AIFU Inc. (AIFU) Q3 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by for Fanhua’s Third Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] For your information, this conference call is now being broadcasted live over the Internet. Webcast replay will be available within 3 hours after the conference is finished. Please 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 Officer.

Good morning. Welcome to our third quarter 2017 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, Mr. Chunlin Wang; our Board Chairman, Mr. Hu Yinan; Chief Financial Officer, Mr. Peng Ge. Mr. Wang will walk you through our financial results in the third quarter 2017. He and Mr. Ge will then take your questions after the prepared remarks. Now, I will turn the call over to Mr. 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 a review of our third quarter 2017 financial and operational performance, followed by a brief discussion of our business outlook. Then we will have a Q&A session after the report. In the third quarter of 2017, we recorded RMB1.1 billion in net revenues, among which life insurance revenues reached RMB730.5 million, representing a year-on-year growth of 177.5%. Operating income beat our expectations was RMB83.2 million increasing by 10 times from a year ago. Our total operating income for the first three quarters of 2017 reached RMB217.6 million, which means that we have completed and exceeded our annual target of RMB180 million in operating income, far ahead of our schedule. In the third quarter, our net income attributable to the company’s shareholders was RMB112.3 million, up 249.8% year-on-year. Now, let’s look at the performance of each of our major business segments. Firstly, life insurance business, in May 2017, CIRC issued number 134th notice prohibiting the sales of the universal life insurance or unit-linked insurance products as rider policies and the payment of survival benefits or endowment and annuity insurance products in the first 5 years, while the annual payable amount is capped at no more than 20% of the contributed premiums. This regulation which came into effect on October 1, 2017 was one of the major catalyst behind the explosive growth in the sales of our annuity life insurance products in September, during which the first year premiums on life insurance business reached RMB570 million, up 380% from a year ago, which is the highest single month in policy sales ever recorded by the company. In the third quarter, first year premiums of life insurance business reached RMB850 million, up 197.5% year-on-year. 13-month persistency ratio was 93.6%, which ranked us among the best performers in the industry. As a result, our renewal premiums doubled year-on-year to RMB470 million in third quarter of 2017. And secondly, the P&C business, the revenue of P&C insurance in the third quarter dropped by 67.5% from a year ago primarily due to our decision to low margin channel business, which we believe didn’t contribute much to our core competitiveness. And instead, we only retained the retail P&C business, which is beneficial to the development of life insurance business as we previously announced in the second quarter 2017. We are glad that our P&C insurance segment has completed a transition towards the platform model. From the fourth quarter onwards, we will continue to provide best services to our sales agents and customers under the new model. We believe that this transition will not only enable us to continue to meet our customers’ demand for wide range of products, but also allowed us to focus our resources on expanding life insurance business and be prepared in capturing new growth opportunities in the P&C insurance in sector in the near future. Our four major online platforms have maintained steady and fast growth in the third quarter of 2017, among which the CNpad App, the number of registered users as of September 30, 2017 reached 330,000. Active users in the third quarter were nearly 100,000 a year-on-year growth of 91.9%. Transaction volume in terms of insurance premiums on the platform has recorded RMB1.4 billion increasing by 39% from a year ago. Baoxian.com, as of September 30, 2017, number of registered users has amounted to 1.3 million. Active users in the third quarter were over 70,000. Transaction volume through the platform has exceeded RMB110 million for the third quarter, was a year-on-year increase of 492.3%. Most importantly, the platform has been making profits for the last three quarters. And thirdly, eHuzhu over 3 years of operation eHuzhu has become the largest online mutual aid platform in the industry in terms of number of valid claims. As of September 30, 2017, the number of registered users has doubled compared to the corresponding period of 2016 reaching to 2.2 million more than 535 valid claims were posted as on the platform, with the amount of contribution in total of more than 87 million. And fourthly, [indiscernible] which is the China’s first sharing economy base online platform for insurance today and claims adjustment services. As of September 30, 2017, number of registered users has reached 32,000 with more than 1.2 million orders processed since its inception. The third quarter of 2017 was a special quarter for us. 10 years ago, on October 31, 2007, Fanhua went public on the NASDAQ global market as the first Asian insurance broker ever listed on the main board of any stock exchange. Since then, we have entered into an active development cycle and made outstanding accomplishments. Over the last decade, our revenues have increased by almost 10 times accelerating from RMB120 million in the third quarter of 2007 to RMB1.1 billion in the third quarter of this year. Over the last decade, we have buildup a sales team which is on the product with that of most insurance companies. 