Q3 2023 Huize Holding Ltd Earnings Call
Participants
Kang Liu; IR; Huize Holding Limited
Cunjun Ma; Chairman & CEO; Huize Holding Limited
Ronald Tam; Co-CFO; Huize Holding Limited
CoCo Gong; Analyst; Morgan Stanley
Zeyu Yao; Analyst; China International Capital Corp Ltd
Amy Chen; Analyst; Citi
Presentation
Operator
Ladies and gentlemen, thanks standing by, and welcome to the Huize Holding Limited third-quarter 2023 earnings conference call. (Operator Instructions)
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 webcasts.
I'd now like to hand the conference over to your speaker host today, Mr. [Kang Liu], Huize's Investor Relations Manager. Please go ahead.
Kang Liu
Thank you, operator. Hello, everyone, and welcome to our earnings conference call for the third quarter of 2023. Our financial and operating results were released earlier today and are currently available on both our IR website and 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 properly 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, Minghan Xiao; and Co-CFO, Mr. Ronald Tam. Mr. Ma will start the call by providing an overview of the company's performance and operating highlights for the third quarter of 2023, and 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
(interpreted) Hello, everyone, and thank you for joining Huize's third-quarter 2023 earnings conference call. In the third quarter of 2023, the macro economy gradually recovered with economic activities showing signs of improvement. However, international relationship challenges persisted and capital markets erratically experienced fluctuations.
The insurance industry continue to deepen product structural adjustment and transformation. The assets of the insurance companies were primarily affected by the continuous impact of the stock market downturn, declining interest rates, and ongoing impairment losses; resulting in adverse impacts to the overall industry investment income.
In the first three quarters, the net profit of the life insurance industry generally shown a year-on-year downward trend. The market cap is experiencing ups and downs, but is on a long-term positive path towards recovery. Amid these external uncertainties, we're focused on leveraging our competitive edge in product innovation, omnichannel distribution, customer acquisition capabilities, and high quality customer profiles and reported another set of solid results.
In the third quarter, total gross written premiums or GWP facilitated on our platform reached RMB1.25 billion, and we recorded total revenues of our RMB290 million. Our GAAP net profit increased 43% sequentially to RMB20.17 million, and we achieved our fourth consecutive quarter of non-GAAP net profits with RMB18.49 million in the third quarter.
In terms of product mix, we continue to leverage our diversified product offering and solid omnichannel distribution capabilities. First year premiums or FYP facilitated on our platform reach RMB640 million in the third quarter. Across the first nine months of 2023, our FYP has increased by 54% year over year to RMB2.2 billion.
The FYP of our long-term health products increased by 8% year over year to approximately RMB100 million in the third quarter. Our savings products maintained strong growth momentum during the quarter. With the FYP of our annuity products tripling year over year to RMB120 million, we are seeing a strong snowball effect as a result of our strategic focus on long-term insurance products and a high stickiness of our users.
Our renewal premiums in Q3 reached RMB600 million, up 7% year over year and 25% sequentially, generating steady cash flow to support our resilient business performance. Moreover, the GWP contribution to long -- of long-term insurance products was 90.9%, marking the 16th consecutive quarter, where this figure has exceeded 90%. Meanwhile, the continued recovery of the domestic economy boosted demand for short-term health, P&C, and accident insurance products in the third quarter. As a result, the FYP of our short-term insurance products increased by 50% year over year to RMB110 million.
As of the end of the third quarter, our cumulative number of insurance clients reached 9.12 million, representing an additional 223,000 new customers. Among clients who purchased long-term insurance in the third quarter, 67.5% were from higher tier cities and their average age was [43.9] years old, reflecting our focus on young, loyal, and high-quality customers.
In terms of FYP, the average ticket size of long-term insurance products was approximately RMB4,600, while the average ticket size of savings products was approximately RMB50,000, up by 23% year over year. As of the end of August, our cumulative persistency ratios for long-term insurance in the 13th and 25th month remain at industry high levels of more than 95%.
As of the end of the third quarter, we have cooperated with 121 insurer partners. Meanwhile, we continue to co-develop various cost-effective and high-quality customized insurance products with our insurer partners. Since September, we have launched Xiao Tao Qi No.2, our customized child critical illness insurance product; and Guardian Critical Care No.6, a customized multiple benefit critical illness insurance product.
We also partnered with China Pacific Life Insurance to jointly launch [Jin Man Yi Zu] premium and increasing whole life insurance product with the increasing retirement plan of the millennials. We recently launched two annuity products; Dajia Hui Xuan and Jin Man Yi Zu No.5, to help younger customers develop sustainable, long-term wealth management, and retirement plan.
