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CNinsure, Inc. (NASDAQ:CISG)

Q3 2012 Earnings Call

November 29, 2012 8:00 p.m. EST

Executives

Oasis Qui – IR Officer

Chunlin Wang – CEO

Peng Ge – CFO

Analysts

Mike Ryan – MJR Capital

Operator

Thank you for standing by for CNinsure's 2012 Q3 3arnings 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's prepared remarks there will be a question and answer section. [Operator instructions].

For your information, this conference call is now being broadcasted live over the internet. Webcast replay will be available within two hours after the conference is finished. Please visit CNinsure's IR website at ir.cninsure.net, under the Events & Webcasts section. Today's conference is being recorded. If you have any objections, you may disconnect at any time.

I would now like to turn the meeting over to your host for today's conference, Ms. Oasis Qui, CNinsure's Investor Relations Officer. Thank you. Please go ahead.

Oasis Qiu

Good morning. Welcome to our third quarter 2012 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 these 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 are 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 is our Chief Executive Officer, Mr. Chunlin Wang, and Chief Financial Officer, Mr. Peng Ge. Mr. Wang will walk you through our third quarter 2012 financial and operating results and discuss the progress of our strategic transition. Mr. Wang and Mr. Ge will then take your questions after the prepared remarks.

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

Chunlin Wang

[Interpreted]. Hello, everyone. Thank you for joining us on today's conference call. I will begin today's call with a review of our third quarter 2012 financial and operating performance, followed by an update on the progress of our strategic transition. Then Mr. Peng Ge, our CFO, and I will go into the Q&A session.

During the first nine months of 2012, China's insurance industry remained in the single-digit growth territory. Despite the challenging market environment, however, we are pleased to see that our total net revenues for third quarter 2012 grew 5% year over year, beating our previous guidance of flat growth.

Looking at our three major business lines, Property & Casualty Insurance segment recorded 7% revenue growth year on year in the third quarter. But intensified competition forced us to increase commissions to our sales agents, which resulted in significant drop of our gross margin and weighted heavily upon our bottom line.

Life Insurance segment, impacted by subdued sales in insurance industry, witnessed a decline in net revenues in the third quarter, but we're encouraged to see that the recurring life insurance premiums that were distributed continued strong growth momentum into the third quarter with a year-on-year growth of 30%, mainly attributable to long-term effect of life insurance business and high 13-month persistency ratio of over 81%.

The growth of our claims adjusting business remained stable in the third quarter 2012, with net revenues increasing 7.9% from the year-ago quarter.

Since I took over as CNinsure's CEO last October, I had been navigating the company through a transition and adjustment period during which we rolled out the following initiatives to push forward the strategic transition. I'm pleased that the transition plan has progressed in line with our expectation.

Firstly, we had been simplifying our organizational structure in order to strengthen our corporate governance. In October we established CNinsure Sales Service Group Company Limited which is expected to serve as the PRC holding company for all of our affiliated insurance intermediary companies. This offers an effective way for us to move the VIE arrangements and build a [backdrop] to improve our corporate governance in order to further simplify our corporate structure.

We plan to gradually change our wholly-owned affiliated insurance agencies into branches of our two nationally operating insurance agencies that are wholly controlled by the group company in the coming three years. Meanwhile, in five years' time we intend to buy out all the minority interests of our majority on affiliate insurance agencies and complete conversion of the subsidiaries into branches.

From a regulatory perspective, as the CRIC is nurturing [inaudible] regulatory framework for large professional insurance intermediate companies to consolidate the market and grow stronger, we believe the establishment of the first insurance sales service group company by CNinsure in China enables us to nimbly seize the opportunities that such regulatory trend provides.

Secondly, we have set up our efforts to construct the e-commerce platform, which is one of our strategic focuses during the transition period, and expect it to be one of our major drivers for future growth. As a result of our continued efforts, we have made two exciting breakthroughs in e-commerce development this year. In January we successfully launched a B2C customer insurance comparison website baoxian.com, which facilitates the full process transaction for insurance purchase.

