Fanhua Inc. (NASDAQ:FANH) Q4 2019 Earnings Conference Call March 18, 2020 9:00 PM ET

Company Participants

Oasis Qiu - Investor Relations Manager
Chunlin Wang - Chairman and Chief Executive Officer
Peng Ge - Chief Financial Officer

Conference Call Participants

Yuan Xue - CICC
Debra Fiakas - Crystal Equity Research

Operator

Thank you for standing by for Fanhua’s Fourth Quarter and Full-Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent the background noise. After the management’s prepared remarks, there will be a question-and-answer session. Please follow the instructions given to you at the 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.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. Thank you. Please go ahead.

Oasis Qiu

Good morning. Welcome to our fourth quarter and full-year 2019 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 are our Chief Executive Officer and Chairman, Mr. Chunlin Wang; Chief Financial Officer, Mr. Peng Ge; and Board Secretary, Lily Lee. Mr. Wang will provide a review of our financial and operational highlights in the fourth quarter and full-year 2019. And he, Mr. Ge and Ms. Lee will take your questions after the prepared remarks.

Now I will turn the call over to Mr. Wang. Wang?

Chunlin Wang

[Mandarin] [Interpreted]

Thank you for joining us on today’s conference call. Here with me, we have our Chief Financial Officer, Mr. Peng Ge. We’ll begin today’s call by giving a brief analysis about recent market trends, followed by an overview of our fourth quarter and full-year 2019 financial and operation results and our growth outlook in the first quarter in 2020. There will be a Q&A session after the report.

In the first part, I’d like to give a brief recap of trends in 2019 in the China life insurance market, which has been under adjustment. In 2019, against the backdrop of escalating trade war between China and the United States and changing macroeconomic situations in China and abroad, China has continued to tighten regulatory supervision to prevent and mitigate risk in the financial industry.

China’s insurance industry, especially the life insurance sector, has been undergoing constant adjustment and ratification. As a result, in 2019, China’s life insurance sector reported negative growth in terms of first year premiums from individual regular life insurance business, which is the second consecutive year with such a negative growth since 2018.

In the second part, I’d like to discuss with you our operation results in the fourth quarter and full-year 2019, which were highlighted with increasing contributions from our life insurance business to our total net revenues and stronger snowball effect as our renewal business accumulate.

Firstly, we delivered solid and healthy growth in 2019 amid the challenges of industry-wide adjustment. Our operating income grew by 36.9% year-over-year to RMB114.1 million in the fourth quarter of 2019, bringing the total operating income in 2019 to RMB469.4 million, representing a growth of 10.2% year-over-year, which is in line with our previous estimate.

Secondly, we outpaced industry growth in terms of total life insurance gross written premiums in 2019, while maintaining top business quality in terms of persistency ratio. In 2019, our life insurance business segment, which is solely consisted of long-term regular life and health insurance product, reported robust growth of 39.3% year-over-year in total gross written premiums to RMB8.6 billion in 2019, of which, first year premiums grew by over 28.2% to RMB3.1 billion and renewal premiums were up 46.6% to RMB5.5 billion, while annualized premiums equivalent for 20 years were approximately RMB2.0 billion, up 5.0% year-over-year. We are proud that we will continue to maintain high business quality with 13 months persistency ratio of approximately 92%.

In the fourth quarter of 2019, our life insurance gross written premiums grew by 37.4% year-over-year to RMB2.4 billion, written by stellar growth in both first year premium and renewal premiums. First year premium of life insurance business hit record high of RMB934.5 million, representing a year-over-year growth of 39.8%. Renewal premiums grew by 35.8% year-over-year to RMB1.5 billion, while annualized premium equivalent grew by 10.4% year-over-year to RMB516.5 million.

