Fanhua(FANH) - 2023 Q2 - Quarterly Report

Executive Summary & Financial Highlights Fanhua reported strong Q1 2023 financial results with significant growth in operating income and net revenues, driven by improved agent productivity and strategic initiatives, while also outlining key non-GAAP measures Q1 2023 Financial Highlights Fanhua reported strong financial results for Q1 2023, with operating income surging by 193.1% year-over-year, significantly exceeding prior guidance. Total net revenues increased by 20.6% year-over-year, driven by robust growth in gross written premiums (GWP) and first-year premiums (FYP) Q1 2023 Key Financial Highlights (RMB thousands) | Metric | 2022Q1 (RMB) | 2023Q1 (RMB) | Change % | | :------------------------------------------- | :----------- | :----------- | :------- | | Total net revenues | 686,387 | 827,737 | 20.6 | | Operating income | 20,589 | 60,355 | 193.1 | | Non-GAAP operating income | 20,589 | 63,474 | 208.3 | | Net income (loss) attributable to shareholders | (37,838) | 60,452 | N/A | | Non-GAAP net income attributable to shareholders | 40,439 | 63,571 | 57.2 | | Diluted net income (loss) per ADS | (0.70) | 1.13 | N/A | | Non-GAAP diluted net income per ADS | 0.75 | 1.18 | 57.3 | - Total gross written premiums (GWP) grew by 29.0% year-over-year to RMB 4.4 billion, significantly above the life insurance industry's premium growth rate of 8.9%[2] - First year premiums (FYP) grew by 51.4% year-over-year to RMB 851.9 million, substantially exceeding the average growth rate of approximately 15% achieved by listed Chinese life insurers[2] CEO Commentary & Strategic Overview CEO Yinan Hu attributed the strong Q1 2023 performance to improved agent quality and productivity, contributions from acquisitions, the open-platform strategy, and operational gains from digitization. The company is committed to its 'Professionalization, Specialization, Digitalization, and Open Platform' strategy and aims for 50% YoY growth in life insurance new business sales and non-GAAP operating income for 2023, focusing on enhancing value-added services, talent acquisition, market consolidation, and professional development - The impressive figures were combined results of significant increase in agent quality and productivity, material contribution from acquisitions and open-platform strategy as well as material operational gains from digitization[3] - The company is executing on its well-defined strategy of driving sustainable growth through 'Professionalization, Specialization, Digitalization, and Open Platform'[3] - Fanhua aims to achieve 50% year-over-year growth in life insurance new business sales and non-GAAP operating income for 2023[6] - Future strategic focus areas include: i) enhancing unique competitive edge through optimizing value-added service offerings, ii) attracting top talents via Family Office Consultant (FOC) training programs, iii) accelerating market consolidation through acquisitions and digital tenant expansion, and iv) supporting Million-Dollar Round Table (MDRT) members in obtaining relevant financial qualifications[6] Non-GAAP Financial Measures Definitions This section provides definitions for the non-GAAP financial measures used in the report, clarifying how non-GAAP operating income, net income attributable to shareholders, and diluted net income per ADS are calculated by excluding specific items like share-based compensation expenses and impairment on investment in an affiliate - Non-GAAP operating income is defined as income of operation before share-based compensation expenses[4] - Non-GAAP net income attributable to the Company's shareholders is defined as net income attributable to the Company's shareholders before share-based compensation expenses and impairment on investment in an affiliate[4] - Non-GAAP diluted net income per ADS is defined as non-GAAP net income attributable to the Company's shareholders divided by total weighted average number of diluted ADSs outstanding[4] Detailed Financial Results (Q1 2023) Fanhua's Q1 2023 financial performance was marked by a significant increase in total net revenues, driven by strong agency business growth, particularly in life insurance, alongside a detailed breakdown of operating costs and improved profitability metrics - Total net revenues were RMB 827.7 million (US$120.5 million) for Q1 2023, an increase of 20.6% from RMB 686.4 million in Q1 2022[8] Net Revenues Breakdown Fanhua's total net revenues for Q1 2023 increased by 20.6% year-over-year to RMB 827.7 million. This growth was primarily