Fanhua Inc. (FANH) Q1 2023 Earnings Call Transcript

Fanhua Inc. (NASDAQ:FANH) Q1 2023 Earnings Conference Call June 5, 2023 8:30 AM ET

Company Participants

Yinan Hu - Chairman and CEO

Lichong Liu - Chief Operating Officer

Peng Ge - Chief Financial Officer

Oasis Qiu - IR Manager

Conference Call Participants

Daniel Wong - JPMorgan

Operator

Thank you for standing by for Fanhua's First Quarter 2023 Earnings Conference Call. [Operator instructions] 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

Good morning. Welcome to our first quarter 2023 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 provision of the US Private Securities Litigation Reform Act of 1995. The accuracy of this statement 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; Chief Operating Officer, Mr. Lichong Liu. Mr. Hu will provide a review of our financial and operational highlights in the first quarter 2023. There will be a Q&A session after the prepared remarks.

Now, I will turn the call over to Mr. Hu.

Yinan Hu

Good morning and good evening. Thank you for joining today's conference call. I will be repeating some of the highlights of our first quarter results reported last week in our earnings release. As we mentioned, with the positive macro and industrial environment over the first quarter of 2023, Fanhua achieved strong results over the period with solid growth across various key operating metrics.

Total premiums up by 29% to RMB4.4 billion, significantly outpacing life insurance industry premium growth of 8.9%. New business premiums up by 51.4% to RMB851.9 million, significantly above the 15% growth rate achieved by the listed Chinese life insurers. Total revenues up by 20.6% year-on-year to RMB827.7 million, and operating income was up by 193.1% to RMB60.4 million, significantly exceeding our previous estimate.

For this quarter, we have express service hours relative to our industry and key list to insurance peers we have made this comparison to demonstrate that we are executing on our well-defined strategy of driving sustainable growth in our business through professionalism, specialization, digitalization and open-platform. This strategy is starting to set us apart from our competitors as demonstrated by our first quarter results.

Next, please allow me to go over three key operation highlight that are direct results from the execution of our strategy. Firstly, our strategic focus on quality growth produces significant increase in agent quality and productivity. Our number of 100k premium agents and Million-Dollar Round Table members professional agents grew 27% year-on-year. The productivity of this high performing agents also grew by 18% and 37% year-on-year, respectively. And together, they accounted for 42% of our sales over the period, up from 32% in the same period last year.

Secondly, we are already seeing material contribution from our open-platform and our acquisitions over the past two quarters. As at the end of the quarter, our Open Cloud Service Business division has connected with over 300 external institutions and grew new business premiums by over 100% to over RMB80.6 million. We are also executing on that strategy of consolidating the industry through M&A and made three acquisitions over the period, including [indiscernible], a leading managing general agent in China, as well as two other leading agency companies.

Looking ahead, we aim to utilize the managing general agent model to accelerate the consolidation of license small to medium insurance intermediaries in the market. As of the end of the quarter, [indiscernible] is connected with 400 licensed brokers and contributed RMB119 million in new business premium over the quarter.

Finally, our strategic focus on digitalization is also delivering material operational gain. The execution of our digital strategy is not only leading to higher productivity for agents on our platform, but also helping us drive improvement in customer service and business quality.

During the quarter, both the 13 months and 25 months persistency ratios improved to industry-leading levels of 93% and 87%, respectively. Achieving higher persistency ratios translate to higher quality of business for our insurance clients, and in turn drives renewal bonuses for our business.

The digital focus when combined with the open-platform strategy has allowed us to deliver significant economic scale and operational efficiency improvements. This is reflected in a substantial reduction in operating expense ratio to 25.9% from 31.3% in the same period last year, despite significant increases in investment, in digitalization and open-platform initiatives to RMB21.3 million in the first quarter 2023, up from [indiscernible] in the same period last year.

And here we like to mention that the acquisitions we have thus far have only delivered revenue contribution, instead of operating income contribution, as we are still in the process of integrating this acquired entities into Fanhua, and the results were not yet reflected in our financial results in the first quarter. However, as the integration of IT and [indiscernible] system completed in the second half of this year, we expect to see material expense synergies and revenue synergies to be reflected in our future results.

Our operational target for 2023 is to grow our life insurance policy premium and operating profit by 50% and no less than 50% year-on-year. We believe the first quarter's strong [indiscernible] will lay a solid foundation for us to achieve this full year target. And we are also confident that for the second quarter, we will also be able to achieve or exceed our target, and we're also make improved preparation for the third quarter and the second half.

