Welcome everyone to Cathay Financial Holding Company's first half 2021 conference call. All lines have been placed on mute to prevent background noise. After the presentation, there will be a question and answer session. Please follow the instructions given at the time if you would like to ask the question. Now I would like to introduce Ms. Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding Company. Ms. Cheng, please begin.
Thank you. Good morning, good afternoon for investors from around the world. Welcome to Cathay Financial Holding 2021 second quarter analyst meeting. I am Sophia Cheng, the Chief Investment Officer of Cathay Financial Holding. Today, I will host the conference call. Thank you very much for joining us today. In the beginning, I would like to introduce the senior managers who are with us on the line. Today, we have our CEO, Mr. Chang- Ken, C.K. Lee, CEO of Cathay Financial Holding. He will spend about 50 minutes with us. Investors are welcome to take the opportunity if you want to ask more about the questions over strategy operations. We also have Ms. Grace Chen, Chief Financial Officer of Cathay Financial Holding; Mr. Abel Lin, Life; Ms. Joyce Chai, Senior EVP of Cathay United Bank; Ms. Grace Hong, EVP of Cathay Life.
First of all, I'd like to invite our CEO, C.K., to give us an opening remark, please.
Hello, everyone. Welcome for joining us for the investor meeting. Well, actually, in Taiwan, we are very happy to enjoy a very good life before mid-May, the pandemic outbreak. After the outbreak of pandemic, actually, Cathay Financial and all the subsidiaries, we accelerate all the digital transformation, especially you can see we launched the cloud platform for the life insurance, for the underwriting for the new policies, or even the customer services. We also launched new credit card services through our banks. The new CUBE credit card, together with the account and also the digital application, turned out pretty good for the customer to switch their customer benefit by themselves. Also on the Cathay Century, we also utilize digital application for the new policies.
Through the Cathay Securities, actually, we launched more and more new products to the market, especially for the remote application for the life insurance policy. This is really fantastic services to customers and also to the tied agents. Especially after the pandemic outbreak, everybody is afraid of touching each other because of the virus. Through the new touch cloud platform, actually we can see customers and the tied agent are very happy to utilize the new touch cloud platform for the new policy. You can see the performance is really, really good. Through August, the new policy reached 54,000 new policies. This new remote application through video conference largely solved the problems of interface signature and contact for the insurance application. Not only the business development, we also commit the RE100 initiative. We commit to utilize renewable energy 100% by 2030. We utilize the COVID-19 pandemic.
We speed up our digital transformation, and also we speed up the ESG development together. This is the second quarter's development, but later I would be happy to answer more and more questions from you. Thank you.
Thank you, C.K., for sharing how we transform the challenge of pandemic into our further self-improvement into service and into ESG, besides our solid year-to-date operating performance. For today's conference call, our IR manager, Yajou, will present the second quarter results, and after the presentation, we are open for Q&A session, in which senior management will answer your questions. Without further ado, let me pass the call over to Yajou for the briefings of second quarter results.
Thank you, Sophia. Let's start with the business overview on page four, which provides a quick highlight on each subsidiary. Cathay United Bank delivers steady loan and deposit growth. Net interest income also increased. Fee income showed double digit growth year-on-year. Wealth management fee income and credit card fee income grew 15% and 18% respectively. Cathay Life continued the value-driven strategy. Protection type first-year premium grew 23% year-on-year. Asset under management of investment-linked products increased to near TWD 700 billion, ranking number one in the industry. Cathay Life also delivered sound investment performance with after-hedging investment yield of 5.6%. Both net profit and book value set new records. Retains strong capital position with RBC ratio of 371% and equity to asset ratio of 10.6%. Cathay Century, the general insurance subsidiary, premium income grew 9% year-on-year.
