Recently, the yield on 30-year government bonds has fallen below 2.0%. As an absolute return institution primarily allocating to Fixed Income assets, the return on assets for Insurance is under pressure. On December 18, according to an announcement disclosed by the Hong Kong Stock Exchange, Ping An Asset Management increased its holdings by 67.255 million shares of China Construction Bank Corporation Listed in Hong Kong, at a cost of approximately 0.424 billion HKD. After this increase, Ping An Asset Management holds a total of 12.054 billion shares of CCB Listed in Hong Kong, accounting for 5.01% of the total CCB Listed in Hong Kong shares and 4.82% of the total share capital of the bank.

Guosen's non-bank views: The key to 'breaking the situation' for Insurance may concentrate on directions such as Equity Assets and long-term Private Equity. As long-term interest rates on the asset side fall, compounded with continuous fluctuations in the equity market, the asset side of insurance companies is significantly under pressure. Furthermore, the gradual maturity of high-quality non-standard assets poses certain pressure on enhancing investment returns for Insurance. Meanwhile, under the new financial instrument standards, fair value measurement, and its changes accounted for in current profits and losses (FVTPL) classes of equity assets exacerbate fluctuations in the income statement. Insurance companies can achieve a degree of accounting profit smoothing by taking stakes in listed companies, reducing the fluctuations in investment returns of equity instruments; however, taking stakes also requires insurance companies to have a strategic industrial perspective, combining first and second market views. We expect that in the future, insurance companies will further increase their holdings of listed companies with high dividends, high capital appreciation potential, and high ROE attributes, matching the long-term, stable demand on the asset side of the insurance industry.

1. Asset returns are under pressure, and Insurance begins a new wave of 'stake-taking craze'

Long-term bond interest rates continue to decline, further increasing the pressure on investment returns for Insurance. As of December 20, the yields on 10-year and 30-year government bonds are 1.71% and 1.96%, respectively, down 0.85bp and 0.87bp from the beginning of the year. Against the backdrop of relatively fixed costs of existing liabilities, the continued decline in long-term bond rates further increases the pressure on asset-liability matching for insurance companies. As an absolute return institution, insurance companies rarely conduct credit downgrades, thus further intensifying the 'asset shortage' pressure.

Since the beginning of this year, companies such as Great Wall Life, China Pacific Insurance, and Ruizhong Life have been increasing their stakes in high-quality listed companies, primarily in industries such as public utilities, transportation, and banking, which have high dividend yields and relatively stable ROE levels.

Recently, Ping An Asset Management has acquired stakes in the H shares of Industrial And Commercial Bank Of China and China Construction Bank Corporation, and the cost performance of Hong Kong stocks is gradually receiving attention from insurance funds. Since 2020, the rapid expansion of insurance liabilities due to high growth in increased value life insurance has sparked a rise in demand for dividend-type equity assets to meet asset-liability matching and investment return requirements, leading to a significant increase in the number of acquisitions of undervalued, high-dividend Hong Kong stock assets by insurance funds. In addition, insurance funds have further increased equity investment returns by taking advantage of the discount of Hong Kong stocks and the corporate income tax exemption policy.

2. Analysis of the motivations behind insurance capital acquisitions.

Under the new standards, asset classification for insurance companies has become more transparent, but equity investment may directly increase profit and loss volatility. On January 1, 2023, the insurance industry fully implemented IFRS 9 (hereinafter referred to as 'I9') and IFRS 17 (hereinafter referred to as 'I17'), which brought certain changes to the accounting measurement methods for liabilities and assets of insurance companies. The implementation of I9 significantly impacts the measurement of financial instruments in insurance funds' asset portfolios, allowing for more objective classification. According to accounting practices, asset classification is more transparent; I9 categorizes financial assets into three types: financial assets measured at fair value with changes in profit or loss (FVTPL), financial assets measured at fair value with changes in other comprehensive income (FVOCI), and financial assets measured at amortized cost (AC). The adjustment of new financial instrument standards directly increases the volatility of insurance companies' profit and loss statements. Under the new standards, more equity assets are categorized as FVTPL, such as funds and a large number of equity assets classified as fixed income that cannot pass the SPPI test, further amplifying profit and loss volatility. Additionally, according to the new financial instrument standards, once equity assets are designated as FVOCI, that decision is irreversible, with only dividends counted in profit and loss. When disposed of, the difference between selling price and purchase price cannot be included in profit and loss and must only go to retained earnings; thus, insurance companies classify a large number of equity assets as financial assets measured at fair value with changes in profit or loss (FVTPL), causing the impact of fair value changes of financial assets resulting from capital market fluctuations on the profit and loss statement to increase.

