Fanhua(FANH) - 2022 Q3 - Quarterly Report

Executive Summary & Financial Highlights Fanhua Inc. reported resilient Q3 2022 financial results with operating income growth and strategic focus on high-quality senior care and wealth management Q3 2022 Financial Performance Overview Fanhua Inc. reported resilient Q3 2022 financial results with operating income growing 14.2% to RMB32.2 million, despite an 8.6% decrease in total net revenues Financial Performance Summary | Metric (RMB) | 2021Q3 | 2022Q3 | Change % | | :-------------------------------------------------- | :----- | :----- | :------- | | Total net revenues | 683,537 | 624,746 | (8.6) | | Operating income | 28,163 | 32,165 | 14.2 | | Net income attributable to the Company's shareholders | 34,250 | 35,371 | 3.3 | | Diluted net income per ADS | 0.64 | 0.66 | 3.1 | | Cash, cash equivalents and short-term investments | 1,397,727 | 1,296,926 | (7.2) | - Gross written premiums (GWP) for life insurance business grew by 6.2% YoY to RMB2.8 billion, with regular life insurance first-year premiums (FYP) increasing by 9.1% YoY to RMB529.7 million[2] CEO Commentary & Strategic Focus The CEO emphasized improved sales force quality and productivity, with a strategic focus on senior care, wealth management, and agent empowerment through digitalization - Per capita productivity of performing agents grew by nearly 20% year-over-year[2] - The number of '100K Premium Agents' increased by 46% year-over-year, contributing 48% of FYP in Q3 2022, up from 39% in Q3 2021[2] - Strategic initiatives include supporting agents with whole life journey services, empowering professional growth through 3F trainings and 3R marketing models, and improving customer service efficiency through digitalization[4] Detailed Financial Results (Q3 2022) This section provides a detailed breakdown of Fanhua's Q3 2022 financial performance, covering revenues, operating costs, and profitability metrics Total Net Revenues Total net revenues decreased 8.6% to RMB624.7 million, primarily due to declines in agency and claims adjusting businesses Total Net Revenues Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Total net revenues | 683.5 million | 624.7 million | (8.6) | Agency Business Revenues Agency business revenues saw a decline, primarily driven by the life insurance segment, despite growth in gross written premiums Agency Business Revenues Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Net revenues for agency business | 562.1 million | 522.7 million | (7.0) | | Total GWP (Agency) | N/A | 2,871.1 million | 6.0 | | FYP (Agency) | N/A | 610.9 million | 7.7 | | Renewal premiums (Agency) | N/A | 2,260.1 million | 5.6 | Life Insurance Business Revenues Life insurance net revenues decreased by 8.5% to RMB480.6 million, influenced by commission rates and product mix changes Life Insurance Business Revenues Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Net revenues for life insurance business | 525.2 million | 480.6 million | (8.5) | | Total life insurance GWP | N/A | 2,789.9 million | 6.2 | | Life insurance FYP | N/A | 529.7 million | 9.1 | | Life insurance renewal premiums | N/A | 2,260.1 million | 5.6 | - The decrease in life insurance net revenues was mainly due to a decrease in the weighted average renewal commission rate of renewal premiums and, to a lesser extent, a change in product mix[6] - Life insurance business accounted for 76.9% of total net revenues in Q3 2022[8] P&C Insurance Business Revenues P&C insurance net revenues increased by 14.1% to RMB42.1 million, contributing 6.8% to total net revenues P&C Insurance Business Revenues Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Net revenues for P&C insurance business | 36.9 million | 42.1 million | 14.1 | - P&C insurance business accounted for 6.8% of total net revenues in Q3 2022[8] Claims Adjusting Business Revenues Claims adjusting business revenues decreased by 16.0% to RMB102.0 million due to COVID-19 disruptions and medical-insurance contraction Claims Adjusting Business Revenues Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Net revenues for claims adjusting business | 121.4 million | 102.0 million | (16.0) | - The decrease was due to disruption from COVID-19 lockdowns and contraction of medical-insurance related claims adjusting business[9] - Claims adjusting business accounted for 16.3% of total net revenues in Q3 2022[9] Operating Costs and Expenses Total operating costs and expenses decreased 9.6% to RMB592.6 million, driven by lower commission and general and administrative expenses Total Operating Costs and Expenses Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Total operating costs and expenses | 655.4 million | 592.6 million | (9.6) | Commission Costs Total commission costs decreased by 10.8% to RMB393.4 million, with both life and P&C insurance segments seeing reductions Total Commission Costs Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Total Commission costs | 440.9 million | 393.4 million | (10.8) | Agency Business Commission Costs Agency business commission costs decreased by 11.8% to RMB324.1 million, primarily from the life insurance segment Agency Business Commission Costs Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Commission costs for agency business | 367.5 million | 324.1 million | (11.8) | | Life insurance business costs | 341.6 million | 298.9 million | (12.5) | | P&C insurance business costs | 25.9 million | 25.2 million | (2.7) | - Costs incurred by the life insurance business accounted