Fanhua Inc. (FANH) Q2 2022 Earnings Call Transcript

Fanhua Inc. (NASDAQ: FANH) Q2 2022 earnings call dated Aug. 23, 2022

Corporate Participants:

Oasis Qiu — Investor Relations Manager

Yinan Hu — Chief Executive Officer & Chairman

Analysts:

Zixian Wang — CICC — Analyst

Presentation:

Operator

Thank you for standing by, for Fanhua’s Second Quarter and First Half 2022 Earnings Conference Call.

[Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. The webcast replay will be available within three hours after the conference is finished. Please visit Fanhua’s IR website at ir.fanhuaholdings.com under the Events and Webcast section. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the meeting over to your host for today’s conference, Ms. Oasis Qiu, Fanhua’s Investor Relations Manager.

Oasis Qiu — Investor Relations Manager

Good morning. Welcome to our second quarter and first half 2022 earnings conference call. The earnings results were released earlier today and are available on our IR website as well as on Newswire. Before we continue, please note that the discussion today will contain forward-looking statements, made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The accuracy of these statements may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or anticipated. Such risks and uncertainties include but are 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 this forward-looking information, except as required under applicable laws.

Joining us today, are our Chairman and Chief Executive Officer, Mr. Yinan Hu; Chief Financial Officer, Mr. Peng Ge; and Chief Operating Officer, Mr. Lichong Liu. Mr. Hu will provide a review of our financial and operational highlights in the second quarter of 2022. There will be a Q&A session after the prepared remarks.

Now, I will turn the call over to Mr. Hu.

Yinan Hu — Chief Executive Officer & Chairman

[Foreign Speech]

Good morning and good evening. This is Hu Yinan. Thank you for joining today’s conference call.

[Foreign Speech]

In the second quarter of 2022, as we continued executing on our Professionalization, Career-based, Digitalization and Open Platform strategy and implemented a series of strategic initiatives, the efforts started to show some encouraging results, with positive improvements across various operating metrics.

[Foreign Speech]

Our insurance business grew 12.2% year-over-year to RMB2.9 billion in gross written premiums of which our life insurance first year premiums reached RMB615.7 million, up by 43.7% year-over-year and 25% quarter-over-quarter. The growth was primarily driven by substantial increases in the number of high-performing agents and their per capita productivity.

[Foreign Speech]

During the quarter, both the number of high-performing agents and the per capita performance indicators have enjoyed great improvement on a year-over-year basis. The number of three-month 10,000 Premium Agents who are defined as those contributing over RMB10,000 annualized premiums equivalent or APE monthly for three consecutive months during the quarter increased by 23.6% year-over-year, with per capita productivity up by 33.3% year-over-year. While the number of 100,000 Premium Agents who are defined as those contributing over RMB100,000 APE during the quarter increased by 41.2% year-over-year with per capita productivity growing 6.3% year-over-year. Correspondingly, as we purposely reduced the number of non-performing and low-performing agents, the total number of Fanhua’s performing agents reduced by 37.6% in the second quarter of 2022. These are clear signs of the positive effects of our strategic focuses on serving mid to high-end customers and high-performing agents.

[Foreign Speech]

With the steady progress in executing our new strategy, we were proud to deliver robust growth in our new business during the quarter while operating income reached RMB31 million well exceeding our prior expectation. The year-over-year decrease in operating income was mainly due to, one; a loss of RMB7 million within our claims adjusting segment due to impacts of COVID-19 during the quarter, especially in our major business areas we have failed to operate for quite a long time so, and also, we have a profit of RMB3.5 million in the same period of last year, that is to say, we have been impacted in income due to COVID-19 for about RMB10 million in claims adjusting segment.

Two, an increase of investment in our Yuntong branches, which correspondingly incurred a loss of RMB15 million during the quarter; and three, our increased expenditure amounting to RMB10.3 million on refining our IT infrastructure to support digitalization of our operation and empower front-line operation of our agents. Although such investments may have increased our cost pressure, we believe it is necessary investments to strengthen capabilities, as excluding the impact of the above mentioned factors, our operating income would have been approximately RMB63 million, representing a growth of 34%, which again demonstrates that we are on track for future sustained growth.

[Foreign Speech]

After over a year of implementation and continued refinement, our strategy is clear and pragmatic, and the preliminary results have contributed to significant improvements of our brand image in the industry, further boosting the morale and confidence of our staff and sales force.

[Foreign Speech]

Building on the preliminary achievements in the first half of 2022, we will focus on pushing forward the following strategic initiatives to further solidify our core competitiveness.

[Foreign Speech]

One, recruitment and training of top talents to build a highly productive sales force.

