Huize Holding Limited

Ladies and gentlemen, thank you for standing by and welcome to Huizhe Holdings Limited's third 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 Huizhe's IR website at ir.huizhe.com under the events and webcast section. I'd now like to hand the conference over to your speaker host today, Ms. Harriet Hu, Huizhou's Investor Relations Director. Please go ahead, Harriet.

Thank you, Operator. Hello, everyone, and welcome to our earnings conference call for the third 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 price 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 file links with the SEC. Joining us today are our founder and CEO, Mr. Sunjun Ma, COO, Mr. Li Jiang. Co-CFO, Mr. Minghan Xiao, and Co-CFO, Mr. Rong Tam. Mr. Ma will start the call by providing an overview of the company's performance and operational highlights for the third 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.

Hello, everyone, and thank you for joining with us third quarter 2022 earnings conference call. For the third quarter, Huize reported another set of results that underlies our resilience in the face of an uncertain operating environment characterized by the ongoing impact of COVID-19, a relatively moderate recovery in the consumer confidence, and the deepening consolidation of the insurance industry. During the quarter, we continue to make progress on implementing our strategic roadmap to build an omni-channel digital insurance service ecosystem that integrates agents, businesses, and customers, or ABC, and further refined our competitive age in customer insights, product innovation, and professional insurance services. In the third quarter, Total growth return premiums, or GWP, facilitated on our platform increased by 29.4% year-over-year to RMB 1.3 billion. And our total operating revenue increased by 11.7% year-over-year to RMB 352 million.

From the point of view of insurance, we are in line with the demand of the market. The effect of deepening the layout of the stock market is further extended. In the third quarter, the annual insurance fee increased by 34% to RMB6.8 billion. Among them, the stock market contribution to the new unit insurance fee is about RMB5.1 billion. The same increase has reached 49.3%. The new asset business model and flexible product strategy In terms of product mix,

We have responded to market demand by enhancing our focus on promoting savings insurance products, and this strategy has produced remarkable results. In the third quarter, the total first-year premiums, or FYP, facilitated on our platform increased by 34% year-over-year to RMB $685 million. of which the FYP of savings product amounted to RMB 509 million, a 49.3% year-over-year increase. These results reflect the ability of our asset-light business model and market-driven product offering to successfully sustain our high-quality business growth. Meanwhile, thanks to the snowball effect and the high user stickiness, generated by our strategic focus on long-term insurance products. Our renewal premiums increased by 24.1% year-over-year to RMB 564 million, providing us with a valuable source of stable cash inflows in this challenging macro environment.

Since 2020, we have been continuing to share our long-term business indicators. We are very proud to say that the basic board of the long-term insurance industry has been very stable. On the one hand, the long-term insurance debt ratio has reached more than 90% in the 12 consecutive seasons. The third season is 35%. On the other hand, as of the end of the third season, the platform has accumulated 8.3 million users. The user image has always maintained high quality. Among the users of the long-term insurance in the third season, Two county and above city customers accounted for 65.2%. Average age is 33.7 years old. With the first Lianbao aircraft, the long-term cost of building an army has increased to RMB 6,108. The total cost of building an army is RMB 40,000. In the first seven months of this year, the long-term cost of the 13th month and the 25th month, the average demand rate is respectively higher than 91% and 96%. Maintain the industry.

We have been sharing the operating metrics of our long-term insurance business with investors since 2020, and we are very proud of the solid foundation laid down by this business. In the third quarter, the GWP contribution of our long-term insurance product was 93.9%, remaining above 90% for the 12 consecutive quarters. We have also maintained a high quality user profile as our cumulative number of insurance clients continues to grow, reaching 8.3 million as of September. In the third quarter, about 65.2% of our long-term insurance customers were from higher tier cities with an average age of 33.7 years old. In terms of FYP, The average ticket size of long-term insurance products and long-term savings products were approximately RMB 6,108 and RMB 40,000 in the third quarter, respectively. Our average persistency ratios for long-term life and health insurance in the 13th and 25th months remained at industry-high levels of 95%. 91% and 96% in the first seven months of 2022 respectively.