Over the past year, our efforts to further optimize our product mix has started to pay off. In 2019, critical illness, annuity and whole life insurance products accounted for 63.7%, 31.4% and 3.0% of our total life insurance premium, respectively, in terms of annualized premiums equivalent, as compared to 74.8%, 15.5% and 1.5% in 2018, respectively.

In the fourth quarter of 2019, the percentage of annuity products in our total life insurance business in terms of APE has increased to 49.9% from 24.5% a year ago. Critical illness products accounted for 44%, as compared to 68.3% a year ago, and whole life insurance accounted for 4.3% of our total life insurance business in the fourth quarter of 2019, compared to 2.4% in the same period last year, in terms of APE, driven by 383% year-over-year growth.

With regard to our product suppliers, we have continued to strengthen the relationship with our key insurance company partners, with Huaxia accounting for 27.6% of our total life insurance revenues; Aeon, 21.2%; Sinatay, 18.6%; Tian’an, 14%; and Evergrande, 44.4%, respectively, in 2019. For the fourth quarter of 2019, revenues from Huaxia accounted for 31.4%; Sinatay, 26.3%; Aeon, 15%; Evergrande, 9.3%; and Tian’an, 5.3%, respectively.

As a result of our efforts to clean up our sales force according to regulatory requirements, we had a total number of 670,000 registered sales agents as of the end of 2019, of which the number of performing agents for selling life insurance products was over 130,000 in 2019, as compared to 150,000 in 2018.

Thirdly, our technology platforms have maintained solid growth and become a crucial part of our core competitiveness.

First is on Lan Zhanggui. As of December 30, 2019, the number of registered users of Lan Zhanggui exceeded 1 million, with monthly average visits of over 290,000, up 13% from last year and yearly active users of over 630,000. First year premiums of regular life insurance products generated on Lan Zhanggui exceeded RMB3.1 billion, accounting for 99% of our total life insurance business in terms of first year premiums.

Secondly, Baowang. Baowang offers over 600 insurance products, underwritten by over 30 life insurance and P&C insurance companies ranging from accidental insurance, medical expense reinsurance, travel insurance and homeowner insurance.

As of the end of 2019, the number of registered accounts increased by 22.7% year-over-year to RMB2.7 million, with the number of active accounts increasing by 8.5% year-over-year to over 340,000 in 2019. Insurance premiums directly generated to Baowang were RMB314 million in 2019, with an year-over-year increase of 28%. It has been profitable for three consecutive years since 2017.

Last but not least, eHuzhu. eHuzhu has gathered approximately 3.4 million paying members as of December 30, 2019, helping more than 3,300 families raise an aggregated amount of RMB519 million financial aid. eHuzhu started to collect management fee earlier in 2019, a total of 10 million management fee and value-added service income were collected in 2019. With a stable revenue model taking shape, we expect eHuzhu to break-even in 2020.

Firstly, Fanhua’s claims adjusting business has made breakthrough development with accelerated growth and improving growth prospects. In 2019, our claims adjusting segment has strengthened efforts to develop health insurance-related claims adjustment business. As a result, its revenues grew by 19.3% year-over-year in the fourth quarter 2019 and 13.2% year-over-year in 2019.

In the third part, I’d like to discuss the measures that we’ve put into place when the COVID-19 epidemic broke out. In response to the outbreak, we have mobilized all human resources and taken timely and targeted measures as follows in order to reduce the impact on our workforce and business operations.

Firstly, we announced the following four relief policies. First, Fanhua will not cut jobs due to COVID-19 epidemic. Instead, we will try our best to create more job opportunities to increase employment.

Second, Fanhua will not cut pay due to the epidemic. And instead, we will try our best to improve efficiency to lower other costs and we’ll actively explore opportunities to improve income of our employees.

Third, Fanhua will implement a special care plan for both our sales agents and employees. During the period from December 1, 2019 to June 30, 2020, an elevation fund in an amount of RMB100,000 will be made available to any of our sales agents or employees who is infected with the coronavirus to compensate for their income loss during their treatment and recovery period. Any – if any of them, unfortunately, decease due to the COVID-19, an additional amount of RMB300,000 will be provided to their family members.

