Huize Holding Ltd Q2 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holdings Limited Second 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, Amber. Hello, everyone, and welcome to our earnings conference call for the second 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 second 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 second quarter 2022 earnings conference call. In the second quarter, Huize's business showed strong resilience despite a decline in insurance demand due to ongoing economic uncertainty and regional pandemic disruptions in China. Our solid digitalization and product innovation capabilities, along with a focus on enhancing users' lifetime value, allowed us to continue driving industry digitalization and implementing our strategic plan for building an omnichannel digital insurance service ecosystem, resulting in another quarter of impressive growth. In the second quarter, total gross written premiums on our platform rose by 30.5% year-over-year to RMB 872 million, and our total operating revenue also increased by 30.5% year-over-year to RMB 248 million. In response to changing consumer preferences and the economic environment, we have strategically focused on promoting savings insurance products. The first-year premiums of savings products facilitated on our platform reached RMB 282 million, a 100% increase year-over-year. Consequently, our total first-year premiums increased by 59.9% year-over-year to RMB 485 million, demonstrating that our diverse product offerings have fueled high-quality business growth. We have maintained a strong competitive position in distributing long-term insurance products, with the contribution of our long-term insurance products accounting for 91.7% of GWP, remaining above 90% for the 11th consecutive quarter. We have also sustained high-quality products and robust business growth, with our cumulative number of insurance clients reaching 8.2 million as of June. In the second quarter, approximately 64.2% of our long-term insurance clients were from higher-tier cities, with an average age of 33.3 years. In terms of first-year premiums, the average ticket size for long-term insurance and long-term savings products was about RMB 3,481 and RMB 44,000, respectively. Our average persistency ratios for long-term life and health insurance in the 13th and 25th month remained high at 91% and 96%, respectively. As of the end of the second quarter, we have collaborated with 100 insurance partners. Since June, we have introduced several customized products, including mid-tier medical insurance for the middle-aged and elderly, as well as an inclusive annuity product co-developed with Sun Life Everbright Life to meet retirement needs. GWP for co-developed products rose by 16.8 percentage points year-over-year. We are also pleased to report that the cumulative first-year premium of our Xin Man Yi Zu product, a customized increasing whole life insurance launched in July last year, has reached approximately RMB 1.2 billion, underlining our capacity to understand user needs and create suitable products. To enhance our insurance services, we upgraded our claim assistance system in June, allowing coverage for policyholders' immediate family members and their non-Huize claims. In the first half of the year, we assisted with 34,000 claims totaling RMB 320 million, with the highest settlement amount in a single case being RMB 2 million. Among these claims, we addressed 252 disputes with a total settlement amount of RMB 9.79 million. Following our disciplined cost control and organizational optimization, our operational efficiency continued to improve. In the second quarter, selling and G&A expenses decreased by 16% sequentially. Moving forward, we aim to further cut our fixed cost base to enhance efficiency and support sustainable business development through resource integration and optimizing staff productivity and workflows. I would also like to share progress on our strategic roadmap for building an omnichannel digital insurance service ecosystem that connects agents, businesses, and customers. In addition to acquiring new customers and nurturing long-term relationships, we have accelerated business growth by better engaging existing clients. In the second quarter, we launched new products and promotional activities, offering service upgrades. Additionally, through live streaming interactions, telemarketing, and consultant communications, we reached over 100,000 users and achieved a sales conversion of more than 3,000 users. For businesses, we continue to drive digital transformation in the industry, as demonstrated by our digital acceleration project with Taiping Life, which allowed them to collect over 4 billion pieces of traffic data from various business scenarios. Our technology service business contributed approximately RMB 5.38 million in total revenue in the second quarter. To agents, we have enhanced our offline business line, with registered insurance agents operating in major cities. The first-year premiums from the To-A business reached RMB 56.6 million in the first six months of 2022. Additionally, we opened our first independent agent store in Shenzhen in the third quarter to offer a broad range of insurance services and empower our professional insurance agents. This will serve as a foundation for our integrated online and offline business model, which we plan to expand to other regions once proven sustainable. Our 15 years of operational experience and leading digital capabilities will enable us to provide a comprehensive range of insurance products across all scenarios while empowering the entire insurance value chain. We are focused on enhancing customer retention, repeat purchase rates, and the lifetime value of our customers, which will contribute to diversified business development and long-term growth. This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ron Tam, for an overview of our key financial highlights for the second quarter of 2022.

