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Securities Analysis 13
Equity Research 13 Nov 2017
Table of contents
EXECUTIVE SUMMARY ...... 3
A LEADING INSURETECH COMPANY IN CHINA ...... 8
REDEFINES INSURANCE VIA ECOSYSTEM-ORIENTED INNOVATION ...... 16
TECHNOLOGY RESHAPES INSURANCE ...... 28
BEYOND INSURANCE: AN EXPORTER OF FINTECH EXPERTISE ...... 33
GROWTH STRATEGY ...... 36
MARKET OPPORTUNITIES ...... 38
PEERS AND COMPETITIVE LANDSCAPE ...... 40
FINANCIAL ANALYSIS ...... 44
FINANCIAL STATEMENTS ...... 56
VALUATION ...... 58
SWOT ...... 61
KEY INVESTMENT RISKS ...... 62
APPENDIX 1: MILESTONES ...... 65
APPENDIX 2: DIRECTORS, SUPERVISORS AND SENIOR MANAGEMENT . 67
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Executive summary
A leading Insuretech company in China
ZhongAn Online P&C Insurance Co., Ltd. (ZhongAn, or the Company) is the first and leading online-only insurance company in China approved by the CIRC. In 2016, ZhongAn achieved gross written premiums (GWP) of Rmb3.4bn, surpassing the other three internet insurance companies. As of 31 Dec 2016, ZhongAn has served approximately 492 million customers and sold more than 7.2 billion policies since inception.
ZhongAn was founded by Ant Financial, Tencent Computer System, Ping An Insurance and six other shareholders. The first three companies now hold 13.54%, 10.21% and 10.21% of the Company.
The Company established ZhongAn Information and Technology Services Co., Ltd. (ZhongAn Technology) in Jul 2016, to explore technology innovation focusing particularly on artificial intelligence, blockchain, cloud computing and data-driven marketing. ZhongAn Technology is expected to be the Company’s new growth driver in the long run and to export and monetize technology solutions.
The Company has a flat organization structure and experienced technology team, with more than half of its employees being engineers and technicians. It has a large and expanding customer base, which lays a solid foundation for data analytics, cross-selling opportunities and new business incubation. The Company sells insurance products and solutions via the platforms of ecosystem partners, its proprietary platforms and other channels. Sales on the platforms of ecosystem partners accounted for 86.2% of GWPs in 2016.
Redefines insurance via ecosystem-oriented innovation
ZhongAn redefines the insurance value chain via developing connective ecosystems. It offers insurance products and solutions in primarily five ecosystems. The five ecosystems echo the evolution of ZhongAn’s business model from embedding products in ecosystem partners’ platforms (lifestyle consumption and travel), to connecting ecosystem partners (consumer finance) and further to establishing ZhongAn’s own ecosystems (health and auto).
1. Lifestyle consumption ecosystem: declining contribution to GWP In this ecosystem, the Company aims to cover customers’ pain points in daily consumption. GWP from the lifestyle consumption ecosystem accounted for 92.2%, 69.9% and 47.6%, 48.4% and 36.5% of GWP in 2014, 2015, 2016, 1H2016 and 1H2017, respectively. ZhongAn first launched its Shipping Return Policy with Alibaba and gradually extended product offerings to vertical ecosystem partners and offline partners. It handles peak sales on cloud- based platform and leverage its big data analytical capabilities to assist pricing, risk control and marketing. Regarding consumer electronics, the Company offers Phone Screen Crack Policy and etc. to cover phone damages and connects offline repair services to reduce claim cost. Image recognition technology is applied to prevent fraud.
2. Travel ecosystem: captures both head and tail flow of customers ZhongAn cooperates with and sell travel-related insurance products via major online travel platforms, major airlines, offline tickets agents and its own platforms. The Company is able to improve accuracy of pricing and achieve dynamic pricing based on analysis of customer data and airline data. Key products include Flight Accident and Delay Policy.
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13 Nov 2017
3. Consumer finance ecosystem: connecting both ends ZhongAn develops a connective consumer finance ecosystem, which builds a channel between funding providers and asset providers (such as consumer finance platforms) as well as consumption scenarios. Leveraging its access to extensive consumer data and credit data, ZhongAn is able to offer credit guarantee insurance products, which generate premium income, and a whole set of credit management, asset management and risk control solutions, which generate service income. Key products include the Baobei Open Platform, which connects funding providers with consumer finance platforms and Mashanghua system, which connects funding providers with various consumption scenarios.
4. Health ecosystem: enhance popular products and innovate with biometric data In 2016, the Company launched a popular customized product – Personal Clinic Policy, which is affordable and targets mid-end customers. In addition to enhancing this product, the Company will continue to connect with a wide variety of health ecosystem partners with different resources and specialties and to upgrade health insurance products with biometric data.
5. Auto ecosystem: light-asset model via co-insurance The Company tapped into the large auto insurance business in an asset-light model thanks to its co-insurance agreement with Ping An P&C, in which ZhongAn and Ping An P&C share the premiums and claim payments on a 30%/70% basis. ZhongAn connects online customers and Ping An is in charge of claim settlement. As of the Latest Practicable Date, the Company has obtained auto insurance business licenses in 18 regions, compared to only 6 as of 31 Dec 2016. ZhongAn is also getting prepared for technology-driven auto insurance to embrace the vast opportunities unlocked by the gradual deregulation of commercial auto insurance.
Technology reshapes insurance
Data: a virtuous cycle from building on data to monetizing data We view the Company as a data-driven community. The Company exceled in both breadth and depth of data in the Insuretech spectrum. We expect the Company to leverage its unparalleled data scale, multi-dimensional proprietary data depth and strong data analytics capabilities, to improve efficiency, reduce cost and enrich product mix in the long run.
Cloud: delivering a fully-fledged ecosystem via low-cost, secure and efficient cloud- based “Wujieshan” system The Company designed its proprietary cloud-based platform “Wujieshan” in 2014. It can achieve short product development cycle (with 2 weeks) and speedy policy processing in a highly secured platform.
AI: AI-powered multi-tier architecture to optimize efficiency and risk management The Company applies AI in multiple areas, such as identify verification, image recognition, model iteration and customer service. For example, through advanced image recognition, the Company enjoys fast and effective anti-fraud measure, and further building unique advantage in optimizing claims process for innovative products such as Phone Screen Crack Policy. Moreover, its real-time risk management system enabled by AI makes it possible to address fraud and default risks throughout a product lifecycle.
Blockchain: decentralizing data to empower trust between parties The Company independently developed its blockchain system, namely Ann-chain and Ann- router. It has applied the blockchain technology in charity, insurance, agriculture husbandry, etc. For instance, it applied Ti-Capsule, a peer-to-peer and secured data storage system, to electronic health insurance policy.
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What’s next? Open technology Tech 2.0: Open platform to connect long-tail ecosystem. Apart from in-house usage, the Company can share core technology platform with ecosystem partners, via two ways: 1) co- promotion of products, and 2) customized scenario-based insurance. ZhongAn’s open platform exceled itself with complete insurance portfolio, standard API and H5/PC connection without development requirement.
Beyond insurance: an exporter of Fintech expertise
3 series to build a chain of “Finance +Scenario +Technology”. Leveraging its experience in ZhongAn Insurance’s core system, ZhongAn Technology developed its leading position as a cloud-based platform provider and an exporter of Fintech expertise, by offering 3 series of technology solutions: 1) S series of insurance and financial applications, including e- commerce platforms, insurance core systems and finance core systems. 2) X series of intelligent data services, with AI-powered multi-tier architecture to address business needs of effective risk management and efficient decision-making. Products include X-model, X-decision, Smart Customer Service and Facial Recognition. 3) T Series of Blockchain services, including Ti-Capsule, Ti-Sun, Ti-GlassHouse and Ti-Packet for storage, security, supervision and signing system.
Growth Strategy
ZhongAn aims to further grow its customer base and GWP, expand and optimize the product mix and maximize profitability by promoting operating efficiency. It will implement an ecosystem-oriented and technology-driven strategy. On the one hand, it strives to solidify its leadership in technology by seeking top engineering talents, cooperating with leading labs and universities, enhancing big data analytics, and exploring usage of AI and blockchain. On the other hand, it plans to foster sustainable ecosystems from scenario-based products (e.g. lifestyle consumption and travel) to in-depth cooperation (e.g. consumer finance and auto) and further to proprietary ecosystem (e.g. health and life).
Market opportunities
(1) The insurance industry is undergoing rapid growth in China.
(2) China’s Insuretech market has significant growth potential. According to the Oliver Wyman Report, the most innovative Insuretech segment, where ZhongAn mainly engages in, is expected to grow particularly fast at a CAGR of 62.0% from 2016 to 2021.
(3) Regulatory environment is favorable towards the long-term healthy development of the insurance industry, and is supportive of internet insurance business as well as product innovation. Regulatory authorities are also beefing up R&D efforts on Fintech.
Peers and competitive landscape
ZhongAn extends beyond traditional insurance. ZhongAn differs from traditional insurance companies in many aspects. For example, ZhongAn is smaller in scale and has higher expense ratio but lower loss ratio. The largest component of expense is technology service fee for ZhongAn, but commission expenses for traditional insurers. ZhongAn, which develops products in five ecosystems, has a different product mix from traditional insurers, of the latter 70% of the products are auto insurance policies. More importantly, ZhongAn is a more active Insuretech player and has more technology genes. Traditional insurers are mainly involved with online distribution and technology-enabled upgrade while ZhongAn engages in ecosystem-oriented innovation.
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13 Nov 2017
ZhongAn is the clear leader among the four internet insurance companies. It obtained license more than two years earlier and has a more mature business model and much higher premium income than the other three internet insurance companies combined.
Financial analysis
Insurance business: underwriting margin to worsen first then improve. We believe the underwriting business will feature (1) strong growth of GWP at a CAGR of 68.6% in FY17- 19E, particularly driven by the consumer finance ecosystem and health ecosystem; (2) claim ratio and expense ratio to rise in FY17 due to business expansion, and then decline thanks to efforts on loss and expense control. We estimate combined ratio to be 119.5%, 110.5% and 101.8% in FY17-19E, respectively. Technology business (Part 1): 3 series of solutions to export and is expected to breakeven in FY19. We expect the Company to bear initial fruits from commercialization of software license and IT service, and then SaaS will be the long-term growth driver. Driven by ramp-up of both customers and ARPU, we forecast tech-export revenue to surge at a CAGR of 301% in FY17-19E, in which SaaS/Rev ratio to climb up to 44% in FY19 from 23% in FY17. We expect technology export to achieve breakeven in FY19 with OPM of ~50%. Technology business (Part 2): Consumer finance service income to become a new source of profit in FY18-19. Income from the provision of credit solutions and other technology services to the consumer finance ecosystem partners is estimated to be Rmb389mn and Rmb680mn in FY18 and FY19, representing another important source of profit. Net profit to sink in FY17 then pick up in FY18 and FY19. We predict the Company will record loss of Rmb563mn in FY17, mainly due to worsening underwriting margin and high R&D expenses from its technology business. In FY18-19, we forecast net profit to become Rmb16mn and Rmb1.32bn thanks to improving underwriting margin and new sources of profit from technology export (in FY19) and technological services to consumer finance ecosystem partners (in FY18 and FY19).
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Valuation
We adopt sum-of-the-parts valuation method because it offers greater insights into the Company’s insurance business and technology business by valuing them separately. In sum, we value ZhongAn at HK$126.8bn, or HK$88.09 per share.
Insurance business is valued at HK$66.03 per share. We value ZhongAn’s insurance business at 4.6x FY18E PBR. This multiple corresponds to a weighted average PBR of the traditional insurance peers and Fintech peers, in which insurance peers receive a weight of about 40%. We think ZhongAn’s insurance business resembles Fintech firms in terms of high top line growth, flat organization structure, rapid innovation and technology talent base. Based on FY18E book value estimate of Rmb17.6bn, we forecast value of the insurance business to be HK$95.1bn, or HK$66.03 per share.
Technology business is worth HK$22.06 per share. The technology business is further divided into two parts. (1) 3 series export, which is not yet breakeven in FY18, is valued at HK$23.9bn, based on DCF model (assuming a WACC of 13.23% and a terminal growth of 3%), or equivalent to 54x FY19E EV/EBIT. (2) For technological services provided to consumer finance ecosystem partners, we apply the industry average 17x FY18E PER, and calculate fair value to be HK$7.9bn. Therefore, overall technology business is valued at HK$31.8bn, or HK$22.06 per share.
Key Investment Risks
(1) Evolving customer preferences and industry standards; (2) Threat from insurance and technology peers as ZhongAn’s products and business model may be replicated quickly; (3) Potential decrease of support or even direct competition from shareholders; (4) Uncertainty in retaining long-term relationship with ecosystem partners; (5) Regulation risks concerning solvency margin ratio and necessary licenses; (6) Operational risks from inaccuracy of data and technical error in each step of insurance value chain; (7) Reputation and law risks of failing to protect the confidentiality of the personal data; (8) Risk of investment underperformance; (9) Potential higher CoR due to intensive and concentrated claims from travel-related insurance; (10) Risk of failing to keep advanced technologies; and (11) Lower-than-expected growth of internet penetration.
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13 Nov 2017
A leading Insuretech company in China
The first and leading online-only insurance company in China
ZhongAn Online P&C Insurance Co., Ltd. (众安在线财产保险股份有限公司, ZhongAn or the Company) was incorporated on 9 Oct 2013, as a joint stock limited company after receiving approval from the CIRC. It was the first internet company to obtain an insurance institution permit and one of the four online-only insurance companies holding such an insurance permit. The Company was founded by nine shareholders, including Ant Financial (浙江蚂蚁 小微金融服务集团股份有限公司), Tencent Computer System (深圳市腾讯计算机系统有限公 司) and Ping An Insurance (中国平安保险（集团）股份有限公司).
ZhongAn is a leading Insuretech company in China. Leveraging its proprietary technologies, the Company develops and offers online innovative insurance products and solutions in the context of five major ecosystems including lifestyle consumption, consumer finance, health, auto and travel ecosystems. In 2016, GWP of the Company was Rmb3.41bn. As of 31 Dec 2016, the Company has served approximately 492 million customers since inception, which include both the policyholders and the insured, and had an aggregate of 245 insurance product terms approved by the CIRC. ZhongAn had approximately 180 ecosystem partners as of the Latest Practicable Date.
Figure 1: The largest Insuretech Company in China
Source: Company, CMBIS Note: *As of 31 Dec 2016.
Major shareholders are giants in finance and technology
ZhongAn was founded by Ant Financial (浙江蚂蚁小微金融服务集团股份有限公司), Tencent Computer System (深圳市腾讯计算机系统有限公司), Ping An Insurance (中国平安保险（集 团）股份有限公司) and six other shareholders. As of now, Ant Financial holds 13.54%, and Tencent Computer System and Ping An Insurance each holds 10.21% of the Company.
