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spk06: Thank you for standing by for Fan Hua's third quarter 2023 earnings conference call. Thank you for standing by for Fan Hua's third quarter 2023 earnings conference call.
spk05: At this time, all participants are in listen-only mode. All lines have been placed on mute to prevent background noise. After management's prepared remarks, there will be 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. Webcast replay will be available within three hours after the conference is finished. Please visit Fan Hua's IR website at ir.fanhgroup.com under Events and Webcast section. Today's conference is being recorded. If you have any objections, you may disconnect at this time. I'd now like to turn the meeting over to your host for today's conference, Ms. Oasis Chiu, San Juan's Investor Relations Manager.
spk03: Thank you. Good morning and good evening, everyone. Welcome to San Juan's third quarter 2023 annual school. A replay will also be available on our website after today's school. During this school, we will be discussing some non-GAAP financial measures and a reconsideration of the differences between the GAAP and non-GAAP financial measures are available in our earnings release. And finally, 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. These statements are made based on management's current expectations and beliefs concerning future events may impact the company and therefore 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 FCC, including our registration statement on Firm 20F. We do not undertake any obligation to update this forward-looking information except as required under applicable law. Joining us today are our co-chairman and chief executive officer, Mr. Yilan Hu, co-chairman and chief strategy officer, Mr. Ben Lin. Mr. Hu will start the call by sharing his view on recent market trends and our strategy proposition, followed by Mr. Ben Lin, who will provide a review of financial and operational highlights. and discuss our business outlook going forward. There will be a Q&A session after the prepared remarks. And please know that you can find our presentation material relevant to this call from our official website. With that, I will turn the call over to our co-chairman and CEO, Mr. Hu. And Ben Lin, our co-chairman, will translate for Mr. Hu. Mr. Hu, you may begin.
spk02: Good morning and good evening. Thank you for joining us on our Q3 earnings call. In the wake of the pricing rate change for life insurance products, the life insurance sector has experienced evident fluctuations in premium growth,
spk01: with a period of very strong growth from the second quarter to July, followed by a significant slowdown from August to October. But withstanding this challenging environment, the execution of our key strategies continues to pay off.
spk02: In the past two seasons, both the insurance industry and the intermediary market, including Fanhua, have been hit hard by the changes in the regulatory policy. I would also like to take this opportunity
spk01: Over the past two quarters, both the insurance industry and the intermediary market that we operate in, including our operations, have inevitably faced significant impacts from regulatory policy changes. I would like to take this opportunity to discuss our perspective on these changes. 从8月1日起,人身险行业正式步入3.0时代。
spk02: This is the era of 3% reserve interest rate. In the short term, the customer demand needs to be repaired for a certain period of time. But in the long term, from the demand point of view, in the context of the further decline of the current bank deposit interest rate, we believe that 3% reserve interest rate insurance products still have a higher attractiveness.
spk01: Starting from 1st of August, the life insurance industry has officially entered the era of a 3% pricing rate cap for traditional life insurance products. In the short term, the restoration of customer demand may take some time. However, in the longer term, considering the backdrop of declining bank deposit rates, we believe that traditional insurance products with a 3% guarantee interest rate remains an attractive, defensive asset class.
spk02: In addition, we also pay attention to the fact that Yen Bao Qidao has recently started to strictly carry out an insurance merger. We expect that the supervision department will also start professional intermediary channels in the next few months. Whether it is the downfall of the reserve interest rate or the fall of the insurance union, it will undoubtedly bring huge challenges to the entire insurance industry in the short term. But we think that from the long term, the fall of these two policies will also push the industry to achieve a more standardized
spk01: In addition, we also expect that the regulator will extend the recent commission rate changes in the bank assurance channel to the agency and independent broker channels in the coming months. While the short-term impact of both the pricing rate adjustment and the enforcement of commission rate caps could present significant challenges to the entire insurance industry, we maintain the perspective that in the long term, These policy implementations will steer the industry towards a more higher quality and sustainable growth trajectory.
spk02: We predict that the development of the future industry will gradually transition to technology and services as products and costs drive. This means that those companies with strong investment capabilities, innovative services, and technology capabilities, and rich capital, The market will be more concentrated. This trend is not only reflected in the insurance company level, but also in the intermediary market. In the future of the intermediary market, there may be a situation where multinationals will come together.
