Fanhua Inc. (NASDAQ:FANH) Q2 2022 Earnings Conference Call August 23, 2022 9:00 PM ET
Company Participants
Oasis Qiu – Investor Relations Manager
Yinan Hu – Chairman and Chief Executive Officer
Peng Ge – Chief Financial Officer
Conference Call Participants
Operator
Thank you for standing by for Fanhua’s Second Quarter and First Half 2022 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. 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 and Webcast 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, Fanhua’s Investor Relations Manager.
Oasis Qiu
Good morning. Welcome to our second quarter and first half 2022 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 are 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 laws.
Joining us today, are our Chairman and Chief Executive Officer, Mr. Yinan Hu; Chief Financial Officer, Mr. Peng Ge; and Chief Operating Officer, Mr. Lichong Liu. Mr. Hu will provide a review of our financials and operational highlights in the second quarter of 2022. 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. This is Hu Yinan. Thank you for joining today’s conference call.
In the second quarter of 2022, as we continued executing on our Professionalization, Career-based, Digitalization and Open Platform strategy and implemented a series of strategic initiatives, the efforts started to show some encouraging results, with positive improvements across various operating metrics.
Our insurance business grew 12.2% year-over-year to RMB2.9 billion in gross written premiums of which our life insurance first year premiums reached RMB615.7 million, up by 43.7% year-over-year and 25% quarter-over-quarter. The growth was primarily driven by substantial increases in the number of high-performing agents and their per capita productivity.
During the quarter, both the number of high-performing agents and the per capita performance indicators have enjoyed great improvement on a year-over-year basis. The number of three-month 10,000 Premium Agents who are defined as those contributing over RMB10,000 annualized premiums equivalent or APE monthly for three consecutive months during the quarter increased by 23.6% year-over-year with per capita productivity up by 33.3% year-over-year, while the number of 100,000 Premium Agents who are defined as those contributing over RMB100,000 APE during the quarter increased by 41.2% year-over-year with per capita productivity growing 6.3% year-over-year.
Correspondingly, as we purposely reduced the number of non-performing and low-performing agents, the total number of Fanhua’s performing agents reduced by 37.6% in the second quarter of 2022. These are clear signs of the positive effects of our strategic focuses on serving mid to high-end customers and high-performing agents.
With the steady progress in executing our new strategy, we were proud to deliver robust growth in our new business during the quarter while operating income reached RMB31 million well exceeding our prior expectation. The year-over-year decrease in operating income was mainly due to, one; a loss of RMB7 million within our claims adjusting segment due to impacts of COVID-19 during the quarter, especially in our major business areas we have failed to operate for quite a long time. And also, we have a profit of RMB3.5 million in the same period of last year, that is to say we have been impacted in income due to COVID-19 for about RMB10 million in claims adjusting segment.
Two, an increase of investment in our Yuntong branches, which correspondingly incurred a loss of RMB15 million during the quarter; and three, our increased expenditure amounting to RMB10.3 million on refining our IT infrastructure to support digitalization of our operation and empower front-line operation of our agents. Although such investments may have increased our cost pressure, we believe it is necessary investments to strengthen capabilities.
Excluding the impact of the above mentioned factors, our operating income would have been approximately RMB63 million, representing a growth of 34%, which again demonstrates that we are on track for future sustained growth.
After over a year of implementation and continued refinement, our strategy is clear and pragmatic, and the preliminary results have contributed to significant improvements of our brand image in the industry, further boosting the morale and confidence of our staff and sales force.
Building on the preliminary achievements in the first half of 2022, we will focus on pushing forward the following strategic initiatives to further solidify our core competitiveness. One, recruitment and training of top talents to build a highly productive sales force
Firstly, further expanding the coverage of Family Office Consultant or FOC and Family Retirement Planner or FRP training programs among high-performing agents, while starting to initiate training and certification programs for Family Policy Managers or FPC, which focus on helping agents to develop the ability to offer policy custody services, so as to help our agents transform from focused experts on insurance products to broader experts on family-based asset allocation and then expanding to experts on elderly care and legacy management.
Secondly, leverage our advantages in insurance trust services and healthcare services with the support of our well proven triple-R marketing model, i.e. account responsibility, solution responsibility, and fulfill responsibility and step-up efforts to attract industry top talents, especially Million Dollar Round Table members or MDRT to achieve the target of 30% year-over-year growth in 100,000 Premium Agents.
