Huize Holding Ltd Q4 FY2021 Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to Huize Holding Limited Fourth Quarter and Full Year 2021 Earnings Conference Call. 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 Webcast. 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, Harriet.

Thank you, operator. Hello, everyone and welcome to our earnings conference call for the fourth quarter and full year 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 fourth quarter and full year 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 for the fourth quarter and full year 2021 earnings conference call. China’s insurance industry witnessed significant events in 2021. However, this brought about new opportunities and a year of reform for Huize. Despite the ongoing pandemic, regulatory refinements, and increasing uncertainties in the overall market and business environment, Huize has adhered to its user-centric strategy, high-tech and digitalization philosophy, and online to offline integration, which led to another year of satisfactory results. In 2021, total gross written premiums, or GWP, facilitated on our platform increased by 66.2% year-over-year to RMB5 billion, while operating revenue increased by 84% year-over-year to RMB2.25 billion, meeting the revenue guidance we provided for full year 2021. In the fourth quarter, total GWP facilitated on our platform increased by 90.2% year-over-year to RMB1.99 billion and operating revenue grew 1.5 times year-over-year to RMB980 million. GWP for long-term insurance products accounted for 97% of total GWP and continued to generate high-quality business for our insurer partners. While growing rapidly, we were able to maintain a high-quality user profile. In the fourth quarter, roughly 67.1% of our long-term insurance customers were from higher-tier cities, with an average age of 35.3 years old. In terms of first-year premiums, the average ticket size of long-term insurance products increased from RMB6,684 in the third quarter to RMB9,593 in the fourth quarter. As of November, our persistency ratios for long-term life and health insurance in the 13th and 25th month have sustained at an industry high level of 94%. Now turning to our products, following the announcement of the new regulations on Internet personal insurance, we proactively expanded our savings product line to address the surge in market demand. In the fourth quarter, our savings insurance products contributed to about RMB1.2 billion of the first-year premium in response to the change in the supply of online savings insurance products after the new regulations. We focused on co-developing such products with leading mid to large-sized insurer partners and launched the first Internet-only incremental whole life product in January. At the same time, we have accelerated the offline expansion to facilitate the provision of online and offline products and services. To stimulate demand for our protection products, we launched Darwin No. 6 in January, which was the first major critical illness insurance product we launched since the new regulations came into effect. In addition to the cost-effective feature of the Darwin service critical illness products, Darwin No. 6 has upgraded the protection benefit such as the inclusion of coverage reinstatement benefit after the first claim of critical illness. We believe that the adjustment of our product strategy and the introduction of new products has demonstrated our quick response to the new operating environment and endorsed our experience and strength in product innovation. At the end of the fourth quarter, we have cooperated with 109 insurance partners and have strengthened our offline presence. In December, we entered into a definitive agreement to acquire 100% equity interest in Shanghai Senhao Insurance Agency Company Limited. The acquisition is expected to be completed in March this year. Senhao Insurance is a nationwide professional insurance agency company with business networks in 11 provincial areas in China. We believe the acquisition will reinforce our competitive advantage in both online and offline service capabilities and generate strategic synergies within our new digital ecosystem. We believe this will accelerate the online to offline integration, thereby strengthening our service capabilities for users through a full range of insurance products across all scenarios. This will allow us to meet some needs of users through online insurance products while simultaneously providing efficient offline professional services through our local branches. Moreover, through our platform, we have empowered traditional intermediaries with digitalization and product supply, thereby creating scalability and reducing the operating cost of our ecosystem. During this year of operating in the long-term insurance market, our high-quality and differentiated services remained one of our core competencies. In 2021, the total number of insurance claims cases affected by our Xiaoma plan service reached 43,000 and the total plan settlement reached RMB570 million, with the highest claim settlement amount for a single case reaching RMB2 million. The upgraded online plan system enables 70% of users to submit their insurance claims using photocopies, highlighting the efficiency and potential of our online insurance services. During the year, our traceable customer service record was unanimously recognized by the industry, and we were awarded the 2021 China Insurance Ark Awards. Moreover, we have published our first ESG report, highlighting our strategic ESG initiatives and accomplishments while providing users and investors with a new perspective on Huize. Our continued efforts to optimize service capabilities and improve user experience have enabled us to attract more new users and increase user conversion rates. As of the end of 2021, our insurance clients have reached 7.5 million. In 2021, we also began to explore the digital and technological capabilities that we have developed in-house, such as the digital CRM system and the MLP Intelligent Quality Control System, to insurance companies, thereby diversifying our revenue streams. At the same time, we are establishing a new business line targeting independent insurance agents. We will assist the opportunity brought forth by the reform in traditional channels, and the separation of product development and distribution in the industry will empower offline agents with product metrics, online customer application capability, and online business development tools through our platform. We believe this will help promote the digitalization of the insurance industry and generate a new growth driver for Huize. In 2022, as we continue to see a refinement in industry regulations and the business environment, we will actively strengthen our leading position in the online insurance business. We will rely on our solid digitalization and data analytic capabilities to gain in-depth insights on users to launch new products that meet the protection needs of users, thereby delivering the competitive advantages of an online insurance platform as an efficient, effective, and inclusive distribution channel. At the same time, we will continue to expand our offline presence and further strengthen the online to offline integration of products and services. Through a more professional and seamless user experience, we strive to promote growth in the number of users and improve user quality, thereby driving sustainable growth in both our premiums and revenue. 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 fourth quarter and full year 2021.