spk01: We anticipate that the future development of the industry will shift gradually from being driven by product and sales commission to be predominantly driven by technology and services. This implies that companies with innovative services, technological capabilities, and ample capital will enjoy a more favorable position. The strong players are likely to become even more dominant, leading to a trend of consolidation and increased market concentration. This trend is not only evident at the level of insurance companies, but is also applicable to the intermediary market. We think the scenario of a few major intermediaries dominating this market is a possible outcome following these regulatory changes.
spk02: We believe that the future direction of the medium-sized market will be the platforming of large companies, and the current market challenges will push more and more small and medium-sized companies to leave the market or choose to join large platforms. We envision that the future trajectory of the intermediate market will see larger companies transitioning towards platform-based operations.
spk01: We expect to see a large number of small to medium-sized brokers to either exit the market or choose to work with larger broker platforms in order to survive. These collaborations could involve platforms providing essential mid-end and back-end support, enabling these companies to lower their fixed costs relating to IT compliance, operation, and training. This allows them to focus more on customer acquisition and relationship management at the forefront of and enable them to enhance differentiated service capabilities to achieve sustainable business development.
spk02: For FANHUA, this new trend and the company's open platform strategy are highly compatible. In fact, the trend that we originally expected to appear in a few years may appear in early 2024. This will accelerate FANHUA's transformation from a sales company to a platform company. to promote the improvement of scale and market size. In this process, we will also strengthen the deep and positive cooperation between our major suppliers and small and medium insurance companies. Through our technological capabilities and customer service, we will not only take on the role of the sales channel of insurance companies, but we can also work in depth in IT and service areas to obtain more diverse income sources.
spk01: This emerging trend aligns well with our open platform strategy. In fact, this is a catalyst that we previously thought could take years to materialize, but it is now looking more likely to take place in early 2024. In essence, these changes should help expedite our transformation from a sales-focused company to a platform-centric entity. This, in turn, should give us the opportunity to gain more market share and grow our scale advantage. We're also looking to intensify our collaborative efforts with our key product suppliers, the small and medium-sized insurance companies, to foster stronger and mutually beneficial partnerships. Leveraging our stronger capability in sales technology and customer service, we aim to extend our relationship with our product suppliers beyond sales and distribution, but also in IT and services. In turn, we aim to generate a more diversified revenue stream for our insurance partners. With greater scale and market dominance, we aim to work closer with our partners in product development and develop greater pricing power.
spk02: We are confident in the future development of our industry. We believe that the company's strategy will bring more opportunities in the new market environment.
spk01: We remain confident in the future prospects of the industry and firmly believe that our company's strategy positions as well to capitalize on numerous opportunities in the evolving market landscape. We are dedicated to advancing the implementation of our established strategies with a commitment to delivering long-term value for our shareholders.
spk02: I will go over this in English just to save us time and we will allocate more time for the Q&A later. So I'm pleased to present our latest earnings results for the third quarter of 2023.
spk01: The pricing changes to life insurance products affected from August caused a spike in new business sales in July, which was then followed by a slowdown in sales in August and September as our insurance partners take time to adjust their new product offerings. Despite this disruption, our results over the quarter were solid and we remain confident that our strategies are working well, allowing us to persevere even under a volatile industry environment. The key highlights of our third quarter results include Total life insurance premium grew by 23% year-on-year to RMB 3.4 billion. First year premium grew by 10.3% to 584 million. Net income attributable to shareholders came to RMB 117.7 million, representing a significant year-on-year increase of 382%. This uplift is largely due to an unrealized gain from our investment in Churchill Technology Limited, in which we hold a 2.8% stake, and they recently went public. Fanhua disposed our P&C division back in 2017 to Churchill for a combined consideration of cash and convertible loan. We obtained the equity stake in Churchill upon exercise of option to convert part of the convertible loan. Our strategic focus on professionalism specialization, digitalization, and open platform remain the cornerstone of our success. Our operational highlights include, number one, our commitment to digitalization has led to substantial cost reduction and efficiency improvement. Our digital technology platform underwent further intelligent transformation, leveraging artificial intelligence and smart algorithm. Like many of our peers, we are trialing with a lot of AI, tools in our business, we introduced AI-enabled digital avatar, AI assistance, and smart recommendation