Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop, Inc.'s First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Ms. Xiaojiao Cui. Please proceed, Ms. Cui. Thank you.

Thank you, operator. Hello, everyone. Thank you for joining Waterdrop's First Quarter 2021 Earnings Conference Call. Please note that the discussion today will contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities and the Litigation Reform Act of 1995. Forward-looking statements are subject to risks and uncertainties that may cause actual 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 does not undertake any obligation to update any forward-looking statements, except as required under applicable law. Also, this call includes discussion 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 General Manager of the Insurance Marketplace; and Mr. Kevin Shi, our CFO; and Mr. Tian Dan, our Head of Group Strategy. They will all be available for a Q&A session after their remarks. Now I would like to turn the call over to our CEO, Mr. Shen Peng. Please go ahead.

[Foreign Language]

[Interpreted] Hello, everyone. Thank you for joining us on our first quarter 2021 earnings conference call today. We are pleased to report strong quarterly results in our first earnings release as a public company. Our net operating revenue reached over RMB 880 million in Q1, representing an adjusted comparable growth rate of 43.2% year-over-year. Our quarterly results reflected the advantages of our operational efficiencies. Since our inception in 2016, we have benefited from the robust industry development and achieved above-industry growth and have become a leading integrated insurtech and healthcare service technology platform in China.

[Foreign Language]

[Interpreted] Before I talk about the key highlights of the quarter, I want to briefly summarize our positioning and strategy and emphasize 3 keywords that represent our business: inclusivity, efficiency and technological innovation. In recent years, the health insurance industry has enjoyed a favorable policy support. And with the implementation of new regulations on Internet insurance businesses, we expect the industry to continue prospering in a healthier environment. The COVID-19 pandemic has broadly increased people's demand for health care services and raised the awareness for health insurance. While, on a macro level, we at Waterdrop have also created multidimensional scenarios for insurance awareness education. We positioned ourselves as an important external force that complements the government social medical insurance system and aspires to bring insurance and health care services to billions of people through technological innovation.

[Foreign Language]

[Interpreted] Waterdrop is fully committed to the realization of the social impact and the commercial value of insurance for all, providing our customers with pre-illness insurance coverage through our Waterdrop insurance marketplace and post-illness crowdfunding support through our Waterdrop Medical CrowdFunding platform. We continue to leverage all of our platforms to support the fight against the COVID-19 pandemic and to promote inclusive insurance program throughout the industry. With a recent call from Chinese regulators to broaden health insurance products that contain wider coverage and better quality, our competitive advantages and influence as inclusive online insurance provider allowed us to rapidly roll out a series of upgraded products that give ordinary people affordable choices for their health insurance needs. Our Waterdrop Medical CrowdFunding as an online platform efficiently connects the patients who are seeking help to cover significant medical costs and the people who are willing to help. However, Waterdrop Medical CrowdFunding itself does not contribute any revenue to us. As of March 31, 2021, through our Waterdrop Medical CrowdFunding platform, approximately 360 million people donated an aggregate of over RMB 40 billion to nearly 1.9 million patients.

[Foreign Language]

[Interpreted] The second keyword is efficiency. Our overall growth performance is driven by the advantages created by our platform efficiencies, and we are pleased to see the contribution by Waterdrop to the overall improvement and efficiency of the industry. One of our core advantages is that we can interact with customers directly online, which allows us to accumulate a massive amount of user profiles through the customer accounts, capital safety and dynamic data and gain invaluable insights into their behavior and demand. This also enables us to satisfy their needs more precisely by presenting the most relevant insurance products while conducting product innovations and upgrades accordingly. Our big data and a customized intelligent marketing system has allowed us to enjoy a competitive customer acquisition cost and operating efficiencies from our economies of scale.

