Recruiting at Heart of Strategy to Grab China Insurance Market Share

The third quarter 2019 financial report by insurance distributor Fanhua, Inc. (FANH:  Nasdaq) revealed important developments at the company as it navigates regulatory and competitive changes in China’s life, property and casualty insurance industry.  The turnover in Fanhua’s sales force has slowed and productivity appears to have improved as the company completes registration of its sales agents with the PRC insurance regulator.  Management is well along with programs to expand and professionalize the sales force by recruiting insurance industry professionals and placing them in new territories in medium- and large-size cities in China.  Their accomplishments bode well for growth in the coming years.

It was evident in Fanhua’s third quarter report that there has been a continued impact of regulatory action vis-à-vis insurance sales agents.  In 2018, the China Banking and Insurance Regulatory Commission (CBIRC) of the People’s Republic of China mandated registration of all sales agents, an action that has impacted Fanhua’s life insurance sales network.  The registration rule is aimed at encouraging higher professional and ethical practices among sale agents and eliminating fake sales and illegal fund raising.  During the conference call to discuss third quarter financial results, Fanhua management suggested that the company is well along in its efforts to register its sales force in compliance with CBIRC requirements. 

One consequence of the agent registration requirement has been a steady reduction in force as less committed sales agents drop off insurance company rolls.  Fanhua has been no exception.  While the number of agents in Fanhua’s network rose steadily through the end of 2018, the force has decline significantly in 2019.  Fanhua reported 658,145 sales agents at the end of September 2019, compared to 860,550 at the end of December 2018.  Fanhua may be faring better than some insurance companies.  First year, drop-out rates as high as 50% have been reported by the Insurance Intermediary Supervision Department of the CBIRC.

Sales agent performance showed improvement in the quarter.  The number of performing sales agents, defined by an agent selling at least one life insurance policy, declined sequentially to 111,486 from 118,738 three months earlier.  Importantly, performing agents as a percentage of total agents increased to 16.9% in the September quarter compared to 14.6% in the June quarter.  The increase suggests that those agents who remain on Fanhua’s team are taking the position more seriously and are more engaged in winning and serving clients.

Fanhua offers specialized digital platforms for sales agaents.  Details on CNpad platform traffic provide some insight into Fanhua’s agent network.  Activations continued in the third quarter, reaching 613,027 by the end of the September 2019.  However, the number of active accounts shrank to 34,188, compared to 129,871 at the end of December 2018.   Despite the decline in active users the value of auto premiums transmitted across the platform rose to RMB 335.6 million (US$47 million) during the quarter.  This represents a sequential increase of 2.1% and a reversal in a downward trend that had begun in 2018.  Notably, the uptick in CNpad metrics was concomitant with a decline in commissions in its auto insurance business in the September 2019 quarter.

Another of Fanhua’s sales agent digital services, the Lan Zhanggui platform, experienced an increase in registered users to 820,880 by the end of September 2019, representing 1.1% increase during the three months.  Mirroring a trend observed in other sales agent metrics, the number of active sales agents using the Lan Zhanggui platform declined to 50,248 in the September 2019 quarter compared to 56,993 in the previous three months.  The sequential comparison is expected given seasonal trends in insurance sales.  However, we also note that active users in the recent quarter are also lower than the same quarter in the previous year when active users totaled 53,713.      

With the right tools seemingly in place, Fanhau is focusing on recruiting.  During the earnings conference call Fanhua disclosed details on a new initiative to recruit more professional sales agents.  With its 1000 Reserve Entrepreneurial Sales Team Campaign, the Company is making a concerted effort to shift from the ‘come one come all’ approach to enlisting individuals as sales agents to more systematic qualification and recruiting of professional insurance industry personnel.  Management reports the successful on-boarding of 600 new sales team leaders by end of September 2019, putting the company well on the way to achieving management’s stated goal of having 1,000 teams by the end of March 2020. 

The effect of bringing on experienced sales agents is likely to staunch the agent churn that has been in evidence since the company began compliance with the CBIRC’s sales agent registration requirement.  Management has set a goal for its sales teams of RMB 50,000 (approximately US$7,000) in annualized premiums equivalent (APE) in the first three months.  Accordingly, we should also see continued increase in active agents and sales commissions per agent.

The Company has also continued with its Shenzhou 100 strategy to expand Fanhua’s market presence in large- and medium-sized metropolitan areas in China.  Over the next five years the company intends to increase the number of provincial branches by 100.  For example, the Shandong area has been divided into three regions led by managerial talent from the insurance industry.  A coastal province, Shandong has a gross domestic product of RMB 7.7 trillion (US$1.2 trillion).  Its three largest cities are Qingdao, Jinan and Zibo.

The recruiting and sales territory expansion campaigns should begin to deliver sales and earnings results in 2020.  Earnings reports remain the single most important catalyst for sentiment and valuation of Fanhua’s shares.  Additionally, earnings per share are impacted by the Company’s ongoing share repurchase program.  Unfortunately, for Fanhua there is a whiff of slowing growth in its reports on sales and earnings from insurance product representation and sales agent activity.  The prospect has weighed on FANH stock price, which remains suppressed since the stock reached historic highs in July 2019.    The stock is now trading at 19.6 times trailing earnings per share, well below the earnings multiple near 29 times for its peer group of China-based financial services companies.  Applying the Company’s peer group multiple to our earnings estimate of US$1.41 per ADS for the year 2019, the ADS are valued at US$40.89 per share.  Current dividend yield of 4.5% provides a compelling return boost.   

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Fanhua (FANH) is a target of research coverage under the CER Report series for sponsored research coverage published by Crystal Equity Research.  Crystal Equity Research has a Buy rating on FANH shares.