Fanhua Inc.
Q2 2018 Earnings Call Transcript

Published: 21 Aug 2018

[Operator:]

Thank you for standing by for Fanhua’s Second Quarter and first half 2018 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 & 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, Miss. Oasis Qiu, Fanhua’s Investor Relations Manager.

[Oasis Qiu:]

Good morning. Welcome to our second quarter 2018 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 United States 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, Mr. Chunlin Wang; Chief Financial Officer, Mr. Peng Ge and Board Secretary, Lily Lee [ph]. Mr. Wang will walk you through our financial results in the second quarter of 2018. And He, Mr Ge and Ms Lee [ph] will take your questions after the prepared remarks. Now, I will turn the call over to Mr. Wang.

[Chunlin Wang:]

Thank you for joining us on today’s conference call. Here with me, we have our Chief Financial Officer, Mr. Peng Ge and our Board Secretary, Mrs. Lily Lee. We will begin today’s call with a review of our second quarter 2018 financial results and the progress that we’ve made during the quarter, followed by a brief discussion of our business outlook for the second half of 2018. Then we will have a Q&A session after the report. In the second quarter of 2018 the central government’s increased efforts to deleverage and rectify market disorders so as to content [ph] initial risk. In the meantime, insurance regulators continue its drive to speed industry back to its primary growth of providing long term protection to consumers. Amid this backdrop new policy sales for most life insurance companies dropped year-over-year as the growth in the number of sales agents in the industry detonated while consumers were held back buying on expectation for more meaningful improvement in product designed for annuity and participating insurance products in the coming quarters. As far as Fanhua is concerned, in the second quarter of 2018, we continue to report strong results, with operating income growing by 77.2% year-over-year to RMB127.6 million beating our previous guidance of RMB100 million and that income attributable to shareholders growing by 22.4% year-over-year to RMB171.8 million. The earnings per ADS grew by 20% year-over-year. The stellar growth of operating income was mainly due to the faster than expected growth and new policy sales for life insurance products and the increasing contribution from renewal business, which generates higher gross margin than new business. Now let’s look at our life insurance business segments. During the second quarter of 2018, our life insurance segment posted strong performance across all of the key operational metrics. Total life insurance premiums grew by 69.8% year-over-year to RMB1.5 billion outpacing the overall industrial growth, among which first year premiums grew by 41.4% year-over-year to RMB715 million and with newer premiums increased by 109.1% year-over-year to RMB763.9 million. Of particular note, our new business started to show more impressive value. In the second quarter of 2018, our renewal premiums have surpassed first year premiums and the revenues contributed by renewal business as a percentage of total life insurance revenues have increased from 7.6% in the same period last year to 15.8% in the second quarter of 2018. Renewal business of long term record of life insurance products is crucial to the sustainable and sound development of the company over the long run as it provides the company with stable and recurring revenues and profits for years to come. In the meantime, the operation fundamentals of our life insurance segment remains quite strong as evidenced by the following assets. Firstly, our sales force continue to increase at a rapid pace with the number of registered sales agents growing 92.2% year-over-year to 630,995 and the number of performing sales agents for life insurance growing 97% year-over-year to 66,654. And secondly, the number of insurance policies sold during the second quarter of 2018 grew 143.9% year-over-year. And for that region, our first year premiums continue to grow by 41.4% year-over-year even though the average per policy premium for health insurance products which have become the main products for the company is much lower than that of annuity and endowment insurance products. Thirdly, annualized insurance premiums from the health insurance business were up 177.1% year-over-year accounting for 79.4% of our total life insurance business as compared to 42.7% a year ago. And fourthly, 13th month persistency ratio outperformed the industry average have remained above 94%. Let’s turn to P&C insurance business segment. In the second quarter of 2018, our P&C insurance segment recorded RMB91.8 million in net revenues, which represent platform service fee contributed by CNpad and commission income generated by Baoxian.com with the former contributing RMB5.8 million and the latter RMB86.0 million. Our P&C revenues in the same period last year mainly represented commission income from our auto and non-auto in P&C insurance businesses. And then in the second quarter of 2018, revenues of our claims adjusting business segment remained flat year-over-year at around RMB72.0 million. In the third part, I would like to share with you a few operational progress that was made during the second quarter. Firstly, our 521 Development Plan; we roll out the 521 Development Plan on June 14, 2018 after accessing the current market trends in our overall gross strategies. The trend is a mid-to-long term initiative to facilitate implementation of Fanhua model within them