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Advance Create 8798
アドバンスクリエイト
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2021-11-15
2021-10-19
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Nomura Fudosan Midosuji Build. Kawaramachi, Chuo-ku, Osaka, Japan
Summary
Advance Create (listed on the First Section of the Tokyo Stock Exchange) was established as an insurance agency business by current President Yoshiharu Hamada in 1995. The company operates in three major segments: Insurance Agency, Media, and Reinsurance. In the Insurance Agency business, the company enters into insurance agency agreements with life and non-life insurers and sells insurance products on their behalf. In the Media business, the company markets its insurance product information website Hoken Ichiba (discussed in more detail below) as a content media platform to insurance companies. In the Reinsurance business, it earns underwriting commissions from life insurers by assuming—through its reinsurance subsidiary Advance Create Reinsurance (ACR)—the risk element of life insurance products issued by such companies and thus share their risk burden.
Insurance
Key dates
2019-10-02
Coverage initiation
Executive summary
Business overview
Advance Create (listed on the First Section of the Tokyo Stock Exchange) was established as an insurance agency business by current President Yoshiharu Hamada in 1995. As an independent insurance agent, it boasts the largest number of insurance agency agreements with 90 insurers in Japan (as of April 1, 2021; compared to 44 and 51, respectively, for competitors Hoken No Madoguchi and Newton Financial Consulting [TSE JASDAQ Standard: 7169]). Its major segments are the Insurance Agency segment (76.1% of consolidated revenue, 73.4% of consolidated operating profit), which generates revenue from insurance agent commissions; the ASP segment (1.7% of revenue, 1.1% of operating profit); the Media segment (11.9% of revenue, 22.1% of operating profit), which generates revenue from advertising income; Media Rep segment (2.2%, operating loss); and the Reinsurance segment (8.1% of revenue, 11.1% of operating profit), which generates revenue from underwriting commissions. The company had an operating profit margin of 11.3% in FY09/20 (10.9% for Insurance Agency, 7.1% for ASP, 20.9% for Media, loss for Media Rep, and 15.4% for Reinsurance).
The company’s business is tied to insurance premiums—which are composed of a pure premium (death benefits [risk premium] and pure endowment [investment portion of the premium]) and a loading premium (overhead costs such as agent commissions, advertising fees, outlet expenses, and personnel costs)—paid by customers to continue their insurance coverage. Insurance agents generally earn commissions from loading premiums, and the company also generates advertising revenue from loading premiums via its Media business, and reinsurance commissions from pure premiums by assuming the risk portion of death benefits from insurers in its Reinsurance business. Another distinctive characteristic of the company is its insurance product information website Hoken Ichiba, which functions as a platform to attract customers. This produces a virtuous cycle of business generation for the Media, Media Rep, and Reinsurance businesses, providing opportunities to monetize pure premiums without the need for underwriting reserves as the company is an insurance agent.
Advance Create’s customers are, first and foremost, the insurers with which it signs insurance agency agreements. However, because the company only generates agent commissions once it signs up new policyholders, its customer base in a broader sense also comprises consumers and corporate customers. It therefore offers value to customers on two fronts: (1) by increasing policies in force for insurers, and (2) by providing a sense of satisfaction for consumers through consulting services based on product comparisons. Price is not a factor in the value offered to consumers because premiums are uniform for the same policy at all insurance agents.
Accordingly, the company differentiates itself from competitors through its ability to sell insurance policies efficiently. Its sales strategy, Online Merges with Offline (OMO), comprises four elements: 1) attract customers to Hoken Ichiba (Japan’s top insurance product comparison and information website with monthly traffic of over 2.0mn visitors), 2) either steer customers toward non-face-to-face sales channels such as mail-order and fully Internet-based sales, 3) or refer customers to direct-sales consultation desks (Hoken Ichiba consulting plazas) for face-to-face sales (including online consultations), or 4) engage in collaborative sales through affiliated agents. By channel (based on annualized new premiums [ANP]), face-to-face sales account for 45% of new customer acquisitions, non-face-to-face sales for 36%, and collaborative sales for 19% (FY09/20). Third-sector insurance products (such as medical, cancer, and nursing care insurance) represent 43.8% of the company’s portfolio, first-sector products (such as term or whole life insurance) 29.6%, and second-sector products (such as auto and fire insurance) 26.6% (as of FY09/19).
