Inside Ping An’s Massive Expansion

Peter Ma Mingzhe, chairman and chief executive officer of Ping An Insurance (Group) Co. of China, sleeps as little as three or four hours a night, focusing his waking hours on expanding the huge financial supermarket he’s built — and on keeping it intact.

Ping An, which means “peace and safety,” is already China’s second-­biggest life insurer, a platform that founder Ma is using to aggressively expand the firm’s offerings beyond insurance. He’s forging ahead despite some investors’ concern that branching out in so many different directions may become unwieldy and create operational risks.

“Not only must we be the insurance expert for every one of our customers, we must be their expert financial consultant and their assistant in every aspect of their lives,” Ma tells Institutional Investor during an interview over lunch in Hong Kong. “The biggest advantage of Ping An’s business model is our wider range of expertise.”

Almost 30 years after founding Ping An, Ma is ambitiously broadening his supermarket of financial products, much like U.S. financier Sandy Weill did as chief executive officer of Citigroup from 1998 to 2003. Weill took the helm of Citigroup when the bank merged with Travelers Group — the insurance giant he led before the deal was completed — creating what was then the world’s biggest financial services company. Citi was bailed out by the U.S. government after being deemed too big to fail during the 2008–’09 financial crisis, and to regain stable footing it eventually dismantled the assets that Weill had pieced together.

So far, China’s Ma is succeeding in his financial supermarket approach, carefully monitoring and adapting Ping An’s expertise to changing markets, technology, and client needs.

Ma founded Ping An in 1988 in Shenzhen, the financial hub of southern China, which lies just north of Hong Kong’s border with the mainland. Over the past five years, the company has climbed onto the list of the world’s ten largest insurers, now ranking No. 4 behind France’s AXA, Germany’s Allianz, and U.S.-based MetLife in terms of assets, according to Relbanks.com. Though Ping An’s insurance assets rose 17 percent in 2016, to $802 billion, the company’s double-digit profit growth is benefiting in part from a diverse group of revenue streams, including banking, securities, asset management, wealth management, private equity, and, more recently, China’s booming arena of Internet finance.

Paul Schulte, chief executive officer of Hong Kong–based Schulte Research, is a fan of Ma’s plan to build out Ping An.

“Sandy Weill’s approach failed because it was a bunch of disconnected entities that were ostensibly under one roof,” says Schulte, who specializes in China’s finance sector and has 27 years of experience as an analyst. He was a National Security Council officer in the Reagan administration before becoming an Asia strategist at Lehman Brothers Holdings and Nomura Securities Co.

“Ping An is actually one platform that receives data on the same people in multiple forms and therefore is capable of allowing people to use the social network to cross-buy,” Schulte explains. “It allows Ping An to use multiple data points to differentiate the good guys from the bad guys.”

The financial services firm showed its strength in its landmark 2016 results.

Ping An saw 11.7 percent revenue growth, with gross earnings reaching a record high of 774 billion yuan ($112 billion), and a 15 percent growth in profits; net earnings rose to 62 billion yuan. About 56 percent of the group’s profits were derived from insurance, down from more than 80 percent a decade ago. The rest came from banking (20.6 percent), asset management (15.5 percent), and Internet finance (8.3 percent).

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Despite the impressive financial results, some observers are not convinced that Ma’s supermarket-style expansion will pay off over the long term. Victoria Mio, the chief investment officer overseeing China for Robeco, a Dutch asset manager owned by Japan’s ORIX Corp., notes there are dangers when Chinese insurers branch into other financial services to seek higher growth.

“The key concern for investors is that the financial statements of insurance companies, which have never been easy to understand, will become even more opaque and complex, not so easy to comprehend,” Mio says. She adds that risks include potential regulatory changes imposing firewalls among the different asset classes, as well as liquidity risks brought on by certain financial products.

Ma, 62, hasn’t always enjoyed success. His achievement is the result of carefully calibrated moves in the past decade that refocused the company on its core strength: China’s domestic markets. This reorientation followed a disastrous foray into foreign markets that cost the group a great deal of money nearly a decade ago. Ping An was embarking on a global acquisition spree in 2008 when a company in which it had acquired a 5 percent stake ­—­ Brussels-­based financial conglomerate Fortis — collapsed. Fortis had to be bailed out and was broken up by the governments of Belgium, the Netherlands, and Luxembourg. The Benelux union eventually sold parts of Fortis to a number of buyers, including BNP Paribas, and Ping An had no choice but to return to China to lick its wounds, eventually writing off $2.3 billion.

