Fanhua, Inc. (NASDAQ:FANH) Q3 2020 Earnings Conference Call November 24, 2020 8:00 PM ET

Company Participants

Oasis Qiu - IR Manager
Chunlin Wang - Chairman & CEO

Conference Call Participants

Yuan Xue - China International Capital Corporation Limited
Frank Auyeung - Morgan Stanley

Operator

Thank you for standing by for Fanhua's Third Quarter 2020 Earnings Conference Call. [Operator Instructions]. For your information, this conference call is now being webcasted live over the Internet. Webcast replay will be available within 3 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 would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager. Please go ahead.

Oasis Qiu

Good morning. Thank you. Good morning. Welcome to our third quarter 2020 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 United States Private Securities Litigation Reform Act of 1995. The accuracy of the 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 as required under applicable law.

Joining us today are our Chief Executive Officer, Mr. Chunlin Wang; Chief Financial Officer, Mr. Peng Ge. Mr. Wang will provide a review of financial and operating highlights in the third quarter 2020. There will be a Q&A session 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. We will begin today's call with an overview of our third quarter 2020 financial and operational results and share with you an update on our recent strategic initiatives. Mr. Ge and I will take your questions after the report. Part 1, financial results in the third quarter of 2020. I would like to start with a brief review of our third quarter financial results.

In the third quarter of 2020, Fanhua's life insurance business grew 15.5% year-on-year in gross written premiums to CNY 2.4 billion, outpacing the industry growth rate. Renewal premiums exceeded CNY 1.8 billion, while first year premiums reached CNY 582.7 million. And annualized premiums equivalent reached CNY 333.5 million. New business growth was below our previous expectation, mainly due to the following factors.

One, there has been an adverse impact of the pandemic on customers' purchasing power and consumption sentiment. Second, our agency expansion plan was put on hold due to the pandemic, and as a result, cannot bring incremental growth as previously expected. Third, in recent years, insurance agents' average income has dropped below socio average level in China, and the gap is still widening, thus, posing considerable difficulties on agent recruitment and resulting in low agent retention rate across the industry.

Fourth, as 2020 is the last year of the 3-year financial rectification initiative in China, small- and medium-sized insurance companies lacked incentives on product innovation. In contrast, major insurance companies have taken more aggressive product strategies, overshadowing the competitiveness of the products offered by small- and medium-sized insurance companies.

Part 2, the strategy of developing a professional sales force, digital capability and open platform. Next, I would like to discuss our strategy of developing a professional sales force, digital capability and open platform. We believe that the key for any professional insurance intermediary to remain competitive and stay on the right course lies in the professional level of its sales force, while digital technology provides essential support to the success in building a professional sales organization by optimizing the use of private customer data.

Meanwhile, Fanhua intends to open our technology, product contracts, mid-office and back-office service capability to the industry. By sharing the leading technology and product offerings with the market, Fanhua helps to assist all market participants to improve their efficiency and lower cost, thus, promoting the common development of the company and the industry.

Therefore, Fanhua is implementing the strategy of developing a professional sales force, digital capability and open platform with key initiatives as follows. One, establish a business division for professionalization for the purpose of implementing Winton plan. Key components of the plan goes as follows.

In 2021, on top of our existing sales force, 25 of our existing provincial-level platform companies will each establish a direct business unit at the provincial headquarter, which will be dedicated to forming a professionalized insurance adviser team by attracting elite sales agents, i.e., the Winton financial adviser team.[Author ID1: at Tue Dec 1 07:57:00 2020

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[Author ID1: at Tue Dec 1 07:57:00 2020

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Two, in 2021, Fanhua intends to introduce top insurance managerial talent firm insurance companies to help establish more than 10 new branches in economically developed cities for developing and operating Winton financial advisory team. Key profiles of professional Winton financial advisers are full-time insurance advisers, many born post-1990s, of high caliber and high productivity, recurrent annual income not less than CNY 100,000. The company plans to recruit 5,000 professional Winton financial advisers in 2021. Two, establish socio-technology company for implementing the digital strategy. We will integrate our data inventory and operation platforms to connect isolated data islands inside of the group. We will carry our intelligent digital operation to improve customer satisfaction and loyalty and enable customers' self-service transaction.

We have also established online marketing center and call center to facilitate online transactions and upper selling. For customers requiring off-line services, they will be routed to off-line insurance advisers. In addition, digital operation tools for insurance advisers will be provided to insurance advisers to enable them to provide better customer service to provide traffic operations. Three, develop cloud service business division for implementing the full mix plan and advancing platform openness. Starting with capital incubation. The open platform will export technology, product contracts, mid-office and back-office operation capability and aftersales service capability to the market. In 2021, the company plans to introduce more than 50 platform partners, including insurance technology companies, professional and ancillary insurance agencies, insurance key opinion leaders and third-party wealth management companies.

