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Edited Transcript of 601318.SS earnings conference call or presentation 24-Oct-19 10:00am GMT

Q3 2019 Ping An Insurance Group Co of China Ltd Earnings Call

Shenzhen Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Ping An Insurance Group Co of China Ltd earnings conference call or presentation Thursday, October 24, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bo Yao

Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director

* James E. Garner

Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR

* Ruisheng Sheng

Ping An Insurance (Group) Company of China, Ltd. - Joint Company Secretary

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Conference Call Participants

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* Charles Zhou

Crédit Suisse AG, Research Division - VP

* Jenny Jiang

Morgan Stanley, Research Division - Equity Analyst

* Kailesh Mistry

HSBC, Research Division - Head of Financials Equity Research, Asia-Pacific and Analyst

* Myung Wook Kim

JP Morgan Chase & Co, Research Division - VP

* Poyung Chang

CIMB Research - Analyst

* Scott Russell

Macquarie Research - Head of Financials Research, Asia

* Steven Lam

Bloomberg Intelligence - Analyst

* Yuping Ma

Citigroup Inc, Research Division - Analyst

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Presentation

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James E. Garner, Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR [1]

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Good evening, ladies and gentlemen. Thank you for joining the conference call today with regard to Ping An Group's 2019 Third Quarter Results announcement. My name is James Garner. I'm the group's Chief Capital Markets Officer, and I will be hosting today's call.

Mr. Jason Yao, our group CFO and Chief Actuary; and Mr. Richard Sheng, the Board Secretary and Brand Director of the group, will also be attending today's call.

This conference call will be conducted in English, and it will last for approximately 30 minutes. (Operator Instructions) Thank you.

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Questions and Answers

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Operator [1]

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Ladies and gentlemen, we will now poll for questions. (Operator Instructions) Our first question comes from Jenny Jiang with Morgan Stanley in Hong Kong.

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Jenny Jiang, Morgan Stanley, Research Division - Equity Analyst [2]

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This is Jenny from Morgan Stanley. So I want to ask about this life business. I know we have 4% growth over the quarter on the like-for-like basis. I want to see if management can give us a little bit more color on the bi-channel trends because the FYP was down 2% in total. How we are doing in different channels like agency, bancassurance and other group business? So a little bit more color here.

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [3]

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All right. Thank you for your question, Jenny. I think, overall, most of -- over 95%, 90% of the new business value is driven by the AGC channel. So we should pretty much focus on the AGC side. As you can see, quarter-by-quarter basis, Q3, the gross number is 4.1% versus Q2 number is around 3.2%, actually. We do see some improvement in agent productivity. But as you also can see, the third quarter for the whole industry is a little bit weak, but we still managed to outperform most of our peers.

And I think this year, this year, in particular, on the life side, we have been performed relatively like 4 big strategic adjustment. The first one is the -- we have a business pace adjustment, which in the beginning of the year, we deemphasizing the opening year campaign to ensure more stable business growth across all quarters. And the second is we also adjust our product strategy by reducing low-margin short-term savings-type of products. And we redesign and even launch new long-term protection products and the long-term savings products to enhance, overall, our margin and meet our customers' demand.

And thirdly, we also adjust our agency force structure by launching what we call the tenant program in most major cities. And also, we use AI to strictly controlling the agent recruitment. And last of which -- which recently, maybe you have seen the news. We also adjust our life company's headquarter structure. And mainly, we strengthen the main function of the headquarter. And I tried to -- try to do a more deep thorough work with our branch management.

So these above 4 adjustments, more or less, will affect our -- this year's business gross and also the agent number gross relatively. That's why we do see, for the whole year, our life new business gross level will be slightly above the Q3 numbers, which is currently at around cumulative is 4.5%. We do see, for the whole year, maybe we will be around -- around slightly above 4.5%, maybe around 5% up.

