Fanhua Inc. (FANH) Q2 2021 Earnings Call Transcript

Fanhua Inc. (NASDAQ: FANH) Q2 2021 earnings call dated Aug. 23, 2021

Corporate Participants:

Oasis Qiu — Investor Relations Manager

Chunlin Wang — Chief Executive Officer and Chairman

Analysts:

Allen Feng — Morgan Stanley — Analyst

Presentation:

Operator

Thank you for standing by for Fanhua’s First [Phonetic] Quarter and First Half 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent background noise. After the management’s prepared remarks, there will be a question-and-answer session. Please follow the instructions given at that time, if you would like to ask a question. For your information, this conference call is now being broadcasted live over the Internet. 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 Webcasts section. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I’d 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, and good evening. Welcome to our second quarter and first-half 2021 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 US 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 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 law.

Joining us today are our Chief Executive Officer and Chairman of the Board, Mr. Chunlin Wang; Chief Financial Officer, Mr. Peng Ge, and Board Secretary, Lily Lee. Mr. Wang will provide a review of our financial and operational highlights in the second quarter and first half 2021. There will be a Q&A session after the prepared remarks.

Now I will turn the call over to Mr. Wang.

Chunlin Wang — Chief Executive Officer and Chairman

[Foreign Speech] Good morning, and good evening. Thank you for participating in today’s conference call.

[Foreign Speech] On this first part, I’ll talk about our views on the market trends. Firstly, the resurgence of COVID-19 had both far reaching impact on China’s economy and business activities, directly or indirectly hurting consumer confidence and purchasing power of the middle class families. Many industries have been [Indecipherable] impacted and the insurance industry was certainly not immune.

[Foreign Speech] Even so, we have some believers that challenges and opportunities co-exist. We still believe that there is tremendous room waiting to be explored in China’s life insurance market in the long run, and that professional insurance intermediaries as an important insurance distribution force still enjoy huge growth potential. The progress made in the past in the professional insurance intermediary industry was only to lay the foundation for future development and COVID-19 is expected to speed up the development of the industry. It is inevitable and irreversible that the market share of professional insurance intermediary will continue to increase.

[Foreign Speech] Thirdly, health insurance market is getting saturated and growth is expected to slow down in the next stage. However, with an aging population, the demand of Chinese middle class families for commercial pension insurance and long-term annuity is expected to continue to grow, and thus opens-up a huge blue ocean market. The key to cultivating and meeting such demand is to build a high-quality sales force, gain customer insights through digital intelligence and provide customers with a variety of customized products according to their individual needs, thus, prolonging customer lifecycle.

[Foreign Speech] Fourthly, we firmly believe our strategy of professionalization, digitalization, and open platform will prepare us well to seize the new opportunities emerging from the market changes. Hence, we will stay committed to pushing forward our strategy.

[Foreign Speech] On the second part, I will give a review of our financial results in the second quarter and first half 2021. [Foreign Speech] Life insurance industry witnessed a sharp decline in total gross return premiums by 16.6% in the second quarter of 2021. [Foreign Speech] Against the industry headwind, Fanhua managed to record RMB2.5 billion worth of total life insurance GWP, representing a positive growth of 4.9% year-over-year with operating income reaching RMB51 million, higher than expectation in the second quarter of 2021. [Foreign Speech] As compared to only 0.4% year-over-year growth in total life insurance GWP in the industry in the first-half of 2021, Fanhua registered RMB5.5 billion in life insurance premiums, up by 16.9% year-over-year and RMB191.4 million in operating income, meeting nearly two-thirds of our target for 2021.

[Foreign Speech] And the third part, we will share the progress that was made in our strategy of professionalization, digitalization and open platform strategy and we have made encouraging progress. [Foreign Speech] Firstly, in terms of professionalization, we have proved the establishment of 14 Yuntong branches, among which nine are in the preparatory stage for opening. Over 100 Yuntong advisors have been recruited after multiple rounds of vigorous tax and assessments. [Foreign Speech] Secondly, in terms of digitalization, we rolled out three major digital tools in the second quarter of 2021, i.e. Digital Asset Management Platform [Indecipherable], Digital Operating Platform, [Indecipherable]. The key value of using these digital tools is in helping team leaders with managing teams more efficiently, and empowering agents to better engage clients based on data-driven insights and digitalized operations.

[Foreign Speech] We applied new digital tools in Hebei Province on a pilot basis since May, with about 8,000 agents installing our WeCom [Phonetic], and over 2,000 registering as digital asset originators, and connecting to more than 40,000 clients through WeCom. These digitalized tools and operations have significantly helped mobilize our existing sales force and connected our clients laying a solid foundation for further team management and client operations.

[Foreign Speech] During our experience in the Hebei pilot zone, we plan to roll-out digital tools among our frontline sales force on a wider basis, and implemented a new development model to expand our entrepreneurial sales teams, but by digital empowerment, i.e. to digitize our offline operation through WeCom base online chat group operation, so as to assist our team leaders to manage their team activities more efficiently and professionally, while empower our agents to better engage with their clients in a professional manner.

[Foreign Speech] The fourth part is about business outlook for the third quarter and the second half of 2021. [Foreign Speech] We expect our new business for the third quarter of 2021 to grow on a quarter-over-quarter basis, while operating income expected to be no less than RMB25 million, with increased spending on implementing our interim plan and promotion of digitalization initiatives. In the meantime, we will spare no efforts to ramp up sales in the last quarter to achieve our full year sales targets and gear up for the Jumpstart Sales Campaign for 2022. Operating income is expected to exceed RMB100 million for the second half of 2021, and no less than RMB300 million for 2021.

