Does the Reshuffle of China's Insurance Industry Bring Development Opportunities to Fanhua Holdings?

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China’s insurance industry is facing a structural change in its business model amid the COVID-19 pandemic. Companies like Fanhua Holdings, a specialist in insurance intermediation, hopes to seize the growth opportunity as the agent model is being reshaped.

Fanhua Inc. FANH, one of the leading O2O independent financial services providers in China, has recently announced that it has surpassed RMB 10 billion in gross written premiums (GWP) for its term life insurance business as of November 23, 2021, achieving the feat one month earlier than last year. The more than 20 years old company that has mainly operated as an insurance intermediary in China is recovering along with the industry.

The Agent Model is Being Reinvented

In the past, the expansion of sales or agent numbers was used as a common practice by Chinese insurers to increase their earnings. This sort of extensive management was conditionally fueled by China’s demographic dividend and ensured that companies were adequately staffed. But the reality was that insurance policies reached by each agent did not see a noticeable increase over the past few years.

The outbreak of the COVID-19 pandemic has changed the sector environment and caused some industry problems to surface. Many insurance companies realized that their insurance agents were losing rapidly with some of the major players reducing about 30% of their staff. More severely, these companies’ net book value (NBV) has long been in a negative growth as they failed to replenish agents quickly due to the new coronavirus disease.

The dive of premiums was an inevitable result of the shrinking size of sales teams, and the reduction in agent staffing has become a hot potato that hobbles China’s insurance industry. More importantly, the insurance industry faces fierce competition for labor with other industries as China’s working population is becoming smaller and smaller. Despite companies can still hire less professional agents at a relatively low price, the expertise of an agent plays a greater role in the sector as clients have more questions about insurance products alongside their development.

However, China’s insurance industry is undergoing a structural shift in its business model during the pandemic. Leading insurers know that aggressive recruitment can not help them get out of the sales plight and will also be replaced by sales teams with more know-how. As for small size insurance companies, focusing on insurance products development may place them in a more favorable position while handing over sales business to third-party intermediaries.

As Chinese insurers outsourcing the distribution business to insurance intermediaries becomes a trendy norm due to the increasing cost of building and maintaining their own distribution networks, companies like Fanhua, which specializes in insurance intermediation, smell development opportunities. “It is expected that more insurers will choose to outsource claims functions to specialized service providers such as our affiliated claims companies,” said Mr. Wang Chunlin, Chairman and CEO of Fanhua Holdings.

Is the Development Opportunity Coming?

The third-quarter earnings report of Fanhua suggested that the company is still not free of the impact of the sector environment. It posted revenue of RMB 684 million in the third quarter, down 15.8% year-over-year, and net profit attributable to the mother company of RMB 34.25 million, down 54.5% year-over-year. But in terms of overall premium income, the company still achieved a higher growth rate in total life insurance premiums than the industry by 10.9 percentage points in the quarter (company 9.0%, industry -1.9%).

Fanhua believes that its massive offline sales teams are what sets it apart from other internet insurers. But, this “asset-heavy model” has dwarfed its performance compared to its peers that center on the online insurance business amid the pandemic. All that may change with the Notice on Further Regulating the Internet Life Insurance Business of Insurance Institutions (referred to as the ‘New Regulation’) issued by the China Banking and Insurance Regulatory Commission on October 22, 2021

“The rationale behind the new regulation is to refocus on offline insurance distribution, particularly for long-term high-value products. Insurers and brokerages with extensive offline sales network coverage will significantly benefit from the New Regulation,” said Mr. Wang in the company’s latest earnings call.

At a time when a flock of staff was dismissed from large domestic insurance companies owing to the pandemic, Fanhua was actively hiring the layoffs who had a strong previous performance, and put them in sales agencies across the company’s distribution and services networks. As of September 30, 2021, Fanhua’s distribution network consists of 750 sales outlets in 23 provinces and 110 services outlets in 31 provinces, with 307,835 sales agents and 2,054 professional claims adjusters.

Although the company’s performance continues to be under pressure in 2021 because of its large sales team, Fanhua claims it has a relatively high-performing sales capacity in the industry, which may inject more energy into the company’s intermediary business as the industry is pulling through. The company said its number of active life insurance agents reached 17,000 in 3Q2021 and exceeded 50,000 in 9M2021. The monthly annual premium equivalent (APE) for brokers with a monthly APE of at least Rmb 10,000 came to Rmb 26,000, a leading level in the industry.

In the secondary market, Fanhua has been on a brighter run since September, rising 19.78% in the last 40 trading days, and the stock price has rebounded from a near three-year low of US$10.53, but is still some distance away from the yearly high of $18.07. The company currently has a market cap of $745 million, a price-to-earnings ratio of 14.76, and a price-to-book ratio (P/B) of 2.55, both slightly above historical averages.

November 25th, China International Capital Corporation Limited (601995. SH) gave a new rating for Fanhua, maintaining a neutral rating with an unchanged target price of US$15 (12.4x 2022e P/E) which offers 4.6% upside. As of November 25, 2021, the stock was trading at 16.6 x 2021e and 11.8 x 2022e P/E.

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