Transformation and Development in a New Environment

Transformation and Development in a New Environment China Life Insurance Company Limited November 28, 2013

Agenda Section I Section II Section III Features of the Current Life Insurance Industry in China Development Outlook of China s Life Insurance Industry China Life s Transformation & Development Strategy

主要内容 Section I: Features of the Current Life Insurance Industry in China

Feature I. Rapid Growth Over the past decade, the CAGR for premium income of China s life insurance industry was 24%, while Europe, the US and Japan s CAGR was less than 7%. By 2012, China became the 5 th largest life insurance market in the world. RMB 100 mn Industry Premiums between 1999-2012 12000 59.7% 10,501 10000 48.3% 8000 6000 28.9% 4000 9,958 70% 60% 50% 40% 30% 20% 2000 872 4.2% 10% 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0% Life Insurance Premiums Growth Rate Source: The China Insurance Yearbook and CIRC website. The annual premium data between 2003-2010 were recorded before the implementation of the No.2 Interpretation of Accounting Standards for Business Enterprises 4

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Feature II. Relatively High Concentration Market Concentration Top 6 Companies Year 1999 99.7% RMB 100 mn 12000 99.7% 98.2% 10000 8000 Year 2012 82.9% 77.2% 10,501 9,958 77.2% 120% 100% 80% 6000 60% 4000 40% 2000 872 20% 0 0% Premiums Top 6 Companies Source: The China Insurance Yearbook and Company annual reports and the CIRC website. 5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Feature III. Dominated by Investment-oriented Products Investmentoriented Products Short-term Participating Endowment Universal Life Unit-Linked Investment-oriented products emerged in 2000, and have grown rapidly In New Premiums In GWP 2004 2012 85% 98% 2000 2012 3% 80% 120% 100% 80% 60% 40% 20% 0% 3% Percentage of Investment-oriented Products 85% 98% 80% Percentage in New Premiums Percentage in GWP Source: The China Insurance Yearbook and the CIRC website 6

Feature IV. High Percentage of Single Premiums During 2004-2012,while the percentage of single premiums in first-year premiums has fallen from 81% to 68%, it remains at a high level. Percentage of Single Premiums in First-year Premiums 85% 80% 75% 70% 65% 60% 55% 50% 81% 79% 77% 77% 74% 73% 71% 68% 2004 2005 2006 2007 2008 2009 2010 2011 Source: The China Insurance Yearbook and the CIRC website 7

Feature V. Bancassurance is the Dominant Channel 2000, full liberalization of bancassurance led to its rapid development. 2004-2009 bancassurance CAGR reached 38%. 2004-2010 bancassurance contribution in new premiums rose from 37% to 70%. 2010-2012, CAGR fell to -6%, and the percentage of bancassurance in new premiums fell to 56%. 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of Bancassurance FYP in Company FYP 70% 65% 66% 65% 56% 46% 37% 38% 2004 2005 2006 2008 2009 2010 2011 2012 Source: The China Insurance Yearbook and the CIRC website 8

Feature VI. Profits Mostly Driven by Investment Spread 140% 120% 100% 80% 60% 40% 20% 0% 76% Percentage of Investment Spread in Three Sources of Surplus(China Life only) 90% 85% 100% 114% 87% 86% 90% 2004 2005 2006 2007 2008 2009 2010 2011 2012 101% Three Sources of Surplus and Contribution of Japan s Life Insurance Industry, 1999 2002 Items Expense Spread Mortality Spread Investment Spread 1999 2000 2001 2002 JPY: bn % JPY: bn % JPY: bn % JPY: bn % 1,143.3 50.55% 999.9 48.80% 789.7 39.95% 703.9 33.57% 2,517.7 111.32% 2,519.5 122.97% 2,706.7 136.93% 2,690.6 128.33% -1,399.3-61.87% -1,470.6-71.78% -1,519.8-76.89% -1,297.8-61.90% Total 2,261.7 100% 2,048.8 100% 1,976.7 100% 2,096.7 100% Source:Company Internl Research 9

