AIFU Inc. (AIFU) Q3 2022 Earnings Report, Transcript and Summary

Thank you for standing by for Fanhua's Third Quarter 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 Web site 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.

Good morning. Welcome to our third quarter 2022 earnings conference call. The earnings results were released earlier today and are available on our IR Web site 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 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 financial and operational highlights in the third quarter of 2022. There will be a Q&A session after the prepared remarks. Now, I will turn the call over to Mr. Hu.

Good morning and good evening. Thank you for joining today's conference call. In the third quarter of 2022, challenges and opportunities coexist. On the one hand with multiple factors such as the macroeconomic uncertainties, restrained consumption, resurgences of COVID-19 cases and the regulatory requirements of nationwide double recording at play, the gross written premiums of China's life insurance industry merely recorded a low single digital growth of 1.3% year-over-year, representing a sharp decline in the growth rate compared with the second quarter of 2022. The decline in the number of insurance sales agents in the industry also continued, with substantial declines in sales force numbers reported by many large insurers. On the other hand, we are encouraged to see a steady growth momentum among insurance intermediaries as a whole, driven by significant growth in agent productivity, despite an overall decline in sales force. In addition, more and more insurers are engaging intermediary channels and showing a more open attitude towards the mode of cooperation with independent insurance intermediaries suggesting greater development opportunities awaiting intermediaries like us. Despite challenging external environment, Fanhua showed resilience with steady business growth during the third quarter of 2022. Our life insurance premiums grew by 6.2% year-over-year to RMB2.8 billion, of which regular life insurance first-year premiums reached RMB529.7 million, up by 9.1% year-over-year. Even with the continued investments in technology and training, our operating income beat expectation to achieve RMB32.2 million representing a growth of 14.2% year-over-year. The quality of our sales force continued to improve during the quarter. While total number of performing agents declined in accordance with our plan, the per capita productivity of performing agents grew by nearly 20% year-over-year. The contribution from high performing agents increased even further with the number of 100,000 premium agents growing by 46% year-over-year, contributing 48% of our total first-year premiums in the quarter, up from 39% for the corresponding period in 2021. Addressing the needs for high-quality senior care, wealth management and inheritance solutions by Chinese mass affluent and high-net-worth families, Fanhua has continued focus on magnifying our infrastructure platforms capability to empower agents to better serve clients. Fanhua has implemented the insurance-as-a-service model by pooling quality trust and health care service resources in the market on top of a wide spectrum of insurance products to match customers' evolving needs throughout their lifecycle and support agents to provide whole life services for their customers. For trust services, as of the end of third quarter of 2022, Fanhua facilitated setting up nearly 150 trust accounts with over RMB1.7 billion in trusted assets, covering over 270 new insurance policies contributing RMB85 million of total insurance premiums. In the third quarter alone, Fanhua facilitated setting up nearly 60 trust accounts with RMB510 million in trusted assets contributing RMB27 million in insurance premiums. For health care services in the third quarter of 2022, Fanhua continued to increase its efforts to expand health care service resources, covering customers' entire life journey, including introducing high-quality life care service resources in the industry. We have also set up 14 health care service experience centers across the country to showcase the health management and elderly care community resources linked by Fanhua across the country to improve customer experience and facilitate business conversion. Leveraging on the trust and health care service resources in Fanhua's insurance policy custody technology, we've established the FFF representing Family Office Consultants, Fanhua Retirement Planning and Family Policy Custodian training and certification system to help agents improve professional skills in a tiered approach. This is based on the RRR representing Accounts Responsibility, Solution Responsibility and Fulfillment Responsibility marketing model and service scenario marketing. We also established a closed loop of services from training to customer engagement activities, service resource facilitation, solution design and final transaction to support agents to engage with their customers and drive conversion more easily. Up to now, Fanhua has carried out nearly 200 FOC and FRP training and certification programs nationwide, with a cumulative total of more than 13,000 certified trainees who have become the major force to assist customers in setting up trust accounts and selling whole life and energy insurance products. In the third quarter of 2022, FOC and FRP certified trainees contributed about 66% of Fanhua's first-year life insurance premiums, and the per capita productivity was much higher than that of non-trainees. Building on the success of the FRP training programs in third quarter, we have accelerated our training with an additional 3,000 trainees completing our training course in October. By the end of the third quarter of 2022, Fanhua has largely finished the construction of its IT infrastructure to support digital operations. We continue rolling out various frontline digital tools for wider adoption among sales agents across the country and continuously optimizing the functionality and user experience. Specifically, our insurance policy custody system version 2.0 and insurance service [indiscernible] workstation, our proprietary customer engagement platform, were both rolled out in larger scale during the third quarter. Currently, we operate a full suite of digital tools to provide all the support that agents need to manage their book of business online from customer engagement, transaction, customer services to personal professional growth, enabling significant efficiency improvements. For the fourth quarter of 2022 in view of the ongoing resurgences of COVID-19 cases across the country, the growth prospect of Chinese insurance industry remains challenging. Against this backdrop, Fanhua will continue with our established development strategy in the fourth quarter to empower agents and create value for customers. The management expects our operating income to be no less than RMB30 million in the fourth quarter of 2022. This concludes my presentation, and now the floor will be open for your questions.

Thank you. [Operator Instructions]. Our first question comes from the line of [indiscernible] from CICC. Please go ahead.

