Huize Holding Ltd Q3 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Huize Holding Limited Third Quarter 2021 Earnings Conference Call. At this time all participants are in listen-only mode. After 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's IR website at ir.huize.com under the Event and Webcast section. I would now like to hand the conference over to your speaker host, 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 third 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 this 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 third 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 third quarter 2021 earnings conference call. The persistent effects of the ongoing pandemic, a challenging macroeconomic environment, and a decline in consumer confidence have continued to affect the growth momentum in insurance product demand and consumption within the industry during the third quarter. In response to these difficult industry dynamics, we have proactively adjusted our business strategy and have benefited from our digitally driven business model, ongoing product innovation, and our capability to attract and service a high-quality user base through our omnichannel distribution platform. Despite the generally weak operating environment in our industry, we delivered solid results in the third quarter. Total gross written premiums facilitated through our platform rose by 24% year-over-year to RMB966 million, while total revenue reached RMB315 million in the third quarter, indicating steady improvement in our business and affirming our execution strategy. As we grow our user base, our users' profiles remain young, with high lifetime value and strong loyalty. In the third quarter, approximately 65.6% of our long-term insurance customers were from higher-tier cities, boasting an average age of 35.2 years. We have proactively adjusted our business strategy to enhance the contribution from savings products and increase our overall average ticket size. Regarding first-year premiums, the average ticket size of our long-term insurance product surged by 74.6% to RMB 6,684 in the third quarter, and the average ticket size of our savings product rose from RMB 25,000 in the second quarter to RMB 35,000 in the third quarter. The repeat purchase rates for our long-term insurance and savings products were 28.4% and 29% respectively in the third quarter. As of August, our persistency ratios for long-term life and health insurance in the 13th and 25th months have remained steady at about 95% for 11 consecutive months. Turning to our product mix, the contribution from our long-term insurance product constituted 94% of total gross written premiums in the third quarter, consistently exceeding 90% over the last eight quarters. The gross written premiums for co-developed insurance products accounted for 49.2% of total gross written premiums in the third quarter, which helped sustain our growth momentum. In the third quarter, first-year premiums totaled RMB 511 million, marking a 42.7% year-over-year increase. This represented 52.9% of total gross written premiums, up 6.9 percentage points year-over-year, underscoring the quality of growth in our business through a diversifying product mix. In light of sluggish market demand for protection products, we strategically focused on expanding our savings insurance business and introduced new customer products like Sinatay Premier, which received a positive market response. Consequently, first-year premiums for long-term life and annuity products surged to RMB 341 million in the third quarter, demonstrating our capabilities in designing and selling customized long-term insurance products that cater to our users throughout their entire life cycle. We also believe the successful development of our savings product line will enhance our offerings on our open platform. Apart from our quarterly operating performance, I would like to share Huize’s future strategy for products and our open platform approach to provide our users with a wider range of personalized products and services both online and offline. By the end of the third quarter, we had partnered with 102 insurers and accelerated the enhancement of our offline operations in compliance with new regulations for online savings insurance business. Lower to medium tier insurers are expected to focus more on developing protection products online, which will likely increase the availability of health insurance and term life insurance products next year. We plan to co-develop more innovative and cost-effective products with our insurer partners to stimulate market demand for protection products. In response to regulatory changes concerning online savings insurance, we will aim to co-develop these products with leading insurers, including value-added services such as retirement communities, and enhance our service capabilities to support both online and offline operations to meet the high-end insurance needs of our users. Our ongoing investment and expansion in offline branch coverage allows us to offer both online-only and mid-to-high-end products compliant with regulations. Huize’s open platform officially entered a trial phase three months ago. This upgrade is expected to provide more flexibility for our business model as we leverage the real value of our digital platform for the industry. We have completed the first phase of system development by opening our business process and management platform to insurer partners as merchants. Currently, Aegon Life, Aviva-COFCO Life Insurance, and Generali China Life Insurance have successfully registered as merchants on our open platform. We have also implemented a differentiated service for our users, which includes an account manager, financial planner, and settlement manager working together to offer insurance planning services. The open platform will allow us to effectively meet user needs through direct access to online insurance products launched by insurers. Simultaneously, we will provide efficient offline professional services through our local branches. In the future, we will enhance our offerings, including precise traffic sharing, customized operational solutions, and user life cycle management, to support the digital transformation of our partners such as insurance companies, intermediaries, and independent agents, improving efficiencies to align demand with supply. We anticipate that new regulatory measures will present short-term challenges to the online insurance market. Accordingly, we will expedite the launch of our open platform and broaden our offline presence to deliver value to our users through a comprehensive range of insurance products across all scenarios. We are also beginning to leverage our in-house technology and digital capabilities to serve external clients, such as insurance companies, aiming to facilitate the digital transformation throughout the industry value chain and generate new revenue through technical service income. Furthermore, we will actively pursue cost reduction and efficiency enhancement strategies by integrating resources, optimizing organizational processes, and implementing other measures to enhance our growth. We aim to balance business scaling with managing operating costs. In the long run, we believe Huize, as a platform with proven technologies, operational experience, and service capabilities, will ultimately thrive from the healthy and sustainable development of the industry. 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 third quarter.