Fourthly, Fanhua will provide an aggregate funding of up to RMB20 million to entrepreneurial sales team leaders to help them cover the challenging operating environment during the outbreak.

Secondly, all of our employees have stayed safe and healthy. None of our employees have been infected with coronavirus. As of today, all of our employees have gradually resumed work in good spirit, while we take all necessary measures to ensure their safety.

Thirdly, our sales agents, too, have kept positive attitude and actively participated in all sorts of virtual training and marketing activities. The results were far better than we had originally expected. Since the epidemic broke out, visit to Lan Zhanggui has exceeded 22,000 per day and attendance for our online training courses also exceeded by 1.5 million, a total of 9,700 product loans, [ph] entrepreneurial sales agents loans and customer interaction activities were hosted online by our agencies across the country, attracting over 724,000 attendance.

Fourthly, in line with our commitment to corporate social responsibility, we have tried our best to do our part in fighting against the epidemic. We mobilized our agencies across the country to actively organize or participate in donations funds and supplies and all kinds of charity activities. As of today, we collectively donated funds and supplies amounting to RMB1 million to the most affected areas.

In addition, eHuzhu, our mutual aid platform, has taken the lead in the industry in including deaths resulting from COVID-19 in the coverage under its mutual aid plan for accidental death back on January 26, 2020.

In the first part, I’d like to give an estimate of operating results in 2020. We estimate that for the full-year of 2020, our total life insurance gross written premiums will be no less than RMB10 billion, annualized premiums equivalent will be no less than RMB1.7 billion and operating income will be no less than RMB420 million, based on the following reasons.

First, the COVID-19 outbreak has rattled numerous industries across China to different degrees, including the Chinese life insurance industry. However, it is widely anticipated that aggressive economic stimulus plans may soon be launched by the Chinese government to ease the economic blow from the epidemic.

As a result, China is expected to witness a strong rebound in its economic growth in the second-half of 2020, which in turn will drive up consumption and demand for insurance products. Fanhua is strongly positioned to capture the opportunities in the insurance market in the second-half of 2020.

Secondly, in the past six years, we have adopted and integrated online to offline operating model. We firmly believe that such an O2O operating model is the most efficient and effective model for distributing insurance products and services, which has been further proven during the COVID-19 outbreak. Any model that operates solely online or offline will face challenges in terms of remaining competitive and proving sustainable.

Thirdly, in response to the COVID-19 outbreak, we have taken through advantage of our strength in digital technologies and extensive offline distribution and service network to conduct all of our operating activities, including training and marketing activities, age and recruitment, customer acquisition and engagement, as well as completion of transactions. In order to minimize the impact of the COVID-19 outbreak to the greatest extent possible, we except our business to largely resume to normal level in the second quarter of 2020.

Based on the aforementioned assessment, we expect our life insurance APE to be no less than RMB300 million, renewal premiums to be no less than RMB1.8 billion and operating income to be no less than RMB15 million for the first quarter of 2020.

Lastly, our dividend policy. As approved by our Board of Directors, we will maintain our regular dividend policy based on our expectation on operating income for 2020. Annual dividend for 2020 will be $1 per ADS payable in four quarterly installments of US$0.25 per ADS for each quarter.

Finally, I would like to share – and the news that we’ve received an order from the United States District Court for the Southern District of New York on March 13, 2020, which granted, in its entirety, the company’s motion to dismiss the class action lawsuit originally filed on September 7, 2018 against Fanhua and three of our current or former executive officers and the case is closed. We are pleased with the court’s decision.

Dear investors, we believe that the wise will always prevail when encountering obstacles and we should keep forging ahead in difficult times. Since the outbreak of the epidemic, we have kept operation uninterrupted with our workforce staying united and motivated. During the Spring Festival holiday, management has been working nonstop on developing strategies to upgrade our sales force and achieve high-quality growth in 2020.

