AIFU Inc. Q4 FY2023 Earnings Call

Thank you for standing by for Fanhua's Fourth Quarter and Fiscal Year 2023 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. 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.fanhgroup.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'd now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager.

Thank you, Andrew. Good morning and good evening, everyone. Welcome to Fanhua's fourth quarter and fiscal 2023 earnings call. A replay will be available on our IR website after today's call. 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 impacting 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 are 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 its forward-looking information, except as required under applicable law. Joining us today are our Vice Chairman and Chief Executive Officer, Mr. Yinan Hu; Chief Financial Officer Mr. Peng Ge; Chief Strategy Officer, Mr. Ben Lin; and Chief Operating Officer Mr. Liu Lichong. Mr. Hu will start the call by sharing his view on recent market trends and our strategy development, 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. Please note that you can find our presentation material relevant to this call from our official website. With that, I will turn the call over to Mr. Hu. You may begin.

Good morning and good evening. Thank you for joining us on our fourth quarter and full year 2023 earnings call. Reflecting on the past year, 2023 proved to be a year of challenges and transformations for the entire life insurance industry in China. The changes in regulatory policies, particularly the downward adjustment of the pricing rate and the implementation of Filing and Actual Fee Consistency requirement in the bancassurance channel, presented unprecedented tests for the industry. Fanhua was no exception. However, it was precisely within this challenging landscape that we showcased resilience and achieved stable growth. In the full year of 2023, we achieved a total insurance premium of RMB16.4 billion, representing a 28.7% year-on-year growth, continuing to outpace the overall industry growth. First year premiums reached RMB3.8 billion, marking a 30.3% year-on-year growth. Leveraging the efficiency gains from digitalization and robust cost control measures, we realized an operating income of RMB195.8 million, up 16.1% year-on-year. Net income attributable to shareholders reached RMB280.4 million, reflecting a growth of 179.7% year-on-year. This solid performance demonstrates the successful execution of our strategy. Over the past year, we have continually strengthened our strategy of driving growth through Professionalization, Specialization, Digitalization, and Open Platform, using a series of pivotal achievements. For instance, we have consistently bolstered our pool of top-tier agents, enhancing their professional capabilities, with contributions from top-performing agents and increased productivity of our sales team at all levels. Our digital platforms have continued to deliver efficiency gains, empowering our insurance advisors while also providing our customers with superior service experiences. The diversified service ecosystem that we have built has established a solid foundation for our company's differentiation and long-term development. Furthermore, our open platform and M&A model have also emerged as key drivers of our company's growth. The forthcoming consistency requirement and the commission cap, although may inevitably pose significant challenges to the industry, will also present enormous opportunities. We believe that amidst this phase of deregulation and accelerating industry transformation, scale-driven leading players, companies able to offer diversified services, and digitally intelligent platform companies will find themselves in a more advantageous position. Leveraging our strategic achievements in specialization, digitalization, and open platforms and service-oriented initiatives over the past two years, we are confident that Fanhua will emerge as the biggest beneficiary. Meanwhile, our internationalization strategy is steadily advancing. Hong Kong, serving as the cornerstone of our international expansion efforts, has seen the official launch of two subsidiaries within Asia Insurance for business operation, providing a solid foundation for our global business layout. Recently we signed a strategic framework agreement with Singapore White Group, marking a significant milestone in our development journey. The potential collaboration represents a strategic upgrade towards artificial intelligence development and internationalization. Investments in high-quality overseas assets aim to deepen our presence in family services, including insurance, wealth management, education, health care, and family governance. This move aims to achieve horizontal and vertical integration, allowing us to offer comprehensive and efficient family asset allocation services to clients. Moreover, it will accelerate our expansion in international markets, paving the way for broader development opportunities and propelling the company to greater heights. Looking ahead, we firmly believe that the industry will gradually move towards consolidation, forming a geopolitical landscape dominated by a few major players, with services and technology driving the way forward. We are poised to emerge as one of the biggest beneficiaries of this transformation. Embracing the insurance processes plus technology model, we will provide comprehensive products and diversified services to our customers while leveraging technology to enhance service efficiency. Our focus will be on serving the high-net-worth customers and MDRT, which are also our core assets. The year 2024 will be pivotal for our development. We will further expand our scale to include industry-leading technology platforms, comprehensive service capabilities, and strong capital to acquire high-quality assets. We believe that in the journey ahead, we will continue to maintain our leading position, create more value for our customers, and achieve the long-term development goals of the company. Now I would like to invite Mr. Ben Lin, our Chief Strategy Officer to discuss our business highlights in the fourth quarter and 2023.