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13 Nov 2017
Figure 2: Shareholding structure
Notes: (1) Ant Financial is owned by Hangzhou Junao Investments (Limited Partnership) (杭州君澳股权投资合伙企业（有 限合伙）) as to 34.15%, Hangzhou Junhan Investments (Limited Partnership) (杭州君瀚股权投资合伙企业（有 限合伙）) as to 42.28% and 21 other shareholders as to the remaining 23.57%. The voting rights of Hangzhou Junao and Hangzhou Junhan are controlled by Hangzhou Yunbo Investment Consulting Co., Ltd. (杭州云铂投资咨 询有限公司) which in turn is wholly-owned by Jack Ma (马云). (2) Tencent Computer System is a subsidiary of Tencent Holdings Limited, a company listed on the Main Board of the Stock Exchange (SEHK: 0700). (3) Ping An Insurance is listed on the Main Board of the Stock Exchange (SEHK: 02318) and the Shanghai Stock Exchange (SSE: 601318). (4) Shenzhen Jia De Xin Investment Limited (深圳市加德信投资有限公司) is a subsidiary of Shenzhen Huaxinlian Investment Co., Ltd. (深圳市华信联投资有限公司) which is controlled by Ou Yafei (欧亚非). Ou Yafei is the elder brother of Yaping Ou, the Chairman of the Company’s Board. (5) Unifront Holding Limited (优孚控股有限公司) is owned by Shanghai Songlu Investment Management Co., Ltd. (上 海松鹿投资管理有限公司) as to 25%, Shanghai Jianglu Investment Management Co., Ltd. (上海江鹿投资管理有 限公司) as to 16.88%, Shanghai Xinlu Investment Management Co., Ltd. (上海鑫鹿投资管理有限公司) as to 13.12%. The entire interest of Shanghai Songlu, Shanghai Jianglu and Shanghai Xinlu are held by Shanghai Youlu Investment Management Co., Ltd. (上海游鹿投资管理有限公司), which is controlled by Zhang Zhen (张真). (6) Cnhooray Internet Technology Co. Ltd. (深圳日讯网络科技股份有限公司) is a subsidiary of Timeway Holdings Limited (中宇集团有限公司). The entire interest of Timeway Holdings is held by Sinolink Worldwide Holdings Limited (香港百仕达控股有限公司) which is listed on the Hong Kong Stock Exchange (SEHK: 1168). (7) Qingdao Huilijun Trading Company Ltd. (青岛惠丽君贸易有限公司) acquired shares from Beijing Ctrip Int’l Travel Agency Ltd.（北京携程国际旅行社有限公司）in a private transfer completed on April 28, 2017. (8) Shanghai Haoguan Investment Management Partnership (Limited Partnership) (上海灏观投资管理合伙企业 （有限合伙）) acquired 28,570,000 shares from Unifront Holding Limited (优孚控股有限公司) which was completed on July 28, 2016. (9) Shanghai Qianguo Investment Management Partnership (Limited Partnership) (上海谦果投资管理合伙企业（有 限合伙）) acquired 31,430,000 shares from Unifront Holding Limited (优孚控股有限公司) through a private transfer which was completed on July 28, 2016. The purpose for the above transfer of a combined 60,000,000 Shares or 4.836% of the Company’s Shares from Unifront Holding Limited (优孚控股有限公司) to Shanghai Haoguan Investment Management Partnership (Limited Partnership) (上海灏观投资管理合伙企业（有限合伙） ) and Shanghai Qianguo Investment Management Partnership (Limited Partnership) (上海谦果投资管理合伙企业（有限合伙）), completed on July 28, 2016, was for the motivation of the Company’s senior management, core employees and other skilled personnel and to provide incentives for their contributions to the Company. As of the Latest Practicable Date, the interests of Shanghai Haoguan and Shanghai Qianguo were held by a general partner and 98 individuals, consisting of one Director and seven members of senior management, and the remaining were employees of the Group. The aggregate consideration of the transfer of the 60,000,000 Shares was Rmb90mn, or RMB1.5 per Share, paid with contributions from the said 98 employees of the Company to Shanghai Haoguan and Shanghai Qianguo. (10) Pre-IPO investors include: Morgan Stanley Asia Securities Products LLC (30,730,833 shares, 2.09%), CICC Securities (HK) Limited (31,250,000, 2.13%), CDH Avatar, L.P.(62,000,000, 4.22%), Keywise ZA Investment (61,189,167, 4.16%), and Equine Forces Limited Partnership (55,455,000, 3.77%). (11) Shanghai Yuanbao Internet Technology Co., Ltd (上海员宝网络技术有限公司) is owned by ZhongAn Information and Technology Services Co., Ltd. (众安信息技术服务有限公司), a wholly-owned subsidiary of the Company, as to 60%, and Wu Qianchang (吴前常) as to 40%. Wu Qianchang is an Independent Third Party. (12) Beijing Youwozai Technology Co., Ltd. (北京有我在科技有限公司) is owned by ZhongAn Information and Technology Services Co., Ltd. (众安信息技术服务有限公司), a wholly-owned subsidiary of the Company, as to 60%, Xu Wei (许炜) as to 20% and Wang Dong (王东) as to 20%. Other than Xu Wei being the COO of our Company and the shareholder of Beijing Youwozai Technology Co., Ltd., he is an Independent Third Party. Wang Dong is an Independent Third Party Source: Company, CMBIS
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ZhongAn Technology as its technology platform
In Jul 2016, the Company established ZhongAn Information and Technology Services Company Limited (众安信息技术服务有限公司, or ZhongAn Technology), with a registered capital of Rmb500mn. It was established to explore technology innovation focusing in particular on artificial intelligence, block chain, cloud computing and data driven marketing. In the long run, the Company expects ZhongAn Technology to be its new growth driver. The Company will strive to make ZhongAn Technology a leader in applying blockchain and artificial intelligence technologies and the incubator for other advanced technologies. Besides, it entered into a JV agreement to establish a microfinance company in Chongqing with Sinolink Worldwide, to further strengthen its consumer finance ecosystem.
Figure 3: Website of ZhongAn Technology
Source: Company, CMBIS
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Flat organization structure and experienced technology team
Flat organization structure and product-driven management system fosters innovation. ZhongAn’s full product development lifecycle could be within 2 weeks, mainly thanks to its unique organization structure. Unlike traditional insurers with cumbersome organization, the Company operates with a flat and effective product management system. Specifically, product managers are responsible for the whole development process of insurance product, from exploring demands, market research, policy clauses design to product launching and backend support. In each step, product managers can monitor the operation and allocate resources to address practical needs, thus leading to a highly-efficient process of both decision-making and product designing.
Figure 4: Organization structure of ZhongAn
Board of Directors
Board Office
General Manager CEO
Deputy GM Deputy GM Deputy GM CTO COO CMO
App Institutional Health Operation Direct Strategy Dept GM Office Finance Dept Development Finance GM Assistant Division Mgmt Center Business Dept Dept Division
Consumer Consumer Data Mgmt Underwriting Travel Risk Mgmt PR Dept Admin Dept IR Dept Electronics Finance Dept Dept Division Dept Division Division
Social Investment Compliance Consumption & Operation E-commerce Network Trade Protection Claim Dept Auto Division Product Dept Safety Dept Division Division Division Division
Financial System Test Customer HR Dept Acturial Dept Fintech Dept. Operation Dept Service Dept Dept
Internal Audit Reinsurance Open Platform Asset Mgmt Dept Dept Dept Dept
Source: Company, CMBIS
Experienced technology team. We believe ZhongAn has inherent Fintech attributes. As of 31 Dec 2016, the research and development staff consisted of approximately 862 engineers and technicians. Moreover, ZhongAn’s R&D/GWP ratio climbed up to 6.3% in FY16, close to that of internet giants.
Figure 5: Employees breakdown Figure 6: Heavy R&D investment
250 7% （Rmb mn） 6.3% 6% 200 Other 5% employees 712 150 4% 862 3% 100
2% 50 Engineers and technicians 1% represent > 50% of total 0 0% employees 2014 2015 2016 R&D expenditures(Left) R&D/GWP ratio(Right) Source: Company, CMBIS Source: Company, CMBIS Note: as of 31 Dec 2016
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A large and expanding customer base
An expanding and loyal customer base with higher life-time value. From its inception in Oct 2013 to 31 Dec 2016, ZhongAn served approximately 492 million customers, which include both policyholders and the insured, calculated based on unique identity and contract information available to ZhongAn. Over 7.2 billion policies were sold. Via cooperation with its ecosystem partners and developing its own platforms, ZhongAn has attracted a large customer base with interactive marketing and user-friendly interface. This produces extensive customer data and lays a solid foundation for cross-selling opportunities to increase customers’ life-time value. In 2016, approximately 78% of the insured customers were served by ZhongAn’s products at least twice. On average, each of the customers was served by 10.3 policies in 2016, increasing from 5.4 in 2014 and 8.3 in 2015. Average GWP per customer increased from Rmb4.0 in 2014 to Rmb7.3 in 2015 and further to Rmb9.9 in 2016.
Figure 7: Customer base Figure 8: GWP/customer and GWP/policy
Source: Company Source: Company
Popular among the younger generation. As of 31 Dec 2016, approximately 60% of ZhongAn’s individual customers were aged 20 to 35 years old, who are accustomed to ZhongAn’s innovative business model and its ecosystem partners. The distribution of customers across different geographic areas in China is largely in line with the distribution of internet users in China. An increasing penetration rate into smaller, non-first tier cities was observed.
Satisfactory customer experience. The growth in customer base and transaction volume per customer are largely affected by the quality of customer service and claims experience. ZhongAn strives to provide customers with simple and speedy services, such as flexible terms and online automated claims. Customer complaint rate was 1.34 per million policies in 2016, ranking the second lowest among the 60 PRC P&C insurance companies according to the CIRC.
Sales channels 1. Platforms of ecosystem partners
ZhongAn primarily embeds its insurance products into the platforms of ecosystem partners and sells products in scenario-based settings. This allows customers to purchase insurance specifically for the risks related to their consumption behaviors in a very simple manner.
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In addition, ZhongAn has set up its official online stores on major online sales channels, such as Tmall, Ant Financial Group’s insurance platform and Weidian, among others. For certain products, ZhongAn further expands its sales base through cooperation with offline channels, for example, offline travel agencies to sell the Flight Delay Policy and offline consumer electronic shopping centers to sell the Phone Screen Crack Policy.
ZhongAn relies on a few ecosystem partners to generate a significant portion of GWP. In 2014, 2015 and 2016, GWP generated from the platforms of ecosystem partners accounted for 100.0%, 97.7%, and 86.2% of total GWP, respectively. GWP from the platforms of the top five ecosystem partners accounted for 97.5%, 87.3%, and 69.0% of total GWP in respective periods.
Figure 9: Shipping return policies on Taobao Figure 10: ZhongAn’s official website on Tmall.com
Source: Taobao.com, CMBIS Source: Tmall.com, CMBIS
Figure 11: Less reliant on platforms of ecosystem partners
Source: Company
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Figure 12: GWP share of Top 5 ecosystem partners each year
Source: Company
2. Insurance agents
ZhongAn sells certain insurance products through insurance agents or other third party channels. For example, a large portion of health insurance products are sold through insurance agents. With the significant growth of the health insurance business, insurance agents have become an increasingly important sales channel. ZhongAn generally pay insurance agents handling charges and commissions in proportion to the GWP generated. In 2014, 2015, and 2016 , GWP generated from insurance agents accounted for 0.0%, 2.1%, and 13.2% of total GWP, respectively.
3. Proprietary platforms
ZhongAn develops its own platforms including website, mobile application, WeChat public accounts and Tmall flagship store to expand its reach to customers and provides seamless purchase experience anytime, anywhere. For example, ZhongAn sells Jijiubao through WeChat account, which primarily targets frequent business travels with last-minute needs for protection. Customers can conveniently purchase a wide range of policies on the proprietary platforms, through which ZhongAn realizes cross-selling and increases customer’s life time value. By furnishing an engaging user experience and providing better services, the direct sales channel can increase user loyalty and stickiness.
In 2014, 2015, and 2016, GWP generated from the Company’s proprietary platforms accounted for 0.0%, 0.2%, and 0.5% of total GWP, respectively.
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4. Other platforms
The Company also distribute products through other platforms, such as Alipay Wallet Service Counter (支付宝钱包服务商) and WeChat Mini Programs (微信小程序).
Figure 13: Proprietary platforms and other platforms of ZhongAn
Source: CMBIS
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Redefines insurance via ecosystem-oriented innovation
ZhongAn redefines the insurance value chain through developing connective ecosystems and engaging in ecosystem-based innovation. During the whole process, cutting-edge technologies, such as big data analytics, artificial intelligence and cloud-based open platform are extensively applied.
Overview – diversifying businesses in five ecosystems
Currently, ZhongAn’s products and solutions are primarily offered in the context of five major ecosystems, namely lifestyle consumption, travel, consumer finance, health and auto ecosystems. Its ecosystem businesses have been diversifying since 2014. In particular, the Company becomes less reliant on lifestyle consumption business, a large chunk of which being shipping return insurance. The travel and health ecosystem developed rapidly in 2016. In the future, consumer finance, health and auto ecosystem will become the major engines driving the increase in gross written premiums.
Figure 14: Five ecosystems and key products
Source: Company, CMBIS
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Figure 15: GWP breakdown by ecosystem Figure 16: GWP by ecosystem
0 500 1,000 1,500 2,000 Rmb mn 732 Lifestyle consumption 1,596 1,620 44 Travel 322 1,082 9 Consumer finance 303 318 0.01 Health 19 236 0 Auto 0.5 4 8 Other 42 148
2014 2015 2016
Source: Company, CMBIS Source: Company, CMBIS
Lifestyle consumption ecosystem: declining GWP contribution
ZhongAn addresses customers’ pain points in daily consumption in the context of (1) e- commerce; and (2) consumer electronics.
Creates a virtuous cycle, which drives the ecosystems to thrive. Insurance alleviates customers’ concerns by providing an additional level of protection against financial, personal or property losses during and after purchases. For example, the shipping return insurance encourages purchases by easing the worry of purchasing goods that might turn out to be unsatisfactory, and it lowers the frequency of disputes between buyer and seller. The availability of insurance products is one of the value-added services that help e-commerce platforms to attract customers and improve customer experience. In return, increased consumption in the relevant ecosystems leads to more insurance sales, resulting in a virtuous cycle.
The largest ecosystem in terms of GWP, but its importance is declining. The lifestyle consumption ecosystem recorded GWP of Rmb732.2mn, Rmb1.60bn and Rmb1.62bn, respectively in 2014, 2015 and 2016. GWP growth decelerated substantially during 2016, but resumed in 1H2017 thanks to GMV expansion of ecosystem partners. In 1H2017, GWP from lifestyle consumption ecosystem increased to Rmb909.1mn from Rmb654.1mn in 1H2016, representing yoy growth of 39%. The share lifestyle consumption as of total GWP has declined from 92.2% in 2014 to 69.9% in 2015 and 47.5% in 2016, and further to 36.5% in 1H2017. The percentage of GWP from shipping return insurance, which was ZhongAn’s first major product, decreased from 77.2% in 2014 to 56.9% in 2015, and further to 35.0% in 2016. This is mainly due to the development and rapid expansion of other ecosystems as well as competitions from new entrants.
E-Commerce
Start with Alibaba. In Nov 2013, ZhongAn partnered with Alibaba and launched the Shipping Return Policy (“退货运费险”) on its Taobao Marketplace and Tmall. This product covers the risk of having to return purchased goods on the e-commerce platforms. Premium of the policy is determined on various factors, such as transaction volume, distance between departure and receipt, and scope of business (for merchants). ZhongAn realized real-time personalized pricing and dynamic risk management based on a model jointly developed and optimized with Alibaba. The cooperation with Alibaba gradually expanded to offer good
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13 Nov 2017 return insurance, online payment security, account security credit insurance and others to address more pain points of customers and offer them simple and hassle-free purchase experience.
Extend to vertical e-commerce ecosystems and offline partners. ZhongAn diversified its product offerings from only shipping return insurance products at a single specific e- commerce platform to a wider range of insurance products on different e-commerce platforms, such as Weidian (微店), Chuchujie (楚楚街) and Xiaomi Pay (小米支付). ZhongAn also extended the e-commerce value chain to offline partners, such as shopping malls, logistics companies and financial institutions, to provide comprehensive services and improve customers’ consumption experience at low cost. As of 31 Dec 2016, the Company had worked with SF Express for logistics service in 272 cities at municipal level and 886 cities at district or county level in China. In Oct 2016, the Generic Buyer Version of Shipping Return Policy was launched, which is a whole-network shipping return insurance that provides streamlined product return services for insured customers at a premium of Rmb9.9 per month.
Cloud-based platform to handle peak sales. The advanced cloud-based platform enables ZhongAn to handle high frequency and high volume sales simultaneously. During the Double 11 Shopping Festival in 2016, ZhongAn reached a sales volume of 200 million policies within a week and sold approximately 13,000 policies per second at the peak.
Big data analytical capabilities to assist pricing, risk control and to reach customers directly. With its big data analytical capabilities, ZhongAn develops knowledge of customers’ behaviors across platforms and creates multi-dimensional customer profiles. The data aggregated not only enables personalized pricing and dynamic risk control, but also allows ZhongAn to directly reach customers on its own platform and provide them with more generic products.
Consumer Electronics
Phone-related insurance products. The number of mobile devices in China reached 695 million with penetration rate of 95.1% in 2016 (According to China Internet Network Information Center). Realizing customers’ needs for extended coverage for their mobile devices, ZhongAn partnered with Xiaomi, in Jul 2014, to offer Phone Accident Policy (“手机意 外险”) against phone screen cracks and other phone damages to new phones. The Phone Screen Crack Policy (“碎屏险”) was later launched in Jun 2016 to tap both the new phone market and the existing stock phone market. It covers phones from major manufacturers with an average premium of Rmb37.8 in 2016.
Image recognition technology to prevent fraud. Equipped with machine-learning- powered image recognition system, ZhongAn is able to automatically examine conditions of the phone screens, verify whether the phone claimed is the phone insured and prevent fraud efficiently. Accuracy of this identification capability is refined gradually through artificial intelligence-powered algorithms.
Connect offline maintenance and repair services to reduce claim cost. Repair services are facilitated through a service platform, which is well-connected to more than 30 third- party maintenance and repair service providers and delivery companies. Once the claim is approved, ZhongAn will arrange and monitor repair services on its service platform for the customers. In this way, ZhongAn is able to provide customers with more convenient repair services and lower its own claim expenses. It is also able to accumulate large amount of repair data to improve pricing and risk control.
