Key Takeaways:
- ZhongAn warned that it lost as much as 750 million yuan in the first half of 2022, reversing a year-ago profit, due to a drop in its investment income and foreign-exchange losses
- The digital insurer made its first-ever underwriting profit last year, but its profitability still depends heavily on investment income
By Warren Yang
ZhongAn Online P&C Insurance Co. Ltd. (6060.HK) has come a long way since its creation less than a decade ago, evolving into a respectable name in the insurance space from what seemed like a high-profile gimmicky start. Yet for all its achievements, the company’s heavy reliance on volatile investment gains remains its Achilles’ heel.
ZhongAn blamed “gloomy” sentiment in capital markets for a significant decrease in investment income, as well as the dollar’s appreciation against its Chinese counterpart that resulted in foreign-exchange losses related to its holdings of bonds denominated in U.S. dollars. In a separate filing, the company said its board will meet Aug. 25 to approve the official version of its interim results, which are typically published later the same day.
The insurer didn’t provide much further detail on the specifics behind its plunge into the red in the first half of 2022. But it’s not hard to see how the six months could have been a nightmare for ZhongAn and insurers in general, whose profits often rely to differing extents on returns from investing the income they collect from their policyholders.
No Shelter
ZhongAn’s assets included about $766 million in U.S. dollars at the end of last year, exposing the company to currency risks.
Investors will only see the magnitude of ZhongAn’s investment losses so far this year nearly two-thirds of the way into 2022 due to Hong Kong’s requirement that all companies only report their results twice per year.
ZhongAn also has operations other than insurance and investment, including a virtual bank in Hong Kong, but none of them are profitable. So, until those operations start making profits, the only way for the company to reduce its vulnerability to capital market volatilities is to continue expanding its insurance business.
ZhongAn’s monthly disclosures on gross written premiums indicate that its year-on-year revenue growth in the first half slowed to well below 10% compared with 45% in the first half of last year.
The company’s stock was down 10% through Tuesday in the four trading days following its first-half profit warning. The shares have lost about two thirds of their value since their 2017 IPO. But the stock still fetches a price-to-earnings (P/E) ratio of about 22, far higher than less than 8 for Ping An. ZhongAn’s P/E ratio looks even loftier compared to other Chinese fintech stocks, such as a meager 1.8 for LexinFintech (LX.US).
ZhongAn’s current valuation suggests that investors remain quite optimistic about its prospects, even though they may be well advised to manage their expectations due to its exposure to market turbulence. At the end of the day, ZhongAn may survive the current market turmoil with relatively little long-term damage. But it will continue to be exposed to market turbulence as long as it remains highly dependent on investment income for its profits.
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