Waterdrop Inc. (NYSE:WDH) Q2 2021 Earnings Conference Call September 8, 2021 8:00 AM ET

Company Participants

Peng Shen - Chief Executive Officer

Guang Yang - Co-Founder Director

Xiaojiao Cui - Investor Relations

Kangping Shi - CFO

Conference Call Participants

Michael Li - Bank of America

Thomas Wang - Goldman Sachs

Qingqing Mao - CICC

(Transcript provided to Seeking Alpha by the company.)

Operator

Good morning, ladies and gentlemen. And thank you for standing by for Waterdrop, Inc.'s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode.

After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I will now like to turn the meeting over to your host for today's call Ms. Xiaojiao Cui, please proceed. Ms. Cui.

Xiaojiao Cui

Thank you, Operator. Hello, everyone. Thank you for joining Waterdrop second quarter 2021 earnings conference call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the US Private Securities and the Litigation Reform Act of 1995.

Forward-looking statements are subject to risks and uncertainties that may cause the results to differ materially from our current expectations. Potential risks and uncertainties include but are not limited to those outlined in our public filings with the SEC. The Company doesn't uptake any obligation to update any forward-looking statements except as required under applicable law.

Also, this call includes discussions of certain non-GAAP measures. Please refer to our earnings release for a reconciliation between non-GAAP and GAAP. Joining us today on the call, are Mr. Shen Peng, our Founder, Chairman, and CEO.

Mr. Yang Guang, Co-Founder Director, and the general manager of insurance marketplace. And Mr. Kangping Shi our CFO. We will be available for a Q&A session after the remarks. Now I would like to turn the call over to our CEO, Mr. Shen Peng. Please go ahead.

Peng Shen

[Foreign Language] Hello, everyone. Thank you for joining us on our quarterly earnings conference call today. In the second quarter of this year, we were successfully listed on the New York Stock Exchange and became the first Chinese insurtech Company publicly listed in the U.S.

This marked a key milestone since our founding 5 years ago. At the same time, we delivered very excellent results for the second quarter. Despite China's lag in the health insurance market, only posting single-digits year-over-year during the quarter, our premium and operating revenue continued to grow strongly, driven by the strong demand from the lower-tier cities where our business is focused on.

Our first-year premiums rate have grown up by 94%, which RMB is 5,357 million for the second quarter. Our net operating revenue for the second quarter rates RMB 939 million up 44.4 year-over-year on a comparable adjusted basis, which is an outstanding performance in the overall insurance industry.

Our long established infrastructure and organizational capabilities to create solid foundation for the sustainable development of Waterdrop. The industry is currently entering a period of transformation with the Waterdrop and other leading players focusing on higher-quality operations and a continued improvement in customer satisfaction.

And we will not adopt a low-quality growth model only to pursue short-term results. We firmly believe that we have clear competitive advantages in terms of customer base, business modes, and the brand recognition, where we benefit more against our competitors during the current transformational cycle.

However, I know that our stock price has been under pressure post-IPO due to the market concerns over several external uncertainties. But I believe that the current stock price has deviated far away from our fundamental performance. As an organization, we have industry-leading organizational management capabilities.

Our core management team are highly experienced in youth under age 35, and all of our business segments are growing in a steady and orderly manner. We firmly believe we will continue to sustain our leading position against the current backdrop of a challenging industry. We also want to take the opportunity during these earnings release to update you about our business performance and the strategies. I would like to start by talking about our three main commitments.

Our first commitment is to actively embrace regulation adhere to compliance and continuously improve user satisfaction. At our inception, the origin of our Company's name Waterdrop came from our vision that says leveraging technology to make insurance protection more inclusive and accessible to the public and achieve common prosperity for everyone.

Waterdrop symbolizes our belief that little drops of water constructs the mighty oceans and save a drop of water in good days should have the Pacific Ocean in bad days. Or as the Chinese proverb goes, a drop of water in need will be repaid by a spring indeed.