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Other innovative products in lifestyle consumption ecosystem
Thanks to its data analytics capabilities and its connection with ecosystem partners, ZhongAn is able to develop innovative products over time to address customers’ pain points in various scenario-based settings. New products in the lifestyle consumption include (1) Furniture Shipping Return Policy (“极有家卖家服务险”), a comprehensive insurance product for merchants on Jiyoujia home interior fitting platform covering shipping return insurance, cargo insurance and product quality bond insurance; (2) Mobike Personal Injury Policy (“摩拜 单车人身意外伤害保险”), which covers personal injuries and medical expenses caused by accidents during the ride of Mobike bicycles; (3) Drones Accident Policy (“无人机意外险”), which is a third-party liability insurance covering property loss or personal injury or death caused by drones crashes; and (4) Account Safety Policy (“账户安全险”), a policy that covers any loss incurred due to a fraudulent payment on an online payment platform.
Travel ecosystem: captures both head and tail flow of customers
Innovative solutions to meet the growing demand for travel-related insurance Nowadays people travel much more frequently than before on both business and leisure. According to the Oliver Wyman Report, the PRC travel market amounted to Rmb2.2tn in 2016, and is expected to grow to Rmb3.9tn in 2021, representing a CAGR of 12.1%. Air travel constitutes a significant majority of the overall travel market. Having witnessed the strong needs in travel, ZhongAn has been developing a large variety of customer-centric air travel insurance products to address customers’ pain points in every aspect of their travel plans. In Mar 2014, ZhongAn began to partner with Ctrip and launched Flight Accident Policy. In Jan 2015, the cooperation expanded to Comprehensive Flight Policy to cover both travel accidents and flight delays. ZhongAn also designed and launched Flight Delay Policy as well as other travel-related insurance products, such as trip cancellation insurance, ticket refund insurance, train accident insurance and etc.
Simple online claim and approval ZhongAn provides a hassle-free solution to customers by processing the entire claim and settlement automatically without requiring manual application. For example, in case of flight delay, a customer who has purchased ZhongAn’s Flight Delay Policy will receive the amount insured automatically through his/her WeChat account immediately after the delayed time has met the minimum timing requirement pursuant to the policy terms.
Data analytics to improve customer experience, pricing and risk control To the extent that ZhongAn is able to obtain relevant customer data and airline data through cooperation with ecosystem partners, the Company can improve the accuracy of pricing, enhance customer experience and achieve instant and dynamic pricing based on flight information, customer profile and weather condition. ZhongAn is also able to enhance risk control by accurately verify whether the customer raising the claim has boarded the delayed flight or not.
Capture both head and tail flow In order to capture both head flow and long-tail demand, ZhongAn cooperates with and sell travel insurance products via (1) major online travel platforms, including the top 4 online travel service providers in China, namely, Ctrip.com, Qunar.com, Alitrip.com and Tongcheng.com; (2) major airlines, including China Eastern, Air China and Spring Airlines,
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13 Nov 2017 which have been encouraged by the Chinese regulatory authorities to develop direct sales; (3) own platforms, including ZhongAn’s official website and its travel WeChat public account, Mashangfei(“马上飞”); (4) offline tickets agents – ZhongAn is one of the few insurance companies to successfully connect to the system of a state-owned information technology provider that processes air tickets sold by offline tickets agents in China on domestic and overseas commercial airlines.
Key products: Flight Accident and Delay Policy (“航意航延险”)
This product was launched in Jan 2015 with Ctrip. Customers who purchase flight tickets on Ctrip.com will be directed to the purchase options of insurance products, including ZhongAn’s Flight Accident and Delay Policy to cover losses in event of an extended flight delay over a certain length of time or flight accidents. The purchase option embedded in Ctrip’s websites allows customers to receive a travel insurance plan in a matter of seconds. Ctrip allocates flight delay or accident insurance products to its customers from various insurance providers, including ZhongAn, based on the fee proposals, and service capabilities of the providers.
Figure 17: Embedded travel insurance products on Ctrip.com
Source: Ctrip.com, CMBIS
Other innovative products: Jijiubao (“急救保”) and Flight Delay Policy (annual package)
Besides embedded flight accident and delay policies, ZhongAn has also developed innovative products with its advanced data analytics capabilities. For example, the Jijiubao (“急救保”) covers same day flight delay for last minute travelers, in which ZhongAn is able to decide the coverages (i.e., the length of flight delay) based on automated analysis of real-time flight information. Another example is an annual package of Flight Delay Policy targeting frequent travelers by covering the next 12, 24 or other times of flight delay within a year. It is user- friendly in that if customers purchase the annual package through WeChat, ZhongAn can automatically compensate them upon the occurrence of delayed flight over a certain length of time by transferring the compensation to their account.
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13 Nov 2017
Consumer finance ecosystem: connecting both ends
Consumer finance: a rapidly developing market Fast-growing consumer finance market. The fast growth of consumption has spurred the demand for consumer finance in China. According to the Oliver Wyman Report, China’s consumer finance market is expected to increase from Rmb5.7tn in 2016 to Rmb13.7tn in 2021, representing a CAGR of 19.2%. Despite strong growth of the consumer finance market, credit infrastructure in China, however, is still underdeveloped due to a lack of complete credit information.
Pain points in internet-based consumer finance. For fund providers, their pain points mainly lie in (1) scarcity of internet-based consumer finance asset targets, which are characterized by small-sum and diversified loans with low risk profile, and (2) lack of systematic technology expertise to connect with the interface of asset providers (e.g., consumer finance platforms) or online consumption scenarios. On the other side of the consumer finance market, asset providers and consumption scenarios also have their pain points, such as (1) scarcity of stable, convenient and low cost capital, and (2) lack of data precipitation and model verification for effective risk pricing and risk control.
ZhongAn builds a connective consumption ecosystem Leveraging its technology-empowered risk management system, ZhongAn connects the funding providers (such as banks and trusts) with asset providers (such as consumer finance platforms or platforms with consumer finance needs) and consumption scenarios. The link between this connection include credit guarantee insurance which provides credit enhancement, as well as a whole set of solutions regarding credit control, asset management and risk management. ZhongAn’s credit guarantee insurance enables its ecosystem partners to offer a variety of financial services, such as virtual credit cards, installment services and cash loan services.
Rich data sources and big data analytics capabilities to provide credit solutions First of all, ZhongAn is able to collect rich consumer data, including educational background, gender, age, address, blacklist information in the PBoC’s credit reporting system, time spent by a customer on mobile devices and annual consumption amount, and in turn offers consumer personal credits for their purchases on various platforms and merchants. The extensive access to user data originates from ZhongAn’s large and expanding customer base, its cooperation with a wide range of ecosystem partners and third-party data providers. ZhongAn is one of the few insurance companies that has been granted access to customers’ official credit record in the database of the PBoC credit reference center.
ZhongAn uses data analytics and artificial intelligence to enhance the understanding of the risk profiles of individual customers and evaluate credit risks based on their consumption behaviors, and further achieves real-time credit rating. The Company has developed mature models to effectively identify potential fraud and high credit risk and has developed robust risk control mechanism throughout the whole process of transactions. During the term of its credit guarantee products, the Company monitors the status of transactions, utilization of credit facilities and potential fraudulent activities. The Company also closely tracks any bad debt and makes significant efforts on debt collection.
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Figure 18: Data analytics capabilities to provide credit solutions
Source: Company
Two key products and solutions Baobei Open Platform (“保贝计划”): connects funding providers with consumer finance platforms
Launched in Apr 2016, the Baobei Open Platform connects consumer finance platforms, such as Zhaocaibao (招财宝) and Xiaoying (小赢理财) with financial institution partners, including banks, asset management department of securities brokers, trusts, finance leasing companies, microfinance providers and factoring companies. The Baobei Open Platform offers credit guarantee insurance, which provides credit enhancement to increase the attractiveness of consumer finance products to fund providers. ZhongAn also ‘exports’ its expertise in credit management, asset management and risk management to the fund providers. Further, ZhongAn may embed the credit assessment models of consumer finance platforms into the models on the Baobei Open Platform, together with the credit guarantee insurance, to enhance the credit quality of assets. As of 31 Dec 2016, ZhongAn has reached agreements with approximately 40 consumer finance platforms across education, housing, cosmetic and automotive industries, such as Lexin, Wecash, Xiaoying and Mime Finance, among others, as well as approximately 20 fund providers.
Mashanghua (“马上花”): connects fund providers with consumption scenarios
Launched in Jun 2017, Mashanghua provides both online and offline consumer financing services to customers in various consumption scenarios. It is a dynamic information and credit platform, the system of which is connected to ZhongAn’s ecosystem partners, consumer finance service providers and fund providers.
For individual customers, ZhongAn establishes a central consumer finance system based on multi-dimensional risk management models and massive data accumulated from various sources. Through this central system, ZhongAn sets a centralized amount for each customer in order to track the credit records and profiling of each customer and accordingly grant a long-term credit line that could be used in a wide variety of scenarios.
ZhongAn also establishes cooperation relationships with ecosystem partners who have strong demand for consumer finance in various scenario-based settings, including Mogujie (蘑菇街), an e-commerce platform targeting female consumers, Bestpay (翼支付), a payment
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13 Nov 2017 platform of China Telecom, Secoo (寺库), a luxury merchandise platform, Spring Airlines (春 秋航空), an airline carrier and China Unionpay Merchant Service, a financial service platform for credit card issuers. By connecting the Mashanghua system to the system of ecosystem partners, ZhongAn has successfully embedded one-stop consumer finance services into a wide range of daily consumption scenarios.
Figure 19: Two key modes of the consumer finance ecosystem
Source: Company, CMBIS
Health ecosystem: enhance best-selling products and innovate with biometric data
Healthcare has become one of the key focuses of ZhongAn The aging population, increasing disposable income and the ‘Healthy China 2030’ plan has started the growth engine of China’s healthcare industry. Healthcare expenditure in China is expected to grow from Rmb4.4tn in 2016 to Rmb7.8tn in 2021, representing a CAGR of 12.1%. As an insurance provider, ZhongAn designs and offers innovative internet-based insurance products to cover a full array of healthcare needs. It also integrates health-related insurance business into the healthcare ecosystems to serve customers’ needs for health management.
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13 Nov 2017
Popular customized product: Personal Clinic Policy (“尊享 e 生”)
Launched on 18 Aug 2016, the Personal Clinic Policy provides illness and disease insurance protections and medical benefits within one year from the effective date of the policy and is renewable until 80 years of age. One of the most innovative features of this policy is its affordability, at an annual premium of approximately Rmb450 per person. Under the policy design, customers are eligible for an annual sum insured to the amount of Rmb1mn to Rmb3mn for ordinary medical expenses plus an additional Rmb1mn to Rmb3mn for malignant tumor-related expenses that exceed the deductible amount of Rmb10,000. The Personal Clinic Policy is sold through a wide variety of channels, including ZhongAn’s own applications, its ecosystem partners and third party sales agents. The policy was the top seller in the non-auto insurance category on Ant Financial Group’s insurance platform in 2016.
Figure 20: Personal Clinic Policy sold on ZhongAn’s Figure 21: Personal Clinic Policy was the top seller in proprietary App non-auto insurance on Alipay’s insurance platform
Source: ZhongAn App, CMBIS Source: Alipay App, CMBIS
Integrate insurance business into the healthcare ecosystem ZhongAn engages in insurance product innovation and extends the value chain by connecting with a wide variety of healthcare ecosystem partners with different resources and specialties. In 2015, it began to cooperate with high-tech wearable devices manufacturers to offer innovative health insurance products, such as Walk to Wellness Policy (“步步保”) by connecting personal exercise data with insurance product covering major diseases. It further launched creative products focusing on the prevention and care of chronic diseases, such as Diabetes Policy (“糖小贝”), which realized personalized pricing through tracking data recorded by the intelligent glucose meter provided together with the Diabetes Policy. ZhongAn connects with medical device manufacturers (such as Omron), health examination centers and clinics to launch insurance products targeting specific diseases, such as female cervical cancer and breast-related diseases, childhood diseases and dental-related medical treatment. It has established partnerships with online healthcare platforms such as We Doctor to expand its distribution channel. Individual customers can access ZhongAn’s health insurance products through its ecosystem partners’ platforms and its proprietary platforms, including websites, mobile apps, WeChat public accounts and etc.
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13 Nov 2017
Walk to Wellness Policy (“ 步步保”): Connects high-tech wearable devices manufacturers. Launched in Aug 2015, the Walk to Wellness Policy is an internet-based health management plan to provide customized health protection for major diseases. After the policy takes effect, ZhongAn tracks customer’s actual exercise amount and dynamically adjusts the premium to be paid by a policyholder next month based on his/her daily steps, which is detected and tracked with the assistance of ZhongAn’s ecosystem partners, including Mi Band, Ledongli App and WeChat. The dynamic and accurate pricing system encourages customers to better manage their health status as they enjoy a lower premium with more exercise.
Diabetes Policy (“糖小贝”): Provides value-added services with the integration of high- tech devices. In Nov 2015, the big-data intelligent medical-insurance product, Diabetes Policy, was launched and primarily targets people with diabetes-related problems. The policy is sold together with an intelligent glucose meter provided through Tencare Doctor Tang (“糖大夫”), a platform of Tencent, which measures customers’ daily glucose levels. A customer is eligible for an additional amount insured of Rmb200 daily if he/she maintains his/her glucose level within a certain range, up to an annual cap of Rmb50,000. The glucose meter will also send dynamic data to the customer’s WeChat account to generate a systematic report of the customer’s health conditions. In this product, ZhongAn is able to provide advisory services to its customers to manage their health conditions.
Group health insurance products: user-friendly cloud-based platform. In addition to individual policies, ZhongAn designs customized group insurance products for corporate and institutional clients. On cloud-based user-friendly settlement platforms, employees of ZhongAn’s corporate and institutional clients can directly claim reimbursement for healthcare expenditures by submitting supporting documents electronically to the settlement platform. If the amount claimed is less than Rmb3,000, the employee can be reimbursed within three working days. Such individualized and efficient settlement solutions provided by ZhongAn reduce human cost of clients and offer them a user-friendly platform to manage healthcare plans. SF Express is one of the group clients of the Company.
Auto ecosystem: light-asset model via co-insurance
Auto insurance is the largest component of P&C insurance market in China In 2016, premium income from auto insurance amounted to Rmb683bn in the PRC, representing 77% of P&C insurance premiums. According to the Oliver Wyman Report, the auto insurance market in China is expected to grow to Rmb1,171bn in 2021, representing a CAGR of 11.4% between 2016 and 2021.
Co-insurance enables ZhongAn to tap into the auto insurance market with an asset- light business model In Jan 2015, ZhongAn entered into a five-year co-insurance agreement with Ping An P&C, a subsidiary of Ping An Insurance, and launched Baobiao Auto Insurance in Nov 2015. Under this agreement, ZhongAn and Ping An P&C share the premiums and claim payments on a 30% versus 70% basis. ZhongAn connects online customers with Ping An Insurance, and the latter is in charge of claim settlement.
The co-insurance business model allows ZhongAn to use Ping An’s offline resources while leveraging on its own strength in targeted marketing and streamlined purchasing process to
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13 Nov 2017 connect online customers. License approval is also made easier considering Ping An’s strong offline facilities.
Auto insurance license has expanded from 6 to 18 regions as of Mar 2017 In the PRC, auto insurance products and operating licenses are regulated by the CIRC, who normally will consult with local authorities of the regions where the applicant intends to enter. As of 31 Dec 2016, ZhongAn only has licenses to operating auto insurance business in 6 regions in China, namely Heilongjiang, Shandong, Guangxi, Chongqing, Shanxi and Qingdao. As of Mar 2017, it obtained licenses in another 12 regions, namely Beijing, Tianjin, Shanghai, Xiamen, Shenzhen, Anhui, Guangdong, Hebei, Henan, Jiangsu, Jiangxi and Zhejiang. The next 12 regions, located along the east coast, cover the majority of China’s auto insurance market. The 18 regions, in total, account for more than 66% of China’s auto insurance market.
