Fanhua Inc

NASDAQ:FANH

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Operator]

Thank you for standing by for Fanhua's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 3 hours after the conference is finished. Please visit Fanhua's IR website at ir.fanhgroup.com under Events and Webcast section.

Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager.

[Shirong Qiu, executive]

Thank you. Good morning and good evening, everyone. Welcome to Fanhua's Third Quarter 2023 Earnings Call. A replay will also be available on our website after today's call.

During this call, we will be discussing some non-GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release. And finally, please note that the discussion today will contain forward-looking statements made under safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995.

These statements are made based on management's current expectations and beliefs concerning future events may impact the company and therefore, may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or stated. Such risks and uncertainties include, but not limited to those outlined in our filings with the SEC, including our registration statement on Form 20-F. We do not undertake any obligation to update its forward-looking information, except as required under applicable law.

Joining us today are our Co-Chairman and Chief Executive Officer, Mr. Yinan Hu; Co-Chairman and Chief Strategy Officer, Mr. Ben Lin. Mr. Hu will start the call by sharing his view on recent market trends and our strategy proposition, followed by Mr. Ben Lin, who will provide a review of financial and operational highlights and discuss our business outlook going forward. There will be a Q&A session after the prepared remarks. And please note that you can find our presentation material relevant to this call from our official website.

With that, I will turn the call over to our Co-Chairman and CEO, Mr. Hu; and Ben Lin, our Co-Chairman, will translate for Mr. Hu. Mr. Hu, you may begin.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] Good morning and good evening. Thank you for joining us on our Q3 earnings call.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] in the wake of the pricing rate change for life insurance products, the life insurance sector has experienced evident fluctuations in premium growth, with a period of very strong growth from second quarter to July followed by a significant slowdown from August to October. But notwithstanding this challenging environment, the execution of our key strategies continue to pay off.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] Over the past 2 quarters, both the insurance industry and the intermediary market that we operate in, including our operations, have inevitably faced significant impact from regulatory policy changes. I would like to take this opportunity to discuss our perspective on these changes.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] Starting from first of August, the life insurance industry has officially entered the era of a 3% pricing rate cap for traditional life insurance products. In the short term, the restoration of customer demand may take some time. However, in the longer term, considering the backdrop of declining bank deposit rates, we believe that traditional insurance products with a 3% guaranteed interest rate remains an attractive defensive asset class.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] In addition, we also expect that the regulator will extend the recent commission rate changes in the bancassurance channel to the agency and independent broker channels in the coming months. While the short-term impact of both the pricing rate adjustment and the enforcement of commission rate caps could present significant challenges to the entire insurance industry, we maintain the perspective that, in the long term, these policy implementations will steer the industry towards a more higher quality and sustainable growth trajectory.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] We anticipate that the future development of the industry will shift gradually from being driven by product and sales commission to be predominantly driven by technology and services. This implies that companies with innovative services, technological capabilities and ample capital will enjoy a more favorable position. The strong players are likely to become even more dominant, leading to a trend of consolidation and increased market concentration. This trend is not only evident at the level of insurance companies but is also applicable to the intermediary market. We think the scenario of a few major intermediaries dominating this market is a possible outcome following these regulatory changes.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] We envision that the future trajectory of the intermediate market will see larger companies transitioning towards platform-based operations, and we expect to see a large number of small- to medium-sized brokers to either exit the market or choose to work with larger broker platforms in order to survive. These collaborations could involve platforms providing essential mid-end and back-end support enabling these companies to lower their fixed costs relating to IT, compliance, operations and training. This allows them to focus more on customer acquisition and relationship management at the forefront and enable them to enhance differentiated service capabilities to achieve sustainable business development.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] This emerging trend aligns well with our open platform strategy. In fact, this is a catalyst that we previously thought could take years to materialize, but it is now looking more likely to take place in early 2024. In essence, these changes should help expedite our transformation from a sales-focused company to a platform-centric entity.

This, in turn, should give us the opportunity to gain more market share and grow our scale advantage. We are also looking to intensify our collaborative efforts with our key product suppliers, the small- and medium-sized insurance companies to foster stronger and mutually beneficial partnerships. Leveraging our stronger capability in sales, technology and customer service, we aim to extend our relationship with our product suppliers beyond sales and distribution but also in IT and services.

