People in the insurance community speculating about Zhong An going public now finally see the InsurTech unicorn making an actual move. Zhong An Insurance has formally filed for IPO in Hong Kong Stock Exchange on June 30th. And the news gained enormous attentions from not only the insurance community but also the whole finance community.

Zhong An was founded in 2013 as China’s first pure Digital Insurance company and it was backed by Alibaba, Tencent and Ping An. When the IPO news hits public, most of the medias are asking the same question: Is Zhong An’s current business development matching its hundreds of billions RMB valuation?

We have summarized the viewpoints from different media and find out that the question above is based on the following perspectives:

Loss in underwriting and poor profitability

Zhong An Insurance has made a net profit of 36.981 and 44.257 million RMB in 2014 and 2015 respectively. But they only made 9.372 million RMB net profit in 2016 which is a 78.8% slump. In the first quarter of 2017, Zhong An has made a 317 million RMB loss. If we take a look at their financial report, we can see that most of the profits came from investment while the underwriting sector is suffering losses.

Although Zhong An managed to bring loss ratio down from 77.82% in 2014 to 42.02% in 2016, the expense ratio jumped from 32.28% to 63.37%. The combined ratio has stayed above 105% since 2014 with 110.10% in 2014, 127.32% in 2015 and 105.39% in 2016.

Distribution cost stays high and dependent on stakeholders in business

According to its 2016 financial report, Zhong An Insurance has paid 102.7 million RMB for Technology Service which accounts for 60% of its Insurance business and management expenses. The payment was actually promotion fees for Internet platforms, in other words, it was the distribution cost.

The other thing people are criticizing about Zhong An is its reliance on stakeholders. Take Alibaba as an example, with the help of Taobao, Zhong An managed to generate 613, 1298 and 1194 million RMB premiums in shipping fees insurance. Despite the ratio of shipping fees insurance declined from 77.2% in 2014 to 35% in 2016, it still weights most in all product lines.

People are saying Zhong An is troubled with all the problems mentioned above. But in our opinion, although it is necessary to discover the potential risks and problems of a startup, it should not be exaggerated. As the first digital insurer in China, Zhong An bears too much expectations which in turn attracted unwanted censures.

We think in the era of new economics, we should stay patient with those who dare to act as the first explorers and respect their attempt to build a brand new business model with new technologies and new approaches.

Besides, is it fair to judge Zhong An’s development with traditional insurance standards?

Firstly, Zhong An’s profits come from different sources compared with traditional insurance companies. According to data in 2016, Zhong An’s profits come mainly from Non-Operating Income.

From the perspective of premium income, although the growth rate declined, Zhong An is still developing rapidly. Zhong An is way behind P&C giants in China in terms of scale, but considering that Zhong An is less than 4 years old, it is quite amazing to get 3.4 billion premium income.

In fact, the fundamental reason that opinions vary on Zhong An’s valuation is the hybrid identity of Zhong An. As both an insurance company and a tech startup, Zhong An has to try to meet both standards in the two industries when it is leveraging double edges.

Yirendai and China Rapid Finance are two P2P Fintech companies which went public in US stock market. Despite they repeatedly addressed their tech genes, their valuations are mainly based on loan scale, pass rate, bad loan rate. It is the same for Zhong An.

So, is Zhong An matching its valuation? Is there bubbles? It is very difficult to measure that. Professional analysts believe that it is not accurate to measure a fast-growing company with EPS or ROE. To investment institutions, if Zhong An is considered as a tech company with 500 million policies, it is definitely worth a high valuation.

And Zhong An’s valuation could go up more if they implement their long-term strategy well. It is well-known that digitalization is changing every industry now. In insurance sector, digitalization is transforming the way insurance products and services interact with customers, the business model of insurance could be completely disrupted in the future. Zhong An is a company pursing such disruption.

Right now Zhong An Insurance is investing heavily on technology development. The R&D expense from 2014 to 2016 is 22.4, 63.9 and 214.4 million RMB and accounts for 2.8%, 2.8% and 6.3% of total premium income respectively.

Besides, Zhong An Technology, wholly-owned subsidiary of Zhong An Insurance, is pursuing innovation on not only application level but also underlying technology. For example, the cooperation with Hengqin Life, Zhong An’s S series products provide one-stop insurance information solutions. It is an exploration to the digitalization of entire insurance industry.

We believe attempts like those are valuable to the long-term development of insurance industry. Inefficiency in various insurance processes has cost too much and it also represents an opportunity to disrupt and profit from Zhong An.

“In the future, whether you are digital insurance company or traditional insurer, the destination is the same which is to digitalize insurance and grab the emerging market.” Chen Jin, COO of Zhong An said.

We cannot be sure if there are bubbles in Zhong An’s valuation now. But what we can be sure is, to evaluate a potentially disrupting startup, innovation and long-term development are the key indices. It’s not about competing in an existing market, it’s about bringing a complete new world to the stage.

What is the future? We believe it’s efficiency improvement and less cost with the help of technologies which is the cause Zhong An is pursuing. We are glad that insurance industry has Zhong An as a pioneer. Maybe we will see the trends and disruption brought by them soon.