the marketing mechanism in China. Actually made a lot of contribution in the past three decades. But right now it has to change according to the circumstances and also customers’ needs.

Now we are entering a period of paying I think there are four mismatches. The first is the age of agents is mismatched with that of our customers. Most of our agents are born in 1960s and ’70s, but our customers are much younger, most of them are born in 1980s and ’90s. They have different mindsets and there is a mismatch. It’s very hard for them to communicate. And the second mismatch is the product, the product supply is not aligned with customers need. In the past, we may focus on one single product. Most agents sell these products to customers. But right now, we can see they are some individualized and personalized demand for our customers, which is very hard to satisfy.

And the third mismatch is the marketing scenarios. We know young people they prefer shopping online, they like visual interactions. But now we still focus on offline marketing though we have advanced our technology advance. Top peers and also other large media companies also find it very hard. We still focus more on face to face marketing and conduct some [indecipherable] and offline activities. So the sales model is changing. The fourth is the income of agents and their retention is not matched. In 1990s, when we started these marketing model the income of them were RMB2,000 to RMB3,000 which was very high at that time. But after nearly three decades the average income still remain flat at RMB3,000 to RMB4,000 which is relatively low in today’s society. It’s not good to the retention of the agent team.

So we can see from the above mentioned three aspects and the four mismatches the Individual Life insurance channel was hit hard, that’s why some indicators you mentioned see a drop in the first half. Faced with these challenges, we take — we took active measures. We have three steps. First, we have three attitudes actually but we choose to actively — respond actively. First we dismissed unqualified agents following the guidelines of regulators and make sure the headcounts premiums and the structures are all free of fraud. And second for the new recruitment we strengthened higher standard and a criteria to seek agents that is younger, more professional and living and working in urban areas. Third, we grasp the opportunity to make short-term health insurance to customers by new policies and to engage more customers and agents use this activity.

We encourage them not to renew their short-term policy, but to buy new long policies. We also provided some specific financial input to this activity. So that we can inject more confidence in this green market to encourage them to visit more customers. At the same time we stepped up our efforts to conduct customer activities for example the campaign Jogging with China, Jogging with the New China Life. If you are familiar with our activities, we invited Mr. Su Bingtian also the outlet to be the guest of our Jogging with NCI activity. Besides, we also build some platforms to keep interaction and engagement with our customers. So that we can make our customers know the company and our products better and to create opportunities for the interaction between agents and customers.

So in this first half the excellent agents and the manager level agents as well as our structure remained stable against all the headwinds. You mentioned marketing channel and team building. We still focus on the full approach, marketing through our policies atmosphere, responsibility and also activities. I mentioned that we prey for agents which is younger, professional and living in the urban areas and also we provide products with the full coverage targeting at whole family and to cover the protection from the book to the debt. We want to build a new ecosystem of our marketing. In the past, the marketing ecosystem focus on the headcounts and product. We think these two can insure — rose the sales. But right now we see we shifted to technology, services, and product.

Technology is — it comes at first. We made some efforts to acquire customers from Internet and to engage customers who know NCI well and recognize our products. Also we launched plans and incentives targeting at specific customer groups. Lastly, I want to say we will strengthen training and to cultivate more excellent agents. We know some agents, they know nothing about insurance. They don’t know how to sell. So training is very important. We have two training program, one is for a new recruit and the other is for managers. Also, we are targeting at 3,000 or 5,000 agents. So we believe in the second half of this year we still see opportunities among challenges we will abide by laws and make sure the headcounts premiums and the structures are true. Also, we will take some innovative steps in-house training, provide financial input. We believe with all these moves we may make some progress. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

For the equity market divergence, Mr. Yang Zheng, please answer this question.

Yang Zheng — Vice President and Chief Financial Officer

This is a very good question. Equity investing is very important to the asset management of NCI. It has a huge influence though it has a limited size, especially during the fluctuation of equity market at May attracted a lot of insights from you. From our fundamental strategy to simplify it and equity marketing — equity investment has three impact. First is duration. And the second is return. And the third is fluctuation. For duration part, equity investing is a little bit shorter than required and it’s — shorter than the — I have to correct myself. Equity investing has the long duration and its return characteristics have to follow the guidance of the government, and also we have to seek high quality targets and alpha returns.

