Good morning, ladies and gentlemen, and thank you for standing by for Waterdrop Inc.'s Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to hand the conference over to your host for today's call, Ms. Cui. Please go ahead.

Thank you, operator. Hello everyone, thank you for joining Waterdrop’s third 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 statement, 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 Insurance Marketplace; Mr. Hu Yao, Co-founder, Director and General Manager of Medical Crowdfunding and Healthcare; and Mr. Kevin 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.

[Foreign Language] Hello everyone, thank you for joining our quarterly earnings conference call. Since the beginning of the third quarter, the capital markets have experienced an increase in volatility and the growth of the insurance industry has softened. The opportunities and challenges faced by our company were also quite different from those prior to our IPO. Notwithstanding this, we continued to strive to be a customer-centric company that focuses on the development of our business and creating sustainable shareholder value. [Foreign Language] In our last earnings release, we announced a one-year share repurchase plan. During the third quarter, we have pragmatically commenced the plan under the relevant compliance framework. Since September 8th, the announcement date of the repurchase plan to the end of the third quarter, we have repurchased a total of nearly 500,000 ADS and we will continue to implement as deemed appropriate. We plan to use these repurchased ADS for our share incentive plans in the future. [Foreign Language] In addition, before IPO, our core management team of more than 30 executives, including myself, have already voluntarily undertaken not to sell or dispose shares or options of Waterdrop in another at least 18 months since the expiry of our IPO lockup in this November, continuing to strengthen strategic stability and keeping focused on business development. This was based on our united confidence in the company’s prospects and our support for its long-term sustainable development. It also demonstrates our long-term commitment to safeguarding the interests of our investors. Despite the entire industry having encountered various challenges throughout the past few months, we see it an optimal time for us to enhance our fundamental operations. We collectively and firmly believe in the long-term positive trend in the Chinese healthcare market and a better future for Waterdrop. We have confidence in…

The main theme of this quarter is the transformation and upgrade of our online user acquisition model so as to better comply with the new regulatory guidance and evolving industry trends. Since the beginning of this year, the growth of the insurance industry has also entered into an adjustment period. According to the statistics from CBIRC, the gross written premium of the health insurance sector only increased by 5% year-over-year in the first three quarters of this year, while the growth rate was minus 3% year-over-year for Q3 and the net profit of major listed insurance companies declined by about 36% year-over-year on average during the third quarter. Our growth has also been affected under this operating environment; however, we are still outperforming the industry. Our FYPs for the first three quarters increased by 37.5% year-over-year to RMB14.46 billion, exceeding the total FYPs for the whole year of last year. And despite the negative growth of the industry in Q3, our FYPs during the quarter remained flat and positive growth. We also significantly improved our cost efficiency with the net loss in Q3 narrowed by 27.3% on a quarter-over-quarter basis. Over the past two years, products of monthly-pay with first month low-premium has stimulated strong market demand, driving a rapid expansion in new users across the online insurance sector. However, since the beginning of this year, along with the reduction in the reaching out efficiency of this model, the benefits of online traffic brought by this model have gradually faded. This was directly manifested by the decline in both the new user conversion rate and retention rate. In addition, the increased customer acquisition costs brought about by intensified competition has also gradually weakened the competitiveness of this model. Meanwhile, in order to ensure the industry’s healthy development, regulators specifically made…

[Foreign Language] In the next session, I will update our progress of R&D and technology innovation, medical crowdfunding and healthcare business. In terms of technology innovation, adhering to our user-centric principle, we at Waterdrop aspire to bring insurance and healthcare service to billions through technology. We leverage our technologies to improve the efficiencies of key business processes, such as online marketing, telemarketing, insurance underwriting, policy renewal, and the claims settlements, thereby resolving the key business pain points and improving our service efficiencies. We have developed an AI-powered matching tool between the sales teams and users. Under our traditional online marketing and telemarketing business model, service staff essentially reach out to users on a random basis, however, leveraged by AI analysis plus considering LPs’ historical service data and the user group they are good at serving. We can match the most appropriate staff to provide services for each user. This substantially improves our user satisfaction and enhances the efficiency of our entire service system. Following the system development in Q2, we conducted some pilot tests on the AI-powered matching tool for sales team and users this quarter. During these pilot tests, we leveraged cutting-edge algorithms to constantly improve our intelligent matching logics through more than 30 rounds iterations. We also established a more intelligent matching system by combining the traditional GBDT machine learning model with the DEEPFM network, enabling self-adaptive adjustments in model metrics based on changes in LP’s leads and data features through a heuristic algorithm. Number of forecast in the algorithm reached over 1 billion per day. Among our major users, the system efficiency improved by 20% to 40%, resulting in an increase in insurance premiums of tens of millions RMB level this quarter. Meanwhile, we have also obtained several key intellectual property rights in this space. The AI-powered…