As of the end of the third quarter, we have cooperated with

106 insured partners to co-develop a wide range of cost-effective and high-quality customized products to stimulate market demand in areas including critical illness, medical, pension, and accident insurance. In the third quarter, the GWP contribution of co-developed products increased by 23.7 percentage points year-over-year to 72.9% Since September, we have launched various customized products, such as Darwin Critical Care No. 7, ,, a customized increasing whole life insurance product, ,, a comprehensive family insurance product, and ,, a comprehensive accident insurance product for children. Of particular note was the launch of Darwin Critical Care No. 7, the latest critical illness insurance product offering in the Darwin Critical Care Series, which offers additional benefits for severe and mild malignant tumors and carcinoma in situ, as well as ICU hospitalization benefits covering major disease outside the list of severe, moderate, and mild illnesses, providing extensive protection for our users and their families.

At the same time, we have continued to advance ABC's digitalized insurance ecosystem strategy logic. Since the opening of the new business line at the beginning of the year at the A-end, we have been achieving remarkable results. In the third quarter, the new insurance fee generated by the A-end business line reached RMB65 million, which increased by 53.3% in the last quarter. In the first nine months of this year, the A-end business line achieved RMB1.2 billion in new insurance fees, We also continue to make progress on executing our three year agents, businesses, customers, strategic business plan.

Our 2A business has achieved pleasing results since its launch at the beginning of the year. The FYP facilitated by our 2A business increased by 53.3% sequentially to RMB 65 million in the third quarter and reached a total of RMB 120 million in the first nine months, becoming a key driver of our future business growth. In terms of customers, we have actively launched promotional activities, including live streaming interactions and value added services customized for different groups of users, such as new parent and high value users, which have enabled us to achieve sales conversion of more than 10,000 users in the third quarter.

We continue to export to insurance companies and other partners, including SCRM system, NLP intelligent inspection system, digitized acceleration engine, intelligent driver's cabin, and other... ...and user growth journey, to provide digital homework in the industry, service sector, and product supply sector of the insurance company. In the first nine months of this year, On the 2B side,

We continue to export various digital tools and technologies to insurance companies with offerings including the Supply Chain Risk Management System and the NLP Intelligent Quality Control System, the Digital Acceleration Engine, and the Business Intelligence Dashboard. Our goal is to drive the digital and intelligent transformation of insurance companies empowering them in the areas of business development, customer service, and product development, and ultimately enabling them to grow their business sustainably. In the first nine months, the total revenue contribution of our technology service business was approximately RMB 14 million. Meanwhile, our capabilities in driving innovation and R&D development have earned industry recognition by being selected as one of the new, distinctive, specialized, and sophisticated SMEs in Sichuan Province in 2022, which highlights our competitive advantages in developing insured products and solutions.

On the other hand, we continue to implement the positive effect. Meanwhile, we continued to reduce our fixed cost base to improve operational efficiencies.

In the third quarter, our total operating expenses decreased by 27.8% year-over-year. In particular, our selling expenses declined by 32.4% year-over-year, driving our selling expense to revenue ratio 10.4 percentage points lower on a year-over-year basis, and demonstrating the great strides we have made in improving our overall operational efficiency. Against the backdrop of China's accelerated economic recovery and the digital transformation of the insurance industry, we believe that by building an omnichannel digital insurance service ecosystem, advancing the OTO integration of our products and services, and strengthening our technology service capabilities, we can sustain our leading position in the digital insurance intermediary business. We will strive to optimize our capital allocation to diversify our business and drive sustainable, long-term, high-quality growth.

This concludes my prepared remarks for today. I will now turn the call over to our CFO, Mr. Ron Tan.

and he will provide an overview of our key financial highlights for the third quarter of 2022.