driven by the agency business, particularly the life insurance segment, which saw significant increases in GWP and FYP, and also by the P&C insurance business due to recent acquisitions Agency Business Revenues Agency business revenues saw a substantial increase, primarily driven by robust growth in both life and P&C insurance segments, with life insurance GWP and FYP showing strong year-over-year growth - Net revenues for agency business increased by 23.4% year-over-year to RMB 725.5 million (US$105.6 million)[8] - Net revenues for the life insurance business grew by 22.3% year-over-year to RMB 683.4 million (US$99.5 million), primarily due to increased new policy sales and acquisitions[9] - Life insurance GWP increased by 29.1% year-over-year to RMB 4,359.8 million, with life insurance FYP increasing by 55.9% year-over-year to RMB 767.8 million[9] - Net revenues for the P&C insurance business increased by 43.2% year-over-year to RMB 42.1 million (US$6.1 million), mainly due to a brokerage firm acquisition in H2 2022[12] Claims Adjusting Business Revenues Claims adjusting business revenues experienced modest growth, though its contribution to total net revenues slightly decreased compared to the prior year - Net revenues for the claims adjusting business increased by 3.9% year-over-year to RMB 102.2 million (US$14.9 million)[12] - Claims adjusting business accounted for 12.3% of total net revenues in Q1 2023, down from 14.3% in Q1 2022[12] Operating Costs and Expenses Breakdown Total operating costs and expenses for Q1 2023 increased by 15.3% year-over-year to RMB 767.4 million. Commission costs, particularly for the life insurance business, rose significantly due to new acquisitions and a shift in business model. Selling expenses decreased due to personnel optimization and reduced rental costs, while general and administrative expenses increased primarily due to acquisitions - Total operating costs and expenses were RMB 767.4 million (US$111.7 million) for Q1 2023, an increase of 15.3% from Q1 2022[13] Commission Costs Total commission costs rose significantly, driven by increased expenses in both life and P&C insurance businesses, with life insurance costs impacted by acquisitions and a new business model - Total commission costs increased by 22.7% year-over-year to RMB 553.1 million (US$80.5 million)[13] - Costs of the life insurance business increased by 25.6% year-over-year to RMB 456.6 million (US$66.5 million), mainly due to commission costs associated with new acquisitions and a lower gross profit margin from a newly acquired entity's managing general agency platform model[14] - Costs of the P&C insurance business increased by 54.8% year-over-year to RMB 30.8 million (US$4.5 million)[15] - Costs of claims adjusting business decreased by 2.1% year-over-year to RMB 65.8 million (US$9.6 million)[15] Selling and G&A Expenses Selling expenses decreased due to personnel optimization and reduced rental costs, while general and administrative expenses increased primarily due to acquisitions - Selling expenses decreased by 11.2% year-over-year to RMB 66.5 million (US$9.7 million) due to personnel optimization and decreased rental costs, partially offset by increased sales events and share-based compensation[16] - General and administrative expenses increased by 5.3% year-over-year to RMB 147.7 million (US$21.5 million), mainly due to acquisitions, offset by savings from personnel optimization and a decrease in the number of branches[17] Profitability and Other Financials Fanhua achieved significant profitability improvements in Q1 2023, with operating income surging by 193.1% and operating margin improving to 7.3%. The company also reported a turnaround from a net loss to a net income attributable to shareholders, alongside substantial growth in investment income. Cash and short-term investments remained strong - Operating income was RMB 60.4 million (US$8.8 million), an increase of 193.1% year-over-year[18] - Non-GAAP operating income was RMB 63.5 million (US$9.2 million), an increase of 208.3% year-over-year[18] - Operating margin improved to 7.3% for Q1 2023, compared to 3.0% for the corresponding period in 2022[18] - Net income attributable to the Company's shareholders was RMB 60.5 million (US$8.8 million), a significant turnaround from a net loss of RMB 37.8 million in Q1 2022[19] - Investment income increased by 207.3% year-over-year to RMB 12.6 million (US$1.8 million)[18] - As of March 31, 2023, the Company had RMB 1,654.2 million (US$240.9 million) in cash, cash