The business scope of the Company is: to execute RMB and foreign-currency life insurance (including various life insurance, health insurance, and casualty and accident insurance); to undertake insurance, examination and claim settlement for domestic and overseas insurance institutions; to provide insurance consultancy; and to engage in fund utilization pursuant to relevant laws and regulations, and other businesses approved by the CIRC.
Business Review - For the year ended December 31, 2012
In late 2012, a famous TV station reported a story titled The Insurer's Wealth Management Traps, which involved a product sold by NCI in 2007 via bancassurance channel that was accused of misleading sales practice. While this happened during our 2013 annual work planning conference, I told the team that there was no need to complain or feel upset. The solution is to face the media and our customers directly. As the core principle of NCI's strategic transformation is to be ˇ§customer-centricˇ¨, we must understand our customers' needs, improve their experiences, and provide them with more attentive products and services. ˇ§To forge iron, a hard hammer is a mustˇ¨. What we need to immediately reflect on is to find if we could have improved our products, agency force or other aspects in any possible way. It is the only way that we can establish a healthy, trustworthy relationship with our customers so that we can have a more respectable corporate image in the society.
Media supervision is only one of the many sources of the pressure we face. We launched our transformation in 2012 to achieve our ˇ§customer-centricˇ¨ strategy following the completion of our A+H Share Initial Public Offering (ˇ§IPOˇ¨) at the end of 2011 with enhanced capital position and solvency. However, the whole industry was facing many challenges arising from the uncertain macro-economy, which were amplified by the internal difficulties NCI had to overcome for the tra
nsformation. For our Company, the year 2012 was full of not only puzzles of and reflections for the transformation but also the forward-looking ambitions and visions.
1. Key operation indicators
ˇE As of the end of 2012, the Company's total assets reached RMB493.693 billion, with equity attributable to shareholders of the Company being RMB35.870 billion.
ˇE The net profit attributable to shareholders of the Company for 2012 was RMB2.933 billion.
ˇE As of the end of 2012, solvency margin ratio of the Company increased to 192.56%.
ˇE In 2012, our Company maintained the overall positive growth of our insurance business. The gross written premiums (GWP) reached RMB97.719 billion, increased by 3.1% year on year; we achieved a market share of 9.8%, and our No.3 position in market was solidified.
ˇE The net investment yield for 2012 was 4.7%, representing a significant increase from that in previous years, i.e. 4.1% for 2011 and 3.8% for 2010.
2. Key transformation efforts
On the basis of the comprehensive analyses of our Company's management and business, we conducted specific researches, evaluation, design and experimental trials for our transformation in more than ten aspects, primarily including:
ˇE Optimizing product portfolios and increasing new business margin The first was improving the product planning system, absorbing domestic and foreign experience, reassessing and building a new product strategy and developing a whole set of product management system covering product development, promotion and innovation processes.
The second was enhancing the restructuring by launching a series of products with high new business margin. For the agent channel, more sales efforts were put into the protection-type products such as health insurance, accident insurance, term and whole life insurance as well as long premium payable period products. The health insurance business in 2012 increased by 1.1 percentage points to 6.6%. The overall business structure of the Company continued to optimize while the overall new business margin increased by 2.2 percentage points up to 12.4%.
ˇE Exploring customer operation and ushering in business model transformation The Company launched a special pilot program to study how to explore high-end customers and how to enhance our agency force, especially those high performing ones. While maintaining a stable total number of agents, we had 29,000 high performing agents at the end of 2012, increased by 16.7% compared with 2011.
We have redesigned our training manuals and consulted renowned professors of China for advice. The training ranges from the Company's strategic vision and transformation road map to our business management practice as well as product system, and the courses, which cover both our back-office and agency force, worked on changing the management's working mode by synergizing the theories with the practices.
Some of our institutions at the coastal areas have achieved encouraging results in exploring new marketing modes. They improved the customer stability and both the agents' performance and income through promoting a more entrepreneurial operations and organizing various interesting customer-experience events.
In addition, we also introduced a series of new bancassurance sales models in bancassurance channel. On the basis of the joint management by both banks and the insurers, we provided comprehensive support to bolster the independent sales of banking staff by way of regulation, training, meeting management, proposal support, supervision and tracking. This may help NCI, a sector pioneer which entered the bancassurance business earlier than most peers, reinforce our vanguard image for innovation and transformation.
ˇE Improving investment management
After several years of endeavor, our investment team has significantly improved their overall capability in research and management. We adopted a prudent investment strategy to stablize the overall return on the Company's assets.
Meanwhile, we had actively applied for and obtained the investment licenses for equity, real estate and overseas investments. The further diversification of the investment channels will help NCI continue to improve its investment yield and diversify investment risks.
ˇE Stably expanding the businesses
In 2012, we set up Xinhua Seniors to build the fundamental framework for our senior care business. Meanwhile, Xi'an Clinic and Wuhan Clinic have officially commenced operation with the management system and organization structure being generally accomplished, and profitability periods and targets being clearly defined.
