Huize Holding - Q4 2022
March 27, 2023
Transcript
Operator (participant)
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'd now like to hand the conference over to your speaker today, Miss Harriet Hu, Huize's Investor Relations Director. Please go ahead, Harriet.
Harriet Hu (Director of Investor Relations)
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 websites 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 call by providing an overview of the company's performance and operational highlights for the fourth quarter and full year of 2022. Mr.
Tan will 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 (Founder and CEO)
[Foreign language]
Speaker 7
Hello, everyone, thank you for joining Huize's fourth quarter and full year 2022 earnings conference call. In the fourth quarter, COVID outbreak 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, Huize 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 omni-channel digital insurance service ecosystem that integrates agent, business, and customers or ABC. In 2022, total gross written premiums, or GWP, facilitated on our platform remained stable at RMB 4.9 billion, despite a high base for comparison.
In line with our guidance in the third quarter, we achieved non-GAAP net profit of approximately RMB 14 million for the fourth quarter.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
In terms of product mix. Although the pandemic limited our growth in terms of total first year premiums or FYP facilitated on our platform, we continued to see heightened public health awareness drive a rebound in the demand of health insurance. In the fourth quarter, the FYP 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 GWP contribution of our long-term insurance product was 96.2%, remaining above 90 for the 13th consecutive quarter. Renewal premiums also increased substantially by 80.8% year-over-year to more than RMB 1 billion, which highlights our operational resilience amidst a complex business environment.
In terms of user profile, 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 FYP was approximately CNY 3,625. While that of long-term savings product increased substantially to approximately CNY 46,000 during the quarter. As of December, our average persistency ratios for long-term life and health insurance in the 13th and 25th month remained 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 Xinxi Ren Sheng Premium, an increasing whole life insurance product designed to satisfy the needs of our users in multiple scenarios, including children's education, retirement, and inheritance. We also entered into a strategic partnership with Pramerica Fosun and launched the Xinghai Yinjia 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, Chang Xiang An Long-Term Medical Insurance. We look forward to accelerating our cooperation with Ping An Health Insurance in the field of insurance product customization and promotion, customer engagement, and health management service. Meanwhile, our Darwin Critical Care Series was once again honored with the China Insurance Innovation Ark Award for 2022. In the fourth quarter, our innovative critical illness product, Darwin Critical Care No. 7,
Harriet Hu (Director of Investor Relations)
...was named one of the top 10 recommended commercial health insurance products in China. For the full year 2022, the GWP contribution of co-developed products increased by 4.6 percentage points year-over-year to 64.8%, which underlines our ability to identify market opportunities based on our in-depth customer insights and offer a full range of insurance products across all scenarios.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
In 2022, we achieved effective cost control and continued to implement our group-wide organizational structure optimization, driving a considerable improvement in our growth 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 provided claim assistance service to 70,000 customers, with the total claim settlement amount increasing by 8.8% year-over-year to CNY 620 million.
Across these numerous user interactions, we achieved a 92% customer satisfaction rate according to our 2022 Customer Service Report.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
During the year, we made substantial progress on executing our three year ABC strategic business plan to build an omni-channel digital insurance service ecosystem. In a 2C segment, we have classified our target users into different groups and adopted a unique business strategy for each group. These differentiate service strategies have enabled us to deepen our engagement with existing customers, driving repeat purchase of new insurance products, and providing upselling opportunities to optimize 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 users and female users. Through these 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 large number of young middle class families, which should become a cornerstone that sustains our long-term development. Going forward in the 2C segment, we will build a business model based on systematic operations and standardized sales processes and strengthen the service capabilities of our localized sales teams, facilitating our online-to-offline integration through enhanced operational and sales capabilities.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
In the 2B segment, we continued to export various digital tools and technologies to insurance companies. In 2022, the total revenue contribution of our technology service business reached RMB 50.2 million. In the 2A segment, we launched our new user management system, Hotlink 1.0, which enables agents to accurately identify users, quickly view user profiles on a mobile device, filter and target users based on profile similarity, and share information through individual or group messaging. This system will enhance our core capability to empower insurance agents in all aspects of their business. FYP, facilitated by the 2A business, increased by 26.7% sequentially to RMB 82.6 million in the fourth quarter, and exceeded RMB 200 million for the full year.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
In 2023, we will focus on our localized deployment plan, aiming to establish professional and high-quality offline service teams in 16 key regions nationwide. We will also strive to boost user activity through increased engagement with high-value users and enhance our core strengths through technology upgrades, with particular focus on optimizing our transaction system, user management system, and insurance policy custodian system.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
In 2023, we will focus on our localized deployment plan, aiming to establish professional and high-quality offline service teams in 16 key regions nationwide. We will also strive to boost user activity through increased engagement with high-value users and enhance our core strengths through technology upgrades, with particular focus on optimizing our transaction system, user management system and insurance policy custodian system.