To fully prepare for the second half, and as well as our future -- in the future year, in the next few years, we will continue to stick to our strategy of pursuing sustainable growth through professionalism, specialization, digitalization and open-platform. And in the coming quarters, we will focus on the strategy execution on the following initiatives.

Firstly, we continue to expand our service offerings to establish our differentiated competitive advantages, focusing on serving the diverse needs of our customers and their families over the entire cycle -- entire lifecycle by facilitating insurance sales in various service settings, leveraging on our abundant [indiscernible] resources, including insurance trusts, health care, elderly care services, and education solutions.

Secondly, we plan to train 3,000 external candidates as Fanhua's Family Office Consultants, or FOC, thereby helping us to attract top talent in the industry. And this year we plan to increase spending on hosting this FOC training courses for the -- the insurance trust training courses to train and certify 3,000 external elite agents, Increasing professionalism and providing another point of differentiation.

Thirdly, we will implement full license holder plan among our agents. In response to the regulatory requirements for Tier [ph] management of agents, we will provide targeted training to our top agents including those who are MDRT members, according to their personal professional levels, to help them obtain financial professional qualifications and certifications so as to further improve their professional image and productivity.

Firstly, we intend to accelerate market consolidation through open-platform strategy and M&A. We plan to fully open our platform to the industry to develop digital talents, particularly targeted and dedicated independent sales teams who can bring in high-quality business. For 2023, our target is to migrate by 100 of our platforms institutional customers to our digital tenant system.

2023 is an important year for Fanhua. It marks the 25th anniversary of our company. It is a milestone that fills each and every one of us at Fanhua, which we are truly proud for. Over the past 25 years, we are proud that we have navigated through China's economic and financial industry cycles, this time emerging stronger than before.

For me personally, this is my second time being Chairman and CEO of Fanhua, having led the position of being CEO of the company in 2011 and now the position of being Chairman of the company in 2017. This is a company I founded 25 years ago. By no exaggeration, it's my second child and I have always had the best interest of the company at heart.

Looking ahead, we intend to invest significantly in our human resources capability to attract the best individual talents in the market, across all levels, from the Board level, to senior managers, to our frontline agents, we are confident that was the right strategy, the right team and the right execution, Fanhua -- we will create over the next 25 years and beyond we will be able to deliver the results expected from all our stakeholders.

This concludes my presentation. Now the floor will open for your questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Yuyu [ph] Zhang from CICC. Please go ahead, Yuyu.

Unidentified Analyst

So the first question was related to the finished product demand [ph]. So previously, China insurance regulator has asked insurers to lower estimated returns for new products. So do you see those [indiscernible] products? And how do you expect the momentum of savings product sales? And the second question, we also see in the last year and the Q1, the average take rate of the [indiscernible] so strong gradually. We know it's mainly due to the changing product mix and reduced [indiscernible] commission. I think it's a really a negative impact on our brokerage income, while our FYP [ph] has a really good performance. So could you share some more color on how you see the future agenda of your take rate and what actions [indiscernible]. And last question is in terms of the open-platform strategy. In the previous conference call you said you plan to invest or acquire around 10 small or middle sized insurance agencies and [indiscernible]?

Yinan Hu

Thank you for the questions, Yuyu. This is CEO Mr. Yinan Hu. Mr. Hu, will like to invite Mr. Liu Lichong, our Chief Operating Officer to address the first question. And our CFO to answer your second question regarding the trend in our commission rate, and he himself will answer your third question regarding to the M&A progress.

Lichong Liu

So with the imminent downward adjustment in the guarantee returns from life insurance products in the new product pricing, we do see very strong demand for savings products, including annuity and whole life insurance products. However, in the second half, how will that change? We still believe that for the longer term, the demand will remain robust for savings products because of the three contributing factors. Firstly, we've seen the acceleration in ageing populations and lower risk appetite among consumers. And why the ageing population still have very strong demands for products that can cater to their needs in their retirement.

And then secondly, we have seen the downward trend in interest rate in the long-term. So even though the [indiscernible] interest rate for new product pricing are [indiscernible] downward to 3%, that still provides a quite attractive returns. And thirdly, with the softening economy, we're seeing a kind of consumption downgrade and also investment product downgrade in terms because of the softening economy did not mainly attractive in that [indiscernible] choices, or why insurance do offers a safe as a kind of safe asset class. Thank you.

