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ZhongAn, World’s First ‘Insurtech’ IPO Oversubscribed 400 Times By Retail Investors

Opportunities in China’s fast-growing insurance market coupled with exciting insurtech future prospects entice investors

China’s largest online insurer and China’s first internet-only insurer, ZhongAn Online Property and Casualty Insurance Co Ltd raised US$ 1.5 billion in a Hong Kong flotation which was oversubscribed by nearly 400 times by retail investors while the institutional order book was more than 10 times oversubscribed as eager investors looked to ride on what will be the world’s first ever ‘insurtech’ IPO, and Hong Kong’s second-largest IPO this year, following the US$ 2.2 billion flotation of Chinese brokerage firm Guotai Junan Securities (SHA:601211) in March.

The IPO was priced at the top of its range at HK$59.70 per share valuing ZhongAn at US$ 11 billion, a hefty price tag for a company that generated just CNY 3.4 billion (a little over US$ 500 million) in total insurance premiums and CNY 9.3 million (about US$ 1.4 million) last year. That revenue however, grew 49.28% year-on-year, with a CAGR of 107.16% between 2014 and last year. In the first half of the year, ZhongAn’s insurance premium revenue reached approximately CNY 2.6 billion and the annual revenue is expected to be reach CNY 6.5 billion.

The company is backed by some of China’s most prominent firms including e-commerce giant Alibaba (NYSE:BABA), social media behemoth Tencent Holdings (HKG:0700) (OTCMKTS:TCEHY) (OTCMKTS:TCTZF) and one of China’s largest insurance firms Ping An Insurance (HKG:2318) (SHA:601318). Japan’s Softbank (TYO:9984) (OTCMKTS:SFTBF) (SFTBY) is a cornerstone investor in ZhongAn’s IPO (committing to hold its shares for a minimum number of months) having confirmed its purchase of a 5% stake in the company. Alibaba affiliate Ant Financial is the largest shareholder in ZhongAn with a 16% stake.

Since its inception in 2013 when the company started off selling “shipping return insurance” at Alibaba’s online marketplaces Taobao and Tmall, the company now offers a variety of insurance products classified into five segments: travel, consumer finance, health, auto and lifestyle consumption.  “Shipping return insurance” which insures the cost of returning goods purchased online (mostly on Alibaba’s Taobao and Tmall platforms), still remains as ZhongAn’s biggest business, having accounted for about one-third of the company’s total gross written premiums last year. Shipping return insurance is classified as a “lifestyle consumption” product.

Bar chart showing ZhongAn Insurance's gross written premium (GWP) during the financial year 2016, by segment, namely “Lifestyle Consumption”, Travel”, Consumer Finance”, “Health”, “Others” and “Auto”. At 47.6%, the “Lifestyle Consumption” segment accounted for bulk of ZhongAn’s GWP. “Travel” accounted for 31.7%, “Consumer Finance” accounted for 9.3%, “Health” accounted for 6.9%, “Others” accounted for 4.4% and “Auto” accounted for 0.1%. Data taken from ZhongAn’s prospectus.

ZhongAn plans to use proceeds from the IPO to strengthen its capital base to accelerate its growth plans which includes adding life insurance and healthcare products to its range of policies. Both of these insurance segments have considerable growth potential in China.


China’s fast-growing insurance market still has room to expand

China is the world’s third largest insurance market accounting for a 9.85% share of total world premiums written in 2016 according to data from SwissRe.

Pie chart showing the top 10 countries in the world by share of total world premiums written in 2016. The United States was the largest accounting for 25.58% of total world premiums written. Japan was second with 9.96% and China third with 9.85%. United Kingdom (6.43%), France (5.02%), Germany (4.54%), South Korea (3.61%), Italy (3.43%), Canada (2.42%) and Taiwan (2.14%) rounded out the top 10.

China’s insurance market has been growing at a rapid clip, with insurance companies benefiting handsomely in the process; over the past two years premium revenue has ballooned 88% and total assets have grown 49%.

According to data from German insurance giant Allianze, global insurance premiums (excluding health insurance) grew 4.4% in 2016, with nearly half of that growth driven by China alone; without China, the global insurance industry would have seen a growth rate of just 2.7%.


Life insurance drives China’s insurance industry

Much of China’s insurance industry growth was driven by the life insurance segment which soared 30% last year, the highest rate of growth since 2008.