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James E. Garner, Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR [4]

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And if I can just add, as what Jason said, we expect that the full year '19 NBV growth rate will be slightly above the 9 months level of 4.5%. And if that comes through, then it implies that our fourth quarter new business value growth rate will be higher than Q3, which was actually higher on Q2. So sequentially, the guidance is that the NBV by quarter the growth rate's improving.

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Operator [5]

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(Operator Instructions) And our next question comes from Charles Zhou with Credit Suisse in Hong Kong.

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Charles Zhou, Crédit Suisse AG, Research Division - VP [6]

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I have another question. I think you probably already answered my question, so maybe I can elaborate a little bit about the question. About your full year commentary or -- and also on Q4, Jason may I ask you, so the growth will be mainly driven by the premiums or by the margins? And so maybe, can you give us a little bit more color about this one?

And also, on the agency side. So when do you think that we can see some pickup in the number of the agent growth again?

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [7]

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Okay. Thanks, Charles. I think for the fourth quarter, we -- just James said, I think fourth quarter, quarter-by-quarter, fourth quarter's gross number, according to our current forecast, will be better than the third quarter. It is largely will be driven by continued sturdy, premium gross and also relatively margin improvement for the fourth quarter.

So I think this year, as all you can see our by -- which we see the total FYP actually decreased. But our new business value by the first 3 quarters to increase to 4.5%. That is largely driven by the margin improvement. Margin improvement mainly came from the product mix structure. We sell less short term, low margin, short-term savings in terms of products. And also, we launched the new products with relatively high margin.

I think overall fourth quarter, we will see both. Hopefully, we can see some pickup in premium and at the same time, the margin also can be hold.

Then for the agency number here, and as you can see, for the third quarter, total number of agent decreased compared to the beginning of the year, it's around 9 -- 9-point-something percent, right? Yes. And also compared to the half year still decreased another around 3%.

So this is this still quite a challenging environment, quite a challenging environment. But we still managed to outperform some of the market. And regarding the agency force, we see some agency development in good trends, for example, agent profiling through AI, which we can accurately get rid of some low productivity agents. And also, we hire more high-quality agent. And also, agency team structure has been relatively optimized, which we, through this talent program, currently, we cover all Tier 2 branches.

And also, we -- the new product we launched, which allow a wider range of agents to sell products to their customers. So it is still a challenge. It is still a challenged microenvironment, but we try to do best. Hopefully, next year, we can see some improvement in the agency number.

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James E. Garner, Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR [8]

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If I can just add, the talent agent program. Since Jason mentioned, we've expanded it. So we're now actually covering 45 second-tier branch locations. And in the end of September, our talent agents account for about 10% of our total agents. And what's very striking is that the productivity and the retention rate of agents that are on the talent program is 1.7 to 1.8x higher than ordinary agents.

So we are growing the talent that we're hiring, but it's also too important to stress that the nationwide rollout of the talent program only target one type out of 8 types of different types of productive agents, which have been identified by our AI recruitment system. Which by the way, is now covering 100% of the initial agent candidate interviews.

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Operator [9]

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(Operator Instructions) Our next question comes from MW Kim with JPMorgan.

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Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [10]

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MW Kim from JPMorgan. I have one question about the asset allocation. Could you please make a comment on the asset allocation outlook going forward? It seems that the nonstandard asset mix is actually declining. And also, the mix is becoming more the prudent. So should we expect the more the asset allocation into the longer duration bond? Could you make a comment on that?

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [11]

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Anyway, I think our asset allocation, third quarter compared to the half years, it should be fairly stable, fairly stable. And I -- we haven't probably disclosed the detail, asset allocation number for the -- by the third quarter. So maybe from what you observed, say, percentage of nonstandard assets has been decreased a little bit, maybe it's from the half year number.

Anyway, I think the reason for that is our asset continues to grow. The premiums still grow; the asset is growing. And some of our standard asset has been -- some of them has been matured, which we invest in 5, 6 years ago. Now it has been matured. So -- and at the same time, we have also been fairly prudent on the new assets, which we select to invest. So overall, I think on the strategic asset allocation, we always have been fairly stable, I think.

