Earnings Call Transcript - HUIZ Q1 2023

Operator, Operator

Ladies and gentlemen, thank you for being here and welcome to Huize Holding Limited’s First Quarter 2023 Earnings Conference Call. Today’s conference call is being recorded and a replay will be available. Please visit Huize’s investor relations website at ir.huize.com under the Events and Webcast section. I will now hand the conference over to your speaker host today, Ms. Harriet Hu, Huize’s Investor Relations Director. Please go ahead, Harriet.

Harriet Hu, Investor Relations Director

Thank you, operator. Hello, everyone. Welcome to our earnings conference call for the first quarter of 2023. 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 press 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 the Co-CFO, Mr. Kwok Tam. Mr. Ma will start the call by providing an overview of the company’s performance and operational highlights for the first quarter of 2023. 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.

Cunjun Ma, CEO

Hello, everyone, and thank you for joining Huize’s first quarter 2023 earnings conference call. In the first quarter of 2023, as China’s economy gradually recovers and private consumption and consumer confidence improve, the insurance industry showed clear signs of revival. We leveraged this positive trend by actively refining our product offerings and business strategies to strengthen our comprehensive online to offline O2O integrated digital insurance service ecosystem. As a result, Huize reported another set of remarkable results in the first quarter of 2023. On a sequential basis, total gross written premiums or GWPs, operating revenue, and non-GAAP net profit all achieved double-digit growth during the period. Total GWP facilitated on our platform reached RMB1.93 billion, marking a 33.4% sequential increase. Our total operating revenue and non-GAAP net profit also increased by 15.7% and 3.3% quarter-over-quarter to approximately RMB300 million and RMB18.4 million in the first quarter. In terms of product mix, first-year premium or FYP facilitated on our platform increased by 58.6% sequentially to approximately RMB660 million. FYP for long-term health insurance products and savings products increased by 32.8% and 50.4% quarter-over-quarter to RMB180 million and RMB340 million respectively, highlighting the high-quality growth driven by our comprehensive product offering. At the same time, we continue to benefit from our strategic focus on distributing long-term insurance products and the competitive edge we have established. GWP contribution of our long-term insurance products was 92.7%, marking the 14th consecutive quarter above 90%. Renewal premiums also demonstrated significant growth, rising by 23.2% sequentially to RMB1.27 billion. At the end of the first quarter, our cumulative number of insurance clients reached 8.7 million. We remain focused on targeting high-quality customers for our long-term insurance products. During the quarter, about 66.2% of our long-term insurance customers were from higher-tier cities with an average age of 33.9 years old. In terms of FYP, the average ticket size of long-term insurance products and savings products was approximately RMB4,120 and RMB44,000 during the quarter, demonstrating our success in unlocking the lifetime value of our users and indicating a positive trend in user engagement. As of February, our cumulative persistency ratios for long-term insurance in the 13th and 25th months remained at industry-high levels of more than 95%, indicating that our high-quality customers show a high level of stickiness and continue to generate stable revenue strength for both Huize and our insured partners. As of the end of the first quarter, we have cooperated with 104 insured partners. During the quarter, in response to the increasing demand for insurance coverage for children and a huge mortality protection gap, we launched Xiao Tao Qi No.1, a customized child critical illness insurance product, and Ding Hai Zhu No.3, a customized term life insurance product, both of which cater to the protection needs of younger generation customers. Additionally, we launched Jin Man Yi Zu No.3, an increasing whole life insurance product with the option to convert the policy between single and joint insurance providing flexibility for customers with pension and inheritance planning needs. We also partnered with Ping An Health Insurance to co-develop Chang Xiang An, a cost-effective long-term medical insurance product that offers guaranteed policy renewals for 20 years, discounts on family subscription, and family deductible benefits. This product was well received by both customers and the industry and was named one of the most popular medical insurance products designed by an insurance intermediary in 2023. In the first quarter, GWP of our customized products accounted for 60.1% of total GWP. In the first quarter, our gross margin reached 39.8%, up by 2.6 percentage points sequentially. The increase can be attributed to a reduction in our customer acquisition cost due to our successful O2O integration and refined user management strategy. Meanwhile, we continued to maintain effective cost controls and optimize our organizational structure. As a result, our total operating expenses decreased by 20.2% year-over-year and our selling expense to income ratio declined by 5.9 percentage points on a year-over-year basis. Moving forward, we will maintain our disciplined approach to cost control and continue improving operational efficiency to achieve sustainable business growth. We also rolled out our online purchase, offline service strategy to deepen the O2O integration of our insurance service ecosystem during the first quarter. Thus far, we have successfully established offline service teams in 16 key regions nationwide. In the To-A segment, we capitalized on the market opportunities presented by independent agents and empowered them with product filtering tools and real-time insights into customer needs. We also provided insurance agents with efficient professional support, enabling them to effectively acquire and engage with customers and deliver the utmost professional services. Moreover, we expanded our localized operations to more regions and commenced product offerings in these regions. In the first quarter, FYP facilitated by the To-A business reached RMB74.8 million, equivalent to one-third of the FYP from the To-A business in 2022, which demonstrates the increasing importance of our To-A strategy to our overall business growth. In the To-C segment, we continued to refine our operations with a strong emphasis on compliance and a strategic focus on customer acquisition, retention, and activation. To better serve our customers, we deployed sophisticated algorithms that effectively integrate 18 distinct indicators of customer demand across four dimensions allowing us to analyze customer demand across various scenarios and make targeted recommendations of the most suitable products and services. In the first quarter, through targeted promotions, branding, and customer engagement activities, we reached more than 70,000 users and achieved more than 10,000 sales conversions. As the insurance industry undergoes gradual reform, digitalization and the independent agent business model will act as new growth drivers. We are confident that the insurance intermediary market will sustain strong growth in the future. To capitalize on this trend, we will consolidate our core strength as the leading insurance intermediary platform, strengthen our cooperation with our insurer partners in areas such as strategy, operations, and processes, provide customers with the most suitable products and services to meet their needs, and drive deeper integration of our O2O ecosystem to enhance customer experience. Our primary goal is to fulfill the long-term protection needs of our customers while achieving sustainable revenue and net profit growth. This concludes my prepared remarks for today. I will now turn the call to our CFO, Mr. Kwok Tam, who will provide an overview of our key financial highlights for the first quarter.