for 76.0% of total commission costs, while P&C insurance business costs accounted for 6.4%[10][11] Claims Adjusting Business Commission Costs Claims adjusting business costs decreased by 5.6% to RMB69.3 million, representing 17.6% of total commission costs Claims Adjusting Business Commission Costs Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Costs of claims adjusting business | 73.4 million | 69.3 million | (5.6) | - Costs incurred by the claims adjusting business accounted for 17.6% of total commission costs[11] Selling Expenses Selling expenses decreased by 3.2% to RMB69.3 million in Q3 2022 Selling Expenses Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Selling expenses | 71.6 million | 69.3 million | (3.2) | General and Administrative Expenses General and administrative expenses decreased by 9.2% to RMB129.8 million due to personnel optimization, despite IT and training investments General and Administrative Expenses Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | General and administrative expenses | 142.9 million | 129.8 million | (9.2) | - The decrease was mainly due to cost savings from personnel optimization, partially offset by increased expenditures on IT infrastructure and trainings[12] Profitability Metrics Fanhua achieved a 14.2% increase in operating income and improved margins, despite a decrease in net income due to lower investment income Operating Income and Margin Operating income increased by 14.2% to RMB32.2 million, with operating margin improving by 1.0 percentage point to 5.1% Operating Income and Margin Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Operating income | 28.2 million | 32.2 million | 14.2 | | Operating margin | 4.1% | 5.1% | 1.0 pp | Investment Income Investment income decreased significantly by 68.2% to RMB2.8 million, derived from short-term financial products Investment Income Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Investment income | 8.8 million | 2.8 million | (68.2) | - Investment income consisted of yields from short-term investments in financial products, recognized upon maturity or disposal[13] Income Tax Expense Income tax expense decreased by 7.5% to RMB8.6 million, with the effective tax rate falling to 20.2% Income Tax Expense Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Income tax expense | 9.3 million | 8.6 million | (7.5) | | Effective tax rate | 21.4% | 20.2% | (1.2) pp | Net Income and EPS Net income decreased by 9.8% to RMB33.2 million, while diluted net income per ADS increased by 3.1% to RMB0.66 Net Income and EPS Overview | Metric | 2021Q3 (RMB) | 2022Q3 (RMB) | Change % | | :---------------------- | :----------- | :----------- | :------- | | Net income | 36.8 million | 33.2 million | (9.8) | | Net income attributable to shareholders | 34.3 million | 35.4 million | 3.3 | | Net margin | 5.0% | 5.7% | 0.7 pp | | Diluted net income per ADS | 0.64 | 0.66 | 3.1 | Operational Metrics This section reviews Fanhua's operational performance, including platform usage, agent network, and distribution channels Lan Zhanggui Platform Lan Zhanggui platform saw a 6.4% increase in active users to 17,822, maintaining stable insurance premiums generated Lan Zhanggui Platform Metrics | Metric | 2021Q3 | 2022Q3 | Change % | | :---------------------- | :----- | :----- | :------- | | Active users | 16,745 | 17,822 | 6.4 | | Insurance premiums generated (RMB) | 452.6 million | 454.2 million | 0.4 | Baowang Platform Baowang platform experienced a 50.8% decrease in active customer accounts but a 101.9% increase in premiums per active customer account Baowang Platform Metrics | Metric | 2021Q3 | 2022Q3 | Change % | | :---------------------- | :----- | :----- | :------- | | Active customer accounts | 116,991 | 57,575 | (50.8) | | Insurance premiums generated (RMB) | 88.8 million | 88.4 million | (0.5) | | Premiums per active customer account (RMB) | 760 | 1,535 | 101.9 | Agent Network and Distribution Agent network saw a 46.0% decrease in performing agents, reflecting a strategic shift towards high-performing agents and high-end customers Agent Network Metrics | Metric | 2021Q3 | 2022Q3 | Change % | | :---------------------- | :----- | :----- | :------- | | Total performing agents | 60,887 | 32,884 | (46.0) | | Performing agents for life insurance | 16,576 | 7,598 | (54.2) | - The decrease in life insurance performing agents was primarily due to a strategic shift to serving high-end customers and high-performing agents, moving towards an elite-based agent pool[16] Distribution Network Outlets | Metric | As of Sep 30, 2021 | As of Sep 30, 2022 | Change | | :---------------------- | :----------------- | :----------------- | :----- | | Sales outlets | 750 | 697 | (53) | | Service outlets | 110 | 100 | (10) | Recent Developments & Business Outlook This section highlights recent achievements and provides Fanhua's business outlook for Q4 2022, considering industry challenges Recent Achievements eHuzhu platform expanded its member base and facilitated RMB1.2 billion in medical aid, while Fanhua received recognition for its RONS Open Platform - eHuzhu, Fanhua's online mutual aid platform, gathered over 1.9 million paying members and assisted 10,323 families in raising approximately RMB1.2 billion for medical costs as of September 30, 2022[20] - Fanhua was selected into the Top 100 Digitalized Insurance Institutions of 2022 for its innovative RONS Open Platform[20] Q4 2022 Business Outlook Fanhua anticipates continued industry challenges due to COVID-19 but