Thank you for standing by for Fanhua's Q2 2023 earnings conference call. At this time, all participants are in a listen-only mode. All lines have been placed on mute to prevent background noise. After the management prepared remarks, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. For your information, this conference call is now broadcasted live over the internet. Webcast replays will be available within three hours after the conference is finished. Please visit Fanhua's IR website at ir.fanhua.com under the Events and Board Webcast section.
Today's conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to turn the meeting over to your host for today's conference, Mr. Oasis Qiu, Fanhua's Investor Relations Manager. Please go ahead.
Good morning. Welcome to our Q2 2023 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 know that the discussion today will contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. The accuracy of this statement 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 Co-Chairman and Chief Executive Officer, Mr.
Yinan Hu, Co-Chairman and Chief Strategy Officer, Mr. Ben Lin, and Chief Financial Officer, Mr. Peng Ge. Mr. Hu will start the call by sharing his view on recent market trends and our strategy positioning, followed by Ben, who will provide a review of our financial and operational highlights and discuss our business outlook going forward. There will be a Q&A session after the prepared remarks. Now I will turn the call over to Mr. Hu. Ben will translate for Mr. Hu.
[Foreign language]
Good morning and good evening to everyone on the call. Thank you for joining today's call.
[Foreign language]
The Chinese economy is currently undergoing a major transformation. Old models of production are disintegrating, while new models of production are developing. This transition is also the root cause of challenges faced by the Chinese economy at present time. However, with its huge and growing market size, China's economy continues to exhibit strong resilience and great potentials. The fundamental sustaining China's long-term outlook remains positive and will continue to provide a favorable business environment for all industries and for our company, Fanhua.
[Foreign language]
For China's insurance market, the previously mass agent model is gradually phased out, and the new professional-based model catering to customer demand have yet to take center stage. Currently, there are fewer than 1 million truly professional trained salespeople in the insurance industry. However, to meet the substantial demand of China's vast middle class population, and aging society for effective retirement and legacy planning, we estimate that there exists a shortfall of at least 2 million professional advisors in the market.
In recent quarters, we have observed an increasing number of quality agents coming from a diverse range of sectors outside of the insurance industry to join our industry. They are in great need of a enabling platform that can support their ongoing development. This factor is yet to become a substantial driving force for the industry's next phase of growth.
We believe that Fanhua's strategy of specialization, digitalization, and open platform fits perfectly well to this emerging trend.
[Foreign language]
A result over the past few quarters, I think it's, it's good evidence that our strategic implementation over the past two years is becoming effective, and Fanhua has taken on a fresh new look. As such, last week, we officially announced our new mission statement, vision, and core values, which are intended to solidify the roadmap to guide everyone at Fanhua to work together to propel the company towards achieving sustainable, high-quality growth. Fanhua will uphold the highest ethical standards to promote our core values of integrity, professionalism, openness, and innovation, while striving to become a globally leading, technology-driven financial services platform, dedicated to empowering the growth of independent financial advisors and fostering the sustainable value creation for our clients.
[Foreign language]
This September, Fanhua will celebrate its 25th anniversary. Since our listing in 2007, the company has consistently delivered substantial returns to shareholders through buybacks and dividends. Looking ahead to the next 25 years, guided by a new mission and vision, we're confident that by continuing to push forward, our defined strategies will continue to create value for our shareholders.
[Foreign language]
Thank you, Chairman. As many of , I joined Fanhua in July. I spent many years in the industry as a sell-side insurance analyst, and a number of years as an investor at a large U.S. equity fund. My position at Fanhua is to be in charge of our overseas development and also our capital markets work. I hope to bring the years of experience I've had in analyzing the insurance market across the globe to help Fanhua achieve our objective of becoming a globally leading financial services platform. I will now take everyone through our Q2 results, which we are very, very pleased with.