Thank you, Mr. Ma and Harriet. Good evening, everyone. The third quarter has proved to be a very difficult quarter on multiple fronts. In particular, the ongoing pandemic-related restrictions imposed with lockdowns on a considerable part of the economy has weighed on consumer confidence, income expectations, and as a result, defers demand for insurance by consumers in China, especially for possession products such as long-term health insurance. The lingering uncertainties with respect to the outcomes of the ongoing PCAOB inspections of the audit working papers of Chinese ADR companies and the corresponding potential delisting risk of Chinese ADRs have also led to further dislocations in the soft prices of ourselves as well as our peers. and altogether contribute to an overall extremely challenging capital markets environment. Despite the difficult macro environment, we have been very focused on the execution of our key strategy. On the product front, we continue to focus on driving distribution of savings insurance products, which continues to be welcomed by the consumer market given its relative attractiveness as compared to bank deposits in a declining rates environment in China, On the channels front, our new 2A2C business line continues to deliver strong growth momentum in the offline space, generating in excess of RMB 120 million of FYP already in the first nine months of the year. And on the corporate front, we continue to implement firm-wide cost savings measures with a strong focus on expense control across our business lines. As a result of a key business strategy, we managed to achieve double-digit growth across all of our key metrics. In the second quarter, total GWP increased by 29.4% year-over-year to RMB 1.2 billion, which was driven by the strong growth in FYP of 34% year-over-year to RMB 685 million. And on a sequential basis, FYP in third quarter grew by 41.3%, which was contributed by the continued momentum in a long-term savings insurance product segment. The results again demonstrate the agility of our platform to adapt to the changing regulatory and market environment and the successful execution of our product strategy to focus on the co-development and distribution of the increasing whole life insurance product category in 2022. The highly successful product IP that we have launched, Jinman Yizhou Series, which we co-developed with Hong Kong Life and exclusive to Huizhen's platform, continues to be one of our key top-selling products on our platform during the third quarter. And together with our co-developed retirement annuity products with other insurer partners such as Sun Life Enterprise and Sinate Insurance, the long-term savings insurance product category, excluding annuities, recorded very strong FYP growth of 1.9x year-over-year. Our renewal metrics continue to be robust, with renewal premiums increasing by 24.1% year-over-year to RMB $561 million. Mr. Ma already touched on our sound persistency metric in his remarks, and this continues to demonstrate the relatively high quality of our customer acquisition and the attractive customer profile that our digital distribution ecosystem brings to our insurer partners during this difficult macro environment. And as of the end of the third quarter, our customer base has further grown to reach the $8.3 million mark, and customer lifetime values are still showing consistent accretion to an average ticket size of well over 40,000 RMB per long-term savings insurance product distribution in the third quarter. Along with the growth in GWP and FYP, our total operating revenue increased by 11.6% year-over-year to RMB $352 million in the third quarter, As mentioned in the previous quarter, we continue to place strong emphasis on the optimization of our overall corporate cost structure and to further drive operational efficiencies. In the third quarter, our operating costs overall were RMB $248.7 million, which represents an increase of 6.7% year-over-year, and as a result, our gross margin has improved by 3.3 percentage points from 26% to 29.3%. Our continuous focus on reducing firm-wide costs and expenses have resulted in a 24% year-over-year decrease in our SG&A expenses, while our R&D expenses also decreased further by 45% year-over-year. For the third quarter, we recorded a net loss of RMB $10.5 million, which narrowed significantly by 87% from the same period of last year, reflecting both our top-line growth this quarter as well as the improved operational efficiencies. At the end of the third quarter, as we continue to maintain a strong liquidity position, as evidenced by our combined balance of cash and cash equivalents of RMB 307 million, we have continued to repurchase shares from the open market under our existing share repurchase program. And as of the end of the third quarter, we have repurchased an aggregate of 382,000 ADSs. Forward to our ADBC business plan, will enable us to build and scale an omnichannel digital insurance service ecosystem, which will place us firmly in the top tier of insurance intermediaries in China, becoming a digital partner of choice for our upstream insurer partners as we move into an age of insurance distribution for new generation consumers, which demands innovative solutions on the product side, as well as a seamless digital experience and professional customer service. We believe that the underlying long-term secular growth trends for China's insurance industry remains firmly intact, and especially for an increasing share of product distribution to be contributed by digital intermediaries like ourselves, providing tremendous opportunities for us to allocate capital to create shareholder value and sustain a high-quality long-term business growth. Lastly, as disclosed in a recent announcement, we would also like to make a quick note on the recent notice that we have received from the NASDAQ listing office with respect to the compliance with continued listing requirements due to our share price being below $1 US. We would note that many companies currently listed on the NASDAQ market and especially our peers in the China ADR space are also facing a similar situation due to the current dislocations in the market valuation due to geopolitical and PCAOB related risks. We would note to investors that common market practice adopted by companies to regain compliance include an adjustment in the ADS to common share ratio or a reverse stock split, which would result in the share price regaining compliance with relevant NASDAQ requirements. We would continue to closely monitor market conditions, which is expected to continue to be quite volatile, and we could implement the aforementioned measures within the 180-day grace period allowed under the NASDAQ rules. We reiterate that the receipt of the notice of NASDAQ does not affect the company's business operations at all. With that, it concludes our prepared remarks for today, and we'll now open up the call to Q&A. Thank you, and over to you, operator.