As a technology platform, we will actively connect our partners in the ecosystem, facilitate the national third distribution drive with the diversified offerings of our Waterdrop Medical Crowdfunding, Waterdrop Insurance Marketplace and Waterdrop Health platforms to achieve common prosperity for everyone. We believe that with our leading technology, we can help to make donations out of love more transparent and our society more giving.

As a technology innovative Company with strong social responsibility and a close connection to people's likelihood. We pro-actively respond to the regulatory guidelines and requirements. Tapping into customers satisfaction, we have adjusted and updated our business operations in advance and engaged in taking the lead to improve industry reputation. In the short term, there might be fluctuations in quarterly results or challenges in our operations. But our determination to remain compliant has never changed.

Secondly, we have further refined our operations since this September. Our management are committed and are confident in delivering higher quality operations and results. The Company was previously in a period of rapid expansion, as the insurance protection and health needs of the billions of users in lower-tier cities were under served, which had a vast potential.

We positioned ourselves to serve both those users and believed it was important for us to build our brand awareness and expand our user base at the beginning. Hence, we pursued rapid business growth during initial stages.

With our continuous development, we have now achieved a leading position in terms of business scale in the industry. In the future, we will gradually switch into a stage of enriching the range of our services and enhancing user value. We believe that refinements of operations is inevitable way to both adapt to the current market environment and achieve our long-term goals. We are confident in balancing between optimizing customer acquisition and the premium's volume growth going forward so as to achieve higher-quality growth.

The third commitment is on technological innovation and empowerment of the entire business chain by technology. In the second quarter, we continue to explore new technological applications and have completed several breakthroughs.

With our intelligence sales system, we can precisely match up our salesperson with a suitable potential customer through proprietary algorithms analysis. Through search optimization, productivity increased by a range of 20% to 45%, enhancing the sales efficiency.

For our intelligent, underwriting and verification process, we applied an NLP algorithm model to extract, summarize and refine the policies from insurance companies, and are combined with actual online verification data.

Based on this enhanced process, we designed our pre-verification decision modal. Through the integration into a CRM system, it provides supporting decision capability for LP verification process so our LP can rapidly and precisely makes decisions on policy it's available to specific customers. simultaneously this system can more accurately create additional sales leads to a more precise screening process. Our interactive QA system is now able to cover 97% of common diseases that online users inquire about.

In terms of our online marketing services, under the concept needs-based service, we designed our system tools and improve users' awareness of service quality to increase sales conversion. Through our live interactive tool, our sales and the service personnel can share screen remotely with users, which helps build users' trust and provides them with a lot smoother experience in understanding and the purchasing the policy, especially in lower-tier cities.

Leveraging our real timing intelligence sales service assistant tools driven by algorithm features and user experience, we are able to provide users with a more professional and a higher quality of services.

We continue to increase our investment research and development, and have attracted nearly 100 new talents with the experience in data and algorithms. More technologically innovation will come in the future.

We hope to join hands with up, mid and downstream toners in the insurance industry chain to continuously iterate and update existing intelligence solutions to meet more personalized, customized, and diversifying insurance protection and health needs of users.

We are convinced that Waterdrop's entrepreneurial solutions being to leverage technology for the interest of public and a common prosperity, business philosophy, and consistent commitment to doing right things will have long-term positive value and the contribution to Chinese society.

As at the end of the second quarter, a total 372 million users of our crowdfunding platform have made donations of more than RMB 42.8 billion to 2.1 million patients. This is not just a few numbers, but a hope for survival of those who have suffered from serious illnesses or accidents, a spontaneously transfer of love among the people and a meaningful supplement to the country's policy on income primary distribution, and the redistribution.

As the largest online medical crowdfunding platform assisting people with serious illnesses to seek help from the public, we expect to contribute more in the income third distribution.

In conclusion, we are firmly confident in the strong and sustainable development of our business going forward. Today, with the earnings, we announced the Share Repurchase Program in which we may repurchase up to $50 million worth of our ADSs over the next 12 months.