Figure 22: Auto insurance market covered by ZhongAn
Notes: (1) In September 2015, the Company received approval from the CIRC to adopt the China Insurance Association Model Comprehensive Commercial Vehicle Insurance Policy (中国保险行业协会商业车险综合示范条款) in six commercial auto insurance experimental zones including Heilongjiang, Shandong, Guangxi, Chongqing, Shanxi and Qingdao. (2) In March 2017, the Company obtained further approval from the CIRC to provide auto insurance products in an additional 12 regions including Beijing, Tianjin, Shanghai, Xiamen, Shenzhen, Anhui, Guangdong, Hebei, Henan, Jiangsu, Jiangxi, and Zhejiang. Source: Company
Gradual deregulation is opening up the auto market to online insurance companies The auto insurance market in China is highly concentrated and dominated by a few traditional P&C insurers. Auto insurance, including its pricing, is still highly regulated in China, but gradual reform is taking place and is opening up the auto market to nimble online insurance players, which are capable of innovation. (See more discussions in ‘Market Opportunities’)
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13 Nov 2017
ZhongAn is getting prepared for technology-driven auto insurance Future liberalization of auto insurance, the development of sharing economy and the internet of vehicles present a natural incubator for technology-driven auto insurance. ZhongAn is actively preparing itself to embrace these opportunities via, (1) developing a dedicated big data-powered technology platform capable of conducting real-time, dynamic, personalized pricing with very flexible terms; (2) exploring collaboration with ecosystem partners, such as Didi Chuxing and Tuhu, and automaker partners, such as Chang’an Motors, to gather and analyze relevant data regarding travel and vehicle information, which will be valuable for customized pricing and risk control for insurance products; (3) planning to extend the coverage to the entire automobile value chain, including products designed for used vehicles, auto consumer finance, accident insurance and extended warranty; (4) partnering with telematics hardware companies to test the technology for usage-based insurance (UBI).
Key product: Baobiao Auto Insurance (保骉车险).
Launched in Nov 2015, the Baobiao Auto Insurance offers standard coverage of damages caused to the insured vehicles as well as some customized options. ZhongAn and Ping An jointly insure and split GWP and expenses on a 30%/70% basis. ZhongAn has entered into partnerships with an expanding list of online ecosystem partners, including Didi Chuxing, Xiaomi and WeChat, to distribute the Baobiao Auto Insurance.
Figure 23: Baobiao Auto Insurance on ZhongAn website
Source: www.zhongan.com, CMBIS
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13 Nov 2017
Technology reshapes insurance
Data: a virtuous cycle from building on data to monetizing data
We view the Company as a data-driven community, to leverage its data to better identify, reach, analyze and serve the customers by enhancing product design, pricing and customer experience. Compared with other peers, the Company excels itself in both breadth and depth of data in Insuretech spectrum.
Figure 24: Extensive user data and strong data analytics capabilities
Source: Company Note: as of 31 Dec 2016
Unparalleled data scale: massive user base (~492 mn customers served), huge policies (7.2+bn policies), coupled with 180+ partners, positions the company well in effectively expanding user coverage with lower TAC.
Multi-channel data resources: the Company captures and aggregates data from various accesses, such as government (e.g. police system), banks, third party payment, e-commerce platforms, etc. For instance, apart from connecting into third-party data providers (e.g. Qian Hai Zheng Xin (前海征信), Sesame Credit (芝麻信用)), the Company was one of the insurance companies to have access to Credit Reference Center of PBOC.
Rich data fields and Multi-dimensional proprietary data depth: Combined with multi- channel public data and its own ecosystem partners, the Company can collect valuable data of customers’ behaviors and consumption patterns in their everyday lives, such as online footprints, travel frequencies, medical records, etc.
Strong data analytics capabilities: leveraging on its low-latency and indexed data, combined with machine learning, the Company can efficiently and accurately analyze large user data, from in-depth customer profiling to product iteration, dynamic pricing, real-time fraud detection, etc. We see high visibility for the Company to improve its operational efficiency, maximize profitability and enhance user experience through its sophisticated data insights and data analytics capabilities.
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13 Nov 2017
Case study 1: dynamic pricing application in Shipping returns insurance
According to the report of “Technology-Driven Value Generation in Insurance” written by Oliver Wyman and ZhongAn, after algorithm optimization of ZhongAn (e.g. adding more variables), CoR and loss ratio of its shipping returns insurance fell to 92% and 77% in FY16, respectively. Meanwhile, the CoR and loss ratio of merchant credit and guarantee insurance, fell to 56% and 2%, despite GWP on the rise.
Figure 25: Dynamic pricing application in Shipping returns insurance
Source: Company, Oliver Wyman, CMBIS Note: the information related to CoR and loss ratio was cited from the report of “Technology-Driven Value Generation in Insurance” written by Oliver Wyman and ZhongAn.
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13 Nov 2017
Cloud: delivering a fully-fledged ecosystem via low-cost, secure and efficient cloud-based “Wujieshan” system
Why Cloud? For insurers providing some policies which occasionally experience high peak demand, traditional computing infrastructures hardly meet the processing capacity without deploying new physical servers. These servers will take long time to migrate and significant cost to maintain. However, with high-capacity networks and service-oriented architecture, cloud computing can exactly cater to unique business needs via remote servers in a cost- effective and flexible way.
ZhongAn: 100% cloud-deployed in proprietary Wujieshan core system. The Company designed its proprietary cloud-based platform “Wujieshan” in 2014. It is able to handle a large amount of transactions in peak time by streamlining the claims management process, reduced maintenance costs and unscheduled downtime.
Figure 26: Key advantages of “Wujieshan” cloud-based platform
Source: Company, CMBIS Note: During the week of the Double 11 Shopping Festival in 2016
Key advantages in stability, speed and scalability. 1) Highly secured: the Company backs up data at distributed servers simultaneously, and can respond to cyber-attacks within 5 seconds through real-time analyzing and predicting; no policies are lost. 2) Fast and automatic. Apart from high-speed policy processing (e.g. >13,000 policies per second, vs. VISA ~14,000 volumes), Wujieshan has strong product launching/upgrading capacity. For instance, its product development cycle would not exceed two weeks, while they are capable of releasing new product or feature to production environment within one minute.
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AI: AI-powered multi-tier architecture to optimize efficiency and risk management
The Company applies AI in multiple areas, such as identify verification, image recognition, model iteration and customer service. AI application in risk management could be a notable case. For instance, with user profiling through graph mining, the Company can provide accurate predictive recommendation to its customers. Through advanced image recognition technology, the Company enjoys fast and effective anti-fraud measure, and further building unique competitive advantage in optimizing claims process for innovative products such as Phone Screen Crack Policy and auto insurance. According to the report of “Technology-Driven Value Generation in Insurance” written by Oliver Wyman and ZhongAn, ZhongAn’s technology increases the accuracy of verifying the phone to be insured with the accuracy of over 90% (vs. market players: 43.2%).
Moreover, its real-time risk management system enabled by AI technology makes it possible for the Company to obtain holistic understanding of customers and address fraud and default risks throughout the product lifecycle, from product design, underwriting, monitoring and claim settlement.
Blockchain: decentralizing data to empower trust between parties
The Company independently developed its blockchain system, namely Ann-chain and Ann- router. Ann-chain is a blockchain protocol implementation which is intended as a foundation for developing blockchain applications and solutions. Ann-router is blockchain network component which is intended to link isomorphic and heterogeneous blockchains.
The Company has applied the blockchain technology in charity, insurance, agriculture husbandry, etc. For instance, it applied Ti-Capsule, a peer-to-peer and secured data storage system, to electronic health insurance policy. The documents stored in Ti-Capsule are secured and cannot be modified. Data is secured even if one of the data centers is under attack. Sensitive information such as customer identity, asset proof, health information and e-contracts can be securely stored with Ti-Capsule. By the end of Feb 2017, the Company has applied blockchain in 213k policies, corresponding to GWP of Rmb3.7mn, according to ZhongAn’s official website.
Figure 27: Blockchain application in electronic health insurance policy
Source: Company, CMBIS
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What’s next? Open technology.
Tech 2.0: Open platform to connect long-tail ecosystem. Apart from in-house usage, the Company can share its core technology platform with ecosystem partners which do not have the business scale to establish a comprehensive technology platform, by opening APIs to achieve fast connection. Specifically, open platform is conducted via two ways.
1) Co-promotion of products(众推广). Co-promotion project is aimed at accelerating monetization by inviting partners (e.g. internet portals, apps) to promote its insurance products, and partners can take rate in return after deals. With advantages of fast traffic monetization, intelligent recommending, data-driven order management system and fast connection, the project has attracted over 180 partners.
2) Customized scenario-based insurance(场景合作/保险定制). We see great potential in 1v1customized insurance among emerging rich scenarios (e.g. O2O industry). ZhongAn’s open platform excels itself with complete insurance portfolio, standard API and H5/PC connection without development requirement.
Figure 28: Open platform applications in O2O service and phone insurance
Source: Company Note: *As of 31 Dec 2016 or for the year of 2016
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Beyond insurance: an exporter of Fintech expertise
3 series to build a chain of “Finance+Scenerio+Technology”. Leveraging its experience in ZhongAn Insurance’s core system, ZhongAn Technology, a wholly-owned subsidiary established in Jul 2016, developed its leading position as a cloud-based platform provider and an exporter of Fintech expertise, by offering 3 series of technology services. ZhongAn Technology began to generate revenue in 2Q17, amount to Rmb2.9mn.
Figure 29: Products of 3 series solutions
Source: Official website of ZhongAn Technology
S series of insurance and financial applications
S Series products are provided for insurance and financial companies with three types of solutions, aiming to speed up the digitalization of traditional insurance and financial services. From e-commerce platforms to finance core system, we think the Company can enjoy the great industrial potential by taking its advantages of quick accesses, precision marketing, and powerful rule engine with flexible configuration.
Figure 30: Three types of S series solutions
Source: Company, CMBIS
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X series of intelligent data services
AI-powered multi-tier architecture to target business needs of risk management, efficient decision-making and efficient policy-making. Lacking complete data and risk management system, traditional financials are always struggling in inefficiency of making decisions and customer examining, thus creating opportunities for ZhongAn X series products. The Company provides with X series products, including various data services backed by AI technology (e.g. X-model, X-decision, Smart Customer Service and Facial Recognition), to improve risk management strengths, operating efficiencies and customer satisfaction.
Figure 31: X series of intelligent data services and AI-powered applications
Source: Company, Oliver Wyman, CMBIS
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T Series of Blockchain services
China’s central bank is driving the development of digital currency, and many private companies such as Alibaba, DianRong, are investing heavily in blockchain. Although blockchain in the financial industry is at the very early stage, we believe that potential roll- out of blockchain in the insurance industry would benefit from blockchain’s trust-instilling capability, transparency, and immutability. As the member participating in drafting standards for Blockchain and among the first number of enterprises to participate in the Blockchain system function test, ZhongAn launched Anlink ecosystem, a proprietary internet security platform based on blockchain, AI, to pioneer in Fintech frontier.
Anlink ecosystem exceled itself, with proprietary test technological feasibility, advanced R&D capacity and complete supporting system. The Company began to commercialize Anlink in May 2017, with four types of products: Ti-Capsule, Ti-Sun, Ti-GlassHouse and Ti-Packet for storage, security, supervision and signing system, respectively. Its potential partners in the development of blockchain technology include major stock and insurance exchanges, insurance companies, banks, as well as leading companies in other industries.
Figure 32: T series of Blockchain services
Source: Company Note: Information of “Blockchain alliance partners” is cited from https://www.zhongan.io/news/detail?code=12001
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Growth Strategy
Higher growth: further grow its customer base and GWP. ZhongAn seeks to drive its GWP growth through: 1) expanding customer reach by implementing various branding initiatives, strategically organizing marketing activities, and partnering with more ecosystems; 2) facilitating purchase frequency and conversion of paying customers through continued product innovation, algorithm optimization and accurate customer profiling; 3) Increasing average premiums per policy by enhancing customer-centric service and platform functionality to enhance customer loyalty.
Richer products: expand and optimize the product mix. By focusing on the three core ecosystems (namely lifestyle consumption, consumer finance and travel), ZhongAn has experienced initial success and is well-positioned to develop scalable and replicable operations. In the near term, ZhongAn will replicate its operations into other emerging ecosystems, such as health and auto ecosystems, and further explore new ecosystems, such as life insurance after getting license. Specially, ZhongAn will expand its product portfolio through 1) scenario-based settings to tap into customers’ everyday lives beyond traditional insurance, and 2) enhance its speed-to-market product engineering by leveraging big data analytics capabilities.
More profitable: maximize profitability by improving operating efficiency. Via persistent technology application to enhance real-time pricing, targeted marketing and risk management, ZhongAn can gradually reduce its loss ratio and expenses ratio in the long run. On the other hand, to further drive operating efficiency, ZhongAn plans to enhance its core competencies in reduction of handing charges and commissions and technology service fees, through:1) further leveraging on user data to improve risk management and pricing to stabilize loss ratio, 2) leveraging on economies of scale to control staff cost and other operating expenses, 3) change of product mix, and 4) increasing sales on proprietary platforms and cooperation with smaller, more specialized or offline partners.
Figure 33: Growth strategy in terms of GWP, products and profitability
Source: Company, CMBIS
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L-form strategy with expanding ecosystems and strengthening technology ZhongAn will implement an ecosystem-oriented and technology-driven strategy. On the one hand, it strives to solidify its leadership in technology by seeking top engineering talents, cooperating with leading labs and universities, and enhancing big data analytics, exploring usage of AI and blockchain, and accelerating monetization.
On the other hand, it plans to foster the growth of sustainable ecosystems from scenario- based products (e.g. lifestyle consumption and travel) to in-depth cooperation (e.g. consumer finance and auto) and then proprietary ecosystem (e.g. health and life). Specifically, for scenario-based products, it will develop long-tail and offline markets, expand distribution channels, enrich product mix and develop multi-platform products; for in-depth cooperation, more innovative health solutions and credit solutions will be offered, and, meanwhile, ZhongAn can strengthen its auto system by obtaining auto insurance license in more regions; for its proprietary ecosystem, it plans to obtain life insurance license and launch more innovative products. We expect the Company to explore more scenarios and ecosystems in the long term.
Figure 34: Long-term strategy in both insurance and technology
Source: Company, CMBIS
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Market opportunities
The insurance industry is undergoing rapid growth in China
Government support, favorable policies and the emerging middle class have contributed to a burgeoning insurance sector in China. Insurance gross written premiums (GWP) doubled in the past four years, reaching Rmb3.1tn in 2016. Despite strong growth, insurance penetration (i.e., insurance GWP as a % of GDP) in China, with 3.6% in 2016, is lagging behind developed markets and some other developing markets. The 13th Five-year plan stipulated that China is to achieve insurance penetration of 5% and per capita GWP of Rmb3,500 by 2020. Based on this, Oliver Wyman projected total insurance GWP to become Rmb4.5tn in 2020 and Rmb4.9tn in 2021.
Figure 35: China insurance GWP - trend and potential Figure 36: Insurance penetration and density
Source: CIRC, Oliver Wyman Report Source: Oliver Wyman Report
China Insuretech market has significant growth potential
According to the Oliver Wyman Report, the PRC Insuretech market as measured by GWP was Rmb363bn in 2016 and is expected to reach Rmb1,413bn in 2021, representing a CAGR of 31.2%. The most innovative Insuretech segment, ecosystem-oriented innovation, is expected to grow particularly fast at a CAGR of 62.0%.
Figure 37: Ecosystem oriented innovation within the Insuretech market
2021E
Total insurance market 2016 Rmb4.9tn 2016-2021E CAGR: 9.6%
Total insurance market Ecosystem oriented Rmb3.1tn Insurtech market Rmb1.4tn innovation Insurtech market Ecosystem oriented Rmb223bn innovation Rmb363bn 2016-2021ECAGR: 31.2% Rmb20bn 2016-2021E CAGR: 62.0%
Source: Oliver Wyman Report, CMBIS
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Favorable regulatory environment
Regulatory environment is favorable for long-term health of the insurance industry. The PRC government, along with regulatory authorities, have issued several major guidelines regarding the development of the insurance industry in China. Recent guidelines include “Several Opinions of the State Council on Accelerating the Development of the Modern Insurance Service Industry (《国务院关于加快发展现代保险服务业的若干意见》)” in 2014 and the CIRC’s “Outline of the 13th Five-Year Plan for China’s Insurance Industry (《中国保险 业“十三五”规划纲要》)” in 2016.
Support internet insurance business and innovative insurance products As of the Latest Practicable date, the CIRC had issued four online-only insurance licenses to support the “Internet+” strategy promoted by the government. Regulatory barriers for innovative insurance products have been relaxed. For example, shipping return and flight delay insurance can be distributed to nationwide clients, without the need to obtain approval from provincial regulators. The CIRC promulgated the Interim Measures for the Supervision of Internet Insurance Businesses (《互联网保险业务监管暂行办法》) in 2015 to promote the healthy development of internet insurance businesses.
