Huize Holding Ltd Q1 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holdings Limited First Quarter 2022 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's IR website at ir.huize.com under the Events and Webcast 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, Harriet.

Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the first quarter of 2022. 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 first quarter of 2022. 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 2022 earnings conference call. In the first quarter, Huize's business results showed strong resilience despite a challenging operating environment due to the ongoing pandemic, reduced insurance demand in China because of economic uncertainty, and the impact of tightening industry regulations. Our solid foundation established over past years helped us maintain total gross written premiums on our platform at RMB1.3 billion during this period, even with a high base for comparison from the first quarter of last year. We have maintained a competitive edge in long-term insurance products, with over 90% contribution to GWP in this segment for the 10th consecutive quarter. Renewal premiums rose by 113.9% year-over-year to RMB1.1 billion, providing steady cash flow to help us navigate economic downturns and market volatility. Our client base continues to grow, and we have maintained a high-quality user profile, with 8 million cumulative insurance clients reported as of March, a quarter-over-quarter increase of approximately 495,000. Around 63.7% of our long-term insurance customers are from higher-tier cities, with an average age of 33.5 years. Our average persistency ratio for long-term life and health insurance in the 13th and 25th months remains high at 94%. The average first-year premium ticket size for savings products was approximately RMB29,000 in the first quarter. By the end of the third quarter, we partnered with 100 insurers, despite the anticipated short-term impact of new regulations on online insurance product supply. Our supply chain has quickly recovered due to timely measures we took to enhance our offline presence and our established capabilities in product innovation and development. Since March, we have launched several customized critical illness products and savings products. In the first quarter, GWP for these customized products represented 69.2% of our total GWP, an increase of 8.2 percentage points year-over-year. We have also co-developed offline savings products with insurer partners and extended our customized product line beyond life and health insurance to allow for more precise customer and product segmentation. Our technology service business has made solid progress, attracting large, mid-sized, and emerging insurance companies looking for help with digital transformation. In March, we were recognized as one of the most reliable insurtech platforms for 2022 due to our strong digital capabilities and service quality. In April, we launched a new digital insurance underwriting system, which reduces information asymmetry between products and customers, aiming to assist chronic disease patients in obtaining insurance. In May, we achieved the DCMM, Stable Class Level-3 certification, one of the most respected systems for data management in China, confirming our leading capabilities in this area. Over the next three years, we aim to build an omnichannel digital insurance service ecosystem that connects agents, businesses, and customers. This will leverage our online platform and expanded offline coverage to deepen relationships with high-value customers and provide a wide range of insurance products. We aim to enhance customer retention and optimize acquisition costs through referrals. We will also help drive digitalization in the industry by providing technology solutions that support digital customer relationship management, underwriting risk management, and claims processes while diversifying our revenue streams. Additionally, we have introduced a new business line for independent offline insurance agents, targeting this area as a potential growth driver, with total GWP from this segment reaching RMB30 million in the first five months of 2022. We plan to open our first independent agent store in Shenzhen in the third quarter. The shift towards independent agents and brokers and the increasing demand for independent insurance agents provide significant growth potential in this area. We intend to meet the needs of independent agents with our unique product advantages, competitive commissions, and comprehensive service through our core platform. Over the past 16 years, we have gained the trust of over 60 million customers through our reliable and customer-friendly services. Moving forward, we are committed to building the most trusted brand as a one-stop online insurance platform and becoming the preferred insurance service provider for middle-class families in China. This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ron Tam, who will provide an overview of our key financial highlights for the first quarter of 2022.