Oasis Qiu

CFO would like to answer this question. First of all he would like to clarify on the definition of commission rates. And from insurance point of view we've actually seen that the commission rate will probably in the downward trend to be in line with the international practice as well as regulators requirements, or regulators wish to lower the costs -- financial costs for financial institutions in China. And then for Fanhua -- and because we sell a wide variety of products, so, product, the changes in product mix as well as the term that customers choose to pay their premiums will have impact on the overall commission rate.

However, if on the basis of annualized equivalent -- annualized premium equivalent basis, our first year commission rates remains quite high. And -- but having said that, I would like to emphasize that the key operating matches that the company ought to focus on our first year premiums, net revenues and gross margin, as well as persistence ratio. I think this are the better operating matches to measure the company's financial health.

As Mr. Liu mentioned that there will be some changes in savings products with the upcoming transition to the new product pricing, which means that the cost for insurance company will be lower. And for -- probably that will impact our sales capabilities in the short-term. However, in the longer term, we still believe that the demand for savings products will remain robust.

And also, having said that, we still believe that for established -- for insurance intermediaries the key -- their key competitive advantage should be on the ability to offer a comprehensive service or comprehensive solutions to address customers diverse demands, instead of simply selling insurance products. As Mr. Liu mentioned that we are actually -- would like to offer -- further broaden our service offerings to include trust services, health care, and now [indiscernible] as well as education solutions to customers. And we believe this is -- are the key for us to further enhance our competitive advantages.

Mr. Hu also mentioned that we target at growing our first year premiums and operating income by 50% year-over-year for 2023. I believe that if we can achieve this 50% full year target, we will also see a continued improvement in our gross margin, net profit margin as well as persistency ratio.

Oasis Qiu

And this is Mr. Hu, CEO of the company. He would like to address your questions on our M&A strategy. Basically, the industry is evolving towards the [indiscernible] of high-quality growth, which means that higher business quality with lower costs. What's happening in the market right now is actually in favor of our M&A strategy. Or i.e. created a much more favorable environment for us to pursue acquisitions. So we will stick to our open-platform strategy and M&A strategy. There's no change to our acquisition target for this year.

M&A is not purely business combination. I think the basis for our acquisitions, moving light on technology, our digital capabilities and AI technology applications. In the longer term, we believe that technology will be a key contributors to drive business growth for insurance intermediary. And just found -- I'm quite confident that Fanhua has stayed far ahead of our peers in terms of IT investments and technological capabilities in China, as well as in Asia.

However, right now in China, and in other Asian markets that we observed, technological investment is not really enough. And that's the key reason that restricts the further growth of insurance intermediaries. However, we believe that the demand for technology is quite strong. While we are also seeing that a lot of licensed insurance intermediary companies as well as independent agents cannot really afford to invest in IT systems on their own.

So, the core of our M&A to export our digital technological advantages and digital capabilities. So that we can allow more insurance intermediary companies to benefit from Fanhua's technological advantages and help them to double their sales capabilities by lowering the operating expenses and building momentum for sustainable growth. And for our future M&A targets, we are actually looking at technological empowerment to this acquired entities and we pursue quality in data -- quality instead of quantity. Thank you.

Operator

Thank you. Our next question comes from the line of Dan Wong from JPMorgan. Please ask your question, Dan?

Oasis Qiu

So, the questions from JPMorgan's. He has three questions. The first question is regarding our agents productivity. And the first quarter, we see a strong improvement in agent productivity. But probably that's because of a low base last year. And he will wonder whether or not the high productivity of our agents will be sustainable in view of the fees competition in the market.

And the second question is regarding the company's share buyback plan to progress. The company announced a share buyback plan in December last year, but now that was the company's M&A strategy, probably the company would like to reserve a more cash in to pay for the acquisition. How the company's capital deployment plan to [indiscernible] and what's the plan for share buybacks?

And the third question is regarding regulation. The regulator has adopted quiet time regulations to supervise the insurance intermediary markets. But we believe that with a more stringent compliance framework and a more stricter supervision on business quality of the company that will help the company to improve sales volume as well as lower risk. So what's the opportunity there for the company?

Again, the three question will be divided among the management, our CEO Mr. Lu answer your first question regarding agent productivity. And Mr. Ge will answer the second question regarding share buybacks and Mr. Hu himself will answer your third question regarding litigation [ph].

We are actually seeing that over the past few years the number of agents that have dropped significantly in the market. And on the contrary the productivity of agents per capita per activity actually have been increasing. I believe that there are two reasons. First of all, the demand -- the customers demand has transitioned from kind of relatively lower end products, i.e. critical illness products to higher value products -- savings type of products.

