Huize Holding Ltd Q1 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management’s prepared remarks, there will be a question-and-answer session. Today’s conference call is being recorded and a webcast replay will be available. Please visit Huize’s IR website at ir.huize.com under the Events and Webcasts section. Now I’d like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huize’s Investor Relations Director. Please go ahead, Harriet.

Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the first quarter of 2021. Our financial and operating results were released earlier today and are currently available on our IR website and the newswire. Before we continue, I would like to refer you to the Safe Harbor statement in our earnings press release, which also applies to today’s call as we will be making forward-looking statements. Please also note that we will discuss non-GAAP measures today, which are more thoroughly explained in our earnings release and filings with the SEC. Joining us today are our Founder and CEO, Mr. Cunjun Ma; COO, Mr. Li Jiang; Co-CFO, Mr. Minghan Xiao; and Co-CFO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the company’s performance and operational highlights for the first quarter of 2021. Mr. Tam will then provide details on the financial results for the period before we open up the call for questions. I will now turn the call over to Mr. Ma.

Hello, everyone, and thank you for joining Huize’s first quarter 2021 earnings conference call. In the first quarter, China’s insurance market experienced steady growth, supported by improvements in the pandemic situation, seasonal demand in the life and health insurance sector, and increasing market demand resulting from the transition to new definitions of critical illness. According to data from the CBIRC, the insurance industry saw premium income of RMB 1.8 billion in the first quarter, up 5.5 percentage points from the same period last year. In the health insurance segment, there was a 16.1% year-over-year increase to RMB 306.6 billion. With strong industry fundamentals, Huize continues to enhance its core capabilities, drive digital transformation, and capture more market share. Total gross written premiums on our platform grew 1.3 times year-over-year to RMB 9.4 billion, while total operating revenue nearly doubled to RMB 713 million, achieving record quarterly highs. Huize has been making steady progress on our long-term insurance strategies. We are committed to providing the first long-term insurance policy for the younger generation and have focused on offering a long-term health insurance policy with higher thresholds for online sales. This strategy is driven by three main factors. First, payment terms for critical illness insurance policies can be as long as 20 to 30 years. The longer users stay with our platform, the longer our service and interaction period, which helps to build trust and increase user retention. Second, as younger users mature and enter new life stages, their insurance needs will evolve. For instance, starting a family often leads them to consider coverage for their children, like critical illness insurance and education savings insurance. Addressing users’ changing needs and creating repeat purchase opportunities is central to Huize’s mission of delivering long-term user value. Third, a long-term relationship enables us to gather more user data from sales and planned activities, helping us to develop more accurate user profiles. These insights on user needs, preferences, and buying behavior allow us to design better growth insurance products and address adverse selection. Next, I’d like to share some key indicators that showcase the value of our insurance user base. First, our user profile. By the end of this quarter, the total number of insurance clients reached 7 million, with around 558.4 million insured clients. Among the insurance clients who purchased long-term products in the first quarter, 73.2% were from higher-tier cities, and their average age was 32.7 years, indicating strong insurance awareness. The second indicator is the average ticket size. In the first quarter, the average first-year premium for long-term policies was around RMB 4,508. The third indicator is the persistency ratio. Since the second quarter of last year, the persistency ratio for long-term life and health insurance in the 13th and 25th months has remained at about 94% for four consecutive quarters. Ultimately, we believe that the long-term insurance business is a competition for user quality, not just user traffic. Our strengths in customer targeting, coupled with our unique position and differentiation in the industry, are evident in our users' capacity for insurance consumption and the overall quality of our user profile. From a product perspective, the new definitions of critical illness present both challenges and opportunities for the critical illness insurance market. Drawing on our extensive experience and ongoing improvements in product customization, we upgraded our offerings shortly after the new definitions took effect to ensure that we continue to provide quality products. In April, we hosted our first online product launch conference, showcasing eight new customized products launched in the first quarter. For instance, our China endowment life insurance represents an innovation in savings product customization, combining safe and maturity plans to provide protection and saving in one policy. Additionally, our new critical illness product, Darwin 5 Glory, includes important drug coverage for targeted cancer medication and immunotherapy, as well as extra protection for malignant tumors, allowing insured clients to receive up to three payments of 40% of the insured amount, each with a one-year waiting period, surpassing the usual three-year waiting period in the market. Furthermore, optional extra coverage for mild, moderate, and severe illnesses adds flexibility. Looking ahead, we see potential for increased demand for critical illness protection, and we will keep innovating with children’s critical illness insurance products, multiple claims products, and offerings for impaired lives, along with additional value-added services. Regarding our digital transformation, during the quarter, we obtained important certifications in technology and R&D, including information security management system certification and information technology services management system certification. Our R&D center achieved CMMI maturity level three certification, indicating Huize’s strong R&D capabilities and commitment to high standards of information security. We will continue to enhance and refine our technologies to deliver quality products and efficient, safe services to our users. Concerning our online to offline strategies, we established a service team in Shenzhen, which commenced trial operations during the quarter. Target users were chosen based on comprehensive user data collected on our platform, guided by advanced user purchase management capabilities. Our offline team reached out to local users who had made purchases on our platform and exhibited higher insurance demand and potential for conversion. By offering differentiated products, such as family health insurance coverage and endowment insurance, we aim to bridge the gap between online interest and premium offline services. With the official implementation of regulations governing Internet insurance in China, the online insurance industry is poised for sustainable growth in a healthier environment. Preserving compliance and maintaining strong corporate governance have always been essential to Huize’s management. As the industry evolves into a phase of rapid and healthy development, Huize will continue to prioritize users, strengthen our core capabilities, boost operational efficiency, and provide more diversified and personalized products and services through online and offline channels. Additionally, we aim to leverage the opportunities brought about by the accelerating digital transformation across the insurance sector, empowering our partners and the broader insurance ecosystem with data and technology, while continuing to develop advanced insurance technology solutions that support sustainable development and high-quality growth in the future. This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ronald Tam, who will provide an overview of our key financial highlights for the quarter.

