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Fanhua Inc. (NASDAQ:FANH)
Q3 2019 Earnings Call
Nov 21, 2019, 8:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by for Fanhua's Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please visit Fanhua's IR website at ir.fanhuaholdings.com under the Events & Webcasts section. [Operator Instructions]

I would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qiu, Fanhua's Investor Relations Manager. Please go ahead.

Oasis Qiu -- Investor Relations Manager

Good morning. Welcome to our third quarter 2019 earnings conference call. The earnings results were released earlier today and are available on our IR website, as well as on Newswire. Before we continue, please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. The accuracy of the statements [Technical Issues] 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 SEC including our registration [Technical Issues].

Operator

Excuse me, our speaker line has experienced some technical difficulty. Please stay on the line as we adjust the technical issue. Excuse me, speaker line is now back.

Oasis Qiu -- Investor Relations Manager

Hello. Sorry for disruption. Our line got accidentally disconnected, so sorry for the condition. So we just talked about our risk factors just now, shall we -- I will continue with this.

As I mentioned just now, we had provided -- forward-looking statements may under safe harbor provision of the US Private Security Litigation Reform Act of 1995. The accuracy of the statements 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 SEC, including our registration statement on Form 20-F. We do not undertake any obligation to update this forward-looking information except as required under applicable law.

Joining us today are our Chief Executive Officer, Mr. Chunlin Wang; our Chief Financial Officer, Mr. Peng and Board Secretary, Lily Lee [Phonetic]. Mr. Wang will provide a review of our financial and operational highlights in the third quarter 2019. And then he -- Mr. Ge and Mrs. Lee will take your questions after the prepared remarks.

Now I will turn the call over to Mr. Wang.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

We have our Chief Financial Officer, Mr. Peng Ge and our Board Secretary Mrs. Lily Lee. We will begin today's call by giving a brief analysis about recent market developments, followed by an overview of our third quarter 2019 financial and operational results and our growth outlook in the fourth quarter 2019. There will be a Q&A session after the report.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

First of all, I would like to share a bit of management's view on the industry dynamics. Amid the ongoing US-China trade war, there has been no sign of relaxation in regulatory supervision in China's financial market, industry wide transformation and adjustment persist in the life insurance market in China as it witnessed a continuous quarter-by-quarter slowdown in growth over the past nine months of 2019. Negative growth is expected in new premiums for regular individual life insurance business in the industry for the full year of 2019. If the trade war drags on and the regulatory environment remains tightened, we expect that the life insurance industry may remain under huge pressure to deliver growth in 2020 due to the following factors. Firstly, lack of product innovation, and secondly, lower buying desire as more consumers choose to stay on the sidelines in views of the market uncertainty. And third, increasing difficulty in recruiting and retaining sales agents across the industry.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Although this industrywide adjustment period may continue for a while, we firmly believe that such adjustment is temporary since the key forces that drive industry growth such as consumer [Technical Issues] power and increasing demand for insurance products have not changed fundamentally and the trend of the industry's spiral growth is irreversible. We are convinced that through continuous regulatory overhaul, the industry will transition to a period of more healthy, sustainable and rapid development in the medium to long-term.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

As for our financial and operating results, in the third quarter 2019, our operating income achieved RMB151.4 million, representing a growth of 21.6% year-over-year. Non-GAAP operating income decreased to 10.4% year-over-year to RMB111.6 million, which was in-line with our previous guidance. The decrease in non-GAAP operating income was primarily due to a comparison with a high base in the same period last year as a result of a one-off performance bonus income of approximately RMB38 million that we've received from one of our insurance partners in the same period last year.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

In the third quarter 2019, Fanhua's life insurance business registered a strong growth of 42% year-over-year to RMB2.1 billion, significantly outpacing industry growth, of which renewal insurance premiums grew by 46% year-over-year to RMB1.4 billion and first year regular premiums grew by 34.5% to RMB683.6 million, while annualized premium equivalent grew by 6.2% to RMB419.1 million.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

