ZhongAn’s Journey – Insurance, Technology, Banking & More
October 30, 2019
If you were running a startup in China’s FinTech landscape, the aim to serve any less than a billion customers from the very first day would not be ambitious enough. When we think about China, these are what dominates the mindshare: some large payment unicorns, a crazy lending landscape, and really innovative InsurTech players. In our earlier coverage on China-based FinTech players, we provided insights about Tencent and Ant Financial, which are not just targeting but actually serving billion+ customers each. Another such player in the insurance industry is ZhongAn – China’s largest online-only, property, and casualty insurance provider that already serves over 400 million customers every year. This monthly analysis dives deep into this InsurTech business and presents insights on ZhongAn’s growth story, its shareholders, business lines, product portfolio, financial performance, strategic direction, and outlook.
The InsurTech market in China is expected to reach $211.7 billion in value by 2021, driven by developments and growth of blockchain, AI, internet of things, big data, and cloud computing technologies.
In a quick slice, we can look at this InsurTech market in two parts:
- Players that are selling traditional products via the internet;
- Those who are upgrading existing products via new technologies, and creating innovative products from big data analytics to tap unmet needs, such as products for good returns on e-commerce sites or others.
ZhongAn would like to see itself in the second category as an innovator. An insurer with more than 50% of its employees as tech staff, deserves the credits to say so. As of December 31, 2018, ZhongAn had a total of 1,618 engineers and technicians, representing 52.4% of its total employees, among which, 100 were responsible for data analysis, 76 for artificial intelligence, 122 for blockchain technology, 423 for system development, and 245 for product R&D and delivery. For many FIs, this firepower of the innovation and development teams is a dream.
ZhongAn was founded in 2013 by Jack Ma (Alibaba), Pony Ma (Tencent), and Mingzhe Ma (Ping An) to create China’s first insurance company to sell its products over the internet. At the time of launch, Alibaba was holding a stake of 19.9% while Tencent and Ping An took 15% each. Other participants included Ctrip, with a stake of 5%, and another five tech or investment companies. One would wonder why Ping An would invest in an emerging competitor like ZhongAn. The answer lies in their view of the Chinese insurance market. According to ZhongAn’s CEO Chen Wei (now e-CEO), China’s InsurTech market presents a huge opportunity where it seems impossible for a single company to gain a dominating market share. So there is a place for both Ping An and ZhongAn.
During the IPO, Ping An, Tencent, and Alibaba reduced their stake in ZhongAn. Since the IPO, Ping An has held a 10.21% stake in ZhongAn while Alibaba (Ant Financial) and Tencent hold 13.54% and 10.21%, respectively.
ZhongAn has emerged as China’s largest, licensed, and an online-only insurance company. It serves over 400 million (FY 2018) policies every year.
ZhongAn’s number of customers amounted to 150 million in the second year (FY 2014) of its product offerings. It registered a growth a CAGR 27.8% between FY 2014 and FY 2018. Its number of users peaked at 492 million users in FY 2016, right before its IPO. In FY 2018, ZhongAn’s number of insured customers declined to 400 million. However, the situation for 2019 seems to improve as in the first half of 2019, ZhongAn had served more than 350 million users. It is interesting to note that around 58% of ZhongAn’s insured customers are under 35 years old – this is due to ZhongAn’s sales channels. ZhongAn’s sells high volumes of online-only insurance products by partnering with a number of China’s biggest internet groups. Now the company boasts that it has over 10 billion policies sold.
Growth Story so Far
Bill Song, the Director of the International Business of ZhongAn Insurance, highlighted this growth story in an interview saying, “We started with ‘shipping return products.’ This has given us a solid foundation. We sell a lot of policies, and by using those policies and, moreover, its data, it helps us to understand our customers much better. Within the first two years, we entered the travel and accident market and also the online health market. We definitely became number one in China’s online health insurance market. Within three months, we sold more than 300,000 online health insurance policies. Now, after two years, we already have more than 10 million health policy clients.”