“Being burned by Fortis — that was quite unexpected and significant,” Jessica Tan, Ping An’s chief operating officer, tells II at the firm’s opulent Shanghai offices, in a 40-story building girded by granite columns that resemble ancient Roman architecture. “But we learned from that,” she adds.

Since 2008, Ping An has bounced back with ferocity thanks to acquisitions and organic growth focused on its home markets. The firm aggressively diversified beyond life and property/casualty insurance with three acquisitions that created Ping An Bank, now China’s 12th largest by assets.Ping An also ramped up investments in securities, asset and wealth management, real estate, venture capital, and private equity, and more recently entered Internet finance.

Among the company’s most touted technology successes is the 2011 founding of peer-to-peer lender Shanghai Lujiazui International Financial Asset Exchange Co. Lufax, as the company is known, has become an e-commerce giant for finance in China, the world’s second-largest economy. It’s the country’s biggest online marketplace for wealth management products: Last year more than 7.4 million individual and corporate investors used Lufax to purchase 6 trillion yuan worth of investment products from Ping An and thousands of other Chinese financial institutions.

Lufax, a venture ­capital–backed company that already has achieved a market valuation of $19 billion, is preparing for an initial public offering later this year or next year. The online lender is well known for using the latest encryption technology, including blockchain.

“Ping An has been a first mover and innovator in the blockchain space,” says Philip McMaster, founder of the Hong Kong–based McMaster Institute for Sustainable Development in Commerce, and an expert on the adoption of blockchain technology in China. “Maybe the IPO will give even more credibility and profile to the blockchain and heat up the global competition for solutions.”

At the core of Ping An’s success is the application of technology across all its business units, according to COO Tan, who helped set up the firm’s tech strategy. She studied electrical engineering, computer science, and economics at the Massachusetts Institute of Technology before joining McKinsey & Co. She worked at the consulting firm until she took a position with Ping An in 2013.

Tan describes Ping An as “one brand with many products and services targeting one mass-market base of clients” through the use of technology. The financial services group has 131 million insurance customers, who purchased an average of 2.2 products each from the company last year. The offerings include insurance — such as life, health, p/c, auto, and accident — and funds, bonds, certificates of deposits, and other types of investments. Customers can buy the products from Ping An Bank, Ping An Securities, Ping An Asset Management, or Ping An Trust.

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The group uses both online and offline approaches to reach customers. Offline the company has 300,000 employees and 1.1 million sales agents, independent contractors who work exclusively for Ping An. These agents solely recommend Ping An insurance and investment products, and also may offer real estate, such as high-end condominiums, developed by the group across China.

Online, Ping An reaches out via a database of more than 340 million registered users, including tens of thousands of high-net-worth individuals and many of China’s middle-class consumers. The firm connects with customers via Lufax, as well as through Ping An Puhui, which caters to lower-middle-class consumers who might not be eligible for bank credit cards. Puhui has a fast-growing database of active customers that now stands at 3.8 million. They’ve borrrowed 272 billion yuan from the business.

Another major success is Ping An’s O2O, an online health care service that employs more than 1,000 doctors offering initial medical consulting and referrals to thousands of clinics accredited by Ping An. So far, more than 130 million Chinese have signed up for the service, known as Good Doctor.

Keeping track of Ping An’s sprawling businesses and assets in a safe way requires multiple tech centers, including a highly secure bunker in Shanghai that’s designed to withstand disaster. All of the firm’s businesses tap into back-end servers, located primarily in Shanghai, which is China’s financial hub, and Shenzhen, in the country’s southeast.

The largest back-office operation is the China Ping An Zhangjiang Backoffice Center, which sits on a 32 acre, tree-lined campus surrounding a small lake on the outskirts of Shanghai’s Pudong financial district. Its staff of 14,000 includes about 8,000 in the facility’s vast telemarketing and online marketing halls, where employees respond to client queries 24-7.