Kwok Tam, Co-CFO

Thank you, Mr. Ma, and Harriet, and good evening to the audience in the Asia time zone, and good morning for those in the U.S. In the first quarter, the insurance industry in China experienced a gradual recovery, which is in line with the improving consumer confidence and household income. As operating conditions have improved, sector-wide gross written premiums increased 9% year-over-year to around RMB1.6 trillion. Leveraging our omnichannel distribution ecosystem, we have achieved business growth that far outpaced and outperformed the overall market trajectory. We delivered a 44% year-over-year and 33% quarter-on-quarter growth in total GWP facilitated on our platform, which has reached RMB1.9 billion in the first quarter. We have also added 300,000 new customers to our ecosystem in Q1, bringing the total number to 8.7 million by the end of the first quarter. During the period, we recorded a non-GAAP net profit of RMB18 million, marking our second consecutive quarter of profitability and putting us on track to meet the full year non-GAAP net profit guidance of RMB30 million that we provided to the market last quarter. This success can be attributed to the successful execution of our key business strategies. Firstly, we continued our strategic focus on long-term insurance products, with the GWP contribution from long-term products remaining at about 90% for the 14th consecutive quarter. Secondly, we continue to target high-quality new generation consumers and empower insurance agents throughout our omnichannel distribution platform, extensive product offerings, and advanced technology. Our To-A and To-C business lines generated a very solid quarter with a total FYP of RMB75 million alone in the first quarter, representing a year-over-year increase of over 400%. Lastly, we continue to focus on cost efficiency enhancements throughout the organizational structure which lead to further cost savings and improved operating leverage. I will now recap the key highlights and takeaways from this quarter’s operating results. First, total GWP increased by 33% sequentially, reaching RMB1.9 billion. This growth was driven primarily by a quarter-on-quarter increase in both first-year premiums and renewal premiums of 58.6% and 23.2%, respectively. Second, our persistency ratio for long-term life and health insurance remained at industry-high levels. As of February, the 13th month persistency ratio stood at 97% and the 25th month persistency ratio stood at 96%. Third, the average ticket size for our long-term savings insurance products was RMB44,000 in the first quarter. This continues to reflect the sound quality and high potential lifetime value of our customer base. These overall positive metrics were primarily driven by our continuous efforts to deepen our user engagement and convert upselling opportunities. In the first quarter, we saw a notable recovery in demand for long-term health insurance products with FYP for this category increasing by 33% sequentially. We have also maintained our market leadership in long-term savings products and solidified our position in that market segment. The GWP contribution of our long-term insurance products remained above 90% for the 14th quarter. Looking ahead, we anticipate a more balanced product mix between the long-term health and long-term savings categories, which aligns with our evolving customer needs and market dynamics in the Chinese context. The recovery in FYP helped drive a 16% sequential increase in our total operating revenue, which reached RMB299 million in the first quarter. We remain very focused on tightening our marketing and channel costs and optimizing our group-wide structure to improve our profit margin and operational efficiency. As a result, our operating cost in Q1 increased at a slower pace than revenue, rising 11% quarter-on-quarter to RMB180 million. This has led to a healthy improvement in our gross margin to 39.8% from 37.2% in Q4. In Q1, our total operating expenses decreased by 20% year-over-year. Our GAAP net profit and non-GAAP net profit were both approximately RMB18 million in the first quarter, translating to a non-GAAP net margin of 6.2%. As of the end of the first quarter, we continue to maintain ample liquidity as evidenced by a combined balance of cash and cash equivalents of RMB230 million. We’ve continued to repurchase shares from the open market under our existing share repurchase program. As of the end of the March quarter, we have repurchased an aggregate of approximately 484,000 ADSs this year-to-date, demonstrating our management’s continued confidence in our business model and our long-term growth prospects. Moving forward, we will strengthen the integration of our O2O ecosystem, which should help us gain market share among high-quality new generation consumers and solidify our position as a top-tier insurance intermediary in China. We will also focus on providing a wide range of products and services across all scenarios and empowering independent agents and our insurer partners. As we improve our operational efficiency and allocate our capital more effectively, we will strive to enhance shareholder value and achieve sustainable business resilience. Now turning to our outlook for the year, we remain optimistic regarding the sustained recovery in the domestic economy, consumer confidence, and consumption activity in China, which should provide a further boost to the insurance industry. With an anticipated macro recovery, our improved operational efficiency, our ability to continue attracting new mass affluent consumers, and our efforts in sales conversion and upselling, and in light of the better-than-expected performance in the first quarter, we are now revising our outlook guidance upward and currently expect to achieve a non-GAAP net profit of not less than RMB50 million in 2023.