Thank you, Mr. Ma and Harriet. Good evening, everyone. For this call, I would like to quickly recap a few highlights and takeaways from our first quarter 2022 results. For detailed discussions of financial line items, I would kindly refer you to our uploaded earnings release for full details. Overall, we are very pleased to report a set of resilient operating and financial results for the first quarter of 2022 in light of significant macroeconomic headwinds, a resurgence of Omicron in China, and the challenges brought by tightening regulatory measures in the industry. In the first quarter, total gross written premiums, or GWP remained fairly stable at RMB1.3 billion, which represents a 4% year-over-year decrease despite a high base for comparison triggered by the transition to the new statutory definition of critical illness in the first quarter of last year. At the same time, first-year premiums, or FYP reached RMB260 million. Renewal premiums more than doubled to RMB1.1 billion, reflecting the continued high user stickiness of our customized long-term insurance products. One key highlight from the quarter is that we have continued to co-develop long-term customized protection and savings products with our insurance partners. One of the key challenges that we expected going into the year 2022 was the disruption on the supply side of online insurance products due to regulatory changes. As Mr. Ma has mentioned, we have made significant progress in replenishing the supply of products on our platform and we have a full suite of co-developed products covering long-term health, savings, and P&C products. In the first quarter, our platform offered 482 insurance products online. These efforts helped drive GWP contribution from our long-term insurance products to remain above 90% for the 10th consecutive quarter. The GWP contribution from our customized products also remained at a high level of 59.2% in the first quarter. Our resilient operational and financial performance continues to reflect the high quality of our 8 million strong customer base and the effective customer acquisition capabilities provided by our omni-channel distribution platform. Two key operating metrics that demonstrated strength are the average ticket size of long-term savings products and the persistency ratios for the renewals of our policies. The average FYP of our long-term savings plans was well over RMB29,000 in the first quarter of 2022. Additionally, our persistency ratios for in-force long-term life and health insurance policies' renewals in the 13th and 25th months remained at an average of 94%, a very high level compared to industry averages. Our robust product innovation and customer acquisition capabilities have not only strengthened our engagement with insurance partners, but have also empowered us to maximize the lifetime value potential of our users. While revenue for the quarter faced a temporary setback due to industry-wide weakness in FYP presentation amidst adverse external factors and the high base for comparison in Q1 of last year, overall improvements in our corporate cost structure have provided some offset. As previously mentioned in our earnings call, we expect the first half of 2022 to be a period of adaptation and transition for most players in the industry. At Huize, our primary strategic management focus is to improve our corporate cost structure and operating efficiencies. We are pleased to report a 59.7% year-over-year reduction in total operating costs and expenses in Q1 to RMB285 million. Thus, we achieved a GAAP net profit attributable to shareholders of RMB10.6 million in the first quarter of 2022. As of the end of Q1, our combined balance of cash and cash equivalents was roughly RMB380 million, demonstrating our ample liquidity and solid balance sheet position to withstand the current economic downturn and providing capital for further investments in business growth. In the first quarter, we also repurchased an aggregate of approximately 339,300 ADSs, or 10% of our approved mandate under the existing 12-month share repurchase program. Going forward, we will continue to execute on our optimization program in Q2, aiming to further reduce our fixed cost base to enhance operating leverage as business recovers. Based on our preliminary assessment of market conditions and expected macro recovery in the latter half of the year, we anticipate achieving quarterly profit in the second half. As Mr. Ma mentioned, we have set a strategic direction to build an omnichannel digital insurance service ecosystem that integrates agents, businesses, and customers over the next three years. We believe our A, B, C strategy will provide tremendous opportunities for strategic capital allocation to enhance shareholder value and sustain long-term business growth. This concludes our prepared remarks for today; we will now open up the call to Q&A. Thank you, and over to you, operator.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. The first question will come from Amy Chen from Citigroup. Please go ahead.

Hi, thank you, management for letting me have the chance to ask the question. And I'll be asking on behalf of Michelle today. The first question would be that as management has mentioned, there is a new regulation this year that has brought some short-term headwinds on the supply side. Would you be able to share more color on how Huize has adapted to this new regulation? And what is the strategy to better cope with the changes? Did you see any changes in terms of product lines and in terms of channel mix? And the second question would be on, can you give us some updates related to the second quarter operations? Thank you very much.

