Fanhua Inc. (FANH) Q4 2021 Earnings Call Transcript

Fanhua Inc. (NASDAQ: FANH) Q4 2021 earnings call dated Mar. 28, 2022

Corporate Participants:

Oasis Qiu — Investor Relations Manager

Yinan Hu — Chief Executive Officer & Chairman

Analysts:

Susan Wang — CICC — Analyst

Presentation:

Operator

Thank you for standing by for Fanhua’s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent any 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 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 and good evening. Welcome to our fourth quarter and fiscal year 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 the 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 Chairman and Chief Executive Officer, Mr. Yinan Hu; Chief Financial Officer, Mr. Peng Ge. Mr. Hu will provide a review of financial and operational highlights in the fourth quarter and fiscal year 2021. 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 Yinan Hu. Thank you for joining today’s conference call. I would like to begin the call by sharing some of my thoughts on current industry trends. Then I will discuss our strategic focuses in 2022.

[Foreign Speech] In 2021, China’s life insurance industry started off well but ended up on a downward track. Premium growth continued to slow down after the transition to the new critical illness definition framework in the first quarter of 2021 and gross written premiums or GWP dropped year-over-year. The resurgences of COVID-19 and tightened regulations clearly played a role, but we believe the major cost lies in the supply side as neither the quality of insurance products nor the professional capabilities of insurance sales agents can fully meet customer needs.

[Foreign Speech] Against the backdrop of industry transformation, despite mounting challenges, we also see tremendous opportunities. In 2022, people reaching the retirement age are expected to grow from 9 million in 2021 to 25 million in China. More than 25 million people are expected to retire in the next 10 years each year, starting from 2022, adding up to 300 million people. With an accelerating aging society, there is burgeoning demand for elderly care, asset preservation, tax planning and legacy management among soon to be retirees. Meanwhile, based on experience learned from mature markets with the rise of the middle class in the increase in consumers’ disposal income, more and more people are shifting their demand for insurance from ensuring basic protection to more comprehensive plans for family based asset allocation. These changing consumer demands are driving the next era of strong growth, but such demands require salespeople to be equipped with higher capabilities and more professional knowledge. [Foreign Speech] Statistics from both the industry and Fanhua in the last few years also confirm this trend.

[Foreign Speech] From the premium mix perspective, critical illness sales have suffered a continuous decline after the transition of CI definition framework. The same applies to Fanhua. For 2021, critical illness sales facilitated on Fanhua’s platforms have dropped quarter-by-quarter, showing a downward trend in general with those sales of savings-type products such as whole life insurance and annuity have been on the rise instead, clearly reflecting the changes in insurance demand.

[Foreign Speech] To take a look at agents, the total number of agents across China’s insurance industry has plummeted from the 9 million to 6 million, leaving a polarized sales force. As on the one hand, a large number of low performing agents are leaving the industry and on the other hand, high performing salespeople are more stable and productive. From Fanhua’s standpoint, despite a fall in Fanhua’s total numbers of agents and performing agents, the last four years witnessed an increase in the number of Fanhua’s high performing agents with annual first year premiums of RMB100,000 and above, from 3,230 in 2018 to 5,432 in 2021, suggesting a distinctly growing momentum in general. And productivity of our high performing agents has also grown year-by-year as their per capita average annual premiums grew from RMB250,000 in 2018 to RMB320,000 in 2021. All this indicates that our agents are also diverging with Fanhua’s core sales force remaining stable and growing in quality.

[Foreign Speech] As for customers. the number of Fanhua’s high premium customers was over RMB100,000 annual premiums has also shown a distinctly upward momentum as the number of new high premium customers each year has been growing and the premiums contributed by repeated purchases have been increasing accounted for more than 30% of the total. This suggests that the middle class has been rising rapidly and the number of high net worth customers has been increasing as well.

[Foreign Speech] In 2021, despite a drop of 0.3% in the industry life insurance GWP, Fanhua managed to register RMB11.6 billion of total GWP, a year-over-year increase of 12.3%. First year premiums reached RMB2.8 billion, a year-over-year increase of 4.1%, among which first year premiums of whole life insurance grew by over 64% year-over-year. This again confirms the changes in customer demand and the contribution of highly productive high performing sales force to business growth as well as the fact that the quality improvement of agents are able to offset the adverse impact of downsizing and it also sheds light on Fanhua’s future path for development.

[Foreign Speech] The two datas that further confirming this trend; firstly, high performing high premium customers and new premiums of over RMB100,000 annual premiums contributed roughly 34% of our total first year premiums in 2021. And then number of agents who contributed over RMB100,000 first year premiums in 2021 amounted to about 5,000 of them contributed around 65% over total first year premium.