system, customer distribution system to assist insurance professionals in offering efficient and personalized solutions to our clients. For the third quarter of 2023, our adjusted operating expense ratio decreased from 32% to 30%, a significant improvement compared to the same period last year, despite increased IT investment. Number two, we remain committed to empowering our sales team with the expertise needed to ensure high quality growth. We persist in conducting our 3F training. As of September 30, the number of individuals trained in 3F, which stands for Fa Hua Policy Custodian, Fa Hua Retirement Planning and Family Office Consultancy, reached over 22,000. The positive impact on agents is increasingly evident with improvements observed in the quantity of our top performing agents, but also led to significant increase in productivity. For the third quarter of 2023, the monthly average per capita productivity of our 100K premium agents increased by 23% year-on-year to RMB 270,000. And that of our MDRT increased by 27% year-over-year to RMB 600,000. The number of MDRT agents also increased by 29%. The proportion of high performing agents contributing premiums also rose from 46% to 62% compared to the same period last year. In response to the growing demand for diversified and personalized services among high net worth individuals, we launched the Family Office Advisor Incubation Program, built upon our free app training and certification system. With the specific aim of attracting talent from other professional industries, outside of the traditional financial industry. This initiative has garnered significant attention within the industry, and we have already initiated preparations in Guangdong and Sichuan for the program. Number three, our open platform strategy continues to deliver material results. We have successfully linked with 791 third-party agency companies as of September 30. These collaborations combined with our M&A have contributed over 28.3% to our sales volume, highlighting the success of our open platform strategy. We have also officially launched the digital tenant system in late October, which has received positive response from the industry. To date, we have received many inquiries from third-party insurance brokers and insurance companies on onboarding the tenant system. and so far have signed up two insurance brokerage firms as our digital tenants. We believe that the current market challenges and the focus on digitalization and cost efficiency will bring more business opportunities for our open platform strategy. The fourth point I want to go through is we have made significant progress with overseas expansion, adding a new pillar to our growth strategy. On October 23, we announced a strategic partnership with Asia Insurance to establish two joint venture companies. In both cases, Fanhua will own 60% controlling interest. The two companies, focusing on developing life insurance distribution technology for the Asia Pacific region, marked an important milestone for Fanhua in our endeavor to establish our global presence and realize our vision of becoming a globally leading technology-driven financial services platform. By joining forces with Asia Insurance, we are confident that we'll be able to leverage the strength of both parties to capitalize on the significant growth opportunities in the Asia-Pacific region and create long-term value to our shareholders. Finally, as I mentioned earlier, we recognize an unrealized gain from the investment of Churchill during the third quarter of 2023. We would like to remind our shareholders that this is a one-off gain in nature, and our holdings in Charcher could continue to cause volatility to our net profit over the short term. The most important implication of Charcher's listing in our view is that we hope you can clear legacy misunderstandings regarding our relationship with Charcher. Our divestment of our PMC business to Charcher and our focus on our core life insurance business have proven to be the right strategic move. We're also delighted for Charcher to be able to complete their listing on the NASDAQ. Looking ahead to the fourth quarter, the anticipated implementation of commission cap is expected to bring about short-term challenges for the entire industry. However, as Mr. Hu highlighted earlier, we also see this as an important catalyst to accelerate the development of our open platform strategy and fast-track our transition from a sales-oriented company to a platform-oriented. In the Hong Kong market, we will continue our collaboration with Asia Insurance, seeking business opportunities and assembling teams for our joint venture companies. We're also excited to share that we have started exploring growth opportunities outside of Asia and are actively looking for partnerships similar to that we have formed with Asia Insurance. In closing, I would like to say that the life insurance industry in China remains very young and the intermediary segment is still at its infancy in terms of development. We strongly believe that the market opportunities ahead of us remain very significant. At the same time, we're also conscious that our young industry will no doubt continue to face regulatory changes as our regulator continues to direct the industry towards higher quality growth. Pharma has been established for 25 years, and we have a strong track record of navigating through changes. This gives us confidence that we can continue to deliver for our shareholders under all market environments. This concludes our presentation. I'll turn the floor over for Q&A.
spk05: Thank you. Thank you. We will now begin the question and answer session. To ask a question, please press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Once again, that's star 1 1 for question. Our first question comes from the line of Yu Yu Zhang from CICC. Please ask your question, Yu Yu.
