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High distribution fees to keep costs elevated for Chinese online insurer ZhongAn

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High distribution fees to keep costs elevated for Chinese online insurer ZhongAn

High fees paid to third-party distribution platforms will remain a hurdle to Chinese online-only insurer ZhongAn Online P & C Insurance Co. Ltd.'s ability to generate underwriting profits, even as the company scales up in a bid to benefit from efficiencies and reduced claims frequency, analysts said.

ZhongAn, which listed almost a year ago in what was the world's first IPO of an insurance technology company, is seeking to turn an underwriting profit within one to two years on the back of expected economies of scale, selective underwriting and better risk controls, CFO Francis Tang said at an Aug. 27 press briefing. But analysts said the company's continued reliance on outside platforms to attract customers means that it will have a longer wait than that to reach underwriting profitability.

The company reported a first-half combined ratio of 124.0%, which implies that it incurred costs of 1.24 yuan for every 1 yuan in premiums generated. Net premiums earned grew 84.6% to 3.62 billion yuan in the first half, but the company's underwriting loss also widened, by 51.4% to 868.2 million yuan.

ZhongAn booked an overall first-half loss of 666.8 million yuan, up from 286.8 million yuan in the year-ago period. Its shares initially spiked after listing in September 2017, and briefly traded above HK$80 apiece, but they have trended steadily downward since and are now worth barely half their HK$59.70 listing price.

ZhongAn's loss ratio, which measures net incurred claims as a share of net premiums earned, is roughly on par with China's biggest nonlife insurers, PICC Property & Casualty Co. Ltd. and Ping An Property & Casualty Insurance Co. of China Ltd., but it is ZhongAn's high expense ratio that is largely to blame for its underwriting losses. The first-half expense ratio was 69.8%, compared to 73.6% for full year 2017, but PICC P&C and Ping An P&C both reported expense ratios below 40%.

Channel fees paid to third-party product distributors for ZhongAn's five major business segments came to 1.44 billion yuan in the first half, or 39.9% of net premiums earned.

Founded in 2013 and backed by Alibaba affiliate Ant Financial Services Group, Tencent Holdings Ltd. and Ping An Insurance (Group) Co. of China Ltd., Shanghai-based ZhongAn has grown primarily through the sale of small-premium products such as shipping return insurance and flight delay insurance through third-party distribution platforms such as Alibaba's Taobao and Chinese travel services provider International Ltd. It also sells health insurance products and offers auto insurance policies in tandem with Ping An P&C, relying on the latter's offline services.

ZhongAn has said it will move to lower channel fees it pays to distribution partners. "[The company] will strive to increase the proportion of sales on our proprietary platforms, so as to reduce the channel expense ratio," it said in its 2017 annual report.

"Technology is never the end game," Daniel Tu, chief innovation officer between 2013 and 2017 at Ping An Insurance Group, told S&P Global Market Intelligence. He noted that ZhongAn has to pay high commissions to Ant Financial and other partners to acquire customers, as it has been less able to attract customers to its proprietary platforms.

Increasing brand awareness helps ZhongAn in negotiating lower channel fees with distribution partners, Tang said Aug. 27. Wiley Huang, a Hong Kong-based analyst at Guotai Junan International, noted that ZhongAn has enhanced collaboration with newer, smaller distribution partners to gain more bargaining power and lower channel fees.

However, cutting the combined ratio below 100% is likelier to take longer than ZhongAn hopes, analysts said.

Lu Yunting, an analyst at Zhongtai Securities in Shanghai, said she does not expect ZhongAn to make an underwriting profit in the near future despite rapid premium growth.

"Channel fees may be lowered but will remain a big chunk of ZhongAn's expenses," Huang said, because as a purely online insurer, ZhongAn has to rely on third-party platforms to distribute its products.

The insurer's scale of operations remains a fraction of market leaders in the nonlife segment. ZhongAn recorded net premiums earned of 3.62 billion yuan for the first half, while PICC P&C and Ping An P&C posted net premiums earned of 168.83 billion yuan and 103.02 billion yuan, respectively.

As of Aug. 30, US$1 was equivalent to 6.84 Chinese yuan.