to cultivate and retain the key talent for the company. The plan is meant to motivate all Fanhua employees and sales agents to be more dedicated, professional and passionate in their works and attract them to take [indiscernible] in Fanhua and sales for Fanhua as well as levy [ph] a sense of some responsibility, sense of entrepreneurship and sense of innovation. Since we made the announcement, the plan has not only received highly – includes actions from our employees and entrepreneurial team leaders, but also attracted lots of attention from the industry. We are pleased with the effect it has achieved so far. Secondly, the progress in sales network expansion. In the second quarter of 2018, we continue to focus on enhancing our sales capability and thought of expanding our market presence in new regions. We added 39 new sub branches increasing the total number of our life insurance sales outlet upto 580 Thirdly, the development of our online platform and firstly CNpad, our auto insurance platform business which is built upon the CNpad has maintained steady growth. As of June 30, 2018 [ph] CNpad’s auto app has gathered and as of date of over 464,000 registered users at 57.8% year-over-year. Total insurance premiums transacted via CNpad Auto app was approximately RMB580 million which was flattish quarter-over-quarter. Secondly Fanhua, Fanhua maintained a strong growth in the second quarter of 2018, the number of its registered users exceeded 1.8 million, up 75.3% year-over-year and is active users which is 89,600 up by 96.8% year-over-year. Insurance premiums hit RMB560 million, representing an increase of over 11 times year-over-year, but a decrease on the quarter-over-quarter basis, the sequential decline was mainly due to the suspension of corporation with one of our products engine, which is a third party online lending platform as the underwriter decided to cut back underwriting business for such kind of platforms in view of the recent tightened financial regulatoryoversight. We do not have specific timeline for resuming the corporation at this stage. As for eHuzhu, it has been in operation for four years, gathering over 3 million effective paying members. As of June 31, 2018 it has helped more than 1000 families with RMB150 million funding raised through the platform. On May 30, 2018 eHuzhu launched an online fund raising platform for those contracted with serious disease [Indiscernible] allowing for the group of Chinese families as such to alternative solutions. As of day, there were 106 cases which have sought help through the platform and raised over 1.9 million funds [ph] in total. Apart from the operational progress, I'm proud to share with you the news that we have won a number of awards during the second quarter which truly demonstrate our brand recognition and growing marketing funds. Firstly, Fanhua was listed again as one of the top 20 global insurance brokers by A. M. Best in July 2018 and it has been on the list for four consecutive years. In July, 2018 Mr. [Indiscernible] President of Fanhua Insurance Sales Service Group Company Limited, our wholly-owned operating entity in China was presented the Insurance Master Golden Award in the Third International Insurance Festival and 2017 Insurance Master Award ceremony. In June 2018 in recognition of its outstanding and steady performance in 2017, Baoxian.com was awarded the Internet Insurance Platform of the year 2017 at the Third China Internet Insurance Conference [Indiscernible] was named the President of the Year 2017 at event. Last but not least, dividend declaration, based on the solid results of the second quarter 2018 our Board of Directors declared a quarterly dividend of US$0.25 per ADS to shareholders of record on September 5, 2018, payable around September 19, 2018. In the last part, I would like to share with you our view on the business outlook in the second half 2018. As statistics show the performance of the overall life insurance market in China was largely in line with our predictions made earlier this year, as we had expected most life insurers have been actively adjusted their business structure with much higher proportion of protection around their products in their total business mix. The raise in demand of the expanding middle-class in China for life insurance product has become and will continue to be a key catalyst to drive just sustainable growth of the life insurance market in China. As for Fanhua, despite the regulatory restrictions on short-term and fast-return savings around life insurance products and the potential negative growth in the Chinese life insurance industry, we remain confident to achieve positive growth in annualized life insurance premiums in 2018 and we believe the fast-growth and renewal business will continue which will become an increasingly more important source to our profit growth. And this allow us to raise our full year guidance for operating income from 40% to no less than 50% year-over-year. Looking ahead to the third quarter of 2018, in view of the extremely high base in the third quarter of 2017 owing to the swell of fast-return annuity and endowment insurance products our annualized life insurance premiums may decrease slightly year-over-year. However, we are still confident that we will be able to achieve no less than RMB100 million in operating income in the third quarter of 2018, based on the expected positive growth in health insurance business and continued fast growth in renewal business during the quarter. Thank you. Now the management will open the floor for questions. Hello, we are ready to take questions.

