The Chinese insurance sector stands on the precipice of significant transformation as it looks towards 2024, marked by robust growth in investment scales and stable asset allocation structuresBy the end of the third quarter, the funds managed by insurance companies had surged to an impressive ¥32.2 trillion, reflecting a 14.1% increase year-on-year—the highest growth rate observed in four yearsThis surge is largely attributed to the booming sales of certain insurance products, such as whole life insurance policiesIn this respect, the funds from life insurers amounted to ¥28.9 trillion, with a 14.9% year-on-year increase, while property insurers saw their managed funds rise to ¥2.1 trillion, a 6.7% increase from the previous year.

The macro picture of asset allocation reveals that by the close of the third quarter, the combined investment in stocks and mutual funds by life and property insurance companies remained stable at 13.2% of managed fundsWhen comparing figures on a like-for-like basis, there was an absolute increase from the beginning of the year of approximately ¥638.79 billionBonds, representing 48.4% of total investments, continued to show a forgiving upward trend with an increase of ¥2.68 trillion in absolute terms since JanuaryMeanwhile, bank deposits experienced a slight decrease to 9.0% of the portfolio, and other investments accounted for a notable decline to 29.4%.

Large publicly listed insurance firms dominate the landscape, holding over half of the industry’s total market share yet demonstrating a cautionary tilt in their overall investment strategiesBy the end of the second quarter in 2024, the collective investment of major A+H share listed companies, which include notable names like China Life, Ping An, and China Pacific Insurance, reached an astounding ¥18.1 trillion—accounting for 58.5% of the industryThe allocation towards fixed-income assets amounted to 76.4%, where almost 60% were in bonds, outstripping the industry average

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Conversely, equity investments constituted 22.5% of their portfolios, broken down into 7.1% in stocks, 4.7% in funds, and 3.9% in long-term equity stakes.

The spotlight in the equity investment sphere continues to shine on high-dividend yielding assetsAccording to reports released by major listed insurers, the total stock scale categorized under Fair Value Through Other Comprehensive Income (FVOCI) at the end of June 2024 reached ¥355.22 billion, showcasing a net increase of approximately ¥96.54 billion since the start of the yearThis elevation nudged the share of equities within their portfolio up by 5.4 percentage points to 27.6%, with equities now comprising 2.0% overall.

Notably, the adherence to new accounting standards implies that these equities are not intended for trading purposes, as fluctuations in their fair value fall under other comprehensive income, preventing profits from transfer upon sale; only dividends contribute to income earningsTherefore, it can be anticipated that the assets within this category predominantly consist of high-dividend sharesFurthermore, given the likelihood that listed insurers are structuring part of their high-dividend stocks into Financial Assets at Fair Value Through Profit or Loss (FVTPL) to maintain positional flexibility and capture price differentials, and that unlisted insurers are presumably holding substantial portions of high-dividend stocks, the total high-dividend equity holdings in the insurance sector for the first half of 2024 are expected to be even higher.

Prospects for significant growth in high-dividend stocks throughout 2024 look positive, particularly after a substantial escalation in the first half of the yearHowever, a notable consolidation of valuation levels coupled with policy stimuli aimed at quickly rejuvenating market sentiments could indicate a slowing pace of investment in high-dividend stocks in the latter part of 2024. Nevertheless, from December onwards, a decline in long-term interest rates alongside other market dynamics has highlighted the advantages of stable, high-dividend assets, compounded by the influx of new premiums from end-of-year policy sales and proactive adjustments by unlisted firms gearing up for compliance with new accounting regulations, signaling a clear demand for continued investment in such stocks.

Specifically, the risk-weighted investments from insurers are prominently targeted within sectors like banking, telecommunications, and utilities, where the average dividend yields are on a continual upslope

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Data compiled from insurance company holdings at the end of Q3 indicates that the top five sectors for insurance investments are predominantly banking (47%), real estate (8%), telecommunication services (7.1%), capital goods (6.9%), and utilities (6.2%). Notably, the concentration in banking and real estate has witnessed a gradual reduction since Q1 2024, while utilities, transportation, and energy sectors have seen increased investments.

Among the currents shaping the investment landscape is a noticeable resurgence of stakes being taken in various firms, with 2024 marking a record peak for shareholding activities by insurance companies since 2021. Influenced by alterations in accounting guidelines, fluctuating asset allocation requirements, and evolving market conditions, there were 20 notable shareholding occurrences reported this year aloneThis trend represents a stark contrast from the previous methods adopted during 2015’s "asset-driven liabilities" paradigm and the subsequent investment approaches by leading insurers focusing on long-term value.

One of the overarching reasons driving this wave of acquisitions is intricately linked to the newly executed standardsAcquisitions made as per the new guidelines allow insurers to insulate their reported earnings from market volatility, yielding a more stable income profileFurthermore, the push for acquiring stakes in firms that share a symbiotic relationship with their own business model has emerged as a key motivator for insurers looking to solidify strategic and operational synergies.

In addition, insurance companies are markedly increasing their investments into Exchange Traded Funds (ETFs), recognizing their inherent liquidity and reduced volatility traitsWith the new regulations in place, where investments in mutual funds must be recorded under the FVTPL category, the interplay of fair value changes with current earnings becomes even more criticalHence, ETFs gain traction due to their lower volatility, effective risk diversification, ease of trading, and transparent valuations aligning perfectly with the insurance sectors' liquidity requirements and long-term return objectives.

In the first half of 2024, insurance capital invested in ETFs soared to ¥177.4 billion, an impressive 13.5% uptick from the start of the year

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