Gradual deregulation of the auto insurance market unfolds opportunities In Feb 2015, the CIRC launched the commercial auto insurance pricing reform, in which P&C insurers were allowed to adjust coefficients (and thus premiums) based on their own risk and expense levels, as well as policyholders’ driving behavior. In Jun 2017, the CIRC launched the second-round pricing reform, which cut the rate floor of adjustable coefficients further to give P&C insurers more pricing flexibility. The pricing reform aims at protecting policyholder rights and promoting healthy development of the auto insurance market. It also pushes P&C insurers to operate more efficiently. We believe the pricing reform and other subsequent deregulation will benefit ZhongAn, who are capable of personalized pricing based on strong technology application. In Jul 2017, ZhongAn obtained the second-round auto insurance pricing reform approval.
Figure 38: Commercial auto insurance pricing reform
Date Major content Progress
Jun 2015 First-round P&C insurers were allowed to First wave Jun 2015 Heilongjiang, Shandong, Guangxi, Chongqing, Shaanxi, and Qingdao adjust coefficients (and thus premiums) based on own risk Second wave Jan 2016 Tianjin, Neimenggu, Jilin, Anhui, and other 8 regions and expense levels, as well as policyholders’ driving behavior Third wave Jul 2016 Beijing, Hebei, Shanxi, Liaoning, and other 14 regions Cut the rate floor of adjustable Jul 2017 Second-round Nationwide coefficients Source: CIRC, CMBIS
Regulatory authorities are beefing up R&D efforts on Fintech. The PBoC established the Fintech committee in May 2017 to strengthen research on Fintech and to promote the healthy development of China’s Fintech industry. Then in Jul 2017, AI application in finance was emphasized in the Next Generation Artificial Intelligence Development Plan (《新一代人 工智能发展规划》), issued by China’s State Council. Moreover, since China’s Ministry of Industry and Information Technology (MIIT) published the first official blockchain whitepaper in Aug 2016, we see clearer support for blockchain development from the government. For example, after completing a trial run of digital currency based on blockchain, the PBoC established Digital Currency Research Institute in Jun 2017, to actively develop prototypes related to blockchain-backed digital currency.
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Peers and competitive landscape
1. ZhongAn vs. Traditional insurers
Figure 39 below displays a comparison of ZhongAn with the listed PRC P&C insurers along a few important dimensions, with respect to both financial and operating metrics in 2016. These P&C insurers are considered traditional ones. Judging from financial performance and other operating characteristics, we believe ZhongAn is different from traditional P&C insurers in the following aspects.
Figure 39: ZhongAn v.s. listed P&C insurers ZhongAn PICC P&C Ping An P&C CPIC P&C Taiping P&C China Continent (China Re)* N/A 2328 HK 2318 HK 2601 HK 966 HK 1508 HK (Rmb mn) (Rmb mn) (Rmb mn) (Rmb mn) (HKD mn) (Rmb mn) GWP 3,408 311,160 178,291 96,607 21,301 32,071 Net profit 9 18,021 12,315 4,717 552 1,244 Total assets 9,332 475,949 273,679 134,230 25,710 41,006 Net assets 6,859 119,306 53,164 36,358 6,487 13,542 ROE (%) 0.1 15.8 22.8 13.4 8.3 10.2 ROA (%) 0.1 4.0 4.7 3.6 2.2 3.1 Combined ratio (%) 104.7 98.1 95.9 99.2 99.8 99.8 Loss ratio (%) 42.0 63.5 54.4 61.2 53.0 52.5 Expense ratio (%) 62.7 34.6 41.5 38.0 46.8 47.3 Solvency ratio (%) 722 287 267 296 206 209 Lifestyle Auto (72.5%) Auto (78.8%) consumption (47.6%) Auto (79.2%) Cml. property (4.0%) A&H (7.7%) Travel (31.7%) Cml. property (5.3%) Auto (80.1%) Cargo (1.0%) Auto (83.4%) Surety (3.7%) Consumer finance Liability (4.0%) Marine (2.1%) Product mix Liability (4.4%) Non-auto (13.8%) Liability (3.3) (9.3%) Accident (2.4%) Non-marine A&H (7.5%) A&H (2.8%) Cml. property (2.8%) Health (6.9%) Agriculture (2.0%) (17.8%) Agriculture (6.3%) Engineering (1.0%) Auto (0.1%) Others (7.2%) Others (4.4%) Others (2.8%) Others (4.4%) Source: Companies, CMBIS Note: China Continent Insurance is a primary P&C insurance company under China Reinsurance Group (1508 HK).
Smaller in scale. As a new company, ZhongAn is smaller than the others in scale. GWP of ZhongAn was Rmb3.41bn in 2016, while GWP of the largest three P&C insurers combined totaled Rmb586.1bn, accounting for 63.2% of China’s P&C insurance market in 2016. Taiping P&C, the smallest listed P&C insurers, achieved GWP of Rmb25.7bn in 2016.
Less profitable in 2016. ROE and ROA of ZhongAn is significantly lower than those of listed P&C insurers mainly because (1) net profit in 2016 was reduced significantly to Rmb9mn due to unsatisfactory investment performance and an increase in R&D expenses; and (2) share issuance in Jun 2015 enlarged equity base, leading to a large denominator.
Higher expense ratio and different expense structure. ZhongAn had a higher combined ratio of 104.7% in 2016 compared to listed P&C insurers (all below 100%, avg. was 98.6%). Expense ratio of ZhongAn was higher, offsetting a lower loss ratio. In addition, ZhongAn’s expense ratio was higher than its loss ratio, which is in contrast with traditional insurers. In terms of expense structure, technology service fee paid to ecosystem partners for sales on their platform, together with handling charges and commissions are the largest component of operating expense for ZhongAn, equivalent to 38.6% of GWP in 2016. For listed traditional P&C insurers, commission expenses are normally the largest component of operating expenses, equivalent to 12% ~15% of GWP.
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Totally different product mix. For listed traditional P&C insurers in China, 70% to 80% of the GWP comes from auto insurance. For ZhongAn, however, auto insurance was a relatively new area, the GWP of which was negligible in 2016 due to regulatory constraints. ZhongAn engages in ecosystem-oriented Insuretech innovation and its product offerings extend beyond traditional insurance to address consumer pain points across multiple ecosystems. Therefore, its product mix is completely different from that of traditional insurers.
Figure 40: GWP by product type of ZhongAn (2016)
Source: Company Note: Others primarily consist of shipping return insurance, which generated 35.0% of total GWP in 2016.
ZhongAn is a more active player in the Insuretech market and engages in ecosystem- oriented innovation Three segments of Insuretech market. The PRC Insuretech market consists of three segments according to the Oliver Wyman Report, (1) online distribution, which involves selling traditional insurance products through online or mobile channels, thus allows insurance companies to reach long-tail customers and becomes more efficient and cost- effective; (2) technology-enabled upgrade, which involves utilizing technology to make existing insurance products more targeted, customized and dynamic; and (3) ecosystem- oriented innovation, which involves leveraging data analytics to satisfy previously unmet insurance needs that have risen in various ecosystems and to cover previously unaddressed risks.
Traditional insurers mainly participate in online distribution and technology-enabled upgrade. Traditional insurers have been enhancing their “Internet+” strategy in recent years, but the majority of them only engage in the online distribution segment of the Insuretech market, which involves selling traditional products online to promote efficiency and save costs. Some traditional insurers, such as PICC P&C and Ping An, also participate in technology-enabled upgrade, which use technology to make insurance products more targeted, personalized and dynamic.
ZhongAn extends beyond traditional insurance. ZhongAn pushes both the online features and the technology frontiers a bit further by primarily engaging in ecosystem-oriented innovation. Certain online ecosystems have salient inherent risks, which many consumers are willing to pay to hedge against if the appropriate insurance products are available. These inherent risks create opportunities for Insuretech companies to develop mutually beneficial insurance products through cooperation with leading players in the relevant ecosystems. Therefore, ecosystem-oriented innovation deals with previously unaddressed risks in an
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13 Nov 2017 innovative way to reach customers. It increases the scope of the insurance market. According to the Oliver Wyman Report, this particular segment of Insuretech is expected to have higher growth potential in the future at a CAGR (2016-2021) of 62.0%, compared with 26.1% and 41.1% for the online distribution segment and technology-enabled upgrade segment, respectively.
ZhongAn has a leading market position in the ecosystem-oriented Insuretech market. (1) It has partnered with leading companies in various ecosystems in China, including a number of sizable leading e-commerce platforms and all of the top four online travel agencies, to develop and offer innovative insurance products and solutions to customers in scenario-based settings. (2) Advanced technology background, accumulated knowledge and experience in Insuretech market enables ZhongAn to strengthen its leadership position and react to fast-evolving market trends.
Figure 41: ZhongAn has a leading market position in ecosystem-oriented innovation
3. Ecosystem oriented innovation segment -- Serve unsatisfied demand in ecosystems using data analysis
-- Wide coverage in vertical sectors of different online ecosystems provides customers/users with insurance solutions to hedge inherent risks in ecosystem -- Dominated by Insuretech companies 2. Technology enabled upgrade segment -- Leverage technology to make existing insurance solutions
capability become more targeted, customized and dynamic; -- Manage risks and optimize efficiency by data collection and analysis with advanced technologies
-- Battleground for both online insurance companies and traditional insurers Technological 1. Online distribution of traditional insurance solutions Traditional -- Distribution of traditional insurance products via internet or mobile channels Insurance -- Dominated by traditional insurance companies Solutions
Online distribution Source: Company, Oliver Wyman Report, CMBIS
Figure 42: The ecosystem-oriented innovation segment is estimated to experience higher growth in the future
Source: Oliver Wyman Report, CMBIS
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Other advantages of ZhongAn over traditional insurance companies include flat organization structure with experienced technology talents, and light-asset business model, which is nimble to market changes.
2. ZhongAn vs. other internet insurance companies
Currently, there are four online-only P&C insurance companies in China, ZhongAn Online P&C Insurance Co., Ltd., Taikang Online P&C Insurance Co., Ltd., Yi An P&C Insurance Co., Ltd., and An Xin P&C Insurance Co., Ltd.
ZhongAn is the clear leader with first-mover advantages among the four online-only insurers. (1) It obtained license more than two years earlier than the other three companies. (2) It is also the first to obtain approval from the CIRC to conduct auto insurance business. (3) ZhongAn has a more mature business model and its insurance products and solutions span five ecosystems. (4) GWP of ZhongAn was Rmb3.4bn in 2016, more than three times as much as other three’s GWP combined.
Figure 43: Comparison of four online-only P&C insurance companies in China ZhongAn Online P&C Taikang Online P&C Yi An P&C Insurance An Xin P&C Insurance Insurance Co., Ltd. Insurance Co., Ltd. Co., Ltd. Co., Ltd. Player 众安在线财产保险 泰康在线财产保险 易安财产保险 安心财产保险 股份有限公司 股份有限公司 股份有限公司 有限责任公司 GWP (Rmb mn) - 2014 794 - - - GWP (Rmb mn) - 2015 2,283 9 - - GWP (Rmb mn) - 2016 3,408 675 222 75 License approval Oct-13 Nov-15 Feb-16 Feb-15 Registered place Shanghai Shanghai Shenzhen Beijing Alibaba, Tencent, Ping An, Taikang Life Insurance Yinzhijie and other 6 Beijing Ximeng Real Estate Founders and other 6 companies Co., Taikang AMC companies and other 6 companies Alibaba, Ctrip, Ping An Taikang Insurance Group, Yinzhijie (a Fintech Hong'an online (a Fintech Key partners Insurance DXY company) company) Auto insr business approval Sep-15 Dec-16 No license Sep-16 Medical expenses Online payment Shipping return insurance Investment-linked insurance; insurance; Key products Flight delay insurance insurance; household property Household property theft Health insurance Accident insurance insurance insurance Source: Company, CMBIS estimates
Figure 44: Online insurance company GWP comparison
Source: CIRC, Company, Oliver Wyman Report, CMBIS
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Financial analysis
Insurance business
1. GWP growth: consumer finance, health and travel to become major drivers
In 2016, gross written premium of ZhongAn was Rmb3.41bn, representing yoy growth of 49%. In 1H2017, GWP increased 84.3% yoy from Rmb1.35bn to Rmb2.49bn. Leveraging its technological expertise and business development skills, we believe ZhongAn will be able to keep up growth momentum via product innovation and business model optimization. We forecast overall GWP to be Rmb6.20bn, Rmb10.46bn and Rmb16.33bn in FY17/18/19, representing yoy growth of 81.8%/68.8%/56.1%. Our estimate implies FY16-19E CAGR of 68.6%, which is in line with the 2016-2021 CAGR of China’s InsureTech market at 62.0% estimated by Oliver Wyman.
By ecosystem, we expect GWP from lifestyle consumption and travel ecosystems will keep growing at close-to or lower-than market speed, because of ZhongAn’s relatively high base and consolidation of respective markets. Consumer finance and health ecosystems will become the major growth drivers for ZhongAn in the future.
(1) Lifestyle consumption ecosystem: GWP growth of lifestyle consumption ecosystem decelerated in FY16 mainly for two reasons. First of all, product mix of ZhongAn becomes more diversified. The percentage GWP from lifestyle consumption ecosystem decreased from 92.2% in FY14 to 69.9% in FY15, 47.6% in FY16, and further to 36.5% in 1H2017. The percentage of GWP from shipping return insurance, which was ZhongAn’s first major product, decreased from 77.2% in FY14 to 56.9% in FY15, and further to 35.0% in FY16. Second, there are more participants to provide insurance products and solutions in the e-commerce ecosystem as e-commerce platforms open up, thereby reducing ZhongAn’s market share.
We think competitive landscape of the e-commerce insurance market will gradually stabilize and enter a new ‘steady state’. Therefore, ZhongAn’s market share will become stable and its GWP growth of lifestyle consumption ecosystem will gradually pick up and converge to market growth. Assuming yoy growth rate of 39%/36%/35% in FY17/18/19, we forecast GWP of lifestyle consumption ecosystem to be Rmb2.25bn/Rmb3.06bn/Rmb4.14bn.
(2) Travel ecosystem GWP from the travel ecosystem increased significantly in FY16 to Rmb1.08bn from Rmb322mn in FY15, thanks to the Company’s expanded cooperation with more ecosystem partners. While the travel-related Insuretech market is estimated to grow at a CAGR of 51% in FY16-21 according to Oliver Wyman, we forecast ZhongAn’s GWP from travel ecosystem to grow at 38% in FY17 (to Rmb14.9bn) and then slow down to grow 35% and 30% in FY18 and FY19, respectively.
In 1H2017, GWP from the travel ecosystem was Rmb705.7mn, representing yoy growth of 49.8%. We forecast growth in 2H2017, especially in 4Q2017, is likely to decelerate due to the cancelling of “bundled charges” on Ctrip, a practice that automatically selects insurance and other value-added services for users. Our more prudent estimate in FY18-19 takes into account (1) more intensive competitions in this particular market in the future, and (2) the relative high base of ZhongAn, which occupies more than 1/6 of the travel-related Insuretech market in 2016.
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(3) Consumer finance ecosystem ZhongAn’s business model regarding the consumer finance ecosystem has become more clear with two major products: (1) The Mashanghua product, launched in Jun 2017, can be conveniently connected to and embedded in a wider range of daily consumption scenarios to meet customers’ growing demand for consumer finance with one-stop solutions; (2) The Baobei Open Platform, launched in Apr 2016, connects consumer finance service providers with fund providers in increasing numbers.
We forecast the average scale of guaranteed financial assets to be Rmb32.0bn, Rmb77.7bn and Rmb135.9bn in FY17/FY18/FY19. We assume ZhongAn will charge a lump sum rate at 3.0%/3.0%/2.9% in FY17/FY18/FY19, of which insurance premium rate is 3.0%/2.5%/2.4% to generate GWP and the rest will be recorded as consumer finance service income since FY18 (See detailed discussions in Figure 69 Consumer finance service income estimate). Based on the above assumptions, we forecast GWP from the consumer finance ecosystem to be Rmb0.96bn, Rmb1.94bn and Rmb3.26bn in FY17/18/19. The implied FY16-19E CAGR is 117.3%, higher than 2016-2021E CAGR of the market estimated by Oliver Wyman at 52.8%.
(4) Health ecosystem: In FY16, health GWP increased to Rmb236mn from Rmb19mn in FY15 thanks to the launch of Personal Clinic Policy. In 2017, the Company enhanced this customized product with new versions and embraced a larger population including children. GWP from the health ecosystem amounted to Rmb438mn in 1H2017 and we forecast the number to be Rmb1.1bn for the whole year of 2017. In addition, the Company is actively enriching its health insurance product lines. Innovative products integrated with high-tech devices to provide value-added services are likely to become more accepted by the market. We forecast GWP from the health ecosystem to grow at annual rate of 370%/140%/90% in FY17/18/19 to Rmb1.1bn, Rmb2.66bn and Rmb5.06bn in respective years.
