In recent discussions regarding China's financial landscape, the focus has turned to increasing the proportion and stability of investments made by commercial insurance funds in the A-share marketThe National Financial Regulatory Administration has reported that insurance capital invested in stock markets and equity funds has surpassed a staggering 4.4 trillion yuanThis development reflects a pivotal shift in how insurance companies approach asset allocation, underscoring a broader trend within the financial sector aimed at enhancing returns amid changing market conditions.

Asset allocation strategies have traditionally favored fixed-income assets, recognized for their stability and lower risk profiles, often serving as a "safety anchor" for insurance companiesWhile the share of equity investments has seen an increase, there remains considerable room for growth in this area over an extended period

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Notable players such as China Life Insurance, China Pacific Insurance, and New China Life have all expressed intentions to elevate their proportion of equity investments, as highlighted in their 2024 Q3 financial reportsAt a recent press conference held by the State Council, Deputy Director of the Financial Regulatory Administration, Xiao Yuanqi, emphasized the need for insurance funds to steadily raise their stake in the stock marketHe encouraged large state-owned insurance firms to lead by example, suggesting a target where 30% of annual new premiums should be allocated to equity investmentsThe goal is to consistently improve the investment ratio of insurance capital in the stock market, thereby fully utilizing their roles as institutional investors that can significantly contribute to long-term value.

Raising the ratio of equity assets in their portfolios is an objective driven by necessity for insurance companies to effectively match assets and liabilities

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The rigid cost associated with liabilities, particularly for life insurance products, adds pressure to insurersFor instance, while the preset interest rates have faced numerous reductions over time, long-term policies sold still maintain a stable predetermined rate of approximately 3%. Coupled with various operational costs – including personnel expenses, marketing costs, and office rentals – the pressure on insurance capital to seekbetter returns is considerableThis dual requirement compels insurers to allocate funds towards safe, stable fixed-income assets like government bonds and bank deposits to protect capital and ensure basic returns, while also striving to enhance investment yields to cover the persistent liabilities associated with their financial obligations.

However, a prolonged decline in interest rates in the market has severely impacted fixed-income assets

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What used to be seen as reliable sources of income – government bonds, bank savings – are now yielding increasingly diminished returns, making it challenging for insurance funds to meet their investment yield expectations and maintain a long-term stable return profileIn stark contrast to this uncertainty in fixed-income investments, the value of equity investments in the capital markets has become more apparentWith ongoing improvements in the capital market structure and an increasingly robust regulatory framework, stock prices of many high-quality companies have started aligning with their intrinsic valuesEmerging sectors characterized by high growth potential, including renewable energy and artificial intelligence, have begun to attract attention, giving insurance funds a golden opportunity to diversify into equity assetsBy investing in high-quality stocks or equity funds, insurance firms can share in corporate growth dividends while simultaneously optimizing their investment portfolios, resulting in improved returns and better alignment between their assets and liabilities.

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The firms taking stakes range widely, from large insurance companies to smaller enterprises, and the target companies span various sectors including public utilities, banking, and energy, characterized by their high dividend yields and stable profit distributionsThis trend reflects a strategic alignment with the growing recognition among insurers of the importance of diversifying their portfolios to include more equities.

Moreover, the operational performance assessment of state-owned commercial insurance companies will see a longer review cycle of three years or more, with annual net asset return measurements capped at a maximum of 30% weightThe weight assigned to performance indicators for three to five-year assessments will not fall below 60%. This approach underscores a commitment to establishing sustainable investment practicesThe push for a second phase of long-term stock investment pilots for insurance capital is also underway, with plans to gradually broaden the range of participating institutions and increase capital inflows.

Equities typically exhibit higher volatility, but extending the investment horizon and adjusting asset allocations judiciously can mitigate associated risks effectively

To increase the proportion of equity investments, insurance capital must integrate a long-term evaluation system to avoid short-sighted decisions by asset management firms purely driven by immediate profit motivationsThis refinement in assessment mechanisms fosters an environment conducive to patient capital, enabling insurers to invest with a long-term focus.

Looking forward, the shift towards enhancing equity investment not only stands to boost investment returns but also significantly fortifies the insurance sector's resilience against risksThis approach is crucial for nurturing a capital market ecosystem where medium- and long-term funds are "willing to come, can stay, and can thrive." Through timely demonstrations and pilot projects with insurance capital, other funds like basic pension insurance and enterprise annuity funds could also find their way into the capital marketsThis influx promises a steady stream of enduring funds, helping stabilize market expectations and contribute to the overarching goal of fostering healthy capital market development.