Thank you, Mr. Ma and Harriet, and hi, everyone. We’re very pleased to report another record quarter for Q1 in terms of total GWP facilitated on the platform as well as our total operating revenue. For the first quarter, total GWP amounted to RMB 1.4 billion, representing an impressive 1.3x growth year-over-year. In particular, first-year premiums, or FYP, accounted for RMB 889.8 million of the RMB 1.4 billion total, or approximately 54% of total GWP, which represents 2.2x growth year-over-year. The strong operating performance in FYP, on the one hand, is a result of industry factors, particularly with respect to the transition of credit unions' definitions from the old to the new regime during the period, which really resulted in a spike in consumer demand in January, as well as the traditional seasonal strength in the auspicious push at the start of the period in the first quarter for the industry. On the other hand, the strong growth in FYP can also be attributed to our more aggressive marketing spend during the quarter in terms of both customer acquisition and service fees paid to our channel partners in order to capture a disproportionate market share vis-a-vis the competition. Given our focus on acquiring high-quality and long-term insurance customers, we believe the quarterly result has reflected those efforts. In terms of renewal business, renewal premiums accounted for RMB 504 million, or 36% of the RMB 1.4 billion total GWP, representing a year-over-year increase of 57%. As Ma has touched on earlier, we are very proud to report consistently strong persistency metrics, maintaining about 94% for our 13th and 25th month persistencies during the past quarter. We believe that high persistency is crucial as we continue to drive efforts to increase the lifetime value of our customers, which we have demonstrated by our increased distribution of savings insurance products during this period. In the first quarter, approximately 18.6% of our FYP was contributed from long-term life and annuity products distribution. We have been able to generate repeat purchases from our existing users for savings products, with about 39% of accumulated savings products customers having purchased one or more policies before on our platform. In terms of product mix, in the first quarter, as mentioned earlier, due to market industry factors as well as proactive marketing strategies to capture market share, our GWP for long-term health insurance increased by 123% year-over-year to RMB 1.1 billion. During the quarter, GWP for long-term life and health insurance accounted for approximately 96.9% of total GWP. GWP for co-developed products with our insurance company partners were approximately RMB 850 million, accounting for 61% of total GWP distributors and representing an increase of 10 percentage points from the same period last year, which continues to reflect our increasing engagement with our upstream industry partners. Among them, the most recognizable product, Darwin number 3, which is our best-selling critical illness insurance product online, was developed with Sinatay Life Insurance, generating first-year premiums of approximately RMB 320 million in the quarter. Now turning to our revenue. Total operating revenue for Q1 was RMB 735 million, again a record quarterly high, which was up by 196% year-over-year, and exceeded our previous guidance given to the market during our last conference call. The increase in revenues was primarily driven by the increase in brokerage income due to the 133% increase in total GWP facilitated during the quarter. Cost of revenue for Q1 increased to RMB 557 million, primarily due to increased service fees paid to our channel partners earlier. Selling expenses for the quarter increased by 45.4% year-over-year to RMB 77 million, mainly attributable to an increase in advertising and marketing spend, which increased by almost 1x year-over-year, as we aggressively increased spend during the quarter to capitalize on the significant market opportunities and demand for critical illness products. Additionally, the increase in selling expenses is also noted due to higher sales and marketing expenses year-over-year. G&A expenses for the quarter increased by 38.7% year-over-year to RMB 54.1 million, primarily due to increased rental expenses from office expansion and a rise in G&A salaries and employment benefits, albeit offset by a decrease in share-based compensation expenses year-over-year. R&D expenses for the quarter grew by 58.4% to RMB 18.8 million, driven by our continued investment in overall R&D and data analytics headcount. For the quarter, we reported a GAAP net profit of RMB 28.5 million. If we exclude share-based compensation, the non-GAAP profit was RMB 38.7 million. We continue to maintain robust liquidity and a relatively strong financial position as of quarter end, with a combined balance of cash and cash equivalents of approximately USD 76 million. Turning to our Q2 guidance, we currently expect total operating revenue for Q2 to be in the range of RMB 230 million to RMB 250 million. We note that is essentially flat from last year, as we observed that market demand for critical illness products has been largely absorbed in advance during the Q1 period, and Q2 is traditionally a slow quarter for the Chinese insurance industry. Taken together with Q1, the guidance represents our first half revenue growth of 1x year-over-year compared to the same half of last year. This forecast reflects the Company’s current and preliminary views on market and operational conditions, which are subject to change due to various uncertainties, including the ongoing COVID-19 pandemic globally. With that, I conclude our prepared remarks for today. We will now open up the call to Q&A. Thank you.