Market share was 12%, maintains number two in the industry, and continue to grow. Asset Management receives premium subsidiary Cathay SITE, AUM with over TWD 1.2 trillion, ranked number one in the industry. First half earnings achieved a record high over the same period. Lastly, Cathay Securities earnings and number of customers each hit new records for a first half period. Please look at page five, Cathay Financial Holding net income and EPS. Cathay Financial Holding net income for the first half reached historical high of TWD 91.5 billion, outpacing 2020 year earnings. Driven by sound investment performance, EPS was TWD 6.66. Page six shows the subsidiaries net income and ROE. Cathay Life delivers strong investment income with first half net profit outpacing last year full year earnings. Cathay SITE and Cathay Securities also reported record first half earnings.
The subsidiaries' strong earnings performance was attributable to economy, recovery, and financial market rally. Cathay United Bank's net income declined due to higher YoY base of investment income last year. Its core business remains solid with net interest income and fee income each showing growth. On a consolidated basis, the holding company's ROE was 20% in the first half of 2021. Please turn to page seven to see the book value of Cathay Financial Holding. The consolidated book value of holding company was TWD 897 billion as of the end of the second quarter. Book value per share was TWD 60.3. Page nine and 10 show our overseas expansion. Cathay Financial Holding continue to expand overseas business by deepening overseas presence. Cathay Life Vietnam's total premium increased 52% year-on-year. As for the subsidiaries operation in China, Cathay United Bank (China) business development is on the right track.
Its joint venture, Chongqing Ant Consumer Finance, obtained operation approval in June. For Cathay Life joint venture in China, the total premium grew 19% year-on-year. Please turn to page 12 for more details about the banking subsidiary. Cathay United Bank delivered robust loan growth. Consumer loan and mortgage both showed double-digit growth. The total loan balance increased 11% year-on-year to TWD 1.8 trillion as of the end of the first half of 2021. Deposit grew 13% year-on-year to TWD 2.7 trillion. The demand deposit ratio increased to 72%. Interest yield is shown on page 13. The net interest margin and spread remained stable. The interest spread was 1.72%, and the net interest margin was 1.2% for the first half of 2021. Page 14 shows the asset quality of Cathay United Bank.
Due to the prudent lending policy, Cathay United Bank maintains low NPL ratio at 21 basis points and coverage ratio at 763%. Growth provision was TWD 2.3 billion, including some from specific overseas cases, but more than half was the general provision for loan growth based on the regulation requirement. Recovery was around TWD 700 million. Now please turn to page 15 for SME and foreign currency loans. Cathay United Bank focused on developing SME and foreign currency loan with defined asset quality. SME loan balance reached TWD 257 billion, increased 12% year-to-date. Foreign currency loan balance was TWD 220 billion, slowing down due to overseas pandemic uncertainty. Page 16 shows offshore earnings. The offshore earnings was TWD 4.5 billion. The decline was mainly due to the high base of investment income last year.
Offshore earnings accounted for 32% of the bank's pre-tax earnings for the first half of 2021. Please turn to page seven for fee income. Fee income grew 11% to TWD 11 billion in the first half. Credit card fee grew 18%, and wealth management fee grew 15%. Page 18 shows the breakdown of wealth management fees. Wealth management fee income increased to TWD 6.3 billion, in which mutual fund fee income grew over 40% year-on-year. Strong demand from new investment-linked policies contributed to the bank insurance fee growth. Please move to page 20 and 21 for Cathay Life's premium performance. Total premium was TWD 327 billion in the first half. The decline was due to lower renewal premium, reflecting the end of premium payment terms for some top-selling regular pay products.
On page 21, first-year premium, FYP, reached TWD 106 billion, up 26% year-on-year, driven by substantial growth in investment-linked products. Protection type policies, FYP, grew 22% year-on-year, strongly supporting the CSM, contractual service margin. The annualized premium, APE, declined to TWD 26 billion, reflecting dominant single-payment investment-linked policies in FYP. Page 22 shows the value for new business. Based on the 2020 embedded value assumption, value of new business for the first half was TWD 15 billion. The decline was due to high base in first quarter of 2020, driven by the deferred premium income from stock selling effect in the end of 2019, and lower sales followed in the second quarter outbreak. Cathay Life continued to grow the high CSM protection type FYP. VNB margin increased to 50%, excluding the FYP from single-pay investment-linked policies. Page 23 shows the cost of liability and break-even asset yield.
