Huize Holding Ltd Q2 FY2021 Earnings Call

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

Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the first half and second quarter of 2021. Our financial and operating results were released earlier today and are currently available on both 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 half and second 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 half and second quarter 2021 earnings conference call. We achieved record results in the first half, which is particularly commendable given the challenging environment we currently face. Total gross written premium facilitated on our platform increased by 72.7% year-over-year to RMB2.06 billion, well above the industry average growth in the first half, and total operating revenue nearly doubled to RMB950 million. In the second quarter, most life insurance companies reported year-over-year declines in GWP due to trends originating from early-year sales challenges and regulatory changes. Nonetheless, we have demonstrated strong resilience in our operations during this traditionally slow season, with total GWP amounting to RMB670 million in the second quarter, returning a double-digit growth year-over-year. Apart from the robust growth in total GWP and operating revenue, our cumulative number of insurance clients and insured clients reached 7.2 million and 60.3 million, respectively. I would like to further emphasize the differentiation of our user profiles, and how this could benefit our business. In the first half, about 72% of long-term insurance customers were from higher-tier cities, with an average age of 33 years old. In terms of first-year premium, the average ticket size of our long-term insurance products has maintained at a relatively high level of RMB4,332 in the first half, while the average ticket size of our savings insurance product has reached RMB28,439 in the first half. Moreover, in the first half, our persistency ratio for long-term life and health insurance in the 13 and 26 months has maintained at above 95%. We believe these indicators highlight the strong stickiness and high lifetime value of Huize's customers. In the first half, GWP for long-term life and health insurance products accounted for 95.3% of our total GWP. This not only demonstrates our competitive edge in both sales and service capabilities among China's online insurance platforms, but also proves our prominent position in long-term insurance products. After years of operations, our strategic focus on distributing long-term insurance products can help extend our reach to customers through innovative services. The multidimensional user data and increased understanding of our user profiles will be strategically important for us to optimize our customer products, improve our service capabilities, and build our ecosystem. At the same time, we have expanded the depth and breadth of our product coverage with a diversified product portfolio, including protection, savings insurance, and retirement spending products encompassing the entire customer lifecycle, thereby tapping the existing market value and exploring the growth potential from new markets. It's worth mentioning that our savings insurance, including annuity and long-term life insurance, contributed to 23.6% of first-year premium in the first half, increasing from 17.1% over the same period last year. Product innovation is one of Huize's core competencies. In the first half, we continued to make progress on new product design and innovation. As a result, GWP for co-developed insurance products accounted for 55.1% of total GWP, increasing significantly by 14.3 percentage points from the same period last year. In April, the insurance regulatory body issued guidance that emphasizes the personalization, differentiation, and customization of insurance products. This signals that the customization of insurance products will be a major event moving forward and we believe that our data-driven capabilities are key to driving product customization. For example, we have recently partnered with Sun Life Everbright Life Insurance to launch Everbright Smart Choice, a retirement annuity product. When developing this product, we identified various market gaps and resolved them one by one through our accumulated user data and machine learning algorithms. At the same time, we used AI technology to estimate the combination of premium rates and terms and conditions of the product that best fit our client interests, thereby creating a comprehensive and innovative product that stands out in the market. Finally, our online marketing strategy has significantly reduced the promotion costs of our products, enhancing our price competitiveness over traditional offline products. On top of product customization, we are also committed to enhancing our service capabilities. We believe that the insurance industry has moved to a phase of quality and sustainable growth, and the traditional business model of relying on numerous insurance agents has reached an inflection point. Future competition in the industry will focus on solving problems and creating value for customers. Since the beginning of the year, we have been exploring and building a value-added service system to provide users with online consultation, early cancer screening, and other health management services. In July, we partnered with Sungrow to launch immune cell trial cryopreservation as a value-added service to meet the high-end healthcare demands of millennial customers. We believe such services throughout the duration of the policy will not only increase the core competitiveness of our platform in the marketplace, but also help us create longer-term engagement with our users and maximize their lifetime value. Digitalization and technology are core strengths for the development of the Huize 3.0 era. We believe that embedding technologies, such as data analytics and AI, into key business processes will help improve operating efficiency and risk management capability. Our calculations show that AI proposal application has made it possible to save up to 83% of our consultants' time, and the average time needed to complete a transaction has been cut in half. Our technology has also been critical to our platform's regulatory compliance with our AI data and quality assurance system, enabling us to achieve full coverage of consultant conversation inspections through NLP technology. This has significantly improved our quality assurance efficiency by over 80 times and accumulated over 200 million records of conversation data. Finally, I would like to share with you an important milestone in our online-to-offline integration strategy. We have entered into a Memorandum of Understanding with Shengs Life & General to acquire a controlling interest in the company. We believe Shengs Life & General has accumulated valuable customer insights in the mass affluent life and health insurance markets. Leveraging its robust sales team of professional industry veterans, extensive coverage, and experience in serving clients, Shengs Life & General greatly complements our last-mile offline presence, allowing us to provide products and services both online and offline, which will further improve the market presence of our customized products and enhance the brand awareness of Huize. We intend to utilize our digital capabilities to empower Shengs Life & General, accelerating the establishment of our open insurance product and service platform, covering sales management, product offerings, and backend support with the aim to significantly enhance the efficiency of traditional insurance operations. We look forward to business expansion and realizing revenue growth synergies from this mutually beneficial integration. 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 first half and second quarter.

