Dialogue with ZhongAn CEO and CFO: Detailed explanation of the reasons behind ZhongAn Online's first profit
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While underwriting losses were significantly reduced, investment income increased significantly.
Text | XF
According to Leifeng.com AI Financial Review, on the afternoon of August 26, China's first Internet insurance company ZhongAn Online (6060.HK, hereinafter referred to as ZhongAn), released its 2019 interim performance report.
The financial report shows that as of June 30, ZhongAn served 350 million users, sold 3.33 billion policies, and recorded premium income of 5.9 billion yuan (RMB, the same below), a year-on-year increase of 14.5%, and achieved a net profit attributable to parent company shareholders of 90 million yuan, achieving the first overall profit for the company since its listing.
ZhongAn CFO Deng Ruimin said that the main reason for ZhongAn's turnaround from loss to profit in the first half of the year was the significant reduction in underwriting losses and the substantial increase in investment income.
Specifically, on the one hand, while premiums grew steadily in the first half of the year, ZhongAn's comprehensive cost ratio was greatly improved to 108.3%, a year-on-year decrease of 15.7 percentage points. At the same time, underwriting losses also decreased by 43.3% compared with the same period last year, narrowing to 490 million yuan. On the other hand, investment income increased in the first half of the year due to the favorable A-share market, reaching 760 million yuan, a year-on-year increase of 118.3%. Under the double benefits, ZhongAn's interim results turned losses into profits.
The optimization of the comprehensive cost rate is mainly attributed to the optimization of the channel cost rate achieved by the company through adjusting its business structure in the first half of the year, as well as the continuous increase in investment in scientific and technological research and development.
ZhongAn CEO Jiang Xing said that in the next five years, the company's goal is to achieve an annualized compound growth rate of total premiums higher than the industry average, continuously optimize the comprehensive cost rate, and ultimately achieve an ROE level higher than the industry. At the same time, the company will continue to invest in technology to promote breakthroughs and changes in the industry on a global scale.
Steady progress and meticulous work have become the keynote of ZhongAn this year. In the first half of the year, ZhongAn adjusted and optimized its business based on the five original ecosystems of health, life consumption, automobiles, consumer finance, and air travel:
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On the one hand, we will continue to invest strongly and grow in core businesses such as health, consumer lifestyle, and automotive businesses;
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On the other hand, for businesses that do not conform to the company's long-term value, such as group insurance business in the health ecosystem and some aviation travel ecosystem businesses, the strategy of raising the underwriting threshold and reducing the underwriting scale is adopted. At the same time, for consumer finance businesses that are in a downward credit cycle, a more prudent risk control strategy is also adopted.
The specific financial performance is:
Focusing on three core businesses, we maintained strong growth. The premium of the life consumption ecosystem increased by 81.8% year-on-year in the first half of the year, contributing the most to the growth; the core products of the health ecosystem, the exclusive e-life and good medical insurance series, achieved a growth rate of 49%; the automobile ecosystem achieved a 25.8% increase in premiums in the first half of the year.
Especially in the aspect of life consumption ecology, ZhongAn has further deepened its cooperation with Ant Financial. Recently, it launched the "worry-free return" service including return insurance and return shipping insurance to users in eight countries including the United States, Canada, and Australia on the AliExpress platform, and promoted the experience of return shipping insurance in China overseas, aiming to solve the problem of difficulty in returning goods caused by high overseas logistics costs.
Reducing group insurance, consumer finance and air travel. In order to focus resources on more valuable businesses, ZhongAn proactively cut some of its poor-quality group insurance businesses and concentrated resources on developing its core product, the Premium Series.
At the same time, as the consumer finance industry continues to face a downward credit cycle and a strong financial regulatory environment this year, ZhongAn has adopted a prudent development strategy, made corresponding adjustments to its business scale, and focused its business more on scenario-based consumer finance platforms and leading platforms.
In addition, the total premium of the aviation and travel ecosystem decreased by 8% year-on-year. ZhongAn said that in view of the high channel costs of the aviation and travel business, the company has reduced it, which has improved the company's overall channel rate. However, ZhongAn will not give up this business because the value of the aviation and travel business to ZhongAn lies in continuous user interaction and enriching user portraits. The company hopes to maintain a small profit or break-even level in this ecosystem.