[Operator:]

Ladies and gentlemen, we will now begin the question and answer session. [Operator Instructions] Your first question comes from the line of Arthur Hall from Halco Incorporated. Please ask your question.

[Arthur Hall:]

Yes, and congratulations on an excellent quarter. Since health insurance is such an important part of your business, could you give more information on the type of insurance? Is there a death benefit in the insurance? What's the duration of the insurance and the renewal rates and the approximate operating margin on the health insurance? Thank you.

[Chunlin Wang:]

The types of health insurance product that we sell are mainly critical illness products. and duration is mainly in the range of like mostly a 20 years. And the gross margin for the first year commission is about 26%, and the gross margin for the renewal commissions is about 60%. So the average, the combined average is about 30%. Thank you.

[Arthur Hall:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Dan Tian from CICC. Please ask you questions.

[Dan Tian:]

There are two questions from Tian Dan. And the first question is that, our first year premiums and the renewal premiums grew by 70% year-over-year, while the revenues for our life insurance products only grew by 37%, and the gross profits from life insurance business also only increased by 19%. He is wondering what's the reason that the revenues growth was outpaced by premium growth? And the second question is about the progress of our 521 Development Plan?

[Chunlin Wang:]

Our first year premiums for life insurance products grew by 41.4% and the renewal premiums grew by 109%, so the combined total life insurance premium increased by 69% -- roughly 70%. And for the renewal business the commission rates is about 17% on average. And while we mentioned before the first year premium is about 122%. So I think one of the reasons that our revenues growth was lower than the premium growth. And the reason that the gross margin growth was lower than the premium growth, because we recognized a performance bonus half quarter to half quarter performance bonus of RMB30 million which increase the gross profits for our life insurance business late year, the same period last year. And the performance bonus was basically calculated on the combined sales volumes of our sales agents and the payment of such kind of performance bonus was not in a fix – was based on fixed timing. So last year the performance bonus was recognized in the second quarter and for this year it's possible that we may have similar kind of performance bonus in the third quarter. Since we announced the plan to the capital market and all members of the company on June 14, we organized a meeting attended by all the [Indiscernible] agency subsidiaries and branches to give full accounts of all details about the 521 Development Plan and to hit the subscription process. As of date, the number of applicants for participating in the plan has exceeded 2300 persons. We expect the whole transactions to be completed by year end. Thank you.

[Operator:]

[Operator Instructions] Your next question comes from the line of Leon Lu [ph] from ALS [Indiscernible] Management. Please ask your questions.

[Unidentified Analyst:]

There are two questions. The first question is regarding our next quarter guidance. Well, the guidance that we provided for the next quarter is slightly lower than the second quarter; just wondering what's the reason? Is it because we expect that the business growth was low down or is it because of the change in business mix? And the second question is about management’s view -- what's the management view about growth outlook for next year?

[Chunlin Wang:]

Last year actually we have created record high sales because of the product ban on the fast return type of annuity and universal products in October, 2017. So based on this high base, and we expect that this is possible that our first year premiums may decline year-over-year and that’s just the base that we predict our profit guidance. And as for the business structure, we believe that it will remain more or less the same with health insurance still be major products contribution. It was because we do expect that the premiums volume may also be lower than the second quarter. But we do expect that our business and profits will bounce back up in the fourth quarter. So basically the seasonality in this year would be a quite a stark contrast to that in 2017. As for the outlook for 2019, firstly for 2018 we had mentioned in the prepared remarks that we are confident to achieve positive growth in first year premiums and increase our operating profit guidance from 40% to 50%, but for the industry we do think that it will be a year of corrections, year of adjustment for the industry in 2018. And however after the adjustment in 2018 we've seen that the industry will resume profit growth in 2019 and after. We remain confident about the growth outlook for 2019. Thank you.

[Operator:]

There are no further questions at this time. Presenters, please continue.

[Oasis Qiu:]

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

[Operator:]

Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may all disconnect.