Okay. Thank you, Hu Yao. Before I go into details on the financial performance, please be reminded that all numbers quoted here will be in RMB, and please refer to our earnings release for detailed information on our comparative financial performance on a year-over-year basis. In the third quarter of 2021, our first year premium reached RMB4,639 million and we managed to achieve stable and positive growth in FYP on a relatively high basis during the period of industry transformation. Our net operating revenue decreased by 9.7% year-over-year to RMB779 million from RMB863 million, and decreased by 7.3% on a comparable basis, i.e. without taking into account the management fee income from Mutual Aid business we already ceased in the first quarter. The decline in revenue was due to soften trend in FYP and decrease in our take rate compared with last year, which was caused by the fast expansion of our customer base compared with last year. In recent months, we have seen our take rate stabilized and began to pick up resulting from the improvement in our business quality. Operating costs and expenses for quarter three increased by 31.5% year-over-year, to RMB1,292 million. However, on a quarter-over-quarter basis, it decreased by 26.4% compared to the last quarter, showing our measures on cost control have taken effect. To break it down, the operating costs were RMB296 million, an increase by 49.2% year-over-year, mainly due to the increase in labor cost as our consultants and insurance agents’ team expanded rapidly compared to last year, and increase in professional and outsourced customer service fees. Sales and marketing expenses increased by 24.3% year-over-year to RMB782 million for the third quarter of 2021. The increase was primarily due to increase in outsourced sales and marketing service fees to third parties, and increase in…

Thank you. [Operator Instructions] We will now take our first question from Michael Li from Bank of America. Please go ahead.

Thank you. [Foreign Language] Thanks management. This is Michael Li from Bank of America Securities. My question is about cost. So we see that third quarter cost and the marketing expenses dropped quite significantly from second quarter in line with our previous guidance. And I also see that in the announcement that we forecasted that in fourth quarter we will continue to see material reduce of our cost and marketing expenses. So my question is whether this kind of cost is because of seasonality because third quarter and fourth quarter are usually weaker quarter compared with first quarter and second quarter, or this about our strategy changes in the current challenging environment. We want to control our cost and control pace of expansion and to make more balanced growth and focusing more on profitability. Thank you.

Hi, Michael. Thank you for question. I think it's a great question. Actually, the main reason is a change of our strategy on the cost control side and also the seasonality. If we compare with last year, the year-over-year increase in total cost and expenses was mainly due to the increase in operating costs and R&D expense. And total operating costs and expenses increased by RMB310 million year-over-year mainly due to the increase in labor cost, but comparing with quarter two, our total operating cost and the expenses reduced significantly this quarter. The decrease of RMB462 million is in total costs and expenses quarter-over-quarter was mainly due to the decrease of RMB460 million in marketing expenses to the third-party traffic channels. And the increase in R&D expenses was mainly due to the increased R&D investment as planned to the infrastructure and the functionality as well as the technology empowerment to the insurance companies and other partners. And actually, we have adopted a lot of specific standards to cancel costs and expenses in quarter three and quarter four. In terms of total marketing expenses, our matters include number one, we have lowered the marketing expenditure and used stricter criteria to select traffic acquisition platforms. And then number two, we are also leveraging our AI empowered platform to conduct more intelligent and targeted marketing. We have seen good results from the tested strategies. In terms of operating costs, specific matters include number one reviewing key tasks and the all business procedures to identify where and the how to optimize. And number two, integrating organizational functions with highest synergies and number three, is strengthening control over selection of suppliers, and number four, measuring some certain officers that who are moving to areas with more reasonable rents. And considering, the industry is currently in a period of transition. All the players will somewhat adjust business strategy and the competitive landscape will also undergo some changes. Platforms with more aggressive, but non-compliant business practice are expected to be greatly shadowed by new regulation, which is good for Waterdrop in the long run. We in terms of the profitability, actually – we originally planned to procure in 2023, but as market environments change, we have increased our efforts to control costs and expenses. Marketing expenses, which used to be our largest highest item have been significantly reduced in third quarter. And we expect this trend will continue in the fourth quarter. So our goal is that our mature business will breakeven by certain months earlier than 2023. Hope that addresses your question, Michael. Thank you.

Thank you.

We will now take our next question from Kui Ma from CICC. Please go ahead.

[Foreign Language] My question is about your auto plan. Could you please talk a little bit about the advantages of your commission system compared with traditional insurance companies? And what would you do to promote offline growth in the new cycle? That's all from me.

Thank you, Kui for the question. This is Yang Guang speaking and we answer your question. I think our national head of auto team has already being on board in last quarter. And he previously spoke in the innovation oriented insurance clients such as AAI and Allianz Life Insurance. And after several months of research and experience-based review we basically formulated the preliminary outline and the general rules for our offline brokerage team. And as mentioned earlier, different from the traditional procurement structure in the insurance industry, we decreased the sales organizational structure to two layers only in order to save more incentive for the direct sales team and increase the recruitment competitiveness. We replace the traditional management layers with AI driven system and online tools to provide more efficient training customization, and operation management support. And we are currently working on the constructional infrastructure and the recruiting, and we will probably pilot the innovative model in three to five cities, especially speaking, we adopt a more productive model as well as management and control mechanism. I think going forward, we’re going to continue to strengthening our capabilities in the – in several aspects. I think firstly to further diversify our customer source both online from our platform and offline from our sales force. And secondly to make more efficient distribution and use of subsidies based on the accurate identification of user needs and the data driven operation. And certainly to be more user centric, to further increase our product offering and deepen the service level by leveraging the offline sales force. And hopefully to equip the offline sales force with online user operation knowhow CRM system and online tools and further assist the sales force to build our personal IP through social media and internet platforms. For our management and control mechanism, we will focus on productivity and efficiency of our offline team and develop corresponding organizational structure, training system incentive mechanism and management model, which hopefully will inspire the team's sales potential. And meanwhile, we will continue to explore different offline models for different customer groups in the future. Hope that answers your question. Thank you.

Due to time constraints, the call will end now. Thank you for your participation in today's conference call. You may now disconnect.