So firstly, in terms of revenue growth, we grew 61% over the quarter. And in terms of operating income, we, the numbers grew by 177%, beating our prior guidance. In terms of our earnings growth, it came in at 192% in terms of Adjusted EPS. In terms of our cash position, total cash and cash equivalents stood at CNY 1.6 billion. All of these basically is an illustration that we are basically getting consistent results from the execution of our core strategy. Underpinning these numbers, let me go through in terms of our operational highlights.
So if you look at the premiums, our premiums grew 55% year-on-year, which is significantly ahead of the industry growth of 23.7%. More importantly, in terms of life insurance first-year premium, we grew 153% year-on-year, while the average of Chinese-listed insurers was 89%. So obviously without doubt, some of our growth in the Q2 came from very strong industry tailwinds, namely the pricing change that took place over the quarter. The most important indicator for us is really the improvement in advisor quality.
So the number of MDRTs increased by 228%, while the premium agent category, which basically agents selling premiums above CNY 100,000 over the quarter, grew 163% year-on-year. And agents who basically sold more than CNY 10,000 over the quarter grew 29%. Without a doubt, these are the three categories that we now will continue to focus on. And in terms of productivity, our MDRT agents grew their productivity by 21.7% to CNY 1.3 million over the quarter. In terms of contribution from our top-tier agents, they now account for 57% of our premium over the quarter, versus 37% last year.
In terms of our renewal premium, it also had very, very strong results, increased by 28.7% over the quarter. And that's mainly driven by a significant improvement in our persistency ratio. Our 13-month persistency ratio came in at 95.1%, which represented a 3.4 percentage point increase from last year. And our 25-month persistency ratio came in at 88.3%, an increase of three percentage points from last year. Our digitalization and open platform strategy continues to deliver in the form of improvement in operational efficiency. So you can see that our digitalization and open platform expenses as a percentage of our revenue now is at 20.9%.
Including all the other expenses, you can see that our operating expense ratio decreased by 9.7 percentage points year-on-year. We continue to make significant investments in IT. On a quarterly run rate basis, it amounts to about RMB 20 million a quarter. The contribution from our open platform strategy is becoming more and more evident. You can see that in terms of organic first-year premium, it came in at RMB 1 billion, an increase of 90.6%. More importantly, though, our open platform first year premium came in at RMB 550 million, an increase of 135% year-on-year.
In terms of contributions now, our open platform and acquisitions we made over the last 12 months now account for 35% of our first year premium and 32% of our revenue mix. Lastly, in terms of business outlook, we maintain our life insurance first year premium target of 50% year-on-year growth to CNY 3.7 billion, and we also maintain our Adjusted EBITDA growth target of 50% year-on-year for the full year of 2023. Obviously, there's a lot of questions about the outlook for the industry, post the pricing change that we saw in the Q2 and the first month of the Q3 . Our take is that, look, this industry has gone through many, many cycles of pricing rate change over the past decade.
And we're confident that the industry will continue to develop through these different stages and cycles. The important thing is that the overall return environment of financial products in China is declining. If you look at wealth management products out there in the market, the returns are below 3%. So insurance products, which now has a return being capped at 3%, is still very attractive for as a form of savings product in the market. And our view is that this industry downturn present excellent opportunities for market consolidation and expansion. With our significant financial resources and open platform strategy, we think we're well positioned to take advantage of this opportunity to facilitate acquisitions and also invite more third-party brokers onto our open platform.
Lastly, I want to go through our capital allocation and our overseas expansion plan. So one of the attractions of our business model is that we're very asset light, we're very capital light, and as a result, our business is able to generate very attractive operating cash flows every quarter and each year. Over the last 16 years since our listing, Fanhua has generated an accumulated operating cash flow of CNY 4 billion, and our cash reserve is now at 1.6 billion CNY. In the past, we have had a strong track record of steady shareholder return through dividend and share buyback. On an accumulated basis, since our listing, we have returned CNY 2.8 billion to our shareholders in the form of dividend and share buyback.
