Strong growth projected for the insurer but fund managers remain cautious Underwriters have begun pre-marketing for Ping An Insurance's US$1.5 billion initial public offering, armed with strong earnings numbers and robust growth projections. Fund managers, however, remain wary of the mainland life insurer's loss-making underwriting business. Morgan Stanley, one of the four underwriters for Ping An, has forecast the company's operating profit to grow 33 per cent to 3.74 billion yuan this year, and 51 per cent to 5.66 billion yuan next year. Goldman Sachs, another underwriter, offered more conservative projections, saying Ping An's operating profit would increase 25 per cent to 3.51 billion yuan this year and 18 per cent to 4.13 billion yuan next year. 'Increased investment income, decreasing expenses and increased premiums should provide higher earnings,' Morgan Stanley wrote in an IPO research report. But fund managers said a closer look at the numbers showed the underwriting business of Ping An would still incur losses, due to the negative spread on policies written before 1999. Both Morgan Stanley and Goldman estimated that 45 per cent of Ping An's total life insurance reserves were attached to such policies, which offer beneficiaries guaranteed returns of more than 5 per cent. The company achieved an average yield on assets of about 4.4 per cent last year. 'Whilst we expect an increase in investment yields in the near term, and therefore a reduction in negative credit spreads, we would expect a deterioration in Ping An's investment yield would result in a material erosion in the company's financial strength,' Morgan Stanley said. Goldman has estimated Ping An's valuation at between 63.9 billion yuan and 76.1 billion yuan, while Morgan Stanley sees the company's market worth at 84 billion yuan to 103 billion yuan. The Morgan Stanley numbers would translate into a multiple of 2.1 to 2.4 times reported embedded value - including the equity injection from the IPO - or 2.5 times to 2.7 times adjusted net assets. Some fund managers see a valuation of more than two times embedded value as too pricey. 'China Life Insurance is now trading at about 1.5 times,' noted one fund manager. But others believe Ping An warrants a higher market valuation than China Life, citing its inherently stronger corporate governance stemming from the presence of foreign strategic investors. HSBC holds an equity stake in Ping An of 10 per cent, Goldman 6.9 per cent and Morgan Stanley 5.9 per cent.