In turn, we aim to generate a more diversified revenue stream from our insurance partners. With greater scale and market dominance, we aim to work closely with our partners in product development and develop greater pricing power.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] We remain confident in the future prospects of the industry and firmly believe that our company's strategy positions us well to capitalize on numerous opportunities in the evolving market landscape. We are dedicated to advancing the implementation of our established strategies with a commitment to delivering long-term value for our shareholders.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] I will go over this in English just to save us time, and we'll allocate more time for the Q&A later. So I'm pleased to present our latest earnings results for the third quarter of 2023. The pricing changes to life insurance products effective from August caused a spike in new business sales in July, which was then followed by a slowdown in sales in August and September as our insurance partners take time to adjust their new product offerings.

Despite this disruption, our results over the quarter was solid, and we remain confident that our strategies are working well, allowing us to persevere even under a volatile industry environment. The key highlights of our third quarter results include total life insurance premium grew by 23% year-on-year to RMB 3.4 billion. First year premium grew by 10.3% to RMB 584 million.

Net income attributable to shareholders came to RMB 117.7 million, representing a significant year-on-year increase of 382%. This uplift is largely due to an unrealized gain from our investment in Cheche Technology Limited, in which we hold a 2.8% stake and they recently went public. Fanhua disposed our P&C division back in 2017 to Cheche for a combined consideration of cash and convertible loan. We are planning the equity stake in Cheche upon exercise of options to convert part of the convertible loan.

Our strategic focus on professionalism, specialization, digitalization and open platform remains the cornerstone of our success. Our operational highlights include: number one, our commitment to digitalization has led to substantial cost reduction and efficiency improvement. Our digital technology platform underwent further intelligent transformation, leveraging artificial intelligence and smart algorithm. Like many of our peers, we are trialing with a lot of AI tools in our business. We introduced AI-enabled digital avatar, AI assistance and smart recommendation system, customer distribution system to assist insurance professionals in offering efficient and personalized solutions to our clients.

For the third quarter of 2023, our adjusted operating expense ratio decreased from 32% to 30%, a significant improvement compared to the same period last year despite increased IT investments.

Number two, we remain committed to empowering our sales team with the expertise needed to ensure high-quality growth. We persist in conducting our 3F training. As of September 30, the number of individuals trained in 3F, which stands for Fanhua policy custodian, Fanhua retirement planning and family office consultancy, reached over 22,000. The positive impact on agents is increasingly evident with improvements observed in the quantity of our top-performing agents but also led to significant increase in productivity.

For the third quarter of 2023, the monthly average per capita productivity of our [ 100,000 ] premium agents increased by 23% year-on-year to RMB 270,000 and that of our MDRT increased by 27% year-over-year to RMB 600,000. The number of MDRT agents also increased by 29%. The proportion of high-performing agents contributing premiums also rose from 46% to 62% compared to the same period last year.

In response to the growing demand for diversified and personalized services among high net worth individuals, we launched the family office adviser incubation program built upon our 3F training and certification system. With the specific aim of attracting talent from other professional industries outside of the traditional financial industry, this initiative has garnered significant attention within the industry, and we have already initiated preparations in an Guangdong and Sichuan for the program.

Number three, our open platform strategy continues to deliver material results. We have successfully linked with 791 third-party agency companies as of September 30. These collaborations, combined with our M&A, have contributed over 28.3% to our sales volume highlighting the success of our open platform strategy. We have also officially launched the digital tenant system in late October, which has received positive response from the industry. To date, we have received many inquiries from third-party insurance brokers and insurance companies on onboarding the tenant system and so far have signed up 2 insurance brokerage firms as our digital tenants. We believe that the current market challenges and the focus on digitalization and cost efficiency will bring more business opportunities for our open platform strategy.

The fourth point I want to go through is we have made significant progress with overseas expansion, adding a new pillar to our growth strategy. On October 23, we announced a strategic partnership with ASIA Insurance to establish 2 joint venture companies. In both cases, Fanhua will own 60% controlling interest.

