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Edited Transcript of FANH earnings conference call or presentation 19-Mar-20 1:00am GMT

Q4 2019 Fanhua Inc Earnings Call

Guangzhou, Guangdong Mar 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Fanhua Inc earnings conference call or presentation Thursday, March 19, 2020 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chunlin Wang

Fanhua Inc. - Chairman & CEO

* Oasis Qiu

Fanhua Inc. - IR Manager

* Peng Ge

Fanhua Inc. - CFO & Executive Director

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Conference Call Participants

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* Debra Ann Fiakas

Crystal Equity Research, LLC - MD, Managing Member & Small Cap Strategist

* Yuan Xue

China International Capital Corporation Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by for Fanhua's Fourth Quarter and Full Year 2019 Earnings Conference Call. (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 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 Qui, Fanhua's Investor Relations Manager. Thank you. Please go ahead.

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Oasis Qiu, Fanhua Inc. - IR Manager [2]

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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 our newswire.

Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provision of the U.S. 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, 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [3]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [4]

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[Interpreted] 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 by give a brief analysis about recent market trends, followed by an overview of our fourth quarter and full year 2019 financial and operational results and our growth outlook in the first quarter in 2020. There will be a Q&A session after the report.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [5]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [6]

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[Interpreted] In the first part, I would 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 negative growth since 2018.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [7]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [8]

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[Interpreted] In the second part, I would 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [9]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [10]

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[Interpreted] Firstly, we delivered solid and healthy growth in 2019 amid the challenges of industry-wide adjustments. Our operating income grew by 36.9% year-over-year to RMB 114.1 million in the fourth quarter of 2019, bringing the total operating income in 2019 to RMB 469.4 million, representing a growth of 10.2% year-over-year, which is in line with our previous estimate.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [11]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [12]

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[Interpreted] 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 products, reported robust growth of 39.3% year-over-year in total gross written premiums to RMB 8.6 billion in 2019, of which first year premiums grew by over 28.2% to RMB 3.1 billion, and renewal premiums were up 46.6% to RMB 5.5 billion, while annualized premiums equivalent for 20 years were approximately RMB 2.0 billion, up 50% year-over-year. We're proud that we continue to maintain high business quality with 13-month persistency ratio of approximately 92%.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [13]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [14]

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[Interpreted] In the fourth quarter of 2019, our life insurance gross written premiums grew by 37.4% year-over-year to RMB 2.4 billion, [driven] (corrected by company after the call) by stellar growth in both first year premiums and renewal premiums. First year premium of life insurance business hit record high of RMB 934.5 million, representing a year-over-year growth of 39.8%. Renewal premiums grew by 35.8% year-over-year to RMB 1.5 billion, while annualized premium equivalent grew by 10.4% year-over-year to RMB 516.5 million.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [15]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [16]

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[Interpreted] Over the past year, our efforts to further optimize our product mix has started to pay off. In 2019, critical illness, annuity and health life insurance products accounted for 62.7%, 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [17]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [18]

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[Interpreted] 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [19]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [20]

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[Interpreted] With regards 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 40 -- 4.4%, respectively, in 2019. For the fourth quarter of 2019, revenues from Huaxia accounted for 30.4%; Sinatay, 26.3%; Aeon, 15%; Evergrande, 9.3% and Tian'an, 5.3%, respectively.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [21]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [22]

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[Interpreted] 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [23]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [24]

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

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [25]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [26]

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[Interpreted] 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 RMB 3.1 billion, accounted for 99% of our total life insurance business in terms of first year premiums.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [27]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [28]

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[Interpreted] 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 2.7 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 RMB 340 million in 2019 with a year-over-year increase of 28%. It has been profitable for [four] (corrected by company after the call) consecutive years since 2017.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [29]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [30]

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[Interpreted] 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 RMB 590 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [31]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [32]

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[Interpreted] Fourthly, 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 (sic) [adjusting] business. As a result, its revenues grew by 19.3% year-over-year in the fourth quarter of 2019 and 13.2% year-over-year in 2019.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [33]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [34]

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[Interpreted] In the third part, I would 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 impact on our workforce and business operations.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [35]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [36]

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[Interpreted] Firstly, we announced the following 4 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 would try our best to improve efficiency to lower other costs and will 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 alleviation fund in an amount of RMB 100,000 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 RMB 300,000 will be provided to their family members. Fourthly, Fanhua will provide an aggregate funding of up to RMB 20 million to entrepreneurial sales team leaders to help them cope with the challenging operating environment during the outbreak.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [37]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [38]