The facility is the pride and joy of Tan, 40, who nine years ago, while still at Mc­Kinsey, helped the firm design and build the entire complex. Ma was so impressed with Tan’s work that he recruited her to join Ping An.

The basement of Building One of the Zhangjiang center houses the digital heart of much of the company’s operations, including the emergency response center, a highly secured, glass-encased area where dozens of senior executives gather when there’s a need for crisis management. The bunker, which is built with reinforced concrete that can withstand bombs, terrorist attacks, and even high-magnitude earthquakes, contains backup servers for Ping An, with rows of computers and large video monitors for live streaming.

It’s where executives gathered for decision making during the last major seismic event to hit China, the Wenchuan earthquake, which shook much of Sichuan province on May 12, 2008, killing 69,000 people and causing $145 billion in damages. During that crisis staff worked in shifts around the clock for days to process emergency claims.

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Ma, an avid reader of both Chinese and Western classics, infused the values of 6th-century BC philosopher Confucius in Ping An from the start. He also embraced Western business models when China was in the early stages of moving to a market economy.

In the mid-1980s, Ma worked as a young assistant manager at China Merchants Group’s social security office in Shenzhen’s Shekou district. He persuaded senior executive Yuan Geng, who later retired as group vice chairman, to allow him to explore the possibility of helping the state-owned trading house set up an insurance unit. With Yuan’s help, Ma steered China Merchants’ entry into the insurance business, establishing Ping An, China’s first life insurer modeled after the West, in 1988.

Ma recruited insurance industry executives from Taiwan and Hong Kong, bringing them to Shekou, then a burgeoning port district of Shenzhen, to help him set up an insurance company modeled on those in the West. Until the late 1980s, China was a centrally planned economy without a life insurance industry. Ma started from scratch, cobbling together an insurance sales philosophy based on individual and family values —a philosophy that reflected the Confucian classics.

In his book, Ping’an Xin Yu, or “Ping An’s Language of the Heart,” Ma presents a collection of essays about the firm’s history, written by him and his team. They recount how they created modern insurance sales and management strategies tailor-made for China. The book references Confucius as the individual who embodies the best of traditional Chinese philosophers and Albert Einstein as the best in Western scientific philosophy.

The CEO is such a fan of the two thinkers that he had their bronze images sculpted and placed in the main hall of Ping An University, the company’s training center in Shenzhen. “He believes in combining the best of the East and West,” says Alex Xiao, vice general manager of Ping An’s corporate branding department in Shanghai.

Despite being burned by his foray into Western markets, Ma never lost respect for their top financial institutions. In the past decade he has opened up the shareholder structure of Ping An, which is listed on both the Hong Kong and Shenzhen stock exchanges. He’s invited a wide range of entities and individuals to invest in his company, including HSBC Holdings, Morgan Stanley, and Goldman Sachs Group, as well as many foreign and Chinese high-net-worth families. Ping An’s shares have soared, rising about 44 percent in the 12 months through May 22, when they closed at 48.20 yuan.

While some foreign investors remain skeptical of Ping An’s diversification strategy given that Citigroup’s financial supermarket didn’t pan out in the U.S., Charles Zhou, a Credit Suisse equity analyst who covers China’s financial sector, points to reasons for optimism.

“On the ground in China, it is working well,” says Zhou, noting that Ping An is meeting the financial needs of customers who want more than just insurance. The company’s diverse portfolio of products “increases the value a Ping An sales agent has for a client,” he says. “It also increases the client’s stickiness for Ping An.”

Joyce Huang, a director in Fitch Ratings’ Asia-Pacific insurance group, says she’s taking a wait-and-see stance with Ping An. Though Fitch doesn’t rate the firm, Huang follows its developments as part of the agency’s broader coverage of Chinese insurers.On the plus side, she notes that more than half of the group’s revenues still come from insurance, giving the company “a buffer just in case other businesses go bad.” But the cushion isn’t enough to convince her that Ma’s push beyond insurance isn’t risky.

“Yes, their diversification can give them a wider range and source of revenues,” Huang says. “But there may be underlying risks that we cannot yet see, especially operational risk. This is an area we will continue to monitor.”