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James E. Garner, Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR [12]

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It was also comforting to see that our total investment return was around 6%, which is obviously materially higher than our 5% long run investment return assumption that we use for our embedded value and operating profit calculation.

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Operator [13]

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(Operator Instructions) Our next question comes from Scott Russell with Macquarie in Hong Kong.

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Scott Russell, Macquarie Research - Head of Financials Research, Asia [14]

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My question is about life operating profits, which were up 30% for the 9 months, which means they're up about 20% in the third quarter. But if we look at it on a pretax basis in the third quarter, it looks like it was pretty flat, assuming the tax rate was something in the mid-teens. Can you just confirm that's accurate? And maybe comment on some of the drivers there? What's happening with perhaps the RMR with a slower new business environment, maybe the spread income's down? Or any operating variances that are worth calling out?

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [15]

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Yes. For the operating profit, especially related to the life business, third quarter, the gross growth rate is lower than compared to the first half. Largely, the main reason is the new business value. New business growth is relatively slow down compared to the previous years, and it will drag down some of the amortization of the residue margin.

And at the same time the operating variance, for example, on the expense on lapse is, compared to last year, is not as good. So slow down a little bit, but hopefully, this is due to some of the seasonal situation because when the business is slowing down on a little bit, but at the same time, some of the expense is still -- it is a fixed expense, a hard expense, we still have to invest. So it will decrease some like the variance on the expense side.

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James E. Garner, Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR [16]

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If I may also add, Scott, we also increased our strategic investment expenses in technology and agent team development, given the critical stage we're at in terms of transitioning to further improve our core competency there.

And if you look at the slowdown from the first half to the third quarter. There was -- it was -- we benefited -- there was a smaller impact of the commission tax deductibility rules in the third quarter than the first half.

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [17]

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Yes. Because in the first half due to this commission issue. But then, for the [fourth] quarter, the impact is less compared to the first half. So that is another reason. But overall, we still -- for the life business, we still had achieved over 30% operating profit growth so far. Yes.

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Operator [18]

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(Operator Instructions) Our next question comes from Michael Chang with CGS-CIMB in Hong Kong.

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Poyung Chang, CIMB Research - Analyst [19]

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It's Michael here. Congrats on the quite solid set of results. Can I just ask, early on, you talked about life insurance growth being relatively more difficult because of the 4 initiatives that you had in place this year. One of which was the change of strategy during the [Cayman Hong] period, the jump-start sales campaign.

Looking forward, therefore, to 2020, will a similar conscious decision being made by management to shift more notably on focusing more on protection for the next year's jump-start sales period? Or are you satisfied with your product mix structure with respect to protection during the jump-start sales period for 2020?

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [20]

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Yes. I think, for next year, the jump-start. We're still going to adopt a fairly stable strategy. That's this year. This year. So we will continue to deemphasize this jump-start campaign strategy. But of course, some of our high, more experienced agent, they will still sell some like a higher ticket size sort of savings-type of products, but most of our agents will continue to sell protection-type of products.

So the new business value contribution quarter-by-quarter will be most -- more stable over the 4 quarters. I think, this year, is the first time, we adjust our strategy. I think, next year, we'll continue to still -- it is, basically, our strategy is value focused.

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Operator [21]

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(Operator Instructions) Our next question comes from Michelle Ma with Citigroup in Hong Kong.

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Yuping Ma, Citigroup Inc, Research Division - Analyst [22]

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This is Michelle from Citi. I noticed in today's board meeting, there are major changes in group supervisor, directors and the senior management, particularly, Mr. Sheng will be the group's new President. While, at the meantime, he will continue the role of Ping An Bank's Chairman. So could you please give us some more color on this? What's the rationale? And how it is related to the previous co-CEO arrangement.