Thank you. At this time, if you'd like to ask questions, please press star 11 on your telephone and wait for a name to be announced. Once again, to ask question, please press star one one and wait for a name to be announced.

One moment for the first question.

First question comes from the line of Yu Yu Chang of CICC, please proceed.

Hello, Guan Yicheng. Thank you for the opportunity to ask me this question. I'm Zhang Yiyu from Zhongsheng. We have two questions about the ABC strategy of the company. The first question is about the image of the A-end agent that the company is working with. How will it promote the future and cooperate with more high-quality agents? The second question is about the expectation of the company on the B-end business. How will it contribute profits in the future? I will briefly translate it. We have two questions regarding the ABC strategy. And the first one is in terms of the 2A segment, what's the profile of the agents who currently have the partnership with you? By what means can you advocate the collaboration with more high-quality agents under your ABC strategy in the future? And the second question is what do you expect of your 2B segment and how will this part of business contribute to earnings in the future? Thank you.

Thank you for the questions. It's Ron here. So with regards to the first question on the 2A business, I think right now we have been running the 2A2C business for 11 months now since the start of the year. I think that we have been targeting the experienced insurance agents from the marketplace. And a lot of these agents carry with them over five years of experience. with respect to life and health insurance policy sales. And most of these agents that we target could complete the entire customer service or customer journey from the customer acquisition itself to business development and to assistance with underwriting and post-policy administration and in-force services. service assistance, et cetera. So we believe that the HWISM model of empowering the independent agents have so far proven to be a success. I think it really has to do with our advantages in providing a comprehensive product supply matrix through our SaaS platform, and we can enable and empower the agents to via the mature digital tools that we have been deploying in-house for our in-house consultants. And basically, we're exporting these tools to the 2A business line independent agents in the marketplace. So I think that's the answer to your first question. With regard to the 2B segment, I think that since the IPO, we have been deploying a meaningful capital in developing the technology service capabilities of Fraser. Since the start of this year, we've started to export these services to our upstream insurer partners. And so far, we've signed up a few reputable names such as Typing Life and Great Wall Insurance as well. So the tools that we're deploying in-house with respect to customer relationship management to compliance and to underwriting assistance and claims assistance, etc. All these tools have been exported to the insurance companies that have been signing up for our 2B business as a client. And I think that right now, for the first nine months, we already achieved a double-digit million of revenue, $13 million overall. I think that this is expected to grow at a relatively high rate over the next two or three years as we start to scale the business with the word of mouth in the market, given the success that our initial seed clients are having. We believe that over the next two or three years, we'll be able to roll out more and more products to the marketplace and to accelerate the adoption by other insurance companies as well. Given that the investment has been made already in the last two years, we do expect that the 2B business is going to be relatively higher margin versus our core insurance distribution business. And we do expect that we will be able to generate positive cash flow in the next year.

Thank you.

Thank you for the questions. Once again, to ask questions, please press star 11. Next question comes from Michelle Ma of Citi. Please proceed.