In the meantime, during the epidemic, we united as a group, have focused on strengthening our skills and sharpening our operating model. We believe that we will prepare for the final battle when the wind stops. I believe that when we finally get through the epidemic, a new Fanhua will emerge stronger, empowered by technology and expertise of challenge with wisdom as our key product. It marks the beginning of an era when China achieved its dream to rejuvenate itself and also marks a key milestone in our path towards transforming ourselves from great to extraordinary.

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

Question-and-Answer Session

Operator

Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] And the first question we have is from the line of Xue Yuan from CICC. Please go ahead.

Yuan Xue

Thank you. This is Xue Yuan from CICC. Thanks for taking my question. I have one question. In the fourth quarter, renewable premiums is nearly three times of APE. So what’s the proportion of commissions contributed by renewable premiums to the total commissions? Thanks.

Oasis Qiu

[Mandarin]

Peng Ge

[Mandarin]

Oasis Qiu

[Interpreted] The question is answered by our CFO. And in the fourth quarter, the revenues contributed from life insurance business was about RMB870 million in total. And of which, renewal commissions contributed around RMB200 million, accounting for 22% of our total life insurance revenues. And then in 2019, our total life insurance renewal commissions was about RMB717 million, accounting for 23% of our total life insurance revenues. Thank you.

Operator

Thank you. [Operator Instructions] The next one we have is from the line of Debra Fiakas from Crystal Equity Research. Please go ahead.

Debra Fiakas

Thank you very much. Thank you for taking my question and then translating it. I want to ask just one small question first and – about the impairment of the CNFinance Holdings. I want – it’s an accounting question really, I need an accounting lesson. Is the impairment required because of U.S. accounting standards, or is it also required by Chinese accounting standards? And then I have another question also about sales.

Oasis Qiu

[Mandarin]

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] The impairment was based on U.S. GAAP’s requirements. And basically, based on the assessment on CNFinance financial performance and stock price performance in the past year, and the amount of the impairment was determined based on the – its fair value as measured by its stock price as of the end of 2019.

Debra Fiakas

Excellent. Thank you. And then my other question is about consumer behavior. Do – is the thinking that there has been a permanent change in consumer behavior because of the experiences during the health crisis? Are China consumers going to continue to want to do things more on a – at home and more in a digital format rather than, say, using the services of a salesperson and meeting with them in person. You’ve changed the way you train your sales agents and they’re learning more about how to get consumers or get customers and how to do sales perhaps in a digital format? How important will that be, say, a year from now?

Oasis Qiu

[Mandarin]

Chunlin Wang

[Mandarin]

Oasis Qiu

[Interpreted] I think it’s certain that the epidemic will have impact on the change in consumer behavior. But going forward, I believe that it will result in further classification in customers’ demand and behavior for insurance distribution.

During the epidemic, the insurance business in China has dropped significantly. It also kind of proved that Internet is most suitable for selling standardized and low-priced insurance products, while for the large ticket insurance policies or more complicated insurance products, it’s still quite difficult to be transacted over – solely over the Internet.

So that’s why we’re saying that online and offline integration is the most efficient and scientific way for distributing insurance. Especially for those savings product, large ticket insurance products, face-to-face interaction is still the most efficient way for selling this type of product.

And – but we do agree that the epidemic has resulted in optimization in our way to train and – to train our agents and in marketing. And we believe that it will also help diversify our operational activities in the future. We see it as a kind of addition or diversification rather than a replacement. Thank you.

Debra Fiakas

Thank you very much. That was very helpful.

Oasis Qiu

Thank you for your questions.

Operator

Thank you. There are no further questions on the line. I’ll now hand the conference back to today’s presenters. Please continue.

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. Ladies and gentlemen, this concludes today’s conference call. Thank you all for participating. You may now disconnect.