equivalents, short-term investments and others[21] Operational Performance & Outlook Fanhua strategically refined its agent network to focus on high-performing individuals, leading to increased per-agent productivity, while its online mutual aid platform expanded its reach and the company provided optimistic financial guidance for Q2 and full-year 2023 Insurance Sales and Service Network Fanhua strategically shifted its focus to high-end customers and elite agents, resulting in a decrease in the total number of performing life insurance agents but a substantial increase in premiums facilitated per agent. The company also adjusted its physical distribution and service network - The number of performing agents for selling life insurance products decreased to 6,941 in Q1 2023 from 9,371 in Q1 2022, a 26% reduction[22] - Insurance premiums facilitated per performing agent for life insurance products grew by 95.1% year-over-year to RMB 82,448[22] - The decrease in agents was due to a shifted focus to serving high-end customers and high-performing agents, maintaining an elite-based agent pool[22] - Fanhua's distribution network consisted of 631 sales outlets and 92 service outlets as of March 31, 2023, down from 717 sales outlets and 109 service outlets in Q1 2022[23] Recent Developments Fanhua's online mutual aid platform, eHuzhu, continued to expand its reach, providing alternative risk-protection programs and significant financial assistance to lower-income groups - As of March 31, 2023, eHuzhu had approximately 1.8 million paying members[24] - eHuzhu assisted 11,862 families in raising approximately RMB 1.3 billion to cover medical costs[24] Business Outlook Fanhua provided guidance for Q2 2023 non-GAAP operating income and reaffirmed its full-year 2023 targets for life insurance first-year premiums and non-GAAP operating income, both projecting significant year-over-year growth - Fanhua expects its non-GAAP operating income to be no less than RMB 46 million for the second quarter of 2023[25] - The company reaffirms its full-year life insurance first year premiums target of no less than RMB 3.7 billion for 2023, representing a year-over-year growth of 50%[25] - Fanhua reaffirms its full-year non-GAAP operating income target of no less than RMB 253 million for 2023, representing a year-over-year growth of 50%[25] Company Information & Disclosures This section provides an overview of Fanhua Inc.'s business model and market position, along with important disclaimers regarding forward-looking statements and the use of non-GAAP financial measures About Fanhua Inc. Fanhua Inc. is a leading independent financial services provider in China, specializing in insurance-oriented family asset allocation services and a comprehensive platform for insurance agents. The company focuses on long-term life insurance products, claims adjusting, and value-added services, supported by a broad distribution network and its online platform, Baowang - Fanhua Inc. is a leading independent financial services provider in China, focusing on insurance-oriented family asset allocation services and a one-stop service platform for individual sales agents and independent insurance intermediaries[28] - The company offers a broad range of insurance products, claims adjusting services, and various value-added services, including operating Baowang (www.baoxian.com), an online insurance platform[28] - As of March 31, 2023, Fanhua's distribution and service network consisted of 631 sales outlets covering 24 provinces and 92 service outlets covering 31 provinces[29] Forward-looking Statements This section serves as a disclaimer, indicating that the press release contains forward-looking statements subject to known and unknown risks and uncertainties. It cautions investors that actual results may differ materially from expectations due to various factors, including operational and macroeconomic conditions - This press release contains statements of a forward-looking nature, made under the 'safe harbor' provisions of the U.S. Private Securities Litigation Reform Act of 1995[30] - These statements involve known and unknown risks and uncertainties, including those related to attracting and retaining agents, maintaining business relationships with insurance companies, executing growth strategy, adapting to regulatory environment, competition, and macroeconomic conditions in China[30] - Investors are cautioned that actual results may differ materially from anticipated results[30] About Non-GAAP Financial Measures This section elaborates on the