Thank you. Thank you, management team, and congratulations on such a good result. So my first question is a follow-up question. So I'm wondering for our offline agents, what's currently their average monthly income? Could you give us a sense on this? Second question is about the outlook. So we noticed for the fourth quarter you mentioned we will achieve quarterly profitability in the fourth quarter. And we noticed that the cost-income ratio has improved very impressively. So just wondering this sustainability and what's the outlook for next year's profitability? You mentioned we will see positive cash flow, but how about the profitability? Do you have any view on the revenue growth and expense growth next year? Thank you. Thank you, Manager Chen, for giving me this opportunity to ask questions. I would also like to thank Mr. Ma, Mr. Rong, and Mr. Harrier for their introduction. It is also a great pleasure to see that we have made a great progress in the financial state of the 3G network. Our losses have also been greatly compressed. I have two questions. The first one is a question that follows the previous one. I'm curious to know what the monthly income of our offline agents is like. They should be in a one-way city. I'd like to know what their monthly income is like. uh uh uh uh Okay, thank you, Michelle. Thanks for joining again. Appreciate it. So the first question on the 2A business

the offline agents and the average, I guess, productivity or take-home kind of salary. I think it all depends on the individual agent's own productivity. But I think overall, on average, I would believe that the productivity of the agents have been relatively robust, which will be on a comparative level as to our own in-house quasar consultants. So as a result, I believe that the take-home pay on a monthly average basis will be in excess of RMB 10,000 level. So I think that that level compares quite favorably with respect or in comparison with the offline brokerages or agencies or even the type agency agents within the incumbent insurance companies themselves. So I think that will be the answer to the first question. And yes, most of the agents are located in the Tier 1 and Tier 2 cities. We have always been quite focused on the mass affluent market sector within China. So the 400 million or so middle class consumers and therefore the 2A2C business line will also be in sync with our core work region platforms focus area in terms of the end user market. So the second question on the profitability outlook. So yes, in Q3, we have shown substantial improvement, narrowing losses down to almost a break-even level. We are on course for a profit-making quarter for Q4. And for next year, I think that we do see a very encouraging sign and very promising news coming out from China today. It's very timely for us to have this for this call tonight with the COVID zero policies seemingly to be pivoting towards reopening. And I think the wider investment community is having a consensus that reopening could happen in the spring of next year. So with that kind of backdrop and with consumer confidence coming back and we have a macroeconomic recovery, we do believe that the growth has been reset this year. And then we will be going back to a trend growth kind of level for the next few years. And I think that number should be something around like 30% CAGR for the next two or three years. It's a reasonable starting point. So with that, and then also you can see that our growth margins for this quarter is around 30%. And I think our growth margins are relatively stable. And next quarter, we will expect to see meaningful renewals contributing to the bottom line because last year in Q4, we had a very huge quarter due to the regular change in the savings product distribution, as we can all remember. So Q4, we will be benefiting from that, will be benefiting from the renewal spike from the corresponding quarter from last year. And then I think for the whole of next year, we should be targeting at meaningful mid to high single digit kind of net margin as the starting point. So I think that would be my answer to your second question, Michelle. Thanks.

For the questions, one moment for the next question. Our next question comes from the line of Connie Liu of China Renaissance. Please proceed.

Hi. This is Connie from China Renaissance. Thanks, management, for giving me the chance to ask questions. And I have one question about our product. Could you please share with us about more details of the new products launched in the third quarter this year? And is there any plan in the fourth quarter or in 2023? Thank you.

Thank you. Thanks for joining the call today. I appreciate it. So the question on new product launches, I think Mr. Ma mentioned in his opening remarks that we have launched quite a few products in the third quarter. And this revolves around the customer lifetime value and on the entire spectrum from health to savings to pension to annuities and also for children healthcare. So next year, I think we also intend to iterate our product launches. I think the average timeframe that we look at for upgrading or launching a new product in each of the various subcategories is about two to six months as we work with different insurer partners and launch various products specializing on different subsectors of the market. And so product development and product launches is bread and butter to Asia's business plan. And this is something that we would be looking to innovate as we collect more and more products customer insights from our A and B and C business lines. And with that, we will feed back into our product development team, which will work with our insurer partners on the upstream to launch new products on all the different segments. As Mr. Mazel mentioned, in the third quarter, we have achieved a very meaningful increase in the proportion of the contribution from our customized products to our overall FYP. And so I think that is also in evidence that we continue to have a very strong relationship and deep engagement with our insurer partners on the product front. I hope that answers questions. Thank you.

Thank you for the questions. There are no more questions from the line. I would like to call back to the management for closing remarks.

Thank you, Operator. So on behalf of Quasar's management team, we would like to thank you for your participation in today's call. And if you require any further information, please feel free to reach out to us. Thank you for joining us today. This concludes the call.