Friday, April 20, 2018

ZhongAn debuts in Hong Kong

Shares in China’s first online insurer got off to a flying start on their first trading day in Hong Kong on Thursday.

The company, which is listed as ZhongAn Online P&C Insurance, priced its initial public offering of 199.3 million new shares at HK$59.70, the higher end of the price range it had marketed at — and by the time it started trading on Thursday morning the stock was already changing hands at HK$69, up more than 16%, prompting many investors to take their profits immediately. Even so, the stock still managed to close its first day of trading at HK$65, representing a respectable 9% gain.

The question now is how the company will perform in the long term. We have questioned before whether ZhongAn is a genuine disruptive insurtech unicorn or simply a company that insures the delivery of goods bought through Alibaba.

Shipping insurance definitely contributes a significant chunk of premiums — more than one-third during 2016, but that is down from 77% in 2014 as the company has expanded its product range to include policies that protect against flight accidents and delays, cracked smartphone screens and even drone accidents. It has also broadened its ecommerce business through merchant policies aimed that save sellers on Taobao and Tmall from having to pay a deposit.

Dependence on shipping returns may have come down, but it is still heavily reliant on premiums generated through its three biggest shareholders: Jack Ma’s Ant Financial, an affiliate of Alibaba, which owns 13.8%; Pony Ma’s Tencent, which owns 10.4%; and Ma Minzhe’s Ping An Insurance, which owns 10%. Close to three-quarters of premiums in 2016 were generated through shareholders — and more than 50% through the Alibaba group.

In this light, the question of whether ZhongAn is genuinely disruptive becomes a pressing issue. On the face of it, selling policies to Alibaba customers and merchants would seem to be more dependent on its relationship with Alibaba than on innovative technology being developed by an army of supersmart engineers.

Worryingly, its own shareholders are already entering ZhongAn’s turf. Cathay, a subsidiary of Ant Financial, is now offering shipping return insurance through Alibaba, Ant Financial and their subsidiaries. Ping An offers short-term health insurance products that are similar to ZhongAn’s personal clinic policy.

Indeed, ZhongAn’s shareholders are the ones with the engineers, as the company acknowledges in its prospectus. “Alibaba and Tencent have strong technological capabilities and may independently develop more products competing with ours in the future.”

Premiums from shipping return policies declined in 2016 as a result of the competition from new market entrants such as Cathay.

At the same time, the company has not yet recorded an underwriting profit. In 2014, 2015 and 2016 it lost Rmb61.5 million (US$9.3 million), Rmb511.6 million and Rmb153.1 million, respectively, and its combined ratio was 108.6%, 126.6% and 104.7%.

The company says that this performance was primarily due to the cost of expanding its network of ecosystem partners — mainly an effort to reduce its reliance on Alibaba — which entails significant costs in terms of consulting fees and service charges that it pays them. It is also incurring more costs from fees paid to insurance agents (which hardly suggests a radical new distribution model).

Despite this, the company has managed to book profits thanks to its investment returns for the past three years. But that is expected to change this year. It incurred a net loss during the first quarter of the year and is forecasting a significant loss for the full year as a result of its attempt to diversify away from the shipping returns business.

Also, its focus on sales through ecosystem partners implies an arms-length relationship to its customers rather than a model that will provide it with valuable access to customer data, though the company is now trying to generate sales through its own apps and in-house platforms.

In many ways, ZhongAn looks like a company that is restructuring its business quite dramatically. Launching an IPO in the middle of such a process is a gamble — and one that investors will be hoping pays off.

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