China’s booming life insurance market accounted for half of the world’s life insurance market growth of 4.7% in 2016; without the Middle Kingdom the global life insurance industry would have notched a growth rate of just 2.3% in 2016.

Yet, there is still ample room for growth; according to data from Allianze, China’s per capita spending on insurance products is just about 170 euros, leaving a long road ahead for the Middle Kingdom before it catches up with the average for developed countries, or even with neighboring Hong Kong and Taiwan, both of which have are within the top 10 countries with the highest per capita gross written premiums.

Bar chart showing the top 10 countries in the world by per capita gross written premium (GWP) in 2016 (in euros). Hong Kong was ranked number one with 6,410 euros of gross written premiums per capita, Switzerland was ranked number two with 5,200 euros of GWP per capita and Denmark was third with 4,470 euros of GWP per capita. Singapore (3,930 euros), Taiwan (3,560 euros), United Kingdom (3,560 euros), Norway (3,560 euros), United States (3,470 euros), Japan (3,160 euros), Ireland (3,120 euros), Sweden (3,080 euros) and France (3,060 euros) rounded out the top 10.

Multiple forces to drive health insurance market in China

The vast majority of China’s citizens are covered under a public insurance system. However, a number of forces are expected to drive the country’s private healthcare insurance sector going forward.

First, as Chinese citizens get increasingly wealthier, a growing number of Chinese are succumbing to “diseases of affluence” such as diabetes and cancer. Second, China’s population is ageing. According to data from the World Bank, as of 2016, about 10% of China’s population was aged 65 and older (compared to about 6% in India) and this percentage has been on an upward trend; in 1960 the 65-and-over population as a percentage of the total population stood at around 3% of the population in both countries, but by 2016, the proportion of this age group in China was double that of India.

Line graph showing the 65-and-above population as a proportion of the total population (%) in China and India between 1961 and 2016. In 1961, 3.7% of China’s population was aged 65 and above while in India the proportion was 3.1%. By 2016, 10.1% of China’s population was aged 65 and above while in India 5.8% of the population was aged 65 and above. Data from the World Bank.

Third, the Chinese government is encouraging private sector health insurance, through supportive government policies, (such as tax breaks for individuals who purchase private insurance), in an effort to alleviate the burden on state finances and the state healthcare system. Finally, China is witnessing a growing proportion of middle class and affluent citizens who are increasingly placing great value on health and well-being, which in turn is encouraging them to seek better quality care than that provided by public hospitals.

Consequently, private health insurance penetration is rising and still has potential to continue growing; according to Boston Consulting Group, in Australia, one in two people have private health insurance while in China, the figure is just one in 20.

China’s fast-growing insurance market has attracted an increasing number of entrants keen to grab a slice of the growing pie. China’s No.1 life insurance player, China Life Insurance, has seen its market share cut by more than half to 20%, from 45% a decade ago. China Life’s president noted that three years ago, China’s seven largest insurers commanded 80% of the market, but now they control less than 60%.

The growth story is not over yet. MunichRe forecasts China’s insurance industry to grow at twice the growth rate of the overall Chinese economy between 2017 and 2020.

Bar chart showing the average inflation-adjusted annual growth rate of China’s GDP, China’s insurance sector overall growth, China’s life insurance overall growth and China’s non-life insurance overall growth between 2012-2016 and 2017(e)-2020(e) according to data from MunichRe. During 2012-2016 China’s GDP grew 7.3%, China’s overall insurance sector grew 14.3%, China’s life insurance segment grew 12.7% and non-life segment grew 16.5%. During 2017 and 2020, it is forecasted that China’s GDP will grow 5.9%, China’s overall insurance sector will grow 11.8%, China’s life insurance segment will grow 13.2% and non-life segment will grow 9.7%.


Insurtech is being touted as the future of growth in the insurance industry

A report released by London-based international law firm Clyde & Co found that 94% of insurers expect digital initiatives to have the greatest impact on their distribution channels such as through the achievement of cost efficiencies and the development of new insurance products. Optimism in this area of insurance helped insurtech startups worldwide attract US$ 1.7 billion of investments in 2016.

And growth has been accelerating. A new report by PwC states that global investment in insurtech in the second quarter of 2017, surpassed that in the previous three quarters combined.

For ZhongAn investors, the opportunity lies in China, ZhongAn’s home base. China is expected to ride the global insurtech wave; consulting firm Oliver Wyman expects China’s insurtech market to expand from CNY 250 billion in 2015, to over CNY 1 trillion by 2020.