Operator, Operator

Thank you. The first question comes from Yuyu Zhang from CICC. Your line is open. Please go ahead with your question.

Unidentified Analyst, Analyst

I’ve got two questions. And the first one is about the current product mix. So could you give us some more details on the product mix based on FYP in the first quarter? What’s the proportion of saving products? And the second one is about the growth momentum. We know that previously, China’s insurance regulator has offered insurers to lower estimated times for newly launched products. So what’s our savings product sales momentum in recent weeks? And we noticed that you’ve mentioned in an earlier conference call that the company saw a mild recovery on long-term health product sales in the first quarter. And now we are at the end of May. So is there still a recovery? Thanks.

Kwok Tam, Co-CFO

Thank you, Yu. It’s Kwok here. So regarding your first question on the FYP product mix in the first quarter, I think that we can break it down for you. So we have a total of RMB661 million of FYP. And of that, roughly RMB180 million is coming from protection, which includes long-term health and term life products. So that RMB180 million number represents about 32% quarter-on-quarter growth. So that will give you some sense of the recovery in the long-term health space. RMB340 million is roughly from the long-term savings segment, which includes the increasing whole life category and also the annuity category. So, that number has increased by 50% quarter-on-quarter versus Q4. So roughly around 28% of the FYP in Q1 is from protection, and roughly 51% of the FYP is from long-term savings. So that will be the product mix question. With respect to the second question on the downward revision on the so-called guaranteed return from 3.5% to 3.0% trend and how that impacted sales, I think what we have seen in the second quarter is we are actually seeing increasing momentum of sales in the second quarter with respect to probably imminent transition to the 3.0% product pricing. So I think Q2, we should probably expect to see a larger increase in sales of this product versus Q1. But then going forward into the second half of the year, what we have seen in quarter two to date is that we are seeing a pickup in annuities as they are very much in demand. So this category is actually picking up momentum. In the second quarter, we’ve seen that momentum should probably continue towards the second half of the year when I think the market transitions from the increasing whole life product into annuities. And that’s what we’re expecting to see as an industry trend in China. But then in terms of the product mix for the second half, we probably will be seeing a more balanced mix between protection and savings as likely the early consumption of savings product would mean that there will be more seasonality effect from the first half versus second half in 2023 for the savings product category. So that would be the answer to your second question. Regarding the long-term health product momentum, in Q1, we definitely see a relatively robust recovery from Q4 of last year. Q4 was definitely very challenging from a macroeconomic standpoint in China. So Q1, we see a relatively robust recovery momentum. In Q2, we see that continuing, but probably the pace of the growth would be somewhat more subdued than Q1. But then I think that the long-term health category as an absolute amount for quarter two would probably be more or less around the same level as Q1. But then I think longer-term, we see that with continued recovery in the macroeconomic picture and continued improvement in consumer confidence. We do expect long-term health or protection products to increase in terms of the proportion of the product mix in the second half of the year. So I think that will be the answer to your third question.