A lot of it actually came through in the last five years. Our consideration and capital allocation strategy now is that, number one, we are temporarily suspending our dividend policy. This is precisely because that we think that we are at a point in time where there is immense, immense consolidation opportunities out there, as well as the opportunity to grow overseas. In terms of our overseas expansion plan, what we want to highlight is that... The intermediary sector in Asia remains very small compared to mature markets like the U.S., or Europe. Some of you may know, there are basically over 800 brokers in Hong Kong. It's a very fragmented market. A lot of them are subscale.
And we think that we are at a point in time where leading technology platforms like Fanhua in China can take some of their expertise and grow overseas. So we are looking at expanding into Hong Kong and potentially in Southeast Asia as well, 'cause these are markets we think is very, very underserved by the broker market. And what they lack is the technology expertise that we could potentially provide. So that sums up the presentation that we have prepared for you and we now turn to Q&A.
Hello, Maggie, we are ready to open the floor for questions.
Thank you. We will now conduct the Q&A session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by as we compile the Q&A roster. Our first question comes from Coco Gong of Morgan Stanley. Please go ahead.
Hi, uh,
Hi, Coco.
Hi, everyone. I'm from Morgan Stanley, Coco. And thanks for management to give me this opportunity to ask the very first question. And first of all, congratulations to company on very excellent results. And the very first question from me would be about the expansion to Hong Kong and the Southeast Asia market. Maybe it's more towards Ben, because we want to understand what would be the sort of the specific plan that company is thinking about? What goals is the company trying to achieve? Maybe can you share with us a little bit of a details on that. And the second would be, what is the company seeing from the first line of agents, on the economic recovery in China? And , that's sort of a question that a lot of investors are very curious about.
That's all. Thank you.
Okay, so if you don't mind, from now on, the Q&A session, I would like to respond in English. and if I do have to pass the question on to some of my colleagues, I can help them translate. So I'll take the first question, and our Chairman Hu will take the second question on the Chinese economy. In terms of our overseas expansion plans, we are at the very early stages of crafting out our strategy. but we can tell you this, we have a very clear focus on what we want to do. It's going to be based on technology, export, and partnership.
, we're not looking to build frontline teams in big scale by entering Hong Kong or Singapore, et cetera. That's not what you should expect from us. , we having looked at this industry for many years I am a strong believer that the intermediary segment in Asia remains the only greenfield amongst financial services in the financial services industry across the region. My view is that this is a very underserved segment in terms of technology. As you understand there are some insurance companies like ZhongAn or Ping An to export some of their insurer tech to Southeast Asia and the rest of the world. But those are basically mainly catered for insurance companies' needs.
There's actually no broker company out there that is developing technology to empower offline and online sales for the traditional industry, for the traditional sales industry. We see significant market potential in the region. As I mentioned earlier, if you look at Hong kong you have 850 brokers in Hong Kong. They're all very, very small. They don't have the capacity to invest in technology. While, as you look at china we are really leading the world now in terms of digital sales of almost everything. So in insurance, you are seeing a growing trend of agents using technology to create their own IP. , they do basically lead generation through social media. They basically use their own expertise to create digital IP.
And some of the recent trends we're seeing is that, there's going to be a trend of using AI to drive a lot of those tasks. And so we think we are at a point where technology can drive consolidation of the brokerage market in Hong Kong and in Southeast Asia. and Fanhua is very well positioned to take advantage of that, given our expertise. , we have 25 years of experience of selling P&C and life insurance products online and offline. And we we have proven that in China. We also have the financial resources to invest in this area. I mentioned earlier each quarter, we're basically spending about CNY 20 million on technology.
so we are very confident that this is the right path. And so please give us some time to find the right partner, to pursue this path, outside of China
[Foreign language]As Chairman Hu stated in his opening remarks, right? I mean, China right now is going through a transition where old models of production are getting phased out, and new models of production are developing.
[Foreign language]
So we can share with you four observations. so the startup community in China right now is a bit weak, and it's because the risk appetite for investors has declined.
[Foreign language]
The other observation is in terms of consumption. obviously consumers in China are cautious coming out of COVID. And , there's obviously some evidence that there is a bit of consumption downgrade for daily products.