Both continue to improve. The reserve base liability cost was 3.8% as of the end of second quarter, improving nine basis points year-on-year. The break-even asset yield was down to 3.06%. Please look at page 24 for the investment portfolio. Cathay Life total investment reached TWD 7.1 trillion as of the end of the first half. Overseas investment accounted 66%. The investment return of each asset class are as follows: cash and cash equivalents, 0.3%. Domestic equity, 24.8%. International equity, 14.8% pre-hedge. Domestic bond, 0.8%. International bonds, 6.1% pre-hedge. Mortgage and secured loans, 1.5%. Policy loans, 5.4%. Real estate, 2.7%. Overall investment yields are shown on page 25 and page 26. After hedging investment yield was 5.59%. Cathay Life capture market opportunities to realize gains in capital markets, boosting the after-hedging investment yields. On page 26, the pre-hedging recurring yield was 2.84%.
The decline was mainly due to the impact on new money yield amidst lower interest rate environments in 2020. The new money yield in the first half of 2021 increased year-on-year, supporting the pre-hedging investment yield enhancements. The hedging cost of the first half of 2021 was 1.39%, improves both quarter-on-quarter and year-on-year. Cathay Life will continue its flexible and dynamic hedging strategy to ensure the effective control of hedging cost. Please look at page 27 for the cash dividend income and regional breakdown of overseas fixed income. Cathay Life recognized dividend income of TWD 4.8 billion and TWD 9.4 billion in the first seven months of 2021 respectively, more than the same period of last year. Given some cash dividend payments are delayed this year as the general annual meeting has been postponed due to the local pandemic outbreak.
For overseas fixed income investment, Cathay Life allocated 46% in North America, 19% in Europe, and the rest are in Asia Pacific and other countries. Page 28 shows the book value and unrealized gains of financial assets. The consolidated book value reached a new record to TWD 734 billion. Unrealized gain was TWD 135 billion, more than the end of last year, reflecting the U.S. long-term bond yield rebound year-to-date. Next, please turn to page 32 to 34 for the performance of Cathay Century. Cathay Century's premium income grew 9% year-on-year to TWD 13 billion. Market share was 12%. Page 34, the growth combined ratio and retained combined ratio increased due to the relatively large claim events from commercial fire insurance. This is the end of the presentation. Now, let's open to Q&A.
Thank you, Yajou.
Thank you. Ladies and gentlemen, we will now begin our question and answer session. If you wish to ask the question, please press zero one on your telephone keypad and you will enter the queue. After you are announced, please ask your question. Should you wish to cancel your question, you may press zero two. Thank you. Now, please press zero one on your telephone keypad if you would like to ask the question. Thank you. Please press zero one on your keypad if you would like to ask the question. Thank you. Our first question is coming from Steven Lam, Bloomberg Intelligence. Go ahead, please.
Hello? Hi, can you hear me?
Yes.
Hello?
Please go ahead. Thank you.
Hi. Yes. Thank you. Congratulations on the good results. I have a couple questions here, some in life and some in the investment side. On the life side, I was just curious, of course, the margin expansion was quite decent, and I suppose that's because of the technical factor, the APE sort of slipped and investment link didn't really drive too much APE. I was just wondering, even within the protection business, what was the margin trend within the protection-type products, say, vs 2020 or even 2019, for example? The reason I ask is because if I look at 2020, but it's still sort of low for the protection APE. The rebound was good in 2020 vs first half of 2019, sort of the pre-pandemic level. I was just wondering, what's the plan for the rest of this year in terms of protection product?
That's number one. On the investment side, I was just curious. I noticed the domestic bond investment return sort of dropped to 0.8% compared to about 4.6% in 2020. I just want to understand what was causing that. Within investment also, noticed that, just some data question, there has been more allocation in the European bonds, if I'm not mistaken. Could we get some color in terms of what kind or what countries you have stepped up in terms of those European bonds? Last but not least, what's the outlook for your equity allocation for both domestic and international? I know it's a tricky time right now because everybody's watching Jackson Hole, and there's a lot of volatility in the equity market. Just want to get your take on your equity allocation over the coming months? Thank you.