Thank you, Mr. Ma and Harriet. Good evening, everyone. For the purpose of this call, I would like to quickly just recap and summarize a few key highlights and takeaways from this quarter’s operating results. And for the financial line items discussions, I would like to kindly refer the audience to our uploaded earnings release for full details. Overall, I think we are very pleased to deliver a set of robust operating performance in light of the very challenging macroeconomic and industry environment and obviously amidst the ongoing tightening regulatory regime for the online insurance industry. For the quarter, we were still able to achieve strong double-digit growth in FYP of 42.7%, which is attributable to our very early anticipation of expected weakness in market demand for traditional protection type insurance products. And so since the second quarter of this year, we have strategically focused our management resources on scaling up the distribution of savings insurance products to more than compensate for the shortfall in long-term critical illness products demand in the market. Our strong growth in savings product FYP, as we have demonstrated since the second quarter, is a direct result of the customer insights that is provided to us by the platform’s data analytics and the agility of our platform business model to adapt and respond to changes in the market and industry dynamics. More importantly, it is also a result of the successful product co-development and marketing of long-term endowment life insurance and annuity products with our insurer partners in a relatively accelerated time frame, which again itself is a testament to our product development capability, our deep engagement, and our strong relationship with our insurance partners. Another highlight with respect to our strong growth in savings insurance products this quarter reflects the quality of both our customer acquisition capabilities via our omni-channel distribution platform as well as our existing user base. As mentioned in the opening remarks, the average ticket size of long-term insurance products that we have facilitated in the third quarter reflect the high quality and young customer demographic with an average FYP per policy of RMB6,684 in the quarter representing a substantial increase of 74.7% quarter-over-quarter. In addition, repeat purchases accounted for approximately 29% of savings insurance product’s FYP, which again reflects the high lifetime value potential of our platform’s 7 million plus user base as we continue to deepen our engagement with our users to encourage cross-selling and up-selling opportunities by leveraging the proprietary data insights that we have accumulated from interactions with our platform over the user’s life cycle. Another highlight with respect to the long-term potential of our user base is the continued strong performance in persistency metrics for our long-term life and health insurance policyholders with persistency metrics in the 13th and 25th month being maintained at about 95% as mentioned earlier. Such strong persistency performance will continue to enable us to work closely with our insurer partners to come up with new iterations of long-term life and health insurance products, particularly under the new regulatory regime where the regulators are highly focused on technological, operational, and customer service capabilities. Above all, most importantly, a strong track record of strict regulatory compliance by insurance companies and their platform intermediaries, partners such as ourselves. As a result of the foregoing operational strategies, operating revenue rebounded from the seasonally weak second quarter, increasing by 44.1% quarter-on-quarter. We are continuing to see very strong momentum in our savings insurance product business going into the fourth quarter, which again greatly complements our FYP and top-line performance and is becoming an increasingly important contributor to diversification in our overall revenue and product portfolio. Accordingly, we are making an upward adjustment to our full-year 2021 revenue guidance from our previously stated RMB1.7 billion to RMB1.9 billion to RMB2 billion, which represents a year-over-year increase of 56% to 64% versus last year. On the other hand, as mentioned earlier in the opening remarks, starting from the fourth quarter of this year, we are also actively implementing a group-wide organizational structure optimization program to further improve our cost structure and operating efficiencies. We are expecting to deliver cost savings over the next few quarters, particularly in our fixed cost base, in a bid to accelerate an improvement in our bottom line performance. In terms of our financial position, we continue to maintain a strong liquidity position with a combined cash and cash equivalent balance of approximately $60 million. Our outlook reflects the company’s current views on the market and operational conditions, which are subject to changes as a result of various market uncertainties, including those related to the ongoing pandemic both globally and in China. With that, this concludes our prepared remarks for today. We will now open up the call to Q&A. Thank you, operator.

Thank you. Your first question comes from Michelle Ma at Citi. Please go ahead.

My first question is about the upcoming Internet life insurance regulation, which will involve many changes regarding available products and potential insurance institution partners. From your perspective, how will the industry landscape shift and what is Huize's market position? Additionally, can you provide any information on headcount guidance for next year related to the expense control exercise we discussed earlier? Thank you.

My first question is about the upcoming Internet life insurance regulation, which will bring many changes in terms of available products and potential insurance institution partners. From your viewpoint, how will the industry landscape evolve, and what is Huize's market position? Additionally, could you provide details on the expense control measures we discussed earlier, specifically regarding headcount for next year? Thank you.