[Foreign language]
The first point we can share with you is that social stability is still very evident. although the confidence level across industry is facing some challenges, but we are seeing signs that they are recovering.
[Foreign language]
[Foreign language]
So in conclusion, look, every industry in China is going through a period of transition, from old models of production to new models of sustainable production. So we are all looking for new engines of growth. This will take one-two years to develop and become evident. But what, Mr. Hu can share with you all is that this new production process will also involve a lot of new tools, including artificial intelligence. And we think that the adoption of new technology and tools will become very apparent over the next two years.
[Foreign language]
[Foreign language]
[Foreign language]
So if you take the insurance industry, for example, right? The last three years, everybody in the across the value chain in the insurance industry have been looking for a new way out, looking for new models, to develop sustainable growth. And what you're seeing is that there's a growing trend of using technology, to meet customer needs.
It's becoming very visible that that that traditional mass agent model, that commission-driven sales process, is. We need to change. And we see the adoption of artificial intelligence, we see the adoption of customer demand as the key tools to drive higher quality growth looking ahead. so what we are going through in the insurance industry we think really applies to other industries in China.
, everybody is basically going from a pretty rough business model or operating model to a more higher quality, sustainable model. , we have walked this path over the last three years, and from all indications, you can see that we are starting to get the results. So we are confident that if we can walk this path, a lot of industries and companies in China can also walk this path as well. so we remain pretty confident on the outlook of the Chinese economy over the long term.
[Foreign language]
Thank you. Just a reminder to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. Just one minute for our next question, please. Our next question come from Yu Yu Zane from CICC. Please go ahead.
[Foreign language]I have two questions, and the first one is related to the product supply strategy and your sales momentum.
We know that the 3.5% life products now is not allowed to sell. I mean, in this case, many insurers and brokers have made changes in their product strategy. So could you share some more details on your product strategy for the second half of this year, and so far in August, how is the sales momentum of your savings and the protection products in your observation? And the second one is about your open platform. Could you share some more color on how you view the growth prospects of the open platform strategy, what opportunities and challenges we may face? And also, what are the agencies most favorite functions and services in our platform, and what updates will you make in the future? Thanks.
[Foreign language]
[Foreign language]
Just to answer your question, obviously post the pricing change in July, the August sales figures across the industry is not looking too great. It will take time for the industry to adjust. But , our view is that going from 3.5% to now 3% guaranteed products, in this market environment, these products are still attractive. So this change from our point of view it will not bring catastrophic change to the industry in terms of demand.
The reality is that every year in China now, you're seeing 20 million people entering the age 60 and above bracket. And over the next few years, if the projections are every year on an accumulated basis, there will be 300 million people entering the age 60 and above category. And this category of elderly population in china they will still have demand for low risk savings products. And so we're still pretty confident that we'll go for a short term adjustment, but the medium to long term outlook, in terms of demand for insurance product in China still remains very, very robust.
[Foreign language]
So look obviously, we think these guaranteed return products will put pressure on insurers' investment capability in a declining interest rate environment. And as a result, we foresee that we could see some product mix changes going forward as well. For example we see annuity products as a very attractive product category. We see elderly health insurance as an untapped market. , although we have a large amount of people in China entering 60 years or above category this is still a pretty young age group. , given China's improving life expectancy, and could be a good risk category for insurers to underwrite health insurance.
And lastly we think the industry will also move towards more customized and differentiated products. , we think what will be standardized is really these investment products. But we also see the opportunity for insurers to offer differentiated products through services. And maybe I'll just add to Mr.
Hu's point that obviously there are some voices out there that the regulators should encourage insurers to also develop participating products in a low rate environment. but obviously the industry concern is mis-selling. , once you go through a period of selling guaranteed products, there's always concern about mis-selling when you move towards non-guaranteed products. Our take is that the only way to reduce this risk is through professionalizing the sales force. And this is an area that we are a very, very strong advocate of.