主要内容 Section II: Development Outlook of China s Life Insurance Industry* Note:Mainland China

I. Still Has Great Potential for Development As of the end of 2012, the penetration and density of China s life insurance market (1.7% and US $102.9) were substantially lower than the world average (3.69% and US $ 372.6), offering great potential for development. In 2012, China s life insurance penetration was 7 percentage points lower than the UK and Japan, 2 percentage points lower than the US and Germany. China s life insurance density was only 3% of that of the UK and Japan, and 5% of that of the US and France. China s share in the global life insurance market was 15 percentage points lower than the United States and Japan. 14 12 10 8 6 4 2 0 % Penetration 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 USA UK FRANCE GERMANY JAPAN CHINA AVERAGE 16000 14000 12000 10000 8000 6000 4000 2000 0 US $ Density 2003200420052006200720082009201020112012 AVERAGE CHINA JAPAN GERMANY FRANCE UK USA Source: Sigma 11

II. Expected to Maintain Rapid Growth Steady economic growth has laid the foundation for the development of China s life insurance industry. According to China s 12th Five-Year Plan", the average annual GDP growth rate is expected to reach 7% over the next five years. Per capita disposable income of urban residents and per capita net income of rural residents are expected to increase by more than 7% annually. China will further promote economic transformation and gradually release reform dividends. China s GDP Growth Rate from 2013 to 2020 (Forecast)(%) GDP Mid-to-Long-term Trend Source: the National Bureau of Statistics 12

III. May Experience Structural Changes On 5 August, 2013, the CIRC released measures on the adjustment of pricing rates of insurance products(the last adjustment occurred on June 10, 1999). One deregulation The CIRC removed pricing interest rate cap for traditional life policies. Life insurers are expected to set product pricing interest rate prudently. The Statutory reserve valuation rates for traditional life policies was lifted from 2.5% to 3.5%. For pension and long-term (10 years and above) annuity business, the statutory reserve valuation rate cap was further raised to 4.025%. Three Adjustments Changes in the cap of agent commission rates. Commission rates can be set by insurers within the range of expense loading. Reduced minimum capital requirement for pure risk components. The minimum capital requirement is determined by risk category, instead of insurance period previously. Past Less than 3-year term death:0.1% 3-5 year term death 0.15% Others:0.3% Now Health:0.24% Death:0.15% Accident: 0.06% 13

III. May Experience Structural Changes Changes in product mix Changes in premium payment duration There will be fewer participating products and more fixed-income products in the market. Priority will be given to protection products (pension, critical illness, and medical insurance.) Single premiums will decrease, whereas regular and renewal premiums will gradually increase. Premium payment duration will be lengthened. Changes in market players Bank-affiliated insurers will maintain rapid expansion with increased market share. 14

Government policies will facilitate the development of pension and health insurance products The 6th Plenary Session of the 16th Central Committee IV. Pension and Health Insurance Will Become Leading Products in Life Insurance Industry 2006 The 17th National Congress By 2020, a social security system will be established to cover all Chinese citizens. 2007 The State Council's " New Rural Pension" pilot programs Accelerated the building of social security system that covers both urban and rural residents The government may purchase insurance services to further promote 2009 the New Rural Pension Program Social Insurance Law * According to CIRC regulation, critical illness products belongs to health insurance 2010 12th Five-year Plan Laid down the guiding principle of Coverage that is wide, basic, multi-leveled and sustainable 2011 CIRC and relevant government authorities started to research on tax-deferred policy for pension insurance Proactively promoted commercial health insurance; improved supplementary medical insurance system; encouraged social capital to establish nursing homes for the seniors; Under the premise of fund security and effective supervision, the government can purchase medical care management services from qualified insurers. Allow qualified insurers to operate the Supplementary Major Medical Insurance for urban and rural residents 2012 September, Opinions on Accelerating the Development of Senior Citizens Service Industry. Encourage senior service organizations to buy liability insurance, seniors to buy health, long-term care and accident insurance; advance connection between commercial senior insurance and senior service industry; encourage and support insurance funds to invest in senior citizens real estate and other senior service sectors. October, "Opinions on the Promotion of Health Services "Health insurance services should be further improved; variety of commercial health insurance products should be enriched; the number of people covered by commercial health insurance should substantially increase; the proportion of commercial health insurance premiums to overall health expenses should be significantly increased; a solid health insurance regime should be established with support from fiscal policies and preferential tax. The18th session of the CPC Central Committee: Tax exemption, deferred taxes and other incentives to accelerate the development of enterprise annuity, occupational pension and commercial insurance, deepening medical and health system reform, accelerating urbanization. The six ministries, Guidance on Supplementary Major Medical Insurance for Urban and Rural Residents 2013 15