We strive to provide comprehensive protection for our clients and their families through a broad range of product offerings, including insurance products for children and the elderly as well as various long-term life insurance products and health insurance products.
In the To-A segment, we continue to empower insurance agents with innovative technologies. During the period, we upgraded our Relink system with new functions, providing automated opportunity, identification, and alerts; helping business consultants assess the insurance agents more effectively and efficiently. The upgraded Relink system is currently able to identify 31 business scenarios and [108] types of business opportunities.
In the third quarter, FYP facilitated by the To-A business reach RMB89.65 million, up by 38% year over year. In the first nine months of 2023, the FYP facilitated by the To-A business amounted to RMB320 million, surpassing the total FYP facilitated by this segment in the whole year of 2022.
In the To-C segment, we remain committed to our customer-centric approach and continue to provide high-quality and effective services that meet our customers' diversified needs across various insurance segments.
In the third quarter, we continue to hold various brand promotions and customer engagement activities, aimed at attracting new users, activating existing users, and engaging high lifetime value users.
We successfully reached more than 50,000 users through these efforts and achieved more than 30,000 sales conversions.
In the third quarter, we continue to strengthen our user engagement efforts and enhance our upselling capabilities to maximize the lifetime value of our customers.
In the third quarter, 38.4% of our long-term insurance product customers were repeat purchases from existing customers, up 4.7 percentage point year over year, reflecting the stickiness of our client base. This high level of customer loyalty has helped stabilize our revenue stream and lower our customer acquisition costs.
In the third quarter, our gross profit margin increased by 6 percentage point year over year to 35.3%. Meanwhile, the company's organizational efficiency continued to be optimized, driving a [27%] year on year decrease in total operating expenses. In particular, we reduced our general and administrative expenses by 50% year over year, resulting a 5-percentage-point decline in the G&A expenses to total revenue ratio, demonstrating overall improvement in our operational efficiency.
Going forward, we will leverage our in-depth customer insights to develop a broad range of innovative customized products that satisfy the wide spectrum of our customers' needs. From health care, accident, and retirement protection through financial and asset planning; we are committed to fostering a win-win dynamic between insurance companies and insurance customers through our digital products and service platform. At the same time, we will seize the opportunities presented by the industry's digital transformation, deepen the application of digital technology in finance, and further promote the O2O integration of our insurance service ecosystem. This aims to empower agents and teams with technology, facilitating high-quality development within the industry cycle.
This concludes my prepared remarks for today. I will now turn the call to our CFO, Mr. Ronald Tam, who will provide an overview of our key financial highlights for the third quarter.
Ronald Tam
Thank you, Kenny, and Mr. Ma, and good evening, everyone. In the third quarter, China's insurance market has entered a transitional phase with respect to the cost structure following the suspension of 3.5% products from August 1. Despite the significant industry-wide challenge, the total GWP facilitated on our platform has remained fairly stable year over year at about RMB1.2 billion in third quarter. Thanks to the resilience of our omnichannel distribution platform, integrating online and offline channels, a large established and high-quality customer base, and a strong insurance product (technical difficulty) [and the vision and] capabilities that we have.
We are consistently acquiring new customers more efficiently with 223,000 net new customers added to the ecosystem in Q3, bringing the total number to more than 9.1 million at the end of the quarter. During the quarter, we continued to record a non-GAAP net profit of about RMB1 -- RMB18 million, marking our fourth consecutive quarter of profitability. This strong bottom-line performance is being driven by the successful execution of our key business strategies.
First, we maintain our steadfast focus in long-term insurance products with GWP contribution from these products remaining at above 90%.
Second, we continue to empower insurance agents through our omnichannel distribution platform, which product offerings and advanced technologies. To-A, To-C business line continued to deliver robust growth, generating total FYP of RMB90 million, representing a year-over-year increase of 38%.
Third, in our direct To-C segment, we continue to target high-quality [mass affluent] young consumers and drive upselling opportunities across our customer base.
In terms of FYP that we purchase ratio of our long-term insurance products increased by about 5 percentage point year over year to 38.4% in Q3.
Lastly, we continue to focus on boosting operational efficiencies throughout our business, and that's reflecting improvements in our gross and operating margins.
Key highlights and takeaways from our operating results include the following. Number one, total GWP increased by 32% year over year during the first three quarters of 2023, of which first year premiums and renewal premiums increased by 54% and 16% year over year, respectively.
Two, our persistency ratio for long-term life and health insurance remained at an industry high level. As of August 13 and 25, month persistency ratios stood at about 95%.