10 years ago, our sales network, cover only 8 provinces consisting of 171 sales outlets and 11,000 agents. Today, our network covers 29 provinces with 153,000 outlets, 410,000 sales agents, 1,300 claims adjusted. As compared to 1,200 employees 10 years ago, we now employ over 4,000 staff among which 200 mid and senior level managers have been with us for over 8 years on average. Over the last decade, we have continuously broadened our product offerings and optimized our business mix. Diversified financial product offering has become a part of our core competitiveness with large sales scale and large sales network as well as industrial leading business quality which build trust with our business partners and the comfort choice for many insurance companies when it comes to insurance distribution. Our insurance business partners have increased from 45 10 years ago to 90 today, 70% of the cooperation are strategic partnerships on headquarter-to-headquarter basis. Revenue structure has undergone great change. 10 years ago, our revenue was generated from life and P&C insurance business, with the former accounting for 10% only and later 90%. Today, we have three mature business lines: life insurance, P&C insurance and claims adjusting, revenue of life insurance business which is of higher embedded value make-up 67.6% of our total revenues becoming the cornerstone of our revenues and profits. Over the last decade, we have strongly emphasized and continuously invested in technology, which places us in the leading position in the industry when it comes to internet application. Our core business system is not only efficient in the factors, but also substantially enhanced with management by standardizing operation and the management procedures. CNPad App, Baoxian.com, eHuzhu and [indiscernible] internet project that we have invested and established since 2010 are taking the leading position in each of their respective niche markets. Transaction volume of auto insurance on CNPad is likely to achieve nearly RMB3 billion in 2017 and nearly all life insurance new business are conducted via CNPad. Baoxian.com, an online platform for standardized products such as accident and health insurance is expected to maintain strong profitable growth as the transaction volume is expected to grow over RMB500 million in 2017. [indiscernible] is looking at a year-on-year growth of over 55% in terms of number of claims processed via the platform in 2017 and the possible breakeven in 2018. Luckily, we did not get lost in the internet fever like other companies investing huge amount of money for nothing. In fact, we empower our offline sales and service network with internet of technology to elaborate those in service quality and efficiency to provide customers with supreme experience. We believe belief that an online plus offline development model is the trend for insurance intermediary companies and we are leading the trends. Over the last decade, we have stayed ahead of the market trends to capture business opportunities and optimize our development model to cope with changing market environment. We believe that it is our innovative and revolutionary spirit that enables us to keep solidifying our leading position in China’s insurance intermediary market since our listing 10 years ago. Following sequential growth of operating income for the last four quarters are an indication of our 10 years IPO anniversary, operating income in the third quarter of 2017 reported RMB83.2 million increasing by more than 10 times from a year ago. Net income attributable to the company’s shareholders reached RMB112 million with a year-on-year growth of 250%. The results have both proved the success of our growth strategies and justified that we are on track to a sustainable profitable growth. In light of this on September 18, 2017, our Board of Directors adopted a regular quarterly dividend policy and on November 19, 2017 declared a quarterly dividend of $0.01 per ordinary share, which represents 75.3% of the company’s net income attributable to shareholders for the third quarter 2017. The dividend will be payable on or around December 22, 2017 to shareholders of record on December 10, 2017. We have faith to continue to bring in shareholders with decent returns going forward. The first quarter of each year it’s usually the time when life insurance companies and distribution channels will focus on preparation for the jumpstart that was at the beginning of next year. In view of this together with the implementation of number 134th notice, which may lead to many harm for sales, life insurance products taken off shelves across the industry, we expect the growth of our life insurance business may slightly slowdown quarter-over-quarter. However, we feel confident that with our operating income in the fourth quarter will be no less than RMB60 million. Thank you. Now, the management will open the floor for your questions.