Thank you, Mr. Ma, and thank you, Harriet. Good evening, everyone. For this earnings call, I would like to quickly recap a few key takeaways from our operational and financial results for the second quarter. For a detailed discussion of financial line items, please refer to our uploaded earnings release for full details. We are pleased to report encouraging operating and financial results for the second quarter of 2022, featuring top-line growth and improved operational efficiency, particularly against a challenging macro environment marked by a continued nationwide COVID resurgence, leading to weakened overall economic activity and uncertainties. In the second quarter, total Gross Written Premium (GWP) increased by 3.5% year-over-year to RMB 872 million, driven by a strong growth in first-year premiums (FYP), which rose by 59.9% year-over-year to RMB 485 million. This recovery in FYP showcases Huize's business model agility in adapting to changing regulations and market conditions, along with the successful execution of our product strategy focused on the development and distribution of whole life insurance products in 2022. The successful product series we developed in collaboration with Hong Kong Life has been among our top-selling products on the platform. The quarter also saw our retirement annuity product with Sun Life Everbright, alongside other savings products, contributing to a strong long-term savings insurance FYP group growth of 1.4 times year-over-year. The recovery in our other key long-term health insurance category was also robust during the second quarter, following the launch of new iterations of the Darwin Critical Care series and our long-term medical insurance product with CBIC. The total FYP for long-term health insurance products grew by 83% quarter-over-quarter and 8% year-over-year. Regarding our renewal metrics, renewal premiums increased by 6.1% year-over-year to RMB 387 million, with our persistency ratios at 91% for the 13th month and 96% for the 25th month, demonstrating a high-quality user profile on our platform. This gives our upstream insurance partners confidence during these challenging macro conditions. In the quarter, we fully replenished our online insurance product supply chain with a complete set of products across the whole life, health, medical, annuity, savings, and property and casualty categories. While long-term insurance products still make up about 90% of our GWP, the contribution from our customized products also increased by 16.8 percentage points year-over-year in the second quarter. Our sophisticated product innovation and customer acquisition capabilities have strengthened our engagement with insurance partners and maximized the lifetime value of our users. Our omnichannel distribution platform expanded our customer base to 8.2 million by the end of the June quarter. The average ticket size of FYP in our long-term savings product category grew to RMB 44,000 in the second quarter of 2022. With this strong growth in FYP, our total operating revenue increased by 13.5% year-over-year to RMB 248 million in the second quarter. As mentioned in the previous earnings call, we are focusing on optimizing our corporate cost structure and operational efficiencies. Through our group-wide organizational structure optimization program, our selling and general administrative expenses decreased by 16% sequentially to RMB 94 million in the second quarter. We recorded a net loss of RMB 39 million for the quarter, narrowing by 55% compared to Q2 of 2021, reflecting our top-line growth and improved operational efficiency from our ongoing cost reduction program. By the end of the second quarter, our combined balance of cash and cash equivalents was RMB 444 million, indicating our strong liquidity and solid balance sheet to navigate the ongoing macroeconomic challenges, while also providing capital for future business growth. We have continued to repurchase shares from the open market under our existing share repurchase program, totaling approximately 357,000 ADSs as of the end of June. Moving forward, we will continue executing our optimization program in Q3 and Q4, aiming to lower our fixed costs and enhance operating leverage as the business and macro environment recover. Based on our preliminary market assessment, we anticipate achieving quarterly profitability in the second half of this year. As Mr. Ma mentioned in his opening remarks, we will continue to build a scalable omnichannel digital insurance service ecosystem that integrates agents, businesses, and customers over the next three years. This strategy aims to position us as a top-tier insurance intermediary in China, becoming a preferred partner for our stakeholders. We see substantial growth potential in the industry that offers us valuable opportunities to allocate capital, create shareholder value, and sustain high-quality long-term growth. This concludes our prepared remarks, and we will now open the call for Q&A. Thank you, operator.

Thank you. We will now begin the question-and-answer session. Our first question comes from Yu Zhong from CICC. Please go ahead, Yu.

Here I have three questions. The first question is about updates on the operation of your offline business. The second question is regarding your current product portfolio. Additionally, could you provide more details on the first-year and year-over-year take rates of different products? Lastly, considering customer demand post-pandemic, what is your outlook on the insurance market for the second half of this year and what will be your corresponding operational strategy? Thank you.