[Non-English content] Steven, just one minute. Steven, thank you for your question. You have asked question, number one, the margin trends, especially on protection type policies for Cathay Life, and then also the investment domestic bonds. This year, the yield was 0.8% vs last year, 4.6%, because the return we have shown on page 24, this includes both coupon and the capital gain. The higher yield in last year, 4.6%, includes the realized gain of domestic bonds, where this year we have not trade much on the domestic bond portfolio. You can see the number. You also ask about the bonds details for our allocation. As you noticed that the bond allocation to European area increased by 1%- 19%. Abel will explain that. Lastly, you asked a question about equity allocation, and I need to apologize.
I think it's very unfair if we, as an investor, try to provide our view on the market, because Cathay is a sizable investor. Any comment we have on the market will probably create trouble for the overall market public impression. Please allow us not to answer the last question regarding our view on equity market and our allocation plan. We tend to answer question on what we have done rather than the prospect of that. With that, I will leave to Abel to answer your question on the product margin for protection type policies and the detail on Eurobonds.
Okay. Thank you.
I think the protection type, we define the first one is traditional life protection. It means that the whole life product. Second one is the accident and health product. Generally speaking, the highest margin is the accident and health product, then is the whole life product. If we comparison this year and that year or 2019, I think the first one, health and accident this year, the margin is a little bit higher than last year. This is because we have some product, we're using a new assumption to reflect some, we observe some experience in our data. Traditional type protection, I mean the whole life. For the tradition, the margin actually is very similar, no matter in what year. You will see actually, our focus is this protection type. No matter is in traditional life saving or health and accident.
Generally speaking, the accident and health product, actually they have very stable demand for people in Taiwan because this medical expense we can cover by the commercial health insurance. Each year I think that it's a very stable demand for our company, actually grows by 5%-10% each year. This is quite stable growth. Second one is the protection whole life product. Sometimes it's relatively popular, but sometimes it's not. It will depends on some product features. If we combine these two segments combined together, actually each year we have very stable growth in protection type. No matter in total premium or in first year premium. If you look at our data in page 20 or 21. This is my shortly briefing for our protection product. For European bond, actually, I didn't have that kind of detail for the European bond.
I think that maybe I get you later for this meeting.
Okay, great. Thank you. Thanks for the color.
Thank you.
If you would like to ask the question, please press zero one on your telephone keypad. Thank you. Next we'll have Chien Po of Credit Suisse for questions. Go ahead, please.
Hi, Chien Po .
Hi. Thank you for taking my question. Just would like to ask if there's any plan for Cathay Life to upstream capital to the holding company next year?
Yeah. Okay. I see the first one, this year our after-tax only higher than last year, and structurally it's not it. This year we have capital and again, most of it come from the equity. Equity capital gain is bigger than fixed income. For the special reserve for equity, I mean, if we only realize the fixed income capital gain, we need to put some special reserve for the fixed income. This year disputable earning to year. I mean, this year we should have some dispute. This cash dividend need to be approved by FSC. Upstream need to fortunately, this year is good comparison to get approval. Secondly, we generally have the chance to communicate with FSC to get some. We also want to communicate with FSC some reserve we didn't think is reasonable.
We hope that we can make to balance our shareholder and also our solvency, and also preparing for the future IFRS 17 and ICS. We want to have some balance, not to more focus on the solvency side or the IFRS 17 side. Considering right now our solvency ratio, I mean, the RBC ratio is the highest, 371% is the highest for the last 10 years. We think at this moment we have some ability, but again, it need to be approved by FSC. We will do our best to have this kind of approval. Here now it's still very uncertain. I think, we get some better position comparison to last year. We hope that we can balance each stakeholder demand for our company. This is what I can say at this moment.
Okay. Understand. Thank you, Abel.
Thank you.
We are now in question and answer session. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. The next question is from Steven Lam, Bloomberg Intelligence. Go ahead, please.