Thank you, Mr. Ma. Let me translate here very quickly for the audience. The question is relating to the impact of the recently announced regulatory changes to the online life insurance market and how that would affect our business, and also the expected cost control measures or any relevant guidance that we can give to the market. The response was that obviously the regulatory changes will have a very meaningful impact on the overall industry, ourselves included. However, we have been operating in the insurance industry for 15 years, and insurance itself is a heavily regulated business. The fact that now the rules and regulations are relatively set in place with a very clear regulatory framework for the industry participants is actually a beneficial development for industry players to focus on the long-term sustainable development of business models rather than being constantly on the lookout for any new potential changes to the regulations. The answer is it's quite good to have a very clear pathway to deal with the regulatory changes, and now it's pretty much set in place, allowing us to focus our business in the near and middle term moving forward. With respect to the internet insurance product itself, the upside of these regulatory changes is that protection products are now being clarified as very conducive for online insurance companies to market with a clear pathway for us to operate. Huize has been a long-term participant in this specific sub-segment of the market. For example, since 2015, we have focused on co-developing critical illness products, which are now necessary protection products with respect to the middle-income groups in China, where insurance awareness is becoming more prevalent. Although the regulatory changes may somewhat negatively affect the commission rates offered to industry players, in the long term, it should mean that consumers will become more receptive and also accelerate the online consumption of protection products such as critical illness, long-term health products, and term-life insurance products. We have achieved some success here in the last few years with our insurance partners. With the current regulatory regime more established, we can now better focus our resource deployment to build the business by merging our online and offline operations. Therefore, in the next few quarters, as mentioned in our opening remarks, we will be optimizing our organizational structure, which will involve certain headcount optimization in the upcoming months, and we'll disclose this to the market as we release our next few quarters of results. Michelle, I hope that answers your question.

Yes.

So first, I want to ask in detail about the new regulation. Will it negatively affect our cooperating insurance companies, particularly in the savings business? Also, what is the process for acquiring the offline brokerage company, and what are the strategies for both online and offline operations in the future? Thanks.

Thanks for your question. So two inquiries: the first relates to the impact on the supply side for online savings insurance products as we move into the new regulatory regime starting next year. The short answer is that we have been cooperating with over 100 insurance companies in the past, and therefore we can co-develop new savings products with issuance partners who are qualified under the new regulatory regime with respect to their core solvency ratios and other metrics now required. We will actively look to collaborate with partners who qualify under these new rules. Regarding the existing suppliers of savings insurance products we work with, the model may shift towards the offline context where we will still leverage our online platform to generate leads and acquire customers. We will route customers for consultations and settlements through our offline branch network. That's the essence of our online and offline business model that we have been building up over the last few quarters with significant capital investments. I hope that also answers your second question about our online/offline business concept. We will utilize our online platform as a front to service customers seeking product information, comparisons, and consultations. Huize has always operated on a more passive marketing model, focusing on providing content and working with partners to educate the market about insurance products. For interested customers, they can request a consultation with our representatives, which aligns with the regulatory requirements for online insurance distribution.

Congratulations on the company's achievement for the last three quarters. This year is particularly crucial for the industry to operate the business and look forward. How can we assess the risks of the business next year? Will the situation be better or worse? Can you discuss the planning for the offline business development? My second question concerns the key concerns of investors regarding stock price and its perceived undervaluation. Is there any plan for a buyback? I'm not certain if there are enough cash reserves for a buyback. Thank you.

Thank you for your question. Regarding your first part about our outlook for the upcoming year, I think it is honest to state that the next few quarters for the whole industry will be a transition period. However, due to our long-term involvement in the industry and our continued success in innovating our business model, coupled with our agility in adapting to regulatory changes, we will still be able to sustain our business growth during these challenging times. Therefore, we remain cautiously optimistic. As indicated earlier by Mr. Ma, with the regulatory framework now clarified, market players can concentrate on business development and allocate resources more productively. Our company has been operating for 15 years, continually investing in our platform and technological capabilities, incurring approximately RMB 100 million over the past two years. We can rightly say that we have mature technological tools throughout our online business from front-end to back-end implementation, enabling us to serve customers more effectively while also beginning to export these capabilities to external insurance clients. As we scale this new technology service income revenue stream, we will gladly provide further details as we increase volume. Concerning our offline operations, we believe our online/offline strategy highlights our strengths. Leveraging our online base allows us to identify higher-value customers and pair them with premium products in the offline context in a compliant manner. Over the next year, we aim to expand our offline network, starting from Tier 1 cities. We anticipate establishing approximately 20 to 30 offline branch locations over the next 12 months. To address your second question regarding share price performance, this situation is influenced by multiple factors. Observers are cognizant of the challenges faced by China ADRs in recent months due to regulatory pressures across various industries, U.S.-China political dynamics, and the resurgence of COVID. Earlier, we announced a management buyback program that will be active for six months. We will execute this program at appropriate times while ensuring regulatory compliance. On the company's balance sheet, we currently do not plan for share repurchase. We believe maintaining capital reserves is prudent for business development amid these regulatory changes in the upcoming months.

Okay, thank you, Ron.

Thank you. That was our last question due to time constraint. I will hand it back to Harriet for any closing remarks now. Thank you.

Thank you, Operator. On behalf of Huize's management team, we would like to thank you for your participation in today's call. If you require further information, please feel free to reach out to us. Thank you for joining us today. This concludes the call.

Thank you. Thank you for participating. You may all disconnect now. Thank you.