spk04: Thank you, Manager Chen, for giving me this opportunity to ask a question. First of all, I would like to congratulate Manager Chen for having a very stable performance. I have a few questions I would like to ask. The first one is about supervision. In the future, we may implement this economic channel, and I would like to ask about the management of the company. So my first question is related to the regulation. The regulator mentioned that they may still implement the fee regulation as we call it in our agency and brokerage channel. So could you share some more color on if it happens, then the impact on the whole industry and Fanghua? And my second question is related to the overseas expansion. We noticed that Fanghua will establish to subsidiaries with Asia Insurance. So could you share some color on the strategy cooperation and is there any further timeline you could share with us? And my last question is about our open platform strategy. So how much digital talent success or their own agreements do we have on our open platform and do we have any further plan to attract more digital tenants? Thanks very much.
spk02: Hello, I'm from Hunan. Let me answer the first question. It's about the impact of telecommunication on the company. First of all, telecommunication, we think this policy is very reasonable for the entire industry. Because we also know that the industry is more difficult to manage now. The reason for the difficulty is on the one hand, the capital market investment field, and on the other hand, The cost of sales is high, so we think that the supervision is on the one hand to reduce the demand rate, and at the same time to reduce the cost of sales. This is very correct for the long-term development and health development of the entire industry, and we support this policy very much.
spk01: Okay, so on your question about the commission rate impact, so first of all, we want to state that the policies that you've been hearing coming out of the regulator is very understandable. Obviously, the industry right now, the life insurance industry in China right now is very challenging. We can see a lot of insurance companies are facing difficulties in terms of investment return given the weak capital market environment. Sales expenses are also very high. So overall, the profitability situation for life insurers in China has been negatively impacted by these issues. The regulators' efforts over the last few months have been focusing on, number one, reducing the liability costs by capping the guaranteed return. And number two is they're trying to reduce the sales expenses. So overall, we think these measures are intended to improve the financial conditions of the life insurance industry, which should be positive over the long term.
spk02: Under this policy agreement, for our professional intermediaries, the core is to compete for the lowest cost of insurance acquisition. How can we have a lower cost of insurance acquisition? We see that either it is a scale-up or an extreme management and operation cost.
spk01: So for our business, we need insurers to stay profitable. That's an essential ingredient for our survival as well. So we basically embrace these changes that are coming through. The impact for our intermediary market will be that it puts pressure for everyone to lower their policy acquisition costs. We believe the operators with the lowest cost will benefit in this environment going forward. And this will force us to reduce costs on two fronts. Number one, through scale, or number two, through efficiency improvements.
spk02: So we think that the next market value or market competition is in two aspects. The first aspect is technology. Only through technology can we reduce costs to the maximum extent. Only through technology can we support the scale-up. The second aspect is professional service. Professional service especially supports the professional growth of high-level entrepreneurs. We think there will be two very important criteria for any intermediary to be successful in the upcoming environment.
spk01: Number one, the ability to develop market-leading technology, which should help reduce costs. and also increase economies of scale. Number two, through professional service. By that, we mean for the high-quality agents, intermediaries that are able to provide a professional development career path will have a competitive advantage in the new environment.
spk02: So in this market, if we can provide these two capabilities, then We have the view that right now the market that we operate in is very fragmented with 2,800 competitors.
spk01: of which we think only a few companies have the capability to develop these two very important operational abilities that we mentioned about in terms of technology and professional service. And this is why we expect that if these regulations were to be introduced going forward, we are likely to see the intermediary market in China becoming more concentrated and potentially be dominated by a few large companies.
spk02: FanHua has always been promoting the transformation from a sales company to a platform company. The implementation of the integrated policy will accelerate FanHua's platform-based process. So we believe that once the integrated policy is implemented, it is also a manifestation of FanHua's competitiveness. Especially with the digitalization and open platform construction that we have completed now, we can provide the knowledge of the middle and the back end to a large number of market entrepreneurs. In this way, we can help everyone to reduce costs and provide more professional services to the market participants. From a financial perspective, we believe that telecommunications will be In the short term, it may be suppressed in terms of profit. However, we will use the implementation of such a policy to accelerate the promotion of this open platform strategy, which will encircle the increase in the market share rate as the goal of our entire country's business, and will scale up So for Faohua, over the last few years, our strategy has been focusing on transitioning from a pure sales company to a platform-centric company.
spk01: And as I mentioned earlier, these regulatory changes we think is going to accelerate our platform evolution. We have very evident competitive advantages in terms of technology and our strategy is really leading the market in many sense. We are the first to launch this platform strategy that we think should help lower the IT costs for a lot of the small to medium size intermediaries in the market. The way we think about it is that these regulatory changes fit quite well with what we're trying to do with our company and what we're trying to provide for the industry. In terms of financial impact, however, there will be some short-term pressure. That's for sure, given the commission rates are likely to drop. However, by focusing on accelerating our platform strategy, we aim to increase our market share significantly and gain significant economies of scale.
