Huize Holding Ltd Q4 FY2022 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huize Holding Limited's Fourth Quarter and Full Year 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 would 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 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. Ron 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 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 fourth quarter and full year 2022 earnings conference call. In the fourth quarter, COVID outbreaks weakened private consumption and consumer confidence in China, hampering the recovery of both the overall domestic economy and the insurance industry. Against the challenging macro backdrop, we've reported another set of encouraging results, as we took proactive steps to adjust our product offerings and business strategies to mitigate downside risk, in line with our mission to achieve operational resilience. We also made good progress in implementing our strategic roadmap to build an omnichannel digital insurance service ecosystem that integrates agents, business, and customers. In 2022, total gross written premiums facilitated on our platform remained stable at RMB4.9 billion despite a high base for comparison. In line with our guidance in the third quarter, we achieved a non-GAAP net profit of approximately RMB14 million for the fourth quarter. In terms of product mix, although the pandemic limited our growth in total first year premiums facilitated on our platform, we continued to see heightened public health awareness drive a rebound in the demand for health insurance. In the fourth quarter, the first year premium of long-term health insurance products increased by 39.2% sequentially, benefiting from our leading market position in long-term insurance and our relentless efforts to maintain a high-quality user profile. The gross written premium contribution of our long-term insurance product was 96.2%, remaining about 90% for the 13th consecutive quarter. Renewal premiums also increased substantially by 80.8% year-over-year to more than RMB1 billion, highlighting our operational resilience amid a complex business environment. About 65.3% of our long-term insurance customers were from higher-tier cities with an average age of 33.8 years old. The average ticket size of long-term insurance products in terms of first year premiums was approximately RMB3,625, while that of long-term savings products increased substantially to approximately RMB46,000 during the quarter. As of December, our average persistency ratios for long-term life and health insurance in the 13th and 25th month remain at industry-high levels of 90% and 96%, respectively. As of the end of the fourth quarter, we have cooperated with 106 insurer partners to co-develop a wide range of cost-effective and high-quality customized products. During the quarter, we launched an increasing whole life insurance product designed to meet the needs of our users in multiple scenarios, including children's education, retirement, and inheritance. We also entered into a strategic partnership and launched a series of pension annuity products, demonstrating our efforts in offering products that combine insurance and retirement services. In March, we established a strategic alliance with Ping An Health Insurance and launched our first co-developed product, providing long-term medical insurance. We look forward to accelerating our cooperation with Ping An Health Insurance in customizing insurance products, promoting them, engaging customers, and offering health management services. Meanwhile, our Darwin Critical Care Series was once again honored with the China Insurance Innovation ARC Award for 2022. In the fourth quarter, our innovative critical illness product, Darwin Critical Care No. 7 was named one of the top ten commercial health insurance products in China. For the full year 2022, the gross written premium contribution of co-developed products increased by 4.6 percentage points year-over-year to 64.8%, which highlights our ability to identify market opportunities based on our deep customer insights and offer a full range of insurance products across all scenarios. In 2022, we achieved effective cost control and continued to implement our group-wide organizational structure optimization, driving a considerable improvement in our gross margin from 24.7% in 2021 to 36.6% in 2022. Our operating expenses decreased by 30.1% year-over-year in 2022 and 16% sequentially in the fourth quarter. Even as we continue to reduce our cost base and improve our efficiency, we remain committed to our core belief in providing high-quality services to our customers. In 2022, Huize provided professional insurance services to more than 780,000 families through over 2 million insurance policies. During the year, Huize helped 70,000 customers with claim assistance services, with the total claims settlement amount increasing by 8.8% year-over-year to RMB620 million. Across these interactions, we achieved a 92% customer satisfaction rate according to our 2022 customer service report. In 2022, we made significant strides in executing our three-year strategic business plan to build an omnichannel digital insurance service ecosystem. In the To-C segment, we categorized our target users into different groups and adopted a specific business strategy for each group. These differentiated service strategies have allowed us to deepen engagement with our existing customers, driving repeat purchases of new insurance products and providing upselling opportunities to enhance lifetime customer value. In the fourth quarter, although the pandemic limited users' willingness to purchase insurance, we continued to promote our customized products to existing users, particularly high-value and female users. Through targeted monthly promotions, branding, and customer care activities, we reached more than 50,000 users and achieved approximately 10,000 sales conversions. Since our inception, we have served a significant number of young middle-class families, which should become a cornerstone supporting our long-term development. Going forward, in the To-C segment, we will build a business model centered on systematic operations and standardized sales processes while strengthening the service capabilities of our localized sales teams to enhance our online to offline integration through improved operational and sales capabilities. In the To-B segment, we continued to provide various digital tools and technologies to insurance companies. In 2022, our technology service business contributed total revenue of RMB15.2 million. In the To-A segment, we launched our new user management system, Hotlink 1.0, which enables agents to accurately identify users, quickly view profiles on mobile devices, filter and target users based on similarity, and share information through individual or group messaging. This system will enhance our core capability to empower insurance agents in all business aspects. The first year premiums facilitated by the To-A business increased by 26.7% sequentially to RMB82.6 million in the fourth quarter and exceeded RMB200 million for the full year. In 2023, we will focus on our localized deployment plan aimed at establishing professional and high-quality offline service teams in 16 key regions nationwide. We will also strive to boost user activities through increased engagement with high-value users and enhance our core strengths through technology upgrades, particularly focusing on optimizing our transaction system, user management system, and insurance policy custodian system. This concludes my prepared remarks for today. I will now turn the call to our CFO, Mr. Ron Tam, who will provide an overview of our key financial highlights for the fourth quarter and full year of 2022.