The 2 companies focusing on developing life insurance distribution technology for the Asia Pacific region marked an important milestone for Fanhua in our endeavor to establish our global presence and realize our vision of becoming a globally leading technology-driven financial services platform. By joining forces with ASIA Insurance, we are confident that we'll be able to leverage the strength of both parties to capitalize on the significant growth opportunities in the Asia Pacific region and create long-term value to our shareholders.

Finally, as I mentioned earlier, we recognized an unrealized gain from the investment of Cheche during the third quarter of 2023. We would like to remind our shareholders that this is a one-off game in nature, and our holdings in Cheche could continue to cause volatility to our net profit over the short term. The most important implication of Cheche's listing in our view is that we hope you can clear legacy misunderstandings regarding our relationship with Cheche.

Our divestment of our P&C business to Cheche and our focus on our core life insurance business have proven to be the right strategic move. We are also delighted for Cheche to be able to complete their listing on the NASDAQ.

Looking ahead to the fourth quarter, the anticipated implementation of commission cap is expected to bring about short-term challenges for the entire industry. However, as Mr. Hu highlighted earlier, we also see this as an important catalyst to accelerate the development of our open platform strategy and fast track our transition from a sales-oriented company to a platform oriented.

In the Hong Kong market, we will continue our collaboration of ASIA Insurance, seeking business opportunities and assembling teams for our joint venture companies. We're also excited to share that we have started exploring growth opportunities outside of Asia and are actively looking for partnerships similar to that, we have formed with ASIA Insurance.

In closing, I would like to say that the life insurance industry in China remains very young, and the intermediary segment is still at its infancy in terms of development. We strongly believe that the market opportunities ahead of us remain very significant. At the same time, we're also conscious that our young industry will no doubt continue to face regulatory changes. As a regulator, continue to direct the industry towards higher-quality growth.

Fanhua has been established for 25 years, and we have a strong track record of navigating through changes. This gives us confidence that we can continue to deliver for our shareholders under all market environments. This concludes our presentation. I'll turn the floor over for Q&A.

[Shirong Qiu, executive]

Amber, we are ready for questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Yuyu Zhang from CICC.

[Yuyu Zhang, analyst]

[Foreign Language] So my first question is related to the regulation. The regulator mentioned that -- they mentioned [indiscernible] the fee regulation as we call it [Foreign Language] in our agency and brokerage channel. So could you share us some more color on, if it happens, then the impact on the whole industry and Fanhua?

And my second question is related to all the overseas expansion. We noticed that Fanhua will establish 2 subsidiaries with ASIA Insurance. So could you share some color on the strategy, cooperation? And is there any further time line you could share with us?

And my last question is about our open platform strategy. So how much digital talent success are on agreements that we have on our open platform? And do we have any further plan to attract more digital tenants?

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] So on your question about the commission rate impact. So first of all, we're going to state that the policies that you've been hearing coming out of the regulator is very understandable. Obviously, the industry right now, the life insurance industry in China right now is very challenging. We can see a lot of insurance companies are facing difficulties in terms of investment return, given the weak capital market environment.

Sales expenses are also very high. So overall, the profitability situation for life insurance in China has been negatively impacted by these issues. The regulated efforts over the last few months have been focusing on: number one, reducing the liability costs by capturing the guaranteed return; and number 2 is they're trying to reduce the sales expenses. So overall, we think these measures are intended to improve the financial conditions of the life insurance industry, which should be positive over the long term.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] So for our business, we need insurers to stay profitable. That's an essential ingredient for our survival as well. So we basically embrace these changes that's coming through. The impact for our intermediary market will be that it puts pressure for everyone to lower their policy acquisition costs. We believe the operators with the lowest cost will benefit in this environment going forward. And this will force us to reduce costs on 2 fronts: number one, through scale or number two, through efficiency improvements.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] We think there will be 2 very important criterias for any intermediary to be successful in the upcoming environment: number one, the ability to develop market-leading technology, which should help reduce costs and also increase economies of scale; number two, through professional service. By that, we mean for the high-quality agents, intermediaries that are able to provide a professional development career path will have a competitive advantage in the new environment.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] And we have the view that right now, the market that we operate in is very fragmented with 2,800 competitors, of which we think only a few companies have the capability to develop these 2 very important operational abilities that we mentioned about in terms of technology and professional service. So -- and this is why we expect that if these regulations were to be introduced, going forward, we are likely to see the intermediary market in China becoming more concentrated and potentially be dominated by a few large companies.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] For Fanhua, over the last few years, our strategy has been focusing on transitioning from a pure sales company to a platform-centric company. And as I mentioned earlier, these regulatory changes, we think, is going to accelerate our platform evolution.

