Core views
In the first half of the year, the company's overall performance was turned into a profit. The comprehensive cost ratio was further optimized year-on-year, underwriting profits continued, and quality sustainable growth was achieved.
Looking ahead to the whole year, looking at the debt side, in the context of post-epidemic recovery, the company's digital lifestyle ecosystem and consumer finance ecosystem premiums are expected to increase. The rapid development of self-operated channels is expected to drive the quantity and quality of the health ecosystem to improve, and continue to contribute to underwriting profits. On the asset side, the company will change its accounting method for Zhongan International in the second half of the year, which will bring the company about 3.8 billion yuan in investment income. However, in the context of the recovery in the capital market compared to last year, the company's total investment income is also expected to improve significantly from last year's lower base, and the impact of the appreciation of the US dollar on the company's performance is also expected to decrease year-on-year. The annual results are highly flexible. In the long run, we are still optimistic that the company's marketing efficiency and operational efficiency will continue to improve. The company's comprehensive cost ratio is expected to continue to fall below 100% to achieve continuous underwriting profits.
occurrences
Zhongan Online discloses results for the first half of 2023
The company achieved net profit of 221 million yuan in the first half of 2023, compared to -626 million yuan in the same period last year; ROE +5.2 pct to 1.4% year on year; insurance service revenue from domestic financial insurance underwriting business was +23.9% to 12.682 billion yuan. The comprehensive cost ratio was -0.7 pct to 95.8% year on year, and underwriting profit was +47.6% to 536 million yuan. The annualized return on investment was +2.6 pct to 4.4% year-on-year.
Brief review
Overall performance: Net profit from return has improved markedly. Mainly driven by improvements in investment income, we achieved net profit of 221 million yuan in the first half of the year. This is a significant improvement from -626 million yuan in the same period last year. It mainly benefited from improvements in investment income, followed by an increase in underwriting profit.
Insurance Division: Premium growth is rapid, comprehensive cost ratio is optimized, and underwriting profit growth is strong
The insurance business (excluding Hong Kong Life Insurance) underwriting profit for the first half of the year was +47.6% year-on-year to $534 million, mainly due to higher premiums and optimized comprehensive cost ratios. In terms of premiums, total premiums for the first half of the year were +37.5% to 14.463 billion yuan, and the insurance division's insurance service revenue was +23.8% year-on-year, mainly driven by the digital lifestyle ecosystem and the consumer finance ecosystem. In terms of the comprehensive cost rate, the comprehensive cost rate for the first half of the year was -0.7 pct to 95.8% year over year, of which the payout rate was -0.6 pct to 57.1% year on year, and the cost rate was -0.1 pct to 38.8% year on year. The decline in the health ecological payout rate was the main driving force for the optimization of the overall comprehensive cost rate.
The impact of the standard change on the comprehensive cost rate: Under the new standard, the 23H1 comprehensive cost rate is 3.1 pct lower than the old standard (98.9% under the old standard). It is mainly affected by non-attributable expenses (that is, middle and back office costs) and amortization of acquisition costs, but part of the impact is offset by reinsurance distribution.
Health Ecology: The increase in the share of new insurance and the payout rate driven by the application of AIGC technology have greatly improved. Total health ecosystem premiums were +15.9% to 5.018 billion yuan, and insurance service revenue was +5.9% year-on-year to 3,968 billion yuan. Health Ecology has about 10.26 million individual insurance paid users, +14.5% compared to the same period last year. Health Ecology Personal Insurance accounted for 22.5% of multi-policy users, and the overall per capita premium was +8.5% to 489 yuan. By product: 1) The total premiums of the flagship health insurance product “Exclusive e-Student” series for the first half of the year were +51.5% year-on-year to 3.469 billion yuan, accounting for +16.2pct to 69.1% year-on-year. 2) The company introduced multiple critical illness insurance payments in the first half of the year. In the first half of the year, the total premium for critical illness insurance products was +267.6% year-on-year to 777 million yuan, accounting for +10.6pct to 15.5% year-on-year. 3) Total outpatient emergency insurance premiums for the first half of the year were +52.8% year-on-year to 100 million yuan, accounting for +0.5pct to 2.0% year-on-year. The company's outpatient emergency insurance broke through the limitations of medical insurance in the past where medical insurance only covered expensive hospitalization scenarios caused by serious illnesses, embedded direct commercial insurance claims services into high-frequency outpatient scenarios, and innovatively added a full range of medical services such as online consultations and drug purchases from Zhongan Internet Hospital to meet users' daily health needs.
The comprehensive cost rate was -3.8 pct to 92.5% year over year, of which the payout rate and cost rate were -17.1 pct, +13.3 pct, to 54.5% and 38.0% year on year, respectively. The decline in payout rates is due, on the one hand, to the increase in the share of new insurance, and on the other hand, to the company's operational efficiency and risk control level in core areas such as data analysis and modeling, risk assessment and prediction, and product plan design, and further improvement with the further application of AIGC technology in the intelligent underwriting engine of Zhongan Health Insurance.
The increase in the cost rate was mainly due to the company's increase in marketing and customer acquisition in the first half of the year.