Thank you, Mr. Ma, and Harriet, and good evening, everyone. First of all, I would like to thank everyone on this call for your continued interest in following the company, especially in light of the recent turbulent market conditions. And for our friends in the Asian time zone, thanks so much for spending the Friday night with us here. And to those of you who may currently be in quarantine, lockdown, or semi-lockdown in Hong Kong or Mainland China, please stay safe and healthy. For the purpose of this call, I would just like to quickly recap a few key highlights and takeaways of this quarter’s operating and financial results. For detailed financial line items, I would like to refer you to look at our uploaded earnings for more details. Overall, we’re very pleased to close out the final quarter of 2021 with record highs in both total gross written premiums or GWP facilitated on our platform as well as total operating revenues. For full year 2021, total GWP amounted to RMB5 billion, representing strong growth of 66% year-over-year. First year premiums of FYP accounted for RMB3.1 billion or 62% of the total GWP, which is up 99% year-over-year from 2020. Renewal premiums accounted for RMB1.9 billion or 27.8% of total GWP, representing a year-on-year increase of 30.5% in 2021. As we expected during our Q3 results call, our strategic focus on savings insurance products since the beginning of the year, coupled with the strong market demand for savings insurance products from consumers, was expected to provide strong momentum for growth in savings products and overall FYP in the fourth quarter. Our continued strong growth in savings product FYP, that we have demonstrated in the results, is a true reflection of a few very important aspects of our platform business and of our customer base. First and most importantly, the quality of our existing customer base and the effective customer acquisition capability by our omni-channel distribution platform that we have built up over the years. The two key metrics to highlight here again, which demonstrate this are the average ticket size of the long-term insurance products that we have distributed, as well as the persistency ratios that we have delivered for the renewals of the policies. For average ticket size, this quarter, we have further seen this number increasing from RMB6,684 for the third quarter to RMB9,593 in the fourth quarter. As of November, our persistency rates for long-term life and health insurance policy renewals in the 13th and 25th months have still remained at a very high level of 94% compared to industry averages. The consistently high persistency metrics that we have delivered also fostered decent engagement and relationships with our upstream insurance carrier partners, and that continues to reflect the high quality of the 7.5 million customer base that we have accumulated to date and the long-term lifetime value potential that can be extracted. For the year 2022, one of our key strategic initiatives will be to focus on further deepening our engagement of existing high-value customers by encouraging cross-selling and upselling opportunities, leveraging the proprietary data insights accumulated from the interactions these customers have with our platform over their lifecycle, as well as utilizing our expanded offline service coverage from continued investment in this area. Our strong operating performance in the fourth quarter has driven a 1.5 times increase in operating revenue to RMB976 million for the quarter, as well as closing out the full year 2021 at RMB2.25 billion, which represents an increase of 84% year-over-year and surpassing our full year guidance given in the last earnings call by 10%. For the quarter, we also achieved a net profit of RMB19.8 million. As we head into the year 2022 amid a backdrop of tightening industry regulations, challenging macroeconomic, and capital market conditions, the next two quarters are expected to be a period of adaptation and transition for most players in the industry. At Huize, our first priority from a strategic financial management standpoint is to further drive improvement in our overall corporate cost structure and operating efficiencies. As we have reported in the last quarter, we are currently in the midst of implementing group-wide organizational structure optimization. So far, we have achieved a double-digit percentage improvement in our fixed cost base in the new year. In addition, the Board has also approved a share repurchase program, which we have announced today, aligning with our commitment to return value to our shareholders and reflecting the continued confidence we have in our long-term growth prospects. We believe that the current market conditions provide us with opportunities to strategically allocate capital to enhance shareholder value while maintaining resources to fund our operations and continued business growth. This concludes our prepared remarks for today. We will now open up the call to Q&A. Thank you, operator.