Okay. Thanks for the questions. It's Ron here. Let me address these three questions. The first question regarding the development of the offline business. We have also mentioned in the opening remarks that we have been seeing very strong growth momentum in our To-A, To-C model, which is the independent agents model that we have kickstarted in the first quarter of this year. I think that this is also due to our ability to connect to offline product supply, as well as our existing online product supply matrix, which allows offline independent agents to serve their customer base in a very efficient manner, connecting them to online and offline product supply while leveraging digital tools to serve the end customers effectively, especially during this period where COVID resurgence and regional pandemic restrictions have still been affecting the traditional offline agency model. So I think we have seen great progress. We have connected with independent agents covering major Tier-1 and Tier-2 regions in China, including Beijing, Shanghai, Guangdong, Shenzhen, and Sichuan. We shared in the opening remarks that the FYP facilitated by the To-A business model has already reached almost RMB 16 million in the first six months of this year. We target to see this number growing to about RMB 100 million by the year's end. For the second question, regarding the take rates and commission rates for the various products on the platform, the FYP commissions for online products are capped at 60%. For the health products, long-term health products like the Darwin series will have first-year commissions of 60%. But for the lifetime value of the product, we are looking at around 110% in LTV commissions, with backend commissions being paid for the second year of renewal. So essentially, for long-term health products, we're getting 110% LTV commissions. For the savings products, we are getting around 60% for the first year, and for the long-term lifetime value, we're seeing another 10% to 15% in years two to five. That will be the take rates for various products right now. For the third question regarding the strategy with respect to the second half of the year, given the continued weakness in the market and softening customer demand, we are seeing that the demand for protection-type products is expected to remain weak. To counter this weakness, we have launched new innovative products in the marketplace. For example, the products that we have co-developed with CPIC and the new version of Darwin Critical Care. We are also seeing recovery in product segments that cater to new consumer preferences. Our major focus on the product perspective will still be on the savings product segment for the next 12 months. We see continued demand in the third quarter, especially for the increasing whole life product that we have been showing much success with in the market, and we're seeing strong growth momentum in Q3 for this particular product. We will continue to drive scale growth in savings products for the next 12 months through new iterations of product launches and leveraging successful product IPs already in the market. Regarding customer acquisition, we are getting more precise on our channel investments in traffic and leveraging more on SEO SEM for our existing product IPs to drive To-C customer acquisitions on the new customer front. We are also making a concerted effort internally to drive existing customer sales on upselling and referrals by existing customers, so that overall, we can further improve our gross margins from the Q2 level. Another thing we would like to continue to drive in Q3 and Q4, as mentioned in the opening remarks, is the continued cost reduction. We target another 10% to 15% additional reduction in the fixed cost base by end of the year, as well as control on G&A expenses. That will be our overall strategy for the second half on multiple fronts. Thanks.

Do you have any further questions, Yu?

No, thanks. Very clear.

Thank you very much. Our next question comes from the line of Amy Chen from Citi. Please ask your question, Amy.

Hi. Thank you, management, for giving me the chance to ask questions. The first question will be also on the commission rate and take rates for our newly launched whole life products compared to critical illness products. The second one would be, I remember on our first-quarter result call, management mentioned that we expect to achieve quarterly profits in the third quarter and the fourth quarter. Do we still maintain that guidance? Or do we have any new guidance for the second half of the year? Thank you.

Thank you, Amy. Thanks for joining the call and for your continued support. Regarding the first question on take rates for the various products, we are looking at around 60% for the savings products sold on the platform. You also need to consider the difference in commission rates for various durations of the savings products because some customers might opt for a 10-year payment, while others may go for a 15 or 20-year payment. This difference in duration will lead to a variation in commission rates. For our online health insurance product, we expect to remain at around 60% as well. There is a small differential between the two. Regarding first-year premium commissions and lifetime value commissions, the increasing whole life product we sell has LTV commissions for years two through five at a rate of about 10% to 15%, compared to long-term health products like critical illness insurance, which will yield about 110% in lifetime value across the same period. There will indeed be a difference in take rates specifically for the two products. As for the second question, we maintain our guidance of achieving quarterly profits in the second half. This will require us to continue our cost optimization program and rely on a recovery in macro conditions to enhance consumer demand and confidence in consumption, which will improve the market for insurance products. We strive to meet these targets in the second half of the year.

Thank you very much. That's very clear.

There are no further questions at this time. I'd now like to hand the conference back to Ms. Harriet Hu for closing remarks.

Thank you, Operator. In closing, on behalf of the Huize's management team, we 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 all for joining us today. This concludes the call.

Thank you.

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