I have three questions. And the first one is what's your current product mix, especially what's the proportion of your savings products? And in terms of the savings products, what type of insurers do you work with more often? And what is the current take rate for such products? And secondly, could you share some more color on your profile of the customers and especially what's the proportion of your high end customers? And the last question is about your sales force. Could you give us some more details on your strategy as to recruitment? Is it difficult to recruit high quality agents currently? Thanks.

Let me get back to your first question first. In the third quarter, whole life insurance products, annuity and endowment, such savings products accounted for 87.5% of our total first-year premiums as compared to 83.6% in the same period last year. And in terms of first-year premiums, our major product suppliers [indiscernible], respectively, accounting for 27.3%, 24.8%, 11%, 5.5% and 4.6% of our first-year premiums, respectively. With the implementation of the [indiscernible] Phase 2, many life insurance companies actually is subject to greater restriction in terms of growing their business as the new accounting principles lowered the recognition of life insurance policies profit as capital which also is resulting in a lowered solvency ratio, therefore, subjecting them to greater gross pressure, capital pressure and this is also one of the reason that even though synergy [ph] remains to be our largest [indiscernible], the shares in terms of our first-year premiums has not yet contacted from last quarter. As we also mentioned earlier, more and more insurance companies have been engaging with insurance intermediary channels and adopted a more open attitude towards the cooperation with independent intermediaries. We expect that our product supply as well as our insurance company partners will become more diversified next year. Based on 10 years APE, annualized premium equivalent, the first-year commission rate of savings products is in the range of 90% to 98%. But in terms of 20 years APE, the first-year commission rate for savings products can be as high as 138% to 145%, varying from one insurance company to another. However, savings insurance products, the payment periods are generally much shorter, typically three years, five years or 10 years. So even though the first-year commission rate is higher, the renewal commissions are actually much lower than other type of products such as critical illness products. And on the other hand, critical illness products have much longer payment periods and the first-year commissions rate is lower than that of the savings products. But the total amount of revenues generated from newer commissions from critical illness products are pretty much higher which means that it has higher and better value for the company. This is also what we were trying to improve by encouraging the sales of more longer term products as well as by partner with insurance companies to design new products with high margin value to improve the overall value creation. As for the second question regarding our customer profile and the percentage of the mass affluent and high-net-worth customers, currently about 30% of our total customer groups are critical illness policyholders with per policy amount of approximately 4,800. And of the critical illness policyholders, 66% are female while 46% of them are in the age group of 30 to 40 years old with annual first-year premiums amounting to approximately 5,000. For the insurance policyholders for savings products, such as whole life insurance and annuity insurance, the female accounted for 76% and over 60% of them are in the age group of 40 to 59 years old with per policy premiums of 48,000. So this means that the age group in the range of 40 to 59 years old, this age group populations are more likely to purchase whole life and annuity insurance for themselves and their family members to cater to their needs for both elderly care, legacy management, as well as savings for children education. So this basically aligns with our current strategy to serve the mass affluent and high-net-worth customers. And currently, there are about 300 million high-net-worth individuals in China with the age between 40 to 50 years old. In 2021, the insurance policyholders who paid over 100,000 first-year premiums annually accounted for approximately 1% of our total insurance policyholders for the long-term life insurance products. However, this small percentage of customer groups actually contributed to over 30% of our total first-year premiums. I believe that the number as well as the percentage of those higher net worth customers are actually increasing significantly on a year-over-year basis. For 2022, we have shifted our agent recruitment focus towards a lead-based agent tool. We have increased the standards for agent recruitment. And confounding with the impact of COVID-19, we do see a slowdown of agent recruitment this year. However, we are encouraged to see that the contributions of the percentage of higher performing agents among new crews are actually increasing significantly. In the third quarter in particular, the percentage of the number of high performing agents, which are defined as those who contributed 25,000 during the quarter in terms of first-year premiums, accounted for -- actually increased from 26% in the same period last year to 43% this year. And the per capital productivity of our effective agents during the quarter also improved both year-on-year basis and on a quarter-over-quarter basis from 14,000 in the same period last year and 20,000 in the second quarter to 22,000 in the third quarter. Building on our advantages in insurance trust services as well as health care services resources as well as the empowering capacity of our platform and as well as leveraging on the trend of the rising demand amount, the mass affluent and high-net-worth individuals for health care and elderly care services, we will step up efforts to introduce more MDRT, Million Dollar Round Table members. Our target for this year is to increase the number of MDRT from 302 last year to 500 by the end of this year. In addition, we also put a lot of our focus to both recruit and to trend our ages with more agents that can contribute over 100,000 premiums annually. And our target is to increase the number from roughly 1,600 to 2,000. So that's representing a growth rate of 3% year-over-year. By the end of the third quarter, solely based on the performance of nine months -- in the first nine months of this year, there are already 300 agents reaching the standards of becoming MDRT. And about 1,200 of agents have reached the standards of contributing 100,000 first-year premiums annually. So with the upcoming fourth quarter results -- with the contribution of their fourth quarter performance, we believe that there is still high chance for us to achieve this target. Thank you.

Thank you. [Operator Instructions]. I'm showing no further questions at this time. I'd like to turn the call back over to Ms. Oasis Qiu for closing remarks.

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

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