Insurers’ Dilemma: Challenges in Both Stock and Bond Investments (AI Translation)

【周刊提前读】险企投资左右两难 股债皆有挑战

[para. 1][para. 2] The anticipated economic landscape for insurance capital in 2024 appears promising, with positive movements in both the bond and stock markets, as well as stability in non-standard sectors. Data shows that in September 2024, the Shanghai Composite Index recovered from below 2,700 points to 3,351.76 by year-end, reflecting a 12.67% annual increase. Concurrently, the "bond bull" market was sustained by declining interest rates, as revealed by a drop in the 10-year government bond yield to below 1.6%.

[para. 3][para. 4][para. 5] Thanks to these conditions, insurance funds saw their investment returns improve significantly, with a comprehensive investment return rate of 7.16% by the end of Q3 2024, up 3.88 percentage points year-over-year. Prominent insurance firms such as New China Life Insurance and China Pacific Insurance reported considerable increases in net profits for 2024 due to their equity and bond investments. However, post-October 2024, the stock market plateaued, emphasizing the impact of ongoing market performance on future investment returns for insurance funds.

[para. 6][para. 7][para. 8] Addressing long-standing issues in the A-share market, a collaborative "Implementation Plan" aims to boost long-term capital inflow, thus stabilizing the stock market. Historically plagued by insufficient long-term capital and a heavy retail investor presence, the market reforms encourage increased investments from state-owned insurance companies and the establishment of long-cycle assessment systems to promote long-term equity investment.

[para. 9][para. 10][para. 11] The insurance sector's investment strategies shifted significantly post-2015, focusing more on high dividends and long-term growth rather than short-term speculation. Experts argue that fostering a healthy capital market environment is essential for attracting long-term investments, advising on relaxing overseas investment restrictions and utilizing derivatives to hedge against market volatility.

[para. 12][para. 13] Following the policy announcement, specific measures were outlined to increase medium- to long-term capital investments in A-shares, with large insurance companies expected to allocate 30% of new premiums to these investments starting in 2025. A-State Council press conference emphasized this policy direction, projecting A-shares to receive substantial long-term capital annually.

[para. 14][para. 15][para. 16] The policy also unveiled plans for flexible long-term equity investment pilots for insurance funds, beginning in 2025, with initial investments reaching up to 100 billion yuan. Assessment cycles for state-owned commercial insurance companies have been extended to three to five years, reducing the emphasis on annual performance indicators and encouraging larger-scale long-term investments. These changes aim to enhance investment returns by aligning with long-term market trends, as seen with the National Social Security Fund's strong historical returns.

[para. 17][para. 18][para. 19] Insurance funds are signaling increasing diversification into equities to heighten returns within a context of declining market interest rates. Insurers aim to identify high-dividend corporations over short-lived trends, with companies like Ping An Insurance and Great Wall Life Insurance leading these investments.

[para. 20][para. 21] In 2024, an emphasis on high-dividend stocks and long-term investments dominated insurance strategies, considering these akin to fixed-income assets. Notably, insurance capital was deemed a crucial force behind the surge in banking stocks, which had dividend yields surpassing 8%.

[para. 22][para. 23] Despite diversification efforts, insurance companies face dilemmas in achieving desired returns, prompting them to ponder allocation strategies amidst regulatory changes urging more substantial market presence through equity investments. Long-term capital allocation increases are predicted as policy mechanisms evolve.

[para. 24][para. 25] The insurance industry continues to face overarching investment pressures amid high liability costs and reduced yields from traditional fixed-income avenues. Exploring overseas investments, expanding product offerings, and employing hedging strategies are recommended for maintaining stable returns.

[para. 26][para. 27] The insurance industry is becoming increasingly open to international investments and derivative market tools, with interest in sectors like gold contracts. Emphasizing Japanese insurers' experience, which achieved superior returns through overseas investments and strategic hedging, analysts suggest similar approaches can be adopted, given that Chinese insurance funds have only utilized a fraction of their overseas investment quota as of 2023.