Main course:
- ZhongAn’s written spending rose 16% last year to 23.6 billion yuan, slowing from 22% growth in 2021.
- The insurer is facing challenges from China’s sudden decision to control the Covid-19, but the decrease in global sales and stock markets also makes it difficult to earn.
By Warren Yang
Last year may have ended on a better note than it began ZhongAn Online P&C Insurance Co. Ltd. ZZHGF (6060.HK), as indicated by its year-end earnings data for 2022 released at the end of last week. But the digital insurer may not want to open the box now as we head into the Year of the Rabbit.
ZhongAn earned 23.6 billion yuan ($3.5 billion) in written profit last year, according to its latest monthly filing of that estimate for 2022. That means revenue from the main insurance business of the company grew by 16% for the year, gradually from 22% in the year. 2021.
However, the fact that ZhongAn’s total revenue grew by about 7% in the first half of the year shows that the second half accelerated on a sequential basis, which it seems more encouraging. In fact, our calculations show that ZhongAn’s operating expenses increased by about 25% year-on-year in the second half, or more than triple the growth rate of the first half.
The improvement suggests that things may finally be looking up for the company and other insurers, which have suffered from cautious consumer spending amid the economic uncertainty caused by in Beijing’s disease control system. The first half of last year was very difficult, not only for insurers but also for many businesses and manufacturers, due to the resurgence of Covid-19 cases that led to the lockdown entire country, including one that closed Shanghai for two months through the end of May.
But ZhongAn may not be out of the woods yet. China’s economy is still struggling, with much of the uncertainty caused by the rise in Covid-19 infections after the sudden shutdown of most of the lockdown measures started in early December. The country’s GDP expanded only 2.9% year-on-year in the fourth quarter, resulting in 3% growth for the year – the second slowest since 1976. released earlier this week also showed a decrease in sales to 1.8% in December from the year. first, marking the third straight month of declines.
The December data indicates that the economy may be suffering from a sudden U-turn in the government’s Covid-19 policies. And the situation will probably not improve until the current wave of diseases subsides, which may take several months.
For the general insurance sector, the high rise of Covid infections in China can face a financial crisis by increasing the payment of health insurance. Wary of that risk, ZhongAn and other insurers last month stopped selling all products to pay policyholders who test positive for Covid-19, according to a report by the Financial Times. Each payment is small, two hundred US dollars at most. But the cost to insurers will quickly balloon if they have to make millions of payments each time.
Without massive Covid-19 debt, ZhongAn can continue to turn a profit from its insurance business, which only turned a profit in 2021. Using that figure as a basis, ZhongAn’s total claim payment as part of its written expenses, known as losses, is about 50% of last year’s written expenses. yes, an improvement from the 56% loss for the first half. of the year.
Reduce costs
ZhongAn has also reduced the cost of selling policies by moving away from third parties acting as agents and receiving commissions for each sale. If the company kept the costs below 50% of its written expenses, as it did in the first half, and if the amount of payment of claims remains at about 50% of the money spending, ZhongAn should have made a profit from the insurance policy in the second half of last year.
But outside of its core insurance business, ZhongAn’s income from investments is a different matter that may cause more headaches. Like other insurers, ZhongAn invests a large portion of the premiums it collects in assets such as stocks and bonds. Such investment income is especially important for a company like ZhongAn because its insurance income is very small.
ZhongAn’s investment performance in the past year does not seem to be very impressive. Investors faced tough markets in 2022 as stock and bond prices fell amid rising global interest rates to dampen inflation. A pair of asset classes often move in opposite directions, allowing investors to continue to make money by buying more of one when bad the other.
Almost all of ZhongAn’s earnings disappeared in the first half of last year as financial markets hit their worst in more than a decade. And with other businesses like digital in the red, the company posted a loss. Therefore, ZhongAn’s ability to avoid an annual loss for 2022 may depend on the use of its investments after July, as the market improves in the second half of the year. The company expects to remain in the black for all of 2022, but only a little bit, as its profits are set to drop 96% year-over-year, according to an average of 21 related studies compiled by Yahoo Finance.
In contrast, do business insurance online Waterdrop Inc. WDH, which only generates revenue from trading fees and has no exposure to financial markets, has reported profits for three consecutive quarters. It shows how difficult life is for insurance policyholders than simple traders in times of weak financial markets.
ZhongAn shares are currently trading at less than half their IPO price from 2017, with a price-to-sales (P/S) ratio of 1.4, less than half of 3.1 for Waterdrop. But ZhongAn is not so bad compared to other insurance companies. The general insurance company Ping An (2318.HK; 601318.SH) is currently trading at a P/S ratio of only 0.9, while China Life (2628.HK; 601628.SH) is more negative, at 0.4.
For all the trouble ZhongAn faces, it’s not in trouble – not yet. Despite a loss in the first half, its cash-to-liability ratio, a key measure of insurance coverage, was above the regulatory minimum. It may only be a matter of time before his insurance business gets back on track as China’s economy recovers from the Covid-19 pandemic.
But it is more difficult to see where the financial markets will go. Continued weakness in this regard may limit ZhongAn’s revenue, which in turn will affect its profitability.