[Foreign Speech]

Firstly, further expanding the coverage of Family Office Consultant or FOC and Family Retirement Planner or FRP training programs among high-performing agents, while starting to initiate training and certification programs for Family Policy Managers or FPC, which focus on helping agents to develop the ability to offer policy custody services, so as to help our agents transform from focused experts on insurance products to broader experts on family-based asset allocation and then expanding to experts on elderly care and legacy management.

[Foreign Speech]

Secondly, leverage our advantages in insurance trust services and healthcare services with the support of our well proven triple-R marketing model, i.e. Account Responsibility, Solution Responsibility, and Fulfill Responsibility and step-up efforts to attract industry top talents, especially Million Dollar Round Table members or MDRT to achieve the target of 30% year-over-year growth in 100,000 Premium Agents.

[Foreign Speech]

Two, providing scenario-based trust, healthcare and elderly care services facilitated by standardized triple-R marketing procedures.

[Foreign Speech]

Firstly, trust plus insurance. As of the end of June 2022, Fanhua has organized over a 100 customer engagement activities and facilitated in setting up 123 trust accounts over RMB1.2 billion in trusted assets covering 215 new insurance policies with each trust accounts contributing one to two insurance policies on average and RMB30,000 APE per policy. Our strategy of offering referral of insurance trust and family trust services to mid to high net worth customers have delivered significant results, establishing a good reputation in the industry and standing out with the competitive advantage.

In the second half of 2022, in combination with our FOC training programs and the triple-R marketing model, we plan to widely organize high-end customer engagement activities with the professional support of the triple-R talents to provide of all suites of services from customer engagement, asset allocation planning and solution making, setting up insurance trust accounts to fulfillment and post sales services. As such, we expect to offer a closed loop of insurance trust services making insurance trust accounts a new competitive mode for Fanhua.

[Foreign Speech]

Secondly, health and elderly care plus insurance. Established in 2021, Fanhua’s health management business unit is dedicated to pooling quality resources of medical and elderly care on the market to empower our partners, agents and customers. In the first half of 2022, Fanhua has launched a wide spectrum of customer acquisition, acquisition products and collaborated with providers of quality services, such as “blood banks and high-end medical service providers.” Furthermore, we have made a breakthrough in securing access to quality elderly care facilities by sealing an in-depth cooperation agreement with the state-owned enterprise.

It also marks the first step for Fanhua to become an Open Platform for connecting small and medium-sized insurers with third-party health and elderly care service facilities. Into the second half of the year, we will make full use of these resources to facilitate scenario-based marketing by organizing onsite visits to healthcare and elderly care facilities for customers to experience quality lifestyles and related services, so as to stimulate their demand for wellness, health, retirement and legacy management solutions and thus boost sales of insurance products.

[Foreign Speech]

Thirdly, upgraded Lan Zhanggui app to support digitalized operation, in the first half of 2022, our Lan Zhanggui app has been upgraded to 3.0 version; a comprehensive platform that integrates customer engagement, customer service, trading support, online and offline operation and professional training and personal branding. With the release of the Lan Zhanggui 3.0, we have observed significant improvement in the operational efficiencies with key performance indicators of the platform also showing remarkable improvements.

Specifically, the number of active agents on the platform were up by about 50% and has continued to increase. The productivity of agents using our digital tools was nearly 1.5 times that of agents otherwise, and the productivity of agents that have become guan jia or insurance service butler was about 20% higher than that of those otherwise. All this shows that our digitalization efforts have been paying off.

[Foreign Speech]

For the second half of 2022, Fanhua will continue to improve user experience by further optimizing key functions and making the system more stable and easier to use, so as to support agents activities more effectively.

[Foreign Speech]

Into the third quarter of 2022, while external factors such as COVID-19 and double-recording may continue to exert an negative impact, Fanhua will continue to further implement our development strategy and work to improve company value by aggressively pursuing the enormous market opportunities. After considering our plans continue to increased investments in technology and training in the near-term, which will take time to fully show their benefits, the management is confident in achieving positive growth with an operating income of no less than RMB30 million.

[Foreign Speech]

This concludes my presentation. And now the floor will open for your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Zixian Wang at CICC. Please go ahead.

Zixian Wang — CICC — Analyst

[Foreign Speech]

So the first question, how do you expect the company’s revenue and the profit in the second half of this year? And the second one is about the agent force. So what is the constitution of our sales agents in aspect of region, age, education, etc.? How about their income and productivity? And the last one, can you share us what’s your current product mix, how do you expect the demand for savings products? Is duration of this product sustainable? Thanks.

Yinan Hu — Chief Executive Officer & Chairman

[Foreign Speech]

Thank you for the questions. For the first one, regarding the outlook for our commission income and profit guidance in the second half of this year, our new strategies has been proven to be quite effective in driving our business growth. And a key part of this strategy is our focus on double high, which means that we focus on high-end customers and as well as high-performing agents with digital empowerment. And these strategies have been proven to be quite effective in driving our business growth over the past quarters. As we can see that even though the total performance agents, the number of total performing agents has dropped by 30%. However, our first year premium continued to increase substantially, which proves that internal driving force remains strong. And as we continue to execute our strategies, we believe that we will see our growth momentum pick up over time in the third quarter, fourth quarter and next year.