Two, providing scenario-based trust, healthcare and elderly care services facilitated by standardized triple-R marketing procedures. Firstly, trust plus insurance. As of the end of June 2022, Fanhua has organized over a 100 customer engagement activities and facilitated in setting up 123 trust accounts over RMB1.2 billion in trusted assets covering 215 new insurance policies with each trust accounts contributing one to two insurance policies on average and RMB30,000 APE per policy.
Our strategy of offering referral of insurance trust and family trust services to mid- to high-net-worth customers have delivered significant results, establishing a good reputation in the industry and standing out with the competitive advantage. In the second half of 2022, in combination with our FOC training programs and the triple-R marketing model, we plan to widely organize high-end customer engagement activities with the professional support of the triple-R talents to provide of all suites of services from customer engagement, asset allocation planning and solution making, setting up insurance trust accounts to fulfillment and [indiscernible] sales services. As such, we expect to offer a closed loop of insurance trust services making insurance trust accounts a new competitive mode for Fanhua.
Secondly, health and elderly care plus insurance. Established in 2021, Fanhua’s health management business unit is dedicated to pooling quality resources of medical and elderly care on the market to empower our partners, agents and customers. In the first half of 2022, Fanhua has launched a wide spectrum of customer acquisition, acquisition products and collaborated with providers of quality services, such as “blood banks and high-end medical service providers.” Furthermore, we have made a breakthrough in securing access to quality elderly care facilities by sealing an in-depth cooperation agreement with the state-owned enterprise.
It also marks the first step for Fanhua to become an open platform for connecting small and medium-sized insurers with third-party health and elderly care service facilities. Into the second half of the year, we will make full use of these resources to facilitate scenario-based marketing by organizing onsite visits to healthcare and elderly care facilities for customers to experience quality lifestyles and related services, so as to stimulate their demand for wellness, health, retirement and legacy management solutions and thus boost sales of insurance products.
Thirdly, upgraded Lan Zhanggui app to support digitalized operation. In the first half of 2022, our Lan Zhanggui app has been upgraded to 3.0 version, a comprehensive platform that integrates customer engagement, customer service, trading support, online and offline operation and professional training and personal branding. With the release of the Lan Zhanggui 3.0, we have observed significant improvement in the operational efficiencies with key performance indicators of the platform also showing remarkable improvements.
Specifically, the number of active agents on the platform were up by about 50% and has continued to increase. The productivity of agents using our digital tools was nearly 1.5x that of agents otherwise, and the productivity of agents that have become Guanjia or insurance service [partner] was about 20% higher than that of those otherwise. All this shows that our digitalization efforts have been paying off.
For the second half of 2022, Fanhua will continue to improve user experience by further optimizing key functions and making the system more stable and easier to use, so as to support agents activities more effectively.
Into the third quarter of 2022, while external factors such as COVID-19 and double-recording may continue to make certain negative impact, Fanhua will continue to further implement our development strategy and work to improve company value by aggressively pursuing the enormous market opportunities. After considering our plans continued increased investment in technology and training in the near-term, which will take time to fully show their benefits, the management is confident in achieving positive growth with an operating income of no less than RMB30 million.
This concludes my presentation. And now the floor will open for your questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from [Zixian Wang] at CICC. Please go ahead.
Unidentified Analyst
[Foreign Language] So the first question, how do you expect the company’s revenue and the profit in the second half of this year? And the second one is about the agent force. So what is the [indiscernible] of our sales agents in aspect of region, age, education, et cetera? How about their income and productivity? And the last one, can you share us what’s your current product mix? How to expect the demand for savings products? Does the [indiscernible] of this products sustainable? Thanks.
Yinan Hu
[Foreign Language] Thank you for the questions. For the first one regarding the outlook for our commission income and profit guidance in the second half of this year. Our new strategies has been proven to be quite effective in driving our business growth. And key part of this strategy is our focus on double-high, which is – which means that we focus on high-end customers and as well as high-performing agents with digital empowerment. And these strategies have been proven to be quite effective in driving our business growth over the past quarters.