Thank you, Mr. Ma and Harriet. Good evening, everyone. In the fourth quarter, operating conditions in China remained tough. The significant macroeconomic challenges during the quarter weighed heavily on consumer confidence and recovering household income and hindered sales of insurance products in China. The total gross written premium or GWP for the entire insurance industry in China was RMB531 billion in Q4, which is down 16.3% sequentially. Against the backdrop of macro challenges and a sluggish industry recovery, we're very pleased to still achieve a 16% quarter-on-quarter increase in total GWP facilitated on our platform totaling RMB1.4 billion in Q4. And to close out the full year 2022 with total GWP facilitated on our platform of RMB4.9 billion, which is essentially flat on a year-on-year comparison basis. For the full year of 2022, we have added 1.2 million customers to our ecosystem, bringing the total from 7.5 million to 8.4 million as of the end of 2022. And most importantly, in line with our guidance given in the previous quarter, we also achieved profitability in Q4, thanks to the successful execution of our key business strategies. First, on the product front, we continued our strategic focus on long-term insurance products. And our offerings in this category continue to be well received by customers. The GWP contribution of our long-term insurance products exceeded 90% for the 13th consecutive quarter. Second, on our channels, we continue to improve the quality of our user base and enhance customer acquisition capabilities via our omnichannel distribution platform. Our new To-A, To-C business line maintained strong growth momentum in the offline market, generating a total FYP of more than RMB200 million in 2022. And finally, on the corporate front, we continued with our group-wide organizational structure optimization and achieved significant cost savings in our fixed cost base across all business lines in 2022, establishing a solid foundation for sustained improvement in operating leverage as the macro economy and consumer consumption recover in the post-pandemic growth. I will now recap a few key highlights and takeaways from this quarter's operating results. In the fourth quarter, the 16% sequential increase in our GWP was mainly driven by robust quarter-on-quarter growth in renewal premiums, which increased 83% to RMB1 billion. Our other renewal metrics have also remained healthy with our persistency ratios for long-term life and health insurance in the 13th and 25th month, both remaining at industry-high levels of 90% and 96% as of December, respectively. In addition, the average ticket size for our long-term savings insurance products was approximately RMB46,000 in Q4. These metrics not only reflect the high quality and lifetime value potential of our 8.4 million strong customer base, but also highlight our efforts to successfully deepen our engagement with existing users and realize upselling opportunities to increase customer lifetime value. In terms of FYP product mix, we are seeing a sequential recovery in the long-term health insurance category and we expect that for the year 2023, our overall product mix to be more balanced between the long-term health segment and the savings categories as compared to 2022. The anticipated macro recovery should drive consumption of protection products, especially with the pandemic effect on raising consumers' awareness of the need to procure health insurance. For this, we will continue to invest heavily and co-develop market-leading long-term health insurance products, such as our Darwin Critical Illness series, which is now in its seventh iteration, as well as long-term medical insurance products such as the latest exciting strategic collaboration we have just announced last week with Ping An Health Insurance. Amid the tough macro environment and COVID challenges, our total operating revenue in Q4 was RMB258 million, down 27% sequentially. Nonetheless, we continue to focus on titling marketing channel costs, optimizing our worldwide organizational structure, and improving operational efficiency. And as a result, our operating costs for Q4 decreased by 78% year-over-year to RMB162 million, prompting a healthy improvement in our gross margin to 37.2% from 23.4% a year earlier. In Q4, our SG&A and R&D expenses both decreased by 63% year-over-year. Overall, we recorded a GAAP and non-GAAP net profit of RMB8 million and RMB14 million in Q4, respectively. This translates to a non-GAAP net margin of 5.5% for Q4. At the end of 2022, we continued to maintain a strong liquidity position, as evidenced by a combined balance of cash and cash equivalents of RMB277 million. We have continued to repurchase shares from the open market under our existing share repurchase program. And as of the end of the December quarter, we have repurchased an aggregate of approximately 655,000 ADSs. On March 17, our Board has just authorized a new share repurchase program to buy back up to $5 million of ADSs over the next 12 months, which continues to demonstrate the confidence that we have in our business model and our long-term growth prospects. Going forward, we will further scale our omnichannel digital insurance service ecosystem by executing on our ABC business plan to secure our position as a top-tier insurance intermediary in China. Strengthening this ecosystem should help us gain market share among high-quality new generation consumers and families who demand innovative and customized insurance products, a seamless digital experience, and professional customer service. We'll continue to streamline our overall corporate cost structure and enhance sales conversions, driving to strategically allocate capital to create shareholder value and sustain our long-term business growth. Now turning to our outlook for the year. At this time, we're cautiously optimistic about a sustained recovery in economic activity, which should improve customer confidence and consumption in China, although the complex external environment and geopolitical tensions will continue to provide challenges for the global and Chinese economy. We expect to remain profitable in 2023 on the anticipated macro recovery, our improving operational efficiency, our continued efforts to upsell existing customers, and our ability to acquire new mass affluent customers. Based on a preliminary assessment, we currently expect that for the full year of 2023, we will achieve a non-GAAP net profit of not less than RMB30 million in 2023. Before we conclude our prepared remarks for the call, I would like to provide a quick update on the notice that we received from the NASDAQ listing office regarding our compliance with listing requirements with the NASDAQ Listing Rule 5450(a)(1) in October 2022. We would note that the matter has been fully resolved and closed and we have regained compliance as of December 14, 2022. And with that, we will now open up the call to questions. Thanks and over to you, operator.