Four, as our existing organization will continue to serve as our solid business base, the company also plans to upgrade the professional skills of our existing 400,000 agents and improve their productivity through digital empowerment and enhanced specialized operations.

Five, last but not least, develop a young and specialized management team. We are happy to welcome a few new members joining us into our management team. We recently promoted the General Manager of our Hunan branch to be the President of our wholly owned insurance sales operation. Fanhua insurance sales group and the General Manager of Hubei branch to be the Vice President of Fanhua Insurance Sales Group.

A former sales manager from a major insurance group in charge of its intermediary business has joined Fanhua to service the customers of our cloud service business division. In addition, we have retained the formal head of the online and telemarketing business unit of a foreign JV in insurance company to build our digital marketing center in Wuhan.

Part 3, expectations. While the immediate future remains challenging for the industry, we anticipate year-on-year growth in the first year -- first quarter of next year and significant incremental growth contributed by our new strategy in the second half of 2021. We are confident in our ability to retain company's position as a leader in the professional insurance intermediary sector over the long run.

This concludes my presentation. Now the floor will open for your questions. Hi, Rishi, we're ready for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions]. The first question we have is from the line of Yuan Xue from CICC.

Yuan Xue

There are two questions from Xue Yuan. The first question is regarding the opening years -- the year-opening sales strategy for Fanhua. How are we prepared for that year opening sales? And the second question is actually regarding a common issue that's faced by the overall industry. It seems that protection-oriented products have encountered huge difficulties in sales. When do you expect the recovery will happened?

Chunlin Wang

For the year opening sales in 2021, it's actually the first time that we attached a special attention to year opening sales in the past decade. So we want to make sure that we are fully prepared for this, and we have also a little bit high expectation for the year opening results. So we set up a special team, a special task force in charge of the year opening sales preparation. We believe that the opening sales will produce very good results in 2021, and we'll also -- some good starting point for our work in 2021. We believe that year opening sales will help stabilize the team better and help enhance their confidence as well as to further enhance our leading position in the industry. The good results from year opening sales were also from a good foundation for our execution of the new strategies in 2021.

And the second question regarding to the difficulty in the sales of protection-oriented products, actually, in our view, it's not that this type of products are difficult to sell; but on the contrary, it's because insurance companies have put more emphasis on the sales of whole life insurance products because these type of products are easy to understand and also have higher ticket size. So usually, the sales teams and sales agents like this type of products.

But having said that, with the issuance of the new definition on critical illness, which is expected to take effect in 2021, so before the new regulation take in effect in January, we expect that the critical illness products may also have the opportunity to experience an explosive growth. Based on the new definition on critical illness, it seems that new products designed based on the new regulation seems less favorable than the old products which is reflected in narrower insurance coverage.

Operator

[Operator Instructions]. The next question we have is from the line of Auyeung Frank from Morgan Stanley.

Frank Auyeung

There are two questions from Auyeung. The first question is regarding to the revenue model with regard to our cloud service plan, things we're going to establish more closer cooperation with some third parties under this cloud service plan. And the second question is regarding to our dividend guidance for 2021.

Chunlin Wang

I would like to answer the first question regarding to cloud service plan. We have attached great importance to this plan actually. In the past two years, we have made a lot of preparation; and actually, we have done some trial -- some pilot project this year, which produced 20 million APE as a result. So we expect to further expand this plan to wider market players this year -- next year. Currently, our new business gross margin is about 25%. So on top of this maintaining this gross margin, we're going to execute on our cloud service plan.

Recently, a senior manager who used to be in charge of the intermediary insurance business in Taikang Life joined Fanhua, who will be in charge of our cloud service operations. He has huge experience, extensive experience in insurance intermediary sector and have a good understanding of the products and services in the insurance intermediary sectors as well. And he has also -- have former experience in signing contracts with at least 400 to 500 small- and medium-sized insurance intermediaries and technology platforms as well as key opinion leaders.

Among this 500 potential business partners, we're going to put them into several categories and among which, for the most potential business partner, we're going to establish cooperation through equity investment.

For equity investment, I think the arrangement will be we may invest a minority interest at the beginning. And then if they can produce very good results, we will further increase our shareholdings.

So through the bond of active investment, we believe that it will be easier for us to establish a mutual trust relationship. And then we will open our resources or share resources with these business partners, including our technology capability, our product offerings as well as our off-line service capability in order to help them to improve their efficiency and reduce costs as well as achieve profitability at an earlier time. So they will be able to have access to our technology platform as well as unified product contracts. So the revenue model in terms of the revenue structure as well as margin structure may vary case by case. We will report to the market as necessary.

For our guidance for dividends in 2021, we would like to continue the dividend policies, but of course, we need to submit our proposal to the Board for their approval.

Operator

We don't have any further question at this time. [Operator Instructions]. And we don't have any further questions at this time. I'll now pass the conference back to Ms. Oasis Qiu for closing remarks.

Oasis Qiu

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

Operator

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