[Foreign Language]

[Interpreted] Next keyword is technological innovation. I want to talk about how we utilize technology to empower the entire value chain and improve efficiencies and our latest developments in technology. In Q1, we made solid progress on our technology empowerment. We utilized our proprietary intelligent marketing system, intelligent user growth system and intelligent online marketing and a telemarketing system based on machine learning and deep learning algorithms to take a deeper dive into customer insights. We designed and developed a series of algorithms that personalized user experiences and provide targeted matches that best suit our users' needs across marketing, growth conversion and online marketing scenarios. We confidently built and optimized our user profile that currently contain roughly 3,000 tags for further growth efficiency for personalized precision medicine.

[Foreign Language]

[Interpreted] We also developed an intelligent chatbot platform based on natural language processing technology. Our intelligent robot for policy renewal can carry out multi-long interactions with users powered by various AI technologies, including semantic analysis, ASR and TTS. This significantly enhances our renewal rates and operational efficiencies. Our AI plus big data powered Waterdrop Brain assembles users' essential attributes, behavior data and medical records to identify categories of claims settlement documents, recognize various certificates and collect standardized and digital data based on our proprietary knowledge base. We conduct intelligent risk management powered by big data and decision-making models to enable automatic claim verification, manage costs, and insurance adjustments and empower other steps throughout the claims settlement process. This enables us to shorten the claim processing cycle and increase our efficiency by 30%. Meanwhile, the accumulated claim data also facilitates our product design and enhances our actuarial capabilities.

[Foreign Language]

[Interpreted] In a nutshell, we believe our trusted brand, comprehensive product offerings and innovative technologies will allow us to maintain our position as a leading technology-driven insurance platform in China. We will continue to expand our user base, diversify our service offerings, and deepen our partnerships with healthcare institutions to build up a larger health ecosystem.

[Foreign Language]

[Interpreted] Now let me pass to Guang, who will discuss some of our key developments in our insurance marketplace business.

Thanks, Peng. Hello, everyone. I'm going to walk you through our key highlights and some of the recent developments in our insurance marketplace business. I will start with the product side where we continue to launch more insurance products on our platform during the first quarter, increasing the number to 240 at the end of March from 200 at the end of 2020. Over 90% of our FYP was contributed by customized insurance products, and we continue to enrich our product attributes on top of our existing product offering and provide overall cycle coverage for our partner insurance people. We have enhanced coverage for specific groups such as children, elderly and the groups with a chronic disease and increased our operating fee easy coverage for the customers. In the first quarter, the new definition on critical illness was officially put into effect. Prior to this implementation, we have upgraded and designed our product offering according to the new definition of chronic critical illness. We moved early to cater to customer needs rather than speculatively exciting CI products under the old definition for simply pursuing short-term incremental volume. The FYP - CI insurance increased by 132% in quarter 1 year-over-year, primarily contributed by the design and the sales of products under the new definition of critical illness. We did forward-looking research thoroughly on new rules and regulations on the insurance industry. Ultimately, our online long-term health insurance products and intense of our information disclosure in order to comply with the new regulatory requirements and improve our customer experience. We also penetrated other categories such as inpatient medical products and certain types of life insurance products that necessarily complements to cater to customers' needs. In terms of long-term interest, we keep strengthening our customer service capabilities and provide necessary online consultation support…

Okay. Thank you, everyone. Hello, everyone. I will walk you through our financial highlights. Please be remind that all numbers quoted here will be in RMB, and please refer to our earnings release for detailed information of our comparative performance on a year-over-year basis. In the first quarter of 2021, our net operating revenue increased by 35.1% to RMB 883 million from RMB 654 million for the same period of 2020, primarily driven by the growth of our insurance brokerage income and technical service income. There has been a major business adjustment in the first quarter of 2021, which is a cessation of our Waterdrop Mutual Aid business, which has already been disclosed in full in our IPO prospectus. To prepare for the cessation, we voluntarily covered the mutual aid participant's medical expenses arising from medical conditions diagnosed before the end of March 2021, subject to certain procedural requirements and eligibility criteria that would have formerly been covered by the ceased mutual aid plan. In addition, we also offered a 1-year complementary health insurance policy to each participant with a similar coverage. As a result, we incurred a one-off cost for the medical expenses and the insurance coverage, among which around RMB 20 million was accounted for as a reduction of management fee revenue, previously recognized for each participant to the extent of cumulative amount earned until March 26, '21 and around RMB 77 million was recorded as an expense. After this change, the corresponding management fee income from mutual aid business, which contributed less than 5% of our total revenue in 2020 will no longer be a revenue stream for us. So on a more comparable basis, excluding the management fee income, our adjusted net operating revenue has a year-on-year growth rate of 43.2%. Our operating costs and expenses…