Thank you, Mr. Hu, and thank you, Oasis. Let me just walk you through our results for 2023. Some of the numbers that I'm going to quote can be found in our results release as well as our online presentation. Impacted by two significant regulatory policy changes in 2023, specifically, the pricing rate change and commission cap at the bancassurance channel, the life insurance industry in China witnessed a roller coaster ride in terms of premium growth. Starting with single-digit growth in the first quarter, it saw double-digit growth in the second quarter due to the pull-forward demand prior to the pricing rate adjustment. What we saw was then a reversion to single-digit growth in the third quarter, and ultimately negative growth in the fourth quarter. Overall, the entire year of 2023 saw a 10% year-on-year increase at the industry level. Amidst the pressures of sluggish performance on both the liability and investment sides, major insurers are expected to experience significant declines in profitability, as indicated by the 15% negative growth in average profit for the listed companies in the first nine months of 2023. Against this backdrop, Fanhua continues to outperform the industry with stellar performance. In 2023, we achieved RMB16.1 billion in total life insurance premium, a 30% increase year-on-year, while net income to shareholders reached RMB280 million, up almost 180% year-on-year. Overall, we're very pleased with our financial results, given the backdrop of a challenging macro and insurance industry environment in 2023. More importantly, we are particularly proud of the strategic executions we have carried out to achieve these results. Throughout 2023, we successfully executed each strategic initiative as we had planned. We firmly believe that these strategic achievements will set us on a higher quality and sustainable growth path. I would like to highlight four key strategic achievements that we saw in 2023. Firstly, our strategic focus on improving our agent quality and productivity produced significant results and is the major driver of our success in 2023. Our MDRT and 100k premium agents have emerged as major contributors to our growth. These agents saw productivity increasing by 15% and 10%, respectively, and they accounted for 65% of our total first-year premium, up by 9 percentage points from 2022. These achievements help offset the significant decline in overall agent numbers, a metric that we're no longer focused on and which is also an industry-wide trend. Secondly, we saw significant achievements in our digital technology empowerment. Based on the digital infrastructure built on big data and intelligent algorithms, Fanhua has built an industry-leading digital empowerment system covering five major systems including operational support and management empowerment, professional growth and IP promotion system, customer management system, customer service system, and transaction support system. Among the many important tools in our digital system, in 2023, Fanhua focused on strengthening digital marketing empowerment with functions such as digital avatars and intelligent recommendation systems. The cost reduction and efficiency improvements brought by the digital empowerment that we have built resulted in significant efficiency increases over 2023. If you look at our operating expense ratio, it decreased from 29.4% to 25.7%. Agents who frequently used our system have productivity that is 1.6 times higher than those who did not. Thirdly, our open platform strategy accounted for over 30% of our total new business. By the end of 2023, we have signed contracts with 854 channels, an increase of 63 from the third quarter of 2023. These partnerships contributed to a total first year premium of over 1.1 billion, accounting for over 32% of our total new business. They are also insurance companies, human resource consultancy agencies, and numerous other B2B channels expressing their interest in further collaboration with us to use an open platform system and digital tools to sell life insurance in their main business. Fourthly, our service-oriented ecosystem continues to take shape with evident results. We have developed a robust ecosystem beyond just life insurance, covering trust service, family offices, health care and wellness, overseas asset allocation, education, tax consulting, and family affairs processing. During 2023, we held 256 family office consultants training sessions and salons, certifying more than 1,200 family office advisors who have since served a total of 500 families in assisting them to set up a total of 450 trusts with total asset value exceeding RMB5.6 billion and facilitating approximately RMB100 million in first year premium. By the end of 2023, more than 20,000 Fanhua Retirement Planners have been trained and certified. Nearly 300 visits to our continuing care retirement community were organized, helping nearly 1,000 customers lock in rates for long-term stays in these retirement communities. And more than 4,000 customers obtained rates for these retirement communities across the nation, helping achieve over RMB600 million in first year premium. At the end of 2023, Fanhua has trained and certified more than 20,000 policy trusteeship experts serving more than 130,000 policy trustee families with 630,000 policies under trusteeship, generating trust sales and upper sales to 30,000 customers, facilitating about RMB550 million in first year premium. Lastly, we have made significant progress in our global expansion strategy. Since the establishment of our two joint ventures with Asia Insurance in Hong Kong, in October, the insurance brokerage company has completed the formation of its core business team and signed contracts with about 10 major insurance companies in Hong Kong, ensuring the ability to meet diverse customer needs. Operations officially commenced in early February for our insurance brokerage business. On the technology side, we're actively engaging with a number of insurers, and we're confident that our technology business will have its own milestones in 2024. Looking ahead for 2024, the insurance industry, especially the independent intermediary channel, will face a series of challenges and opportunities. Due to the significant uncertainties surrounding the specific timing and extent of the implementation of the requirement for consistency in reported and actual fees in the independent intermediary channel, we are unable to make precise predictions regarding our annual performance targets. However, what can be anticipated is that whilst the regulatory change may lead to short-term adjustments, it will also bring important opportunities for the development of our open platform. Our strategic focus in 2024 will include, number one, continuing to build a professional and specialized sales team. We aim to increase our market share by growing the number of high-quality agents, particularly MDRTs, taking advantage of the market consolidation opportunity likely to arise from the commission cap to be implemented. Number two, enhancing our capabilities to serve high-net-worth individual clients. We will continue to strengthen our service ecosystem, supplementing our offerings in financial services through education, elderly care, and overseas support. Number three, bringing in high-quality assets while going global, accelerating our internationalization and digitalization process. We have been invited by a number of insurers to set up operations in Macau and Singapore. Lastly, we will pursue M&A opportunities to achieve horizontal and vertical integration. Given our strong financial position with over RMB1.4 billion in net cash and the backing of our potential strategic shareholder, Singapore's White Group, we're likely the most well-resourced intermediary in the region with the capacity and capability to undertake attractive and accretive M&A opportunities, both inside and outside of Mainland China. This concludes my presentation, and I'll hand the session back to Oasis.

