A Future Insurtech Blue Chip : ZA Online (HKG:6060)

Of all the industries out there which are ripe for disruption, the insurance business is perhaps one of the more visible ones.

Many of the processes which are commonly associated with insurance such as on-boarding, claims settlement, and risk assessment, are time consuming and tedious, taking up many man-hours to perform.

Such inefficiencies are exactly what Insurtech startups are working to reduce and possibly eliminate through the use of technology.

Furthermore, with better technologies such as data analytics, machine learning, and block-chain, these companies can truly optimize insurance, resulting in product innovation, and a better customer experience.

If executed properly, such companies can capture a large market share early on, allowing them to drive economies of scale. Today, we’ll look at one such enterprise which seems to be set for promising growth.

The Candidate

ZhongAn Insurance, also known as ZA Online, is a Insurtech leader in China, with operations in various areas such as technology export, and online banking. They operate a digital-only bank and insurer in Hong Kong as well.

The company is backed by big names such as Ant group, Tencent, and Ping An insurance. Currently, they serve about 524 million users, with insurance policies sold exceeding 7.9 billion.

In 2020, the company ranked 9th among the top 10 companies operating in the China Property and Casualty insurance market based on gross written premiums.

Aside from being the youngest of these companies, ZA Online was also the market leader for the internet P&C insurance segment.

The company uses Gross Written Premiums as a total revenue equivalent, as a vast majority of their revenue comes from insurance, with about 5% of their total revenue coming from “other income”. This is where most of the revenue from technology export and banking flows into.

ZA online also offers it’s Insurtech software products to other enterprises around Asia. Among some of the partners which they work with are; NTUC Income, AIA, OVO, and Grab.

The company is a digital-native, and can be said to have strong fundamentals in online and cloud based operations.

This edge will likely aid them in future operations in which they have to develop and adopt more advanced systems and software for growth.

Core Business

ZA Online’s core business is in insurance, which can be split into 4 segments, namely Health, Digital Lifestyle, Auto, and Consumer Finance.

While the Auto and Consumer Finance segments have seemingly plateaued, the Heath and Digital Lifestyle segments have been experiencing strong growth. Health GWP is up by around 400% since 2017, while Digital Lifestyle GWP is up by around 200% since 2017.

In the Health segment, ZA Online has been enhancing it’s Health insurance ecosystem, offering services and products such as outpatient services, medical consultation, critical illness, and health insurance, all within it’s ecosystem.

This approach drives synergies across their products, and promotes customer stickiness and cross-selling altogether.

With the Health ecosystem as a base, customers would be more likely to consider other types of insurance products offered by the company as well.

Other Ventures

The company also offers their Insurtech software to other business entities. Their products cover a full suite of products for each stage of the insurance industry.

This includes areas such as operations, technology, data, and management. Their revenue from this segment consists of fees such as project fees, software licensing fees, and technology service fees under a SAAS model.

In the first half of 2021, revenue from technology exports increased by a whopping 122% compared to 2020. However, losses also increased by about 30%, showing that this segment is still very much in a developing stage and yet to be a proven business model.

The last segment is virtual banking. ZA Online operates ZA Bank, a leading virtual bank in Hong Kong. For 2020, the bank has managed to attract HKD$6b worth of deposits, and granted loans of HKD$650m to customers.

The company has also recently kick-started operations for it’s digital insurer ZA Insure, which provides Hong Kong residents with insurance products on a 24/7 online platform. Management believes that both business units can collaborate to meet the needs of customers better.

Financial Metrics

The company’s gross written premiums have increased tremendously since it’s inception, rising from HKD$7.1b in 2017, to HKD$20.1b in 2020. This amount looks set to increase further in 2021.

Most of the premiums earned are used in turn to settle claim payouts (about 40%), and pay for general and administrative charges (about 35%). These two are among other charges which have also been increasing year over year.

Recently, the 2021 Interim report shows that the claim payout amounts and G&A charges seem to be stabilizing. This could mean that the company is starting to achieve economies of scale in it’s business operations.

At the moment, the company’s stock currently trades at a trailing PE ratio of 45 times earnings. This can be attributed to the impressive surge in net profits for the first six months of 2021.

Wrapping Up

Since it’s IPO in 2017, the company’s share price has come off it’s all time high, and has been languishing for the past 3 years. This is likely because most of the initial hype has dispersed as other, more exciting IPOs take centerstage.

Nonetheless, the company has been performing well, growing it’s online market share, attracting and retaining more customers under it’s ecosystem, and venturing into other, more promising undertakings as well.

With all these aspects in mind, perhaps it’s time for would-be investors to take a closer look at this dark horse.

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