IV. Pension and Health Insurance Will Become Leading Products in Life Insurance Industry Pension Assets of Major Countries from 2002-2012 A promising prospect for China s pension insurance China s pension market lags far behind The per capita long-term life policy in China is 0.1, far below the average level of 1.5 in developed countries Country Total Assets(USD 100 mn) 2002 year end 2012 year end Proportion of pension assets to GDP by the end of 2012 (in local currencies) CAGR in the past 10 years AUSTRALIA 2,920 15,550 101% 18.2% BRAZIL 530 3,400 14% 20.4% CANADA 7,540 14,830 84% 7.0% FRANCE 1,070 1,680 7% 4.6% GERMANY 1,860 4,980 15% 10.3% HONG KONG 270 1,040 40% 14.4% IRELAND 340 1,130 55% 12.7% JAPAN 22,890 37,210 62% 5.0% NETHERLANDS 5,030 11,990 156% 9.1% SOUTH AFRICA 730 2,520 64% 13.2% SWITZERLAND 3,330 7,320 118% 8.2% UK 1,120 27,360 112% 9.3% USA 89,680 168,510 108% 6.5% Total 147,400 297,540 78% 1 7.3% China 181 2,078 2.52% 27.6% 1.Calculated with all currencies converted to USD Source: Global Pension Assets Study 16

IV. Pension and Health Insurance Will Become Leading Products in Life Insurance Industry A bright future for China s health insurance Compared to developed countries, China s overall health expenses to GDP ratio is substantially lower. 90 80 70 60 50 40 30 20 10 0 (%) 17.6 The Proportion of National Health Expenses to GDP and Government Expenditure to National Health Expenses 48.2 83.2 71.1 76.9 76.8 9.6 11.4 11.7 11.5 9.2 USA UK CANADA FRANCE GERMANY JAPAN CHINA 80.3 5.0 54.3 Health Expenses/GDP Government Expenditure on Health Care/Health Expenses Source: World Health Statistics 17

IV. Pension and Health Insurance Will Become Leading Products in Life Insurance Industry A bright future for China s health insurance Less than 2% of the medical expenses are covered by commercial health insurance, lower than the average of developed countries and the average of countries offering free medical services. Percentage of Medical Expenses Covered by Commercial Health Insurance (%) 45.0 40.8 40.6 40.0 35.0 30.0 25.0 23.8 20.0 14.8 14.9 15.0 12.9 10.1 10.3 10.0 8.2 7.2 5.0 3.5 3.5 1.2 1.5 0.0 UK CANADA AUSTRALIA GERMANY JAPAN USA CHINA 2009 2010 2011 Source: World Health Statistics 18

IV. Pension and Health Insurance Will Become Leading Products in Life Insurance Industry Supporting polices for pension insurance Supporting policies for health insurance Encourage government to purchase pension insurance service Encourage government to purchase medical protection services Insurance fund investment in senior citizen real estate and related services Entrust insurers to handle medical care management services Pilot launch of reverse mortgage endowment products and progress of tax deferred pension insurance Encourage the development of commercial health insurance that is linked to basic medical insurance Advance the progress of commercial insurers undertaking Supplementary Major Medical Insurance for urban and rural residents 19

