The Zhitong Finance App learned that Dongwu Securities released a research report saying that long-term insurance capital entry and equity market growth are prerequisites for co-prosperity and coexistence, and that insurance capital needs to find a balance between solvency ratio, investment income goals, and financial goals that match assets and liabilities. As for 2024, insurance capital still has the motivation to allocate long-term capital in response to regulatory calls for long-term capital to enter the market. The points of disagreement are solvency, impact on income statements, and profit effects. Investment opportunities in insurance stocks are gradually shifting from the left to the right. Currently, what hangs above the valuation of life insurance stocks is still the sword of Dharma Clix. Concerned about the possibility that 2H24 interest rates will be lowered again, the safe-haven advantage of financial insurance stocks will continue. The active capital market policy continues to be strengthened, and strict supervision is being carried out to clear up market chaos. As the foundation of the long-term capital entry guarantee system, insurance stock investment income expectations have improved. We recommend China Taibao (601601.SH), China Financial Insurance (02328), and Xinhua Insurance (601336.SH), which is reversed at the bottom.

Foreword:

After the July 24 Politburo meeting, the Securities Regulatory Commission collaborated with various ministries and commissions to call for active entry of long-term funds represented by insurance funds into the market. As an incremental capital with high expectations in recent years, whether insurance capital can continue to increase stock allocations has become a hot topic of discussion among investors.

▍ The main views of Dongwu Securities are as follows:

Continued low interest rate environment, combined with concentrated maturity of non-standard high-yield assets in stock, insurance capital reallocation yields are under significant pressure.

The overall decline in the central level of long-term interest rates, represented by ten-year treasury bonds, has declined from a 3.0% pivot point before the pandemic to around 2.3% now. Under IFRS 9, the original AFS account was abolished. Although FVOCI equity instruments can mitigate the impact of short-term fair value fluctuations on income statements, they are unable to deliver on capital gains brought about by the continued rise in underlying assets, and the company faces a trade-off between profit growth and stability.

For large insurers with lower debt costs, the comparative advantage of high-dividend assets gradually became apparent. However, for small and medium-sized insurers with high debt costs, the obstacle to allocating high dividends comes from dividend strategies or difficulties in meeting the requirements of absolute yield assessments and “non-transactional” practical judgments.

Insurers should be driven by debt, with solvency as the core indicator, committed to creating stable investment returns across the macroeconomic cycle to meet debt demand, and strictly and disciplined implementation of tactical asset allocation to accumulate high-quality assets to cope with the current allocation of high-quality assets.

From solvency constraints to analyzing the motivations for allocating stocks, insurance capital dances with shackles. There is an essential difference between time selection and the underlying logic of stock selection and traditional asset management institutions. From the perspective of investment income target analysis, stocks are a major asset allocation direction with enhanced insurance returns, and “stable dividends” may be more important than “high dividends.”

Judging from the review, it is still very difficult for insurance capital to obtain absolute returns on A-shares under a bear market. As an important incremental capital in the current market, the insurance capital heavy tradable stock industry is mainly concentrated in the banking, real estate, utilities, food and beverage, and communications industries. Based on asset-liability matching analysis and allocation of stock drivers, the marginal loss absorption function of contract services has been increased under the new standards, which is beneficial to the balance and liability matching of insurers.

Calculation of the entry of additional funds into the market for insurance funds.

Under a neutral assumption, it is estimated that from 2024 to 2026, insurance capital stock balances will account for 12.5%, 13.0%, and 13.5% respectively, increasing year by year to around 15.0% in 2030. The end-of-period share base balances will be 3.74, 4.18, and 4.64 trillion yuan, of which the stock investment balances will be 2.24, 2.51, and 2.78 trillion yuan, respectively. At the same time, according to the neutral (20% increase in the current year's share base) assumption, the industry's OCI will be allocated an incremental capital of 817, 882, and 92.9 billion yuan from 2024 to 2026.

A few suggestions on insurance capital entering the market.

1) Optimize equity risk factor solvency standards, such as granting risk factor certification concessions to stock assets that exceed a certain dividend rate and have been held for more than a certain period of time; 2) it is recommended that each level level as stipulated in the former Banking Insurance Regulatory Commission's “Notice Concerning the Optimization of Insurance Companies' Equity Asset Allocation Supervision” be lowered by 25% or 50%; 3) Relaxation of FVOCI certification of public funds to encourage insurance capital to lay out a wide range of high-growth equity portfolios through a market-based FOF/MOM entrustment mechanism.

Risk warning:

Stock allocation dynamics were blocked under multiple restrictions, the profit effect of the stock market was lower than expected, and actual estimates were lower than expected.