In the third quarter 2019, our annuity insurance products accounted for 29.8% of our total life insurance business in terms of annualized life insurance premiums, as compared to 11.3% in the same period last year, while long-term health insurance accounted for 65.3% as compared to 76.5% last year and endowment insurance, term life insurance and whole life insurance collectively accounted for 4.9%.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

In the third quarter 2019, we had more balanced and diversified mix of product suppliers with Huaxia accounting for 25.4% for both total life insurance revenues, Sinatay 22.6%, Aeon 21.6% and Tian'an 13.9% respectively.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Net revenues of our claims adjusting business were 94.8% -- sorry RMB94.8 million for the third quarter 2019, up 18.6% year-over-year. The increase was mainly due to strong growth in multiple insurance related claims adjusting business.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

In the third quarter 2019, we have completed cleaning up our sales force in accordance with the regulatory requirements. In the meantime, we still maintain a steady growth of approximately 50,000 new crews per quarter. As of September 30, 2019, the number of registered sales agents in Fanhua was 658,145, including 54,696 who were added during the third quarter of 2019.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

During the third quarter 2019, we've achieved remarkable results in implementing our 1000 Reserve Entrepreneurial Sales Team Campaign. As of September 30, 2019, Fanhua has introduced over 600 new Reserve Entrepreneurial Sales team, which we believe will start to make positive contributions to our business growth into 2020.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Meanwhile, we've steadily and vigorously rolled out our Shenzhou 100 strategy nationwide, which will lay a solid foundation for our rapid development in the next years to come.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Next, I'm going to share a bit update of our technology empowerment. Over the past few years, Fanhua has been dedicated huge efforts to research and development of proprietary technologies. We have invested [Technical Issues] in our technology infrastructure which empowers our sales agents to manage their sales and marketing activities more efficiently by improving our operating efficiency and customer experience.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

In the third quarter 2019, after 1.5 years effort, we have successfully launched an upgraded internet base pool [Phonetic] business system, which featured more intelligence and mobile service support as far as Integrated Data Processing across dozens of insurance company to believe that this new system will provide stronger scalability to support our future business expansion, while driving efficiency.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Our online platforms maintained solid growth momentum and on which eHuzhu has gathered approximately 3.8 million effective registered members as of September 30, 2019, helping more than 2,900 families raise an aggregated amount of RMB508 [Phonetic] million financial aid. Five years into operation, started to experiment on monetization by providing certain value-added services, in addition to charging it's members a management fee of RMB1 per person since early this year, a total of RMB1.8 million management fee was collected as of September 30, 2019.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Meanwhile, Fanhua maintained solid growth with the number of investor served accounts increasing by 30.8% from a year ago to RMB2.6 million as of the end of September 2019. And the number of it's active customer accounts during the third quarter 2019 increased by 12.8% from a year ago to over 150,000. Insurance premiums generated through Baowang was RMB86.6 million in the third quarter 2019, with a year-over-year increase of 19.6%.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Fourthly, a bit of update on our quarterly dividend payout trend. Dividend for the third quarter 2019 is USD0.30 per ADS payable on or around December 19, 2019 to shareholders of record on December 5th, 2019. Going forward, we expect to maintain our quarterly dividend policy unchanged.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Fifthly, our business outlook In the fourth quarter of 2019. In light of the industry dynamics and our ongoing strategic initiatives, we expect that our annualized premiums equivalent to grow by no less than 10% year-over-year and non-GAAP operating income to grow by no less than 20% year-over-year for the fourth quarter 2019.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

When any industry undergoes adjustment, there tends to be a reshuffle in the competitive landscape, with accelerating consolidation. And as a result, the big one becomes bigger, while the strong one becomes stronger. There is no exception in the insurance industry.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