Eunice Tan, lead analyst for Greater China insurance ratings at Standard & Poor’s, says a key problem is Ping An Bank, whose nonperforming loan ratio rose to 1.74 percent last December from 1.45 percent a year earlier. “Ping An Bank is unfortunately a drag on its insurance sisters,” Tan says, noting that the bank caters to small businesses and that risk is rising among such companies with China’s slowing growth.

Timothy Chan, Ping An’s chief investment officer, says the firm is well aware of the operational risks of diversifying and constantly keeps a wary eye on potential problems from a holistic point of view, monitoring all its business units and asset classes. Chan says top executives focus on five areas: information security, asset quality, liquidity, operations, and brand reputation. Ping An also imposes “firewalls” to separate business units, Chan adds, so if a crisis breaks out in one, it does not spread to another.

Moreover, Ping An regularly calibrates its liabilities to help protect itself from financial shocks, according to Chan. He notes that at the end of 2016 the company had 5.58 trillion yuan in assets and roughly 5.1 trillion yuan in debt and liabilities, leaving the group with 486 billion yuan in net assets, or shareholder equity.

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The fundamental cause of the 2008 global crisis was high leverage in the financial system in the West, says Sheng Ruisheng, Ping An’s secretary to the board of directors and head of corporate branding. Not only is Ping An well capitalized, but it has low debt levels, Sheng says, emphasizing that revenue and net profit growth continue to be in the double digits. Furthermore, Sheng says, the firm’s compliance and risk officers in every division work closely with regulators to ensure all products on all Ping An platforms are in full compliance with financial regulations.

Gregory Gibb, co-chairman and CEO of Shanghai-based Lufax, can attest to Sheng’s assertion. An American who began his career as a McKinsey consultant, Gibb says he and his team have spent an enormous amount of energy, time, and money creating in-house know-your-customer software that advises clients on trading and investment risks. Gibb, who previously served as Ping An’s chief innovation officer, says the risk management program uses artificial intelligence and extracts data from the client’s ever-changing online profiles. The software advises clients on risks in real time and can automatically stop trades if they are deemed to exceed the individual’s financial abilities or risk tolerance levels.

Lufax’s risk managers examine the risk profile of every investment product before it enters the marketplace, weeding out those that may carry possible fraudulent or systemic risk for the platform as a whole, according to Gibb. “We believe only through stringent risk management, especially by accounting for the risk tolerance of individual investors, can we protect our investors, as well as the future growth of the entire marketplace,” he says.

The hypergrowth of Lufax and Ping An’s other Internet platforms holds the future for the company, says COO Tan, who notes that 30 percent of all new customers arrive online — up from zero in 2012. “We see online platforms deriving 50 percent of new customers by 2019,” she says.

Lufax’s adoption of the latest financial technology innovations — artificial intelligence and blockchain — reflects Ping An’s orientation and ambitions. Another representation of that ambition is the company’s shiny, glass-encased new group headquarters, the Ping An International Finance Center, which rises 118 stories, or 600 meters, over the Shenzhen landscape.

The tower, located in the city’s Futian financial district, opened earlier this year. It is China’s second-tallest skyscraper after the Shanghai Tower, and the fourth tallest in the world. With a construction budget of $2.3 billion, the building is held up by a megasteel structure that can withstand a magnitude-8.0 earthquake. Shaped like a sword and tipped by a glass pinnacle that resembles a sparkling diamond, the tower thrusts into the Shenzhen skyline and can be seen in neighboring Hong Kong, where the International Commerce Center, the tallest skyscraper in the territory, stands a full 71 meters shorter.

Executive suites will occupy selected floors from the 100th floor upward, and it will be from these commanding heights that chairman Ma and his team will marshal their army of insurance agents and financial advisers. There is no question that Ping An has come a long way from 1988, when Ma was its first and only employee, sitting at a small desk in an old building in the China Merchants compound.

Other companies will join Ping An in the new office building.

“Ping An won’t be the only tenant here,” says Kathleen Ma, associate director of the building’s developer, Shenzhen Ping An Financial Center Construction and Development Co.

“We plan to invite not only multinational companies but also some of China’s most innovative companies — many of them in finance and many with global ambitions,” she says with a smile. “It is from these heights that you can see not only Ping An’s future is bright, but all of China’s future is bright.”