Cunjun Ma (Founder and CEO)
[Foreign language]
Speaker 7
This concludes my prepared remarks for today. I will now turn the call to our CFO, Mr. Ron Tam, and he will provide an overview of our key financial highlights for the fourth quarter and full year of 2022.
Ron Tam (Co-CFO)
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 recovery in 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 RMB 531 billion in Q4, which is down 16.3% sequentially. Against the backdrop of macro challenges and a sluggish industry recovery, we are very pleased to still achieve a 16% quarter-on-quarter increase in total GWP facilitated on our platform, totaling RMB 1.4 billion in Q4. To close out the full year 2022, with total GWP facilitated on our platform of RMB 4.9 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. 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 omni-channel distribution platform.
Our new 2B/2C business line maintains strong growth momentum in the offline market, generating a total FYP of more than CNY 200 million in 2022. 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 macroeconomy and consumer consumption recovers in the post-pandemic world. 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-over-quarter growth in renewal premiums, which increased 83% to CNY 1 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%, 96% as of December respectively. The average ticket size for our long-term savings insurance products was approximately RMB 46,000 in Q4. These metrics not only reflect the high quality and LTV potential of our 8.4 million strong customer base, but also highlight our efforts to successfully deepen our engagement with users existing 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 and especially with the pandemic effect on raising consumers' awareness of the need to procure health insurance. For this, we will continue to invest heavily in co-developed market-leading long-term health insurance products, such as our Darwin Critical Care 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 the Q4 was CNY 258 million, down 27% sequentially. Nonetheless, we continue to focus on tightening marketing channel costs, optimizing our group-wide organizational structure, and improving operational efficiency.
As a result, our operating costs for Q4 decreased by 78% year-over-year to CNY 162 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 CNY 8 million and CNY 14 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 our combined balance of cash and cash equivalents of CNY 277 million. We have continued to repurchase shares on the open market under our existing share repurchase program.
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 continue to demonstrate the confidence that we have in our business model and our long-term growth prospects. Going forward, we'll further scale our omni-channel 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, striving to strategically allocate capital to create shareholder value and sustain our long-term business growth. Turning to our outlook for the year. At this time, we're cautiously optimistic about a sustained recovery in the economic activity, which should improve customer confidence and consumption in China. The complex external environment and geopolitical tensions will continue to apply challenges to 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 in acquiring 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 CNY 30 million in 2023.
Before we conclude our prepared remarks for the call, I would like to provide a quick update on a 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. With that, we will now open up the call to questions. Thanks. Over to you, operator.
Operator (participant)
Thank you. To ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Please stand by while we compile the Q&A queue. Our first question comes from the line of Yuyu Zhang from CICC. Please go ahead. Your line is open.
Yuyu Zhang (Analyst)
[Foreign language]
Speaker 7
I have two questions. The first one is related to our operating strategy. This year will you put more emphasis on growth or our profitability? What business goals do you set, and then how to achieve them? The second one in terms of the AI technology. We've noticed that digital technology has announced to connect Baidu ERNIE Bot. I'm just wondering how AI can affect insurance sales business. Could you share some more color on this? Thanks.