non-GAAP financial measures used by Fanhua, explaining their definitions, the rationale for their inclusion as supplemental measures for assessing performance, and their inherent limitations. It emphasizes that these measures should not be considered in isolation from or as a substitute for GAAP financial information - Non-GAAP financial measures (operating income, net income attributable to shareholders, net margin, and basic/diluted net income per ADS) are provided as supplemental measures to review and assess operating performance[31] - These non-GAAP measures exclude impairment on investment in an affiliate and share-based compensation expenses[31] - The presentation of these non-GAAP financial measures has limitations as analytical tools and should not be considered in isolation from, or as a substitute for, GAAP financial information[31] Financial Statements This section presents Fanhua's unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flow statements, along with reconciliations of GAAP to non-GAAP measures for Q1 2023 Unaudited Condensed Consolidated Balance Sheets The unaudited condensed consolidated balance sheets present Fanhua's financial position as of December 31, 2022, and March 31, 2023. Key changes include an increase in total assets, driven by short-term investments and goodwill, and corresponding increases in total liabilities and equity Key Balance Sheet Figures (RMB thousands) | Metric | Dec 31, 2022 (RMB) | Mar 31, 2023 (RMB) | | :--------------- | :----------------- | :----------------- | | Total assets | 3,089,516 | 3,903,667 | | Total liabilities| 1,358,185 | 1,734,530 | | Total equity | 1,731,331 | 2,169,137 | - Short term investments increased from RMB 347.754 million to RMB 696.401 million[34] - Goodwill and intangible assets, net, increased from RMB 109.997 million to RMB 481.300 million[34] Unaudited Condensed Consolidated Statements of Income and Comprehensive Income This statement details Fanhua's financial performance for the three months ended March 31, 2022, and 2023, highlighting a significant increase in total net revenues and a positive shift from a net loss to a net income attributable to the company's shareholders Key Income Statement Figures (RMB thousands) | Metric | 2022Q1 (RMB) | 2023Q1 (RMB) | | :------------------------------------------- | :----------- | :----------- | | Total net revenues | 686,387 | 827,737 | | Income from operations | 20,589 | 60,355 | | Net (loss) income attributable to shareholders | (37,838) | 60,452 | - Basic and diluted net income per ADS were RMB 1.13 for Q1 2023, compared to a net loss of RMB 0.70 per ADS in Q1 2022[37] Unaudited Condensed Consolidated Statements of Cash Flow The unaudited condensed consolidated statements of cash flow outline the cash movements from operating, investing, and financing activities for the three months ended March 31, 2022, and 2023. It shows a reduced cash outflow from operating activities and a substantial increase in cash generated from financing activities in Q1 2023 Key Cash Flow Figures (RMB thousands) | Metric | 2022Q1 (RMB) | 2023Q1 (RMB) | | :------------------------------------------- | :----------- | :----------- | | Net cash used in operating activities | (87,074) | (18,736) | | Net cash generated from (used in) investing activities | 151,683 | (134,439) | | Net cash generated from financing activities | 3 | 168,455 | | Cash, cash equivalents and restricted cash at end of period | 721,388 | 660,781 | - Proceeds from bank and other borrowings significantly increased cash from financing activities to RMB 170.268 million in Q1 2023[40] Reconciliations of GAAP Financial Measures to Non-GAAP Financial Measures This section provides a detailed reconciliation between GAAP and non-GAAP financial measures, illustrating the adjustments made for impairment on investment in affiliates and share-based compensation expenses to derive non-GAAP figures, which show higher profitability metrics GAAP to Non-GAAP Reconciliation (RMB thousands) | Metric | GAAP (2023Q1) | Adjustments (2023Q1) | Non-GAAP (2023Q1) | Change % (Non-GAAP) | | :------------------------------------------- | :------------ | :------------------- | :---------------- | :------------------ | | Income from operations | 60,355 | (3,119) | 63,474 | 208.3 | | Net income attributable to shareholders | 60,452 | (3,119) | 63,571 | 57.2 | | Operating margin | 7.3% | | 7.7% | 155.6 | | Net margin | 7.3% | | 7.7% | 30.4 | - Adjustments primarily include share-based compensation expenses of RMB 3.119 million for Q1 2023[42][43]