Fanhua Inc.
Q2 2015 Earnings Call Transcript

Published: 20 Aug 2015

[Operator:]

Thank you for standing by for the CNinsure's Second Quarter 2015 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 CNinsure's IR website at ir.cninsure.net, 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, CNinsure's Investor Relations Officer.

[Oasis Qiu:]

Good morning. Welcome to our second quarter 2015 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 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 is our Chairman, Mr. Yinan Hu, Chief Executive Officer, Mr. Chunlin Wang; and Chief Financial Officer, Mr. Peng Ge. They will walk you through our financial and operating performance in the second quarter 2015, and take your questions after the prepared remarks. Now I will turn the floor over to our Chief Executive Officer, Mr. Chunlin Wang.

[Chunlin Wang:]

Thanks to all of you for joining us this morning. It's our great pleasure to have our Board Chairman, Mr. Yinan Hu and our Chief Financial Officer, Mr. Peng Ge on today's conference call. On today's agenda, I will start by giving you an update on our financial result for the second quarter 2015 and follow by our plan in the second half of the year. After that I will hand to rest of the management team to facilitate your questions after the prepared remarks. During the second quarter of 2015 total insurance premiums in Chinese insurance industry grew by 17.6% year-over-year with P&C Insurance and life insurance sector of 9.3% and 23% year-over-year respectively. And we are pleased that we further extended our market leadership in the insurance and leading sectors with total topline growth of [13.1%] [ph] in the second quarter 2015. The strong growth also reflected the growing contribution from our online and mobile initiative with the proportion of net revenues generated by online and mobile initiative increasing from 10.3% a year ago to 25.8% in the second quarter 2015. As more sales agents are adapting CNpad Mobile Apps to conduct business, we will continue recruitment in operational efficiency in - as evidenced by a job in adjusted operating expense ratio from 19.5% in second quarter last year to 16.8% this second quarter. As a result, adjusted operating income was up by 50% and basic earnings per share for ADS grew by 26.1% year-over-year to RMB1.39. Looking at the nature of our business plans, net revenues of our insurance agency business was up 34.3% from the five year quarter's with robust growth with both P&C and life insurance sectors. Our P&C insurance agency business was up 35.3% year-over-year, CNinsure is about - an increase in commission by and also aside more growth of 15.3% from the year ago quarter, which is substantially higher than the 9.3% asset growth. And one of the key drivers was expanded implementation of CNpad Mobile App. Within our life insurance agency business segment, the year-over-year rebound starting from the fourth quarter 2014 to 2015 to the second quarter 2015. The total net revenue of life insurance agency business grew by 28.3% year-over-year, driven by 31.1% and 43.6% year-over-year growth in revenues from new policy sales, and renewal commission increased respectively, which was partially offset by the decrease in revenues from short-term life policies. And the growth of new policy sales mainly comes from a rapid growth of long-term premium health insurance products, which generally have high industry value. Health insurance products stood at 80% of new policy sales during second quarter of 2015 compared to only 45% in the same quarter last year. 13 months [technical difficulty] maintaining a leading position across the industry. Our brokerage insurance business continued the strong growth momentum in the second quarter of 2015 with 26.2% year-over-year growth mainly coming from our continued adverse to go-to market and accumulate customer base. And now it has become a second largest segment in our company. Net revenues from our insurance claims adjustment business dropped 12% year-over-year mainly due to a decline in our auto P&C insurance claims adjusting cases because of fewer natural disasters and also because of job in our auto related business as one of our insurance business partners reduced claim service outlook to third-party service provider. We will increase before the 4Q the claims adjustments settling and hope that the situation will be gradually reversed in the next quarter. We are maintaining solid growth in our traditional offline business, we continue to enhance investments in our online initiative, and we were pleased with the progress we made online and I will now discuss the four specific examples. Firstly, CNpad mobile app as of the second quarter of 2015, auto insurance products from 41 P&C insurance companies and line insurance products from five life insurance companies were available on CNpad app. As we got more products supply, we continue to improve user experience, both downloads of CNpad app and transaction volumes on mobile devices grew substantially. Cumulative activated downloads for CNpad app were 76,000 copies, among which about 12,492 copies were newly activated in the second quarter and approximately 28,000 active users contributed over RMB630 million insurance premiums in the second quarter representing a year-over-year growth of 158.1%. As we strive to push forward the transition of our auto insurance business and also life insurance new policy sales from offline to online approximately 50% of the auto insurance business and 26% of our life insurance new business transacted through CNpad mobile app in second quarter of 2015. Secondly, eHuzhu just celebrated its first anniversary since it's launch in July 2014. As of today, the cumulative number of registered members has topped 350,000, up over 22% quarter-over-quarter and the record growth in members demonstrated that eHuzhu has gained wide recognition by the public as a platform that provides effective low cost risk aversion solution. As of the