ZhongAn's Insurance Sales Show Signs Of Picking Up, But Challenges Remain

Key Takeaways:

• ZhongAn’s gross written premiums rose 16% last year to 23.6 billion yuan, slowing from 22% growth in 2021
• The insurer faces challenges from China’s abrupt end to strict Covid-19 controls, while slumping global stock and bond markets also make investing gains difficult

By Warren Yang

Last year may have ended on a better note than it began with for ZhongAn Online P&C Insurance Co. Ltd. ZZHGF (6060.HK), as suggested by its year-end gross written premium data for 2022 released at the end of last week. But the digital insurer may not want to uncork the champagne just yet as it leaps into the upcoming Year of the Rabbit.

ZhongAn earned 23.6 billion yuan ($3.5 billion) in gross written premiums last year, according to its final monthly filing of that metric for 2022. That means revenue from the company’s core insurance business grew by 16% for the year, slowing from 22% in 2021.

Still, the fact that ZhongAn’s gross written premiums grew just about 7% in the first half of the year suggests that second-half growth accelerated sharply on a sequential basis, which looks more encouraging. Indeed, our calculations show ZhongAn’s gross written premiums increased by around 25% year-on-year in the second half, or more than triple the first-half growth rate.

The apparent improvement suggests that things may finally be looking up for the company and other insurers, which have taken a hit from cautious consumer spending amid economic uncertainties created by Beijing’s strict pandemic-control policies. The first half of last year was particularly challenging, not just for insurers but also for most consumer-facing businesses and manufacturers, as a resurgence of Covid-19 cases led to lockdowns across the country, including one that shut Shanghai for two months through the end of May.

But ZhongAn may not be out of the woods just yet. The Chinese economy is still wobbly, with more uncertainties created by a surge in Covid-19 infections after an abrupt scrapping of most containment measures starting in early December. The country’s GDP expanded just 2.9% year-on-year in the fourth quarter, resulting in 3% growth for the year – the second slowest rate since 1976. Data released earlier this week also showed retail sales declined 1.8% in December from a year earlier, marking the third straight month of declines.

The December data suggests the economy may be suffering from the sudden U-turn in the government’s Covid-19 policies. And the situation probably won’t get better until the current wave of infections subsides, which likely will take at least a few months.

For the broader insurance sector, the sharp rise in Covid infections across China could deal a severe financial blow by causing a surge in payouts of health insurance. Wary about that possibility, ZhongAn and some other insurers last month stopped selling all products that pay policyholders who test positive for Covid-19, according to a Financial Times report. Each payout would be small, a couple hundred U.S. dollars at most. But the cost to insurers would snowball quickly if they had to make millions of individual payouts.

Without massive Covid-19 liabilities, ZhongAn could plausibly continue to turn a profit from its insurance business, which only became profitable in 2021. The company paid more than 11.9 billion yuan in claims last year, according to media reports that cited its disclosure. Using that figure as a basis, ZhongAn’s total claim payouts as a proportion of its gross written premiums, known as the loss ratio, would be about 50% of last year’s gross written premiums, an improvement from the 56% loss ratio for the first half of the year.

Cost cutting

ZhongAn has also been cutting expenses for selling policies by shifting away from third-party platforms that act as agents and get fees for each sale. If the company kept such costs below 50% of its gross written premiums, as it did in the first half, and if total claim payouts remained around or below 50% of premiums as well, ZhongAn should have made some profit from insurance underwriting in the second half of last year.

But outside its core insurance business, ZhongAn’s income from investments is a different matter that may be cause for bigger headaches. Like other insurers, ZhongAn invests a large share of the premiums it collects in assets like stocks and bonds. Such investment income is especially critical for a company like ZhongAn because its profit from insurance underwriting is still tiny.

The performance of ZhongAn’s investments last year was most likely not so pretty. Investors faced tough markets in 2022 as prices of both stocks and bonds fell amid global interest rate hikes to cool inflation. The pair of asset classes more typically move in opposite directions, allowing investors to keep making money by buying more of one when the other is performing poorly.

Nearly all of ZhongAn’s investment income evaporated in the first half of last year as financial markets notched their worst performance in more than a decade. And with its other businesses like digital banking in the red, the company posted a net loss. Thus, ZhongAn’s ability to avoid an annual net loss for 2022 could well depend on how its investment income performed after July, as markets improved in the second half of the year. The company is expected to stay in the black for all 2022, but just barely, as its its net profit is seen plunging 96% year-on-year, according to the average of 21 analyst estimates compiled by Yahoo Finance.

By comparison, online insurance broker Waterdrop Inc. WDH, which only generates revenue from brokerage fees and has no exposure to financial markets, has reported net profits for three consecutive quarters. That shows how life can be harder for insurance underwriters than simple middlemen during times of financial market weakness.

ZhongAn shares currently trade at less than half of their IPO price from 2017, with a current price-to-sales (P/S) ratio of 1.4, less than half of 3.1 for Waterdrop. But ZhongAn isn’t faring particularly poorly compared to other insurance underwriters. Traditional insurance giant Ping An (2318.HK; 601318.SH) now trades at a P/S ratio of just about 0.9, while China Life (2628.HK; 601628.SH) is even worse, at 0.4.

For all the headwinds ZhongAn is facing, it isn’t in a crisis by any means — at least not now. Despite a net loss in the first half, its cash flow relative to liabilities, a key measure of an insurer’s solvency, was well above the regulatory minimum. It might be just a matter of time before its insurance business gets back on track as the Chinese economy finally moves on from the Covid-19 pandemic.

But it’s harder to predict where financial markets will go. Continued weakness in that regard could limit ZhongAn’s investment income, which would also hurt its profitability.