(5) Auto ecosystem: GWP from the auto ecosystem was only Rmb3.7mn in FY16 because the Company had approval to conduct auto insurance business in only six regions as of 31 Dec 2016. In Mar 2017, the approved regions expanded to 18 regions and they cover approximately 66% of the auto insurance market in China. In addition to this enlarged area of approval, we think the gradual reform of commercial auto insurance pricing and products as well as the development of telematics and UBI will provide impetus for the growth of the auto ecosystem. Therefore, we predict GWP from auto ecosystem will burst to Rmb12mn, Rmb36mn and Rmb72mn in FY17/18/19, respectively.
In our forecast, we do not take into account life insurance business, as the Company is still in the process of applying for life insurance license with the CIRC. Moreover, we think market competition in ecosystem-oriented insurance market will become more intensive, thereby decelerating growth in FY19 onward.
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Figure 45: GWP forecast by ecosystem GWP (Rmb mn) FY14A FY15A FY16A FY17E FY18E FY19E 1H16 1H17 Lifestyle consumption 732 1,596 1,620 2,252 3,063 4,135 654 909 Travel 44 322 1,082 1,493 2,015 2,620 471 706 Consumer finance 9 303 318 960 1,943 3,262 120 256 Health 0 19 236 1,109 2,661 5,056 44 438 Auto - 1 4 12 36 72 0 4 Others 8 42 148 371 742 1,186 63 179 Total 794 2,283 3,408 6,197 10,460 16,332 1,352 2,492
GWP YoY growth FY14A FY15A FY16A FY17E FY18E FY19E 1H16 1H17 Lifestyle consumption N/A 118% 2% 39% 36% 35% 39% Travel N/A 628% 236% 38% 35% 30% 50% Consumer finance N/A 3169% 5% 202% 102% 68% 114% Health N/A 174673% 1127% 370% 140% 90% 899% Auto N/A N/A 629% 222% 200% 100% N/A Others N/A 407% 255% 150% 100% 60% 184% Overall N/A 187.5% 49.3% 81.8% 68.8% 56.1% 84.3% Source: Company, CMBIS estimates
Figure 46: ZhongAn GWP estimate vs. Insuretech market size estimate Our estimated GWP for ZhongAn Insuretech market size estimated by Oliver Wyman (Rmb mn) FY16A FY19E FY16-19E CAGR 2016 2021E 2016-21 CAGR Lifestyle consumption 1,620 4,135 36.7% 5,300 56,900 60.8% Travel 1,082 2,620 34.3% 6,000 47,300 51.1% Consumer finance 318 3,262 117.3% 6,000 50,000 52.8% Health 236 5,056 177.8% 30,000 198,000 45.9% Auto 4 72 168.4% 124,000 412,000 27.1% Others 148 1,186 100.0% N/A N/A N/A Total 3,408 16,332 68.6% 363,000 1,400,000 62.0% Source: Company, CMBIS estimates
Figure 47: Product mix is to become more diversified
Source: Company, CMBIS estimates
Net premiums earned
Net premiums earned equal GWP less premiums ceded to reinsurers and net change in unearned premium reserves. Premium ceded to reinsurers will continue to increase primarily due to the increase in GWP from health insurance, as the Company’s reinsurance arrangements are primarily related to health insurance products. Net change in unearned premium reserves will also increase because of GWP growth and the increase of longer-term products such as health insurance and credit insurance.
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As a result of the foregoing, we estimate net premiums earned to be Rmb5.36bn, Rmb9.10bn and Rmb14.57bn in FY17/18/19, representing yoy growth of 66.2%, 69.8% and 60.1% in respective years.
Figure 48: Net premiums earned
Source: Company, CMBIS estimates
Loss ratio may climb due to business expansion
Net claims incurred are typically the largest expense of the Company. Loss ratio, defined as net claims incurred as a percentage of net premiums earned, was 73.4%, 68.5% and 42.0% in FY14/15/16, respectively. While loss ratio may be affected by a number of factors including market conditions, we think the declining loss ratio of ZhongAn since FY14 was due mainly to its evolving product mix, which was a reflection of the Company’s ability to select profitable risks. For example, insurance products in travel ecosystem have significantly lower loss ratios than the shipping return insurance. The fast growth of these two ecosystems reduced the overall loss ratio from 68.5% in FY15 to 42.0% in FY16.
In 1H2017, loss ratio climbed to 52.8% from 41.0% in 1H2016 mainly due to the rapid growth of consumer finance ecosystem and lifestyle consumption ecosystem. Products in these two ecosystems are likely to bear higher loss ratio. We forecast loss ratio to be 51.5%, 48.4% and 45.6% in FY17/18/19, respectively. On the positive side, we believe the Company will continuously improve its risk management through data collection and experience accumulation.
Figure 49: Net claims incurred Figure 50: Loss ratio
Source: Company, CMBIS estimates Source: Company, CMBIS estimates
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Expense ratio may increase in FY17 associated with new business
Technical service charges, and handling charges and commissions are the largest component of insurance operating expenses of ZhongAn.
Technical service charges are primarily fees paid to the ecosystem partners related to sales of insurance policies on their platform. Factors affecting technical service charges depend on cooperation with various ecosystem partners, which include fixed or variable fee rates charged, among others. In FY15 and FY16, the increase of technical service fee outpaced the growth of GWP primarily due to increased technical service fee rates charged by the Company’s major ecosystem partners and the rapid growth of certain products with relatively high service charges, such as accident insurance. Going forward, we believe the increase in technical service charges will be more controllable because (1) the Company may figure out better ways to deal with fee rate proposals of ecosystem partners, and (2) a larger proportion of sales is expected to be made via the Company’s proprietary platforms. We estimate technical service charges to be Rmb1.68bn, Rmb2.42bn and Rmb3.25bn in FY17/18/19, accounting for 27.2%, 23.2% and 19.9% of GWP in respective years.
Handling charges and commissions are fees paid to insurance agents and sales channels for the distribution of insurance policies. The hike in handling charges and commissions in FY15 and FY16 was mainly due to the increase in the number of agents and sales channels related to the Company’s fast-growing health insurance and travel-related accident insurance products. We estimate handling charges and commissions to grow to Rmb0.65bn, Rmb1.13bn and Rmb1.74bn in FY17/18/19, accounting for 10.6%, 10.8% and 10.7% of GWP in respective years.
Expense ratio. Expanding into new ecosystems and product types is typically associated with a significant amount of expenses in the initial years. Therefore, the expense ratio, which equals insurance operating expenses expressed as a percentage of net premiums earned, increased from 35.2% in FY14 to 58.1% in FY15 and further to 62.7% in FY16. We predict expense ratio will climb to 68.0% in FY17 since the Company is expected to expand into relatively new ecosystems, such as the auto ecosystem, which may entail high initial operating expenses. In FY18 and FY19, we forecast expense ratio to drop to 62.1% and 56.2%, respectively, as the Company becomes more capable of controlling operating expenses.
Figure 51: Insurance operating expenses Figure 52: Expense ratio estimate
Source: Company, CMBIS estimates Source: Company, CMBIS estimates Note: Handling charges and commissions are those net of reinsurance expanse covered.
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Figure 53: Sales cost by ecosystem (Rmb mn) FY14A FY15A FY16A FY17E FY18E FY19E Technical service fee Lifestyle consumption 67 278 281 390 505 662 Travel 25 190 633 881 1,108 1,336 Consumer finance - 100 66 197 369 555 Health - - 27 166 346 556 Auto - - 5 12 29 43 Others - 2 15 37 67 95 Total 92 570 1,027 1,683 2,424 3,247 yoy 519% 80% 64% 44% 34% As % of GWP 11.6% 25.0% 30.1% 27.2% 23.2% 19.9%
Handling charges and commissions* Lifestyle consumption 1 1 0 18 24 32 Travel 18 91 240 313 403 498 Consumer finance 0 0 0 0 1 1 Health - 1 14 222 506 910 Auto - - 0 1 2 4 Others 0 9 33 100 193 297 Total 19 102 287 654 1,128 1,742 yoy 429% 180% 128% 72% 54% As % of GWP 2.4% 4.5% 8.4% 10.6% 10.8% 10.7%
Sales cost**/GWP Lifestyle consumption 9.3% 17.5% 17.3% 18.1% 17.3% 16.8% Travel 96.9% 87.3% 80.8% 80.0% 75.0% 70.0% Consumer finance 0.4% 32.9% 20.7% 20.5% 19.0% 17.0% Health 0.0% 5.5% 17.2% 35.0% 32.0% 29.0% Auto N/A 0.0% 125.8% 105.0% 85.0% 65.0% Others 5.9% 27.5% 32.3% 37.0% 35.0% 33.0% Overall 14.0% 29.5% 38.6% 37.7% 34.0% 30.5% Source: Company, CMBIS estimates *Handling charges and commissions are those net of reinsurance expense covered. **Sales cost is referred to as technical service fee plus handling charges and commissions.
Combined ratio
Per previous discussions, we estimate combined ratio to be 119.5%, 110.5% and 101.8% in FY17/18/19, respectively.
Figure 54: Combined ratio
Source: Company, CMBIS estimates
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Investment income
The Company relies on Ping An Asset Management Co., Ltd., a third-party asset management company to provide investment and asset management services. ZhongAn has established an Investment Strategy Committee under the Board of Directors to review annual investment plans and guidelines. ZhongAn is now developing its own in-house asset management team.
As of 31 Dec 2014, 2015 and 2016, the Company had total investment assets of Rmb1.15bn, Rmb7.71bn and Rmb7.84bn, respectively. Investment income, including net investment income and net fair value gains through profit or loss, was Rmb90mn, Rmb561mn and Rmb140mn in FY14/15/16, respectively. The volatility was primarily due to the increase in investment assets purchased with the proceeds from share issuance in Jun 2015 and the equity market boom in 2015, together with the subsequent bust.
We expect investment asset will grow to Rmb19.42bn, Rmb19.94bn and Rmb22.38bn as of 31 Dec 2017, 2018 and 2019. We predict investment income to be Rmb315mn, Rmb650mn and Rmb968bn, respectively, in FY17-19. Net investment yield is predicted to be 2.6%, 3.1% and 4.3% in FY17-19, respectively, and the dip in FY17 is primarily due to the expected capital injection.
Figure 55: Investment portfolio (31 Dec 2016) Figure 56: Investment assets estimate
Source: Company Source: Company, CMBIS estimates *Other investments include wealth management products and trusts.
Figure 57: Investment income estimate Figure 58: Investment yields
Source: Company, CMBIS estimates Source: Company, CMBIS estimates *Investment income includes net investment income and net fair value * Net investment yield = (Interest income + dividend income – interest gains through profit or loss. expense related to securities sold under agreements to repurchase)/Avg. of investment assets of the year. **Total investment yield = (Net investment income + net fair value gains through profit or loss)/Avg. of investment assets of the year.
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Other operating income Other operating income primarily consists of government grants, which include rental subsidies, development support funds and government subsidies related to intangible assets. It increased by 75.9% from Rmb26.6mn in FY15 to Rmb46.8mn in FY16 mainly due to an increase in government grants. We estimate other operating income to be Rmb240mn in FY17, mainly because of an increase in government subsidies (to ~Rmb200mn) and advisory income related to arrangements with Ping An P&C (~Rmb40mn). And we estimate other operating income to be zero in FY18 and FY19 out of prudence.
Fintech 3.0-Technology export
In our view, ZhongAn is still at an early stage of building a full-fledged revenue model related to technology export, but we believe it can leverage its rich experience in Fintech to monetize its high-volume data and advanced tech capacities. We expect the Company to bear initial fruits from commercialization of technology export through two ways:
1) Software license, IT service, and SaaS fees by offering 3 series of technology services. Most of S series solutions will generate revenue through charging software licenses and IT services fees. This business mode was similar to Ping An Technology. In terms of X series, we expect some of its X series products (e.g. X-Model, X-antifraud) to monetize by charging technical service fee of SaaS. For convenience, we classify technical service fees of 3 series into three types: Software license, IT service, and SaaS fees. 2) Technical service income from consumer finance business. By leveraging its rich credit data sources and big data analytics capabilities, ZhongAn can provide credit solutions and risk management services to partners in consumer finance ecosystem. For example, they can charge some platforms lack of enough risk management capabilities with premium fees, which we classify into technical service fee of exporting consumer finance-based technology.
(1) Tech export of three series
Robust revenue growth driven by ramp-up of both customers and ARPU
Taking growth trend of cloud as reference, we believe technology export will create a virtuous cycle, by connecting more customers and promoting fast adoption of Fintech, while generating higher returns and building reputation. Aided by fast-growing online ecosystems and a tech-savvy population, the Company may enjoy tremendous ramp-up of revenue once Fintech applications reached a considerable level of maturity.
At the beginning, ZhongAn Technology can monetize its high-volume data, cloud-based platform and series of solutions through providing with proprietary software licenses (e.g. e- commerce platforms, core systems, etc.). Taking peers’ early development as reference, we assume that ZhongAn could sign~27 contracts of offering software license to insurers and small-sized banks in FY17, with ARPU at Rmb1mn~Rmb1.5mn, in line with current industry standard, then it will generate revenue of Rmb36mn in FY17.
Meanwhile, we category some of its X series and T series products (e.g. X-Model, X-antifraud, Ti-Capsule) as SaaS solutions, due to the similar monetization modes. ARPU of SaaS could be smaller while no. of customers will be far more than that of software license and IT services. Assuming that no. of contracts of SaaS was ~200 with ARPU at Rmb50,000~Rmb800,000 in FY17,we estimate revenue from SaaS at Rmb10.6mn in FY17, accounting for 23% of tech export revenue.
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After initial sales in FY17, software licenses will derive regular maintenance fees and IT service fees since FY18. Besides, in our view, the Company could export its technology into both domestic and international market, promoted by the Belt and Road initiative. Due to the relatively limited experience in overseas development, overseas monetization could be slower. Therefore we assume that ZhongAn will began to explore its overseas expansion in FY18, with less than 5 contracts, but enjoying higher ARPU.
Overall, we model its tech export from 2 main drivers: 1) No. of contracts to climb up to over 1400 in FY19, at a CAGR of 163%; 2) total ARPU to grow at a CAGR of 52% in FY17-19.
Therefore, we estimate revenue from technology export to be Rmb47mn/198mn/749mn for FY17/18/19, at a CAGR of 301%.
Figure 59: Revenue projections of technology export Figure 60: No. of contracts and ARPU projections （Rmb '000） 800 （Rmb mn） 749 330% 1600 600
700 320% 1400 517 500 600 310% 1200 400 500 300% 1000
400 290% 800 300 260 1449 300 280% 600 223 198 200 200 270% 400 762 100 100 47 260% 200 209 0 250% 0 0 FY17E FY18E FY19E FY17E FY18E FY19E Revenue (Left) YoY growth (Right) No. of Contracts(Left) ARPU(Right) Source: CMBIS estimates Source: CMBIS estimates
Figure 61: Tech-export revenue breakdown by types Figure 62: Tech-export revenue breakdown by market
800 （Rmb mn） FY19E 700 23% FY18E 600 FY17E 500
400
300 77% 200
100
0 FY17E FY18E FY19E Domestic Market International Market IT Service License-related SaaS Source: CMBIS estimates Source: CMBIS estimates
SaaS to be long-term growth driver
With cloud-enabled solutions widely applied, ZhongAn Technology can offer more SaaS solutions for core business processes, which are much less mature currently and with few dominant players, but in greater demand. We believe insurers will gradually adopt a cloud- based platform with a combination of maturing technologies (e.g. AI, big data, blockchain, etc.), and players in certain markets have shown such willingness. Taking peers’ early development and industry growth as reference, we assume a 159% CAGR of no. of contracts and a 116% CAGR of ARPU, then we estimate SaaS/Tech Rev ratio to climb up to 44% in FY19 from 23% in FY17, with SaaS revenue at a CAGR of 458%, mainly driven by stronger
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Figure 63: Market size of SaaS in China Figure 64: View on SaaS in insurance core systems
50 50% （Rmb bn） 45 45%
40 40% 5.3% 15.8% SaaS will definitely be a big part of our 35 35% core systems strategy moving forward 21.1% 30 30% SaaS might be useful, but the jury's 25 25% still out 20 20% For a variety of reasons, SaaS is 15 15% probably not for us 10 10% 57.8% I'm not ready to opine on SaaS just yet 5 5% 0 0% 2015 2016 2017E 2018E 2019E 2020E Market size(Left) YoY growth(Right) Source: iResearch Source: Oliver Wyman
Figure 65: SaaS/Rev ratio projections Figure 66: SaaS revenue breakdown
800 50% 350 （Rmb mn） 44% （Rmb mn） 45% 700 300 40% 600 34% 35% 250 500 30% 200 23% 400 25% 150 300 20% 15% 100 200 10% 50 100 5% 0 0% 0 FY17E FY18E FY19E FY17E FY18E FY19E IT Service License-related SaaS SaaS/Rev ratio(Right) SaaS commissions SaaS profit-sharing income SaaS service fees Source: CMBIS estimates Source: CMBIS estimates
Near-term margin pressure from initial heavy R&D investment, but better long-term margin outlook.