And for this type of statements product the ticket size is larger. And then secondly, because this product are more complicated and required a more comprehensive financial knowledge or knowledge involves management areas. So usually this type of products are so by higher agent, a higher end agent.

And then secondly, for the critical illness products. They just kind of [indiscernible] has some work kind of replaced by online medical insurance products. And for those ages, who can only sell to critical Illness products, will naturally be repaid as well. So only those who are knowledgeable enough who have more comprehensive knowledge can stay in the industry.

Fanhua has shifted our focus to serving middle class or high net worth individuals or ultra high net worth individuals. And this customers groups require more professional service by hired and customers or more professionals as agents. So that's why in the past few years, we have set up investments to recruit professional agents and to train professional agents, as well as increase our investment in digitalization to increase the empowerment to our agents to help them to improve their professional capabilities. And as a result, we have sought -- we have seen a 50% growth in a number of MDRT agents in the past years. And in the first quarter, we also see substantial growth in a number of MDRT agents.

So we have this right strategy. And in addition to that, we believe that service is those acquiring food quite crucial. So that's why we have considered insurance plus services or insurance plus wealth management, Elderly cared insurance trust as this as important part of our overall strategy. The bleeder with this service offerings, our agents, our top agents will be able to serve the offerings, our agents, our top agents will be able to serve the diverse demands of our high-end customers. So with the customer demand and with the ability of the top agents, I believe that the policy amount of our -- the product that was out and so and also the productivity of our agents, men at quite high-level.

Oasis Qiu

So Mr. Ge would like to answer your second question on share buyback. So, I believe that Fanhua is a quite responsible company to shareholders. I have recap on the use of capital no since IPO. We have spent around RMB1.7 billion on cash dividends since our IPO and spend around RMB700 million on share buyback, totaling RMB2.4 billion, which represented over 50% of our total operating cash flow, amounting to like RMB4 billion. So that shows our commitment to maximize shareholder returns.

In the past 3 years since 2020, due to the COVID-19 and a softening economy, the industry has undergone substantial changes. Fanhua, however, has sticked to our strategy. And we have saw material contributions on execution of a strategy in the first quarter of 2023. In my view, I believe that our cash should be earmarked to build momentum for sustainable rapid growth in the future in the longer term. So including our initiatives, such as M&A.

And because of what's happening in the past 3 years, our stock has been significantly undervalued. We believe that share buyback will be a much more efficient means to maximize shareholder returns compared to dividends. So that's why we announced a 20 million share buyback plan last December. And despite the restriction of the window [ph] period, and the restriction on the trading volume that company can buy, we have purchased about [indiscernible] ADS amounting to US$600,000. That's the progress that we've made in terms of our share buyback.

I would like to add a comment on your first question. And this is also the strategy that we have that fit to over the past 15 years. We believe that no matter how its professional or how elite the sales agents are, if they only sells insurance products properly, it will not be sustainable for them to sustain high productivity by solely selling insurance products.

So transition to become a financial advisors that can offer more comprehensive solutions to their customers covering not just insurance, but also insurance trusts, tax planning, or legal advisors, that will enable them to better serve customers demand and sustain higher productivity. And I believe that is a irreversible trend for agents to transition or transform themselves to become a financial advisors for their customers.

So that will require a much higher -- that pose out to be a much high requirements on the compliance of the companies and on regulate -- on regulatory compliance. This is a huge challenge. But at the same time, it also pose great opportunities for the company. I believe that any companies who can help other institutions or independent agents to address the compliance issues, they will have the future.

My long-term vision has been to transform the company from a sales insurance -- sales insurance intermediaries into a platform company or infrastructure platform provider to the industry. And this is what we've been pushing forward in the past few years. We're like we're dedicated to providing a infrastructure platform to the whole industry. And we're also working on building a unified compliance model and a unified risk management modeled on the basis our digital technology. Right now our existing organizations contributed 80% of our revenues. I'm hoping that in the future 60% of the revenues will be generated by the services or the platform services that was provided to the industry.

The new regulation changes pose great challenges to a lot of industry players. However, we see it as a great opportunities for Fanhua. And in response to the market changes and [indiscernible] capture the market opportunities, we have returned Boston Consulting Group as our consultants to give us advices on our open-platform strategy. And so far, BCG has completed their first Phase of work, and this has had three helpers greatly and deliver great results. And I believe that this will be helpful for us to view our digital compliance model and digital risk management model going forward. Thank you.

Operator

Thank you. I'm showing no further questions. I'll now turn the conference back to Ms. Oasis Qiu for closing remarks.

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

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

Oasis Qiu

Thank you.