The company started in 2013 and launched its proprietary technology platform Wujieshan in early 2014. It raised its Series A funding in mid-2015. The next major milestone for the company was its new subsidiary technology company that was founded in late 2016. This subsidiary was aimed to provide technology services to China’s insurance industry. Detailed product offerings of this subsidiary are provided later in this report. In 2017, ZhongAn launched an IPO on the Hong Kong Stock Exchange as internet-only insurance. It became the largest IPO in Hong Kong in 2017 by raising $1.5 billion on day one at a valuation of $10 billion. However, since its launch, the stock price of ZhongAn has continued to underperform at the broader Hong Kong’s stock exchange index.
ZhongAn’s Stock Performance Since Listing
The stock price of ZhongAn (HK 6060) has declined by over 70% in the last two years, compared to a 6.2% decline on the Hang Seng Index in the same period. ZhongAn isn't currently profitable (registering net loss at the end FY 2018), which makes revenue growth as the only indicator for analysts to understand how fast the underlying business is growing. But a larger investor base is probably not very excited about its long-tail strategy that focuses on profitability in the long run.
ZhongAn’s Exposure to Five Major Ecosystems
Lifestyle Consumption Ecosystem
ZhongAn provides insurance products to cover risks associated with product quality, delivery, logistics, and security of transactions, mainly in collaboration with e-commerce platforms in China, such as Taobao, Tmall, and Wedian. The company has also partnered with consumer electronics manufacturers, such as Xiaomi, to provide insurance for accidental damage and repair services for consumer electronic products such as smartphones and other smart devices. ZhongAn’s key products in this ecosystem include its shipping return policy, generic buyer version of the shipping return policy, Zhong Le Bao, and Can Ju Xian.
Consumer Finance Ecosystem
ZhongAn offers insurance products to protect funding providers against default and facilitate consumer borrowings and consumption on Internet finance platforms such as BestPay, Wo Wallet, Secoo, Zhaocaibao, and Xiaoying. It also serves the consumer financing needs arising from other platforms, including China Telecom and Mogujie. Key products offered in this ecosystem are Mashanghua and Baobei Open Platform.
ZhongAn provides insurance products and solutions covering risks of incurring medical and healthcare expenses and value-added services to encourage individuals’ health-consciousness. It offers individual health insurance products and group health insurance plans. In this ecosystem, ZhongAn has partnered with hospitals, research institutions, medical device manufacturers (such as Omron), online healthcare platforms (such as We Doctor), online healthcare forums, pharmaceutical companies, and distributors. Its key products include Personal Clinic Policy, Walk to Wellness Policy, Diabetes Policy, Didi Automobile Owner Insurance Plan, and the Group Health Insurance Plan.
ZhongAn offers insurance products to protect customers against vehicle damage, personal injury and death, vehicle theft, and robbery. In 2015, it launched "ZA & PA Joint Auto Insurance" ("Baobiao Auto Insurance") jointly with Ping An Insurance. It acquires customers primarily from internet platforms and automotive aftermarket service channels. It has established a partnership with auto-retail platforms like Guazi and Maodou and automobile financial platforms like Cango. It also connects with offline automotive aftermarkets and other long-tail channels, such as auto detailing shops and automobile repair shops, through open platforms. As of June 30, 2019, the number of insured users of the auto ecosystem amounted to approximately one million.
ZhongAn provides insurance products and solutions to protect customers from unexpected emergencies such as flight accidents, flight delays, travel accidents, flight, or hotel cancellations. The company has partnered with major online travel agencies such as Ctrip, airlines, and offline travel agencies to offer its products. Key products in this ecosystem are Flight Accident & Delay Policy and Train Accident Policy. In 2019, ZhongAn focused on initiatives to reduce certain low-quality underwriting business, including flight insurance products with relatively high channel fee ratio.
ZhongAn’s other insurance product lines mainly included individual accident insurance and employer liability insurance.
