As the pressure on investment returns intensifies due to a prolonged volatility in equity markets, insurance companies are feeling the heatThe yield on 30-year government bonds recently dipped below 2%, compounding these challenges for insurers that predominantly invest in fixed-income assetsThese market conditions are exacerbated by the imminent maturity of high-quality non-standard assets, which further strains investment gainsPredictions indicate that such circumstances will compel insurance companies to increasingly invest in publicly listed firms that offer high dividends, substantial capital appreciation potential, and high return on equity (ROE), aligning with the long-term and stable demand of the insurance sector.

A recent announcement by the Hong Kong Stock Exchange revealed that Ping An Asset Management has drastically stepped up its ownership of Construction Bank H-shares, acquiring over 67.25 million shares at a cost of approximately HKD 424 million

Advertisements

This move resulted in Ping An holding a total of 12.054 billion shares of Construction Bank's H-shares, accounting for 5.01% of its H-share total and 4.82% of its overall share capitalThis significant acquisition illustrates the ongoing strategy to bolster investment returns amidst market volatility.

The relentless decline in interest rates, coupled with a volatile equity market, has severely strained the asset side of insurance companiesThe recent changes in financial accounting rules mean that equity assets measured at fair value and recorded as current profit and loss (FVTPL) can introduce more variability into financial statementsInsurance companies have found that acquiring stakes in publicly listed firms allows for some smoothing of accounting profits, helping to mitigate the volatility associated with equity investment returnsHowever, this strategy necessitates a strategic industry outlook, incorporating perspectives from both the primary and secondary markets.

The key to resolving the current challenges in investment returns for insurance funds may lie in focusing on equity investments and long-term stakes

Advertisements

Looking ahead, it is anticipated that insurance companies will further ramp up their investments in high-dividend, high-capital gain potential, and high-ROE listed firms to match the long-term, stable needs of the insurance industry.

The recent uptick in investment pressures relates to the “absolute return” strategy favored by many insurance funds, which tends to eschew downward credit movementsGiven that the costs of existing liabilities remain largely fixed, these funds are now facing increasing pressure on investment returnsAs pressures mount, a new wave of equity buying activities by insurance funds has commenced.

Since the beginning of 2024, several insurance companies, including Great Wall Life, China Pacific Insurance, and Ruijun Life, have significantly increased their ownership stakes in quality publicly listed companies, focusing primarily on industries such as public utilities, transportation, and banking, which are known for their high dividends and stable ROE levels.

Notably, Ping An Asset Management has recently made significant moves by acquiring stakes in both the H-shares of Industrial and Commercial Bank and Construction Bank

Advertisements

The growing importance of cost-effectiveness in Hong Kong stock configurations is evident hereSince 2020, as insurance liabilities surged due to strong growth in endowment-type insurance products, there has been a marked increase in the demand for dividend-paying equity assets to ensure an adequate match between assets and liabilities while satisfying return on investment expectationsConsequently, the frequency of acquiring undervalued, high-dividend Hong Kong stocks by insurance funds has substantially increasedMoreover, insurance funds have capitalized on the discount advantage of Hong Kong stocks and the tax-exempt status of corporate income, further boosting equity investment returns.

With the implementation of new financial accounting standards, the clarity of asset classification for insurance companies has improved, although the impact of equity investments may lead to increased fluctuations in income statements

• Bank-Resold Funds Ignite New Price War
• Rising Bankruptcy Rates in the U.S.
• Zeekr Targets SUV Market Again with New Model
• Record Online Sales During Holiday Shopping Season
• Acceleration of Machine Tool Industry Chain Evolution

The new standards, specifically IFRS 9 and IFRS 17, came into effect on January 1, 2023, introducing significant changes in how liabilities and assets are measuredIFRS 9 has particularly affected the measurement of financial instruments, as it introduces a more objective classification scheme.

Under the new accounting rules, financial assets are categorized into three kinds: those measured at fair value with changes recorded in current profit and loss (FVTPL); those measured at fair value with changes recorded in other comprehensive income (FVOCI); and those measured at amortized cost (AC). This reclassification has direct implications on the volatility of profit and loss for insurance companies, with a significant increase in the number of equity assets being designated as FVTPL, which will directly amplify fluctuations in their income statements.

Furthermore, once classified as FVOCI, the decision for equity assets is irreversible

Only dividends can be recorded in profit or loss, whereas gains or losses from changes in fair value during sales can only be recorded in retained earnings, making the impacts of market fluctuations on profit statements more significant when many equity assets are classified under FVTPL.

Long-term equity investments inherently possess stable, long-term investment value, but the risks of impairment must be handled with careAs per the accounting standards for long-term equity investments, when an insurance company possesses voting shares in a listed company that have a significant impact, they must recognize and measure these using the equity methodInvestment gains and other comprehensive income are recognized based on the changes in owners’ equity related to profits and comprehensive income (OCI) generated by the listed A-share annual performance, and the book value of long-term equity investments is adjusted accordingly.

When insurance funds acquire shares in publicly listed companies, price fluctuations in these stocks do not immediately impact the net profit of the insurance company

Only the net profit accrued in that period will affect the investment gainsTherefore, from an accounting perspective, acquiring substantial stakes in publicly listed firms can help stabilize profit fluctuations, though the consideration of possible impairment losses in measuring investments with the equity method is crucial.

The implications of accounting standards require insurance companies to assess whether their assets may be impaired at the end of the reporting periodNotably, sharp declines in the market value of assets may signal potential impairmentsWhen there is evidence of impairment, and the recoverable amount falls below the book value, a provision for asset impairment losses must be recognized, potentially leading to negative impacts on investment returnsThis leads insurance funds to prefer undervalued, high dividend yield, and high ROE investment targets, focusing primarily on sectors such as banking, public utilities, and infrastructure.

The transitional period for the second phase of the solvency II directive is being extended, allowing communications about policy with financial regulatory agencies and branches until January 15, 2025. By the end of February 2025, the regulatory authorities will determine the transition policies on a case-by-case basis.

Insurance fund investment in equity is also constrained by solvency regulatory indicators, which somewhat affects the willingness and capacity of insurance companies to increase equity investments