Advance Create adopted the Accounting Standard for Revenue Recognition in FY09/19, ahead of the mandatory adoption. The new standard should make it easy to discern revenue trends by annualized new premiums (ANP; e.g., ANP of JPY200,000 for five-year product with premium of JPY1mn [JPY1mn/5]). The company’s ANP is closely correlated to cost of revenue, and promotion costs to sell new policies therefore warrant monitoring as they account for the bulk of cost of revenue. Its cost-to-revenue ratio stands at around 25% and its SG&A-to-revenue ratio at around 60%. Personnel expenses make up roughly 40% of SG&A expenses. Over the three years through FY09/20, the company’s ANP grew at a CAGR of 3.6%, notwithstanding the impact of the COVID-19 pandemic, in contrast to the life insurance industry average (for 42 companies) of -16.3% for the same period.
The company has not disclosed its medium-term business plans, but it targets the following KPIs: ROE of at least 20%, a recurring profit margin (RPM) of at least 20%, a payout ratio of at least 50%, and an equity ratio of at least 80%. Key strategies are enhancing its online consultation focused OMO approach to boost productivity in its Insurance Agency business and creating further synergies from the Media, Media Rep, and Reinsurance businesses. It also aims to grow earnings by leveraging the IT technological capabilities of its ASP and BPO businesses and selling systems to third parties. Under the slogan “Software First,” the company plans to redouble its focus on systems development, which it has already moved in-house, and aims to develop a platform that connects consumers, insurance agencies, and insurance companies.
Earnings trends
For FY09/21, the company reported full-year consolidated revenue of JPY11.0bn (+4.8% YoY), operating profit of JPY2.0bn (+72.4% YoY), recurring profit of JPY1.9bn (+75.7% YoY), and net income of JPY1.3bn (+85.0% YoY). Both revenue and profits reached new highs. The OPM of the Insurance Agency, the company's core business, rose to 17.7% from 10.9% in FY09/20. The cost-of-revenue ratio declined due to the implementation of efficient promotions using AI and other technologies.
For FY09/22, the company forecasts revenue of JPY12,.5bn (+13.4% YoY), operating profit of JPY2.3bn (+12.7% YoY), recurring profit of JPY 2.2bn (+14.2% YoY), and net income of JPY1.5bn (+11.9% YoY). Key measures include 1) promotion of OMO strategy based on online consultations, 2) fortification of online marketing, 3) strengthening of system cooperation with collaborating agencies, and 4) building a solid sales foundation as a financial information service provider.
Strengths and weaknesses
The company’s strengths are 1) its ability to attract customers to its insurance product comparison and information website Hoken Ichiba, the largest in Japan 2) its in-house IT capabilities, and 3) its reinsurance operations. Its weaknesses are 1) low customer retention compared to rivals, 2) weakened organizational power in the network of affiliated agents, and 3) a shortage of finance and IT specialists hampering its envisioned growth.
Key financial data
Note: Per-share data adjusted for stock splits
Recent updates
Monthly performance summary for October 2021
Advance Create Co., Ltd. announced its monthly performance summary for October 2021.
In October 2021, total annualized new premiums (ANP) at application were down 18% from the previous month. Compared with September, ANP from mail order/online sales were down 22%, face-to-face (direct) sales were down 16%, and collaborative sales were down 20%. As a decrease in the number of COVID-19 infections led to more people going out and a greater appetite for spending, interest in insurance seemed to dip and appointment numbers dwindled. On a YoY basis, mail order/online sales were down 26%, face-to-face (direct) sales fell 3%, and collaborative sales dropped 11%.
Note: Past figures are subject to adjustments when the company releases preliminary figures for the most recent month.