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Ruisheng Sheng, Ping An Insurance (Group) Company of China, Ltd. - Joint Company Secretary [23]

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Sorry, my English is (inaudible). So I'll answer the question in (foreign language).

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Unidentified Company Representative, [24]

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[Interpreted] Overall, this arrangement is because of Mr. Gu Liji who is -- who was the Chairman of the Board of Supervisors and his age is the reason he retired, and he recommended Mr. Sun Jianyi to take over as the Chairman of the Board of Supervisors. And also, Alex Ren to be the Vice Chairman of the Group; and Mr. Xie Yonglin to be the President of the group.

If you remember, last year, we have launched the Co-CEO mechanism in the Q4 last year, which means we strengthened the co-CEO, mechanism and to solve the overlap in the Chinese company load, the overlap is between the President of the group and also the co-CEOs of the group.

In general, we just want to do it to improve our efficiency and also the execution. It is important to stress that we do this arrangement to make our senior management younger. As you can see, Mr. Sun Jianyi is much younger than Mr. Gu Liji, and Mr. Alex Ren is younger than Mr. Sun, and Jessica Tan and Xie Yonglin is younger than Sun Jianyi and Xie Yonglin because they joined the new executive directors.

Number two, we want to make our senior management team more professional. As you can see, Mr. Xie Yonglin has been working in Ping An Group for over 20 years, and he has been working in insurance banking and investment and many other important positions, and he has cross-industries expertise.

And Jessica Tan has achieved great achievements in the technology application and development in Ping An Group. And Ms. Cai Fangfang has been appointed as the Vice President of the group because of her achievements when she was the Chief HR Officer in terms of system building, senior talent introduction and also the KPI system development.

Number three, we want to make our senior management team more international. And we can always see there's a combination between domestic China and overseas or international expertise in Ping An Group.

In domestic talents, we have Mr. Xie Yonglin and Alex Ren, et cetera. And for the overseas talents, we have Mr. Lee Yuansiong, Jessica Tan, Jason Yao and James, et cetera.

Number four. We won -- if you can notice that we have always have a talent team development mechanism, which means the older management will refer the younger management, like Mr. [Yuan Jao Zhou], who was the godfather of the insurance industry in Asia. He referred Mr. Lee Yuansiong as -- to join Ping An. And Sun Jianyi, who was the Chairman of Ping An Group, he referred Mr. Xie Yonglin and also helped his career development.

And also Stephen Meldrum, who was the expert in actuaries, he referred Jason Yao to be the Chief Actuary of Ping An Group.

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Operator [25]

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Our next question comes from Steven Lam with Bloomberg Intelligence.

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Steven Lam, Bloomberg Intelligence - Analyst [26]

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Yes. A couple of questions here. One is on the P&C side. Just curious, it's encouraging to see the improvement in terms of combined ratio sequentially despite the typhoon incident. So could you comment on that? If there's -- without the typhoon losses, would the combined ratio could improve even further?

And also sticking with the P&C side, is I would like to get your comment on your outlook for premiums growth for the rest of this year. Do you still see that, so far, what we have observed is that there's a bit of a slowdown in the non-auto line, I suppose, is a combination of credit insurance and some other lines, accident health sort of holding up well on the back of a very high base a year ago. So I just want to hear your comment on Q4.

And just lastly, a couple of things on the profit side. Could you tell us the -- what was the change in terms of the discount rate? I see that perhaps in the third quarter based on how I backed it out, between your net profit and operating profit, there's a benefit in terms of the change in discount rate that was recognized in the third quarter. Just want to see what was driving that.

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [27]

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Okay. Thank you, Steven. Regarding P&C side, I think the number we disclosed, that the combined ratio is fairly stable. Last year it's 96%, this year it's 96.2%, right? So overall, it is still a very satisfactory level. We are quite happy with that, and it's also stable. You mentioned about the typhoon. I think every year, you're going to have typhoon. Whether it's going to be big or sometimes it's big, sometimes it's small. And also depend on the typhoon, the area that the typhoon hit, right? If it hits an area that is used to typhoon, maybe the loss will not be as big as another area.