Thank you. [Operator Instructions] Our first question today comes from the line of [indiscernible] from CICC. Please ask your question.

First of all congratulations from [indiscernible] with CICC and he has two questions. The first question is regarding our P&C business. How we are progressing with regard our transition towards the P&C platform model and what achievements we have made so far in this regard? And the second question is regard to our sales force right now, we have about 410,000 sales agents, what’s our plan to improve the productivity and the retention ratio for agents going forward and whether or not we will continue to load a number of sales agents in the next 3 years?

So far we have been making smooth progress with regard to the transition towards the platform model in the third quarter. We haven’t experienced any internal conflicts with regard to this transition. And then secondly, we have also spin-off our P&C subsidiaries by selling the shares to [indiscernible] network, which is a company that operates in auto insurance platform. And secondly with regard to our sales force, we believe that a division of labor in the industry will be a trend going forward. And the independent insurance intermediaries will see a migration of sales agents from insurance company to the independent insurance intermediary structure. We are still confident to achieve our annual targets to grow the number of our sales agents to 500,000 by the end of this year and to further grow the numbers to 1 million by the end of 2019. And also we believe that there is – it takes time to accumulate as sales force and to certify the sales force, we will definitely enhance training and also improve our cultural developments to our sales agents in order to optimize their productivity.

Thank you.

Our next question today comes from the line of MW Kim from JPMorgan. Please ask your question.

Yes. Thank you for taking my question. My name is MW from the JPMorgan. So first of all, thank you for your strong quarterly earnings reporting, which is part of the company’s RMB50 million of the operating income guidance last quarter. So I have two questions. My first question is about your earnings outlook. So, as management mentioned, although there was precise demand in the industry, the Q3 results just show the company’s revenue and earnings structure have potentially changed to the life insurance brokerage model from the non-life brokerage business. So, we think that China for the life insurance consumption looks structured the growth trend and it is very early stage of the journey. In the next couple of years if China provides the insurance industry is growing in a healthy way with 5% of the insurance penetration growth by 2020. So how does it impact on the life insurance brokerage industry and company’s revenue and earning structure? My second question is about the commission structure, I believe that China is in early stage of insurance market development compared to the other North Asian countries, it should mean that so far the regulator has not been highly focusing on the customer protection or the adequate life loading margin structure. Starting from this year, we see several documents by CIRC for controlling the product margin and insurance risk management practice. So, current companies have very strong earnings growth momentum perhaps achievable under the assumption that current industry commission structurally made pretty stable. So, my question is should we concern potential, the industry commission structure change in the next couple of quarters following the life protection or the health insurance market development? Thank you.

The first question with regard to the revenue and profit structures we believe that life insurance business is a more valuable business for insurance intermediaries, which enabled us to generate more stable revenues and recurring revenues and profits. So, we will continue to focus on expanding our life insurance business. And also secondly, we also believe that online plus offline is a better model for the development of independent insurance intermediaries as well. And looking forward, we believe that starting from the fourth quarter, 90% of our revenues will come from life insurance business and more than 90% of profit will come from life insurance business. And the second question we believe that all the mature insurance markets have developed, well developed insurance intermediaries only with the development of insurance intermediaries, the industry can maintain a healthy and rapid development. So, we believe that the CIRC will encourage the development of insurance intermediaries going forward as well as the commissions that’s paid by insurance companies as we have that small and medium size companies has actually paid more than 150% to 200% to acquire new business if they distribute through their own channels, which is much higher than the distribution cost that they pay to independent insurance intermediaries. While the larger insurance company, their acquisition cost for new business is roughly 100%, which is slightly lower than that in two of the insurance intermediaries, but we believe that with the further development of independent intermediaries and also with the intensified market conditions that duration may change over time. So therefore, we don’t believe that the conditions paid by insurance companies to independent insurance intermediaries will go lower. However, with the competition gets more intensified, we do believe that the margin might be squeezed slightly over time.

Thank you.

Our next question today comes from the line of Howie Xia from BeaconLight Capital. Please ask your question.

Thank you. There are two questions. First of all is with regard to the number of sales agents in the past four to five quarters, our agents grow by 40,000 to 50,000 each quarter or quarter-over-quarter. However, in the third quarter, our agents increased by 85,000 compared to the last quarter, which is a bit increased compared to the previous quarters. So, what have changed in the overall market that has drive this rapid growth? And the second question with regard to – so right now, we have 410,000 sales agents, how many of them produce policies or produce life insurance business each month?

Well, it is true that since we started implementing our 1 million sales agent plans, 1 to 2 years ago and the number of sales agents has been growing quite rapidly. And our subsidiaries all of them have to bear a target, which is part of their KPIs to achieve certain number of agents and the reason that the increase in the number of sales agents faster than the previous quarter it has something to do with the normal practice across the industry. Usually in July and August, most of the insurance companies or insurance distributors will focus on recruiting sales agents rather than just simply focusing on growing new business. So, that’s the major reason. We are targeted at attributing a active ratio of 50% in terms of agents, the number of – the ratio of agents to produce auto insurance business or life insurance business or as dental or health insurance business and even recommending new members into the eHuzhu and then among the total members, 10% of the agents will be those that who will sell life insurance policies each quarter. Right now, we have 60% of agents across both auto and life insurance products.

Thank you.

There are no further questions on the line today. I would now like to turn the conference back to management for closing remarks.

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