In recent months, a notable trend has emerged in the Chinese financial sector: insurance companies have been aggressively accumulating stocksThis phenomenon can be observed particularly from December 18 of last year to February 7 of this year, where Ping An Group, through its subsidiaries, notably Ping An Life and Ping An Property & Casualty Insurance, has invested nearly HKD 10 billion in H-shares of major Chinese banks including ICBC, Agricultural Bank of China, China Construction Bank, Postal Savings Bank, and China Merchants BankThis move has led to an impressive total stock holding exceeding HKD 180 billion.

The stock-buying spree is not a new occurrence; it actually began last year when insurance companies poured funds into various equitiesA report reveals that in 2024 alone, insurance firms initiated their stakes in A-shares (increasing their holdings to over 5%) twenty times, marking the third major wave of investment in the past decade, alongside two previous spikes in 2015 and 2020.

As of the third quarter of 2024, insurance companies have managed assets totaling 32.15 trillion yuan, with 2.33 trillion yuan invested in stocksThis amount reflects a significant increase of 20% compared to the 1.94 trillion yuan recorded at the end of 2023. Such growth in stock investment is not merely a fluke; it is the result of systematic policies and the inevitable evolution of the insurance industry itself.

In the past years, traditional insurance products like whole life insurance have gained massive popularity due to their capital preservation and interest guarantee featuresThis surge has propelled premium income in China to astronomical figures, from 4.5 trillion yuan in 2020 to a projected 5.6 trillion yuan by 2024. This rapid premium expansion creates a significant demand for strategic asset allocation, pushing the insurance firms to seek higher investment yields.

However, a concerning issue arises as the central interest rate in China has been on a steady decline post-2021, with the ten-year bond yield dropping below 1.7%. This has compelled insurance companies to confront challenges related to interest rate spreads and a shortage of viable assets, emphasizing the urgency for alternative investment avenues that can boost yields

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Under these circumstances, the stock market has presented itself as an almost singular path forward.

On one hand, the stock market boasts a substantial size, with a total market capitalization exceeding 90 trillion yuan and daily trading volumes surpassing a trillion yuanIt thus caters to the considerable demand for both investment space and liquidity from insurance capitalOn the other hand, it houses some of the country’s most outstanding enterprises across various industries, which meet the high standards and rigorous requirements for asset quality and profitability set by insurance firms.

The relationship between insurance capital and the stock market is mutual: insurance firms need the stock market, and the stock market, in turn, requires the capital injections from insurance entities.

Presently, there remains some ambiguity surrounding the concept of "new premium," which could refer to various metrics such as new single premiums, net cash inflow from operations (total premiums less claims and expenses), total premiums, and the annual increment of total premiumsGiven that total premiums may witness a decline, the latter option presents significant complexity, leading most discussions to revolve around the first three metrics.

From calculations based on net cash inflow, the top six insurance companies are projected to collectively register approximately 0.89 trillion yuan in 2024, with 30% corresponding to a potential fund flow of around 270 billion yuanIf we calculate based on new single premiums, the figures soar to about 1.76 trillion yuan, translating to 530 billion yuan, whereas the total premium estimation reaches around 3.15 trillion yuan, potentially delivering around 940 billion yuan in funding.

In essence, this indicates that insurance firms are poised to pour thousands of billions into the stock market annually going forward.

Since the regulatory efforts initiated in September 2024, financial authorities have made exhaustive endeavors to energize the capital market

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Regardless of how many policies are introduced, the underlying concern remains whether new funds will indeed be injectedCurrently, the stable and long-term nature of insurance funds makes them an ideal candidate for patient capital investment, becoming the most promising fresh force in A-sharesUnderstanding the investment preferences of this demographic can provide investors with significant real-world insights.

Recent data indicates that in 2024, companies targeted by insurance capital for increased shareholding yielded dividends of over 2%. In particular, over 30% of these entities provided dividends ranging between 4-6%, with nearly 20% surpassing a 6% yieldComparatively, the percentages for 2020 were merely 23.1% and 7.7%, respectively.

Clearly, insurance capital is now gravitating toward high-yield dividends, largely due to changes in accounting regulationsEffective from 2023, publicly listed insurance companies began applying new financial instrument standards (IFRS 9), while non-listed entities are expected to adopt similar measures by 2026. This new framework signifies a shift in the classification of financial assets, where the most critical change involves choosing between FVTPL (Fair Value Through Profit or Loss) and FVOCI (Fair Value Through Other Comprehensive Income) for stock assetsSelecting FVTPL subjects stock price fluctuations to immediate accounting impacts and profits volatility, while FVOCI allows only dividend income to impact recognized investment revenue, insulating firms from severe loss margins.

Historically, many insurance companies primarily utilized FVTPL, which heightened their exposure to stock market volatilityA straightforward illustration of this was evident in the third quarter of 2023 when the market dipped around 4%, concurrently leading to a staggering more than 60% year-on-year decline in net profits among insurance firmsConversely, by the third quarter of 2024, as the market bounces back with a 16% increase, insurance companies’ net profits surged fivefold year on year.

For financial entities such as insurance companies, the stability of performance is paramount, making the existence of extensive fluctuations unsustainable in the long term

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Consequently, this predicament has prompted two strategies: long-term equity investments and a high-dividend approach.

The new standards do not apply to long-term equity investments, thereby enabling insurance firms to convert their stock investments into long-term equity stakes, circumventing the adverse effects of new regulationsThese long-term investments may follow either the cost method or the equity methodUnder the equity method, regardless of whether the invested entities disburse dividends, investors can recognize returns and adjust the book value of their long-term equity holdings according to their shareholdingsThis accounting treatment means that the yields of investors align closely with the return on equity (ROE) of the investees, maintaining stability.

However, a stipulation for classifying investments as long-term equity is the control and significant influence over the invested entities, thus prompting insurance capital to aggressively increase their stakes.

Compared to long-term equity investment, adopting a high-dividend strategy is far less rigorous, requiring only the selection of companies that offer stable and high dividend returns, alongside possessing the FVOCI accounting classificationBy mid-2024, major listed insurance companies holding stocks evaluated at fair value through comprehensive income (FVOCI) totaled around 355.22 billion yuan, marking a net increase of approximately 96.54 billion yuan since the beginning of the year, with expectations of these figures rising significantly by year-endIt is anticipated that high-dividend assets, particularly in the banking sector, will continue to be focal points for insurance investments.

In 2024, insurance companies experienced an extraordinary profit surge, with China Pacific Insurance reporting a 65.5% year-on-year increase in net profit for the first three quarters, while China Life showcased a staggering 173.9% growth in their net profits during the same period

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