Thank you. Our first question comes from Yu Yu Shang from CICC. Please go ahead. Your line is open.

I have two questions. First, regarding your operating strategy, will you focus more on growth or profitability this year? What business goals are you setting, and how do you plan to achieve them? Second, in terms of AI technology, we’ve observed that our digital technology has been announced to connect. How do you see AI impacting the insurance sales business? Could you provide more details on this? Thank you.

Thank you. It's Ron here. I have two questions from your side. The first one is about our business strategy for this year. We are clearly seeing the end of the pandemic towards the end of last year, and the reopening of the Chinese economy has led to a recovery in consumer spending in the first quarter. We are also noticing initial impacts on the insurance industry, with a modest year-on-year recovery across all business lines. The pandemic has heightened awareness of the importance of health insurance for individuals and families, which signals long-term growth potential. From a product perspective, we will focus on developing variable offerings for the broader market. Our recent collaboration with Ping An Health Insurance exemplifies this approach. We will continue to enhance our product portfolio and co-develop offerings with leading insurance companies. Now that we have this new strategic partnership with Ping An, it will positively influence our product development. Regarding your question about growth versus profitability, we remain cautiously optimistic about growth prospects this year. However, the organization's main focus will be on profitability, as evidenced by our clear guidance for 2023 that our profit will be at least RMB30 million. This reflects our commitment to prioritizing bottom-line profitability. For your second question on AI deployments, we have been heavily investing in R&D over the past 2.5 to 3 years and have consistently shared our progress with the market. We have developed AI tools to enhance efficiency across our operational processes, such as CRM and our AI proposal engine, which supports our consultants. These in-house AI investments are already being implemented. As we enter 2023, heavily influenced by AI advancements like ChatGPT and Baidu, we plan to further explore and test these technologies in our business processes. We have announced our collaboration with Baidu and are conducting internal trials, alongside our work with ChatGPT, where we are improving the coding and programming efforts of our R&D personnel. We are beginning to see positive initial results from these initiatives. Therefore, in product development, AI will play a crucial role in enhancing efficiency and further improving operating leverage in the coming years. That will be all. Thank you.

Thank you. Our next question comes from Amy Chen from Citi. Please go ahead. Your line is open.