This is a decision that was made based on the judgment of the Company's current value and our confidence in our long-term sustainable development. Meanwhile, we plan to reserve repurchased shares for share incentive plan, which will further improve the long-term incentive mechanisms and align the interest of our employees with the growth of our Company.

We will adhere to the Company's mission, vision and the users' real needs, always to work as day one and strive to become the preferred platform for health protection in the minds of the people.

I will pass to Mr. Yang Guang to give an update on the development of the Waterdrop insurance business.

Guang Yang

Thanks. Hello, everyone. I'm going to walk you through key highlights of the quarter and some recent developments in our insurance marketplace business.

Let's start with the product side. The number of insurance products we offer has further increased from 240 in the previous quarter to 275.

In addition to upgrading of the existing products, we have also developed new products that are closely aligned with the current marketing demands, including vaccine-related, flood-related, and other scenario-based insurance products. We continue to uphold the concept of serving the general public with insurance coverage, developing products and services that are suitable for different customer groups, and promoting supply side innovation.

For instance, our cancer insurance products are available up to the age of 80; and can be upgraded to include general medical insurance for broader coverage if the customer could pass physical examination. Furthermore, our emergency outpatient insurance product could address the rigid need of users and are highly cost effective making it possible for general public to obtain more practical insurance coverage in a cost-effective way. We also cooperated with reinsurance companies to develop the industry's first online, non-standardized CA insurance products covering patients with dozens of common chronic diseases such as hypertension, diabetes, hepatitis B, and hypolipidemia.

This insurance product helps to address the difficulties of the sub-optimal health group in obtaining insurance coverage and fully addressed the insurance needs of people with multiple disease or abnormal health indicators through our technology innovations, and that being said, disease modeling premium loading methodology and scenario optimization, each disease can be evaluated by answering three to six questions, which greatly improve the convenience for individuals with sub-optimal health insurance to get insurance coverage. The share of our short-term CI products has increased from 14.9% in Q1 to 17.3% in Q2.

We also saw more than 60,000 newly launched outpatient insurance products in Q2, showing our progress in diversifying product offering. Next let me talk about our user growth and channel development.

Regarding user base in the second quarter there were 4.2 million customers buying insurance products through our platform, up 53% year-over-year, resulting in the outstanding growth in our FYP of 94%. As of June, the accumulating member of insurance customers of Waterdrop have exceeded 102 million people, among which 24.9 million were paying customers.

On top of all the rapid increase in the number of customers, about 1/3 of these paying customers in the second quarter are repeat buyers. In Q2. the FYP per customer reached RMB1,276 compared to RMB1,165 in Q1and the overall repeat purchase rate of short-term insurance has increased to the range between 50% to 60%. Supported by our effective managing our existing customers, we have seen positive results in policy repurchase and renewal.

Moving on to the channels of our customer acquisition. Firstly, we increased investment in third-party traffic channels on the back of our prediction that external traffic would be relatively abundant in the second quarter.

The periodic increase in new user acquisition from external channels is somewhat lead to a decline in utilization rates. However, at the same time, we have also applied intelligent applications, and automatizing service tools as placements, which has improved our customer acquisition efficiency.

So the use of AI algorithm, they have been building our big data models, which are used to assess the impact as ADs placement on user clicks, user conversion, retention rate, and the complaint odds. The system we use may estimate the potential license that each user request could bring to Waterdrop and guide the real-time API to give accurate bidding price for acquiring new users.

Such process could improve our return on investments through filtering out the lower-quality traffic and facilitate acquisition or higher-quality traffic with specific biding mechanics for various customer segments. Currently, our system has been connected to major media RTAs and the new strategy has boosted our premium ROI by 8% to 10%.

Secondly, for internal traffic, Waterdrop Medical Crowdfunding is no longer simply an aid-seeking platform for critical illness or a standalone influence conversion platform, but also multi-functional conversion scenario for healthcare, medical and patient management services, thereby enhancing our capabilities to launch more healthcare services for user. We will continue to reserve traffic and scenario to growing new business trials.