Operator, we can start the Q&A session now.

Your first question comes from the line of an unidentified securities analyst. Please go ahead with your question.

I will translate the question into English. The question is about the company's agility for the first quarter, which is reported to be very good. They would like to know how much of the gross written premium is coming from repurchased clients versus new customers. Additionally, they are interested in the company's customer acquisition strategy going forward and whether there is any data available regarding repurchase rates that can be shared.

Okay, it’s Ron here, and let me address this question for the team. I think in terms of repeat purchases, we’re definitely increasing our efforts in maintaining existing customers and engagement and also trying to increase lifetime values with these customers. I mentioned in our prepared remarks that around 39% of our savings products come from repeat purchases. We also shared that approximately 19% of the FYP for the first quarter comes from savings-related products. So with those two numbers, you can basically get an idea that roughly less than 10% of the customers are repeat purchases. This number is still relatively low and definitely, there’s a lot of upside and room for growth in this area. We have mentioned before to the market that over the last three years or so, we have ramped up and scaled most of the efforts towards acquiring new customers from the market. However, with the existing customer base, and the data insights that we have, we are definitely going to increase engagement and drive long-term values with these customers through more precise data analytics. That’s why we’ve been investing heavily in R&D to ensure that our company efficiently empowers our agents and consultants to pursue these repeat purchase customers. As Ma mentioned before, the online to offline strategy is also a very critical piece for us to drive LTVs on the platform. Currently, this initiative is still in the trial phase. We have established a trial team in Shenzhen to really scale up the business, and we will be happy to share more metrics with the market once we reach more critical milestones. Hope that answers the question.

Okay. Thank you, Ron.

Your next question comes from the line of CLSA. Please ask your question.

My question is related to the new regulation for Internet insurance sales, which is expected to be implemented in January next year. Within the rule, there are some requirements regarding pricing and expense ratio. I wonder what measures have been put in place to address expenses.