Thank you. Now the floor opens for the Q&A session. Andrew?

And our first question comes from Yuyu Zhang with CICC. Your line is open.

So my first question is about the commission revenue. Could you be a little bit more precise on this? Beyond your observation, to what extent did the commission revenue decline? If you have numbers you can share with us. My second question is for the overseas business. Could you share some more details on what you've done in 2023 and your plans for 2024? How can someone cooperate with you to achieve more market share in Asia? Thank you very much.

Mr. Hu would like to invite our Chief Operating Officer Mr. Liu to take your first question. And the second question actually consists of two parts. So first of all, regarding our national initiative, especially the business in Hong Kong, this part will be answered by Mr. Ben Lin, our Chief Strategy Officer and the last regarding our potential collaboration with White Group, Mr. Hu will answer the question.

The requirements for the reported and actual fee consistency in the independent brokers channel is upcoming. Although the regulatory body has not yet given specific timing as to when they will be implemented, the rumors in the industry suggest that it will probably be implemented in April. As for the extent of the commission cap, there is also no specific guidance from the regulatory body yet, but the consensus among a lot of insurance companies is that the commission rates for the same type of products will likely be down by 30% to 40%. While it's certain that the business for independent insurance brokers will be severely impacted, many insurance companies will have to adapt their product strategies to address this market change, diverting their focus from whole life insurance products to participating insurance products to compensate for some of the lost commission income for independent brokers. The commission cap and the reported fee consistency are inevitable trends, given the continued decline in interest rates. However, these changes may present a short-term headwind for the industry, but we are fully prepared for these new changes. We have also been expanding our platform models and believe that this regulatory change will result in many small and medium-sized insurance intermediary companies collaborating with Fanhua in terms of platform business, helping us continue to drive market share.