Monthly performance summary for September 2021
Advance Create Co., Ltd. announced its monthly performance summary for September 2021.
In September 2021, total annualized new premiums (ANP) at application were level with those in the previous month. Compared with August, ANP from mail order/online sales were down 9%, face-to-face (direct) sales were up 2%, and collaborative sales were level. Mail order/online sales, which temporarily experienced an increase in demand due to the COVID-19 pandemic in the previous year, declined 16% YoY. Face-to-face (direct) sales rose 6% YoY and collaborative sales rose 2% YoY thanks to steady progress in online interviews and other OMO strategies, resulting in an 2% YoY increase in total ANP at application.
Note: Past figures are subject to adjustments when the company releases preliminary figures for the most recent month.
Monthly performance summary for August 2021
Advance Create Co., Ltd. announced its monthly performance summary for August 2021.
In August 2021, total annualized new premiums (ANP) at application were up 9% versus July. Compared with July, ANP from mail order/online sales were up 39%, face-to-face (direct) sales were up 8%, and collaborative sales were up 1%. While mail order/online sales, which temporarily experienced an increase in demand due to the COVID-19 pandemic in the previous year, declined 13% YoY, face-to-face (direct) sales rose 23% YoY thanks to steady progress in OMO strategies such as online interviews. This resulted in the total ANP at application to rise 11% YoY.
Note: Past figures are subject to adjustments when the company releases preliminary figures for the most recent month.
Trends and outlook
Quarterly trends and results
Notes: Figures may differ from company materials due to differences in rounding methods.
Results by segment (quarterly)
Full-year FY09/21 results
*Net income attributable to owners of the parent
Key points
The results for FY09/21 show record highs in both revenue and profits.
Revenue increased JPY509mn YoY. By segment, revenue was up JPY180mn in the mainstay Insurance Agency and up JPY12mn in ASP. Meanwhile, revenue in the Media segment decreased by JPY220mn YoY, revenue in Media Rep was essentially unchanged YoY, revenue in Reinsurance increased by JPY91mn YoY, and adjustments decreased by JPY446mn YoY. The cost-to-revenue ratio decreased by 7.7pp to 22.3%. SG&A expenses were up JPY354mn YoY.
Operating profit grew JPY858mn YoY, reflecting a JPY604mn YoY increase in Insurance Agency, a JPY37mn YoY increase in ASP, a JPY40mn YoY decline in Media, a JPY258mn YoY increase in Media Rep, and a JPY2mn YoY decrease in Reinsurance. OPM rose by 7.3pp YoY to 18.5%.
Results by segment
Insurance Agency
Revenue in the Insurance Agency segment was JPY9.1bn (+2.0% YoY), with operating profit at JPY1.5bn (+69.5% YoY). Policy sales were up YoY in directly owned consulting plazas, owing to an increase in appointments and enhanced profitability of online insurance consultations. Further, cost-to-revenue ratio fell as the company ran online promotions utilizing AI, leading to higher revenue and profit YoY.
ASP
Revenue in the ASP segment increased by 6.4% YoY to JPY195mn. Recurring revenue from subscription services increased. Operating profit was up 287.1% YoY to JPY50mn as the company focused on reducing costs.
Media
The Media segment reported revenue of JPY1.0bn (-17.6% YoY), with operating profit of JPY221mn (-15.4% YoY). The company reported fewer YoY ad placements on its Hoken Ichiba website, which provides information on a wide range of insurance products.
Media Rep
Revenue was essentially unchanged YoY at JPY808mn, and operating profit was JPY166mn (loss of JPY93mn in FY09/20). Profit increased YoY as the segment achieved profitability through cost controls.
Reinsurance
The segment recorded revenue of JPY943mn (+10.7% YoY) and operating profit of JPY130mn (-1.2% YoY). Revenue grew steadily, but profit fell on higher costs.
Full-year company forecasts
Shared Research will update the following content following the interviews with the company.