As the leading independent insurance agency in China, Fanhua will take few advantage of the adjustment period to make strategic deployments, so as to further solidify our leading position by capitalizing R&D favorable opportunities presented by the accelerated separation of insurance underwriting and distribution. We will stay focused on executing the Shenzhou 100 strategy and the 1000 Reserve Entrepreneurial Sales Team Campaign, through which we aim to further strengthen our sales force by attracting elite sales and managerial talent and further tap into the market potential in medium and large-size cities in China. We believe this initiative will position the Company well to embrace the next round of explosive growth in the China's insurance industry over the long run. Thank you.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Thank you. Now, our management will open the floor for your questions.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Dan Tian from CICC. Your line is open.

Dan Tian -- CICC -- Analyst

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

This is Tian Dan from CICC and he has two questions. The first question regarding to our number of sales agents and annualized premium equivalent and he is wondering why number of our sales agents and APE decreased sequentially from the second quarter? And what happened -- was there -- was causes for this? And the second question is regarding to the year opening strategies of our business partners?

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Thank you for the questions. In regard to your first question, answering in two parts. First part is regarding to the number of our sales agents and the decrease in the number of sales agents mainly due to the sales force cleanup as required by the regulator and basically the law code bureaus of the CBRC have attached great importance to this requirement and even given a massive -- given a cap on the number of sales agents that agencies can have.

So as the number one sales agent -- insurance agencies in many of the regions in China, we have followed -- strictly follow the requirements of the local CBRC bureau. So that's why the number of our sales agents decreased significantly from the second quarter. [Speech Overlap] the sales force cleanup, the performance, number of performance agents also decreased slightly.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

And after the sales force cleanup, we also have more clear direction on -- clear target in terms of the growth in our sales force. And we expect to continue to maintain a steady pace of new crews going forward and we expect that also to recruit approximately 50,000 per quarter going forward.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

And secondly regarding to the decrease in our new business, in China, particularly in the life insurance industry is a kind of seasonality or in the implementation of campaigns throughout the year by insurance company. In beginning of the year, there is a year opening sales campaigns and then followed by what we call April and May joined promotional campaigns. And then followed by -- like golden period in September and October where insurance company will also put more efforts to promote sales wide. In July and August, usually the focus will be on increasing the number of sales agents. I think the promotional campaigns in September and October force in two separate quarters. So usually the third quarter will be relatively weak than the first quarter and the second quarter. So except that if insurance company have some special promotional activities like discontinued product line, so that may prompt the sales in that particular quarter. Otherwise, it's usually normal that the business in the third quarter will be relatively lower than the second quarter.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Regarding to the year opening sales, probably insurance intermediary companies may face a little bit complicated situations here. This year -- firstly, there is more -- there will be probably more competitions from insurance companies, for example, China Life and Ping An they actually started their year opening sales in October, which is far earlier than usual than previous years. I think maybe this is their efforts to get more market shares than their competitors. And then secondly, in order -- as a matter of fact, our year opening sales is that recently the CBRC has assembled meeting among over 10 insurance companies which offer annuity products with a assumed interest rate of 4.025%. And basically the CBRC require them to discontinue the sales of this type of products probably by mid-December.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

We will keep a close watch on the market development and we will also take measures to adapt to the market changes in time. And our year opening sales strategy is basically we are going to kick start our year opening sales before December 10th, this year.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Thank you.

Operator

Your next question is from Xue Yuan. Your line is open.

Yuan Xue -- CICC -- Analyst

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

This is Xue Yuan from CICC and he has two questions. The first question is regarding the change in our first year commission rate, is it increased or decreased from last quarter? And then secondly is regarding to the recent developments in our Shenzhou 100 strategy.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Our first year commission rate remains unchanged at around 112% in the third quarter.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

And going to the second question, Shenzhou 100 strategy, it's our medium-term and long-term strategy. And since we launched this strategy in August, we have received very enthusiastic response from the market. And currently we have spread our Shandong provincial branch into three separate provincial branches, which is the Shandong provincial branch, Guangdong provincial branch and Liaoning provincial branch, divided by regions -- different regions in Shandong. And in the meantime, we also have been in close contact with the managerial talent in top six insurance companies who are the typical profile as top managerial personnels are there -- or in the -- born in the 1980s.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Starting next year we present more and more new provincial branches will be established in the next three years and we believe that we will be able to achieve this target to establish nearly 100 provincial branches by the end, which will lay a solid foundation to our future growth.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Thank you.