This is what we want, that is the long duration and excess return. Third is the fluctuation. This may seems negative to you at very first glance, but the fluctuation of equity market is not a bad thing. It’s a neutral phenomena. How to leverage the fluctuation of the market and to meet our strategic asset allocation target is a key area and equity investing is very important tools, duration, return and fluctuation. These are the three key roles equity marketing played and we can see in the first half we achieved a rosy results. So in the second half, we will still follow these three objectives to prolong the duration, to generate higher return and to use fluctuations of our objectives.

We can see right now China’s economy and the performance of different sectors, industries and corporations, they diverge in different ways. Some changes within our expectation. But most of them actually took us by surprise. NCI has accumulated experience to cope with the short-term fluctuation and for us to the media to long term trend. So we will leverage these advantages and to grasp our opportunities in asset allocation, sector selection and security selection also to some of the return objective through short-term fluctuation. Equity assets especially in short-term period as you all know is very important to company’s performance. We will follow our established strategy and to grasp market opportunity. Thank you.

Operator

Let’s welcome the next question. [Operator Instructions] Thank you. Next question comes from Yu [Phonetic] from FAST Securities.

Yu — FAST Securities — Analyst

Thank you for this opportunity. I have two questions. First is, we can see the NBV and B margin has increased for the bancassurance channel and we can see the pure company has strengthened the focus on bancassurance channel, and I want to know your strategy in bancassurance channel and your advantage. The second question is that the persistent visual of 13 months has increased by 2.2 PT but the 25 month versus the ratio increased. I want to know the reasons for that and we can see the 25 month versus the ratio decreased for other peer companies but yours are increased. I want to know the reason. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

These two questions, let’s welcome Mr. Li Quan to answer.

Li Quan — Chief Executive Officer and President

For the first question about the bancassurance channel in the second half of this year, in the first half of this year the bancassurance channel performance is sound in a market and in our peer companies, the distribution channels has realized a good performance in the second half, we will continue to follow our three operations, namely distribution team, and the customer operations, and follow our strategy for promote regular premiums with single premiums. The single premium above our combination has a similar and decreased to target compared with the last year but with their strategy the FY our FY RPC question. So in the second half will follow prescribed strategy in terms of wealth management business, we will consolidate our team building, strengthen trainings and provide more support to the sales of high-value products. And that’s the first point.

And the second is about the persistency ratio of 25 — 13 months, and 25 months. We’re going to see the increase of 25 month versus the ratio shows that stable team with the sales of products and high quality business contributed to this result. So we can see the 25 months versus ratio increased the company attached to importance to the quality management. We excluded the surrender policies and premiums in the business supporting schemes. And for those institutions we haven’t realized the target of versus ratio. We have some punishment measures. So with those efforts we can see the 25 month possess the ratio increased and for the 13 month persistent ratio, in the first half it has decreased in the first half of this year. But we will, we think there is that trend has allowed us to market and the reasons are first is because of the pandemic, the economy hasn’t recovered.

Last year we prioritized stabilizing the team. So there are some issues about the quality and the business of quality has decreased and for the second reason is we can see the renewal premiums and the willing for paying renewal premiums of customers has decreased. So these two reasons contribute to the decrease after 13 months persistent ratio but we also have taken measures to cope with that problems and we have conducted specified meetings to cope with that problems and for the products was weak persistency ratio will strengthen our supervision and promotion and we will punish those who have weak and bad performance. So we have to conclude that we have conducted multiple measures to cope with these problems.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

And Mr. Li Yuan to add to the bancassurance channel.

Li Yuan — Vice President

[Indecipherable] bancassurance channel has realized positive growth and contactor effective measures after the new management took office in 2019. Now last year I have shared with you about my philosophy about bancassurance channel, we will conduct develop the bancassurance channel in a bigger picture will strive to improve our management level, reduce the cost and improve the value of bancassurance channel. We have being continually follow our strategy and solid results have been received. And in the future we will strive to grow the bancassurance channel continually. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Next question please.

Operator

[Operator Instructions]

Junhua Mao — CICC — Analyst

Thank you, management for the opportunity to ask the question just now you have answered and cleared a lot of my doubts. We know that the change of customers has posed challenges and many companies are seeking new growth points. You mentioned the wealth management strategy. Could you please update in this regard. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Thank you, Ms. Mao from CICC. Since we took office, we proposed the strategy called one plus two plus one. First, to build NCI into the best financial service groups that provide all around services and customer-centered and the first is the life insurance, the two is old age care, health care and another one is for technological empowerment. From execution resort we can see this strategy has translated into actions first in the life insurance business, our foundation and the basis is solid. We have professional channels and products and services. To cope with these uncertainties and difficulties we are exploring transformations of marketing mechanism and strengthen the coordination among different industries.