ZhongAn’s Sales & Distribution Channels and Lack of Competitive Moat
ZhongAn is not focused on B2C companies. It generates revenues through a network of over 300 “ecosystem partners,” which includes Alibaba and Tencent, who also happen to be its shareholders.
Analysts point out that ZhongAn’s business model relies heavily on the ecosystem players, and the company lacks a competitive moat since ZhongAn’s competitors can also team up with the same ecosystem partners. Francis Tang, ZhongAn’s Chief Financial Officer, clarifies in an interview with FT in 2018, saying, “From the very beginning, we didn’t want to rely on agents. So for us to take the first step, we had to use the big channels. We wanted quick access to our customers so that they can learn about our products." He added that ZhongAn was now working with new channels where it has more bargaining power, and developing its own proprietary platforms.
ZhongAn’s Strategic Direction
The company started with a shipping return policy, and now it has a portfolio of more than 200 products. The company is building products on the big data on customers, which enables it to develop some quirky insurance products. For example, in the 2014 Football World Cup, it offered fans a “hooligan insurance” at $0.45 to cover medical expenses caused due to skirmishes between fans.
The insurer leverages on its cloud-based core insurance system, which enabled it to optimize computational power to match fluctuations in the business volume. It helped the company to demonstrate scalability. Its systems adopt a module structure that the company refers to be similar to LEGO bricks, to promote innovation and the rapid rollout of products. Implementation of intelligent underwriting and automatic processing enables it to achieve automation rates for its underwriting and claim settlement services of over 99% and 95%, respectively.
In 2018, through its subsidiary ZhongAn Technology, the insurer strengthened its product portfolio and launched a SaaS platform for other insurance companies in China. ZhongAn won the virtual banking license from HKMA in Apr 2019 and plans to start the banking operations by the end of 2019.
The company is working on its long-tail market development strategy. It names the insurance + technology as its dual-engine strategy, where the ultimate aim is to use cutting-edge technologies to explore more use cases and develop more insurance ecosystems.
Geographic Expansion Plans
ZhongAn has been focused on the Chinese market so far. However, in the last one year, it has made some strategic moves that indicate its broader geographic expansion plans. We can expect some Southeast Asia developments from ZhongAn in the coming years. Here are some notable partnerships that would support its geographic expansions:
- In 2018, the Japan-based Softbank Vision Fund signed an agreement with the startup to invest $100 million to bring the ZhongAn technology and model abroad, starting with Asian markets.
- In January 2019, it entered into a cooperation agreement with Grab to form a joint venture company and explore the online insurance distribution business in Southeast Asia. The joint venture company will actively seek insurance partners around the world to provide various customized insurance products.
- Its other overseas partners include SOMPO, Japan's oldest property insurance company, and Famous, the largest comprehensive insurance institution in Singapore.
ZhongAn’s Financial Performance
ZhongAn’s revenues grew at a CAGR of 83% between FY 2014 and FY 2018. The revenues have grown 12X, from $129 million in FY 2014 to $1447 million in FY 2018. Gross profits grew at a CAGR of 92% between FY 2014 and FY 2018. Gross profits have grown 13X in these five years.
ZhongAn’s total gross written premiums grew at a CAGR of 94% between FY 2014 and FY 2018. The gross written premiums have grown 14X in the last five years.
ZhongAn’s growth is driven by health insurance, bond insurance, and accidental insurance products. The health insurance, bond insurance, accidental insurance, and credit insurance combined contributed three-fourths of the total gross written premium in FY 2018.
Analysts expect the company to be profitable in 2020. However, the signs of profitability are on the horizon of H1 2019 results:
During this period (H1 2019), the company was able to successfully manage the combined ratio and expense ratio that registered a decline. The company attributed the better financial performance to customer acquisition, products, risk control, and services, together with enhanced bargaining power and growing brand awareness, so as to control the channel fee ratio of each ecosystem.