Medium-term outlook
Advance Create does not disclose medium-term management plans, but we provide our views on the company’s medium-term outlook below.
KPIs
The company does not release medium-term management plans, but targets the following KPIs: ROE of at least 20%, RPM of at least 20%, payout ratio of at least 50%, and an equity ratio of at least 80%.
Challenges
Increase competitiveness of Insurance Agency business
Insurance agency operation is shifting toward one-time revenue business industry-wide. Despite this trend, Advance Create must continue to increase its policies in force, so the key question is how it can efficiently increase requests for brochures and face-to-face appointments to begin with. At the same time, the company has room to improve its renewal rate from the second year onward; other outstanding challenges include strengthening after-sales services and the competitiveness of affiliated agents. Effective strategies include reinforcing the competitiveness of affiliated agents through the ASP and BPO businesses, and securing a high number of policies through policy transfers.
Add recurring-income businesses
Seeds for new recurring-revenue businesses have been planted through the ASP and BPO businesses. The company plans to push ahead with external sales of GOYOKIKI, DECHI, HIKYAKU, and Dynamic OMO while promoting its Advance Create Cloud Platform (ACP) to insurance companies and agents. It also plans to market its BANTO contract information checking system and online consultation system externally.
ACP has prospects to foster industry support for open application interfaces (open APIs: publicly available specifications that enable interaction between insurers and user systems with the goal of developing shared systems in the industry and thus expanding the market), which is an area where the insurance industry still struggles.
Strategic direction
The company has named its OMO approach and “Software First” as key elements of its strategy. Advance Create has combined its online and offline operations because increasing points of contact with customers is the most important aspect of its business model. One of its strengths in this respect is having brought systems development in-house (as of March 31, 2021, 97 (21.7%) employees were assigned to IT and InsurTech activities out of a total of 448 employees [including contract employees]).
The company uses systems developed in-house and offers them to affiliated agents and primary insurers once it has demonstrated their benefits. The strategic direction entails selling in-house developed software to consumers, independent agents, and primary insurers and developing a platform that connects parties involved in the insurance industry.
Business
Business description
Insurance agency business operator
Founded in Osaka in 1995 by President Yoshiharu Hamada
Current President Yoshiharu Hamada and his wife Akiko established Advance Create in Osaka in 1995. They started the business in a one room condo on the sixth floor of a building located on a side street off of Midosuji Avenue (Osaka). Advance Create started operating as an independent insurance agent from around 1997, following the enactment of the new Insurance Business Act in 1996.
Insurance agents
Insurance agents enter into agency agreements with insurers, and sell insurance policies on behalf of such companies—either as an intermediary or directly—to general consumers and corporate customers. Insurance agents can be broadly divided into captive and independent agents. The former concludes an insurance agency agreement with only one insurer, while the latter enter such agreements with multiple insurers. Independent agents have an advantage over captive agents because they carry a larger number of products in their portfolio, allowing customers to more easily find an insurance product that fits their needs. Operating as independent insurance agent was approved under the new Insurance Business Act of 1996.
Business structure
The company operates in five major segments: Insurance Agency, ASP, Media, Media Rep, and Reinsurance. In the Insurance Agency business, the company enters into insurance agency agreements with life and non-life insurers and sells insurance products on their behalf. In the ASP business, the company develops and sells systems that link insurance data between consumers, insurance companies, and independent agents. In the Media business, the company markets its insurance product comparison and information website Hoken Ichiba (discussed in more detail below) as a content media platform to insurance companies. In the Media Rep business, the company uses its expertise in advertising management to manage ads on behalf of insurance companies under contract. In the Reinsurance business, it earns underwriting commissions from life insurers by assuming—through its reinsurance subsidiary Advance Create Reinsurance (ACR)—the risk element of life insurance products issued by such companies and thus share their risk burden.
In FY09/20, the Insurance Agency business contributed 76.1% of revenue, the ASP business 1.7%, the Media business 11.9%, the Media Rep business 2.2%, and the Reinsurance business 8.1%.