second quarter of 2015, five donations have been made and with the total donation amount of RMB2 million. While we continue to initially review with some more people, we also found that eHuzhu helped establish closer bonds between our sales self extended claims and has generated core selling opportunities for sales agents. eHuzhu is also a perfect example of how we are exploiting opportunities in China's rapidly growing share economy. During the second quarter, we are especially excited about getting more corporations and institutions to subscribe to you eHuzhu membership plans for their employee as part of their employee benefits or for their clients as additional value added focus. Thirdly, Chetong.net, as of the second quarter 2015, Chetong.net has over 16,000 registered service representatives and has reestablished corporation with 32 insurance companies or health insurance organization. This network covers 98% of the provincial cities and 66% of the counties in China. During the second quarter, approximately 59,000 insurance premiums in total representing an increase of 73.5% quarter-over-quarter. Those momentum accelerated each month and over 30,000 claims were processed in one single month in June. Firstly, Baoxian the official name of our auto insurance policy comparison website which in English means way to buy insurance. We have started internal trial operation of the website and anticipate an official launch on August 31, 2015. We are targeting to establish through proceed transaction enabled give us system assets or EBI connections with eight insurance company by the end of this year. Baoxian will also as Open Platform that allows other third party online insurance sales platforms to access our product offerings and offline service products. Starting from last year there have been a lot of new developments on the regulatory front which is the new guidelines issue last year and also strength on the launch rollout this early this year and also the life insurance policy and evaluation of last year. In early May 2015 the insurance law was amended which renewed the requirement for agencies to obtain further certificate from the CRRC before [indiscernible] from the regional, industrial, and commercial bureau and also higher – by the CRRC [indiscernible]. Fortification certificate is also no longer required for sub agents and brokers who could drop business. Then in July 2015, the regional measures on the position of international business was from small basis which sets forth defenders of the online strength of our operations. And for the insurance organization and also third-party online platforms as a new divisional institution for online sales of certain insurance products. This regulations and policies provide both challenges and alternatives for insurers. Against this fair job in the second half of 2015, we’ll focus our efforts on three programs to accelerate market expansion and drive better growth, mainly the sales network full coverage program accelerated growth of search programs and platform opening-up program. Firstly two different coverage of sales network programs as of today our sales network which is 17 provinces and unique provinces out of the 34 provinces in China. However, there are still 17 provinces and 69 city where the currency have no market percent and this region consider over RMB700 billion insurance premiums in 2015 of approximately 35% of the total market shares. This represent a huge market opportunities for insurer. The market consolation opportunities presented by the deregulation on life insurance planning or insurance agencies will aim to achieve full coverage of our offline sales network in regions where we currently have no market presence and we’ll review this through attachment of new branches to division or franchisees. We also aim to further enhance our online presence by pursuing horizontal alliances and make strategic investments in entrepreneurial companies focus on internet insurance subscription and service. Secondly, Accelerated Growth of Sales Force program, in China there are over 10 million individual insurance sales agents right now. We have been in major distribution channels in Chinese insurance market which should be approximately 40% of the total market share. Looking at the Accelerated Growth in developed insurance market, such as the United States where 56% of life insurance and 30% of broker insurance was still so high individual sales agents or brokers in 2013. We believe that individual subagent will remain a major distribution in the next two years in China. The recent amendment to the Insurance Law has removed certificate requirements on insurance sales agents and brokers which we believe will provide an excellent opportunity for us to consolidate the individual sales agent channel. By targeting the 3 million insurance sales agents, we will increase our marketing resources and give them access to a wide range of insurance and financial products and use our online tools to attract more top talent to join CNinsure and rapidly grow our sales force. Thirdly, Platform Opening-up program, we will open up our integrated platform to peer companies, alliances and insurance companies, including our online tools, IT infrastructure, contractual relationship with insurance companies and offline service support. This program is in line with our positioning to become an online insurance partner and service platform provider to third-party vendors and business partners. Our other three major programs, we expect our top line growth to accelerate in the second half of 2015 and we believe we are on track to achieve 30% annual top line growth and 10 billion insurance premiums in 2015. And in the medium term, we expect - and we aim to achieve a target of doubling insurance premiums with a 30% CAGR growth within the next three years further strengthening our market leadership. Thank you. Now, our CEO, Mr. Wang Chunlin, and our CFO, Mr. Ge, will open the floor for your questions.

