Insurer says investment yields will increase, although analysts warn of possible early policy terminations Ping An Insurance (Group) stands to benefit from expected interest-rate rises, officials said yesterday on the eve of launching the retail tranche of its $16.48 billion global initial public offering. Higher interest rates would lift new investment and reinvestment yields, while the classification of a growing portion of its bond portfolio as held-to-maturity investments would shield it from capital losses on such holdings. 'According to most economists' views, we probably have seen the bottom of the interest-rate [cycle],' Ping An's chief investment officer Young Wen Binn said in a video link from Los Angeles. 'Our investment return - the reinvestment and new investment - will only be benefiting under the rising interest-rate environment.' The mainland's restrictive investment rules force insurers to park most of their assets in bank deposits and government, financial and corporate bonds even as eight consecutive cuts since 1996 have reduced rates to a record low. At the end of last year, Ping An - the mainland's second-largest insurer by assets - held 50.2 per cent of its 155.91 billion yuan investment portfolio in fixed deposits at commercial banks. The deposits generated 55.4 per cent of its investment income of 6.5 billion yuan in the 12 months. Government, financial and investment-grade corporate bonds accounted for 43.7 per cent of its investment assets, and contributed 33.7 per cent of investment revenue. Although an expanded bond portfolio and bank deposits drove a 53.4 per cent year-on-year surge in Ping An's investment income last year, there was gloomier news on the yield side. Amid falling interest rates, average yield on its bank deposits declined from 5.7 per cent in 2001 to last year's 4.6 per cent, accompanied by a similar slide in bond investment yield from 4.4 per cent to 4 per cent. However, with the central government increasing efforts to cool an overheating economy, analysts widely expect an upturn of interest rates which may be sustained for years to come. Beijing's Economic Observer newspaper last week quoted an unnamed official in the research arm of the People's Bank of China as saying the central bank had submitted a plan to raise interest rates to higher authorities. Rising interest rates could reduce the fair market value of Ping An's existing bond portfolio. Still, company officials said the effect would be mitigated by the accounting classification of almost 70 per cent of its bond holdings as held-to-maturity or loans and receivables which are reported at amortised costs, instead of being marked to fair market value. 'The impact under the rising interest rate environment on our investment income is very minimal,' Mr Young said. Less than 16 per cent of Ping An's investment assets were bonds listed at cost in 2001. However, analysts have also warned that rising interest rates might trigger a wave of early policy terminations as policyholders seek higher returns elsewhere. Ping An plans to reduce the weight of bank deposits in its investment portfolio while pumping more money into bonds which offer higher after-tax yields and a better match to the insurer's longer-term liabilities, its prospectus said. Ping An is offering 69.39 million H shares to Hong Kong retail investors at $9.59 to $11.88 per share, or 23 to 28 times this year's expected earnings, from today. Final pricing will be determined on Friday with a debut on the Hong Kong main board scheduled for June 24. Goldman Sachs (Asia) co-head of Asia equity capital markets Mark Machin said bankers were 'very happy' about investor interest in the 1.31 billion share institutional tranche of Ping An's IPO after the first week of book-building. Ping An's IPO is co-lead managed by Goldman Sachs, BOCI Asia, HSBC and Morgan Stanley.