spk02: 好的,第二个问题是关于与亚洲保险的这个战略合作,那么这个问题请这个Ben你来回答。 好的,I'll try and answer this in English next time again.
spk01: So we have basically formed two joint ventures with Asia Insurance in Hong Kong, both of which Fanhua owns 60%, Asia Insurance owns 40%. As many of you may know, Asia Insurance is the insurance subsidiary of Asia Financial Holdings in Hong Kong. The aim of these two joint ventures, in essence, is to launch Baohua's expansion overseas. And what we intend to do with Asia Insurance is mainly focusing on exporting our technological capabilities in China onto the global stage. As many of you may know, Technology adoption in China now is very mature compared to a lot of markets outside of China. 100% of our sales in China right now is basically paperless. It's all driven by our app. In fact, what's different about China versus Hong Kong is that all of our agents can use Fanhua's app, Lan Zhan Gui, to basically issue policy proposal and also complete the entire transaction process. In Hong Kong, where you have 811 brokers, they cannot complete the entire transaction. In Hong Kong, if a broker was to sign an insurance policy for a client, they have to issue the policy on the insurance platform. So we think there's immense opportunity for Fanhua to export all the IT that we have developed in China over the last 10 years, which costs us billions in RMB in terms of IT spending into Hong Kong. Some of our competitors in Hong Kong are already charging $200,000 in Hong Kong dollars per year for very simple apps that basically just does policy illustration, policy comparison. So you can imagine the revenue opportunity that we can gain from expanding into just Hong Kong. And beyond Hong Kong, we're also exploring with Asia Insurance about expanding into Southeast Asia, where they also have a very strong presence in the P&C business. So that's the essence of what we're really trying to do with Asia Insurance. What you can expect is that over the coming months, there'll be a few things. Number one, we are at the final stages of completing, acquiring a local life insurance brokerage license. which should basically enable us to have contracts with up to 17 life insurance companies in Hong Kong. And we'll further increase that post-acquisition. We'll sign up with more insurance companies in Hong Kong. Secondly, we're already at the very early stages of translating our Lang Zhang Hui app in China. into traditional Chinese and also English that will be applicable to the Hong Kong market. We're also working very hard on the human resource front, basically recruiting the relevant personnels to launch our business in Hong Kong. So all in all, I think 2024, I have confidence that Hong Kong will potentially be a revenue contributor to Fanhua. Thank you.
spk02: The third question is about the users of the open platform signature agreement. Currently, we have three types of agreements on the platform. One is the FanHua platform agreement. The other is the management general management agreement of MJ. The third type is the signature agreement. We are still in the process of connecting the three-party agreement. We are gradually advancing. So far, there are not too many users in our pre-agreement agreement. Currently, there are three in operation. These three are also in cooperation with the insurance company, because it involves the data security of the bottom. So it is also in progress. It is expected that there will be more than 10 pre-agreement agreements. In this way, our platform may be a relatively smooth experience. At that time, we can fully promote it. Currently, the MGA agreement has been running very well on the platform. There are about 791 signing channels, and they can be carried out smoothly on our platform. These channels that have been signed will have their own signing agreement. Now they are our potential customers. So in the current process, we are still working with insurance companies
spk01: So on our open platform, there are basically three types of agreements. Number one is the FANHUA agreement, number two is the MGA agreement, and number three is the SELF agreement. The question was related to how many tenants that we have is using their SELF agreement. What we want to explain is that for the SELF agreements, it requires a three-way data exchange agreement between the insurer the broker, and the platform. Right now, we have three tenants that's using their self-agreement in operation. Because it relates a lot to data security and data exchange, we think that we need about 10 in operation to fully promote this service. But the opportunity is very evident. On the Fanhua Yunfu Cloud and also MGA channels, We have a total of 791 connected parties in terms of on our IT system. They have their own agreement and it's basically our largest pool of potential clients.
spk06: Okay, thank you. Thank you. Once again, to ask a question, please press star 111. on your telephone.
spk05: I am showing no further questions. I'll now turn the conference back to Ms. Oasis Chiu for any additional comments.
spk03: Thank you, Amber. If you have any further questions, please feel free to contact us. Thank you for participating in today's conference call. Thank you.
spk05: Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.
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