IV. Pension and Health Insurance Will Become Leading Products in Life Insurance Industry Pension insurance Health insurance Undertake basic pension program, enterprise annuity business and individual pension insurance products Participate in New Rural Health Care program, Basic Medical Insurance for Urban Residents, and Supplementary Major Medical Insurance that is being rolled out nationwide. In 2012, the insurance industry gained 18 qualifications for operating enterprise annuity. Entrusted assets accounted for 70% of corporate trustee services and investment management assets accounted for 47% of market share. Annual annuity insurance premiums totaled RMB 131.9 billion. In 2012, the trustee-administered funds amounted to RMB 12.98 billion, premium income RMB 11.3 billion, compensation paid RMB 18 billion, and claims and compensation paid over 34.7 million person/times. Annual commercial health insurance premium income totaled RMB 86.3 billion and 29.8 billion was paid for claims. By the end of June 2013, nine insurance companies are carrying out the Supplementary Major Medical Insurance plan for urban and rural residents in the 84 regions across 21 provinces nationwide, covering more than 200 million people. 20

V. Insurance Asset Management Will Gradually Become The Major Part of Life Insurance Business Investment channels for insurance funds have been fully liberalized and asset allocation options further broadened Before 1999 Term deposits Treasury bonds Large state-owned enterprises bonds 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 + + + + + + + + Negotiated Deposits Mutual funds Investment in Affiliated Enterprises AA-rated Corporate Bonds Stocks Foreign Currency Investment Infrastructure Commercial Bank Equity Medium Term Note Overseas Investment PE Real estate Trust Unsecured Debt Financial Derivatives Fixed Income Equities Cash and Equivalents Alternative Investments Improve asset liability matching. Stabilize and enhance longterm investment returns. Leader of cross-class investment 21

V. Insurance Asset Management Will Gradually Become The Major Part of Life Insurance Business 70% 60% 59.7% 12.2% 14% 12% 50% 48.3% 10% 40% 30% 20% 10% 3.1% 31.1% 2.7% 2.9% 7.2% 3.6% 14.0% 5.8% 11.4% 21.9% 1.9% 6.4% 11.0% 28.9% 4.8% 3.6% 3.4% 6.9% 4.2% 8% 6% 4% 2% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Industry Premium Growth Rate Industry Investment Yield 0% Investment income not only was the main source of earnings, but also had direct impact on business development Source: The China Insurance Yearbook and CIRC website 22

V. Insurance Asset Management Will Gradually Become The Major Part of Life Insurance Business China Insurance Regulatory Commission August 27, Guiding Opinions on Supporting Economic Restructuring and Transformation and Upgrading of the Insurance Industry Infrastructure debt plan Infrastructure equity plan Local construction fund Quasi-loan financial products Deregulated overseas investment restrictions, foreign investment has been extended to the money market, fixed income, equity and real estate, and markets have been expanded from Hong Kong to 25 developed markets and 20 emerging markets. The overseas investment quota has been raised from 2% to 15% of total assets. 23

主要内容 Section III:China Life s Transformation & Development Strategy

I. China Life's Transformation and Development Development Mode: From Equally Emphasizing on Scale & Value to Prioritizing Value & Efficiency Operating Philosophy Operating Goals Development Drivers Growth Pattern Life Insurance Products From policy centered to customer centered From premium-driven to value & efficiency-driven From resource-driven to innovation-driven From FYP-driven to Renewals-driven From investment-oriented to protection-oriented while offering diversified products 25

II. Business Development Strategy Focus on the development of longterm regular payment business to optimize business structure steadily. Focus on the development of traditional products, with moderate development of investment-oriented products. Agents, bancassurance and group insurance as the main sales channels, actively expand into telemarketing, internet sales and service counter direct sales. Align overall development goals with individual growth targets to achieve a rapid, coordinated and sustainable business development. 26

III. Product Development Trend Investmentoriented Short-term Participating Universal Unit-Linked Pension Enterprise Individual Critical Illness Term Whole Life Health Inpatient Outpatient 27