expects Q4 2022 operating income to be no less than RMB30.0 million - The growth prospect of the Chinese insurance industry remains challenging for Q4 2022 due to ongoing COVID-19 resurgences[4] - Fanhua expects its operating income to be no less than RMB30.0 million for the fourth quarter of 2022[21] Company Information This section provides an overview of Fanhua Inc., its forward-looking statements, and investor relations contact information About Fanhua Inc. Fanhua Inc. is a leading independent financial services provider in China, offering diverse insurance products and services through online platforms and an extensive offline network - Fanhua Inc. is a leading independent financial services provider in China, offering life and property and casualty insurance products, insurance claims adjusting services, and value-added services[23] - Key online platforms include Lan Zhanggui (all-in-one agent platform), Baowang (DTC online insurance platform), and eHuzhu (non-profit online mutual aid platform)[23] - As of September 30, 2022, Fanhua's network comprised 697 sales outlets in 23 provinces and 100 service outlets in 31 provinces[25] Forward-Looking Statements This section cautions that forward-looking statements are subject to various risks and uncertainties, including agent retention, regulatory changes, competition, and macroeconomic conditions - Statements regarding future financial and operating results are forward-looking and subject to risks and uncertainties[26] - Potential risks include ability to attract and retain agents, maintain insurance company relationships, execute growth strategy, adapt to regulatory changes, compete effectively, and macroeconomic conditions in China, including COVID-19[26] Conference Call & Investor Relations Fanhua Inc. hosted a conference call on November 21, 2022, to discuss Q3 2022 financial results, with webcast and investor relations contact details provided - A conference call was scheduled for November 21, 2022, at 8:00 p.m. EST to discuss Q3 2022 financial results[22] - Live and archived webcast of the conference call is available on Fanhua's investor relations website[22] - Investor Relations contact: Tel: +86 (20) 8388-3191, Email: qiusr@fanhuaholdings.com[41] Unaudited Condensed Consolidated Financial Statements This section presents Fanhua's unaudited condensed consolidated financial statements, including balance sheets, income statements, and cash flow statements Unaudited Condensed Consolidated Balance Sheets The balance sheet shows a decrease in total assets and liabilities, with notable shifts in cash, short-term investments, and other receivables Unaudited Condensed Consolidated Balance Sheets | Metric (RMB thousands) | As of Dec 31, 2021 | As of Sep 30, 2022 | | :-------------------------------- | :----------------- | :----------------- | | Total current assets | 2,266,068 | 2,066,283 | | Total non-current assets | 976,050 | 791,016 | | Total assets | 3,242,118 | 2,857,299 | | Total current liabilities | 908,675 | 786,528 | | Total non-current liabilities | 373,081 | 397,088 | | Total liabilities | 1,281,756 | 1,183,616 | | Total equity | 1,960,362 | 1,673,683 | - Cash and cash equivalents decreased from RMB564.6 million (Dec 31, 2021) to RMB377.3 million (Sep 30, 2022)[30] - Other receivables increased significantly from RMB60.8 million (Dec 31, 2021) to RMB279.6 million (Sep 30, 2022), and other current assets from RMB39.9 million to RMB220.9 million[30] Unaudited Condensed Consolidated Statements of Income and Comprehensive Income Consolidated statements show decreased total net revenues for both periods, with quarterly operating income up but nine-month operating income significantly down Unaudited Condensed Consolidated Statements of Income and Comprehensive Income | Metric (RMB thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total net revenues | 683,537 | 624,746 | 2,468,485 | 2,014,249 | | Income from operations | 28,163 | 32,165 | 219,569 | 83,782 | | Net income | 36,765 | 33,202 | 241,485 | 20,215 | | Net income attributable to shareholders | 34,250 | 35,371 | 240,040 | 29,656 | | Diluted net income per ADS | 0.64 | 0.66 | 4.47 | 0.55 | - Share of income of affiliates turned into a loss for both the three and nine months ended September 30, 2022[34] - Comprehensive income attributable to the Company's shareholders increased for the three months ended Sep 30, 2022, but decreased significantly for the nine-month period[37] Unaudited Condensed Consolidated Statements of Cash Flow Operating cash flow was positive for the quarter but negative for nine months, with significant investing outflows due to short-term investments and third-party loans Unaudited Condensed Consolidated Statements of Cash Flow | Metric (RMB thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net cash generated from (used in) operating activities | 17,705 | 19,788 | 58,082 | (17,165) | | Net cash generated from (used in) investing activities | 329,365 | (151,120) | 533,788 | (125,945) | | Net cash used in financing activities | (51,958) | — | (209,207) | (52,066) | | Net increase (decrease) in cash, cash equivalents and restricted cash | 295,112 | (131,332) | 382,663 | (195,176) | | Cash, cash equivalents and restricted cash at end of period | 724,099 | 462,837 | 724,099 | 462,837 | - Significant cash outflows in investing activities for the nine months ended Sep 30, 2022, included RMB340.0 million prepayment for short-term investments and RMB205.8 million cash lent to third parties[40]