Ping An Insurance, China’s second largest insurer by market share, is tightening risk management practices as it pushes further into internet finance.
The group, one of nine global systemically important insurers, is attempting to bolster its financial position to meet expected stricter capital adequacy requirements from Chinese and global regulators.
It is also strengthening risk controls in its lending and investment businesses, especially internet finance, a segment that has boomed over the past few years.
“Ping An will keep paying attention to credit risks related to a slowdown of macro economic growth,” Jason Yao, chief financial officer of Ping An Group, told FinanceAsia. “We have been cautious and will continue to strengthen credit risk control. It’s our upmost task.”
Ping An was chosen as one of the nine global systemically important insurers in 2013 by the Financial Stability Board, an international body that monitors and makes recommendations about the global financial system, and faces potentially stricter capital requirements in the coming years.
As of June 30 2014, the company’s solvency ratio -- a key indicator of financial health – was 186.6%, comfortably above the 100% bottom line required by China Insurance Regulatory Commission.
Meanwhile, Ping An’s banking business’s capital adequacy ratio is 11.02%, with its tier-1 capital adequacy ratio and core tier-1 capital adequacy ratios at 8.73%.
All are in compliance with the regulatory requirements of 10.5%, 8.5% and7.5% respectively.
However, the group is looking to further strengthen the safety net.
Ping An Trust, which services high net-worth individuals and institutional clients, has started to assign ratings to more than 1,300 counterparties last year to better control risks.
Meanwhile, the Ping An group has recently tapped the capital markets for funds in an effort to bolster its capital levels.
It raised HK$36.8 billion ($4.75 billion) in November through Hong Kong’s largest private share placement and the insurance subsidiary may issue preference stocks and bonds this year, according to Yao.
The group’s solvency ratio is likely to increase by 16bp to 216% in 2015 as a result, according to JP Morgan’s estimates.
Ping An Bank, meanwhile, has announced a plans to raise Rmb30 billion ($4.8 billion) through preference stocks along with a private share placement. These are expected to take place this year.
The group will not conduct any further substantial fundraisings in the next two to three years, Yao said. However, “the group will inject capital to the subsidiaries if necessary,” he added.
Internet finance risks
Ping An’s caution is especially important because the group is aggressively pushing into internet finance, a burgeoning segment attracting the attention of traditional e-commerce companies such as Alibaba.
Such diversification into so-called non-traditional finance has sparked investor concerns over asset quality following liquidity crunches in China’s financial industry and Beijing’s curb on shadow banking.
The core customers of internet finance are usually small-to medium-sized businesses, which have faced difficulty in raising funds through the traditional banking system.
Shanghai Lujiazui International Financial Asset Exchange (known as Lufax), a peer-to-peer lending platform owned by Ping An, will put more resources - including people, technology and money - into risk control in internet finance business, according to the company.
The company will take advantage of its “big data” store of millions of small-loan borrowers and investors.
It collects data from users’ online activities, including risk preference, preferred maturity and borrowing amount, as well as the time spent online and web usage habits.
Ping An then frequently updates its risk control model with the data and analyses potential risks based on it.
It has also refined its globally applied risk-evaluation model by adding Chinese variables such as differences in regional economic circumstances, which can be stark in the country.
To further decrease the company’s risks in a product default scenario, Lfex, Lufax’s peer-to-peer lending platform for institutional investors, recently stopped providing guarantees for lenders.
This is a move to break the implicit guarantee — a common phenomenon in China’s trust and wealth management industry that acts as a backstop for investors but which has drawn criticism for distorting the true health of the financial markets.
“Lfex will only provide information and risk evaluation of assets trading on the platform, because professional financial institutions should have independent judgement in risks,” Lufax said in an email to FinanceAsia. “The move will upgrade our asset allocation efficiency and liquidity.”
Lufax may probably follow suit, according to local media reports citing the company management.
China’s insurance sector saw its best year in 2014 with 17.5% growth, the fastest since the 2007 financial crisis. Its premium income amounted to Rmb2 trillion and the total asset hit the record high of Rmb10 trillion.
“I believe internet finance will contribute considerable profit in the future,” said Yao. Some of the business lines will be breaking even as soon as in these two years, Yao said.
Ping An launched an mobile app in January that provides one-year free internet service. In one day, 1m people downloaded the app and connected to Ping An’s services.
This is only one of the examples how Ping An has been scrambling for business from China’s 632 million internet users and their $100 billion online shopping capability.
“The internet business is changing so fast,” said Yao. “We are fighting the clock in developing internet finance.”