We just presented to you with the H1 performance the GWP is RMB100.6 billion, up by 3.9%. The growth rate is not high compared with last year. But against the backdrop of this year it’s a hard one resort. Renewal premiums accounted for 67% a major contributor to the GWP growth and for wealth management we have put in place a material model that align our asset side with liability side to leverage the advantage of asset management and to support the steady growth of liability side. The investment yield is quite rosy and sharing. The annualized total investment returned 6.5%, up by 1.4 percentage points and for health care and elderly care industry. Now, we have setup multiple elderly care communities in different cities and we have three communities named [indecipherable].

These communities helped contributed RMB1 billion premiums and in health industry we helped, we have served 110,000 clients for health checkup and therefore, technological empowerment, we have strengthened our technological support and to expand the technology application we have launched the core system and to cater the needs of our agents and agent team for the marketing and we also launched the [indecipherable] program to optimize customer experience. These are some results we quoted. Thank you.

Operator

[Operator Instructions] Next question comes from Mr. Li Dan from CLSA.

Li Dan — CLSA — Analyst

Thank you for this opportunity. I’m analyst Li Dan from CLSA. Just now the management team have answered a lot of questions. And I have two questions, first is you have mentioned these strict regulation in the market. And what regulation policies could we expect next year? And can you expect some regulation policies that may impact to the business in a short — in the short run. And the second is about the aged care. Well, you can see in the market, there is a new stage annuity insurance that will be established and I want to know your comment on that. And what do you think the traditional life insurance companies participating in this business.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Let’s welcome Mr. Li Quan to answer these two questions.

Li Quan — Chief Executive Officer and President

First is about the severe regulation policies. The regulators in the past three years has introduced the policy in line with country and the whole national economy. A lot of policies has been introduced for us we believe in the future in terms of product supply, the distribution model and agent team, new policies might be introduced and for the regulations we think it will be a new normal for the regulation. Now the economy of our countries had into high quality growth, the regulators based on the current development model and level to regulate the industry and promote the industry to return to the essence of life insurance and maintain high quality growth.

The second information about state annuity company, this is a new topic and a hotspot recently. I think the state annuity insurance company is new, a lot of its future business and supporting policies hasn’t been released. For me first of all, I think it shows that our country has the aged care and the country has in a macro level strengthened the role of aged care companies and hope the banks should play a more important role in this regard and in the future I think it’s a priority in terms of the national strategy, and the second, for the life insurance industry, we think we should focus on our own business and seek the comparative advantage for life insurance business, we have our advantage.

I believe we have three advantages. First is in product design we have a guaranteed rate for the product, which is a competitive advantage for us. The second is life insurance industry has accumulated a sound pricing model and risk control mechanism in the long run and life insurance business has also accumulated wealth management capabilities of long-term asset which are pivotal to aged care. So for NCI we believe we will attach importance to — in this field and also the possible regulations that might be introduced by the government such as the tax support policies or how can the insurers participated in this regard, we will focus on three aspects.

First is we are one of the 6-pillared institutions of exclusive aged care annuity insurance and we will actively participate in this regard. And the second is, we will try to accumulate experiences in our pilot programs. The second is we will enrich our aged care products, and the service supplies and we will provide long-term annuity insurance, carrier insurance etc. And we are planning to — planning to introduce the monthly paid annuity insurance to meet the demand of customers. The second is we will improve our layout in the aged care industries and a form sound coordination with life insurance business and to form a sound ecology.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Next question.

Operator

[Operator Instructions]

Chow — Ocean Securities — Analyst

Thank you, management. I’m Chow from Ocean Securities. I have two questions, the first is about the basic policies of the agent team since we know you launched the new policy last July and now the industry environment has changed, how do you reflect on the new policies and what is the pros and cons. How do you improve it?

The second question is about the old age care and healthcare. We noticed that you have three elderly care communities. So what is the operation and the profitability of these three pipelines and what’s your future outlook. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Mr. Li Quan, would you please answer the first question.