And third, the average ticket size for long-term savings insurance products increased by 23% year over year to above RMB50,000.
These positive metrics continue to reflect a high-quality customer profile and our relentless efforts and success in tapping into the long-term lifetime value potential of our customers.
In the third quarter, we sustained our market leading position in long-term insurance products. The FYP of a long-term health products increased by 8% year over year to RMB104 million, while the FYP of our annuity products more than tripled year over year to RMB116 million. We will continue to pursue a balanced product mix between the long-term health and savings categories to satisfy our evolving customer needs.
We remain focused on tightening marketing channel costs and optimizing our organizational structure to improve product margin and efficiency. As a result, our operating costs in Q3 decreased by 24% year over year to RMB189 million, leading to a strong improvement in gross margin to 35% as compared to 29% over the same period last year, primarily driven by increased customer acquisition efficiencies and repurchases by existing customers on our platform.
In Q3, our total operating expenses continued to decrease, falling by 27% year over year and our operating expense ratio improved to 29% in Q3 from 33% in the same period of last year. And our GAAP and non-GAAP net profit figures were possibly RMB20 million and RMB18 million in Q3.
As of the end of the quarter, we continue to maintain strong liquidity as our combined balance of cash and cash equivalents increased to RMB258 million, and we have continued to repurchase shares from the open market under our existing share repurchase program. And as of the end of the September quarter, we had repurchased an aggregate of approximately 1.1 million ADSs to date, which continue to demonstrate our management's confidence in the business model and long-term growth prospects.
Moving forward, we'll continue to deepen the financial applications of generative AI, striving to enhance our product innovation and upselling capabilities. We will further strengthen the integration of our online to offline ecosystem and empower our agents to acquire high-quality customers and engage with clients more efficiently and effectively.
We will also continue to drive improvements in operating efficiency and optimize resource allocations across the business. We remain committed to expanding our market share and solidifying our position as a top-tier digital insurance product and service platform in a home market in China as we strive to enhance shareholder value and achieve sustainable business growth.
We are also investing in growth opportunities in the international market with the Hong Kong operation is now up and running and gaining good momentum, having launched our first-ever customized whole life insurance product earlier in August with China Pacific Life Insurance, Hong Kong, with an innovative products feature that facilitates underwriting in Hong Kong and retirement in the mainland.
We are now working to expand into other attractive markets in the Asia region, and we are currently targeting to generate double-digit percentage of our group's revenues from our international markets within next 12 months. And with that, we'll now open up the call to questions. Thanks and over to you, operator.
Question and Answer Session
Operator
(Operator Instructions) CoCo Gong, Morgan Stanley.
CoCo Gong
Thank you so much for taking my question. Congratulations on a very good performance for the third quarter of 2023 in a very challenging environment.
I have two questions today, if I may. So the first one would be about some of the regulation changes in China, especially on the broker channel as well as some recent regulations on short-term health insurance. So how does the management perceive this change impact on our overall business? Just a little bit of a insight on the -- on maybe the product mix change or product innovation or anything related would be much appreciated.
And the second question would be about the critical illness demand. Because we've talked about launching like the new critical illness products. But how are you seeing the marginal changes in terms of the critical illness demand given the savings demand is very significant. But are we seeing any positive changes for the critical illness or protection types of product demand recently? Thank you very much.
Ronald Tam
Thanks, CoCo. It's Ron here. So two questions from you. The first one relating to regulatory changes and how is that impacting the overall business?
I think that's a very fair question, and it's very topical right now. I think the multiple funds of the business is being impacted by the recent [regulatory] changes. I think the most evident one would be the cessation of 3.5% products and that has led to somewhat a downturn in the overall market. I think across the board, we have seen FYP numbers coming down quite a bit among the top-tier companies as well as I think from market channel checks.
I think slowly, we have seen that demand recovery has commenced starting after the October 1 holidays, after the National Day holidays. I think, we are seeing some momentum being regained into November, but I think that we are still a bit short of where we were for a normal month notwithstanding any special changes in the product structure that is driven by the regulatory changes.
So in terms of product mix, I think we are seeing some channels or market demand for participating products. I think we are seeing some trends there. We do believe that participating products could be very interesting in the new environment where it provides a radically lower fixed guaranteed return with on top of that, more of a variable return profile to consumers. I think consumers still in strong demand for goods savings product that could deliver good returns over the long term, and with more of a protected structure. So I think participating products could gain momentum, particularly in the new year.
That's point number one. I think we're also seeing a good demand from consumers on retirement annuities products. And with that, we have already launched at least two annuity products in the recent quarter. As we have mentioned in the opening remarks, with two insurance companies targeting different segments of the population. So I think we are continuing to drive product innovation to capitalize on the changing customer preferences, subject to the regulatory changes that is already in place.