We believe initial R&D investment is inevitable, not only for core business but also for Fintech export. But we keep positive on longer-term margin outlook, thanks to:1) a larger share of SaaS to deliver a better margin;2) scale effect; and 3) significant operating leverage and cost synergies among ecosystems. We expect technology export to achieve breakeven in FY19 with OPM of ~50%, in line with current industry standard.
Figure 67: expense projections of technology export Figure 68: margin projections of technology export
0 0% 400 375 100% FY17E FY18E FY19E （Rmb mn） -50 -50% 50% 300 -100 -100% 0% 200 -150 -150% -50%
-163 -200 -200% 100 -100%
-250 -250% -150% 0 -258 FY17E FY18E FY19E -300 -300% -200% -100 -59 -350 -350% -250% -117 （Rmb mn） -400 -375 -400% -200 -300% Expenses(Left) Expenses/Rev ratio(Right) Operating profit(Left) OPM(Right) Source: CMBIS estimates Source: CMBIS estimates
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(2) Tech export of consumer finance service
Consumer finance ecosystem to generate service income in FY18/19 The Company develops connective consumer finance ecosystem to provide credit solutions, risk management and asset management services, in addition to credit guarantee insurance products. Therefore, this ecosystem of business will generate not only premium income but also service income for the Company.
According to iResearch, market size of consumer finance will surge to Rmb3.4tn in FY19, at a CAGR of 98% in 2016-2019E. Assuming ZhongAn’s market share of 3.2%/4.0%/4.0% in FY17-19, we forecast the average scale of guaranteed financial assets to be Rmb32.0bn, Rmb77.7bn and Rmb135.9bn in FY17/FY18/FY19, at a CAGR of 106%. Taking industrial average take rate as reference, we assume the service fee rate to be 0.5% in FY18-19. Based on the above assumptions, we forecast service income from the consumer finance ecosystem to be Rmb389mn and Rmb680mn in FY18/19, respectively.
Figure 69: Consumer finance service income estimate 2017E 2018E 2019E Market Size*(Rmb bn) 998 1,943 3,398 yoy 129% 95% 75% ZhongAn's avg underwriting assets(Rmb mn) 32,000 77,716 135,934 yoy 150% 65% Lumpsum take rate 3.0% 3.0% 2.9% - premium rate 3.0% 2.5% 2.4% - service fee rate 0.0% 0.5% 0.5% Lumpsum service income(Rmb mn) 960 2,331 3,942 - GWP 960 1,943 3,262 - service income 0 389 680 Source: iResearch, CMBIS estimates Note: Market size data was cited from iResearch estimates
Inherent high margin of technical service fees related to consumer finance Since technical service fees are charged as premium income, the Company allocates all of its cost and expenses into insurance business of consumer finance. Therefore, margin of this part was estimated to be 100%.
Net profit may decline to negative territory in FY17 then pick up
We expect profit loss in FY17. We forecast net loss of Rmb563mn in FY17 because of (1) widening underwriting loss, and (2) R&D expenses from the Company’s technology business. On the underwriting front, both loss ratio and expense ratio are predicted to be higher associated with the Company’s expansion into relatively new ecosystems. On the technology front, ZhongAn Technology is still in its initial stage of heavy R&D investment with relatively little revenue. We forecast EBIT to be –Rmb619mn in FY17, consisting of –Rmb1,057mn loss from insurance underwriting, Rmb315mn gain from investment income, Rmb117mn loss from technology business and Rmb240mn gain from other operating income. Profit loss for the Company is expected to be Rmb563mn in FY17.
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Profit may pick up in FY18/19 on (1) improving underwriting margin and; (2) new sources of profit from consumer finance service income (since FY18) and technology export (since FY19). We forecast net profit to be Rmb16mn and Rmb1.32bn, respectively, in FY18 and FY19.
Figure 70: Net profit forecast Figure 71: Sources of EBIT
Source: CMBIS estimates Source: CMBIS estimates *Note: Service income refers to technological services provided to consumer finance ecosystem partners. Adjustment refers to other operating income, which mainly consists of government grant.
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Financial statements
Income statement YE 31 Dec (Rmb mn) FY14A FY15A FY16A FY17E FY18E FY19E
Gross written premiums 794 2,283 3,408 6,197 10,460 16,332 Premiums ceded & net change in unearned premium reserves (82) (362) (183) (836) (1,359) (1,759) Net premiums earned 712 1,921 3,225 5,361 9,101 14,574
Investment income 90 561 140 315 650 968
Income from insurance business 802 2,483 3,366 5,676 10,139 16,221
Income from technology export - - - 47 587 1,429 Software license,IT service and SaaS - - - 47 198 749 Consumer finance service income - - - - 389 680
Other operating income 15 27 47 240 - -
Total income 818 2,509 3,413 5,962 10,337 16,970
Net claims incurred (523) (1,316) (1,355) (2,760) (4,406) (6,639) Handling charges and commissions (16) (101) (287) (654) (1,128) (1,742) Technical service fee (92) (570) (1,027) (1,683) (2,424) (3,247) Finance costs (6) (3) (0) (1) (0) 0 Expenses from Tech Export - - - (163) (258) (375) Other operating and administrative expenses (144) (459) (730) (1,321) (2,099) (3,209) Total benefits, claims and expenses (781) (2,450) (3,400) (6,581) (10,315) (15,211)
Operating profit before income tax 37 60 13 (619) 22 1,759 Income tax expense 0 (15) (4) 56 (5) (440) Net profit 37 44 9 (563) 16 1,319 Source: Company, CMBIS estimates
Balance sheet YE 31 Dec (Rmb mn) FY14A FY15A FY16A FY17E FY18E FY19E Financial assets 1,290 7,709 8,681 19,538 19,978 22,387 - Investment assets 1,150 7,706 7,825 19,419 19,943 22,376 Non-financial assets 80 360 651 1,090 1,590 2,103 - Insurance-related assets 51 233 346 632 994 1,388 - Other assets 29 127 305 458 596 715 Total assets 1,369 8,069 9,332 20,628 21,568 24,490
Insurance contract liabilities 123 616 797 1,129 1,894 3,306 Financial liabilities 140 3 856 119 36 11 Other liabilities 86 551 820 1,301 1,569 1,797 Total liabilities 349 1,171 2,473 2,550 3,499 5,113
Net assets 1,021 6,898 6,859 18,079 18,069 19,377
Shareholders' fund 1,021 6,898 6,859 18,079 18,069 19,377 Source: Company, CMBIS estimates
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Key metrics YE 31 Dec FY14A FY15A FY16A FY17E FY18E FY19E
GWP split Lifestyle consumption 92.2% 69.9% 47.5% 36.3% 29.3% 25.3% Travel 5.6% 14.1% 31.7% 24.1% 19.3% 16.0% Consumer finance 1.2% 13.3% 9.3% 15.5% 18.6% 20.0% Health 0.0% 0.8% 6.9% 17.9% 25.4% 31.0% Auto 0.0% 0.0% 0.1% 0.2% 0.3% 0.4% Others 1.0% 1.8% 4.4% 6.0% 7.1% 7.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
YoY growth GWP N/A 187.5% 49.3% 81.8% 68.8% 56.1% - Lifestyle consumption N/A 118.0% 1.5% 39.0% 36.0% 35.0% - Travel N/A 627.6% 235.8% 38.0% 35.0% 30.0% - Consumer finance N/A 3169.2% 4.9% 201.8% 102.4% 67.9% - Health N/A 174672.7% 1127.2% 370.0% 140.0% 90.0% - Auto N/A N/A 628.8% 222.2% 200.0% 100.0% - Others N/A 407.0% 255.0% 150.0% 100.0% 60.0% Net premiums earned N/A 169.8% 67.9% 66.2% 69.8% 60.1% Investment income N/A 523.8% -75.0% 124.0% 106.5% 49.0% Consumer finance service income N/A N/A N/A N/A N/A 74.9% Income from insurance business N/A 209.5% 35.6% 68.6% 78.6% 60.0% Income from technology business N/A N/A N/A N/A 325.3% 277.9% Total income N/A 206.9% 36.0% 74.7% 73.4% 64.2% Operating profit before tax N/A 62.9% -78.2% N/A N/A 8014.5% Net profit N/A 19.7% -78.8% N/A N/A 8014.5%
Underwriting performance Combined ratio 108.6% 126.6% 104.7% 119.5% 110.5% 101.8% Loss ratio 73.4% 68.5% 42.0% 51.5% 48.4% 45.6% Expense ratio 35.2% 58.1% 62.7% 68.0% 62.1% 56.2%
Investment Net investment yield 4.8% 3.5% 3.6% 2.6% 3.1% 4.3% Total investment yield 7.3% 12.6% 1.8% 2.3% 3.3% 4.6%
Business margins Underwriting EBIT margin -9.7% -27.5% -5.4% -19.7% -10.5% -1.8% Insurance business EBIT margin 2.6% 1.3% -1.0% -13.1% 0.8% 8.5% Technology business EBIT margin N/A N/A N/A -250.0% -30.0% 50.0% Net profit margin 4.5% 1.8% 0.3% -9.4% 0.2% 7.8%
Returns ROE 3.6% 1.1% 0.1% -4.5% 0.1% 7.0% ROA 2.7% 0.9% 0.1% -3.8% 0.1% 5.7%
Solvency margin ratio Core solvency margin ratio N/A N/A 722.5% 1115.4% 674.8% 451.5% Comprehensive solvency margin ratio 714.9% 1620.4% 722.5% 1115.4% 674.8% 451.5%
Per share data EPS (Rmb) 0.04 0.04 0.01 -0.38 0.01 0.90 Book value per share (Rmb) 1.02 5.56 5.53 12.30 12.29 13.18 Dividend per share (Rmb) 0 0 0 0 0 0 Source: Company, CMBIS estimates
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Valuation
We adopt sum-of-the-parts valuation method, to separately evaluate ZhongAn’s insurance business as well as its technology business, in which the Company exports technology expertise via its subsidiary ZhongAn Technology. This is because the two parts of business are intrinsically different in their business models and financial performance.
P/B valuation for insurance business We believe the P/B method is most appropriate for the valuation of the Company’s insurance business. We refer to not only insurance peers but also Fintech peers in this valuation exercise, because (1) ZhongAn is much technology-heavier than traditional insurers; (2) ZhongAn’s topline growth rivals those of technology firms and is much higher than those of traditional insurers; (3) ZhongAn resembles technology firms in terms of company culture, organization structure (flat), human capital composition (>50% engineers), and etc.
Traditional insurance companies in China are listed in both mainland and Hong Kong, and are currently trading at 1.95x FY18E PBR on average. We also select a sample of Fintech companies listed in mainland, Hong Kong and the U.S. These companies engage in various Fintech areas, including internet finance, P2P, payment & solutions, among others, and their businesses have some similarity with ZhongAn Technology. The Fintech peers are currently trading at 6.47x FY18E PBR on average.
We use 4.6x FY18E P/B multiple to value ZhongAn. This multiple corresponds to a weighted average of peers’ P/B ratio where the insurance peers receive a weight of ~40%. That is to say, we think ZhongAn’s insurance business is ~40% insurance and ~60% technology in valuation. Applying this multiple to FY18E book value, we estimate ZhongAn’s insurance business is worth HK$95.1bn, or HK$66.03 per share.
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Figure 72: Valuation of Fintech peers and insurance peers
Mkt cap EPS PE PB Company Ticker Currency Last Price ROE (%) PB (USD mn) FY1E FY2E FY3E FY1E FY2E FY3E FY1E FY2E FY3E Fintech - Internet Tencent 700 HK 469,326 HKD 385.4 30.3 4.4 6.7 8.6 48.8 38.1 30.4 14.5 13.0 9.8 7.6 Alibaba BABA US 474,146 USD 185.1 21.4 17.5 33.0 43.6 37.2 28.2 22.5 9.8 11.2 8.5 6.7 JD JD US 56,848 USD 39.8 -6.5 -2.7 2.2 5.0 118.0 53.2 31.0 7.5 8.7 7.6 6.2 Fintech - P2P On Deck Capital ONDK US 369 USD 5.0 -28.5 0.0 0.3 0.4 NA 18.2 12.4 1.4 1.7 1.4 1.3 Yirendai YRD US 2,541 USD 42.5 65.0 20.7 26.2 38.1 13.6 10.8 7.4 6.1 4.7 3.7 2.6 Lending Club LC US 1,780 USD 4.3 -9.6 0.0 0.2 0.3 195.0 22.1 15.4 1.8 1.3 1.3 1.2 Fintech - Payment & Solutions VISA V US 254,988 USD 112.1 24.6 4.1 4.7 5.5 27.5 23.7 20.5 8.8 8.4 7.8 7.4 Paypal PYPL US 89,062 USD 74.1 10.6 1.9 2.3 2.7 39.6 32.6 27.1 5.8 5.6 4.9 4.3 Square SQ US 14,750 USD 38.0 -10.0 0.3 0.4 0.7 151.8 85.5 52.1 20.1 19.4 16.6 13.0 Fiserv FISV US 26,859 USD 128.9 37.2 5.1 5.7 6.4 25.4 22.4 20.1 11.5 4.8 4.0 3.6 First data FDC US 15,468 USD 16.8 45.2 1.5 1.6 1.7 11.0 10.8 9.8 7.4 6.3 3.7 3.1 WEX WEX US 5,359 USD 124.9 5.5 5.3 6.3 7.2 23.4 19.9 17.3 3.3 3.2 2.9 2.6 Fintech - A share 10JQKA.com 300033 CH 4,609 RMB 57.0 35.7 2.3 2.0 2.5 28.4 22.5 21.8 10.5 8.8 7.4 6.3 Hundsun Technologies 600570 CH 5,266 RMB 56.6 3.9 0.0 0.8 1.1 67.6 52.7 44.4 12.6 12.4 10.8 9.2 Average(Fintech Peers) 8.6 7.8 6.5 5.3
Insurance - H share Ping An 2318 HK 186,385 HKD 75.8 17.4 3.5 4.0 4.7 16.0 13.6 11.7 2.6 2.6 2.3 2.0 China Life 2628 HK 133,139 HKD 27.7 6.9 0.7 1.1 1.2 22.4 19.6 16.2 2.2 2.1 1.9 1.8 CPIC 2601 HK 56,312 HKD 40.1 9.6 1.3 1.6 2.0 21.3 17.2 14.5 2.4 2.2 2.0 1.9 NCI 1336 HK 28,297 HKD 53.9 8.1 1.6 2.0 2.6 23.2 17.8 14.6 2.3 2.2 2.0 1.8 China Taiping 966 HK 13,385 HKD 29.1 6.2 1.3 1.5 1.8 19.8 16.3 14.0 1.7 1.7 1.5 1.3 PICC Group 1339 HK 22,788 HKD 4.2 12.1 0.3 0.4 0.4 8.9 8.6 8.1 1.1 1.0 0.9 0.8 PICC P&C 2328 HK 31,633 HKD 16.6 16.2 1.2 1.5 1.6 9.7 9.0 8.5 1.6 1.5 1.3 1.2 China RE 1508 HK 9,402 HKD 1.7 7.6 0.1 0.1 0.2 10.5 9.1 8.1 0.9 0.8 0.8 0.7 Insurance - A share Ping An 601318 CH 186,270 RMB 69.9 17.4 3.5 4.0 4.7 17.5 14.7 12.4 2.8 2.8 2.5 2.1 China Life 601628 CH 133,056 RMB 34.0 10.4 0.7 1.0 1.2 34.2 27.8 22.8 3.1 2.9 2.7 2.5 CPIC 601601 CH 56,277 RMB 44.4 10.6 1.3 1.6 1.9 27.5 22.9 19.2 3.0 2.8 2.6 2.3 NCI 601336 CH 28,280 RMB 67.4 8.4 1.6 1.9 2.5 35.6 27.2 22.7 3.3 3.3 3.0 2.7 Average(Insurance Peers) 2.3 2.2 2.0 1.8 Total Average 5.7 5.2 4.4 3.7 Source: Bloomberg, CMBIS. *As of 10 Nov 2017.
Technology business: fair value of HK$31.8bn For technology export of three series, we adopt DCF method to value it, since it has not yet breakeven in FY18 but enjoy triple-digit growth in FY17-19 according to our estimate. This approach finally yields a fair value of HK$23.9bn, or equivalent to 54x FY19E EV/EBIT and 27x FY19E P/S, assuming a WACC of 13.23% and a terminal growth of 3%.