Ron Tam (Co-CFO)
Hey, thank you. It's Ron here. Two questions from your side. The first one regarding the business strategy for this year. I think clearly, we are seeing the end of the pandemic towards the end of the last quarter of last year. With that, we're seeing that the reopening of the Chinese economy has seen the consumer recovery in everyday consumption in the first quarter. I think we're also seeing initial effects of that spilling over to the insurance industry. In the first quarter, we're seeing some modest recovery on a year-on-year basis across all business lines.
With the pandemic effect on raising people's awareness on procuring health insurance for themselves and the families, I think we are seeing a structural long-term growth to be remaining intact with the improved awareness. I think in the product perspective, we will continue to very focused on developing, you know, valuable money propositions for the broader market. I think the recent announcement that we have with Ping An Health Insurance is a very good example of that. We will continue to iterate and upgrade our product matrix and co-develop products with leading insurance companies. Now that we have a new strategic collaboration with Ping An, I think that will be very positive for the product side of things.
I think your question on the growth versus profitability, I think this year will be cautiously optimistic on the growth prospects for the economy and the industry, as I just said before. I think the focus for the organization and I think for the industry overall will be very much on the profitability side. The bottom line of the P&L will be the main focus for this year. I think we have just given out clear guidance for the full year 2023 that our profit will be no less than CNY 30 million, which states our clear intention on the focus on bottom line profitability for this year. That would be question 1.
For question two on AI deployments, and Baidu, I think we have been investing heavily in our R&D over the last two and a half, three years, and we have been consistently telling the market. Throughout the years, we've also been able to, you know, incubate AI tools and technology to increase efficiency throughout our or in our entire operational processes. For example, on the front end on CRM, and on, you know, we have an AI proposal engine that enables our consultants, et cetera. I think these products that we have developed in-house is an example of that, and that's basically already our in-house AI investment deployment.
Now that we have, you know, entered 2023 under the heavy influence of the AI capabilities of, for example, ChatGPT and Baidu, we are definitely going to explore and trial test the develop deployment of these technologies in our in-house business processes. For Baidu, we did announce that collaboration and we're already doing some trial testing internally, as well as ChatGPT. We have already now done some trial testing in-house on our product development and R&D personnel to utilize ChatGPT on improving significantly the coding and programming work streams. We're now already seeing some initial results on that.
I think on the product development side, definitely the AI will also be very helpful in terms of improving efficiency, and thereby even further improving our operating leverage in the next few years. That would be all. Thank you.
Operator (participant)
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, press star one and one again. We kindly ask you to state your question in Chinese first and then translate it into English. Please stand by. Our next question comes from the line of Amy Chen from Citi. Please go ahead. Your line is open.
Amy Chen (Analyst)
The first question is regarding latest regulatory notice regarding the self-inspection of the online marketing of insurance agents. We're wondering what would be the potential impacts for Huize sales going forward. The second question is relating to Huize's products. We see that more and more smaller insurers are actually exiting the online insurance space. We see that Huize has been starting to collaborate with relatively larger scale insurers. We wanna understand more about the difference in terms of commission take rate and product design regarding to these new products. Regarding to the full year of 2023, is there a guidance for premium facilitated? Thank you.
Ron Tam (Co-CFO)
Hey, thanks, Amy. It's Ron here again. Thanks for joining again. The first question on the regulatory, you know, the self-inspection notice. I think this is something that we have been taking seriously ever since the first regulation came out on the online insurance, you know, marketing, you know, business, you know, compliance requirements two years ago. We have been continuously adapting to the regulatory changes. This is something that has not been. It's definitely not new to us. In fact, we have basically over the last two years, we have been adjusting our business processes. We have been strengthening our controls of our third-party channel partners in terms of compliance requirements.
We have clear guidelines and clear requirements for our channel partners to obey and to, you know, abide by in order to cooperate with us on a compliant manner. We have been holding compliance very highly throughout the last 2 years. I think this self-inspection is just an execution step by the regulators based on the earlier regulatory framework. It is not a new regulatory requirement per se, it's just an execution step. For Huize, because we have been maintaining high standards of compliance throughout our whole ecosystem, we are relatively confident that first of all, we'll be fully compliant with the regulator's self-inspection requirements. We will also encourage our third-party channel partners to cooperate fully.