Li Quan — Chief Executive Officer and President

Thank you for the question. The new agent team policy was launched in last July, and we see three features. First, the new policy strengthened the culture of promotion to consolidate the foundation of the pyramid. The foundation is our marketing group, then the upper level is the marketing division. We try to consolidate the whole structure layers by layers through promotion. Now we have about 600 supervisors, 6,000 divisions and 30,000 net groups. The second feature, it strengthened the cultivation of excellent agents. From the very beginning when we recruit the agents we set high bars and criterias. We divided into two directions. The first phase excellent recruitment and the other is some common recruitment.

So for excellent recruitment we prioritized their education background and their ages. Also we provide some measures for example the training of Excellence 5000 Elite clubs and Elite summits for this team. These measures helped to stabilize excellent teams and, but we have to say last year, the total headcount reached 6,000. So this is a result yielded by the new policy. Both promotion and consolidation. For the future how do we update the new policy? I have to reiterate that new policy is the cornerstone management tool for the whole company. Right now, according to our schedule we don’t have amendment to the new policy but we have noticed there is some difference.

First, the market environment is different. Second is our emphasize on the excellent agents training. We have to step up our efforts in this regard and also the layers of the pyramid will be streamlined. The hierarchical level will be simplified. And also thirdly we put more emphasize on the agents who are younger, more professional and working in the urban areas. This is a new trend of our team building. That’s all for the question. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Mr. Yang Zheng would you please answer the second question.

Yang Zheng — Vice President and Chief Financial Officer

Thank you for your question and your support and attention in this regard. Mr. Li Quan just mentioned healthcare and elderly care industry actually show its initial effects. We have formed multiple elderly care communities in different cities. In the first half, the operational indicator remained stable and the business are stable. Our constructions are proceeding smoothly and two for some details you mentioned we have three communities. In Beijing, we have [indecipherable] and in Henan we have lower community. These two communities are put into operation. And each community, which is still under construction in Beijing and district.

This construction project were undergoing smoothly and Phase 1 construction is expected to complete by the end of this year on May 28, we had a debut ceremony. Over 100 potential clients have visited our Yantian community. This is the brief introduction of our elderly care communities. On the other side we to better serve our strategy we have seeing excellence with hospital and also we have CYI excellence help investment management company, it has set up 19 health care centers around the world, so to speak the elderly care and healthcare program, has stable operational indicators and the business. For the future, we will make more efforts and provide more inputs.

We try to set up more programs in Beijing Tianjin Hubei province, as well as Tianjin River Delta and Zhujiang River Delta to build NCIs on ecosystem. Also, we want to be boosted the effective of synergy between elderly care industry and the life insurance to strengthen our profitability. Thank you.

Operator

[Operator Instructions] Next is Mr. Zhang [indecipherable]

Zhang — — Analyst

Thank you for the opportunity. I have one question. For the setbacks of the sales of health insurance business, the long-term insurance is pivotal to the product. Now there is increment whole life insurance, which is popular individual insurance channel I want to know your product strategy in the next decision outlook for NPV margin.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

This is the second year after the break of the pandemic. The pandemic has huge influence on the industry and people’s lives. This year there are many challenges for the industry. And the core for that is there is a mismatch between the life insurance, the planned people’s demand in the previous years there is obvious evident and characters that people’s demand are changing and in the past staged people have favorable interest in the annuity insurance product and some people prefer house insurance product. And after the pandemic people have diversified demand for insurance product and for NCI the sales has showed those trend the annuity insurance has a sound yield and performance but the house insurance has encountered challenges for how to explore customers’ demand and growth point and circumstance is a priority of our company.

And people’s demand for critical illness products should be explored and attached importance and we have strengthened our research on the expanded product coverage and product research, also in terms of the sales we tried to guide the customers and from our regular product innovation we have introduced a new whole life insurance product including [indecipherable]. Also we have promote research and development to new products which are insurance and OLAF insurance, which might be introduced next year. And focusing on those changes the product combinations and portfolios will be enriched and to identify the customers demand and improve the business relatively the term of the whole life insurance is long. So we expect more values from those product. We hope that it will be recognized by the market and the form and contribute to the value growth. Let’s welcome the next question.