As we can see that even though the total performing agents, the number of total performing agents has dropped by roughly 30%. However, our first year premium continue to increase substantially, which prove the internal driving force to remain strong. And as we continue to execute our strategies, we believe that we will see our growth momentum will pick up over time in the third quarter, four quarter and next year.
However, we do notice that there are two factors may pose adverse impact on our business results. Firstly, our product mix, even though we maintain strong growth in our first year premium, however, the products are mostly short-term products, which means that this product have [lower and bad] value for the company. So that’s why that our commission income profit growth are not exactly in line with the growth of our first year premium.
And the second factor is the resurgence of COVID cases in many regions in the third quarter as well as the regulatory requirement for double-recording in some key markets, particularly in our major markets, which may pose some pressures on our business growth. That’s why we believe that we are bottomed out and we don’t believe that we will see any further substantial decline in our business.
The second question regarding agent profile, currently, about 60% of our agents are in the age of between 40 to 60 years old. This also aligns with our current strategy. Our strategy focus on high-end customers. As many of the wealthy populations or the [average] populations are also in the age of 40 to 60 years old, especially for those in the age group of 50 to 60 years old, there are about 300 million of them who have strong demands for elderly care and legacy management. So the age profile of our agents are actually basically aligned with our customer group [Technical Difficulty] which is a positive thing for – to execute our strategy. Most of our agents are located in the second tier cities and to be honest not very high education level.
In order to make up for the shortcomings of some of these agents, we launched 3R marketing model, which basically to separate the whole sales process into several steps and with several rules to be played by different agents. For those agents that do not have very professional skills, they are responsible for customer engagement, while more professional agents will be responsible for providing solution designs and to execute the transaction.
In the meantime, we are also stepping up efforts to recruit higher education agents and younger generation of agents to become professional solution managers or fulfillment managers to support the operations or support the customer services of those relatively ordinary agents. Currently, about 25% of our agent sales force are in the age group of 30 to 40 years old and this age group of agents have typically higher education level and better learning abilities. In the first half this year, we hosted a lot of FOC and FRP training sessions in order to improve the professional skills of our sales force to support the customer services.
As for productivity, in the second quarter, the productivity of our effective agents were about 20,000 per agent as compared to 12,000 per agent in the same period last year, so that’s 60% improvement year-over-year.
And the third question regarding to our product mix as well as the demand and sustainability of growth for savings products. In the second quarter, whole-life insurance and annuity products accounted for 79% of our first year premiums as compared to 68% in the same period of last year, while critical illness products accounted for only 7% as compared to 20% in the same period last year. That’s also the reason why we delivered strong first year premium, our commission income was not exactly inline towards the strong growth in first year premium.
As for as the savings product demand as well as sustainability of the growth, we believe that in the next 10 years, we will continue to see strong demand for savings products driven by the aging population in China. Well, 60 years ago in China, there was a baby boomer trend and then which means that 60 years ago, roughly every year there were 20 million people were born. So that means that starting from this year, there will be 20 million people every year going into the retirement age. And the key demand for this age group of people are for quality retirement lifestyle and for wealth appreciation as well as to – as well as legacy management. So believe that in the next 10 years, the people in this age group, the strong demand for savings product, which may cater to their needs for retirement and legacy management will become a key trend.
Based on the strong market demand as well as considering the potential adverse impact of the increased contribution from savings product in our total mix, we will step up efforts to introduce our healthcare and elderly care services to cater to people’s needs for quality retirement lifestyle as well as to step up efforts to expand our insurance trust services, which may help people to cater to their needs for wealth management as well as legacy management.
And secondly, we also make effort to optimize our product mix by encouraging the sales of products with a longer payment period particularly for products with over 10 years payment period. And certainly, we will also design new products by cooperating with reinsurance companies to improve the product and add values. For example, we recently cooperating with Aviva-COFCO to introduce a leveraged style whole-life insurance products. For this type of products, customers typically preferred a longer payment period in between 10 years to 20 years. So this will help improve the award embedded value of our product. Thank you.
Operator
Thank you. We have no further questions in queue. [Operator Instructions] If there are no further questions, I will hand back to management for closing remarks.
Oasis Qiu
Thank you for participating in today’s conference call. If you have any further questions, please feel free to contact us. Thank you. Have a good day. Bye.
Operator
Thank you so much. This does conclude today’s conference call. Thank you all for joining. You may now disconnect.
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