At the same time, considering the long-term and the robust developing of our platform, we'll balance various factors including our compliance requirements and the customer experience and push forward steadily instead of pursuing aggressive about businesses conversion.

Thirdly, let me talk about our participation in the government-backed health insurance, or Huiminbao. Leveraging the competitive advantage of our online insurance platform, we have actively acquired new consumers through the government-backed health insurance scheme Huiminbao, given that it provides a relatively lower entry barrier for individuals to purchase healthy insurance products. Under this scheme, Waterdrop is positioned as a one-stop insurtech platform, which can provide services such as product design, platform set up, marketing, claim settlement, pharmacy benefit management, and the patient services. Moreover, by leveraging our sophisticated technology and full insurance intermediary licenses, we could help our partners to develop influence infrastructure, personal account payment system for their customer distribution system for mutual insurance entity, insurance claims system and a one-stop settlement system that are fit for Huiminbao. At the same time, Huiminbao also constitutes an emerging channel for acquiring new users in markets supplement to our commercial health insurance.

Now, regarding our sales model upgrade. Considering the abundance of our product offering to enhance the insurance awareness of our users and the protection quality of our products, we plan to upgrade our sales strategy gradually in the near term. Especially we will replace the medical products which target first-time buyers by a first month premiums discount with other products that have a lower premiums, higher cost-effectiveness, and a flat monthly payment. This will help enhance retention and the repurchase rate or our users, thereby increasing the overall LTD per user.

Despite that, the upgrade may have some short-term impact on conversion rate for online sales. This could significantly improve customer retention and satisfaction, as well as reducing the reliance on expensive external channels.

And we will continue to engage in cross-selling activities with existing customers, leveraging our experience in online operations and the customer database, we believe that we will lead the industry in the upgrading of the short-term insurance marketing model further improving our user economics and delivering more healthy and sustainable growth.

Now onto our claim settlement services. Our claim efficiency is enhanced through our technology combined with personal interactions to improve overall customer experience and satisfaction.

Our self-developed AI intelligent claim settlement system could assist customers throughout the entire process, from the moment that they submit claim applications online to the closure of settlement. Our intelligent adjustment system could support visual configuration, monitoring the product changes in the market, and supplement and update the rules of claims accordingly on a real-time basis. The system also adopts the intelligent data analysis to automatically proceed the calculation in each claiming case, thus avoiding manual errors. It only takes the system millisecond, from the start of a model calculation to generating a claim decision. The latest claims accuracy rate of the system has now reached 99.78%.

In addition, we launched our “Claims Butler” service to provide one-on-one personal assistant services across the entire claim process. This includes the consultation and upload of a claim materials, case progress tracking, interpretation of our claim conclusion and assistance in the dispute settlement.

Customer can communicate directly with our claims settlement team through the Enterprise WeChat account. As of June 30 this year, the 24-hour closure rate for quick settlement cases has reached 98.6%.

We also collaborated with our partners to cover other claim settlement-related services such as health consultation, convenient access to hospitals, CI advance payment, full process claim assistance and drug purchase discounts. I think with that we will now turn over the call to Kevin, our CFO, to discuss our second-quarter financial performance.

Kangping Shi

Thanks, Guang Yang. Before I go into details on our financial performance, please be reminded that all the number provided here will be in RMB and please refer to our earnings release for additional information on all of our comparative financial performance on a year-over-year basis.

In the second quarter of 2021, our first-year premiums have grown by 94% to RMB5,357 million. Our net operating revenue increased by 38% year-over-year to RMB939 million from RMB681 million primarily fueled by the growth in our insurance brokerage income. On a comparable basis without taking to account management fee income for our mutual aid business, we have already ceased in the first quarter, which no longer contributed to our revenue in the following quarters.

Our adjusted net operating revenue achieved a strong year-on-year sales rates of 44.4% significantly outperforming the industry growth. Our insurance-related income was RMB899 million, including insurance commission and the technical income, increased by 38.3% from RMB 650 billion in Quarter 2 last year.

