Fanhua Inc.
Q3 2018 Earnings Call Transcript

Published: 21 Nov 2018

[Operator:]

Thank you for standing by for Fanhua’s Third Quarter 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 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. 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 & Webcasts 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, Miss. Oasis Qiu, Fanhua’s Investor Relations Manager.

[Oasis Qiu:]

Good morning. Welcome to our third 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 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, Mr. Chunlin Wang; Chief Financial Officer, Mr. Peng Ge; and Board Secretary, [Lily Lee]. Mr. Wang will walk you through our financial results in the third quarter of 2018. He and Mr. Ge, Mrs. Lee will then 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 third quarter 2018 financial results and the major progress that we made during the quarter, followed by a brief discussion of our business outlook for the fourth quarter 2018. Then we will have a Q&A session after the report. To begin with, I would like to give a brief analysis of the industry dynamics. Since early this year, government's efforts to rectify the order in the financial markets are said to continue. Deleveraging, removal of implied guarantee returns, cracking down on illegal fund raising are the main things. Meanwhile insurance regulator continues its emphasis on long-term protection of products capping the guarantee returns on savings type of insurance product and restricting the fast return features for those products, which formed stark contract with the aggressive wealth management products offered by the bank in the first half of 2018. As a result, consumers were held back from making decision to purchase savings products which directly led to a decline in sales agents’ income and damper their moral thus resulting in obvious job in sales agent’s prosperity and active ratio across the industry. And as a result, negative growth in first year premiums of regular personal life insurance business, which is the most valuable insurance business, has seemed to become an inevitable reality across the industry for the full-year 2018. Against this backdrop, we continue to report strong profits for the third quarter 2018. Operating income was up 48.7% year-over-year to RMB124.6 million, again, beating our previous guidance, and net income increased by 73.9% year-over-year to RMB195.2 million. Now, let’s look at the performance of our three business segments. Firstly, the life insurance segment, our total life insurance premiums hit RMB1.5 billion in the third quarter 2018, up 10.6% year-over-year of which new business in terms of annualized premiums equivalent was down 28.9% from a year ago to RMB394.5 million as we had previously expected. Mainly caused by the high base in the same period last year and a change in our product structure. As a result of the Notice NO. 134, the sales of fast return type annuity products exploded in September 2017. In the meantime, guaranteed returns from annuity products declined after new rule took effect. As a result, annualized premiums equivalent from high-ticket annuity insurance products dropped significantly in the third quarter 2018 accounting for 11% of our total renew business as compared to 49% same year last year. Health insurance business however, despite the fact that the per policy amount of health insurance products is typically less than half of annuity products, remain strong growth during the quarter, up 101.4% year-over-year in terms of annualized premiums equivalent taking up 82% of our total life insurance new business as compared to 28% a year ago. We are particularly encouraged by the performance of our renewal business due to the strong growth in new business of our life insurance segment in the same period last year and benefitting from our outstanding renewal business management, renewal premiums grew 109.5% year-over-year, which is one of the key drivers behind the continued rapid growth in our operating profits during the quarter. Gross margin of our life insurance business improved significantly during the third quarter 2018, largely attributable to the increase in the contribution from renewal business which represented 20.6% of our total new revenues in the third quarter of 2018, as compared to 9.3% in the third quarter 2017. While the performance of our life insurance new business was largely in-line with our prior expectations, we anticipate annualized premiums equivalent of our life insurance business to achieve solid growth year-over-year in the fourth quarter of 2018. As such, we maintain our estimate of positive growth in new life insurance business in terms of annualized premiums equivalent for the full-year 2018. Second, the P&C insurance business segment. Revenues from the P&C agency segment in the third quarter 2018, mainly represented RMB8.9 million platform service fee and RMB14 million commission income from Baoxian.com. The decline in net revenues in this segment was mainly due to the transition of our auto insurance business towards a platform fee-based business model and the Baoxian.com's termination of business cooperation with one of its major business partners, a third-party online lending service provider since June 2018. Despite the decline in revenues as the gross margin from platform service fee is 100%, the overall gross margin from our P&C insurance business improved from 13.7% to 34.4% in the third quarter of 2018. Thirdly, the claims adjusting segment. The claims adjusting segment reported solid performance was 9.9% year-over-year