Nevertheless, in view of the immature insurance B2C market in China, we decided to suspend massive marketing investments in promoting the B2C website and concentrate more efforts to develop the mobile sales support system, a key component of our B2B model. The research and development process over the past two years has been with some difficulties in not only technology arena, but more importantly, the [product ties] capabilities to integrate with our system. Despite all the difficulties, we still [in line of] success and launch CNpad, the device of our mobile sales support system, in October.

CNpad features a variety of functions encompassing insurance purchase, business management, information alert and image management. We believe it is a powerful weapon for agents to do business in a more efficient and cost-saving way. Attractive as it is to sales agents, it enables the insurer to reach to millions of sales agent force across China more easily. It also enables the company to break the limitation of traditional sales outlets and speed up sales network expansion through the distribution of CNpad which we believe will largely increase our sales volume.

Currently CNpad primarily supports the purchase of all insurance, and we will gradually put other standardized insurance products on shelf, such as [healthcare] insurance, travel insurance and home insurance, etc. Going forward, we also plan to include products and services that require consultation such as life insurance, wealth management products, health management products, and other financial services products on the platform. On top of that, we also intend to integrate the auto insurance claims adjusting support application into CNpad, which we believe will help sales agents strengthen customer relationships and improve the operating efficiency within our auto insurance claims adjusting business.

Currently, we are carrying out trial operation of CNpad in Guangdong province and plan to roll out a nationwide distribution by next June. In the coming three years we expect to sell 50,000 to 100,000 CNpads. We believe our strong brand awareness in professional insurance intermediary industry will power up our marketing plan that aims to further penetrate into the market.

Thirdly, leveraging on our established life insurance sales network. We've devoted a lot of efforts to build up capabilities to offer comprehensive financial services and products to our clients, which we believe will become another powerful growth driver for CNinsure.

While shifting our focus to penetrate into major cities and develop mid to high-end customer base, we started to cross-sell wealth management products early this year through our life insurance sales force. This business has been growing very fast in the past three quarters with the value of wealth management products that were distributed amounting to over RMB100 million per month. For the first nine months of 2012, the aggregate value of wealth management products distributed by CNinsure was approximately RMB590 million and the number of customers that have wealth management products through us was over 890 as of the end of third quarter 2012.

Our life insurance business also benefited from strong sales of wealth management products which modestly boosted life insurance sales, and more importantly, substantially improved customer loyalty. Next year we plan to accelerate our network expansion into major cities, leverage on our advantages in diversified product offerings, multiple revenue sources, and flat team structure to attract more sales talents to join CNinsure to build up the best sales team in our life insurance intermediary companies and further expand the cross-sell of life insurance and wealth management products.

Fourthly, we have taken various measures to streamline operations to seek quality growth instead of quantity growth. First, we abandoned cooperation with some channels which have lower margins and very high management risks. Second, we shut down sales outlets which are less productive. Third, we cleared out inactive and unproductive sales agents, particularly within our life insurance business segment.

Fifthly, in face with the challenging competitive environment, we have chosen to safeguard our market position rather than near-term margin in order to preserve strength for long-term growth. In recent quarters, competition among [top 10 carrier] insurers have exacerbated amid market growth. They were offering higher discount and commissions and set up efforts to engage in direct channels such as telemarketing and online sales to gain market share. According to statistics, contribution from telemarketing in terms of premium was up over 100% for the first nine months of 2012.

As a result, market commissions were driven up to an extremely high level and we have to pay more commissions to our sales agents to be competitive, which significantly reduced the gross margin of our P&C business and further squeezed our profit. However, we managed to maintain a positive growth of our property and casualty business despite the measures to streamline the operation. In addition, we believe that our P&C gross margin has hit bottom in the third quarter and we expect it to [enlarge] gradually.

As 2012 is coming to an end, we are pleased to see the progress that we've made with the company strategic transition over 2012 which is also in line with our expectation. Looking ahead, we will continue to execute our strategies to bring CNinsure back on the growth track.

Now we would like to open the floor for questions.

Question-and-Answer Session

Operator

We would now begin our question-and-answer session. [Operator Instructions].