ZhongAn Technology Company
ZhongAn Technology is a wholly-owned subsidiary of ZhongAn Insurance, established in November 2016. ZhongAn Technology specializes in technology research in areas such as blockchain, artificial intelligence, big data, and cloud computing. The company aims to supply technology products and B2B solutions to its internal and external partners.
ZhongAn Technology has five product lines:
- T Series: Ti-Sun (ID authentication), Ti-Capsule (data safety storage), Ti-Packet, intelligent anti-forgery products, and others.
- X Series: Visualization, intelligent customer service, public opinion detection & analysis, data insight platform, information verification, traffic analysis platform, image recognition, machine learning platform, robotics platform, fraud prevention, decision-making system, and others.
- S Series: Mobile business development platform, new-generation agent pass, merchant analysis platform, cloud sharing platform, auto insurance billing system, new-generation distributed e-commerce platform, and others.
- H Series: The healthcare insurance service platform can directly pass healthcare invoices to insurers for automatic claims processing, arrange body examinations for policyholders and assist insurers in managing risks. It also provides functions like medical data visualization, customized insurance services, medical knowledge, and fund insurance services.
- F Series: Consumer loan system, the installment mall, Fund-Asset Matching Platform, collection & payment, the consumer installment loan system, and the virtual credit card system.
ZhongAn’s Loan Business
While it is not discussed much, but the company does have a lending license. Chongqing ZhongAn Microfinance Co., Ltd. was approved by the Chongqing Local Financial Supervision Administration in October 2017. It obtained an Internet small-loan license with a registered capital of RMB 510 million. It is mainly engaged in the credit business, such as microfinance and consumer finance. However, the company reduced its stake in ZhongAn microfinance in 2019 from 70 to 41%.
ZhongAn has established itself as a significant insurance player in China in just half a decade. The InsurTech player is still in its expansion phase, where profitability was not a major concern. However, being a public listed entity, now the company is shifting its focus towards profitability, and the analyst community expects that it will achieve profits in FY 2019 or FY 2020. Because the first half of 2019 was already profitable, the analyst sentiments seem to be right. It would be interesting to see ZhongAn’s international expansion moves, especially in Southeast Asia, where InsurTech has started its groundwork.
Note: All RMB to USD conversion in this report are based on historical periodic average rates.
SECTION 2: What Was Hot in FinTech
September 1 – October 15
The All-Seeing Regulatory Eye
In September 2019, the Monetary Authority of Singapore (MAS) announced a regulatory evaluation program for the payments industry. The MAS and the Singapore Academy of Law have launched this joint initiative to connect payment companies with legal service providers that will enable these players to consult with legal experts who specialize in regulations and compliance.
The Central Bank of Egypt (CBE) has indicated that it would launch a $50–$100 million FinTech fund by early next year. The CBE aims to transform Egypt into a regional center for electronic financial services. Other measures by the CBE in this direction include the establishment of an Innovative Financial Technology Applications Lab and a Financial Technology Unit.
In September 2019, FinTech Scotland launched a consumer panel, which will connect consumer and citizen advocate groups into the FinTech community with the emphasis on “citizen financial inclusion, problem-solving, and innovation.”
The National Bank of Romania (NBR) launched the FinTech Innovation Hub project. The platform will focus on encouraging and supporting innovation in payments and payment instruments.
A Race to Become a FinTech Hub
The Qatar Financial Centre (QFC) shared its plans to extend support to an increasing number of financial services firms through the QFC platform. In September 2019, it issued new rules that allow a bigger playing ground for FinTechs. QFC says, “Under new rules and guidance, the activity of non-regulated Professional Services firms has been widened to FinTech Services Providers which include activities such as, but are not limited to; providing cybersecurity solutions, application programming interfaces (API), cloud computing, developing blockchain-based technologies, artificial intelligence, and companies which provide a platform for facilitating real-time transaction capability of internet-connected devices.” Apart from this, the QFC has already signed many agreements with FinTech entities to develop the FinTech industry in Qatar.