Thank you. Our first question comes from Michelle Ma from Citi. Please go ahead with your question.

My first question is about the product mix for the first year premium and written in the fourth quarter last year. We noticed the take rate for premium actually increased as the operating revenue growth outpaced GWP underwritten in the Q4 last year. So, what’s the reason behind? And the second question is about the radical regulatory environment changes. What is our new product strategy? And what’s the difference between the old model of cooperating with medium-sized insurance companies versus currently, we need to collaborate with more top-tier insurance companies? What’s the major difference and the difficulties we face here?

Okay. Hi Michelle, it’s Ron here. Thank you so much for joining us and for the two questions. Maybe quick answers to both questions from me. First question really relates to the take rate of the fourth quarter and how the product mix is looking into the fourth quarter for the FYP. So, I think the overall take rate that you have seen, which has increased, is a function of the fact that the mix of GWP in the fourth quarter has a much larger contribution from FYP. About 71.3% of the fourth quarter GWP is coming from first year premium policies and 28.7% from renewals. In terms of the FYP product mix, roughly 63% is coming from long-term life, mainly the incremental savings product that we are distributing for HongKang Life. Around 21.6% is coming from annuities and 10% coming from long-term health products, which include critical illness, and the rest is from short-term products. So, I think overall, the take rate has improved mainly as a result of the increased proportion of contribution from FYP over gross written premiums. For the second question regarding the new operating environment after January 1st, I think in terms of product strategy, we will see significant changes on the online side related to the online savings product segments. This has been a key driver for both the 2021 year and also as we expect in the New Year. I think this is a combination of a few factors at play. Most importantly, the market demand for insurance products in the savings or investment-linked products continues to exist in the protection products as we have seen across the board in the industry. In the New Year, we will still focus on driving the savings product segment both online and offline. As you see, we have already launched the first Internet online savings products with a qualified insurance company partner, and that was in January. We have also introduced an online critical illness product, Darwin No. 6, as mentioned earlier. We have a full suite of about 30 products that we look to release this year. We’re on a good track here. In the offline space, many mid-size or smaller-sized insurance companies that we worked with previously, which may not qualify under the new rules on the online side, we will still be able to offer offline products. This is why we are now accelerating our online-offline integration business model. We also disclosed that we acquired 100% interest in the Senhao Insurance, which provides us with offline coverage in 11 provincial areas. This will speed up our online-offline touchpoints and our ability to service customers in the offline context. This captures the major changes we are seeing regarding the regulations being enforced in the New Year, and we will continue to drive momentum in this space. We hope to have more material updates in the next earnings call to share with everyone. Thank you.

