Ping An Insurance (Group) Co., China’s second-largest insurer, is diversifying into property and private equity and increasing holdings in Chinese stocks to boost investment performance after its worst year since 2005.
"Returns are lower than last year and I’d say it’s the toughest time” in five years, after bond yields and the benchmark stock index declined, Timothy Chan, 49, deputy chief investment officer of Ping An and chairman of its asset management units, said in an interview at the company’s office in Shanghai. “The forecast for investment returns in 2011 looks very similar to this year’s levels.”
The government is widening the investment scope of insurers including Ping An and China Life Insurance Co., which held most assets in bonds and bank deposits, limiting returns. Ping An had 86 percent of its portfolio invested in fixed income and 9 percent in equities at the end of June, Chan said.
Ping An may expand to commercial property, infrastructure and take a stake in AIA Group Ltd., the Asian business of American International Group Inc., to generate higher returns after 10-year government bond yields fell to a 12-month low in July of 3.17 percent. The yields have since climbed to 3.6 percent as the government raised borrowing costs.
"We will try to improve yields by adding more credit risk,” Chan, who helps oversee 600 billion yuan ($90 billion) at the Shenzhen-based insurer, said yesterday.
Real Estate
The China Insurance Regulatory Commission said in August it would allow insurers to invest in real estate and equities of unlisted companies and give them more freedom in stock-market investments. The yield on Ping An’s investment income was 3.7 percent in the first half of this year, down from 4.8 percent in the same period last year. China’s inflation rate jumped to 3.6 percent in September, the fastest pace in almost two years.
Chan, who joined Ping An in 2005 and previously worked at BNP Paribas Asset Management, is boosting his equity allocations as the Shanghai Composite Index, the benchmark index, extends its rally since reaching a 2010 low in July. The measure has jumped 26 percent since July 5 after lagging behind advances in other emerging markets and as a rising yuan lured capital inflows. The measure fell 0.3 percent to 2,974.41 as of 9:53 a.m. in Shanghai, bringing this year’s decline to 9.2 percent.
'More Positive’
"We are still getting more positive on the equity market on valuation and also the government policy is still favorable toward equities,” Chan said. “This year we had a big correction and valuations have come off to a more reasonable level and earnings growth remains pretty stable.”
The Shanghai Composite trades at 17 times estimated earnings, compared with about 24 times at the start of the year, according to data compiled by Bloomberg. The index dropped this year after the government tightened monetary policy to curb potential bubbles in the property market.
China’s stocks will benefit from the announcement that insurers will be able to invest as much as 25 percent of their assets in yuan-denominated shares and allowing foreigners to hold 10 percent of their investment quotas in index futures, Sean Darby, a Nomura Holdings Inc. equity strategist, said in an August report.
Chan favors insurers and banks, based on valuations, and said machinery makers for industries related to environmental protection will benefit as China reforms its economy to reduce its reliance on fixed-asset investment and export-driven growth.
Interest Rate Increase
The central bank raised borrowing costs for the first time since 2007 on Oct. 19, two days before official data showed the economy grew 9.6 percent in the third quarter and inflation accelerated to the fastest pace in almost two years.
Inflation “isn’t going away” and the central bank should “theoretically” further raise interest rates, Chan said. “The biggest concern is negative interest rates. Either rates have to go up or inflation has to come down.”
Officials have reined in new lending and clamped down on speculation in the housing market to limit the risk of asset bubbles after record property-price gains this year.
China’s insurers will face increasing risks as their investment channels are expanded, Wu Dingfu, chairman of the China Insurance Regulatory Commission, wrote in an article published in China Finance magazine this month. The nation’s insurance industry still faces “many” uncertainties and unstable factors as changes in the external environment have a greater effect on their risk, Wu wrote.
Falling Investment Income
Ping An’s total investment income from insurance funds fell 26 percent in the first half from a year earlier to 10.4 billion yuan, the company said in August. It had 2.2 billion yuan in net realized and unrealized losses on investments, compared with a 5.6 billion yuan gain a year earlier. First-half profit climbed 29 percent as premiums expanded and its property- insurance unit made money, and that helped offset the effects of stock-market declines on investment returns, it said.
Ping An plans to raise holdings of non-guaranteed corporate bonds, which offer a higher yield, as returns on government debt aren’t high enough to match liabilities, Chan said. Government and corporate bonds have gained 3.1 percent this year after a 0.3 percent loss in 2009, according to an index compiled by Chinabond, the nation’s largest debt-clearing house.
China will let insurers invest as much as 5 percent of total assets in privately held companies and 10 percent in real- estate assets, according to rules posted by the China Insurance Regulatory Commission on its website on Aug. 5.
Widening Investment Scope
" 'We will widen the investment scope to include investments in infrastructure such as toll roads, property investments such as offices, hotels and service apartments and private equity,” Chan said.
Ping An is among major institutional investors interested in obtaining stakes in AIA’s Asian Unit, the Financial Times reported Oct. 17, citing people with knowledge of the matter it didn’t identify. AIG raised about HK$138.3 billion ($17.8 billion) selling shares in its main Asian unit in the largest initial public offering in Hong Kong, said three people with knowledge of the matter. “We will definitely participate if the valuation is attractive,” Chan said.
Chinese insurance companies are expected to emerge as a dominant force in the local property market and their real estate portfolio may rise to a combined $131 billion by 2020, according to a Jan. 28 report by DTZ Holdings Plc. Ping An’s real-estate investments now account for “less than 1 percent” of funds, Chan said.
Short-Term Risks
"Diversified investments will be good for insurers like Ping An in the long run because most Chinese insurers’ investments are banking deposits that generate very low returns,” said Zhang Kun, a strategist at Guotai Junan Securities Co. in Shanghai. “But short-term risks may increase after the government raised interest rates.”
Chan expects slower growth in the regional economy in 2011 and is “cautious” about investing in foreign assets given the outlook for appreciation in the yuan. The renminbi, as the Chinese currency is officially known, may rise 3 to 5 percent this year and next against the dollar, he said.
China’s economic expansion, running at more than three times the pace of growth in the U.S., may add fuel to arguments that the economy can withstand a stronger yuan. Escalating tensions over currencies can lead to a “trade war” and dent global growth, Chan said.
"There’s no imminent trigger but it’s something we monitor,” he said. “It’s always better to be cautious.”