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[Interpreted] 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [39]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [40]

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[Interpreted] 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, visits to Lan Zhanggui has exceeded 22,000 per day, and attendance for our online training courses also exceeded like 1.5 million. A total of 9,700 product salons, entrepreneurial sales agents salons and customer interaction activities were hosted online by our agencies across the country, attracting over 724,000 attendants.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [41]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [42]

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[Interpreted] 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, which actively organized or participate in donation funds and supplies and all kinds of charity activities. As of today, we collectively donated funds and supplies amounting to RMB 1 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [43]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [44]

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[Interpreted] 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 RMB 10 billion, annualized premiums equivalent will be no less than RMB 1.7 billion, and operating income will be no less than RMB 420 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [45]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [46]

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[Interpreted] Secondly, in the past 6 years, we have adopted an 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 off-line will face challenges in terms of remaining competitive and proving sustainable.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [47]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [48]

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[Interpreted] Thirdly, in response to the COVID-19 outbreak, we have taken through advantage of our strengths in digital technologies and extensive off-line distribution and service network to conduct all of our operating activities, including training and marketing activities, agent 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 expect our business to largely resume to normal level in the second quarter of 2020.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [49]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [50]

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[Interpreted] Based on the aforementioned assessment, we expect our life insurance APE to be no less than RMB 300 million, renewal premiums to be no less than RMB 1.8 billion and operating income to be no less than RMB 50 million for the first quarter of 2020.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [51]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [52]

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[Interpreted] 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 4 quarterly installments of $0.25 per ADS for each quarter.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [53]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [54]

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[Interpreted] Finally, I would like to share 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 3 of our current or former executive officers. And the case is closed. We are pleased with the court's decision.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [55]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [56]

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[Interpreted] 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're well prepared 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 talent with wisdom as our key product. It marks the beginning of an era when China achieves its dream to rejuvenate itself and also marks a key milestone in our path towards transforming ourselves from great to extraordinary.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [57]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [58]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we have is from the line of Xue Yuan from CICC.

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Yuan Xue, China International Capital Corporation Limited, Research Division - Research Analyst [2]

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This is Xue Yuan from CICC. I have one question. In the fourth quarter, renewable premium is nearly 3x of APE. So what's the [percentage] of commissions contributed by the renewable premiums to the total commission?

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Oasis Qiu, Fanhua Inc. - IR Manager [3]

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(foreign language)

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Peng Ge, Fanhua Inc. - CFO & Executive Director [4]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [5]

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[Interpreted] The question is answered by our CFO. And in the fourth quarter, the revenues contributed from life insurance business was about 870 million in total. And of which, renewal commissions contributed around RMB 200 million, accounting for 22% of our total life insurance revenues. And then, in 2019, our total life insurance renewal commissions was about RMB 770 million, accounting for 23% of our total life insurance revenues. Thank you.

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Operator [6]

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(Operator Instructions) The next one we have is from the line of Debra Fiakas from Crystal Equity Research.

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Debra Ann Fiakas, Crystal Equity Research, LLC - MD, Managing Member & Small Cap Strategist [7]

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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.

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Oasis Qiu, Fanhua Inc. - IR Manager [8]

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(foreign language)

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Peng Ge, Fanhua Inc. - CFO & Executive Director [9]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [10]

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[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 its fair value as measured by its stock price as of the end of 2019.

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Debra Ann Fiakas, Crystal Equity Research, LLC - MD, Managing Member & Small Cap Strategist [11]

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Excellent. And then my other question is about consumer behavior. 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?

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Oasis Qiu, Fanhua Inc. - IR Manager [12]

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(foreign language)

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [13]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [14]

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[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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [15]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [16]

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[Interpreted] 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [17]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [18]

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[Interpreted] So that's why we think that online and off-line integration is the most efficient and scientific way for distributing insurance.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [19]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [20]

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[Interpreted] 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.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [21]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [22]

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[Interpreted] 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 I believe that it will also help diversify our operational activities in the future.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [23]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [24]

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[Interpreted] We see it as a kind of addition or diversification rather than a replacement.

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Chunlin Wang, Fanhua Inc. - Chairman & CEO [25]

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(foreign language)

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Oasis Qiu, Fanhua Inc. - IR Manager [26]

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[Interpreted] Thank you.

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Operator [27]

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

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Oasis Qiu, Fanhua Inc. - IR Manager [28]

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Thank you for participating in our conference call. If you have any further questions, please feel free to contact us. Thank you.

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Operator [29]

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