Okay, I'll answer the first part of the second question with regard to progress in the Hong Kong market. We established the two joint ventures with our partner Asia Insurance back in late October, so it's been about five months. I am very pleased to say that we have made very significant progress with our two joint ventures. Firstly, in terms of our team setup and office, we now have two offices in Hong Kong. One is our brokerage business and the other one is our technology business. In our brokerage business, we have now built a team of 13 members in the administration and technical representative areas to facilitate contract signing. From November to January, together with the management team from Asia Insurance, we met with all the major life insurers in Hong Kong to start the process of contract signing. So far, we have signed contracts with 10 insurers. Recently, we received the commission schedule forms from some insurers. I am very pleased to say that we can officially commence business starting this week. In terms of where we differentiate in Hong Kong and why we are confident that we can be successful, I believe it comes down to two things. Firstly, we are the only broker in Hong Kong backed by two listed companies with abundant resources, providing us with abundant opportunity and capability to offer comprehensive services to our customers. Secondly, on the technology front, the broker technology segment in Asia remains very underdeveloped. Even in mature markets like Hong Kong, much of the contract signing is still paper-based compared to 100% digital or paperless in China. We have over 200 in-house IT support staff that can transfer the know-how we built in the Chinese market to Hong Kong. In the discussions that we had with all the life insurers from November to January, the focus was really on two topics: contract signing and IT integration. I am very pleased to say that all insurers expressed strong interest in working with us not only to do business but also in how we can collaborate to improve the sales technology in the Hong Kong market. Interestingly, we are also convincing them to possibly outsource their in-house sales technology to Fanhua, because we have invested considerable resources in our sales technology capabilities over the last four to five years. I think a lot of this know-how is probably ten years ahead of the Hong Kong market. I am very confident that our technology capability and differentiation will be one of our strong competitive advantages in the Hong Kong market. Although we just commenced our Hong Kong business, we have been invited by several insurers to start operations in Macau and also in Singapore. In these markets, there is also a lack of presence of a major broker, that has strong shareholder backing and technology capability. One step at a time, I wouldn't be too surprised that in 2024, we will expand beyond Hong Kong. The second part of the second question will be answered by Mr. Hu regarding our progress with Singapore’s White Group.

First and foremost, we want to reiterate that our collaboration will not change the positioning of Fanhua and our strategic direction. Last year, we issued our new mission statement for the company, and we made it very clear that our objective going forward is to become the regional service provider for family services, broadening our capability beyond insurance to include education, retirement, etc. We are advocating an insurance-plus model beyond Mainland China. We believe the opportunity to collaborate with White Group is very timely for us. The synergy that our collaboration with White Group could provide is primarily twofold. First, White Group has a much better capability in terms of capital raising, particularly in the international market compared to Fanhua. Secondly, their track record and capability in mergers and acquisitions is also very evident. Given their history of success, we think these two capabilities serve as important upgrades for Fanhua as we pursue our strategy of going global through both organic and inorganic strategies. M&A will be a core part of our strategy because we see significant opportunities for consolidation in the market, not only in China but across the region. Our focus will be on two areas: we will focus our mergers and acquisitions on improving our capability to develop a professional sales team across the region, and we will work to broaden our services to high-net-worth clients. Without a doubt, the biggest change to our industry from 2024 onwards is the commission cap. The regulatory purpose of this cap is really to drive higher quality growth. How do you achieve that? At the end of the day, it comes down to upgrading your capability, something very important. We believe that the commission cap is the right move for the industry, and we fully embrace it. Our strategy is to allocate resources toward enhancing our capabilities so that in this environment, we can become the biggest beneficiary.

I'm showing no further questions at this time. So with that, I hand the call back over to Oasis Qiu for any 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.

Thank you for participating. This concludes today's program, and you may now disconnect.