After optimizing the business structure and ZhongAn's technology brand effect, the company's overall channel rate has improved, with the rate in the first half of the year being 44.4%, down 25.4 percentage points year-on-year. Deng Ruimin said: "After the structural adjustment in the first half of the year, we can better lighten our load, deepen our core business, and achieve better growth. "
In Jiang Xing's view, in addition to the adjustment and optimization of the original business structure, ZhongAn's profitability in the first half of 2019 is also inseparable from its adherence to the dual-engine strategy of "insurance + technology", which has achieved further cost reduction and efficiency improvement driven by technology.
In the first half of 2019, R&D investment reached RMB 460 million, accounting for 7.8% of the company's total premiums, up 23% from the same period last year. As of June 30, 2019, there were 1,476 engineers and technicians, accounting for 51% of the company's total employees. In terms of patents and awards, as of the end of the first half of 2019, the number of patent applications totaled 405.
With the support of human and financial resources, ZhongAn has applied cutting-edge technology to the entire insurance process, greatly improving the company's operating efficiency. For example, the automation rates of its underwriting and claims settlement have reached 99% and 95% respectively, and the utilization rate of online customer service artificial intelligence has reached 70%, saving 61% of online service manpower. Since the launch of the smart insurance consultant ZhongAn Elf a year ago, the number of users served in a single day has reached 300,000, and the industry's first insurance intent recognition model has been established, with a recognition accuracy rate of more than 94%.
In terms of technology exports, the company achieved revenue of RMB 100 million in the first half of 2019, three times that of the same period last year; it signed contracts with more than 170 domestic and foreign customers, including Taiping Property & Casualty Insurance, AXA Tianping, AIA and other insurance companies; in terms of overseas exports, it reached agreements with overseas customers such as Southeast Asian O2O platform Grab and Singapore's largest comprehensive insurance institution NTUC Income, and will bring mature insurance technology and business models that have been verified in China to Southeast Asia.
Specifically, in January 2019, ZhongAn and Grab jointly established a joint venture, Grab Insure, to jointly explore the Internet insurance distribution business in Southeast Asia. In Malaysia, by connecting with 14 local property insurance companies, the first on-demand Internet UBI auto insurance was launched, which can be insured on a daily basis; at the same time, the joint venture also connected with Income in Singapore to provide Grab platform drivers with an on-demand critical illness insurance plan "Pay Per Trip", which greatly lowered the insurance threshold.
In addition, Jiang Xing said that since obtaining the virtual banking license issued by the Hong Kong Monetary Authority in March, ZhongAn Bank has been in the intensive preparation process.
The following is a Q&A session between Leiphone.com and ZhongAn CEO Jiang Xing and CFO Deng Ruimin.
Interview Questions and Answers:
Leifeng.com : In which specific projects was the 460 million yuan of scientific research investment invested?
Jiang Xing: We mainly invested in four areas. The first is the support for the R&D of ZhongAn’s five ecosystems. Currently, all the company’s systems and platforms, as well as a complete set of solutions, are developed by ourselves.
The second is innovative business, such as virtual banking business, how to develop virtual banking apps in the future, how to provide a better user experience, etc.
Third, in terms of internal product standardization and output, we will turn internal systems or products into standardized products that can be exported, including the current large-scale project support of Science and Technology International. Only by providing more standardized products can there be less customization costs in the future, and the company can make more profits.
Fourth, we will make forward-looking technology reserves for the future, including the research and development of platform tools such as blockchain, AI, and big data, and we will continue to invest.
In addition, in terms of talent allocation, currently about 60% to 70% of engineers support internal staff, with internal staff being the main focus.
Leifeng.com: What are our specific costs and revenues from technological output?
Deng Ruimin: In the first half of this year, our technology output revenue was 100 million yuan, including both domestic and foreign ones. Although we had 100 million yuan in revenue from technology output, we still had a loss of 167 million yuan in this regard.
