ZhongAn Insurance Files for Hong Kong IPO, Valuation Expected to Reach $10 Billion

ZhongAn Online (6060.HK), the internet insurer that has drawn significant attention from the capital markets, finally held a press conference on September 17 regarding its initial public offering (IPO) in Hong Kong.

It is reported that ZhongAn’s IPO plans to issue 199 million shares, with an offer price of HK$53.7–59.7 per share, raising an estimated HK$11 billion and reaching a total valuation of up to HK$80 billion, making it the largest initial public offering in the financial technology (Fintech) sector.

According to ZhongAn Insurance’s prospectus, the IPO will allocate 95% of the shares to international placement (typically targeting cornerstone investors subject to a six-month lock-up period and institutional investors with substantial capital), while 5% will be offered through public offering in Hong Kong (allowing retail investors to subscribe for new shares via their Hong Kong brokerage accounts). Following its role with Meitu, Futu Securities has once again served as a joint lead manager for ZhongAn’s IPO, while also providing the only fully online, one-stop leveraged subscription service available across Hong Kong.

Mr. Chen Jin, CEO of ZhongAn Insurance, stated that as ZhongAn is still in a period of rapid growth and the company remains highly optimistic about the insurtech market, it seeks to increase investment and therefore intends to supplement its capital by listing in Hong Kong.

Over the three years from 2014, ZhongAn’s total gross written premiums (GWP) grew from RMB 794 million to RMB 3.408 billion, representing a compound annual growth rate (CAGR) of 107.2%. In the first quarter of this year, total GWP also increased by 70.48% year-on-year to RMB 1.03 billion. However, despite ZhongAn’s rapid development over the past three years, its share of China’s overall property and casualty insurance market remained only 0.4% as of the end of 2016—still negligible compared with PICC Property and Casualty Company’s market share of more than 30%.

ZhongAn Insurance’s IPO is set to become one of the largest tech company listings in Hong Kong this year. Other companies preparing for Hong Kong IPOs include gaming hardware developer Razer and e-book publisher China Literature. Ant Financial also plans to go public as early as next year, though its listing venue has not yet been determined.

Many Chinese tech giants are attempting to enter the insurance industry. Last month, private equity investment firm Yunfeng Financial Group Limited (“Yunfeng Financial”) joined a consortium to acquire the Hong Kong operations of MassMutual Life Insurance Company.

Despite recent stringent regulatory scrutiny of investment-linked insurance products offered by some insurers and their aggressive overseas acquisitions, the insurance industry is still regarded as having immense growth potential, given China’s relatively low insurance penetration rate.

According to an Oliver Wyman report, total premiums in China’s insurance market are projected to grow from approximately RMB 3.1 trillion in 2016 to around RMB 4.9 trillion in 2021, representing a compound annual growth rate (CAGR) of 9.6%. Meanwhile, total premiums in China’s insurtech market are expected to increase from RMB 363 billion in 2016 to RMB 1.41 trillion in 2021, with a CAGR of 31.2%.

The persistent underwriting losses and the business model’s excessive reliance on major shareholders are the primary reasons investors doubt the sustainability of its high valuation. However, ZhongAn’s combined ratio has remained above 100% for the past three years, widening further to 129.3% in the first half of 2017, indicating that the company continues to incur underwriting losses. In its prospectus, the company stated that it does not expect any improvement in its underwriting losses before the end of 2018.

The company also disclosed unaudited financial data for the first half of this year in its prospectus: gross written premiums increased by 84.3% year-on-year to RMB 2.492 billion, primarily driven by a substantial rise in gross written premiums from health insurance, accident insurance, liability insurance, and return-shipping freight insurance. However, costs such as the loss ratio, expense ratio, operating and administrative expenses, and commissions all increased year-on-year during the period, causing the combined ratio to rise from 111.8% in the first half of 2016 to 129.3% in the first half of this year. Overall, the net loss for the first half of the year amounted to RMB 287 million, compared with a net loss of RMB 228 million in the same period of 2016.

Regarding related-party transactions, the total gross premiums generated through shareholders or related parties accounted for 98.0%, 87.9%, 73.4%, and 59.3% of ZhongAn’s total gross premiums in 2014, 2015, 2016, and the first quarter of 2017, respectively. Chen Jin responded that ZhongAn has received full support from its major shareholders, maintains product differentiation from companies under the “Three Ma” umbrella, and shares a mutually reinforcing relationship with them; however, he believes that reliance on the “Three Ma” will gradually decrease in the future.

Furthermore, the company stated that it will make substantial investments in insurtech research and development. In July last year, it established a wholly-owned subsidiary, ZhongAn Technology, dedicated to advancing cutting-edge fintech R&D, including the S-series of insurance and financial applications, the X-series of intelligent data services, and the T-series of blockchain services.

Jiang Xing, Chief Technology Officer of ZhongAn Insurance, stated that the company will focus on increasing investments in three key areas—S, X, and T—and expressed confidence that revenue would rise accordingly as its customer base expands.