Tencent and other Chinese companies invest in Chinese subsidiary
– The Chinese subsidiary of Samsung F&M sells property and casualty insurance and voluntary auto insurance policies. It has been selling the latter through its website since March 2013, when it became the first foreign insurer to be licensed to sell auto insurance online, and underwrites the first for Samsung subsidiaries. In addition, the subsidiary is approved for the sale of liability insurance.
– At the end of 2019, shareholders’ equity amounted to KRW 142.6 billion and written premiums to KRW 108.8 billion (automobile insurance KRW 54.1 billion, property and casualty insurance KRW 54.7 billion).
– The subsidiary is 100% owned by Samsung F&M. After investments by Chinese companies, equity will increase to KRW 385.4 billion, with Samsung F&M holding 37.0% stake, Tencent 32.0%, Boyu Fund 4.0% and three Chinese companies at 27 % (11.5% + 11.5% + 4.0%), according to Yonhap News (November 26).
– Chinese partners will only be involved in operations related to automobile insurance; Samsung F&M will continue to manage insurance coverage for Samsung affiliates.
JV looks positive
– We believe that the investments are positive for Samsung F&M.
– The Chinese auto insurance market is contracting due to excessive competition in the offline market and privacy concerns. However, Samsung F&M is expected to find a solid foundation for its growth through (1) a reduced expense ratio cap (35% → 25%) and (2) a preference for contactless channels among COVID-19.
– Samsung F&M’s stake in the Chinese subsidiary will decrease, but we positively view the partnership with Tencent, as it will offer Samsung F&M the opportunity to sell auto insurance through Tencent’s online channel, which has 1.2 billion users. In addition to the growth momentum, the partnership will help increase profit margins. The subsidiary’s earlier efforts to improve profit margins have been thwarted by an inability to reduce the combined ratio, largely attributable to (1) the high expense ratio characteristic of Chinese auto insurance companies and (2) the inability to the subsidiary to achieve economies of scale.
– With Samsung F & M’s domestic auto insurance business still hampered by market saturation and restrictions on premium increases, the Chinese market looks promising as its insurers have some freedom to adjust insurance premiums and that its online auto insurance sales only represent 3.4% of total auto insurance.
– Two uncertainties are: (1) the Chinese authorities have not yet approved the JV and (2) rivals Allianz and Axa are also looking to partner with platform providers to gain leeway in the online market .
– We plan to factor the JV transition into our assessment after local authority approval and Samsung F&M announces its longer term strategies.
Overview of the Chinese auto insurance market
– Total written auto insurance premiums amounted to CNY 819.0 billion in 2019 (10.8% CAGR since 2012). Based on 2018 figures, the top three companies hold 66% of the market (PICC at 32%; Ping An Insurance at 22%, CPIC at 12%). Premiums written from online sales represent 3.4% (CNY 27.0 billion) of total premiums written. In the online market, eight insurers control 78.4% of the market share (CCIC at 20.1%, CPIC at 14.2%, Ping An Insurance at 13.7%, PICC at 6.7%). (Source: Daxue Consulting)
– Until 2009, 4S stores (sales, spare parts, service, surveys) were the main outlet for automobile insurance. Mainly engaged in the sale of spare parts and maintenance / repair, auto insurance was only their secondary activity, with discounts paid to customers (60 to 70% of insurance sales commissions) to increase the number of customers, thus preventing 4S stores from gaining a tariff advantage. direct sales channels of insurers. In 2009, the China Insurance Regulatory Commission (CIRC) capped the insurance sales commission rate at 15%, eliminating the attractiveness of 4S store offerings. From there, Ping An Insurance moved aggressively into direct sales channels, increasing its market share to 16.1% (from 9.1% in 2005). Meanwhile, PICC, which relied heavily on 4S stores, saw its market share plunge to 37.8% from 51.1%.
– In July 2020, IARC announced guidelines for auto insurance reform as fierce online competition increased the incidence of abusive sales despite gaining stealth over auto insurance premiums volunteers from 2015 to 2017. Highlights of the directive include (1) the increase in the sum insured. , (2) broaden the premium adjustment criteria and (3) lower the expenditure ratio ceiling (35% → 25%). In short, the reform has strengthened the regulatory hold on spending.
– The no. online platform partnerships are increasing. Amid the pandemic-driven growth in contactless commerce, JD.com partnered with Allianz, resulting in a 109% year-over-year increase in written premiums. In November 2019, Axa signed an online sales agreement with ShuDiBao. The increase appears to be attributable to (1) the lowering of the spending cap ratio, which exposed limits to competition in the offline market, and (2) the growing growth potential of the online market.