[Foreign Speech]

However, we do notice that there are two factors that may pose adverse impact on our business results. Firstly, our product mix, even though we maintained strong growth in our first year premium, however, our — the products are mostly short-term products, which means that this product has lower embedded value for the company. So that’s why — that our commission income and profit growth are not exactly in line with the growth of our first year premium. And the second factor is the resurgence of COVID cases in many regions in the third quarter as well as the regulatory requirements for a double recording in some key markets, particularly in our major markets, which may pose some pressures on our business growth.

[Foreign Speech]

Net-net wise, we believe that we are bottoming out, and we don’t believe that we will see any further substantial decline in our business.

[Foreign Speech]

The second question regarding agent profile. Currently, about 60% of our agents are in Asia between 40 to 60 years so, this also aligns with our current strategy, our strategic focus on high-end customers, as many of the wealthy populations, although average of [Phonetic] populations are also in the age of 40 to 60 years, so especially for those in the age group of 50 to 60 years old, there are about 300 million of them who have strong demand for elderly care and legacy management. So the age profile of our agents are actually basically aligned with our customer group which [Technical Issues] was a positive thing to execute our strategy.

[Foreign Speech]

Most of our agents are located in the second-tier cities and to be honest, not very high education level.

[Foreign Speech]

In order to make up for the shortcomings of some of these agents, we launched a 3R marketing model, which basically to separate the whole sales process into several steps and with several roles to be played by different agents. For those agents that do not have very professional skills, they are responsible for our customer engagement, while more professional agents will be responsible for providing solution designs and to execute the transactions.

[Foreign Speech]

In the meantime, we are also stepping up efforts to recruit higher education agents and younger generation of agents to become professional solution managers or fulfillment managers to support the operation or support the customer services of those relatively ordinary agents. Currently, about 25% of our sales forces are in the age group of 30 to 40 years old, and this age group of agents have typically higher education level and better learning abilities. In the first half this year, we hosted a lot of our FOC and FRP training sessions in order to improve the professional skills of our sales force to support the customer services.

[Foreign Speech]

As for productivity, in the second quarter, the productivity of our effective agents were about RMB20,000 per agent as compared to RMB 12,000 per agent in the same period last year. So that’s a 60% improvement year-over-year.

[Foreign Speech]

And the third question regarding to our product mix as well as the demand and sustainability of growth for savings products, in the second quarter, whole life insurance and annuity products accounted for 79% of our first year premiums as compared to 68% in the same period of last year, while critical illness products accounted for only 7% as compared to 20% in the same period last year.

[Foreign Speech]

That’s also the reason why we deliver strong first year premiums, but commission income was not exactly in line with the strong growth in first year premium.

[Foreign Speech]

As for the savings part of demand as well as sustainability of the growth, we believe that in the next 10 years, we’ll continue to see strong demand for savings products driven by the aging population in China. Well, 50 years ago, in China, there was a baby boomer trend and then — which means that at 60 years ago, roughly every year 20 million people were born. So that means that starting from this year, there will be 20 million people every year going to the retirement age. And the key demand for this age group of people are for quality retirement lifestyle and for wealth appreciation as well as to — as well as legacy management. So we believe that in the next 10 years, the people in this age group, the strong demand for savings product, which may cater to their needs for retirement and the legacy management will become a key trend.

[Foreign Speech]

Based on the strong market demand as well as considering the potential worst impact of the increased contribution from savings products in our total mix, we will step up efforts to introduce our health care and elderly care services to cater to people’s needs for quality retirement lifestyle as well as to step up efforts to expand our insurance trust services, which may help people to cater to their needs for wealth management as well as legacy management. And secondly, we also made effort to optimize our product mix by encouraging the sales of products with a longer payment period, particularly for products with over 10 years payment periods. And thirdly, we will also design new products by cooperating with reinsurance companies to improve the product embedded values. For example, we are recently cooperating with Aviva-COFCO to introduce a leveraged style whole life insurance products and for this type of product, customers typically prefers a longer payment period between 10 years to 20 years. So this will help improve the overall embedded value of our products.

[Foreign Speech]

Thank you.

Operator

Thank you. We have no further questions in queue. [Operator Instructions] If there are no further questions, I will hand back to management for closing remarks.

Oasis Qiu — Investor Relations Manager

Thank you for participating in today’s conference call. If you have any further questions, please feel free to contact us. Thank you. Have a good day. Bye.

Operator

[Operator Closing Remarks]