Hey, thank you. Sorry for troubling you guys again. I just want to follow up on the question on the equity investment. I understand forward-looking guidance, it is tough. Maybe I can switch that discussion around a little bit. If I look across the shoulders, for we can say the Chinese, the Japanese, or the Korean, I am under the impression your peers in the room that because of the preparation for the new solvency rules, there is a tendency that they would like to control the equity exposure. With that sort of backdrop, could we assume that, of course, there is some short-term trading opportunities here or there in the next few months or whatnot, but generally speaking, in the medium to longer term, say two or three years timeframe, could we expect the allocation to stocks should come down?
Not on an absolute basis, but say within the whole portfolio. The second question is on banks. I can understand that you have a very diversified portfolio on your overseas banking, say across China and Southeast Asia. Now we are already almost two years China to Southeast Asia, then Southeast Asia back to China. What is the lessons learned, or what does that mean? Supply chain has moved from China to your overseas banking expansion or development thinking going forward from COVID? Thanks.
Steven, thank you for your question. You are asking a scenario for something past 2025. Taiwan's, including ICS and IFRS 17, these are something toward 2026. As Abel mentioned earlier in our Chinese session, we have been lowering our asset duration. It's now down to 14.2. Sorry. Asset duration already expanded to 12.1, where liability duration has reduced down to 14.2. This is a very, very important but quite long-term issue if you compare this with the equity movement. The eventual capital efficiency, IFRS 17 preparation, this has been our top agenda in the past 10 years. Definitely this is something we do care, and we have been designing our new policy investment strategy toward that direction. Yes, for the long term, asset liability management, find the right timing at a good valuation for dividend payout stock, and increase the proportion of fixed income.
These are something very important, it's hard to mix that long-term strategy adjustment toward short-term market movement. I think these two are just different, okay? On overall strategy, yes, we do need to plan our long-term capital planning toward IFRS on a more CSM based overall asset allocation to matching with our product. That's something we do care. If we have progress, we should update. The second question you have is regarding how we think about overseas banking operations after COVID. If we think about the past 30, 40 years, at least one big event in every decade. If COVID become part of our daily life, we should be designing our business around that. This is very dynamic adjustment from very beginning of last year. Within Taiwan, we are lucky able to contain. There's a very clear consensus.
When situation is deteriorating, people just put on mask and follow order. Far lucky in the past three months, we can try to contain the situation. Yes, we never know whether there will be more and more different type of virus challenging us. Also we do have operation in Southeast Asia, the policy, how to respond. There's nothing more important than human beings' life and health and safety. Okay. Our regional expansion is a 10-year, 20-year plan. It takes Cathay United Bank from the ninth two years, three- year, even four- year disruption is something to make us stronger, it should not be something that blocking us from become a regional player.
So far, if you look at consolidated profit, page five, on the NDR version, you will see that compared with 2012, and it's about 10 years ago vs today, Cathay United Bank has make more than TWD 10 billion extra profit. This is a long-term growth we need to pursue. Probably some short-term disruption is a perfect time for us to rethink. If things resume, how can I do better job than my original plan? What are the operation lessons, including asset quality, loan allocation, local culture, and then how do I design new business market along with local society trends? Are they accumulating more wealth? This is a 20-year plan. It's not a two-year plan. I don't think I can give you perfect answer, but the pandemic should not affect our ambition to become a regional, one of the well-recognized-
Please press zero one on your keypad if you would like to ask the question. Thank you. We are now in question and answer session. If you would like to ask the question, please press zero one on your telephone keypad. Thank you. There appears to be no further questions at this point. Ms. Cheng, can we close the conference call now?
Yes. Thank you very much for dialing in the call today to Cathay Financial Holding first half results. In the Chinese session earlier, analysts have asked quite a lot of questions. For those of you interested and understand the Mandarin, you can also dial in there. If investors, you haven't thought of question right now, please feel free to contact our IR team whenever you need some information, data, and if you have any questions and comment. Thank you. Next quarter, we can continue to have good results to share with you. We hope. Thank you very much, and goodbye.
Thank you, Ms. Cheng. Ladies and gentlemen, we thank you very much for your participation in Cathay Financial Holding Company's conference call. You may now disconnect. Goodbye.