[Operator:]

[Operator Instructions] The first question comes from the line of Henry Guo of Summit Research. Please ask your question.

[Henry Guo:]

Hi, thanks for taking the question. So, congrats on the strong results. So, one question is really about the investment in the margin. So, since the margin is weather impacted - so, what's the factor behind that, do you – much money in the quarter, or how should we think about the near time the margin trend? Thank you.

[Oasis Qiu:]

Henry, could you repeat the question. In what kind of -

[Henry Guo:]

I'm sorry about that. So, regarding the margin in the quarter - since the operating expense is less than I expected. So, what's the reason behind that and how should we think about near term trend in terms of margin?

[Oasis Qiu:]

You mean the improvement in margin?

[Henry Guo:]

Yes.

[Chunlin Wang:]

There are two reasons for the margin improvement. First of all is the expense ratio, there is a drop in the expense ratio due to wider application of our Mobile App. And then secondly, we are receiving more higher commissions from insurance companies which allow us to benefit from the margin spread and we believe that the margin now will remain stable in the next quarter.

[Henry Guo:]

Great, thank you.

[Operator:]

[Operator Instructions] The next question comes from the line of Zhu Ling of BBA. Please ask your question.

[Zhu Ling:]

The question is from Zhu Ling, and the first question is with regard to CNpad contribute about 630 insurance premium in the second quarter, and how about revenue, how much revenues did CNpad contribute in the same quarter? And the second question is about Baoxian, which we trying to launch in the third quarter, is it a similar model of Chetong operated by Alibaba, what kind of business model it is?

[Chunlin Wang:]

The 630 insurance premium generated by CNpad translated into about RMB180 million are in commission revenues, basically in line with our offline revenue model. Baoxian is a third-party auto insurance comparison website, while [indiscernible] online is an insurance company and as far as we know they haven't started to sell auto insurance yet. So the major difference is that we are an insurance distributor, while [Guangdong] [ph] is an insurance company a part of the supplier. Guangdong has just obtained approval from CRCC to sell auto insurance. So, once they roll out their auto insurance product, I think this product may also be available on our Baoxian website. Does that answer your question Zhu Ling?

[Zhu Ling:]

The third question is about the auto insurance pricing deregulation, will they be rolled out this year?

[Chunlin Wang:]

A pilot program has been rolled out with regard to the auto insurance pricing deregulation program. It has been - the program has been rolled out in six provinces on June 1st. And under the new scheme as far as we know, the price - the premium level, there is not much change with the premium level, and as for the commission level, there was a slight drop in the first month in the beginning, but it gradually returned to the same level. So, we believe that the auto insurance pricing deregulation will be implemented on a steady pace and it will not trigger immense change in price so that we'll be entailed for – over market. In the six provinces, there are three provinces including Chongqin, Shandong, [Shaanxi] [ph] provinces where we have our market presence. And according to the feedback that we have got so far, there is not much impact on our business operations but we do believe that as the results depends it will be priced to our advantage and it will create a better competitive environment for CNinsure. Thank you.

[Operator:]

[Operator Instructions] The next question comes from the line of Jenny Jiang of Morgan Stanley. Please ask your question.

[Jenny Jiang:]

There are two questions from Jenny, and the first one is about baoxian, our comparison website. It is a new model and it's quite different from the traditional offline sales agency model that CNinsure has relied on. And as far as you know, we have spend a lot of time to negotiate with insurance company in terms of contract and also system directs our connections. So, what's the difference between the commission -- in terms of the commission level online and offline and also what is the profit margin for this online model? And the second question is about, is that, a lot of U.S. listed Chinese companies have announced their privatization plans, what Management told about this kind of involvement.

[Oasis Qiu:]

So Wang will take the first question and our Chairman will answer the second question.

[Chunlin Wang:]

Baoxian has a major difference with our traditional and offline business model in it's nature, CNpad mobile app is used by our sales agents but baoxian is directly dealing with direct consumers. Right now about 70% to 80% of the major insurance companies do have appreciated value of third-party comparison models and we believe that 70% to 80% of these companies will give us direct assets and put their products on our website. From our technical point of view, we believe that we can get older products from old insurance companies on our website. The commission level is slightly lower than the traditional business model -- for the online model the commission rate is lower than the offline model. The price will be lower as well, but we believe that the profit margins will be higher than the traditional model. They should be higher than the traditional model. Now Mr. Hu Yinan will answer your second question.

[Yinan Hu:]

We have not received any privatization offer yet as of today, and also the Management as the bigger shareholder of the Company has no intention to take the Company private. Our focus - the Management's focus will remain on implementing our O2O strategy and we also believe that this is the best way to create long-term value for shareholders. Also I notice that the Internet price has become a very hot talk in China and the talk about Internet finance and Internet insurance have been very popular among the first domestic stock market and as a result there are over 10 district companies - ATR district companies have tried to tap into the insurance sector in one main or another. And several Chinese listed companies has also expressed strong interest to invest in insurance and we welcome this opportunities and we can introduce some strategic investors especially those companies listed in Asian market so that to expand our interest in the domestic market and also to enhance our capability to consolidate the market resources.

[Operator:]

The next question comes from the line of Andy Nahas of Prospect Fund. Please ask your question.

[Andy Nahas:]

Yes, first of all thank you for deciding not to privatize the company. We appreciate that. Also I wanted to ask you, when you spend money to get new customers its actually very important, very helpful to try to retain those customers beyond the first year, so I wonder if you could just give me some type of comfort or explain how you feel that you can continue to keep those customers beyond the first year so that they will renew with you and stay with you.

[Oasis Qiu:]

Into the online claims and offline claims?

[Andy Nahas:]

Well, both.

[Chunlin Wang:]

So basically in insurance we have to wait to retain the partners, firstly to offer more diversified product offerings to customer so that it can - it’s opportunistic for us to pop out on products to them. And then secondly, we will provide better services to them to provide more value added services and also differentiated services to increasing segments of customers.

[Andy Nahas:]

Thank you.

[Operator:]

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:]

Thank you everybody joining the conference. If you have any further questions, please feel free to contact us. Thank you.

[Operator:]

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.