Ping An, one of China’s biggest insurers by assets under management, is considering opportunities in corporate bonds and real estate as it seeks to fulfil the twin goals of finding appropriate assets to match its liabilities while adhering to regulator calls to support the real economy.

“[To that end] we may consider some corporate bonds. But we’ll have to manage our credit risks well…Another asset class is real estate, in which we can consider [investing into] long-term rental apartments and [property for] elderly healthcare, those that can generate rental income,” Timothy Chan, chief investment officer of Ping An, said at a press briefing held in Hong Kong to announce its 2018 results.

He did not elaborate further.

Chan’s comments come on the back of the Chinese Banking and Insurance Regulatory Commission (CBIRC) repeatedly calling on insurers to focus on investments such as private equity to prop up China’s slowing economy.

Timothy Chan

Indeed, the development of long-term rental housing is also a key socio-economic priority for authorities.

Chan noted that insurance companies should play an important role in China’s strategic development of its economy and financial markets and Ping An will play its part in carrying out government directives.

Corporate bonds accounted for 5.8% of Ping An’s investment assets of Rmb2.79 trillion ($416 billion) as of end-2018; 80% of those bonds boasted triple A ratings. Overall, bonds accounted for 45.4% of its portfolio. 

Meanwhile, its total exposure to real estate, through equity, bonds and direct ownership, is just about 7% -- much lower than the regulatory limit of 30%, said Alex Ren, president of Ping An. That indicates the insurer has room to bulk up its property portfolio. 

If it does invest in property, the insurer will only make long-term financial investments in real estate companies, and will not interfere with their management or operations, Ren added.

At $416 billion, Ping An’s overall investment portfolio (from business premia or insurance funds) was up 14% from a year earlier. The Shenzhen-headquartered group has operations in life and health insurance, as well as in property and casualty.

While the life and health business brought in 62.5% of the entire group’s operating profit, the property and casualty business accounted for only 10%. That suggests business premia from its life and health insurance operations likely makes up the bulk of its investment portfolio.

Its net investment yield for 2018 was 5.2%, while the duration gap between its assets and liabilities is understood to be 6.6 years.

BOOSTING LONG-TERM STAKES

Ping An adopted the International Financial Reporting Standards 9 (IFRS 9) in January 2018 and so far, remains the only insurer in China to have done so. Under the new accounting standard, most assets are reported at fair value (or mark-to-market) in the income statement, making overall earnings susceptible to fluctuations, particularly when there are large swings in stock market movements.

To reduce earnings volatility, Ping An cut its stock allocations to 8.3% by the end of 2018 from 11.1% a year earlier. In contrast, its long-term equity stakes have increased to 3.3% from 2.4% over the same period.

Ping An will likely continue to increase investment in long-term equity stakes to make up for the drop in stock allocations, an insurance analyst at a securities firm who declined to be named, told AsianInvestor.

Long-term equity stakes are investments held for the long term and the accounting treatment for such investments is the cost method, Chan said in response to an AsianInvestor query on how the insurer differentiates these investments from other equity holdings.

Under IFRS 9, the cost method is used when an investor’s stake in a company is large enough for the investor to have significant influence, but not control, over the latter’s business activities.

An insurer will report earnings from such investments that are in line with how much stake it has in a company. For instance, if an insurer owns 20% of a company, the insurer will report 20% of that company’s earnings on its own earnings statement.

Returns from such long-term equity stakes are considered to be more stable than stock market returns.

Source: Ping An (The numbers for 2017 are restated comparable figures)
 

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