[Operator Instructions] The first question today comes from Jenny Jiang with Morgan Stanley.

[Foreign Language]

Jenny, please go ahead to translate your questions in English.

Okay. All right. All right. So management, this is Jenny from Morgan Stanley. First of all, congratulate on the successful IPO, and thank you for giving us this question to meet with management and then talk about your results again. So 2 very simple questions from me. The first one is about acquisition costs. We noticed that some of the education segment has not been doing very well because of some policy changes. I remember that management mentioned before that this sort of our key sort of competitor for online traffics in the past. So given this backdrop, have you start to see some of the decline in the online acquisition costs? Do we think this is going to be sustainable? Is that going to be very positive to our business going forward? Second question is about the sort of strategic like in the health area. What kind of new strategy we're planning to implement in the future? I know Yang Guang mentioned a few progress in the first quarter. Can you give us a little bit more update after first quarter, I think in April and May, what we have done to continue to push for a expansion in the health care?

Thanks, Jenny, for the question. This is Guang Yang speaking. I will answer the first question regarding the marketing expense. I think our business is still at an expansion stage with the proportion of external traffic increasing. So with our continuous exploring customer needs after we acquire users, I think the effects of value investment begin to show, and we will further increase the investment with the customer acquisition cost. As long as the customer acquisition costs can be covered by the lifetime value of our customers and continue to expand our customer base through third-party user acquisition channels. I think currently, sales and marketing expense account for a major part of our expenses, which is in line with our current strategy. In the short term, our priority is to grow customer base but the criteria for sales and marketing cost control are seriously lower than LTV to match cost and benefit. And the LTV per user is also increasing approximately and for customers with higher LTV those sector, higher acquisition costs. I think the recent market dynamics, as we just mentioned, are favorable to control the increasing pace of the [ CAC ] and further expand our user base. Meanwhile, we will continue to enrich our product offering and improve our service capabilities to promote repeat purchase and attract natural traffic. And for the second question regarding health business, I will hand it over to our CEO, Shen Peng, to answer the third question.

[Foreign Language]

[Interpreted] Yes. Waterdrop are providing members with cost-effective quality medical and health care services. Our health care and medical services focus on customer needs, offering different values for 2 types of customers.

[Foreign Language]

[Interpreted] Our Waterdrop health business serves healthy people with basic health care management services. Packaging with existing insurance products, we provide a range of services, including consultation, telephone doctors, health care product, physical examination, basic drugs, et cetera. This has generated synergies with our insurance business and help the insurance business increase the differentiated value of users, accumulate more health care data and enhance risk control capabilities. At present, we have more than 5 million health care members and nearly 1 million users of our health care app.

[Foreign Language]

[Interpreted] Our Waterdrop Medical business, mainly serves patients, especially those with critical illness. Our long-term strategic goal is to build core competencies in the medical and pharmaceutical industry chain based on our millions of patients customers. Our current medical business is mainly divided into 2 segments. The first segment is our [ PBM ] service. Our Waterdrop Medicine enables patients acquisition, retention, and conversion. The number of new members for Waterdrop Medicine in the first quarter exceeded 70,000, bringing the total cumulative number of members to around 140,000. So far, we have established cooperation with 1,040 pharmacies.