Operator

[Operator Instructions]

Zhou Jing Jing — Changjiang Securities — Analyst

Thank you, management. Thanks for the opportunity. Zhou Jing Jing from Changjiang Securities. Mr. Gong just talked about some products and strategies in the future we know the pension system may see some changes from the contractor system to account system. So from the actuarial perspective if we did see this switch what products will NCI prepare since the union link and universal products usage will be account system products for right now traditional whole life annuity products, they are different. So what adjustments and what products will you make in the future.

The second question is about the agent. Actually we are concerned about the turning point of the kinds of development. What is the bottom of this drop? We see some peer insurers also see some challenges because of the stringent regulation. So the agent headcount has decreased about 40% for the whole industry. What is the end of these declining trend? What’s your expectation? Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

I’ll answer the first question. You talked about the annuity and pension products this is a very big and complex question. Also this is an important aspect how to cope with the agent population challenging and how to construct the third pillar. I’d like to share some of my thoughts. The social hot spot — hot topics reflect a symmetry of information. In the past we see some information asymmetry which may cause conflict of interest and market pressures and now the quick and convenient media coverage make information more transparent. This is also the same to the pension and annuity products. In the past we mix the accumulation of money and also the withdrawal of money into one product.

Our customer at his 40s to pay his money to the company — insurance company and by the end of 60 he may withdraw the money. But he does not know how his account performed during this period. Our past product strategy distinguish clearly about between the account type product. For example, the union linked products and the other annuity products. These are two totally different types of products in NCI. Now, while the company is pushing up the construction of the third pillar and proposed a new plan that is to distinguish the accumulation period from the withdrawal period. So for the accumulation period, the rights and the obligations are more clarified.

We have set individual accounts for customers which allows customers to see how much they have paid and how does the account perform while in the withdrawal period how much you have accumulated in the during the accumulation period. All these numbers and the data are transparent and clear. Such a approach may represent the future trend of NCI and encourages us to be more innovative and to improve our existing system. Also as you just mentioned we have to leverage our advantage and capabilities in managing longevity risk and to deepen the reform of contract the type of products and the second, for the account type of products on the guidance of the third pillar, we have to set up a more flexible management model for the accumulation period and then to generate more abilities to create values to provide a much clearer and transparent display presentation to the customers.

And at the point we will encourage customers to switch back to the contract type products. I think this is the macro trend of pension annuity products. NCI is a life insurance company. We have a complete and the sound product system. And this year, we also launched some new products, some of them are short-term to medium term like wage annuity also we introduce the [indecipherable] other products that was linked to elderly care communities. For third-party accounts products we will also follow the experience we accumulated on the third pillar structure and try to make some innovation. Thank you.

Li Quan — Chief Executive Officer and President

I’ll answer the second question. You mentioned agent head counts. When can we expect to see the lowest headcount? From 9 million headcounts to over 4 million headcounts, what a dramatic drop for insurance industry. Actually this trend will continue. A lot of unqualified agents leave this industry, some of them are not suitable for the insurance selling. Many companies including NCI are taking active measures to recruit new agents. I can’t say the specific time of these valley but we think it’s more important for us to retain those agents that are good at and excel at insurance sellings. Right now the headcount of agents is not enough for such a big population in China.

I have several thoughts to share with you. As I mentioned before the first is to follow the rules and laws. There used to be some misconduct in the agent team to acquire illegal and strengths and interest and the profits from the company. So we have to strengthen the team management to abide by the laws and rules and to make sure all the data are transparent and are true. Second, we we have launched the product targeting at new recruits and existing agents for new agents, we want to provide them with some simple some products that is easy to sell and help them to engage with the customers. As Mr. Gong mentioned we have some health care and elderly care communities that will help the new record to sell. And the third is to build up agent team that is younger, more professional and good at working at urban areas.

We wanted to simplify the hierarchical levels and the structure to meet the diversified needs of our customers. The last point is technological empowerment. We want to gain more customers from the Internet. We have to expand the online channels and to cater to the needs of the younger customers. In the past, we used to think the recruitment of agents will bring naturally customers, it is not true. We have to expand the channels to help our team market and to increase their income so as to help them retain in the company. By doing so we have to make efforts in two aspects, one is quality, the other is quantity. Thank you.