We have very evident competitive advantages in terms of technology, and our strategy is really leading the market in many sense. We are the first to launch this platform strategy that we think should help lower the IT costs for a lot of the small- to medium-size intermediaries in the market. So overall, the way we think about it is that these regulatory changes fits quite well with what we're trying to do with our company and what we're trying to provide for the industry.

In terms of financial impact, however, there will be some short-term pressure. That's for sure, given the commission rates are likely to drop. However, by focusing on accelerating our platform strategy, we aim to increase our market share significantly and gain significant economies of scale.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

I'll try to say this in English to save time again. So we have basically formed 2 joint ventures with ASIA Insurance in Hong Kong, both of which Fanhua owns 50%. ASIA Insurance owns 40%. As many of you may know, ASIA Insurance is the insurance subsidiary of Asia Financial Holdings in Hong Kong. The aim of these 2 joint ventures, in essence, is to launch Fanhua's expansion overseas. And what we intend to do with Asia insurance is mainly focusing on exporting our technological capabilities in China onto the global stage.

As many of you may know, sales -- technology adoption in China now is very mature compared to a lot of markets outside of China. 100% of our sales in China right now is basically paperless. It's all driven by our app. In fact, what's different about China and versus Hong Kong is that all of our agents can use Fanhua's app, [indiscernible], to basically issue policy proposal and also complete the entire transaction process.

In Hong Kong, where you have 811 brokers, they cannot complete the entire transaction. In Hong Kong, if a broker was to sign an insurance policy for a client, they have to issue the policy on the insurer's platform. So we think there's immense opportunity for Fanhua to export all the IT that we have developed in China over the last 10 years, which cost us billions in RMB in terms of IT spending into Hong Kong.

Some of our competitors in Hong Kong are already charging HKD 200,000 per year for very simple apps that basically just does policy illustration, policy comparison. So you can imagine the revenue opportunity that we can gain from expanding into just Hong Kong. And beyond Hong Kong, we're also exploring with ASIA Insurance about expanding into Southeast Asia, where they also have a very strong presence in the P&C business. So that's the essence of what we're really trying to do with ASIA Insurance.

What you can expect is that, over the coming months, there will be a few things. Number one, we are at the final stages of completing -- acquiring a local life insurance brokerage license, which should basically enable us to have contracts with up to 17 life insurance companies in Hong Kong, and we'll further increase that. Post acquisition, we will sign up with more insurance companies in Hong Kong.

Secondly is we're already at the very early stages of translating our [indiscernible] app in China into traditional Chinese and also English that will be applicable to the Hong Kong market. We are also working very hard on the human resource front, basically recruiting the relevant personnel to launch our business in Hong Kong. So all in all, I think 2024, I have confidence that Hong Kong will potentially be a revenue contributor to Fanhua. Thank you.

[Yinan Hu, executive]

[Foreign Language]

[Lincoln Benet, executive]

[Interpreted] Okay. So on our open platform, there are basically 3 types of agreements. Number one is the Fanhua agreement. Number two is the MGA agreement; and number three is the sales agreement. The question was relating to how many tenants that we have is using the sales agreement. What we want to explain is that for the sales agreements, it requires a 3-way data exchange agreement between the insurer, the broker and the platform. Right now, we have 3 tenants that's using their sales agreement in operation because it relates a lot to data security and data exchange, we think that we need about 10 in operation to fully promote this service.

But the opportunity is very evident. On the Fanhua [indiscernible] Cloud and also MGA channels, we have a total of 791 connected parties in terms of -- on the IT system. They have their own agreement and is basically our largest pool of potential clients.

[Operator]

[Operator Instructions] I am showing no further questions. I'll now turn the conference back to Ms. Oasis Qiu for any additional comments.

[Shirong Qiu, executive]

Thank you, Amber. If you have any further questions, please feel free to contact us. Thank you for participating in today's conference call.

[Operator]

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.

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