We calculated our take rate by dividing insurance-related income to FRT of the same period. Our FRT has grown faster than that of net revenue, mainly due to the decrease in our take rate by 6.8 percentage points from 23.6% in second quarter of 2020 to 16.8% in second quarter of 2021.

And this was a temporary outcome caused by the fast expansion of our customer base through external traffic channel as we still see strong demand from our potential customer groups and customer base is key to our business development. We are confident that we will be able to be able to maintain our take rate stable going forward as we can keep personalized interaction with our customers and provide tailored and all-round services to them after their first purchase from our platform and explore and realize higher LTV for each customer.

Operating cost and expenses for quarter two increased by 160% to RMB1,755 million. To break it down, the operating costs were RMB260 million mainly due to RMB38 million increase in personnel costs as we rapidly expand over consultants and the insurance agent team to support the business growth. We also incurred a RMB56 million increase in professional and outsourced customer service fees.

Sales on the marketing expenses increased by 270% year-over-year to RMB1,245 million, primarily due to the increase in marketing expenses to third-party channels because of our accelerated business expansion and branding promotions during the favorable market window for our traffic in Quarter 2. As some traffic was released across sectors. We also have seen intensified competition from peers in acquiring new customers driving up our CAC.

We have adjusted our plans to further control expenses in third-party traffic through more refined operational management and a strict cost control. In the third quarter, we expect to materially reduce such expenses.

G&A excels increased by 21.8% in the Quarter 2 to RMB 149 million primarily due to the increase in professional service fees and the personnel costs. R&D expense increased by 80.4% to RMB 100 million. Excluding share-based compensation, the adjusted R&D expenses will be RMB90.7 million, implying an increase of 72.1%, mainly driven by the Increasing R&D personnel costs as our research and development team continues to expand to enhance our competitive capabilities in technology.

We incurred a net loss of RMB 656 million GAAP basis and an adjusted net loss of RMB 570 million. This adjusted net margin was negative 60.7% for quarter 2. The expanded negative margin was mainly driven by the increase in sales and marketing expenses as discussed above.

For the third quarter of 2021, we expect our FYP to be in the range of RMB4.3 to RMB4.6 billion and reduce our sales and marketing expenses materially compared to this quarter. Such outlook is based on the current market conditions and reflects our preliminary view and estimates, which are all subject to change. This concludes our prepared remarks. I will now hand over to the Operator to open the call for the Q&A session. Operator, we are ready to take questions. Thank you.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. To ask a question, you may press star then one [Operator Instructions]. [Operator Instructions]. At this time, we will pause momentarily to assemble our roster. The first question comes from Michael Li with Bank of America. Please go ahead.

Michael Li

[Indiscernible] we noticed that in the beginning of August that the CBIRC issued document number 87 on Internet Insurance and there is a lot of concerns and requirement on the internet insurance companies. So can you tell us what kind of environment you will need to I mean fix your previous issues. And what kind of impact will be on your future operation and the results. [Indiscernible] Before the IPO we talked about the development of healthcare services, which is an important part of our overall business. May I know the latest growth or strategy, and the progress of this healthcare services? Thank you.

Guang Yang

Thank you for the question, Michael. This is Yang Guang speaking. I will answer the first question. I think the rectification campaign you mentioned is a follow-up initiative to implement the regulatory measures on Internet insurance business, which were actually announced in December last year then officially took effect in February this year. I think the regulatory matters aim to promote the healthy development of internet insurance business not to restrict its development. So we believe it will benefit the development of compliant, and licensed quality institutions for the long run. I think the relevant requirements of the rectification campaign generally follow the basic framework of the regulatory measure on internet insurance business well with more detailed measures and no significant changes in the general policies. So before this campaign was actually launched, we have already been proactively adjusting our business in compliance with the new regulations. And after the detailed measures came out, we have continued our efforts and we have complete self-inspection and make necessary adjustments accordingly by September 30 this year. This will neither have a material impact on our current business nor put us at a material compliance risk. The adjustment for certain processes expected to affect our conversion efficiency in the short-term. But in the long term, we believe it is beneficial for our business quality improvements as well as the compliance in the standardization of the whole industry. Hopefully, this answers your question well and I believe your second question to Mr. Shen Peng.

