A-Share Market Eyes 2025 Influx of Funds

The movement of financial markets has always been closely tied to the influx of new capitalEach time a market begins to warm up, it is typically motivated by the injection of additional funding, which in turn influences the overall direction and style of that marketRecently, with the news conference held by the State Council Information Office on January 23, the future appears to be clearer for investors and market participants alike.

Among the various players in the financial ecosystem, a significant role has been allocated to insurance capitalThis capital has been identified as a crucial force in pushing long-term investment into the stock marketPolicymakers have emphasized the following two points regarding insurance fund allocation:

• First, there is a push to accelerate the rollout of a second pilot program for long-term stock investments by insurance funds, with a targeted scale of no less than 100 billion yuan.
• Second, large state-owned insurance companies are being steered toward increasing their scale and proportion of investment in A-shares, aiming for 30% of annual new premium income to be directed towards A-share investments starting from 2025.

In fact, since last year, insurance capital has been actively purchasing shares in the A-share market

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Data reveals that in 2024, insurance companies have made 20 significant equity investments—raising their stake in certain companies to above 5%, marking the third wave of investment spree from insurance capital in the past decadeThe previous rounds occurred in 2015 and 2020.

As of the third quarter of 2024, the total balance of funds utilized by insurance companies reached a staggering 32.15 trillion yuanOut of this, the combined investment in stock market by property and life insurance companies rose to 2.33 trillion yuan, which indicates a considerable growth of 20% compared to the 1.94 trillion yuan noted at the end of 2023.

It is essential to recognize that this trend of insurance capital buying into A-shares results from both policy incentives and an inevitable demand based on their own business developmentOver the last few years, traditional savings-type insurance products, notably those offering guaranteed returns, have been in high demand

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This has dramatically increased domestic premium income, which is projected to grow from 4.5 trillion yuan in 2020 to approximately 5.6 trillion yuan by 2024. The rapid expansion in premium scale has generated a significant need for asset allocation and has demanded higher returns from investments.

However, the backdrop has not been entirely favorableSince 2021, domestic interest rates have been on a downward trajectory, with the yield on ten-year government bonds dropping below 1.7%. This decline puts insurance companies under pressure due to margin loss and a scarcity of investable assets, prompting them to seek new investment avenues to boost returnsIn this context, the stock market emerges as almost the only viable option.

On one hand, the A-share market is massive, with a total market capitalization exceeding 90 trillion yuan and daily trading volumes surpassing 1 trillion yuan

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This scale addresses the need for liquidity and investment space for insurance capitalOn the other hand, this market houses some of the country’s best-performing companies, boasting top-tier asset quality and profitability, meeting the high standards that insurance capital holds.

The necessity for insurance capital to invest in the stock market is matched by the stock market's desire for insurance investmentCurrently, the concept of "new premium income" lacks a precise definition, leaving room for interpretation between several possibilities, including new single-premium sales, net cash inflow from operations (total premium income minus claims and expenses), and the overall and annual incremental total premium incomeSince total premium income can potentially exhibit negative growth, the more feasible approaches tend to focus on the first three definitions.

When considering net cash inflow, the top six insurance companies are expected to generate approximately 0.89 trillion yuan by 2024 combined; thus, a 30% allocation corresponds to roughly 270 billion yuan in potential capital for stock investment

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Alternatively, if examining new single-premium figures, this same group could see about 1.76 trillion yuan leading to potential contributions of 530 billion yuanBy focusing on total premium income, their combined figure may reach up to 3.15 trillion yuan, suggesting a possible annual contribution to the stock market of several hundred billion yuan.

Since the implementation of the “924” policies, financial regulatory bodies have made continual efforts to invigorate the capital marketRegardless of the policies rolled out, the pivotal remaining factor is whether new capital can be injected into the marketPresently, funds like insurance, with long-term investment considerations and high stability, align perfectly with the qualities sought after in the A-share marketUnderstanding the investment preferences of this capital group yields practical insights for other investors.

A growing focus on high dividend yields among insurance investments has become increasingly evident

Data shows that in 2024, companies targeted by insurance capital typically offered dividend yields exceeding 2%, with nearly 30% of those yielding between 4% and 6%, and about 20% surpassing 6%. This marks a significant rise compared to 2020’s figures where only 23.1% and 7.7% achieved those yield levels.

Such a decisive pivot towards high dividends can be traced back to changes in accounting standardsUnder the new financial instruments standard (IFRS 9) implemented for listed insurance companies starting in 2023, and expected for unlisted companies by 2026, the classification of financial assets has undergone critical revisionsA major distinction lies in the accounting treatment for equity assets; insurers must choose between Fair Value Through Profit or Loss (FVTPL) and Fair Value Through Other Comprehensive Income (FVOCI). The former could amplify profit fluctuations, directly impacting annual performance reports, while the latter provides a steadier stream of recognized income through dividends only.

Historically, many insurers primarily utilized FVTPL, resulting in significant sensitivity to market fluctuations

For example, when the overall stock market dipped by about 4% in the third quarter of 2023, insurers saw their net profits plummet by over 60%. Conversely, in a 16% rise the next year, profits surged over fivefoldFinancial firms like insurers prioritize stabilit, necessitating a shift towards two primary strategies: long-term equity investments and high-dividend stocks.

It’s worth noting that the new standards do not pertain to long-term equity investments, allowing insurers to pivot their stock portfolio toward long-term holdings, thereby bypassing immediate volatility impactsThe accounting methods for long-term investments encompass cost and equity methodsUnder the equity method, investors can recognize income based on their ownership proportion regardless of dividend payouts, aligning earnings with the underlying business performance.

In practice, to classify an investment as long-term, significant influence over the investee is required, which explains the current aggressive equity-buying behavior of insurance firms

In contrast, pursuing high dividend yields entails fewer stringent requirements, wherein insurers merely need to target well-established companies that consistently offer high dividends, recording these under FVOCI to ensure stable returns.

As of mid-2024, primary listed insurers have reported a net increase of stocks worth 355.22 billion yuan, with further growth anticipated for the yearUnsurprisingly, high dividend assets like the banking sector are attracting significant investment interest from insurance firmsAs seen in 2024, notable profit spikes have emerged, with key firms like China Pacific Insurance reporting a staggering 65.5% increase in net profit for the first three quarters, while China Life reported a 173.9% jump, with their successes largely attributed to performance in capital markets.

The promising prospects presented through such profits undoubtedly reinforce the commitment of these firms to continue to pour investment into A-shares moving forward into 2025 and beyond