Appendix I. Organization, Outlets and Personnel With the most extensive distribution network across China, we have established a flat and specialized management system in our branches. After a period of rapid growth, our sales force and number of outlets in agent channel, group insurance channel, bancassurance channel and telemarketing channel are growing steadily. Year 2012 Provincial Branches 36 City Level Branches 324 County Level Sub-branches 2,690 Field offices 17,960 Bancassurance outlets 96,000 Exclusive individual agents 693,000 Direct sales representatives 16,000 Bancassurance sales 46,000 Account managers 25,000 Financial advisors 21,000 Telemarketing agents 5,204 Employees 99,271 29

Appendix II. Organizational Chart Secondtier profit center First-tier profit center Profit Centre Revenue Center Headquarters Provincial Branches City Level Branches County Level Sub-branches Revenue Center (Sales Unit) Agent Direct Sales Bancassurance All branches below city level (include) became revenue centers Each sales channel (vertical)is a revenue center Cost Center (Non-sales Unit) Business Processing Business Processing Customer Service Customer Service Service Counters Provincial Sales Units(horizontal) became revenue centers Accounting Accounting All Non-sales Units(vertical) are cost centers Service Counters Business Processing Units after provincial centralization (horizontal) became cost centers All Service Counters became cost control centers 30

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Appendix III. Total Assets The Company has maintained a rapid growth of total assets. 1996-2012 Increased 35 times in 16 years CAGR:25.1% By the end of September 2013, the Company s total assets reached RMB 1.96 trillion. RMB: 100 mn 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 1315 Total Assets between 1996-2012 38.3% Total Assets Growth Rate 18989 19.9% 50% 40% 30% 20% 10% 0% Source: The China Insurance Yearbook and company annual reports 31

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Appendix IV. Premium Income The Company s gross written premiums continue to grow rapidly. 1996-2012 Increased 16 times in 16 years CAGR:19.3% Gross Written Premiums between 1996-2012 RMB: 100 mn 3500 102.6% 3227 3000 2500 2000 1500 1000 1.4% 500 192 0 120% 100% 80% 60% 40% 20% 0% -20% Premium Income in 2012 RMB 322.7 billion GWP GWP Growth% Source: The China Insurance Yearbook and CIRC website 32

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Appendix V. Market Share The Company continues to maintain its leading position in spite of an increased number of competitors and increasingly fierce competition. 80% 60% 65.6% Change in the Company s Market Share between 1996-2012 70.9% Number of Life Insurers 40% 32.2% Year 1996 7 20% 0% Year 2012 69 As of September 2013, the Company s market share was 32.2%. Source: The China Insurance Yearbook and CIRC website 33

Appendix VI. Business Mix 2003-2013 Business Mix of China Life 100% 90% 80% 70% 60% 8% 7% 23% 57% 60% 50% 40% 30% 20% 10% 0% 42% Percentage of 10 year or longer regular premiums 46% 45% 45% 50% 34% 40% 41% 52% 2005 2006 2007 2008 2009 2010 2011 2012 2013.9 50% 40% 30% 70% 100% 80% 60% 17% 34% 20% 10% 36% 40% 20% 83% 66% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013.9 0% FYP of Long Term Policy Renewal Short-Term Policy Single Premiums First Year Regular Premiums 34

Appendix VII. Premium Income from Channels 2010-2012 Premium Income by Channels (%) 100% 90% 0.5% 0.2% 0.2% 4.3% 4.0% 4.2% 80% 70% 60% 50% 40% 30% 20% 10% 47.9% 45.4% 47.3% 50.5% 39.9% 55.7% Other Direct Sales Bancassurance Agent 0% 2010 2011 2012 Note: Other channels mainly refer to telemarketing channel 35

Appendix VIII. Net Profits Net Profits between 2004-2013.9 RMB: 100 mn 400 338.1 300 238.9 200 100 0 9.6 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013.9.30 36