Long-term equity investments offer stable investment value over the medium to long term but must be cautious of impairment risks. According to the accounting standards for long-term equity investments, when holding voting shares of listed companies significantly influencing them (associated companies), insurance companies should confirm and measure using the equity method in the long-term equity investment approach. Insurance companies should recognize the investment income and other comprehensive income (OCI) for the equity they are entitled to in the changes in shareholders' equity arising from the net profit and other comprehensive income (OCI) generated in the A-share listing year, while adjusting the book value of long-term equity investments, and correspondingly reduce the book value of long-term equity investments when cash dividends are actually received. When insurance capital acquires a listed company, the stock price fluctuations of the listed company will not be reflected in the current profit and loss of the insurance company; only the current net income will influence the investment income of the insurance company. Therefore, from the perspective of accounting standards, the acquisition by insurance capital of a listed company serves to smooth profit fluctuations to some extent. However, it is also necessary to be aware of potential impairment loss risks when measuring investments using the equity approach of long-term equity investments. On one hand, from the viewpoint of accounting standards, insurance companies must assess the likelihood of potential impairment on the balance sheet date; if the market price of an asset has significantly declined during the period, it indicates possible impairment. For assets showing signs of impairment with recoverable amounts below their book value, an asset impairment loss must be provided, which could negatively affect the investment income of insurance capital. Therefore, insurance capital mainly chooses targets with low valuations, high dividend yields, and strong ROE that have stable medium- and long-term investment value, focusing investments in industries such as banking, public utilities, and infrastructure.

3. The transition period for the "Solvency II" Phase II has been extended, optimizing industry risk clearance.

On December 20, the National Financial Supervision Administration issued a notice regarding the extension of the transitional period for the solvency regulatory rules for insurance companies (hereinafter referred to as the "Notice"), clearly stating that "for insurance companies significantly affected by the switch between the old and new rules on solvency adequate ratio, communication with the Financial Supervision Administration and its dispatched agencies on the transitional period policy can be made before January 15, 2025, and the Financial Supervision Administration will determine the transitional period policy for each company by the end of February 2025."

The proportion of insurance funds in equity investments is restricted by solvency regulatory indicators, which to some extent affects the willingness and ability of insurance companies to increase equity investments. It is expected that corresponding policy adjustments will open up some space for insurance capital's equity allocation. The Solvency II Phase II project has stricter criteria for recognizing actual capital, raising the recognition standards for certain assets invested by insurance funds, resulting in a decrease in insurance companies' actual capital, thereby affecting their solvency adequacy ratio. Against this backdrop, the solvency adequacy ratio of insurance companies has broadly declined. After the implementation of the Solvency II Phase II rules, the constraints on the solvency in insurance companies' asset allocation have shifted from "soft constraints" to "hard constraints." It has become more challenging for insurance companies to balance capital occupation and returns on the asset side, requiring refined management to enhance capital efficiency, thereby adjusting equity allocation coefficients and providing space to further encourage insurance funds to allocate to equity assets. Furthermore, according to regulatory requirements, equity assets typically carry higher risk weights compared to fixed income assets, leading to greater capital consumption for insurance companies in equity allocations. According to the provisions of the "Classification of Risks in Insurance Assets (Draft for Comments)," the risk classification standards for equity assets are stricter compared to those for fixed income assets, resulting in increased capital consumption, which in turn limits the scale and enthusiasm of insurance funds entering the market. According to regulatory requirements, the supervisory proportion of insurance companies' equity assets may reach up to 45% of total assets as of the end of the previous quarter, while the current proportion of equity investment in the insurance industry is approximately 12%, indicating substantial room for growth. It is expected that with the extension of the transitional period, insurance companies represented by small and medium-sized firms may open up some equity allocation space, primarily focusing on investing in high-dividend special OCI stocks.