Thank you, Mr. Ma, and Harriet, and hi, everyone. We are very pleased to report a set of record first half operating and financial results, in terms of both total gross written premiums or GWP facilitated on our platform, as well as total operating revenues. In the first half of 2021, total GWP amounted to RMB2.1 billion, representing a strong growth of 72.7% year-over-year. First-year premiums, or FYP, accounted for RMB1.2 billion, or 57.9% of total GWP, which has doubled from the same period of last year. Renewal premiums accounted for RMB868 million, or 42.1% of total GWP, representing a year-on-year increase of 45.4% in the first half. For the half-year mark, we have already achieved over two-thirds of the total GWP for the entire year of 2020 and almost 80% of total revenue for last year. In the first quarter of the year, we capitalized on the tremendous market demand for critical illness products by consumers by adopting a more aggressive approach to marketing spend and customer acquisition strategies, which has resulted in a very strong 2.2 times growth in FYP in Q1 as well as acquiring many high-quality users onto our platform, with an average FYP per policy of over RMB4,000. For the second quarter, as we expected it to be a relatively slower quarter due to seasonality as a result of the prior sales campaign in Q1 and also the expected softness in the critical illness product segments after the absorption of pent-up demand in the first quarter, we focused strategically on the marketing and distribution of savings insurance products, including customized endowment life insurance and annuity products with our insurance carrier partners. As a result of our strategy, we maintained a healthy growth in total GWP of 12% year-over-year to RMB668 million in the second quarter. This was driven by a robust year-on-year growth in renewal premiums of 22%, which again speaks to the high quality of the users that our platform can attract and acquire through our marketing channels, as evidenced by the consistently high 13-month and 25-month persistency ratios of over 95% that we have achieved during the second quarter. As for FYP, although we saw a modest 5% decrease year-over-year in the second quarter mainly due to the slow pickup in critical illness market demand, we still drove significant growth in the distribution of savings insurance products, which accounted for 38.2% of total FYP distributed in the second quarter. Another highlight in the savings insurance product segment is that 31% of the FYP in savings insurance was contributed by repeat purchases from our existing users on the platform, which again speaks to the high quality of our user base exceeding 7 million. We are continuing to see strong momentum in our savings insurance product segments going into the third quarter, which will greatly complement our overall FYP and top-line growth for the rest of the year and also become an increasingly important contributor to our diversification in revenue and overall product portfolio. Now, turning to the financial line items. Total operating revenue for the second quarter was RMB218.6 million, which is a slight decrease of 7% year-over-year. The decrease was primarily due to the 5% decrease in FYP facilitated, which totaled RMB303 million for the quarter, but offset by a strong 32% increase in renewal premiums, which amounted to RMB364.8 million in the second quarter. Operating costs for the quarter increased by 8% year-over-year to RMB152 million, which is primarily due to increased customer acquisition and channel costs. Selling expenses for the quarter increased by 62% year-over-year to RMB77.9 million, mainly attributable to increased salaries and employment benefits due to an increase in sales and marketing headcount as well as an increase in advertising and marketing expenses, offset by a decrease in share-based compensation expenses. Selling expenses as a percentage of total operating revenue for the first half, however, decreased from 28.9% last year to 16.2% this year, representing a 4.7 percentage-point improvement year-over-year. G&A expenses for the quarter decreased by 7% year-over-year to RMB43.5 million, primarily due to a decrease in share-based compensation expenses. The G&A expense to revenue ratio also decreased to 9.9% in the first half this year from 17% in the same period of last year, resulting in a 7.1 percentage-point improvement, which reflects the overall operating efficiency and leverage that we have demonstrated. During the quarter, we have continued to invest heavily in our technology upgrades for our core platform, and R&D expenses for the quarter grew by 104.3% year-over-year to RMB25.7 million, which was mainly driven by an increase in technology investment and the related number of R&D personnel. Overall for the quarter, we recorded a GAAP net loss of RMB77 million. We continue to maintain a robust liquidity and a strong financial position. As of quarter end, we had a combined balance of cash and cash equivalents of approximately US$67 million. As for our guidance, we currently expect total operating revenue for the full year of 2021 to be approximately RMB1.7 billion, representing a 40% growth rate year-over-year. This forecast reflects the company's current and preliminary views on the market and operational conditions, which are subject to change due to various uncertainties, including those related to the ongoing COVID-19 pandemic globally and any recurring rates of infections in China. With that, that concludes our prepared remarks for today's call. We will now turn the call over to the Q&A session. Thank you.

