ZhongAn posts strong premium gains

The digital insurer says it returned to the black, as it clocked its fastest revenue growth since 2017 in the first seven months of this year

Key Takeaways:

  • ZhongAn expects to post a net profit of at least 200 million yuan for the first half of 2023, reversing a loss in the year-ago period
  • The online insurer’s gross written premiums grew 37% year-on-year in the first seven months of 2023, the fastest rate in six years


By Warren Yang

ZhongAn Online P & C Insurance Co. Ltd. (6060.HK) is humming along this year after life returned to normal with the end of China’s strict pandemic control measures.

On the one hand, the Chinese economy continued moving past the Covid-19 pandemic in the first half of this year, boosting consumer demand for insurance policies. At the same time, financial markets performed well, providing a boost to the other major piece of ZhongAn’s business as an institutional investor.

Whether that buoyancy will hold up for the rest of the year is the million-dollar question right now, as signs like tumbling exports and deflation cast a growing shadow over the Chinese economy. But that’s a question for later, and for now we should let ZhongAn bask in the glow of a strong first-half performance.

ZhongAn alerted investors to its recent business boom in a positive profit alert on Monday, saying it expects to post at least 200 million yuan ($27.5 million) in net profit for the first half of this year – a stark turnaround from a net loss of 636 million yuan a year earlier. As a Hong Kong-listed company, ZhongAn only needs to report its financials twice a year. But Chinese insurers that disclose earnings on a quarterly basis already posted their best results since 2018 in the first quarter, so ZhongAn seems likely to join the party.

ZhongAn’s brief Tuesday statement didn’t provide much detail on how it returned to profitability. But its latest monthly revenue disclosure released last Friday shows its product sales were growing nicely this year, suggesting that Chinese consumers are becoming more receptive to spending money on insurance as worries about their finances ease.

In the first seven months of this year, the company collected 17.7 billion yuan in gross written premiums, the top-line item for insurers’ income statements. The total is about 37% higher than the same period of last year, which puts ZhongAn on track for its fastest annual revenue growth since 2018, the year after the company went public.

ZhongAn doesn’t provide any product breakdown of its revenue in its monthly disclosures. But it’s safe to bet that demand for insurance that pays medical bills will grow in China as people become increasingly health conscious. Also, gimmicky policies that ZhongAn has become famous for, such as protection against smartphone screen cracks, will continue to gain traction because they are cheap and useful in everyday life.

Of course, increasing insurance sales doesn’t always mean greater profitability for ZhongAn, or any insurer for that matter.

A key thing to watch is for an improvement in the company’s underwriting margin, which hinges on its ability to control claims and costs. ZhongAn’s “combined ratio” — the sum of net claims and insurance operating expenses as a percentage of net premiums earned after deducting costs for reinsurance — hit a major milestone when the figure fell below 100% for the first time in 2021. That means there was some money left over after those costs were deducted from insurance sales.

The figure declined another 1.1 percentage points last year to 98.5%, showing that ZhongAn’s underwriting margin continued to improve. It may look like a small change in percentage terms, but combined with a 17% revenue increase, the gain was large enough for the insurer’s underwriting profit to more than quadruple last year.

High-cost model

ZhongAn is China’s first online-only insurer, founded in 2013 by Alibaba and Tencent and financial heavyweight Ping An Insurance. It has a fundamentally high-cost business model due to its use of third-party online channels, including those of its two internet giant founders, to sell the bulk of its products. But ZhongAn has been trying to cut such costs by increasing the use of its own sales platforms.

The company has made good progress on that front over the years. Premiums collected from its proprietary distribution channels jumped 64% last year, vastly outpacing its overall revenue growth, to account for more than a quarter of gross written premiums, up from 17% in 2021 and 13% in the prior year. As a result, the company’s fees paid to its third-party partners relative to net premiums earned decreased across all product types.

At the same time, ZhongAn has been trying to revamp its risk management capabilities to reduce claims. That effort has also been bearing some fruit, contributing to improvements in its underwriting margin.

With all this progress, ZhongAn has already come a long way from its origin as a seller of gimmicky insurance to cover costs for returning goods purchased on Taobao, Alibaba’s popular online marketplace. If ZhongAn can keep improving its combined ratio and continue to grow revenue at more than 30% for the rest of the year, it’ll post some nice growth in its underwriting profit, further solidifying its credentials as an insurer.   

Regardless of what happens to its underwriting profit, ZhongAn’s bottom line will largely be determined by the performance of its investment portfolios as it ploughs much of its premium income into financial markets to generate returns. The company suffered greatly last year as raging inflation hit both global bond and stock markets, dealing a blow to its investment income.

But things are looking up for ZhongAn in that regard as stocks and bonds both rebound this year. The company’s return to the black in the first half hints that it reaped sizable returns on its investments as its other non-insurance businesses, like its digital bank, probably continued losing money.

ZhongAn shares are up about 6% this year, outperforming industry titans like China Life Insurance (2628.HK) and Ping An Insurance (2318.HK), even though the stock is worth less than a third of its IPO price. ZhongAn also trades at a higher price-to-sale (P/S) ratio than the other two, even though its multiple is also pretty modest at about 1.4.

The company’s valuation may reflect investor optimism about its prospects as a technology-based insurer. When it reports its official first-half results on Aug. 28, it may give investors a pretty good reason to stick around – though all eyes will also be watching for any signs of a business slowdown in tandem with China’s slowing economy.

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