Thank you. Our next question comes from the line of Mindy Gao from CLSA. Please ask your question.

I have got two questions. The first one is regarding the Senhao Insurance that you agreed to acquire in December. What will be your business plan for this company? And what is your plan for online and offline integration in the future? The second question is regarding the technology export. You have mentioned previously that you have begun to export your technology to other insurance companies, and this will generate new revenue streams. I wonder if you could provide us with an update on this business and related revenue as well as the outlook for the future. Thank you.

Okay. Thanks, Mindy. It’s Ron again here. So, two questions. The first question on the online-to-offline integration and the Senhao acquisition and our business plan regarding that. I think I touched upon that quickly in response to Michelle’s question. The key focus areas here are that we have been trying to complement our service capabilities in the offline context. Over the first 15 years of the company’s development, we have solely focused on online distribution and online service capabilities to our customer set. Starting last year, with a combination of regulatory changes and our internal business plan to improve and deepen engagement with existing customers, we need extensive offline coverage to service these customers, particularly higher-value customers, whom we can extract from our user database to cross-sell and upsell. A bolt-on acquisition like Senhao really accelerates our efforts while we build organically. This saves time for us to go province by province regarding regulatory and timing considerations. About the second point regarding the new regulatory environment, offline products will increasingly be critical for us to distribute. We are beginning to distribute this year, starting with our internal consultants sales force. The Senhao acquisition will also enable us to provide the cloud platform we already have with a mature supply chain concerning the insurance products we cooperate with over 100 insurance companies, particularly the customized products that we have been distributing successfully. These products can be channeled into the offline agency force connected to the Senhao network. Therefore, we can really streamline the online-to-offline integration. Lastly, the independent agency framework introduced by the CBIRC is an attractive opportunity for a comprehensive one-stop shop digital insurance product and service. Independent agents can be plugged into our ecosystem, leveraging our online cloud system for front-end services, product comparisons, intelligent proposals to customers, and intelligent underwriting post-policy claim services. This will provide bespoke, fully digitalized insurance service experiences for offline customers. All these are the things that we are looking to drive through this acquisition into the key ecosystem we've put in place over the years. Hopefully, that answers your question. Thank you.

Thank you. Our next question comes from CICC. Please ask your question.

First, congrats on the impressive results of our management in Q4. I have two questions. The first one is about Senhao. Will our company continue to hire more agents and broaden our business into more provinces? The next question is about profit margin. We see the margin has improved in Q4. I would like to know if it’s sustainable since we changed more product layers to larger companies, and there are still costs related to offline outlets. Overall, will the margin in 2022 be improved or deteriorate compared with the 2021 level? Thanks.

Great. Thank you so much. So, two questions. The first question regarding the offline business and whether we will be looking to expand coverage. The answer is clearly yes. We are happy to start with the locations already in place through the acquisition. This covers most of the key insurance-heavy or top-ranking areas for our target markets. There are areas where we can still expand, but we will proceed on a measured basis as we go along. Regarding the profitability of the company, yes, in Q4, we achieved marginal profitability. However, we expect the next two quarters, Q1 and Q2, to be extremely challenging from an operating perspective. We are adjusting to the new regulatory regime and new business models amidst macroeconomic challenges. Many locations are still under lockdown, which significantly impacts consumer confidence, particularly regarding discretionary financial products like insurance. Consequently, the next two quarters are expected to be tough. We have not provided official guidance yet, and we will update you later. We are focusing on continued cost reduction throughout our corporate structure. Thus far, we have achieved a double-digit percentage figure in the first quarter, and we will continue to drive further cost reductions in the second quarter. Thank you.

Alright. Thank you. We have reached the end of the question-and-answer session. I will turn the call back to Ms. Harriet Hu, Investor Relations Director, for closing remarks.

Thank you, operator. In closing, on behalf of the Huize management team, I would like to thank you for your participation in today’s call. If you require any further information, please feel free to reach out to us. Thank you for joining us today, and have a nice weekend.

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