Fanhua Inc.
Q3 2023 Earnings Call Transcript

Published: 21 Nov 2023

[Operator:]

Thank you for standing by for Fanhua's Third Quarter 2023 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 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.fanhgroup.com under Events and Webcast 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, Ms. Oasis Qiu, Fanhua's Investor Relations Manager.

[Oasis Qiu:]

Thank you. Good morning and good evening, everyone. Welcome to Fanhua's third quarter 2023 earnings call. A replay will also be available on our website after today's call. During this call, we will be discussing some non-GAAP financial measures and a reconciliation of the differences between the GAAP and non-GAAP financial measures are available in our earnings release. And finally, please note that the discussion today will contain forward-looking statements made under safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are made based on management's current expectations and beliefs concerning future events may impact the Company and therefore, may be impacted by a number of business risks and uncertainties that could cause our actual results to differ materially from those projected or stated. 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 its forward-looking information, except as required under applicable law. Joining us today are our Co-Chairman and Chief Executive Officer, Mr. Yinan Hu; Co-Chairman and Chief Strategy Officer, Mr. Ben Lin. Mr. Hu will start the call by sharing his view on recent market trends and our strategy proposition, followed by Mr. Ben Lin, who will provide a review of financial and operational highlights and discuss our business outlook going forward. There will be a Q&A session after the prepared remarks. And please note that you can find our presentation material relevant to this call from our official website. With that, I will turn the call over to our Co-Chairman and CEO, Mr. Hu; and Ben Lin, our Co-Chairman, will translate for Mr. Hu. Mr. Hu, you may begin.

[Yinan Hu:]

Good morning and good evening. Thank you for joining us on our Q3 earnings call. In the wake of the pricing rate change for life insurance products, the life insurance sector has experienced evident fluctuations in premium growth, with a period of very strong growth from second quarter to July followed by a significant slowdown from August to October. But notwithstanding this challenging environment, the execution of our key strategies continue to pay off. Over the past two quarters, both the insurance industry and the intermediary market that we operate in, including our operations, have inevitably faced significant impact from regulatory policy changes. I would like to take this opportunity to discuss our perspective on these changes. Starting from first of August, the life insurance industry has officially entered the era of a 3% pricing rate cap for traditional life insurance products. In the short term, the restoration of customer demand may take some time. However, in the longer term, considering the backdrop of declining bank deposit rates, we believe that traditional insurance products with a 3% guaranteed interest rate remains an attractive defensive asset class. In addition, we also expect that the regulator will extend the recent commission rate changes in the bancassurance channel to the agency and independent broker channels in the coming months. While the short-term impact of both the pricing rate adjustment and the enforcement of commission rate caps could present significant challenges to the entire insurance industry, we maintain the perspective that, in the long term, these policy implementations will steer the industry towards a more higher quality and sustainable growth trajectory. We anticipate that the future development of the industry will shift gradually from being driven by product and sales commission to be predominantly driven by technology and services. This implies that companies with innovative services, technological capabilities and ample capital will enjoy a more favorable position. The strong players are likely to become even more dominant, leading to a trend of consolidation and increased market concentration. This trend is not only evident at the level of insurance companies but is also applicable to the intermediary market. We think the scenario of a few major intermediaries dominating this market is a possible outcome following these regulatory changes. We envision that the future trajectory of the intermediate market will see larger companies transitioning towards platform-based operations, and we expect to see a large number of small- to medium-sized brokers to either exit the market or choose to work with larger broker platforms in order to survive. These collaborations could involve platforms providing essential mid-end and back-end support enabling these companies to lower their fixed costs relating to IT, compliance, operations and training. This allows them to focus more on customer acquisition and relationship management at the forefront and enable them to enhance differentiated service capabilities to achieve sustainable business development. This emerging trend aligns well with our open platform strategy. In fact, this is a catalyst that we previously thought could take years to materialize, but it is now looking more likely to take place in early 2024. In essence, these changes should help expedite our transformation from a sales-focused company to a platform-centric entity. This, in turn, should give us the opportunity to gain more market share and grow our scale advantage. We are also looking to intensify our collaborative efforts with our key product suppliers, the small- and medium-sized insurance companies to foster stronger and mutually beneficial partnerships. Leveraging our stronger capability in sales, technology and customer service, we aim to extend our relationship with our product suppliers beyond sales and distribution but also in IT and services. In turn, we aim to generate a more diversified revenue stream from our insurance partners. With greater scale and market dominance, we aim to work closely with our partners in product development and develop greater pricing power. We remain confident in the future prospects of the industry and firmly believe that our company's strategy positions us well to capitalize on numerous opportunities in the evolving market landscape. We are dedicated to advancing the implementation of our established strategies with a commitment to delivering long-term value for our shareholders. I will go over this in English just to save us time, and we'll allocate more time for the Q&A later. So I'm pleased to present our latest earnings results for the third quarter of 2023. The pricing changes to life insurance products effective from August caused a spike in new business sales in July, which was then followed by a slowdown in sales in August and September as our insurance partners take time to adjust their new product offerings. Despite this disruption, our results over the quarter was solid, and we remain confident that our strategies are working well, allowing us to persevere even under a volatile industry environment. The key highlights of our third quarter results include total life insurance premium grew by 23% year-on-year to RMB3.4 billion. First year premium grew by 10.3% to RMB584 million. Net income attributable to shareholders came to RMB117.7 million, representing a significant year-on-year increase of 382%. This uplift is largely due to an unrealized gain from our investment in Cheche Technology Limited, in which we hold a 2.8% stake and they recently went public. Fanhua disposed our P&C division back in 2017 to Cheche for a combined consideration of cash and convertible loan. We are planning the equity stake in Cheche upon exercise of options to convert part of the convertible loan. Our strategic focus on professionalism, specialization, digitalization and open platform remains the cornerstone of our success. Our operational highlights include

[Oasis Qiu:]

Amber, we are ready for questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of Yuyu Zhang from CICC. Please ask your question.

[Yuyu Zhang:]

So my first question is related to the regulation. The regulator mentioned that -- they mentioned [indiscernible] the fee regulation as we call it [Foreign Language] in our agency and brokerage channel. So could you share us some more color on, if it happens, then the impact on the whole industry and Fanhua? And my second question is related to all the overseas expansion. We noticed that Fanhua will establish two subsidiaries with ASIA Insurance. So could you share some color on the strategy, cooperation? And is there any further time line you could share with us? And my last question is about our open platform strategy. So how much digital talent success are on agreements that we have on our open platform? And do we have any further plan to attract more digital tenants?

[Yinan Hu:]

So on your question about the commission rate impact. So first of all, we're going to state that the policies that you've been hearing coming out of the regulator is very understandable. Obviously, the industry right now, the life insurance industry in China right now is very challenging. We can see a lot of insurance companies are facing difficulties in terms of investment return, given the weak capital market environment. Sales expenses are also very high. So overall, the profitability situation for life insurance in China has been negatively impacted by these issues. The regulated efforts over the last few months have been focusing on

[Operator:]

[Operator Instructions] I am showing no further questions. I'll now turn the conference back to Ms. Oasis Qiu for any additional comments.

[Oasis Qiu:]

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

[Operator:]

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.