Peng Shen

[Foreign Language] In the second quarter of this year, we continue to explore new growth opportunities across various sub-segments of our healthcare business. For Waterdrop Health, which targets healthy customers, we continue to extend the categories of our Consumer Healthcare Services and enrich our product and service offerings, et cetera. These include the launch of new healthcare consumption products, genetic testing services, and early screening for cancer services. We also developed our underwriting risk control function and empowered transaction processes to assist insurance carriers in matching qualified customers.

For Waterdrop Medicine, as of the end of Q2, we have around 150,000 members and established cooperation with more than 1,500 pharmacies. We continue to expand our cooperation with pharmaceutical companies, Insurance institutions, and pharmacies. Leveraging commercial insurance, medicine for public welfare, pharmacy insurance, and innovative payment services, we help our pharmacy partners enhance their competitiveness and customer stickiness and reduced patient’s out-of-pocket expenses for medicine.

For our patient management platform, we focus on providing full lifecycle of patient management services outside the hospital service system to patients with critical diseases after surgery. We have built up key services capabilities in this platform, providing our patients with services such as an adverse reaction prevention and management, reminder of hospital revisits, medical report interpretation, prescription, as well as supplying medicine and nourishment. We strive to become a high-value healthcare platform benefiting doctors, patients, and pharmacies.

And I hope all of you could continue to take attentions into our three segments. Thank you.

Xiaojiao Cui

Okay, next question.

Operator

Thank you. The next question comes from Thomas Wang with Goldman Sachs. Please go ahead.

Thomas Wang

[Foreign Language]. Let me translate my questions. The first one is on FYP. So can we have a breakdown between the long-term health product growth rate. And secondly, on the increasing acquisition and sales and marketing expenses, can you give us a little bit color on why the timing of this increase and also comparing to the FYP growth, the expense growth was faster? How should we think about on a quarterly basis? Should we expect faster FYP growth next quarter? Thank you.

Guang Yang

Thanks for the question, Thomas. For this quarter, our sales for long-term insurance have grown. although with a slower growth rate than that of the overall FYP growth. We mainly sold our long-term insurance products through our online consultation teams and traditionally March and April are the high time marketing and salespeople would switch their jobs after the Chinese New Year. It led to temporary decrease in our sales force. Moreover, after our IPO, we let go, some of our partnering and the in-house sales force that did not meet our requirements in certain quality and the efficiency.

The number of our online consultancies was lower than that in the last year, our overall service efficiency and premium retention both went up. So the growth slowdown was mainly due to the voluntary adjustment we made to our sales team and due to THE aggressive scale expansion or short-term insurance business and the relatively shortage in the sales workforce for long-term insurance products. The sales leads for short-term insurance products were not fully utilized and besides that, due to the rapid scale-up of our short-term insurance business driven by external traffic, the quality of our new leads slightly went down and had an adverse impact on our long-term insurance business.

So due to the reasons mentioned above, the growth of long-term interest products slowed down but it was only temporary and mostly a result of our own choice. So the improvement of our service quality and customer satisfaction are long-term goals. The take rate of our long-term insurance product has grown to be important as a result. Going forward, we will actively develop our sales team and further expand our hiring channels and step up our recruitment efforts. Meanwhile, we have also adjusted our general rules and the incentive mechanism and optimize our team compensation.

In the current marketing environment, we believe we will be able to onboard more outstanding sales staff and external institutions, and that we will continue to optimize leads matching and improve our conversion efficiency. Our algorithm-based leads matching system has improved -- increased the FYP per lead by 20% this quarter. So given the rapid growth of our short-term insurance products in Q2, a great amount of accumulated leads for our long-term insurance will gradually reach more sales potential as we replenish our workforce. And for the second question regarding the marketing expense, I'll hand it over to Kevin, our CFO to answer the question. Thank you.

