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One man's misery is another man's gain, goes the old saying. Or perhaps “a man's insecurity” is more accurate in the case of ZhongAn Online P&C Insurance Co. Ltd. (OTCPK:ZZHGF, OTCPK:ZZHGY, 6060.HK), which is riding through China's ongoing economic downturn due to strong demand for its insurance. The company stands out from many other suffering companies by making money with products that protect against various types of uncertainty.
Last week, ZhongAn it said collectedly Gross written premiums were 2.4 billion yuan ($333.4 million) last month, up about 20% from January 2023. That's slower than the 37.5% year-over-year increase the company posted in the first half of last year, but still respectable, especially given China's current economic headwinds that are causing consumers to become increasingly cautious become.
In fact, the latest monthly growth represents a big improvement from January 2023, when ZhongAn's gross written premiums rose just 1.5% year-on-year before the pace accelerated in the following months. The company's gross written premiums for the full year 2023 rose 25% to 29.5 billion yuan.
Here we should note that the strong start to this year could also be partly due to timing, as the long New Year holiday fell in February this year, but in January last year. This means we will likely have to wait for February's data before we can make a final decision on how 2024 begins for this provider of innovative insurance products.
ZhongAn shares rose 10% in the two trading days after the latest announcement, amid a broader stock market rally after the Lunar New Year holiday. But like most Chinese companies, shares are still down about 27% this year.
Founded in 2013 by Alibaba, Tencent and financial heavyweight Ping An Insurance, ZhongAn made a name for itself in its early days with a product that covers the cost of returning goods posted on Taobao, Alibaba's popular online marketplace, which is one of its ” “Digital Lifestyle” business was purchased. Over the years, the company has sought to strengthen other product types, particularly health insurance, which has become one of its two largest product lines, along with digital lifestyle products.
In the first half of last year, the digital lifestyle segment accounted for the lion's share of ZhongAn's sales growth. For the six months, gross written premiums from such products rose nearly 53% year over year – the fastest growth rate among the company's core lines of business. They accounted for around 40% of total gross written premiums, compared to 35% for health insurance.
Digital lifestyle products could continue to drive ZhongAn's sales growth. Fees for such products are generally low, so they are unlikely to worry cost-conscious buyers seeking protection from problems with their online purchases, even in the weak economy currently prevailing in China as real estate and stock market declines hit fortunes that consumes households.
The digital lifestyle segment also includes travel insurance, which can cover everything from flight delays to hotel cancellations. Demand for such products could rise as Chinese consumers undertake “revenge trips” – a sector that is holding up better than most after three years of Covid restrictions. In an encouraging sign for ZhongAn, official data showed that tourism spending in China during this month's Lunar New Year holiday rose by more than a third compared to last year, even surpassing the level of 2019, the last year before the pandemic.
Challenges to profitability
ZhongAn is doing relatively well when it comes to growing its revenue, but profitability can be a bit more challenging. First of all, the margins for digital lifestyle products are significantly lower than for the company's other business areas. Although operating costs for digital lifestyle products are relatively low, ZhongAn paid out more than 68% of gross premiums from this category in the form of claims and related costs in the first half of last year.
As a result, the so-called combined ratio – all payouts for claims and other expenses in relation to the gross premiums written – for digital lifestyle products was 99.8%. In other words, the company earned a meager profit of 20 cents for every $100 in gross written premiums from these products. In comparison, the rate for health products was significantly better at 92.5%.
Because the margin for the digital lifestyle segment is low, its growth may actually hurt ZhongAn's profitability if it far exceeds sales increases for other product types. However, ZongAn's overall underwriting margin has continued to improve since the company achieved its first ever underwriting profit in 2021. In the first half of last year, the combined ratio improved by 0.7 percentage points to 95.8% compared to the previous year.
Capital gains, which make an important contribution to insurers' overall profits, are another important variable for ZhongAn. The company follows a conservative investment approach and invests the majority of its assets in fixed income investments, which are safer than stocks, which have been quite volatile recently. At the end of June, fixed-income investments accounted for more than 82% of ZhongAn's total assets, up from around 78% a year earlier.
In its interim report, ZhongAn said it would keep the proportion of its fixed-income investments stable. This will certainly help insulate the company from the volatility of stock prices, which led to large fluctuations in earnings in the past, when the company was much less risk-averse than it is today.
But in China's current low interest rate environment, this investment strategy presents its own challenges. Debt yields will remain low and could fall even further if China's central bank cuts interest rates this year – as many expect. It was only on Tuesday that the central bank cut the key interest rate to support the real estate sector.
Fifteen analysts surveyed by Yahoo Finance expect ZhongAn's profit to fall 8% this year, even as they forecast 13% revenue growth.
ZhongAn shares are currently trading at a reasonable price-to-earnings (P/E) ratio of around 11, well above 3.5 Ping an insurance (2318.HK; 601318.SH; OTCPK:PNGAY). That suggests investors seem to favor ZhongAn, perhaps with good reason, as the company focuses on smaller, more affordable products that are likely to weather China's economic downturn better than traditional products like life insurance.
Disclosure: None.
Editor's note: The summary bullet points for this article were selected by Seeking Alpha editors.
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