The first question is about the recent regulatory notice concerning the self-inspection of online marketing by insurance agents. What potential impacts could this have on Huize's sales moving forward? The second question pertains to Huize’s products. We have noticed that more smaller insurers are leaving the online insurance market, while Huize has been collaborating with larger insurers. Can you provide insights into the differences in commission take rates and product design for these new offerings? Additionally, is there a guidance for premium facilitated for the full year of 2023? Thank you.

Thanks, Amy. It's Ron here again. I appreciate everyone joining. The first question pertains to the regulatory self-inspection notice. We have been taking these regulations seriously since the initial compliance requirements were issued for the online insurance marketing business two years ago. We continuously adapt to regulatory changes, and this process is not unfamiliar to us. Over the past two years, we have adjusted our business processes and strengthened our controls with third-party channel partners regarding compliance requirements. We have established clear guidelines and expectations for our partners to ensure compliance when working with us. We have maintained a high level of compliance throughout this period. I believe the self-inspection reflects an execution step by regulators based on previous frameworks; it is not a brand-new requirement. For Huize, since we have upheld stringent compliance standards across our ecosystem, we are confident that we will fully meet the regulators' self-inspection requirements. We will also encourage our third-party channel partners to fully cooperate. Following the three-month self-inspection, which runs from April 3 to June 3, we expect to emerge in a stronger competitive position compared to some industry peers due to our higher compliance standards. Additionally, it’s important to highlight that we are one of only two insurance intermediaries in China operating online that has voluntarily integrated our backend system with the regulators’ system for real-time transaction data sharing. This is a strong indication of our commitment to regulatory compliance. Regarding the second question about future business developments with insurance partners, Ping An Health Insurance is a prime example, especially as we transition into a post-pandemic environment where increased regulatory requirements will encourage collaboration with mid-sized and larger insurers. Ping An Health Insurance gives us a significant market advantage by offering valuable, customer-centric products that can fill current market gaps. For our full-year guidance, we are providing clear profitability expectations on the P&L side. On the top line, we are cautiously optimistic about sustaining macroeconomic recovery and anticipate moderate growth in the premiums facilitated this year.

Thank you. We'll now move on to our next question. Our next question comes from the line of Rick Zhao from Morgan Stanley. Please go ahead. Your line is open.

The first question is about the regulator's research on reducing pricing rates. What could be the potential impact on the company and what preparations are we making? The second question concerns whether, given China's economic and consumer recovery, we have observed an improved sales trend in production products like medical items compared to the pandemic and the internet industry. Thank you.

Thanks, Rick. Thanks for joining. Welcome you to Huize story. I think the first question on the pricing front, yes, I think that we do note that the regulators are now looking to maybe adjust the pricing rates on the products. And I think the short-term impact on, not just the company, but also on the overall industry is that we might see some of the current products reach the end of their lifecycle. So I think that might be translating to some of the accelerated sales of some of these existing products in the next quarter or two. I think that will be some of the short-term impact, which actually should be a net positive for the company, because we are well-positioned in terms of the product supply side. We have very good market-leading products that we can facilitate to the market. For the longer- medium to longer-term, I think that because we have always been very focused on co-developing new products with our upstream insurer partners, we are fully prepared, and we are already in discussions to iterate the savings products into the next version maybe post the pricing rate regulatory changes. So I think we are fully anticipating some of these changes going into the second half of this year and 2024 onwards. So with that, I think that again, because of the way that we have been operating with a very clear focus on middle-class mass affluent families in China. I think that the good-quality customer base and the ability that we can acquire new customers will provide us an upper end in terms of negotiating and working with the larger middle to larger-sized insurance partners to help co-develop new versions of these savings products and bring products to the marketplace to adapt to the changes in the regulatory side. So I think that will be the first question. Second question, I think I told the other analyst earlier on the call that we are seeing some modest recovery in Q1. On a year-on-year basis, actually, we are quite strong versus Q1 of last year. So we are still cautiously optimistic. I think the broader external environment is definitely very challenging right now as we speak. I think the geopolitical tensions remain extremely tight. So still a lot of uncertainties in the exports, and I think that will also have some effects on the SMEs in China and so forth into consumer covenants. But then I think in Q1, we are seeing modest and healthy recovery across the key product segments, i.e., long-term health and long-term savings products. So I think that we should be hopeful for a modest rebound in the first half of this year. Thank you.

Thank you. There are no further questions at this time. So I'll hand the call back to you for closing remarks.

Thanks, operator. It’s Harriet here. So 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 the IR team. And thank you for joining us today. This concludes the call.

Thank you, everyone. Have a good evening.

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.