After going public in 2017 and being named as 'China's first insurtech stock,' ZhongAn (6060:HK) attracted many investors' eyes. The highest market value was UHD 143.8 billion (USD 18.55 billion). Now, in the third year of being publicly listed, its stock price has shrunk nearly 70% (by the end of March) compared to the highest historic level. ZhongAn continues to lose money, and this year's best hope is to achieve a break-even point.

Just like other star firms, this 2013-founded insurtech firm has a glorious story to tell. In June 2015, ZhongAn received financing of approximately USD 934 million from an investment consortium, including Morgan Stanley. Corporate partners and stakeholders included big names such as Ant Financial, Tencent, and incumbent insurance company Ping An. The firm was oversubscribed 400 times on the first day of listing.

Nowadays, ZhongAn's luster is fading, and their business in 2019 raises new problems.

Investment income is the main contributor

ZhongAn divides its business into three main sectors and five ecosystems. The three main sectors include insurance, technology and others. The five ecosystems include health, consumer finance, auto, life consumption and air travel. According to the 2019 financial report (in Chinese), only the insurance part earned a profit of CNY 7.6 million (USD 1.1 million); technology lost CNY 334 million (USD 47.26 million), and the other part is CNY 315 million (USD 44.57 million). On the insurance side, the profit mainly came from investment. In 2019, the cumulative growth of the two major stock indexes in Shanghai and Shenzhen exceeded 22% and 44%, respectively.

In technology, ZhongAn's investment is increasing. The number changed from CNY 22 million in 2014 to CNY 977 million in 2019. However, there are not many results that can be converted into financial income outside the promotion of cooperation. The loss of technological output in 2018 was CNY 453 million – in 2019. the situation just became a little better. It is difficult to smooth out losses in such a short period.

Take a look at the synthetic fund cost rate, which is a wind vane for the insurance industry. The number never went below 100% over the past six years. The higher the number, the weaker the profitability, and 100% is a watershed. As for the claim ratio, an essential component of the synthetic fund cost rate, the numbers in five ecosystems fluctuated compared to last year.

The claim ratio of consumer finance increased most, from 72.3% to 97.0%, while this part occupied 21% of the total premium in 2019, with a decrease of about 12.2% compared to 2018. For the health ecosystem, the revenue grew from CNY 2.87 billion to CNY 4.81 billion and took a share of 33%. Life consumption occupancy was 25%, which was an increase of CNY 1.62 billion to CNY 3.73 billion. These three sectors are the main premium income sources for this insurtech player.

The point that is often made about ZhongAn is that revenues grow, but profit doesn't. While, thanks to the right market situation in 2019, which brought CNY 1.8 billion in income, the loss decreased much from CNY 1.74 billion in 2018 to CNY 454 million in 2019. So actually, ZhongAn's loss decrease doesn't matter, because the company's profitability is improving due to the high synthetic fund cost rate and the increasing claim ratio in consumer finance.

Rely heavily on Ant Financial

Since the very beginning, ZhongAn has been tied together with Ant Financial. As insurance is a relatively low-frequency product, relying on Ant Financial's huge user traffic advantage can solve the problems of customer acquisition. Before Internet insurance came up, the industry attracted customers through brokers, which is time-consuming and not efficient.

For the largest share of the health ecosystem, the core insurance products are the mid-end medical insurance product and good medical insurance series, and the primary sales channel is Alipay. The premium income of the premium series in 2019 accounted (in Chinese) for 89.7% of the total premium of health ecology, while the revenue contribution from the Alipay insurance platform accounted for about 76%. So, ZhongAn's largest insurance ecosystem's revenue is provided by Alipay. For the second-largest ecosystem life consumption, the main product is the return freight insurance, which serves Taobao and Tmall. In 2019, its degraded freight insurance premium income was CNY 3.073 billion, and the proportion of premiums in the entire life consumption ecology exceeded 80% again.

Relying heavily on Ant financial brings considerable benefits to ZhongAn's business. Still, maybe it's time for this former insurtech unicorn to think about how to build on the groundwork of its loyal customers. Putting all one's eggs in one basket is too risky. Also, its products raise dissatisfaction among clients. The China Insurance Regulatory Commission named ZhongAn repeatedly and let ZhongAn rectify its product in 2019; meanwhile, the number of complaints about contract disputes increased (in Chinese) 74.61% to nearly 3700 in the area of property insurance.