Thank you, sir. We have the first question from Michelle Ma at Citi. Please ask your question.

So my first question is about the recent crackdown on irregularities in the online insurance sales space. I am wondering what the impact is on our channel. Secondly, regarding our future strategy, we have a large amount of cash on our balance sheet. Do we have any new initiatives regarding future business strategy, especially since we mentioned before that we want to strengthen our channel? Thank you.

Okay. Thank you, Michelle. It's Ron here. I will take your questions. Regarding regulations, the market has been quite concerned not just in our industry, but also across various sectors about the recent tightening of government regulations. Specifically for the insurance industry, the recent 87 document actually does not consist of new regulations, per se, but rather is a reemphasis on the implementation timetable for the regulations released in December of last year, which was effective this February. Overall, Huize is a long-established platform with 15 years of track record. We embrace this new regulatory regime and guidelines as they are beneficial for the long-term sustainable growth of the industry. As one of the leading and compliant platforms in the industry, we see ourselves as beneficiaries of these regulatory developments. The regulators are more focused on best-selling activities by platforms, bundled sales of insurance products, and compliant operations during business processes. Given that we have been adapting to these changes since late last year, we have conducted a comprehensive review of our operations to establish relevant rules and policies with respect to our self-operated activities as well as the other channels we cooperate with to ensure that all marketing materials delivered to the marketplace are compliant from a regulatory standpoint. In terms of best-selling and product pricing, we have always focused on higher-value long-term health products. We are less involved with short-term medical or reimbursement insurance products, which I believe carry the majority of the selling risks. In conclusion, we believe we are well-positioned to manage these regulatory changes and do not foresee any material impact on the business as a whole. As for your second question regarding the cash balance and potential use of resources, we have recently announced the acquisition of Shengs Life & General, which will be an important element to accelerate our online-to-offline integration strategy. This will enhance our engagement with customers and generate more lifetime value through additional offline coverage or in-person interactions with our clients. M&A is definitely one of the potential areas where we can deploy our cash resources. We are also focused on executing our new open platform strategy, which is still in the early stages, requiring additional capital for technology investments, as reflected in our continued R&D investments since our IPO. Lastly, we will increase investments in our branding and marketing to further improve our business and generate more organic traffic to the platform. I hope that answers your questions, Michelle. Thank you.

Thank you.

We have the next question from the line of Edwin Liu from CLSA. Please ask your question.