In the first half of the year, the total premium of the Health Ecology self-operated channel was +163.1% compared to the same period, and the renewal rate of the self-operated channel was about 87.4%.
Digital lifestyle ecosystem: In the context of post-epidemic recovery, the growth rate of e-commerce, air travel, and innovative business premiums was impressive. The total premium rate of the digital lifestyle ecosystem was +52.8% to 5.836 billion yuan, and insurance service revenue was +42.5% year-on-year to 5.701 billion yuan. Among them: 1) Total premiums for e-commerce business were +35.8% year on year to 3,098 billion yuan, of which total return insurance premiums were +45.9% year on year to 2,958 billion yuan. The increase in e-commerce business was mainly due to the strong overall recovery in e-commerce consumption in the first half of the year. 2) Total premiums for the air travel business were +118.1% year-on-year to 1,442 billion yuan, mainly because the tourism industry ushered in a strong recovery as the impact of the epidemic gradually subsided. 3) The total premiums for innovative businesses (including pet insurance, broken screen insurance, multi-scenario accident insurance, and household insurance) were +47.9% to 1,296 million yuan, of which the total amount of pet insurance premium transactions was about 200 million yuan, an increase of nearly 100% over the previous year, and total premiums for drone insurance were 274 million yuan, +31.5% year-on-year.
The comprehensive cost rate was 99.8%, the same as the previous year. Among them, the payout rate and cost rate were +3.6 pct and -3.6 pct year on year to 68.4% and 31.4%, respectively. The decline in fee rates was mainly due to the year-on-year increase in the share of new-channel e-commerce returns insurance and innovative businesses with superior profits.
Consumer finance ecosystem: In the context of consumption recovery and the return of the corporate exhibition industry to normal, consumer finance premiums increased by +52.0% year-on-year to 2,787 billion yuan, and insurance service revenue +17.0% year-on-year to 2,318 billion yuan. The increase in premiums is expected mainly due to the recovery of the consumer finance industry and the return of the company's exhibition industry to normal (22H1 company actively shrinks business after considering the macroeconomic environment). By the end of the first half of the year, the loan balance insured by Consumer Finance Ecology was 26.477 billion yuan, +14.2% compared to the end of the previous year, and +30.6% year on year. The average term of underlying assets was about 10 months. The comprehensive cost rate was +0.4 pct to 90.7% year over year, of which the payout rate and cost rate were +11.6 pct, -11.2 pct to 60.8% and 29.9% year on year, respectively.
Automobile Ecology: Premium growth rate is superior to that of the industry. New energy vehicle insurance premiums are growing strongly. Total auto ecosystem premiums were +54.3% year-on-year to 822 million yuan, and insurance service revenue was +35.9% year-on-year to 695 million yuan. Among them, total premiums for new energy vehicle insurance increased by more than 228.7% year-on-year.
The comprehensive cost rate was -0.6 pct to 97.3% year over year, of which the payout rate and cost rate were +2.1 pct and -2.7 pct to 59.1% and 38.2% year on year, respectively.
Proprietary channels: The share of premiums has further increased, and the renewal rate has remained at a good level. The total premiums of self-operated channels were +90.6% year-on-year to 4.425 billion yuan, accounting for +8.6pct to 30.6% of total premiums. Looking at the breakdown, the number of paid users through self-operated channels was +24.8% to 6.18 million, and the per capita premium of users was +52.7% to 712 yuan. The company continues to make efforts to build cross-penetration across ecosystems, enriching the product matrix in terms of self-operated channels. In the first half of the year, self-operated channels accounted for 54% of multi-policy users, 1.5 per paying user, and the renewal rate for self-operated channels reached 87.3%.
Asset side: Significant improvements in fair value led to a marked recovery in total investment income in the first half of the year, total investment income from insurance fund asset management business was +557.3% (an increase of 613 million yuan) to 723 million yuan, mainly driven by changes in fair value and improvements in net profit and loss in the context of capital market recovery. Net profit and loss from changes in fair value in the first half of the year was 573 million yuan (22H1: -165 million yuan). The improvement was mainly driven by fund investment classified as FVTPL, with net investment income of 146 million yuan (22H1:274 million yuan). In the first half of the year, the total annualized return on investment of the company and the insurance division was +2.6 pct and +3.4 pct to 4.4% and 4.0%, respectively. The annualized return on investment of the company and the insurance division was +0.1 pct, 0.0 pct, 2.3%, and 2.2% year on year, respectively, the same as the previous year.
Technology export: Technology export revenue returned to a growth trajectory, but net loss increased due to worsening net investment income, and the technology export revenue of the Technology Division increased by +22.0% year-on-year to 267 million yuan. In the first half of the year, 35 new insurance industry chain customers, 8 banks and brokerage clients were signed. Among them, domestic technology export revenue for the first half of the year was +35.5% to 150 million yuan, and international technology export revenue for the first half of the year was +8.3% year-on-year to 118 million yuan. Management expects implementation delivery and contract revenue confirmation to be mostly concentrated in the second half of this year. The Technology Division had a net loss of 247 million yuan (22H1: net loss of 16 million yuan) in the first half of the year. The increase in net loss was mainly due to a year-on-year deterioration in net investment income. The net investment income of the Technology Division for the first half of the year was 27 million yuan (22H1:390 million yuan).