Your first question today comes from the line of Mike Ryan from MJR Capital. Mike, please go ahead.

Mike Ryan – MJR Capital

Hi. Thanks for taking my call this evening. My first question as it relates to commissions and fees and how that's trended over the year as a percentage of revenue, and particularly in the current quarter, whether there was any sort of unusual items included in that given the close-down of some of the sales outlets.

Oasis Qui

[Chinese language spoken]

And second part of the question?

Mike Ryan – MJR Capital

The second part of the question is, what are -- I mean, the current level of commission and fees as a percentage of revenue seems to be untenable. What are we doing to fix that? I understand that what you're saying is that we've -- it kind of plateaued, but what are we doing to drive that down?

Oasis Qui

[Chinese language spoken]

Peng Ge

[Chinese language spoken]

Oasis Qui

Our CFO would like to take your question. The commission rate we received for the third quarter 2012 was 23% as compared to 19% last year for the P&C business.

Chunlin Wang

[Chinese language spoken]

Oasis Qui

CEO would like to answer your second part of the question. As we mentioned, that the commission that we pay to our sales agents has reached a very high level and we believe the highest level in this quarter, in the third quarter. But we believe that the gross margin has already hit the bottom in the third quarter. And the way for us to drive the commission cost down is to -- by development or distribution of the impact or the sales support divide.

Chunlin Wang

[Chinese language spoken]

Oasis Qui

Yes.

Mike Ryan – MJR Capital

I was just going to ask, where do you see the operating margins going? Will we ever get back to 30% operating margins, or where do you see them heading based on where sales commissions will end up going?

Oasis Qui

[Chinese language spoken]

Chunlin Wang

[Chinese language spoken]

Oasis Qui

Based on the third quarter's results, our gross margin for the third quarter was like 27% to 28%, and the expense ratio is roughly 25% to 26%. So that means the operating margin was down only 2% to 3%. Based on our experience and the trends, what we have experienced in the past decade, we believe that the commission level, the commission cost is at the highest level and now our gross margin has reached the lowest level, and we don't think that our operating margin will go down any further.

Mike Ryan – MJR Capital

I guess what I'm trying to get a better understanding of is how long do you think we'll be at the higher level of the commission expense and when do you think that will start trending -- and maybe you could give a little high-level color why somebody comes to work as an insurer. Is it solely based on the commissions that they're going to receive or is there some value in being able to, you know, for a wide variety of products from different carriers, value in the systems you have? Maybe talk some more about why sales agents come to CNinsure. Maybe that can help in the answer to where commissions might go.

Oasis Qui

[Chinese language spoken]

Chunlin Wang

[Chinese language spoken]

Oasis Qui

So, first of all, from the market perspective, we have seen very fierce competition among property and casualty insurance companies, and we believe that it has reached the most severe level that we have ever seen. And as a result of that, we expect that half of the property and casualty insurance companies may report a loss this year. So the likelihood for them to further increase the commissions paid out is very low. So that's why we don't think the commission costs will continue to go up.

And secondly, for CNinsure, we have launched the CNpad and we expect to distribute 50,000 to 100,000 units of this CNpad to sales agents. And because the CNpad actually is very powerful tool for -- to help agents to improve their efficiency, reduce the operating costs and also diversify their revenue sources, so that also help reduce the commission rate that we're going to pay to our sales agents.

Chunlin Wang

[Chinese language spoken]

Oasis Qui

And the reason that sales agents may choose to join CNinsure is furthermore we have wider range of product offerings and we represent multiple insurance companies, and we also help them to better -- provide better services to their clients.

Mike Ryan – MJR Capital

Great. Thanks a lot. I appreciate your time, and I'll let somebody else ask a question.

Oasis Qui

Thank you.

Operator

[Operator Instructions].

It seems that we have no further questions on the line today. And that does conclude the call.

Thank you all for your participation in CNinsure's conference. There will be a webcast replay within two hours. Please visit CNinsure's IR website at ir.cninsure.net under the Events & Webcasts section.

Thank you all for your attendance. You may all now disconnect. Good bye.

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