We should come up from this three-month inspection, which starts from April third and to finish by June third. We should come out from this self-inspection even stronger from a competitive standing versus some of our peers in the industry. Just because of the higher compliance standards that we have here at Huize. I just wanna note that also to give you a sense of the regulatory compliance that we have. We're actually one of the only two insurance intermediaries in China which is operating on the online context.
It's us, Huize, and Tencent, which has voluntarily connected our back-end system to the regulator's EAST System, which mandates a real-time sharing of transaction data with the regulatory body. I think we are one of the very few market participants that are able to do this, and I think this is a very strong testament as to our compliance with the regulations. That was the first, that would be the first question. The second question on the future development of our business vis-à-vis the upstream insurance partners.
I think that, yes, I think the Ping An Health Insurance is a very good example of now that we are moving into a post-pandemic world, and also that, you know, the more stringent stringent requirements on the regulator side would mandate that we would be working even more now with the mid-size or larger size insurance companies in the market. Ping An Health Insurance definitely is a very strong first step in this foray. And, you know, the long-term health insurance product remains to be a very attractive market segment for China.
I think that working with Ping An definitely will give us a very strong advantage in the market in providing, you know, good value for money, and customer-centric products, which will help address some of the vacuum in the marketplace right now. That will be the question number 2. For full year guidance, I think that again, we are giving a clear guidance on the profitability side of the P&L. For top line, I think we are cautiously optimistic that with continued and sustained macro recovery, we should see, you know, modest growth in the premium facilitated this year.
Operator (participant)
Thank you.
Harriet Hu (Director of Investor Relations)
Thank you. That is very clear.
Operator (participant)
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.
Rick Zhao (Analyst)
The first question is that the regulatory is doing research on reducing the pricing rate. What might be the potential impact of the company and any preparation from our side? second question is that with the China's economy and the consumer recovery, have we seen a better selling trend on protection products like,
Ron Tam (Co-CFO)
Thanks, Rick. Thanks for joining. welcome you to the. orry. I think the first question on the pricing front, yes, I think that, we do note that the regulators are now looking into, maybe, adjusting the pricing rates on the products. 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, to reach the end of their life cycle. I think that that might be, translate into 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 will actually should be a net positive for the company because we are well-positioned in terms of the product supply side with a very good market-leading products that we can facilitate to the market. For medium to longer term, I think that because we have always been very focused on co-developing, you know, 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, you know, version, maybe post the pricing rates, you know, regulatory kind of changes. I think we are fully anticipating some of these changes going into the second half this year and 2024 onwards.
With that, I think that again, because of the way that we have been operating, with a very clear focus on, you know, middle class, mass affluent, families in China, I think that the good quality customer base and the ability that we can acquire a quality new customers will provide us an upper hand in terms of, you know, negotiating and working with the larger, mid-to-larger sized insurance partners to help co-develop new versions of these savings products and, you know, quick health products to the marketplace to, you know, adapt to the changes in the regulatory side. I think that will be the first question.
Second question. I think I told the other analysts earlier on the call, we are seeing some modest recovery in Q1 on a year-on-year basis, actually, quite strong versus Q1 of last year. We are still cautiously optimistic. I think the broader external environment is definitely very challenging right now as we speak. I think geopolitical tensions remain extremely tight. Are still a lot of uncertainties on the exports, and the, and I think that will also have some spillover effect on the, you know, SMEs in China and so forth into consumer confidence.
I think Q1, we are seeing modest and healthy recovery across the key product segments, i.e., long-term health and long-term savings products. I think that we should be hopeful for a modest rebound in the first half this year. Thank you.
Operator (participant)
Thank you. There are no further questions at this time. I'll hand the call back to you for closing remarks.
Harriet Hu (Director of Investor Relations)
Thanks, operator. Harriet here. 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 Huize IR team. Thank you for joining us today. This concludes the call.
Ron Tam (Co-CFO)
Thank you, everyone. Have a good evening.
Operator (participant)
This concludes today's conference call. Thank you for participating. You may now disconnect.