Hong Kong Virtual Bank: Net revenue grew steadily, and the net loss ratio narrowed by about 60 pcTza Bank's net revenue for the first half of the year +13.0% year-on-year to HK$152 million. In terms of deposit and loan business, as of the end of the first half of the year, ZA Bank had a deposit balance of about HK$10.712 billion (22H1: over HK$8 billion), and a total loan amount of about HK$4.916 billion (22H1: over HK$4 billion). The deposit-to-loan ratio was 45.9%, and the net interest spread further increased to 1.87%, mainly benefiting from the interest rate hike cycle and continuous diversification of loan products. In terms of non-interest income, non-interest income accounted for about 25.8% in the first half of the year. ZA Bank focused on business quality and improving operating efficiency, and the net loss ratio narrowed by about 60 pct to 131.8% year on year. The bank division's net loss for the first half of the year was 177 million yuan, narrower than 22H1's net loss of 213 million yuan.
In terms of retail business, by the end of the first half of the year, ZA Bank's retail customers were close to 700,000. The penetration rate of the overall population aged 18 or above in Hong Kong reached 10%, and the average number of monthly card purchases by customers was nearly 15 times, close to double the average of the VISA card market in Hong Kong. In addition, ZA Bank is also actively developing products and functions such as investment and financial management, insurance, and foreign exchange, and is continuously improving its service content. ZA Bank officially launched its fund investment business in August 2022. By the end of the first half of the year, the asset management scale of retail users had reached HK$537 million.
Changes in Zhongan International's accounting treatment method: After Baishida's capital injection, it was changed to a joint venture accounting. It will confirm investment income of about 3.8 billion yuan. On August 14, 2023, Baishida injected 44.6 million US dollars into Zhongan International. After the investment, Zhongan Technology, Baishida, Warrior, and OpportUnitiesFund held about 43.65%, 46.04%, 7.68%, and 2.63% of Zhongan International's voting rights, respectively. After the capital injection, Zhongan International will no longer be a subsidiary of the company, but will be accounted for as a joint venture. The company will confirm an investment income of approximately 3.8 billion yuan as a result of this transaction.
Investment suggestions: Be optimistic about the upward elasticity of the company's 2023 performance and the sustainability of long-term underwriting profits, maintain the “buy” rating, and the resonance of the company's financial resources in the first half of the year to drive overall performance to turn losses into profits. The comprehensive cost ratio was further optimized year-on-year, underwriting profits continued, and quality sustainable growth was achieved. The company's technology drives cost reduction and efficiency, the application of AIGC technology has led to significant improvements in health ecological payout rates, and the strategic advantages of the “insurance+technology” dual engine are prominent. Looking ahead to the whole year, looking at the debt side, in the context of post-epidemic recovery, the company's digital lifestyle ecosystem and consumer finance ecosystem premiums are expected to increase. The rapid development of self-operated channels is expected to drive the quantity and quality of the health ecosystem to improve, and continue to contribute to underwriting profits. On the asset side, the company will change its accounting method for Zhongan International in the second half of the year, which will bring the company about 3.8 billion yuan in investment income. However, in the context of the recovery in the capital market compared to last year, the company's total investment income is also expected to improve significantly from last year's lower base, and the impact of the appreciation of the US dollar on the company's performance is also expected to decrease year-on-year. Annual performance is highly flexible. In the long run, we are still optimistic that the company's marketing efficiency and operational efficiency will continue to improve. The company's comprehensive cost ratio is expected to continue to fall below 100% to achieve continuous underwriting profits.
Overall, we are optimistic about the upward elasticity of the company's 2023 performance and the sustainability of long-term underwriting profits. We expect the company's total premium (old standard) growth rate in 2023/2024 to be 36.2%/19.4%, comprehensive cost ratio (old standard) of 98.1%/97.7%, and net return profit (old standard) of 40.27/1,424 billion yuan.
The company was given a target price of 36.5 yuan for the next 12 months to maintain the “buy” rating. As of the close of trading on August 29, the company's PB positions in the past 1, 3, and 5 years were 61.2%, 22.9%, and 17.5%, respectively. In the long run, the valuation is still low, and the margin of safety is sufficient.
Risk warning:
Internet insurance regulatory policies are becoming stricter: If the regulatory policy on Internet insurance is significantly tightened beyond expectations, it may have an impact on the scale of premiums in the industry.
A sharp decline in the equity market: If there is a sharp decline in the equity market, it will adversely affect the company's investment income.
The recovery in domestic demand continues to fall short of expectations: if residents' demand for insurance products continues to be sluggish, it may have a negative impact on the company's premium growth.
Increased competition in the health insurance market: If the level of competition in the health insurance market further intensifies and more products with lower rates enter the market, it may make it more difficult for the company to sell health insurance products. If the company chooses to lower prices in the context of increased market competition, it may have a certain negative impact on the payout rate of the company's health insurance products.