3. Key challenges and weaknesses
We are unfolding our transformation amid drastic fluidity of the external environment, which has begun to result in certain problems. The most obvious one was the decline of GWP: we shifted to the products with higher new business margins, but the significant increase of new business margins could not offset the much shrinking size of available new business value resulted from its premium decrease. Meanwhile, the income drop of some agents also adversely affected the stability of our agency force. I believe that four key reasons led to this situation:
Firstly, agency force needs time to adapt to new conditions. We produced and distributed a large number of training materials in texts or videos to introduce and explain our strategic concepts to all levels of agents and have hosted many comprehensive training sessions to the management and agents from front- and back-offices. I personally attended dozens of such training sessions given to our management and high-end agents, and explained to them specifically the Company's transformation strategy. Even the most junior agents understand well that NCI is implementing the transformation, which is keenly and enthusiastically recognized by them. However, they need time to learn how to transform, and how fast should such transformation be, as well as how to sell high new-business-margin products to the right customers.
At a workshop hosted by one of our branches, a fellow colleague who has stayed with our team for over ten years once commented: ˇ§I have been working for NCI for over ten years, and I indeed feel the urgency to implement transformation; otherwise we would not survive the next decade. After the Company proposed the transformation, we've been making explorations, but we indeed have to confront many challenges, such as where we can find new customers, how to find them, and what we should do and learn. We have too many puzzles.ˇ¨
Secondly, the supplementary and supportive policies and measures for our undergoing transformation still lack due collaboration and coordination.
Thirdly, the existing business structure also imposes pressure on transformation.
As we all know, bancassurance has been maintaining a key position in NCI's business, but the business in this channel suffered from a significant fall in 2012 across the life insurance industry. The negative impact was felt more by NCI. The agency channel contributed 44% to our premiums in the year of 2012, increased by 6.2 percentage points compared to last year, which was not only due to an optimized business structure but also to the major decline of premiums in bancassurance channel. As the premium increase from the agents channel failed to offset the decline in bancassurance channel, the overall decline in the premium income from our new policies may seem disappointing in some analysts' eyes.
Fourthly, the middle- and back-office support systems remain relatively underdeveloped for NCI. It was NCI's policy of allocating more resources to the front-line work and the attractive sales incentives at the early stage that made great contributions to NCI's growth into the third largest life insurer in China. However, it is the way of Heaven to diminish superabundance, and to supplement deficiency. Things have changed as time goes by. The business growth of the Company and the industry maturity have certainly led to higher requirements for the middle- and back-office support services. In this regard, we must take actions to avoid compromising sustainable growth in the future.
Thus, NCI last year also established the new System Project Management Office besides the aforementioned efforts in products research & development (ˇ§R&Dˇ¨) and operation management. This new office is responsible for the upgrade of the core systems.
Compared with the leading peers, we need time to address some legacy problems properly, which we expect would not be solved in one go.
Besides, we were somewhat weak in professionally coordinating the front-, middleand back-office management. For example, our human and financial resources failed to stay close enough to the market; the internal decision-making process is protracted; our responses to the market changes were slow; our management efficiency was less than satisfactory. When the whole industry's growth slows down, the adverse effect caused by these constraints was amplified to impede our business growth.
Business Outlook - For the year ended December 31, 2012
When a senior executive from the Life Insurance Marketing and Research Association (LIMRA) of the United States of America visited NCI, I asked him about the global challenges faced by the life insurance industry. In his view, key challenges include what the regulatory changes will be and how to increase agency productivity, with both of which I completely agree. I believe that NCI will at least face the following four external challenges in 2013:
1. Hypercompetition among life insurers in the high-yield, saving-substitute products Traditional insurance products earn profits from the ˇ§three marginsˇ¨. Customers, insurers, channels and agency force constitute the value chain, sharing the value created by the insurers. High yields and high agency expenditures will surely force the insurers to allocate more profits to customers, channels and agency force. In the current weak markets, many peers prefer to promote such products for market share and cash flows.
However, the adverse impacts of such hypercompetition on the value chain of the life insurance industry should not be neglected. The promised high-yields to customers may delay the life insurers' cash flow problem while they can only bet on high investment returns to be realized in future; this may multiply the investment risks.
Despite the significant improvements in profitability and new business margin, thanks to the transformation in 2012, NCI still underperforms other listed life insurers in terms of those indicators ˇV we have few chips to win such hypercompetition; One man's candy may be another's poison; how to accurately position ourselves in the current circumstances will deeply test our management capability.
2. Changes to the competitive landscape of bancassurance business As of the end of 2012, the GWP of the insurers controlled by some state-owned banks grew by around 50%, with their market shares up by 1.2 percentage points.
Meanwhile, the bancassurance business contributed 25% less GWP on average to the top life insurers. It is reasonable to conclude that, given NCI's traditional reliance on bancassurance business to a large extent, the Company will face serious challenges.
3. Continuous attention by the regulators and media to misleading sales practices Regulators and media have become more committed to protecting the interests of consumers in recent years. Their ongoing concern and monitoring will undoubtedly help improve the image of insurers and create a favorable market environment in a long run.
However, it indeed puts substantial pressure on the sales and after-sales management of life insurers in the short term.
4. Pressure on cash flow and loss of customer due to maturities and surrenders The domestic life insurance market has been favoring the scale growth and focusing more on short-term products in the past years. In particular, recently sold regular premiums products via bancassurance channel were dominated by those with maturity of 3 or 5 years. When the new policies cannot maintain a high growth, the renewal premiums will be greatly impacted. NCI is facing a challenging situation: the renewal premiums may continue dropping in the next one or two years without effective countermeasures.
Meanwhile, we observed that the number of new customers for the entire industry has been dropping on a continual basis due to maturities and surrenders, while the customer retention became increasingly difficult. The life insurance industry undoubtedly needs to explore a new model for customer exploration, service and value creation.
Source: New China Life Ins (01336) Annual Results Announcement
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