increase in net revenues was gross margin improving from 41% a year ago to 44.8% in the third quarter of 2018. Second part, I would like to discuss the progress we made on expanding our sales network. Firstly, as of September 30, 2018 total number of registered sales agents exceeded 716,000 representing a growth of 73.1% year-over-year, while total number of agents who have sold life insurance policies during the third quarter reached 44,686. And secondly, we are happy to welcome over 10 industry veterans to join us during the third quarter who will serve as the general managers or deputies of our provincial branches. With their prior working experience in Top 5 life insurance companies, we believe that their expertise will enable to the company to further improve our business operations to become more professionalized. Certainly, in the next part, I will like to give you an update of the solid progress that our online platforms have made during the quarter. Firstly, CNpad. As of the end of the third quarter 2018 total registered and activated users were over 496,000 representing an increase of 49% year-over-year, and RMB419 million or total insurance premiums were transacted through CNpad during the quarter, representing 84.5% of our total auto insurance business. Secondly, Lan Zhanggui. As of the end of the third quarter 2018, registered users of Lan Zhanggui has exceeded 716,000 worth RMB480 million premiums transacted through the platform during the third quarter of which RMB373 million were – 37.3 million were P&C insurance premiums and 415 million were first year premiums of life insurance products, accounting for 93.6% of our total first year premium. Thirdly, Baoxian.com. The number of its registered users exceeded 2 million, up 66.7% year-over-year. And its quarterly active users reached 140,000, up by 98.3% year-over-year. Insurance premiums transacted through the platform were over RMB72.4 million and the declines year-over-year was mainly due to the termination of cooperation with a Fintech Company in June, but its regular business on the other hand still maintained rapid growth. Fourthly, eHuzhu. eHuzhu has reported a net increase of nearly 300,000 registered members each month. As of September 30, 2018, its registered members have hit over 3.8 million with effective paying members exceeding 2 million. In four years, since its launch it has helped more than 1,495 families with RMB250 million fund raised through the platform. Yigizhu, an online fund-raising platform for those contracted with serious disease under eHuzhu has helped 844 families to raise a total of RMB3.9 million funds. Next, I would like to share with you some recent major developments. Firstly, I would like to take this opportunity to congratulate CNFinance on its successful listing on New York Stock Exchange on November 7, 2018 under the ticker symbol of CNF. After its IPO, our share holding in CNFinance is diluted from 20.58% to 18.6%, but as we still have a seat on its board, the investment will still be accounted for under equity method. And then secondly, as we previously announced as part of Tianfu New Area’s investment introduction project, Fanhua Lianxin Insurance Sales Company, our wholly-owned subsidiary which is the holding company of our life insurance operation, completed the relocation and registration of its office from Beijing to the Tianfu New Area of Sichuan Province on August 27, 2018. As a result of the relocation on November 2, 2018, the company received a one-time reward of RMB8 million from the local government. Fanhua Lianxin will also be eligible to enjoy certain favorable tax achievements and fiscal incentives in proportion to its contribution to the local economy. After the relocation we have resumed collection of headquarters to headquarters commission receivable from our life insurance company partners, which had previously been suspended. We expect our operating cash flow will return to normal levels afterwards. In addition, persuaded to its policy of attracting investment to develop the local economy, in 2016 the Renshou County government in which the Tianfu New Area is situated, expressed its support for Fanhua to publicly bid for a parcel of land in the Tianfu New Area to establish a back-office center. As Fanhua had neither a license nor interest in real asset development, on July 16, 2016 Fanhua established a joint venture with an independent third party real-estate developer Sichuan Tianyi Real Estate Development Company for the sole purpose of developing the parcel of land. Under this arrangement, Sichuan Tianyi will be responsible for developing the land and providing all funding for the development, while Fanhua will not provide any loan guarantee or any other funding for the development. Upon completion of the real estate development, Sichuan Tianyi would keep all the profits from the sales of the development properties and Fanhua will have a right to purchase certain properties at a discount. As of today, the project is still under development. Looking ahead to the fourth quarter of 2018, we expect annualized premiums equivalent of our life insurance business to grow by no less than 35% to RMB416 million from RMB340 million in the same period last year. For full-year 2018, annualized premiums equivalent of our life insurance business is expected to achieve positive growth and operating income to grow by no less than 50% year-over-year. We are optimistic about achieving these targets. Now, the management will open the floor for your questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Dan Tian from CICC. Please go ahead.