At present, in the field of technology, profit is not our primary goal, we will invest more.
In the first half of this year, our business grew by 15%, and technology investment grew by 23%, which is the proportion over the same period.
Leifeng.com: How much has our user base increased in the first half of the year?
Jiang Xing: Let’s look at this number from another dimension. ZhongAn’s accumulated user base is already quite large, and currently more work is done to create unit value for individual users.
The product of Zunxiang e-Health Insurance has 4.6 million users, with an average price of more than 500 yuan per year. The average price of auto insurance is 2,000 to 3,000 yuan, and it is currently in the millions. The average price of air travel is lower, which may be a few yuan to tens of yuan, covering more than 40 to 50 million users. We are now focusing on different ecosystems and looking at the value of unit users horizontally.
Leifeng.com: What are our considerations for getting involved in the field of Internet hospitals?
Jiang Xing: We obtained the Internet Hospital license in order to extend our third-party service system around the health insurance ecosystem. We currently have more than 4.6 million customers of Zunxiang e-life. How can we provide better medical services to these customers? In the recent innovation of health insurance, we have proposed innovative services such as special medicines and parental medical care. We want to better connect medical resources through the Internet hospital platform.
At present, the promotion of this area must not be a heavy asset model, but a lightweight one, mainly to better connect and coordinate resources. Based on this, our investment in this area will not have much cost pressure, and we will maintain a relatively agile, lightweight, and low-cost model to promote it.
Our original intention was to serve existing health insurance customers mainly, making serving them well our first priority, and then to acquire customers through word-of-mouth effects and obtain renewals from old customers.
Leifeng.com: What is our bargaining power when cooperating with channel partners? How can we gain more bargaining power? Is the current channel layout concentrated or relatively dispersed?
Jiang Xing: We currently have more than 300 partners. Given that the Internet is currently a highly concentrated ecosystem, and because of ZhongAn’s background as a major shareholder, ZhongAn’s cooperative channel formats are related to the Internet ecosystem itself. Ant is our shareholder, and we have had in-depth cooperation for the past five years, and the cooperation will continue to strengthen in the future.
Regarding channel costs, they must be based on mutual win-win and long-term development. It must be a market-oriented system. At the same time, in the company's operations, channels are only one of the important links. The ability of insurance companies is more reflected in their own risk management capabilities, claims services and customer experience. Therefore, in terms of operations, we will consider all aspects. The high and low channel costs will be comprehensively judged and implemented in different company strategic decisions.
Deng Ruimin: Regarding channel costs, we now consider them from two dimensions:
First, we will continue to connect with our top partners in the ecosystem. The connection process is a win-win situation. We provide technological connections to give their customers a better experience.
Second, self-operated channels are an important part of balancing the proportion of our company's channel fees, but we have to do it step by step. In addition, in the entire market, Internet insurance is becoming more and more powerful, and there is a lot of room for us to explore.
Jiang Xing: I think the expense rate and cost rate are not absolute. Health insurance will be a high-growth area in the future Internet ecosystem. Instead, we should increase operations and promotions in this area to better acquire our users and market share.
We should consider the overall situation in business decisions and make effective decisions based on the market and the company's future short-term and long-term business goals, rather than simply looking at the expense rate at a certain time. For example, for health insurance, we hope to increase investment to gain users in emerging markets, provided that it is allowed.
Leifeng.com: What changes have occurred in the domestic Internet insurance industry in the first half of 2019 compared with last year?
Jiang Xing: In the first half of 2019, there will be a solicitation of opinions on the Internet insurance supervision measures, which will better stand from the perspective of consumer rights and interests and increase the protection of consumer rights.
In the Internet insurance industry, the overall business of health insurance is developing rapidly. Due to the current commercialization reform of auto insurance in China, three provinces are currently conducting pilot projects. With the promotion of the next round of reforms, there should be greater room for imagination in this area in the future.
Looking at the entire industry, all companies are actively exploring and investing in digital marketing for the Internet. The overall development of the industry is a continuous process, and we have great confidence in this trend and direction in the future. Our current investment in technology is also to better cope with the changes in digital marketing for the Internet in the future.
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