Okay. Thanks, Amy. It's Ron here. I will take your questions. So the first question regarding the impact of the regulatory changes starting from this year. I think that the regulatory changes have been, well, I guess, absorbed by the market and industry. Three key points that I would like to answer in relation to this question are that, most importantly, we have replenished our supply side with over 400 products as of the first quarter and that encompasses the full suite of products from long-term health and savings to property and casualty. I think that's the major concern that people have or the market has on the sector is the disruption of the supply side on online insurance products. We have demonstrated that we have already made good progress in replenishing the supply. Recently, we upgraded our portfolio of customized products, including an online version of annuity products, which is one of the first in the industry that we co-developed with Heng An Standard Life, a joint venture backed by the Aberdeen Group in the UK. Secondly, regarding the impact of the regulation, there's also a point about how first-year commissions or the first-year premium commissions were constrained at about 60%, thereby affecting the economics of the policy for brokers like ourselves. What we have achieved is that on a new critical illness product, we have co-developed with the insurance companies, we can now achieve a lifetime value equivalent to what we had before the regulatory changes. This means that the 60% first-year commission has been compensated by higher second and third-year renewal commission rates, allowing us to maintain the lifetime value of the policy at around 120%. Finally, since the second half of last year, we have actively entered the offline space, which has allowed us to launch offline versions of savings products in collaboration with our insurance company partners, particularly with Hong Kong Life. I think we have adjusted to the new regulatory regime over the past two quarters and come out strong regarding the supply side, online-offline presence, services and products, and economic arrangements with insurance companies. Regarding Q2 guidance, we all know that Q2 has been extremely challenging for the Chinese economy in general, with enforced lockdowns in major cities across the country. It’s reasonable to expect weak Q2 operating performance. We are showing some sequential recovery due to the strides made in replenishing the supply side of online insurance products. However, challenges remain, especially with the lockdown situation. Compared to last year, it will be flattish year-over-year. Correspondingly, we expect to achieve a quarterly profit in the second half with macro recovery anticipated.

Thank you very much. That was very clear.

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

Hi, thank you for taking my question. This is Mindy from CLSA. I have two questions. The first one is, as we see the resurgence of COVID outbreaks in the first half in China. And I just wonder how that would affect our business in the first half of 2022? My second question is, as we noticed earlier that Huize has been included in the provisional list under HFCAA recently, and I'm wondering what would be the impact? How does the management plan to deal with the potential risk of the listing? That's my two questions. Thank you.

Thank you, Mindy, for your questions, and thanks for joining. Regarding the first question on the COVID impact on the business. I think on two sides of things, first from a business operational perspective. We are not as affected by the emergence of COVID as some of the more traditional offline agencies or brokerages, because most of our activities are done online, as you know. However, the more pertinent point to make is that the Omicron outbreak has dampened income expectations of the average consumer in China. It has also led to quite massive layoffs in various industries across the economy. The major impact of Omicron on the industry really has to do with consumer confidence and the willingness to purchase insurance products, which are non-essential items and more discretionary compared to securities or fixed income products. Therefore, the significant impact Omicron has seen is on the demand side of the industry, and it has been weak in the first two quarters, as reflected in the FYP numbers of major insurers in China and other brokerages and third-party intermediaries. Regarding the second question on HFCAA and potential delisting risk, I think the market has somewhat absorbed this news by now. Most Chinese companies listed in the U.S. ADR markets have gone on this list. From the company's standpoint, we would like to assure that we continue our listing in the U.S. and will take all necessary steps to maintain shareholder interest and value. We are exploring measures such as potential secondary listings in Hong Kong to hedge against the delisting risk. Encouragingly, we have seen some signs of collaborative efforts between regulators from China and the U.S. to progress on the PCAOB issues regarding on-site inspection and audits, among others. This is somewhat a corporate matter beyond our control, but we remain optimistic about a resolution and will continue to take steps to safeguard our shareholders' interests.

Thank you, Ron. It's very clear.

Thank you. As there are no further questions, I will turn the call back to Harriet for closing remarks.

Thank you, operator. So in closing on behalf of Huize's management team, we want 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 this concludes the call.

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