Operator

Your next question is from Debra Fiakas from Crystal Equity. Please go ahead.

Debra Fiakas -- Crystal Equity -- Analyst

Thank you and thank you for taking my question in English. My first question -- I have two. The first one is about the 600 new reserve sales teams. I was wondering if you could tell us more about the teams are they -- how large they are? How many people are on the sales teams, one or many? And also if you have expectations for turnover in these teams related to the regulatory effort to register and sort of clean up the sales forces if you will? And then also, I wondered if you could tell us the number of hours that they're trained, how much training they get? And then my second question is really about the number of active users of the Lan Zhanggui platform. The number went down this year, there is fewer active users, but I wondered if you could explain about their performance or is each one of the active users selling more per person or selling less if you could just tell us about the performance of the ones that you have retained. Thank you very much.

Oasis Qiu -- Investor Relations Manager

Thank you. [Foreign Speech]

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Regarding to your first question, our 1000 Reserve Entrepreneurial Sales Agents Campaign, which we launched in our half-year operational conference earlier in June, July and the Shenzhou 100 strategy, which we launched in August and September, both of these strategies and campaigns are launched and according to our judgment to the market development especially our judgment that the market is undergoing a transformation. And we think that we must take advantage of this opportunity to do more fundamental work, side-by-side our infrastructure, our sales force. And the 1,000 Reserve Entrepreneurial Sales Teams Campaigns is our effort to shift our focus from recruiting individual sales agents to kind of structural recruitment i.e, recruitment of sales agents in teams. As you may note, Fanhua has innovated a entrepreneurial system, entrepreneurial sales agent system, this reserves entrepreneurial sales team -- they may not have made these agendas as a entrepreneurial sales team.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

The typical profile of Reserve Entrepreneurial Sales Teams are basically they should be -- the member should be dedicated in insurance industry. And then secondly, they -- the sales team will be able to generate over 50,000 APE each month for three months -- three consecutive months. And then thirdly, the team should have at least six performance effective performing agents.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

As for these certificates, that in accordance to the CBRC's requirement, we -- currently after the sales force cleaned up, we -- all of our sales agents have been properly registered with the CBRC and have been issued with our certificates to indicate that they are allowed to sell insurance under Fanhua's. And for all the new crews, they will also be properly registered and issued with the certificates. As for the training, we will provide all the new crews standardized training activities, as well as differentiated training programs in accordance to their specific needs.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

As for the active users of Lan Zhanggui, the decrease is mainly due to the sales force cleanup as regulatory requirements required that our first year premiums recorded a strong growth year-over-year, so that means that per person productivity also improved significantly.

Chunlin Wang -- Chairman & Chief Executive Officer

[Foreign Speech]

Oasis Qiu -- Investor Relations Manager

Thank you.

Operator

We don't have any other questions as of the moment. Please continue, presenters.

Oasis Qiu -- Investor Relations Manager

Thank you.

Chunlin Wang -- Chairman & Chief Executive Officer

Thank you.

Oasis Qiu -- Investor Relations Manager

If you have any further questions, please feel free to contact us. Thank you for joining us -- the call. Thank you.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Oasis Qiu -- Investor Relations Manager

Chunlin Wang -- Chairman & Chief Executive Officer

Dan Tian -- CICC -- Analyst

Yuan Xue -- CICC -- Analyst

Debra Fiakas -- Crystal Equity -- Analyst

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