[Foreign Language]

[Interpreted] The second segment is our patient management platform. We have established a patient management platform outside the hospital system to help underserved patients with critical illness who need to be on medicine long term after surgery. This platform works with Internet hospitals to provide patients with a range of services, including prescriptions, health care management, medicine purchase and nutrient supply. With a community of hundreds of thousand patients, the platform already has the basic functions and service capabilities of an Internet hospital. Meanwhile, we are testing the platform's commercial value on a small scale.

[Foreign Language]

[Interpreted] In the first quarter, Waterdrop has made substantial progress and expected to provide more information in the second quarter earnings disclosure.

Thanks for all the questions. Thank you.

The next question from Michael Li. [Operator Instructions] The next question comes from Michael Li from BOA.

[Foreign Language] This is Michael Li from Bank of America Securities. So I have 2 questions. My first question is about the growth of FYP. So we noticed that this year is very challenging for all of the insurers in China, and the growth of health insurance decelerated to about 16% in the first 5 months this year. So Waterdrop's 40% -- about 40% FYP growth is definitely a better result than sector average or its peers. So can you give us some, I mean, explanation why Waterdrop could outperform? And also, in terms of the sector growth, what are the reasons behind this kind of deceleration? And do you see any turning points? The second thing is about product mix. So Waterdrop improved the product mix in the past 2 years with higher mix of long-term insurance. And can you give us some breakdown of long term versus short term in the first quarter this year and also the outlook of the product mix changes in the next few quarters?

Thank you, Michael, very important question. I'll try to address your questions about the industry as well as the growth rate of Waterdrop, and Mr. Yang Guang will address your second question. First, I think the recent slowdown in the Chinese health insurance market may be attributed to several factors, first, which the ongoing challenge facing the expansion in traditional agency force industry-wide and also intensified competition in Tier 1 and Tier 2 cities in China. And maybe also with speculative marketing CI policies under new regulatory definition in the first quarter that have distorted the pace of sales of health insurance products throughout China in the second quarter, maybe even into the third quarter '21. About ours sales, first, I want to highlight the fact that our health insurance business segments have very strong growth throughout the year 2020 and also in the first quarter of '21. We believe that the Chinese health insurance market has huge growth potential, as always, especially in lower-tier cities. We have a efficient distribution model and attractive product offerings are often lacking. Also, I want to address that, so far, based on what we have seen there have been no signs of weakening demand for health insurance protection products in China, and that reason is why Waterdrop managed to grow faster than peers. It seems the biggest reason is because we have a far more technologically advanced and efficient business model. Based on data insights and strong knowledge of operation knowhow, we're able to distribute insurance policies completely online so that we have access to the mass market in China in a cost-efficient way. Also, we focus relentlessly on lower-tier cities, which have huge growth potential to insurance protection product, potential insurance products, especially the health protection, but at same time, often underserved by existing insurance players. I'd also to like to highlight a fact that we always focus on delivering the true value to our customers, which we believe will help us to grow our customer base in the longer term. For instance, we didn't do the speculative marketing of older CI policies in January, even though most of our peers did. Instead, we switched to the new CI policies along before the cut-off date set up by the regulators because we believe this new product offers better value to our customers. I think that addressed your questions, and Mr. Yang Guang will address the other question.

I think with respect to the product mix, our long-term critical illness insurance grew 132% year-over-year in first quarter with the growth coming mainly from product under the new definition for CI products, as mentioned by Mr. Tian Dan. We didn't participate in the speculation of the sales of the old products. And the other categories also maintained robust growth, while we continue to diversify and still offer -- product offerings and most of our products within exclusive and customized products. I think in the short term, we still mainly focus on life and house insurance, including health, life, annuity, accidental, et cetera. The specific product composition may change at any time according to the changing needs of users. In the future, we do not exclude experimenting with other types of insurance as appropriately.