It's good to see that the savings insurance has accounted for a larger portion of the FYP. I would like to understand more about the details of the savings insurance. Specifically, if we calculate the take rate with FYP as the denominator, what would be the take rate level for the savings insurance? Additionally, if we calculate the cost of revenue percentage of the brokerage income for the savings insurance, what would that be, especially in comparison to other types of products like long-term health insurance? Thank you.

Okay. Hi, Edwin. Thank you for joining the call again. On the question regarding the latest developments in the savings insurance product, it's encouraging to see that we are making headway in scaling up this portion of the portfolio—not only because of the weakness in critical illness sales in the market, but also as part of our long-term strategy to extract further lifetime value from our existing users. We touched upon the relatively high proportion of repeat purchases of savings insurance products from existing users. For our latest endowment life insurance product, the commission rate typically ranges around 10 to 20 percentage points, which is a bit lower than your standard customized long-term critical illness products. However, the average ticket size for savings products is significantly higher, averaging around RMB28,000 compared to roughly RMB4,000 for critical illness products. Therefore, despite the lower take rate, the overall contribution to our revenue stream is quite promising. Additionally, if you compare our Q2 results versus Q1 on a quarter-on-quarter basis, you can see a 5-percentage-point improvement in our gross margin.

Great, thank you. That's very clear.

Thank you, Edwin.

We have the next question from the line of Allen Feng from Morgan Stanley. Please ask your question.

I have two quick questions for management today. First, should we continue to expect an increase in the mix for savings products in the upcoming quarters, given that critical illness sales are still relatively weak in China? Secondly, you mentioned a lot about the O-to-O synergies between Shengs Life and General and your core business. Could you elaborate on that and provide a few examples? Thank you.

Okay, thank you, Allen. Thanks for joining the call again. Regarding the proportion or contribution from our savings insurance products going forward in the second half of this year, it is likely that we'll see an increased contribution from savings products in Q3 and Q4 due to the overall market sentiment surrounding critical illness products. Consumers seem to prefer life insurance or annuity products at this time, and we have recently launched a new retirement annuity product with Sun Life Everbright. This showcases our ability to adapt to market changes and leverage product development expertise with our insurance carrier partners. We are already seeing strong sequential growth in the endowment life insurance product we developed with HongKang Life in the second and third quarters. However, I believe that the critical illness products will see a resurgence towards the end of this year. We are gearing up to launch a new product in this space, likely by the end of this quarter or next quarter. With this new product launch, we should be able to drive improved sales in this area, given its innovative features that make it more appealing for marketing and distribution. Regarding potential integration revenue synergies with the offline agencies from Shengs Life and General, some possibilities include leveraging an offline presence to serve customers more personally. This will not only facilitate face-to-face interactions but also deepen our engagement with them to better understand their and their families' needs, thereby creating more insightful customer profiles. These insights can then feed back to our consultants, creating cross-selling and up-selling opportunities. Additionally, the comprehensive suite of products on the Huize platform allows us to empower these offline partners overnight with a full array of offerings. Many regional agencies struggle with a lack of product supply and unfavorable commission structures from mainstream insurance companies. By plugging into the Huize system, we can enhance their product supply and equip them with our digital tools, thus increasing productivity on a per agent basis.

Thank you, sir. Can we go ahead and move to questions?

Yes, please.

We have the next question from the line of an unidentified analyst. Please ask your question.

My first question is about the savings product. We can see an increase in the proportion of savings products. What percentage of the savings products are from existing customers? The second question is have we seen a drop-off related to headwinds faced by the education industry in the second quarter? Thanks.

Thank you. Thanks for joining the call. To answer your first question regarding the savings product, we see that in the second quarter, approximately 31% of our savings product comes from repeat purchases by existing users on the platform. Regarding the second question on the cost trend against the headwinds in the education sector, we do not see a material or obvious impact, as we have a different target market and marketing strategy than most of our peers. Therefore, our cost of acquisition remains stable on our platform. Thank you.

Thank you, sir. At this time, I would like to hand the call back to the speakers for any closing remarks. Thank you.

Hi. Thank you. Thank you, operator. Thank you, everyone. We would like to thank you all for joining the call today. If you require any further information, please feel free to reach out to us. Thank you for joining us today.

Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.