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Fosun: The investment edge

Source: Asia Insurance Review | Nov 2014

It is no secret that Fosun, the leading privately-owned investment group taking root in China, models itself and learns from the Warren Buffett model. Mr Liang Xinjun, Vice Chairman and CEO of Fosun International, shares with Asia Insurance Review the insurance industry’s appeal for the company,its unique investment model and Chinese advantages, and how talent management needs to evolve in the industry. 
By Benjamin Ang
 
“Our vision is to be a world-class global investment group with insurance as its core business,” said Mr Liang, adding that “insurance-oriented comprehensive financial capability” is one of the twin drivers underpinning the group, with the other being “industrial-rooted global investment capability”, as it continues to make solid strides towards becoming a global leading “Insurance + Investment” group.
 
The insurance forays
Fosun is moving with great speed in its insurance forays. Total insurance funds available for investments now amounts to around CNY120 billion (US$19.55 billion). 
 
Beginning with its first investment in the insurance industry in Chinese P&C insurer Yong’an in 2007 (current stake 19.9%), it has since added Pramerica-Fosun Life Insurance (50%) and Peak Re (85.1%) in 2012, and Fosun Insurance Portugal, an investment into three insurance companies in Portugal (80%) which was completed in May this year. 
 
At the time of this interview, it had also entered into an agreement to acquire a 20% stake in US insurer Ironshore for about US$463.83 million, which will add about CNY27 billion of investable assets to its funds. As such, Fosun has constituted a comprehensive insurance platform covered by property and casualty, life and non-life, specialty and reinsurance.
 
The industry is particularly appealing to the investment group as it prefers the valuable low-cost, long-term, and sustainable source of capital from insurance float. 
 
Investment groups are used to high capital costs as funds are borrowed or leveraged from banks, private equity and limited partnership investors. As a result, the expectations on investment rate of returns have also been high at 15-20%. 
In contrast, capital in the insurance industry can be obtained at 2-3% or even negative 2-3%, he said. 
 
The investment advantage
Sure, the insurance industry is one that is highly regulated and risk management should be of paramount importance. But ultimately, the security and stability in policyholders’ funds depend primarily on the way these assets are managed and invested, he said. 
 
In addition to competing in the area of sound underwriting, investment returns can also be the key differentiator in performance among the different insurers. 
 
While traditional insurers may lament the intense competition in the industry and the challenging climate for reaping investment returns, Fosun believes its roots as an investment group gives it a firm advantage. 
 
“Since our entrance into the insurance industry, we have affirmed that our investment expertise can indeed help insurers to enhance their returns,” said Mr Liang. 
 
Understandably, a significant gap exists between the investment capabilities of an investment team in an insurance company and a pure investment group. 
 
An insurer may place a lot of emphasis on the business or underwriting side, but the resources placed in its investment team and the resultant talent and expertise will not be able to match up to that of an investment group. This also means that when looking at target investments, analyses will not be as robust and in-depth. 
 
In addition, one of the primary considerations for investment groups is that “most want to be sure that they can add value to the project and further enhance the returns”, such as getting involved and working with the management teams to improve and tap on opportunities from the investment groups’ networks and expertise. But an insurer may be looking at it only from an investment perspective.
 
The impact can be huge, he said. Giving an example, he said the average return on asset that the Portuguese group achieved in the past was about 4.2%. With Fosun working hand-in-hand with the management team, it is confident that it can achieve a return of about 6% in the next two to three years. With a float size to the tune of CNY100 billion, an additional 1-2 percentage points will result in a huge difference, he said.
 
The talent mismatch
In the area of talent management, he also sees a stark difference between insurers and investment groups. 
The insurance industry has customers with long-term commitment. However, insurance professionals in the industry generally stay with a company for only a short period of time, he said.
 
Investment holdings on the other hand, take a long-term view when it comes to talent management. Rather than looking at a stay in a company for two or three years, the top talent are made partners in a bid to attract and commit them to stay for their whole careers. And this is something that Fosun is looking to support and encourage in all the companies it is involved in to ensure the brightest talent see their futures in the group.
 
The Chinese advantage
Even among investment groups, Mr Liang believes that Fosun has a unique advantage – the ability to tap opportunities in the China market, which for at least the next 8-10 years, will still be the engine of growth for the global economy. 
 
“With an investment strategy centred on ‘Combining China’s Growth Momentum with Global Resources’, Fosun strives to be the best in the world in benefitting from China’s growth momentum through our value investments,” he said. 
 
“Also, we do not just want to excel in the initial stages of analysing and placing our investments. Through our network and strategic advantages in China, we differentiate ourselves by significantly value-adding to our ventures.” 
 
He added: “And finally, by continuing to tap on the insurance platform and increasing the insurance float for investments, even if we achieve similar returns to other investment groups, our results will be superior due to the low cost of capital.” 
 
The next steps
In the first half of 2014, Fosun’s insurance revenue amounted to CNY2.18 billion, and leveraging its successful connection to Fosun’s investment capability, the profit attributable to owners of the parent of the insurance segment rose 19.9% year-on-year to CNY114.5 million. The group, including all its business units, achieved a total profit of CNY1.83 billion. 
 
Fosun is not resting on its laurels. In fact, it is continuing to strengthen its investment capability, such as in fixed income investment and real estate investment in OECD. 
 
It accelerated the establishment of local investment capabilities in Europe, US, Japan, Hong Kong, and Southeast Asia by investing in local platforms and recruiting local partners. Its investments into IDERA, a Japanese real estate capital management firm, and One Chase Manhattan in the US are examples of its efforts to boost its real estate investment and assets management capability. 
 
There is still much room for growth in the insurance industry for Fosun, said Mr Liang. At the moment, insurance assets of the group account for 37%. “We don’t have an exact number in mind, but we have a vision to increase the proportion of our insurance assets. I don’t think 37% is enough. Berkshire Hathaway has about 70%, so there is still a huge gap.”

 

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