The next question comes from Thomas Wang with Goldman Sachs.

[Foreign Language] Yes. So two questions from my side. First one, relatively simple. Restricted cash balance increased quite a bit versus full year position. Just -- I'm trying to understand why -- what's driving that increase? And secondly, policies retention rate in the first quarter. Can you give a little bit color how does it look versus last year first quarter and Q-on-Q versus fourth quarter 2020?

Thomas, thanks to your question. Regarding your first question, our restricted cash primarily consists of our premiums collected by us from the insurance consumers in a different capacity until disbursed from insurance carriers. The balance of restricted cash will increase in line with the increase of FYP and the relevant balance of payable was recorded as the insurance premium payable in our balance sheet. The settlement period of short-term and long-term insurance brokerage income is generally M plus 1 and M plus 2, respectively. And in terms of your question regarding about our retention rates, there was some change in our user acquisition channel mix for the forthcoming insurance product in the first quarter, where our investment in the external user acquisition channels increased and with retention rates slightly go up accordingly as our user base expanded. We expect our retention rate of long-term products to keep stable. There might be some fluctuations in near term, but it depends on the quality and the scale of our users. So we expect the retention rate for long-term to be stable.

The next question comes from Qingqing Mao with CICC.

[Foreign Language] This is Qingqing Mao from CICC. Firstly, congrats to the robust performance this quarter. I have 2 questions. For the first one, I'd like to know the company's future development strategy of long-term product. For the second one, could you please share more information about the remainder of management fee income in Q1 and the total expenses incurred in relation to the cessation of mutual aid?

Thank you, Qingqing. A very good question. I think we have achieved very strong growth in long-term insurance and short-term insurance business, respectively. And then I think our strategy is to promote that the future growth of our long-term insurance business we will provide users with more valuable products by continuing to enrich the categories of a long-term insurance product offering, including innovating in product portfolios and cooperating with new insurance carriers, especially for those large brands life insurance companies in China. We also plan to reach a large number of existing users which is close to 100 million users through our online channels to convert them to long-term insurance users. And also by leveraging our massive user data to intelligently match users and [indiscernible] to our algorithm, we keep improving the conversion rate of long-term insurance business. We started the initiative in April, and we ran our test in May and expect to see the results in the second quarter. And we have also -- we also have a technology-empowered online sales consultants to improve the quality of customer service so as to improve the efficiency of long-term insurance conversion. We are also testing the business model of promoting the long-term insurance product by insurance brokerage from O2O from online to off-line channels. And hopefully, by doing all these channel implications, we are able to further expand on our long-term insurance business. And regarding the management fee, the mutual aid, I will hand it over to Kangping to answer the question.

Qingqing, thank you for your question. Regarding your question about management fee. To explain the remainder of management fee income in quarter 1, in connection with cessation of mutual aid, we voluntarily covered mutual aid participant's medical expenses arising from medical conditions diagnosed by March 31, 2021, that would have been covered by the ceased mutual aid plan. In addition, we offer a 1-year complementary health insurance policy to each participants with a similar coverage as the participant's of original mutual aid plan. And as of April 30, 2021, total of 2.71 million people has applied for this complementary health insurance policy. The estimated medical expenses and the 1-year health insurance coverage will be partly accounted for a reduction of management fee income that was previously recognized for each participant to the extent of the cumulative amount earned the until March 26, 2021. In quarter 1, we recorded RMB 2.7 million of management fee income. The one-off cost amounted to RMB -- amounted to RMB 96.7 million, including two parts. The first part is the -- so this medical expenses are expected to RMB 15 million, and the cost of 1-year complementary health insurance policies are expected to be RMB 81.7 million. And as of March 26, 2021, the deducted cumulative management fee income of RMB 19.9 million, and the related costs recognized in the first quarter was RMB 76.8 million. Thank you.

We are now approaching the end of our conference call. Thank you for your participation in today's conference. You may now disconnect. Have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]