Operator

Next question comes from Sheila [Phonetic]

Sheila — — Analyst

Thank you for the opportunity. [indecipherable] I have two questions, first, I want to ask about the industry, because the industry going down in the second quarter, what do you think are the reasons behind this and when can we expect a turning point or what indicators or signs that may reflect the turning point. The second is in the finance we can see the payout of health insurance increased about over 40%, which is higher than the premium growth and whether they are changes of assumptions behind this and will adjust your assumption in the future. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

For the increase offset payout, we can see that the payment for medical insurance because of the pandemic in 2020 a lot of areas are restricted and the payment for medical insurance are low but in this year, payout return into a normal level. So that’s the answer for your first question. And about the payout for the critical illness product in the past several years the critical illness business grew too fast and accounting for high proportion in FYP in some time. And so we have a growing existing business with the increase of our existing business, we can expect the growth after payment to claims and which is in line with the business growth in the past several years.

And we can expect that the payout payment to the claims increase in the future. And for the current assumptions and increase of payments claim payments whether there are some problems in terms of the pricing and the customers I think is a complex question for the pricing point for the pricing of our company has followed the critical illness table and our cash table of the industry on the mortality rate and these tables are transparent. So I think we have relatively certain and sound gross profit as risk centers in the second point customers awareness protection in insurance has increased, which promoted the customers to buy health insurance product. But no doubt we can see, there are some fraud in these products sales and which has increased the payment ratio of our company. And the last rate ratio as well.

Recently, we can see many news which can show this phenomena and other is the increase of the medical technology such as cancer, which has a lower it was not that critical part as a higher claim payment generally speaking, I believe the claim payment as in the normal track and increases within our expectation and we will close today follow those assumptions and reference. Thank you. Welcome Mr. Li Quan to answer your first question.

Li Quan — Chief Executive Officer and President

About the first question, you mentioned the growth of the industry in the second quarter. I have answered in my previous answers — I talked about this [indecipherable] industries mainly in the individual insurance channel by the bancassurance channel and the crop insurance has relatively good performance and for the life insurance business I think there are four mismatches. Those this mechanism. The changes of the market and the mechanism all contribute and influence the industry development and I think the distribution team building models needs to be changed. And for example, there is a mismatch between the age of customers and our agents.

The second is the mismatch between product supply and the customers’ demand. And people customers have diversify and personalized demand. The third is there is a mismatch between the sales model and market customers purchase models. So the young people likes to buy insurance products online. So we are working on that. And last is a mismatch between the people’s income and the affordability of insurance product. So there are mismatches and about the turning point for me I hope the turning point to show as quickly as possible. And for me was the regulation requirement and severe regulation policies we can see, there are some time that needs to adjust and adapt to the new regulatory requirements.

And secondly, I think there needs time to transform the agent team, company’s needs to invest resources in this regard and we have made selection and adjustment in the team building and this is promotion and we have this similar setting that we hope the turning point show quickly. And through the transformation and coordination of various resources, we believe we can expect some indicators to show the turning point. And in this process, we should first of all, adapt to the regulatory requirement. And the second is we need to strengthen the innovation. There are four mismatches just now I’ve mentioned and wish we work on that to solve those mismatches and this will require us to strengthen our efforts in product innovation and we hope to empower the business with technology.

The second is we hope to build a new team which is young professional urban team and we hope to provide precise service and products to customers and to meet their demand. We hope those products were sold can better meet people’s demand including the demand for aged care and healthcare. At the same time, we hope to provide a better health care service for the customers, as well as aged care and healthcare service. And also, we hope to provide more products and service in terms of wealth management business and aged care. Those businesses are our priorities and we will closely follow the trend of those indicators.

First is about performance rate. The second is productivity per capita. In the first half, we can see the productivity per capita of our company has increased by double-digit. The third indicator is people’s income. Now the income of the agents is about RMB3,000, which is not high and inadequate for agents living. So, to improve and increase the income of agents will be our priority in the future and first indicator is recruitment we have two falloff of existing agents and recruit high quality agents and recruit the high performance agents. We hope to reduce falloff of the new agents and retain the team and we help those who are inappropriate for the industry leaves and I hope those who can adjust the industry can retain. And that’s all for my answer. Thank you.

Gong Xingfeng — Vice President, Chief Actuary and Board Secretary

Thank you for participating our interim results announcement and for your questions. If you have further questions, please contact the IR team of our company and we are happy and ready to answer your questions. That’s the end of the interim results announcement of NCI. Thank you.