Investment patterns in financial markets are often driven by the influx of new capital, which plays a crucial role in shaping market dynamics and overall trendsAs the financial landscape evolves, recent developments, particularly those surrounding the insurance sector in China, have garnered significant attentionOn January 23, a pivotal press conference was held, shedding light on the future of long-term investments, highlighting insurance funds as central players in this strategy.

The press conference was attended by key figures from the National Financial Supervision and Administration Bureau and the Ministry of Human Resources and Social SecurityThe main thrust of the discussions focused on propelling medium- to long-term capital investment into the markets, with an emphasis on harnessing the power of insurance fundsThe authorities set forth specific guidelines for the insurance sector, which predominantly included two primary objectives that are expected to have a lasting impact on the market.

Firstly, there was a clear directive to expedite the implementation of the second tranche of insurance funds' long-term equity investment pilots, with targets set at no less than 100 billion yuanSecondly, the aim is to encourage major state-owned insurance companies to augment their investment in A-shares, targeting a goal of redirecting 30% of new premiums towards A-shares starting in 2025.

The increasing participation of insurance capital in the stock market is not merely a reaction to policy changesIn fact, since last year, there has been a notable trend of aggressive buying behavior by insurance funds within the A-share marketData indicates that by 2024, insurance companies had significantly raised their stakes in numerous A-listed companies, marking the third surge of insurance-funded acquisitions in the last decade, with previous waves occurring in 2015 and 2020.

By the third quarter of 2024, the total operating balance of insurance company funds reached a staggering 32.15 trillion yuan, with investments in stocks amounting to 2.33 trillion yuan—a remarkable 20% increase from the 1.94 trillion yuan recorded at the end of 2023. This trend is attributed to an ongoing search for higher yields amid a challenging investment landscape that has persisted since 2021, characterized by a declining central interest rate.

Insurance products such as traditional life insurance with guaranteed returns have been particularly popular, leading to rapid premium income growth

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Forecasts suggested an expansion from approximately 4.5 trillion yuan in 2020 to about 5.6 trillion yuan by 2024. However, this escalating scale of premiums has created a pressing need for diversified asset allocation and a demand for higher investment returns.

The historically low yield on ten-year government bonds, which has dropped below 1.7%, has led to substantial pressure on insurance companies, facing tight margins and asset shortagesGiven these constraints, the stock market emerges as a viable avenue for investment, offering liquidity and a plethora of high-quality enterprises across various sectors.

This symbiotic relationship between insurance capital and the stock market signifies mutual benefits; while insurance funds seek lucrative investment opportunities, the stock market thrives on the stability and long-term orientation that insurance investments provide.

As parties involved in this market explore the potential for new premiums, the definitions and implications surrounding “new premiums” remain somewhat ambiguousThese could encompass various terms, such as new policy premiums, net cash flows from business (net premiums less claims and expenses), total premiums, or annual increases in total premiumsHowever, the potential for total premiums to experience shrinkage complicates the scenario, leading to a primary focus on the first three definitions.

When calculating based on net cash flows from business, the top six insurance firms are projected to amass approximately 0.89 trillion yuan in 2024, translating to 270 billion yuan in potential stock market contributionsIf measured by new policy premiums, this figure rises to about 530 billion yuan; and considering total premiums, it could average 940 billion yuanConsequently, insurance funds are poised to contribute several hundred billion yuan annually to the equity markets.

Since the policy shift on September 24, regulatory bodies have made considerable efforts to revitalize capital markets, recognizing that the ultimate litmus test for these initiatives lies in whether new funds will flow into the market

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Investment strategies that are stable and oriented towards long-term growth are now decidedly the most anticipated forces in A-shares, particularly as insurance funds strive for sustainable growth and reduced volatility.

Another focal point of this transformation lies in the growing emphasis on high-dividend yield investments by insurance funds, which have increasingly gravitated toward stocks offering robust dividendsStatistics from 2024 illustrate that companies targeted by insurance funds boasted average dividend yields exceeding 2%, with a significant portion yielding 4-6%—and nearly 20% of these companies surpassing a 6% yieldThe sharp contrast in dividend yield distribution compared to 2020 highlights a clear shift toward a high-dividend investment strategy.

This change is primarily driven by a recent adjustment to accounting standardsWith implementing the new financial instrument accounting standards (IFRS 9) in 2023, which introduced significant alterations in the classification of financial assets, insurance firms must now carefully consider their approach to equity investmentsStocks can either be categorized for fair value through profit or loss (FVTPL) or other comprehensive income (FVOCI). This critical decision impacts how stock price fluctuations affect reported earnings, consequently moderating the associated risks.

Historically, firms predominantly used the FVTPL classification, resulting in amplified sensitivity of their profit statements to stock price volatilityFor instance, in Q3 2023, a general market decline of about 4% coincided with a drastic profit drop exceeding 60% among these firmsConversely, after a rebound of 16% in Q3 2024, profit margins soared, showcasing the influence of market conditions on profitability.

This economic climate reinforces the need for stability, leading companies to adopt strategies such as long-term equity investments and high dividend pursuits

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