For technical service fees from consumer finance business, we adopt P/E multiple to value it. We apply the industry average’s FY18 P/E, which is 17x, to its net profit in FY18. This approach finally yields a fair value of HK$7.9bn.
Figure 73: P/E multiples of consumer finance peers
Mkt cap EPS PE Company Ticker Currency Last Price ROE (%) (USD mn) FY17E FY18E FY19E FY17E FY18E FY19E Fintech - P2P On Deck Capital ONDK US 369 USD 5.0 -28.5 0.0 0.3 0.4 NA 18.2 12.4 Yirendai YRD US 2,541 USD 42.5 65.0 20.7 26.2 38.1 13.6 10.8 7.4 Lending Club LC US 1,780 USD 4.3 -9.6 0.0 0.2 0.3 195.0 22.1 15.4 Shanghai 2345 network 002195 CH 3,456 RMB 7.0 14.3 0.2 0.3 0.4 23.9 17.8 12.8 77.5 17.2 12.0 Source: Bloomberg, CMBIS
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Figure 74: DCF Valuation of technology export DCF Valuation (Rmb mn) 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E EBIT -117 -59 375 809 1,374 1,975 2,710 3,568 4,527 5,562 Tax 0 0 -56 -121 -206 -296 -407 -535 -679 -834 D&A 15 29 41 49 57 62 67 71 74 76 CAPEX -64 -98 -116 -128 -139 -151 -161 -171 -179 -186 FCF -166 -128 243 609 1,085 1,591 2,210 2,933 3,743 4,618 FCF Growth -23% -289% 151% 78% 47% 39% 33% 28% 23% PV -147 -101 168 374 589 764 939 1,103 1,246 15,371 Terminal Value 47,561
Assumptions WACC 13.23% tax rate 15.0% Risk free rate 3.6% Cost of debt 0.0% Beta 1.2 Market risk return 12.0% Cost of equity 13.2% Debt/Assets 0.0% Terminal growth rate 3.0% Debt value 0 WACC ~ 11% 12% 13% 14% 15% Equity Value 1.5% 29.0 24.9 21.5 18.8 16.6 PV 20,308 2.0% 30.2 25.8 22.2 19.4 17.0 minus：Net cash Terminal 2.5% 31.6 26.8 23.0 20.0 17.5 minus：Minority Interest growth rate 3.0% 33.2 28.0 23.9 20.6 18.0 Equity Value(Rmb mn) 20,308 3.5% 34.9 29.2 24.8 21.4 18.5 4.0% 37.0 30.7 25.9 22.2 19.2 Firm Value(HK$ bn) 23.9 4.5% 39.3 32.3 27.1 23.0 19.8 Source: Bloomberg, CMBIS estimates
SOTP yields total value to be HK$88.09 per share
The insurance business is worth HK66.03 per share while the technology business is worth HK$22.06. Summing up the two parts, we set target price at HK$88.09.
Figure 75: SOTP valuation table for ZhongAn Insurance business FY18E book value (Rmb mn) 18,069 FY18E book value of ZhongAn Technology (Rmb mn) 500 FY18E book value ex. ZhongAn Technology (Rmb mn) 17,569 Fair P/B multiple of ZhongAn (x) 4.6 This multiple is equivalent to w1*Insurance + (1-w1) * Tech , where w1 = 41.4% 2018E P/B of Insurance peers = 2.0 2018E P/B of Tech peers = 6.5 Value of insurance business (Rmb mn) 80,819 Value of insurance business (HK$ mn) 95,081 Value of insurance business per share HK$66.03 Technology business Value of technology export of three series from DCF (HK$ mn) 23,891 Value of technical service fees from consumer finance business (HK$ mn) 7,875 Value of technology business (HK$ mn) 31,767 Value of technology business per share HK$22.06 Total value of Zhong An per share HK$88.09 Source: CMBIS estimates
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SWOT
Figure 76: SWOT Analysis
Source: CMBIS
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Key Investment Risks
Evolving customer preferences and industry standards The Company may fail to introduce popular new products, cater to evolving preferences of customers and maintain high customer satisfaction, thereby fail to grow its business and remain competitive. Even if the product offerings respond to changing market demand, the Company may be unable to commercialize them or the products may fail to receive necessary regulatory approvals.
Threat from peers as its business model may be replicated quickly Although the Company is the first-mover in Insuretech, its business model may be quickly replicated by other internet companies, traditional insurance companies, as well as financial institutions. Traditional insurance companies and financial institutions may convert their offline resources and customers into online business. Internet companies have strong abilities in capturing customer data and have abundant existing online channels.
Recently, internet companies, namely the BAT, have been making real progress in their insurance business layout. For example, Baidu Inc. (BIDU US) has obtained license for internet-based insurance brokerage and proposes to set up Baian Insurance Company with Allianz and Hillhouse Capital. Tencent has established Weimin Insurance Agency Company and launched insurance platform WeSure through WeChat and QQ. WeSure will work with well-known insurance companies to provide users with high-quality insurance services. The first product available on WeSure is a medical insurance product developed through cooperation with Taikang Life Insurance Company.
Even though there is massive market space for InsureTech, we believe the competition will become much more intensive for ZhongAn when technology companies are equipped with insurance expertise and vice versa.
Potential decrease of support or even direct competition from shareholders ZhongAn’s shareholders, in particular Ant Financial and Ping An Insurance, are amongst its most important ecosystem partners. ZhongAn relies on the systems and platforms of its shareholders and their related parties to uncover and address consumer needs. For example, the Shipping Return Policy is embedded into the system of Taobao Marketplace.
However, the cooperative arrangements with shareholders and their related parties are not exclusive and may or may not be renewed upon expiration. Within an increasing number of players engaging in similar business as ZhongAn, the shareholders may not necessarily favor ZhongAn in the selection of insurance solutions providers. Moreover, some of the shareholders and their related parties may directly offer competing products. Such competition may become more noticeable in the future, which weighs on the Company’s business development.
Uncertainty in retaining long-term relationship with ecosystem partners The Company relies on a few ecosystem partners to generate a significant portion of GWP. In 2016, sales on ecosystem partners’ platforms accounted for 86.5% of GWP, and sales on top five ecosystem partners’ platforms accounted for 68.6%. In addition, the Company earns a significant portion of GWP from a limited number of policyholders. In 2016, top five policyholders combined accounted for approximately 28% of its GWP. The Company’s business may be adversely affected if it fails to retain these partners and policyholders.
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Regulation risks concerning solvency margin ratio and necessary licenses Uncertainty in regulatory framework changes of the Insuretech and internet financial service. Due to the relatively short history of the Insuretech and internet financial service industries in China, CIRC has not adopted a clear regulatory framework to regulate these activities. Changes in government regulations, measures and policies may reduce the Company’s profitability and limit its growth.
Risk of failing to maintain required solvency margin ratios. The Company is required by CIRC to maintain solvency margin ratios commensurate with its business and risk exposures. Failing to do so could cause CIRC to impose a range of limitations on its insurance business operations and investment activities, thus constrain its underwriting capacity, lower its growth rate and have a material adverse effect on its results of operations.
Uncertainty in getting necessary licenses for future business development. The expansion of the auto insurance and life insurance business requires further approval from CIRC, which brings uncertainty to growth and profitability.
Operational risks from inaccuracy of data and technical error in each step of insurance value chain The Company relies on the big data collected in each step of the insurance value chain to enhance its business performance and results, and we cannot assure that the Company is able to accumulate or access sufficient data in the future, the incompleteness and inaccuracy of data, or any technical error may materially and adversely affect its business and results of operations. Beside, differences in actual benefits and claims from the assumptions used in pricing and charging reserves for the Company’s insurance products may adversely affect its underwriting profitability. For the Company’s credit guarantee business, it may be negatively impacted if the credit or other information received from third parties about a customer and other related information is inaccurate or may not accurately reflect the customer’s creditworthiness.
Reputation and law risks of failing to protect the confidentiality of the personal data The Company relies on a network of process and software controls to protect the confidentiality of data. If the Company or its partners inappropriately disclose any personal information, or if third parties are able to penetrate its network security, it could be subject to claims for identity theft or other similar fraud claims, such as unauthorized marketing or unauthorized access to personal information.
Risk of underperformance in investment return. Without any subsidiary that is capable of and qualified to provide asset management services, the Company relies on Ping An Asset Management Co., Ltd., a third-party asset management company to provide investment services. Therefore, its ROI and even profitability remain uncertainty, especially when considering the fluctuation of interest rate, exchange rate and macroeconomic changes.
Potential higher CoR due to intensive and concentrated claims from travel-related insurance Its travel-related insurance may face intensive and concentrated claims due to incidents such as large scale flight delays and major accidents which reflect the nature of the travel industry, such as flight delay and accidents, which may bring challenges to its financial condition during a specific period of time.
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Risk of failing to keep advanced technologies The Company’s business is highly dependent on the proper functioning and improvement of its information technology systems and infrastructure as well as internal control system. If it fails to anticipate or successfully implement new technologies could render its business uncompetitive, and reduce its income and market share.
Lower-than-expected growth of internet penetration Insuretech is reshaping the traditional insurance market with extensive use of advanced technologies in the insurance sector, enabling new insurance products, services and processes. The Company’s future results of operations will depend on factors affecting the development of the Insuretech industry, such as the growth of internet, personal computer and mobile penetration and usage in China. A decline in the popularity of online activities in general, or failure to adapt to new changes will affect the Company’s business prospects.
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Appendix 1: Milestones
Year Event
2013 October The Company was incorporated on October 9, 2013 as a joint stock limited company and began operation in November.
2014 March CIRC approved the expansion of the insurance industry’s permitted business scope, including the addition of “short term health and accident insurance”.
April The Company’s proprietary technology platform “Wujieshan” went online.
November The total number of insurance policies sold by the Company during the Double 11 Shopping Festival reached the record of approximately 100 million within one week.
2015 May The Company received approval from CIRC to include “motor vehicle insurance, including mandatory motor vehicle accident insurance and commercial motor vehicle insurance” and “insurance information services” in the Company’s permitted business scope.
June The Company completed its Pre-IPO Investments and RMB5.775 billion was raised.
September The Company received approval from CIRC to adopt the China Insurance Association Model Comprehensive Commercial Vehicle Insurance Policy (中国保险行业协会商业车险综合示范条款) in six commercial auto insurance experimental zones including Heilongjiang, Shandong, Guangxi, Chongqing, Shanxi and Qingdao.
November The Company released the first Online to Offline auto insurance and maintenance brand Baobiao Auto Insurance (保骉车险).
December The Company topped the “Fintech 100” list jointly published by KPMG and Australian fintech investment firm H2 Ventures.
2016 April The Company released the Baobei Open Platform (保贝计划), which connects consumer finance platforms with its financial institution partners, including banks, assets management department of securities brokers, trusts, finance leasing companies, microfinance providers and factoring companies by utilizing the Company’s advanced technology and risk management capabilities.
May ZhongAn Information and Technology Services Co., Ltd. was incorporated with the approval from CIRC.
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August The Company released a mid-range medical insurance product Personal Clinic Policy (尊享 e 生).
October The Company was placed fifth in the “Fintech 100” list jointly published by KPMG and Australian fintech investment firm H2 Ventures.
November The Company released the “ZhongAn Tech” brand (众安科技), with the aim of supporting the technological upgrade of the insurance industry and promoting and developing the insurance industry’s use of blockchain, artificial intelligence and other new technologies.
The total number of insurance products sold by the Company during the Double 11 Shopping Festival reached the record of approximately 200 million within one week.
The Joint Laboratory of Blockchain and Information Security (区 块链与信息安全联合实验室 ) was established through the Company’s joint cooperation with Fudan University.
December The Company was awarded the “Annual Award for Online Insurance” (年度互联网保险奖) at the 2016 Yicai Financial Summit (2016 第一财经新金融峰会).
As of December 31, 2016, the Company served over 492 million customers since inception, which include the policy holders and the insured, and had an aggregate of 245 insurance product terms approved by the CIRC.
2017 September The Company listed on Hong Kong Stock Exchange.
Source: Company
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Appendix 2: Directors, Supervisors and Senior Management
Directors
Name Age Time of joining Existing Position Roles and Responsibility the Company
Mr. OU Yaping 55 Sep 2013 Chairman of the Provide overall strategic planning and Board and Non- business direction; member of the (欧亚平) executive Director Remuneration and Nomination Committee
Mr. HAN Xinyi 39 Nov 2016 Non-executive Provide professional opinion and Director judgment to the Board; member of the (韩歆毅) Investment Strategy Committee
Mr. LAI Chi Ming 44 Nov 2013 Non-executive Provide professional opinion and Jimmy Director judgment to the Board; member of the Investment Strategy Committee (赖智明)
Mr. WANG Guoping 53 Dec 2016 Non-executive Provide professional opinion and Director judgment to the Board; member of the (王国平) Audit Committee
Mr. HU Xiaoming 46 Nov 2013 Non-executive Provide professional opinion and Director judgment to the Board; member of the (胡晓明) Risk Management Committee
Mr. CHEN Jin 48 Jun 2014 Executive Director Provide overall management and and Chief Executive overseeing day to day operations of the (陈劲) Officer Company; chairman of the Investment Strategy Committee
Mr. ZHENG Fang 52 Nov 2013 Non-executive Provide professional opinion and Director judgment to the Board; chairman of the (郑方) Risk Management Committee
Mr. OU Jinyi Hugo 25 Apr 2017 Non-executive Provide professional opinion and Director judgment to the Board; member of the (欧晋羿) Investment Strategy Committee
Mr. ZHANG Shuang 45 Nov 2016 Independent Non- Supervise and provide independent executive Director judgment to the Board; chairman of the (张爽) Remuneration and Nomination Committee
Ms. CHEN Hui 50 Dec 2016 Independent Non- Supervise and provide independent executive Director judgment to the Board; chairman of the (陈慧) Audit Committee
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Name Age Time of joining Existing Position Roles and Responsibility the Company
Mr. DU Li 36 Dec 2016 Independent Non- Supervise and provide independent executive Director judgment to the Board; member of the (杜力) Remuneration and Nomination Committee
Mr. LI Yifan 49 Dec 2016 Independent Non- Supervise and provide independent executive Director judgment to the Board; member of the Audit Committee
Mr. WU Ying 58 Apr 2017 Independent Non- Supervise and provide independent executive Director judgment to the Board; member of the (吴鹰) Risk Management Committee
Source: Company
Supervisors
Name Age Time of joining Existing Position Roles and Responsibility the Company
Ms. WEN Yuping 36 Nov 2013 Chairman of Board of Exercising supervisory duties in Supervisors accordance with regulatory (温玉萍) requirements and the Memorandum and Articles of the Company
Ms. GAN Baoyan 42 Nov 2014 Supervisor Exercising supervisory duties in accordance with regulatory (干宝雁) requirements and the Memorandum and Articles of the Company
Mr. XIANG Lei 37 Apr 2016 Employee Exercising employee representative Representative supervisory duties in accordance with (向雷) Supervisor regulatory requirements and the Memorandum and Articles of the Company
Source: Company
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Senior Management
Name Age Time of joining Existing Position Roles and Responsibility the Company
Mr. JIANG Xing 40 Apr 2014 Vice General Manager Overseeing information technology, and Chief Technology operations & safety (姜兴) Officer
Mr. XU Wei 37 Feb 2014 Vice General Manager Overseeing operations and Chief Operating (许炜) Officer
Mr. WU Ti 40 Dec 2014 Vice General Manager Overseeing marketing operations and Chief Marketing (吴逖) Officer
Mr. ZHANG Yongbo 39 May 2013 Chief Legal Officer Overseeing compliance and Secretary of the (张勇博) Board
Mr. ZHOU Huichuan 44 Jun 2013 Finance Director Overseeing financial operations
(周会船)
Mr. TENG Hui 38 May 2013 Actuary Director Overseeing actuary operations
(滕辉)
Mr. WANG Min 32 Dec 2014 Strategic Overseeing strategic development Development Director (王敏)
Mr. MA Mingyu 44 Jun 2015 Vice General Manager Overseeing risk management and Chief Risk (马明宇) Management Officer
Source: Company
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Disclosures & Disclaimers
Analyst Certification The research analyst who is primary responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by that analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report 3 business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report.
CMBIS Ratings BUY : Stock with potential return of over 15% over next 12 months HOLD : Stock with potential return of +15% to -10% over next 12 months SELL : Stock with potential loss of over 10% over next 12 months NOT RATED : Stock is not rated by CMBIS
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Notes: CMB International Securities Limited and/or more of its affiliates performed investment banking services to ZhongAn Online (6060 HK) over the past 12 months.
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