[Foreign Speech] Fifthly, our dividend plan for the second quarter of 2021. [Foreign Speech] Our quarterly dividend for the second quarter of 2021 is $0.15 per ADS. The dividend is payable on or around September 23, 2021 to shareholders of record on September 7, 2021.

[Foreign Speech] Thank you. Now the floor will open for your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Allen Feng from Morgan Stanley. Please ask your question.

Allen Feng — Morgan Stanley — Analyst

[Foreign Speech] Good morning, management. I just have two quick questions. First, what is the impact of the so-called double recording practice on offline insurance sales?

And secondly, could you just quickly comment on the new sales trend of critical illness products, as well as savings type products since the third quarter of this year? Thank you.

Chunlin Wang — Chief Executive Officer and Chairman

[Foreign Speech] Firstly from Fanhua’s perspective, we welcome these new regulations. We believe that it will help to regularize to standardize the operation in the industry, and help to reduce malicious policy cancellation, reduce sales misrepresentation. And then secondly, short-term wise, there may be some adverse impact, but from long-term perspective, we believe that the benefits will be much larger than the adverse impacts. And thirdly, this regulation will also pose a higher requirement for professional insurance intermediaries to standardize their operations, and it will help to improve the quality of the professional insurance intermediary sectors as a whole.

[Foreign Speech] We believe that this double recording requirement is a positive for those companies, who have already more standardized operations and have this strong capability. [Foreign Speech] In the past, as life insurance sales organizations are mostly organized in the pyramid structure and a lot of the sales agents are actually working as a sales agent on a part-time basis. So, not a lot of them have strong abilities in the sales skills. So critical illness, which is relatively easy to sell became the major products for professional insurance intermediaries. And as a result, the penetration rate of critical illness products has been quite high in China.

[Foreign Speech] So therefore, we expect that the room for further development for critical illness products will be quite limited. [Foreign Speech] And we believe that the broader market will come from the demand from the 400 million middle class families or diversified family assets location solution. [Foreign Speech] As such demand opens-up a new blue ocean market, but such demand will also require the services or more professional sales agents, who will be able to offer customized products for the clients based on the individual needs.

[Foreign Speech] So therefore, our future market propositions and our major focus will be to meet the demands of these 400 million middle class family asset allocation planned. [Foreign Speech] Therefore, we’re going to actively pursue customer innovation and customer customization and product customization, to make sure that in the future, this customized products will account for a majority of our sales.

[Foreign Speech] On August 26, we’re going to host a new product launch conference or a customized product, a whole life insurance product, which is [Indecipherable] number one and this product will be officially launched into the market in September, and which will be our major product in September. [Foreign Speech] We already established cooperation agreements with six reinsurance companies. So in the future, we will work with those reinsurance companies and insurance companies to customize and design products for our customers. [Foreign Speech] Thank you.

Operator

Your next question comes from the line of [Indecipherable]. Please ask your question.

Unidentified Participant — — Analyst

[Foreign Speech] Okay. I’ll repeat my questions in English. First, congrats to the [Indecipherable] higher than industry growth in the first half. Here are my two questions. The first one is about the product mix. What is our current product mix, say the proportion of annuity critical illness and life insurance? And is there any change compared with the previous year?

And next question is about the original strategy, which provinces or cities are our main targets and which group of people are our targeted customers? Thanks.

Chunlin Wang — Chief Executive Officer and Chairman

[Foreign Speech] By 20-year APE, whole life insurance, critical illness and annuity represented 49%, 43% and 6%, respectively, compared to 19%, 69% and 9%, respectively in the same period last year. And by 30-year premium, whole life insurance, critical illness and annuity represented 69%, 20% and 7%, respectively, as compared to 31%, 45% and 14%.

[Foreign Speech] Our critical illness product, as this percentage of our total mix dropped quite significantly. I believe that there was two major factors. Firstly, in the first quarter, there is the transition between the new critical illness definition with one, and after the transition, we believe that the critical illness products are not as good as the old one. So therefore, the demand for critical illness has weakened after the transaction.

[Foreign Speech] And then secondly, I believe there is already a market consensus that critical illness product has reached a significant high level. So the major market for future will be the savings products. [Foreign Speech] So we believe that the critical illness growth will slow down, while savings products will continue to grow. But of course, it will also take time for the savings product to achieve explosive growth. [Foreign Speech] Thank you.

Operator

There are no further questions at this time. I would like to hand the conference back to today’s presenters. Please continue.

Oasis Qiu — Investor Relations Manager

Hi, operator, we haven’t covered the second question yet. Hold on.

Operator

Okay, sure.

Chunlin Wang — Chief Executive Officer and Chairman

[Foreign Speech] Most of the 400 million middle class families live in urban areas, therefore, our strategies have always been urbanization, and it is sales force focused. And as we mentioned, we are going to implement our digitalization and professionalization strategies. And the major markets for us to implement this strategy will be the major cities.

[Foreign Speech] We have two strategic priorities. Firstly is the development of entrepreneurial sales teams, backed by digital empowerments. We hope that we can attract more and more elite sales agents to join our sales force. And the second priority is our Yuntong plans. As we mentioned just now we have a 14 Yuntong branches, and we expect to have 25 Yuntong branches by the end of this year. [Foreign Speech] These Yuntong branches will be mainly located in first tier cities, including Shanghai, Beijing, and Guangzhou, Shenzhen as well as provincial capital cities. [Foreign Speech] So far, we have made good progress. [Foreign Speech] Thank you.

Operator

Yes, there are no further questions at this time. I would now like to hand the conference back to today’s presenters, please continue.

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.

Hello, you can conclude this call.

Operator

[Operator Closing Remarks]