Great. Thanks for your question. We’re obviously in constant dialogue with both regulators and our industry partners. This new rule is still in the consolidation phase. Although it is likely to be passed and effective next year, we are trying to ensure compliant operations is the key. I believe our internal systems can be ready when these rules come into impact. Regarding industry pricing, this is still a bit uncertain at this stage, but we have strong relationships with our insurance company partners, as demonstrated through our history of customizing products with them. Therefore, in terms of product design and pricing structure, we are well positioned to manage and cope with changes the new regulations might bring.

Great. Thank you.

Thank you.

Next question comes from the line of an analyst from CICC. Please ask your question.

Thanks for taking my question. This is from CICC. My first question is about the negative effects caused by the switch of critical illness definitions. When do you think this effect would fade away? My second question is how do you expect profitability trends considering the increasing marketing expenses?

Okay, thanks for your questions. The first quarter has seen a significant spike in demand for the old definition products in the marketplace. We have tried to capture market share during this period, which has resulted in an upward trend in costs. However, I believe we brought on many good-quality customers during this period. For the new definition products to really scale up sales in the market, we probably need to wait until the later part of this quarter when these products have been marketed for a longer time and understood better by consumers. I expect to see more recovery in critical illness product distribution in June and into the third quarter. Regarding profitability, the first quarter's strong revenue growth demonstrates our platform's scalability across both our B2C and B2B businesses. We achieved significant growth this quarter without substantially increasing investments in headcount. Going forward, Q2 will be a slow quarter, as indicated in our guidance. We must balance growth and profitability as our major objective for the rest of the year.

Thanks.

Thank you.

Your next question comes from the line of Ehsernta Fu from Citigroup. Please ask your question.

Thank you. The first question is about understanding how the suspension of mutual aid platforms affects our business plans and whether we have successfully reached new customers. The second question concerns our views on the impact of rising point-of-sale costs, especially for certain medical instruments. Lastly, I would like to know if you can share some insights on the competitive landscape, which is clearly relevant to our operations. Thank you.

Okay. Thank you, Ehsernta. You had three questions there. The first question about Q2: we have observed that market players have been shutting down various mutual aid platforms or programs, which is a very realistic reflection of the healthy and long-term sustainable development of the industry. Regulators seem to be taking a stance on this aspect, which may alleviate some competition for typical users. For Huize, we remain laser-focused on long-term insurance product segments in the marketplace. Most of these platforms target customers that may not fit into our core strategy, so the impact will be relatively limited. The second question on the government's new initiative regarding cleaning health insurance: this should be encouraging for overall insurance awareness and the propensity to purchase protection for families. Our target demographic remains relatively young, affluent, and better educated individuals seeking quality insurance, so we do not expect significant impact from this initiative on our business. And regarding the third question on our Q2 guidance, it reflects the current market situation. We are noticing industry-wide weaknesses, particularly with incumbents. Q2 is expected to be slow, but we are sticking to our quarterly guidance practice.

Okay. Thank you, Ron.

Your next question comes from the line of Xinqi Liu from Guotai. Please ask your question.

I just have one question. Has the management shared any views about the competitive landscape, comparing traditional insurers with other online platforms? Thanks.

Okay. Thank you again. The question on the competitive differentiation of Huize compared to other platforms or traditional brokers: we focus on leveraging technology and data to optimize efficiency, which has been the foundation of our business model for 15 years. We have addressed several pain points in the marketplace, including providing customers access to a comprehensive suite of products and the tools to compare products to get the best value for their needs. The traditional players are often challenged by an aging agent force and more homogeneous product offerings. Our differentiation stems from our customer-centric perspective, allowing individuals to find the best insurance products for their needs. Additionally, we have a user base of 7 million, mostly young and from high-tier cities in China. Our product strategies target relatively high ticket sizes, reflected by the RMB 4,500 average ticket size for long-term policies. We also achieve persistency ratios of 94%, likely putting us in the top quartile of the marketplace, further boosting our partners' confidence in working with us to develop more innovative and suitable products.

Thank you.

Thank you.

Your last question comes from the line of Halsey Wu of AMTD Group. Please ask your question.

Thank you, Halsey Wu from AMTD Group. Please go ahead with your question.

Thank you.

Thank you.

Thank you.

As there are no questions, I’d like to hand the conference back to the management for the closing remarks.

Hi. Thank you for joining us today, and we look forward to seeing you next time. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect.

Thank you, everyone. Good night. Thank you.