[Foreign Speech] Based on our judgment on the industry, Fanhua implemented in full strength the new strategy of professionalism, digitalization and open platform in 2021 in an attempt to fully empower and cultivate professional talents and also empowered the industry to take full advantage of the great opportunities brought by the rising demand for elderly care and family legacy management. In 2022, we will further execute development strategy of professionalism, digitalization and open platform with a focus on the following initiatives.

[Foreign Speech] We are planning to tap into high net worth market by offering referral of insurance trust and family trust services with a target to complete over 1,000 large ticket family legacy management policies and increase the amount of premiums contributed by high value customers who have paid no less than RMB100,000 premiums annually by 30% and this is made based on previous judgment on the industry and we leave that the contribution of high-value customers is on the rise, so that we pay our first focus on high-value customers demand. And our point here is to make sure to meet their demand for family legacy management first.

[Foreign Speech] Second, as high performing agents with RMB100,000 FYP contributes about 60% of the total FYP in Fanhua, we will focus on fostering and recruiting more productive agents through professional empowerment, customer resources offering and digital empowerment to meet the target of 30% growth in first year premiums contributed by highly performing agents with a RMB100,000 FYP within our existing sales force in Fanhua.

[Foreign Speech] Three, we expect to accelerate the advancement of the open platform strategy, benefiting from the favorable environment after the new regulations on Internet insurance took effect, through which we look to achieve the target of generating 10% of our first year premiums in 2022.

[Foreign Speech] Our goal is to transform Fanhua into a brand new digitalized and specialized company that demonstrate high growth in the next two years. 2022 will be a year of capacity building, laying the ground work for Fanhua to get back on track for sustained and high profit growth.

[Foreign Speech] This concludes my presentation and now the floor will open for your questions. Thank you.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Susan Wang of CICC. Your line is open.

Susan Wang — CICC — Analyst

[Foreign Speech] First, congrats to the impressive results of management in Q4 and I have two questions. First, after the new regulations of Internet insurance [Technical Issues] 2022 performance outlook.

And next one is about the product. We can see a rapid growth in the savings type products. Do we think this is a short-term adjustment or it is still to that the demand for protection product have picked. So how could we do better [Technical Issues] products and commission rate up sharply lower than that of the protection type. Thanks.

Yinan Hu — Chief Executive Officer & Chairman

[Foreign Speech] Concerning your first question regarding the impact of the Internet life insurance regulations, we do observe that a lot of small and medium sized insurance company have more positive attitude towards cooperating with this as well as designing new products. And so we believe that this new regulation is positive to our business development in general. In addition to that, we are observing that the integration between online and offline business has also shown the significant progress. And after the new regulations, a lot of online channels who used to distribute their business through Internet channels are willing to pursue cooperation with our open platform [Indecipherable]. Last year, we have generated about RMB40 million first year premiums through our open platform strategy and this quarter in the first quarter, we have already achieved about RMB30 million first year premiums and our target for 2022 is to deliver about RMB300 million to RMB500 million first year premiums. So in conclusion, we believe that this new regulation is definitely quite favorable to our development.

[Foreign Speech] For your second question regarding the product mix, we do observe a drastic change in our product mix in the past quarters and the past year. In the fourth quarter, whole life insurance and annual life insurance collectively accounted for 70% of our total first year premium as compared to 20% contributed by critical units products as compared to — in the first quarter, the percentage of whole life and annuity as compared to CI product is much lower. And also in the second quarter and third quarter, we are already seeing that the percentage of whole life and annuity has already [Indecipherable] CI products. This has clearly reflected the changing demands in customers.

As for whether or not critical illness product has reached its ceiling, we will not say that, but we do believe that the growth of critical illness insurance will slow down. And in the future, savings products such as annuity, pension insurance and whole life insurance will become the main products. In response to this changing demand, we will also address our methods of selling and first of all, our target group will change to those people in the age of 40 to 70 years and particularly those in the age of 50 to 60 years who are going into retirement, this group of people, the main beneficiary of China’s economic development after the opening up some and this also, other group of people who own the [Indecipherable] of the family. So as they’re going into retirement, they have strong demands for elderly care for legacy at the management etc. As this people also, the owner of the family wealth, they are the main buyers or they are the people who pay for family insurance policies. So this group of people will be our main target customers.

As I mentioned just now, each year there will be 215 million people going into retirement. So going forward, we’re going to address our sales method to assess this people’s needs for family as allocation services by offering retirement and legacy management services. And as I mentioned just now, there about the repeated purchases rate among our existing customers for whole live and annuity products are about 30%, which means that 70% of our existing customers have not on whole life and annuity products before, so that indicates significant room for further growth. Thank you.

Hope that answered your question.

Susan Wang — CICC — Analyst

[Foreign Speech]

Operator

I show no further questions in queue.

Oasis Qiu — Investor Relations Manager

Okay. Thank you for your attendance. If you have any follow-up questions, please feel free to contact me. Thank you.

Operator

[Operator Closing Remarks]