The Israel Security Authority (ISA) and Capital Markets, Insurance & Savings Authority (CMISA), signed an MOU with the Croatian Financial Services Supervisory Agency (HANFA) for collaboration on FinTech issues. The aim is to bolster FinTech innovation and activity in Croatia and Israel. Prior to this, Israel had also signed agreements with New York (USA), France, and Switzerland.
The Dubai International Financial Centre (DIFC) has registered over 100 FinTech firms until now. These numbers reflect a three-fold growth in registered FinTech firms since the end of 2018. The Chief Executive Officer of DIFC Authority said, “The significant rise in the number of registered FinTech firms establishing a presence at the Centre highlights our sustained efforts to transform the region’s financial technology ecosystem and drive sustainable economic growth. It is a reflection of our commitment to reinforcing Dubai’s position as one of the world’s top ten FinTech hubs.”
The Financial Services Authority (OJK) of Indonesia has recently introduced an online registration system Called Electronic Gateway for Digital Finance Systems (Gesit), to track the development of FinTech sector growth in the country. The system aims to support FinTech startups that are seeking to expand their business through the OJK Infinity platform. The OJK platform is a FinTech innovation hub, business incubator, and education center that the OJK created last year.
The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market has awarded the first digital banking license and Category 1 status to Anglo-Gulf Trade Bank. The bank’s website indicates that its focus areas are trade and transaction banking services for people in the UAE.
After 40 years, the Bank of Israel has approved the first license for the establishment of a new bank. It is more important to note that it is the first digital-only banking license in Israel. This new digital-only bank is expected to be functional by the end of 2020.
SME-focused neobank Allica has received a banking license from the PRA and the FCA. Mark Stephens, Allica’s CEO, said, “The banking license is an important milestone in our ambition to offer SMEs a genuine banking alternative.”
PayPal, the ‘original FinTech’ of the world, has become the first foreign firm to get an online payment license in China. PayPal got the clearance after buying a 70% stake in Guofubao Information Technology Co (GoPay).
Where Is the Money?
In September 2019, Reuters reported that China Securities Index Co. Fintech Theme Index, which represents stocks of China’s FinTech firms, recorded notable a surge of more than 50% in the first half of 2019. This surge was driven by the market’s anticipation that China would launch its own digital currency. However, in the last week of September, PBoC denied the rumor that it is going to launch its own digital currency anytime soon.
Fintech Fundbox Inc., a US-based B2B payment and credit network, has raised $176 million in a new funding round. Its investors include Allianz SE and General Catalyst.
JPMorgan announced that it would invest $25 million in Financial Solutions Lab. According to Karen Keogh, JPMorgan’s Head of Global Philanthropy, “investment in the Financial Solutions Lab will help early-stage FinTech companies’ products that could help people in communities like Harlem.”
Valued at $35 billion in valuation, Stripe has raised $250 million in additional funding. The latest funding round was joined by General Catalyst, Sequoia, and Andreessen Horowitz.
Acronis, a Singapore-based cybersecurity firm, raised $147 million in funding led by Goldman Sachs. The latest funding round brings its valuation between $1 billion–$2 billion.
Blockstack, a blockchain startup, has secured $23 million in the US SEC regulated token offering along with a strategic investment round in Asia. In an interview, Muneeb Ali, CEO of the company, said, “Our goals for working with regulators in the States were twofold. Primarily, we wanted to reach more retail investors who can be users of our network, and have a financial stake in the success of our ecosystem. Secondly, we identified Asia as a priority market, and our SEC qualification added weight to our strategic move toward Asia.”
Los Angeles-based FinTech startup Dave raised $50 million from Norwest, making it a unicorn with a valuation of $1 billion.
Klar, a Mexico based digital bank that aims to become the ‘Chime of Mexico,’ raised $57.5 million in debt and equity seed funding in a round led by Quona Capital. A small part of this funding ($7.5 million) is in equity and the remaining $50 million in debt financing.