[Foreign language]
So in terms of how we work with our suppliers, our upstream the manufacturers, insurance companies, we are taking a more differentiated approach now. We want to work with suppliers who have strong Solvency Margin, good investment capability, and service capability. And with those suppliers, our intent is to co-develop differentiated products and services to meet the demands of our clients.
[Foreign language]
So yeah, in terms of the challenges facing by our open platform, the challenge is really also the opportunity for us. , right now, the sales process or over the last decade, the sales process in China has been driven by the mass agent model. And , the focus on digital tools was not very prevalent. It's all about recruiting. And so , that has led to a series of problems and challenges that's facing by the industry right now. But we think that , these constraints are basically opportunities for us, right? So for a lot of the brokers, they're constrained by capital in terms of capital investment into technology.
They're also constrained by the fact that in a lot of their commission agreements they have in insurance companies, there is no specific mandate for them to invest in technology. but we think as the industry goes from mass agent to professional agency with a small number of insurers serving still the same size market or growing market, there will be a need for automation of the sales process. And so we think the industry needs then to invest in infrastructure to support digital and also artificial intelligence-based selling. and that's an area where Fanhua, we think we have the resources and the experience to do this.
[Foreign language]
I mean, what we're doing in terms of the open platform, is obviously something that's quite new, not only in China, in my view, but across the region. But as you can see from our results over the last Q2 , our execution on our open platform strategy is leading to more and more people recognizing that it is a very viable strategy. It is now one third of our business in a very, very short period of time.
[Foreign language]
So since august obviously the industry numbers are pretty bad, and we recognize that a lot of our peers are basically facing growth challenges. , they, they're looking for new, modes of growth. They're looking for new tools to help them grow. So on the 25th of September, in Shenzhen, at Tencent headquarters, we are going to host, Fanhua's Open Platform Day, to basically illustrate all, all our capabilities and what we can bring for them.
[Foreign language]Second place is our digital operating platform. So digital operation includes transaction operation, digital tools, our industry integration. The third is our professional training.
[Foreign language]
[Foreign language]
Okay, so to answer your question about what value do we bring to these independent brokers from our open platform, we would like to share with you five things. Firstly is obviously the products and services they can get from our platform, insurance products, mutual funds, retirement products, et cetera. And then secondly, is digital operation. So we provide them the tools to conduct transaction, digital training, et cetera. And then thirdly is professional training. We basically offer a comprehensive training schedule from risk management to retirement needs, as well as family consultation.
so for a lot of these agents, what we want to do is basically develop a full-time career path for them, so that they become competent, not only in selling insurance, but a full range of financial services products. And then fourthly, is capital support. And we think that's going to become increasingly more important. Some of you are probably aware that the regulator has already started changing the commission structure of the bank insurance channel. We think it's likely that they're going to change the commission structure for the broker channel as well. We think that they're likely to reduce the first year commission and put more weighting on renewal commissions.
And as a result that's going to bring challenges for a lot of our peers, particularly the smaller ones that lack capital and scale. and we think this is an area where we could with our significant capital resources, could provide support. And then lastly, is in terms of future technology and tools we think that we are at a juncture where artificial intelligence and large data modeling is becoming an essential part of the sales process for our business. And so this is an area where we're going to continue to invest.
Some of you may know, to give you an example we were speaking to some insurance executives from overseas recently who were in China for a tour. And we showed them Shu digital avatar. , basically, insurance agents posing in front of a camera, but turn themselves into a digital person where they can sell insurance through TikTok or Douyin in China. and in the past, they have to go to a studio to record this, right? And they can probably only sell during a certain period of time.
But through artificial intelligence now we basically can create these contents with speed, and more importantly, with flexibility. so these are the use cases of artificial intelligence that could be adopted in our industry.
Thank you.
Thank you. I see no further question at this time. I will turn the call back to Iris Chu. Thank you.
Thank you for participating in today's conference call. If you have any further questions, please feel free to contact us. Thank you.
This concludes today's conference call. Thank you all for participating. You may now disconnect.