• Online-only insurer ZhongAn made a profit from underwriting insurance for the first time in the first half of 2021, helping its net profit jump 54%
• Company’s shares still trade far below their IPO price, underscoring soured investor sentiment after years of losses
By Warren Yang
It’s been a long time coming for ZhongAn Online P&C Insurance Co. Ltd. (6060.HK), the online insurer that made a splash in 2013 when it was launched as China’s first online-only insurer by internet titans Alibaba and Tencent and financial heavyweight Ping An Insurance.
Eight years after that high-profile event, the Chinese online insurance pioneer has turned its first-ever underwriting profit from a growing suite of protection policies, be it for an illness or a faulty product bought on the internet. That milestone may help the company win back investors put off by years of losses — if it can repeat the feat consistently, that is.
ZhongAn last week posted a 54% jump in first-half net profit attributable to owners of its parent to 755 million yuan ($116.7 million) from a year earlier on the strength of its insurance operations, even as its two other main businesses — technology and banking — saw their losses widen.
Gross written premiums, the equivalent of topline revenue for insurers, grew solidly, by nearly 50%. And investment income, the primary component of profit for ZhongAn, also increased by a quarter. Most notable, though, was ZhongAn’s profit from underwriting insurance, an unprecedented achievement for the company. Investors cheered the results, sending ZhongAn shares up 4.4% the day after the Aug. 26 earnings announcement.
But the stock has fallen back to pre-announcement levels since then.
ZhongAn stock has lots of ground to recover. Its Aug. 30 closing price of HK$36.25 per share is nearly 40% down from the company’s IPO price after years of losses soured investor sentiment. Although ZhongAn made its first annual net profit last year, its return on equity was only 3.5%, an improvement from negative figures in prior years but nowhere near rates that stock investors appreciate.
Also, while the latest half-year results may look stellar in percentage terms, absolute figures pale in comparison to earnings that big Chinese insurers generate. For example, Ping An Insurance made a net profit of 58 billion yuan in the first half, some 77 times what ZhongAn earned during the same period. The pullback in ZhongAn’s stock price after the initial euphoria shows investors may not be fully sold on its prospects just yet.
Still, investor expectations of ZhongAn, or perhaps the online insurance sector in general, remain lofty. Although ZhongAn shares are way below where they were at their market debut, they still traded at a trailing price-to-earnings (PE) ratio of 54 as of Aug. 30, while the similar internet insurance broker Huize commands an even higher 70.
Those figures dwarf valuations of other fintech companies in China, such as 3.8 for LexinFintech, 9.3 for Lufax, 5 for FinVolution and 1.5 for Qudian, all listed in New York. Those privately owned fintechs have been depressed by a crackdown on online lenders over the last three years as Beijing tries to rein in the group. That movement has only recently extended to online insurers, and has had far less impact so far on bigger names like ZhongAn.
No Mean Feat
To some extent, it’s not hard to see why investors are betting big on the online insurance market in China. The insurance penetration rate in China is very low, giving the industry abundant room to expand. Plus, consumers hooked on the ease of online shopping will naturally gravitate toward internet platforms when purchasing insurance as well, particularly after experiencing Covid-19 outbreaks that kept them home for extended periods.
In an industry dominated by state-owned heavyweights and deep-pocketed financial conglomerates, ZhongAn has carved out a nice niche. Its most popular products include plans that pay for shipping costs when products need to be returned – a relatively common occurrence in the era of e-commerce.
The company charges tiny fees for such policies. But in a country as large as China, numbers can add up quickly. The products accounted for about 15% of ZhongAn’s gross written premiums in the first half, even though the share has decreased over time as the company has grown with more offerings. ZhongAn continues to come up with new products, such as a medical policy for pets and protection against damage to mobile phone screens. These may look gimmicky but can be critical for ZhongAn to set itself apart from big insurers.
Nevertheless, it has been difficult for ZhongAn to make money selling insurance. Its insurance business first became profitable only in 2019, and that was because of investment income, which can fluctuate depending on market conditions.
The company has been unable to make an insurance underwriting profit until now because claims and expenses have always exceeded revenue from premium collection. It can be especially hard for ZhongAn to keep costs down because it pays service fees to its big-name founders and their subsidiaries for business they bring its way, and these expenses alone take away quite a big chunk of revenue.
That’s why the first-ever underwriting profit, however small, is no mean feat. On a conference call to discuss first-half results, ZhongAn management attributed the achievement to the use of technology to cut costs and strict risk management to reduce claims.
Now that ZhongAn has achieved underwriting profitability, the question becomes whether it can sustain it or – better yet – improve it. The so-called combined ratio, the sum of all claims and expenses as a percentage of premiums earned, was 99.4% for the first half, leaving ZhongAn with very little cushion against any mishaps that can push the ratio back above the break-even point. Comparisons with major insurers show ZhongAn has some way to go. Take Ping An for example again, whose combined ratio for the first half was 95.5%.
At the same time, ZhongAn operates in an increasingly difficult regulatory environment as authorities in China generally make life hard for all types of financial service firms to weed out bad apples. While that campaign was mostly focused on online lenders initially, online insurance businesses have recently been added to regulators’ watchlist.
The intensifying scrutiny, particularly over marketing and pricing, can cut both ways for ZhongAn. Eradicating unfair practices by its rivals can make the company more competitive in its fight for market share without sacrificing margins. On other hand, a run-in with regulators would deal a huge blow to ZhongAn.
ZhongAn investors will want to see the company overcome these challenges and steadily capitalize on a potentially lucrative insurance market in the long run. After all, the insurance business is currently ZhongAn’s strongest card, at least for now, with its other businesses showing no signs of contributing to the bottom line in the near-term.