Earnings trends
In FY09/20, consolidated revenue reached JPY10.5bn on a three-year CAGR of 8.9% (figure below). Revenue expanded 5.5% in the mainstay Insurance Agency business, 24.7% in the Media business, and 7.6% in the Reinsurance business. (The company started disclosing segment information for the ASP business from Q4 FY09/18, and for the Media Rep business from Q4 FY09/20.) Operating profit was JPY1.2bn on a three-year CAGR of 4.3% (16.9% in the Media business and -0.4% in the Reinsurance business). The combined share in operating profit of all other businesses excluding Insurance Agency rose from 1.0% in FY09/09 to 42.0% in FY09/19 and reached 26.4% in FY09/20.
Established insurance mail-order model: Non-face-to-face sales through leaflet distribution
In 1997, when the mainstream sales channel for life insurance products was door-to-door sales, Advance Create began sales activities focused on leaflet distribution. In two years, it reached 6mn families across the country by using this approach, accumulated 7,000 policies in force, and worked with 200 leaflet distribution companies. By mailing application materials to prospective customers, the company managed to reduce costs associated with face-to-face sales, thus proving that mail-order sales were an effective non-face-to-face business model for companies that had no prior experience in selling insurance.
Note: Figures do not include eliminations of intersegmental sales and transfers.
Recognized value of customer data (customer relationship management) systems ahead of the industry
The success of insurance mail-order sales hinges on collection of customer information such as personal data and historical records of customer interaction. In 1999, Advance Create internally developed the GOYOKIKI system, a database of customer information. When the Internet started taking off—but long before insurers had corporate websites—the company established its Hoken Ichiba website with the ambition of creating a secondary insurance product market that could serve as a platform through which buyers and sellers could freely engage in transactions on equal footing, replacing the more aggressive sales practices that were the norm at the time.
Effective utilization of the GOYOKIKI customer database enabled direct mail and outbound calls, realizing one-to-one marketing based on customer relationship management (CRM). Advance Create achieved all of this before CRM started garnering attention in the Japanese finance world in the early 2000s, which is a testament to the company’s foresight and execution capabilities.
Transition from pioneer in walk-in insurance shops to online marketing
Advance Create listed in 2002. From 2004, the company started rolling out stores that were effectively the precursors to modern walk-in insurance shops. However, its store network grew excessively large over time, peaking at 197 stores, at which point the company was forced to streamline its operations. In FY09/06, the company was forced to move to restructure due to losses. In 2007, new insurance applications received via the Hoken Ichiba website for the first time exceeded those received through leaflet distribution. This prompted the company to revamp Hoken Ichiba into a platform for insurance product comparisons, with online marketing as the foundation. By FY09/09, Advance Create had created the template for its current business model.
Business model
The company’s business model is best illustrated by analyzing the underlying components of insurance premiums earned by insurers. Life insurance services are underpinned by the concept of mutual aid in the sense that a society or community equitably shoulders the risk of deaths, injuries, diseases, or other adverse events. Insurance premiums are determined based on this principle of equivalence (insurance claims paid x number of deaths = insurance premiums x number of policyholders). Let us take a group of 100 people as an example. Assuming that two persons in this group will die in the next year (2% mortality rate) and that a life insurer will have to pay the bereaved families JPY1mn each, we expect the total insurance claim payment to be JPY2mn (JPY1mn x 2 people). If we distribute the burden equitably across all members of the group, we arrive at an insurance premium of JPY20,000 per person (JPY2mn/100 people). This is the calculation logic that underpins insurance premiums.
By paying insurance premiums to insurers, customers essentially fund 1) future insurance claim payments (pure premiums) when a risk materializes, and 2) expenses (loading premiums) necessary to operate insurance companies and their insurance frameworks. Insurance premiums can therefore be thought of as combination of pure premiums and loading premiums. The bulk of Advance Create’s revenue is generated from agent commissions in the Insurance Agency business. From the standpoint of an insurer, such commissions are paid from loading fees, which are booked under SG&A expenses (as shown in the following figure).