Operator, Operator

Thank you. The next question comes from Amy Chen from Citi. Your line is open. Please ask your question.

Unidentified Analyst, Analyst

This is a question from Citi. First, I want to congratulate the management on such significant sequential growth in the first quarter. My first question is about the increase in whole life products. I’m curious about the percentage it represented in terms of FYP and GWP facilitated in the first quarter and year-to-date. As we look toward the third and fourth quarters, what product mix can we expect? My second question is about brokerage income. Year-over-year, it appears relatively flat, yet we observed strong FYP growth in the first quarter. Could this be related to your TO-A channel independent agent channel? Thank you.

Kwok Tam, Co-CFO

Okay. Thank you. So the two questions. I think the first question we have touched upon in the response to the question just from CICC. So the increasing whole life product in the first quarter, I think in terms of our public disclosure, we have lumped together the long-term savings product categories, which include the increasing whole life and annuities as a whole. This category has accounted for 51% of our FYP for the first quarter. If you are asking about the outlook for the rest of the year, I think in Q2, we probably see a higher proportion of FYP coming from the increasing whole life and annuities categories, probably more than 51% in the second quarter. But that would come down in the second half as we transition to the new product pricing landscape. As we all know, from 2.5% to 2.0%. In Q3, we will see probably relatively weak sales of long-term savings in the increasing whole life segment. But then we do see that a complementary makeup from the annuities product as we see that the growth momentum in the annuities category continues to be quite strong in Q2 year-to-date. So regarding your question on the brokerage income, yes, we do acknowledge that the year-on-year growth on the brokerage income side is going to be flat. I think that has to do primarily with the lower commission rate associated with the savings product category from this quarter versus the same quarter last year. So I think that the take rate decrease has been the main contributing factor to the relatively flat performance in brokerage income from last year to this year.

Operator, Operator

Thank you. The next question comes from the line of Securities. Your line is open. Please ask your question.

Unidentified Analyst, Analyst

My first question is, you mentioned that you have deployed an online purchase offline service strategy. So could you elaborate more on this strategy and what do you aim to achieve with this strategy? And my second question is, your major peers have moved towards creating health and insurance or combining medicine and insurance to facilitate customer acquisition. So what are your key customer acquisition strategies? And how do you plan to optimize your customer acquisition cost? Thank you.

Kwok Tam, Co-CFO

Okay. Thank you for your questions. So with respect to the first question on the online/offline strategy, I think we have been telling the market for quite some time that we have always aimed to pursue an integrated model with online customer acquisition and offline customer service as a comprehensive strategy. This year, we will be able to accelerate the development of this finally after the post-COVID era where we can really push things on the ground and deploy human resources across the country. So far, we have already deployed significant human resources on the ground in over 17 potential areas in China. In addition to your traditional Tier 1 and Tier 2 cities, we have further expanded our geographical coverage to places like Hubei, Jilin, Jiangsu, Zhejiang, and Hainan, which represent the top 20 GDP per capita regions of China. These areas are important for us to expand our offline coverage from a service standpoint. To elaborate on our strategy, we have already accumulated 8.7 million customers—paying customers—on our platform. We have now reached a point where we want to further improve our ability to service these customers and upsell them for higher-value products, which includes not only insurance products but also healthcare and eldercare services. With the offline locations, we can have face-to-face interactions with these high-value customers, allowing us to upsell and maximize the long-term value of these high-quality customers. We have been witnessing tremendous success in the last 2 years, starting from relatively lower ticket size protection products to now offering higher premium products. This trend is expected to continue as our customers mature and accumulate wealth. The second element of the strategy is the new To-A and To-C business line that we deployed starting last year, which has already surpassed RMB200 million for the previous year, and now we’re seeing almost RMB100 million in the first quarter. This new business line has gained momentum. With the new offline coverage, this will further accelerate our connectivity in the local regions, where local agents can provide effective service to local customers. That would be my answer to your first question. Regarding your second question on the ecosystem approach, we want to improve not only from an insurance standpoint but also by providing other services like healthcare and eldercare. We have been investing in this regard by trial testing our healthcare services platform internally, and we plan to roll it out in the second half of the year to provide healthcare services, which are higher in frequency and will allow us to extract a larger share from our existing customer base while improving our knowledge about customer consumption patterns.

Operator, Operator

Thank you. Dear Speakers, there are no further questions at this time. I would like to hand the conference over to our management team for any closing remarks.

Harriet Hu, Investor Relations Director

Thank you, operator. On behalf of the Huize 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. Thank you for joining us today. This concludes the call.

Kwok Tam, Co-CFO

Thank you, everyone.

Operator, Operator

That concludes our conference for today. Thank you for your participation; you may now all disconnect.