So I think, currently, this 96.2% already reflected those related loss. So for the outlook, I think, still relatively the outlook for the combined ratio should be fairly stable. And for the premium growth for the first 3 quarters, it's around 9%. I think for the whole year, still compared to the third quarter, it's still fairly stable. Nothing dramatic is going to happen.

And the challenge for the auto -- the P&C side has continued to relatively slowdown in the new car sales and put some pressure on the growth for the whole industry. But Ping An has always been exceeding the market growth rate, and also a much better combined ratio going forward.

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James E. Garner, Ping An Insurance (Group) Company of China, Ltd. - Chief Strategist & Head of IR [28]

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Just on profit -- on the profit, as you rightly pointed out, there was a release of reserves because our life reserves with discount rate has a partial linkage to the 750-day moving bond yield. And what we observed is that the 750-day moving bond yield actually moved up slightly. So that drove an increase in -- a modest increase in life reserve releases. I would stress that we made no changes to our liquidity premium in that formula.

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [29]

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Yes. And just one more comment. On the reserving side, due to the discount rate. I think since the new calculation introduced by the CSRC, which introduced this up to 40 years. It is used the ultimate rate. So ultimate rate is 4.5%. So that is going to enhance a lot of stability for the reserve. Because the 4.5% is fixed. It is regardless of the bond, bond yield curve. So the reserving is more stable. But of course, still going to have some volatility. But compared to the previous mechanism, the current one is a lot more stable. And also, we take out this element out of our operating profits rate.

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Operator [30]

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Our last question comes from Kailesh Mistry with HSBC in Hong Kong.

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Kailesh Mistry, HSBC, Research Division - Head of Financials Equity Research, Asia-Pacific and Analyst [31]

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First one is, just coming back to life new business value. I'm slightly surprised by the volume weakness. So I just wanted to better understand what do you put this down to? Is it because of the lower agent numbers? Is it more competition? I.e., replicating your new product, your refreshed product launch? Or is it as simple as lower economic activity within the Chinese economy impacting confidence, and therefore, volume growth?

And then, just another one, just seen a headline flash across the screen about Ping An setting up a consumer finance JV. Could you just provide a little bit of color on what that refers to? And what it means?

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Bo Yao, Ping An Insurance (Group) Company of China, Ltd. - Executive VP, CFO, Chief Actuary & Executive Director [32]

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Well, regarding the life new business. Yes, it is a little bit challenging on the environment, the macro environment is a bit challenging. You're recording new agent. It's not as easy as in the previous years. And as you can see, for the whole industry, it's still going to be fairly tough.

Of course, the competitive environment, the competition on products, et cetera, is also getting tighter, right? Getting tighter. And also for us, internally, we launched new products. Now currently, we have -- on the protection side, we have 3 layers of products, mainly (inaudible) products is tough -- the average premium size is around 2,000 to 3,000. Then we also have the second tiers, it's about 4,000 to 5,000. Then also have Ping An Fu for the high end.

So we roll out different kind of products, but -- and also take a little bit of time for some of our agents to get used to this new product structure. Because previously, the agent only sell, the best product is Ping An Fu. Now, we have different layers products too. The agent will take some time to get used to.

So that's why we, to some extent, I think we lower our expectation for this year. But hopefully, we're a bit more optimistic for next year -- for next year.

Regarding this consumer finance company. This is quite an important business. Because you have this license, if you can apply this license, and you can really do some of the consumer finance business, even some of the businesses, the replacement of some of the P2P business. So I think it is quite a strategic for Ping An Group here.

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Operator [33]

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Thank you, ladies and gentlemen, for joining the conference. This concludes the call. Thank you.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]