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Are there bubbles in Zhong An Insurance's IPO?

Source: AIR | Aug 2017

China InsurTech Property & Casualty Financial Performance Technology

After prolonged speculation of Zhong An Insurance going public, the InsurTech unicorn has finally made a move. The online insurer has formally filed for an IPO in the Hong Kong Stock Exchange on 30 June and the news has garnered much attention from not only the insurance community, but also the wider financial services industry, observes Chinese InsurTech platform InsurView.
Zhong An Insurance was founded in 2013 as China’s first pure digital insurance company and it was backed by Alibaba, Tencent and Ping An. When news of its IPO was released, most of the media posed the same question: Is Zhong An’s current business development matching its hundreds of billions of CNY valuation?
   We have summarised the viewpoints from different media and noted that the question above was based on the following perspectives:
  • Underwriting losses and profitability struggle
Zhong An Insurance has made a net profit of CNY36.981 million (US$5.5 million) and CNY44.257 million (US$6.5 million) in 2014 and 2015 respectively. But they only made CNY9.372 million net profit in 2016, which was a 78.8% slump.
   In the first quarter of 2017, Zhong An made a CNY317 million loss. If we take a look at their financial report, we can see that most of the profits came from investment, while the underwriting made losses.
   Although Zhong An managed to bring its loss ratio down from 77.82% in 2014 to 42.02% in 2016, its expense ratio jumped from 32.28% to 63.37%. The combined ratio has stayed above 105% since 2014 with 110.10% in 2014, 127.32% in 2015 and 105.39% in 2016.


  • Persistently high distribution cost and dependency on stakeholders
According to its 2016 financial report, Zhong An Insurance paid CNY102.7 million for technology services, which account for 60% of its insurance business and management expenses. The expense was attributed to promotion fees for internet platforms; in other words, it was the distribution cost.
   Industry observers also noted Zhong An’s significant reliance on stakeholders. An example is investor Alibaba’s Taobao e-commerce site, through which Zhong An managed to generate CNY613 million (2014), CNY1298 million (2015) and CNY1194 million (2016) in shipping fee insurance premiums. Despite the decline in claims for shipping fee insurance from 77.2% in 2014 to 35% in 2016, shipping fees claims payout still weighs the most among all its product lines.
Stay patient
Notwithstanding the above-mentioned challenges faced by Zhong An, we think that while it is necessary to understand the potential risks and problems of a startup, these issues should not be exaggerated. As the first digital insurer in China, Zhong An bears too much expectations, which in turn has attracted unwanted censures.
   We think in the era of new economics, we should stay patient with those who dare to act as the first explorers and respect their attempt to build a brand new business model with new technologies and new approaches.
Zhong An is different
Besides, is it fair to judge Zhong An’s development with traditional insurance standards?
   Firstly, Zhong An’s profits come from different sources compared with traditional insurance companies. According to data in 2016, Zhong An’s profits come mainly from non-operating income.
   From the perspective of premium income, although the growth rate has declined, Zhong An is still developing rapidly. No doubt that the online insurer is way behind domestic giants in terms of scale, but considering that Zhong An is less than four years old, clocking CNY3.4 billion in premium income is itself an amazing feat.
   In fact, the fundamental reason that opinions vary on Zhong An’s valuation is the hybrid identity of Zhong An. As both an insurance company and a tech startup, Zhong An has to try to meet both standards in the two industries when it is leveraging double edges.
   To put things in perspective, Yirendai and China Rapid Finance are another two P2P Fintech companies that went public in the US stock market. Despite repeatedly emphasising their tech genes, their valuations are mainly based on loan scale, pass rate, bad loan rate. It is the same with Zhong An.
Digitalisation and disruption
So, is Zhong An matching its valuation? Are there bubbles? It is very difficult to measure that. Professional analysts believe that it is not accurate to measure a fast-growing company with EPS or ROE metrics. To investment institutions, if Zhong An is considered as a tech company with 500 million policies, it is definitely worth a high valuation.
   And Zhong An’s valuation could go up more if they implement their long-term strategy well. It is well-known that digitalisation is changing every industry now. In the insurance sector, digitalisation is transforming the way insurance products and services interact with customers, and the traditional insurance business model could be completely disrupted in the future. Zhong An is a company pursing such disruption.
Investing heavily in technology development
The digital insurer is currently investing heavily in technology development, spending CNY22.4 million, CNY63.9 million and CNY214.4 million from 2014 to 2016 respectively. These numbers amount to 2.8%, 2.8% and 6.3% of its total premium income.
   Zhong An Technology, a wholly-owned subsidiary of Zhong An Insurance, is pursuing innovation on not only application level, but also underlying technology. For example, the cooperation with Hengqin Life, Zhong An’s S series products provide one-stop insurance information solutions. It is an exploration into the digitalisation of entire insurance industry.
   We believe such attempts like valuable to the long-term development of the insurance industry. Inefficiency in various insurance processes has cost too much and it also represents an opportunity to disrupt and profit for Zhong An. As its Chief Operating Officer Chen Jin said: “In the future, whether you are digital insurance company or traditional insurer, the destination is the same and that is to digitalise insurance and grab [a share of] the emerging market.”
Key indicators
While the verdict is not out on whether there are bubbles in Zhong An’s valuation, what we are sure of is, to evaluate a potentially disrupting startup, innovation and long-term development are the key indicators of success. It’s not about competing in an existing market, but about bringing a completely new world to the stage.
   What is the future? We believe the future is in improving efficiencies and lowering costs with the help of technologies, which is the course Zhong An is pursuing. We are glad that the insurance industry has Zhong An as a pioneer and maybe we will see the disruption trends brought about by them manifest soon. A 
InsurView is vertical portal for the Chinese Internet insurance industry and keeps a close eye on innovations from InsurTech startups as well as insurance information. For more information, visit
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