AIFU, Inc. Q3 FY2022 earnings call

• Macro environment: China's life insurance industry gross written premiums grew 1.3% y-o-y with sales force declines, but insurance intermediaries showed steady growth. - Fanhua's performance: Life insurance premiums up 6.2% y-o-y, operating income up 14.2% y-o-y. Sales force productivity improved: per capita productivity up nearly 20%, high-performing agents up 46%. - Trust services: Nearly 150 trust accounts by end-Q3, 60 in Q3. - Health care services: 14 experience centers set up. - Digital tools: Insurance policy custody system 2.0 and customer engagement platform rolled out for agents' efficiency.

In the third quarter of 2022, Fanhua's life insurance premiums grew by 6.2% year-over-year to RMB2.8 billion. Regular life insurance first-year premiums reached RMB529.7 million, up by 9.1% year-over-year. Operating income was RMB32.2 million, representing a growth of 14.2% year-over-year. The number of 100,000 premium agents grew by 46% year-over-year, contributing 48% of total first-year premiums in the quarter, up from 39% in 2021. For trust services, as of the end of the third quarter of 2022, Fanhua facilitated setting up nearly 150 trust accounts with over RMB1.7 billion in trusted assets, and in the third quarter alone, nearly 60 trust accounts with RMB510 million in trusted assets and RMB27 million in insurance premiums. In health care services, 14 health care service experience centers were set up across the country.

The management expects our operating income to be no less than RMB30 million in the fourth quarter of 2022.

• Macro economic uncertainties. - Restrained consumption. - COVID-19 resurgences. - Regulatory requirements of nationwide double recording impacting insurance industry growth.

Q: 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?

A: 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.