Kangping Shi

Thomas, thank you for your question regarding sales and marketing expenses. The increase in sales and marketing expenses was mainly due to the increase in the marketing expense for user acquisition and the brand building. There were a few industry factors behind the increase to our sales and marketing expenses in quarter 2. Traffic resources across industries started to recover in quarter 2, so this is favorable for the user acquisition. Amid this environment, we maximized our user acquisition efforts while maintaining a relatively healthy ROI. The increase in external traffic investment will naturally lead to a subsequent increase in our CAC and compromise in efficiency metrics. We also foresaw that with regulations on the overall industry will be tightened. Therefore, we have also implemented compliance measures in advance on our marketing side in order in order to strike a balance among business growth, operating efficiency, and the costs. Although our marketing expenses increased significantly in quarter two, our CAC was still at a relatively low level among the industry. In terms of our customer acquisition efforts, we've conducted docking algorithms with external platforms, which has started to show positive effect on our ROI since quarter two.

This year we will take relevant measures. We will have lower marketing budget, focused more on per capita output efficiency and marketing ROI and use stricter criteria to select traffic acquisition platforms. We will also leverage our AI empowered platform to conduct more intelligent and targeted marketing. We are now testing a number of different marketing strategies and have seen some good results. So I hope this addresses your questions, Thomas. Thank you.

Operator

The next question comes from Qingqing Mao with CICC. Please go ahead.

Qingqing Mao

[Indiscernible] My question is about Huiminbao, our government-backed health insurance. What's the impact of the development of Huiminbao and your strategy in response to the development of it, as well as the potential contribution? Thanks.

Guang Yang

Thanks Qingqing for the question. I think since last year, we have made explorations and attempts in the garment-backed health insurance area. So far, we participated in Beijing inclusive medical insurance program designated by Beijing Municipal Medical Insurance Bureau and supervised by Beijing banking and insurance regulatory bureau and have made solid progress. Also, we have undertaken the government-backed health insurance program as the operating platform for Zibo, Shandong province and other cities in this year.

Meanwhile, we kept a frequent and good communication with major insurance companies who joined the government back-end health insurance program, as well as with many local medical insurance bureaus. We participated government-backed health insurance program, which you already called Huiminbao due to the following consideration.

I think firstly, the demand of consumers. As the existing products cannot meet the demand of some customers, we always want to invest our resources to explore new ways to serve the users. And I think secondly, by leveraging our advantages on the insurance technology, product design, claim settlement, and the DTP service as well as healthcare management, we are able to help medical insurance institutions and insurance companies save costs and improve efficiencies.

To ourselves joining Huiminbao will connect the products with our insurance payment tools and healthcare services establishing meaningfully piloted version of the uniting health. And stemming from the government's perspective, many local medical insurance authorities have clarified the position of government-backed health insurance as a commercial supplementary medical insurance, which can significantly reduce greater the self-pay ratio of medical expenses. For the insurance industry, it also helps educate people about insurance and the raise the awareness of insurance protection and it is also on conductive to exploring customers potential insurance needs. And from the prospective of product design, government backed health insurance programs introduced DTP service, the direct-to-patient service which provide protection beyond medical social insurance scope and expand the coverage of commercial insurance. To sense some extent, it helps solve the problem of poverty due to illness. So both patients and the elderly can participate in the programs which forms a complementary solution for product supplies.

So in the short-term, I think the government-backed health insurance program will have a certain impact on the sales of Million Medical Insurance product, [Indiscernible]. It may that takes some time for people to know these two products and given its credit endorsed by the government, the government-backed health products are easier to gain trust, which have certain substitution effect on Million Medical Insurance products. I think going forward in the long run, these two should be a position as differentiated products and the government-backed health insurance attracts more patients and older people while Million Medical Insurance is more positioned to catching the younger generation and healthy people, offering a wider coverage outside the medical insurance catalogue as well. Accordingly, the two products are more supplementary rather than substitutive. Thank you. That's all for the question.

Operator

We are now approaching the end of the conference call, given the time limit, we will close the call. Thank you for your participation in today's conference. You may now disconnect. Have a good day.