The increasing sum assured products still are interesting. I think that provides a guaranteed close to 3% IRR. We should continue to be well received by the overall market when the declining rate environment is expected to continue in the near to medium term.
We said the critical illness product, I think, on that we have also the public disclosed that we have about 8% year-over-year growth on the long-term health segment, which is primarily from critical illness products. So it's a slow recovery but then we also are driving product innovation in this respect. We have launched different types of critical illness for different segments of the consumer base, for example, the child critical illness product that we have launched. So I think we will continue to tackle in a resumption of recovery of consumer demand through delivery of high-value customized products. So that will be the answer to your first question.
With respect to your second question, I think, I've addressed just now on the critical illness demand. So hopefully, those are good answers to your questions. CoCo?
Operator
Zeyu Yao, CICC.
Zeyu Yao
(interpreted) So my question is related to our product strategy with the launch of many new insurance products so far this year. So under your observation, what are most popular products? And by the way, how is the sales of MCV products? Could you share some more details? Thank you.
Ronald Tam
Thank you, Zeyu. So first question on which are the more popular products these days? I think we're seeing real-time data in our systems. I think that the top two or top three categories are probably I think number one would be more towards retirement annuities. And these are the customized products that we have launched together with our partners. I think that is gaining the best momentum in the third quarter.
We also, as I mentioned to CoCo's questions just now, I think we are seeing good demand as well in participating products. So this is something a bit new, I think some of a new trend. So this will be the second category. And I think with respect to MCV products, we have launched the new product in August. So I think it still takes time for us to really jump up our channels and push sales. But I think we are getting decent market feedback on this innovative product, which enables Hong Kong residents or insurance customers in Hong Kong to enjoy privileges as to retirement in the mainland.
I think this is a very innovative product structure. And I think that given time for the product to run, I think that we will be achieving a pretty good sales on this.
With respect to MCV net income, I think, we are also gaining momentum there because of our brand equity in the Mainland China. And I think we also getting good attention from incoming travelers. So with respect to product mix there, I think, mostly I think as we have seen in other companies or other operators in the Hong Kong market, the strongest demand is probably still for savings products that is underwritten by Hong Kong or international insurance companies with branding. So I think that's my answer to your second question.
Operator
As a reminder, if you ask a question in Chinese, please translate it into English for the benefit of everyone on the call.
Amy Chen, Citi.
Amy Chen
Hey, congratulations on another strong profitable quarter. I have two questions here. The first one would be on the guidance for next year. You touched a bit on the trend of product mix in the third quarter. I wonder if you could share more color about your product strategy in 2024. And also, what's your outlook in terms of brokerage income as well as on the earnings side?
And second question is that we see that the company has made enormous efforts on containing operating costs through our funds. And we see that effectively the operating cost to income ratio has come down. I'm wondering if the management has a target for this ratio. Thank you.
Ronald Tam
Okay. Thank you, Amy. So with respect to your first question, on guidance, right now, we have not refreshed our guidance for next year. I think we will be giving guidance when we are coming up with the fourth-quarter results for next year. I think we are still looking to standardize on the overall strategy for next year, so it's a bit early to tell now.
And product mix, I think we can share a little bit more insights. I think in the new year, we're more likely to cooperate with larger size insurance companies with respect to savings related products in particular. And we can also explore cooperation with (inaudible) and joint venture companies that are involved in the savings category. And in particular, with respect to participating products, I think that we would very likely would be rolling out a customized product in that segment.
Second, I think we still have a very strong focus on retirement annuities products with additional service tied to the insurance policies. So I think that's something that is in strong demand. And we are also able to drive differentiating product innovations in this to set ourselves apart in the competition. So I think those two will be our strong focus for next year in terms of product strategy.
And on the cost side, I think it's always going to be top of our mind in terms of driving additional efficiencies across the business, across the organization structure. So I think that will continue to drive cost down. And I think there's always further room to improve in that regard. Maybe we have already done quite substantial cost cutting already year to date. But then I think there is something that we will continue to be very focused on. Maybe we can squeeze out another few percentage points there, but we'll continue to work hard on that to drive profitability for the business. Thank you, Amy.
Operator
(Operator Instructions) Seeing no further questions at this time, I will now turn the call back to Kang Liu for any closing remarks.
Kang Liu
Thank you, operator. In closing, on behalf of Huize's management team, we would like to thank you for your participation in today's call. If you require any further information, feel free to reach out to us. Thank you for joining us today. This concludes the call.
Operator
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.
Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.