[Dan Tian:]

The question is from Tian Dan and he has three questions. Firstly, the company reported strong growth year-over-year in number of sales agents in the third quarter. He would like to know whether the company has kept a record of our active sales agents? The number of our active sales agents each month, or what is the active ratio of those sales agents? And the second question, insurance company have started preparing for the year opening sales in 2019 and as far as the information he has got the situation seems a bit challenging and he wonders what preparation we have made for the year opening sales in 2019, and what are our tactics for the year opening sales? And what’s our expectations for the growth of our life insurance business next year? And the third question, recently there is an officer from the CBIRC who talked about a reform, a possible reform on the sales agent’s organization model, what is your view on this potential reform?

[Chunlin Wang:]

Since we started our expansion to achieve the target of 1 million sales agents by 2019, the net increase per month of our sales agents is basically in line with our expectations, which is the net increase -- we have maintained a net increase of like 25,000 agents per month. And as I mentioned just now, we have also attracted a lot of senior managers from top life insurance companies to join us, which is a good demonstration of the acceleration of the trend of division of labor and the division of the manufacturing from distribution. And however, due to the restriction on the annuity products and – like savings type of products the active ratio of sales agents is somewhat effected. And as we think that this is a normal phenomenon in time of correction or in time of adjustment of the industry. And so, for Fanhua, the active ratio of our agents is relative stable and right now basically 50% of our registered sales agents are active agents in terms of selling all types of products or having all kind of sales activities, including for selling like auto insurance, P&C insurance and the accidental insurance and life insurance or have recommended someone to join our eHuzhu platform. And for the monthly active agents for life insurance business, this is the key metric that we are more focused on, and currently the number of active life insurance agents is probably 5% of the total registered sales agents or 10% of the active agents. So, in 2018, particularly in the third quarter, we do see a somewhat decline in the monthly active ratio of our life insurance agents, mainly because of the adjustment in the products, as well as the rapid increase in a number of our sales registered sales agents. But we would definitely need to put more focus on increasing the active ratio of our sales agents going forward. As for the year opening sales in 2019, I think life insurance company kind of in an awkward situation on the one hand they want to put more focus on achieving their full-year operating targets in 2018 and in the same time they need to set a target for the year opening sales. So, as for – based on the information that we have gathered so far, each insurance company gives different – has different tactics for the year opening sales. And now our year opening sales pays remain consistent with that in past years and we have made the full preparations for the year opening sales. Firstly, we have already completed the products and the contract arrangements with the insurance companies, and we expect that in 2019, there will be more better performance in the sales of savings type of products, participating type of products because we think that consumers will have better digested the change in the product designs in the savings type of products, and they will be more willing to buy the savings type of products driving the sales of this type of products. And then, we will hold an annual meeting on December 10, which will last like 5 days, by that time we will deploy the specific tasks for the next year, and we look forward to a good performance in the year opening sales. And the third question regarding to the stage 5, the deputy director of the intermediary division of the CBRC, firstly I think that the comment actually is not really quite official because the comments were made in the speech in the forum, which is more like academic communication rather than an official attitude by the regulator. We are fully convinced of two trends. Firstly, the sales of long-term regular life insurance products will still be mainly sold through individual sales agents. And then secondly, we firmly believe of the trends accelerating trends of the divisions of manufacturing from distribution.

[Dan Tian:]

Thank you.

[Operator:]

Our next question comes from the line of Arthur Hall from Halco. Please go ahead.

[Arthur Hall:]

Hello and thanks for taking my call. The only question I had was the top three insurance carriers for the quarter, has that changed at all? Who were the top three for the life insurance carriers and what was that percentage and how do you see that changing?

[Chunlin Wang:]

We maintain normal and active cooperation with our business partners and still a lot of new insurance company are trying to pursue cooperation with us. Basically, there are three criteria that we will look for when we select our business partners i.e. the product offerings and their services, as well as their technology support capability and right now more and more insurance company fit into these criteria. As for the top three in the third quarter, Huaxia accounts for 31% of our total life insurance revenues and Tian'an represents 21% and the Aeon takes up 26%. And other companies like Taikang ICBC-AXA also have been quite active to pursue the cooperation. And we expect that the cooperation with Aeon, Greatwall, and Evergrand will have more positive performance in 2019. Thank you.

[Arthur Hall:]

Thank you and congratulations on a good quarter.

[Chunlin Wang:]

Thank you.

[Operator:]

Thank you. [Operator Instructions] I will now hand back to management for any closing comments.

[Oasis Qiu:]

Thank you for joining us on today’s call. If you have any further questions, please feel free to reach out to us. Thank you.

[Operator:]

Thank you so much. Ladies and gentlemen, that does conclude the call for today. Thank you so much for your attendance. You may now disconnect.