Guolian: How has the investment strategy of insurance companies evolved?

Guolian released a research report stating that with the continued implementation of favorable policies driving the stabilization of the real estate market and the recovery of the capital market, the investment income level of insurance companies is expected to marginally improve. This can in turn support a good growth trend in net profit for the full year of 2024. Currently, the valuation of the insurance sector is still relatively low historically, indicating potential for future recovery. One of the main factors influencing the investment strategy of insurance companies is policy, as regulations have gradually been lifted on restrictions for insurance companies to invest in funds, corporate bonds, overseas assets, stocks, real estate, unlisted equity, and other assets, leading to increased diversification of investable assets for insurance companies. Key points from Guolian are as follows: Policy is one of the main factors influencing the investment strategy of insurance companies. Since the restoration of the domestic insurance industry in 1979, regulatory authorities have issued a series of policy documents aimed at promoting the use of insurance funds. With regulations gradually easing restrictions on insurance companies investing in funds, corporate bonds, overseas assets, stocks, real estate, and unlisted equity, the types of investable assets for insurance companies have become more diversified. At the same time, as regulations guide insurance companies back to their core function of providing protection, the requirements for safety of insurance funds have increased. Currently, the insurance industry has formed an investment strategy primarily focused on fixed income assets, with equities and other assets playing a supplementary role. In the first half of 2024, the insurance industry's allocation to bank deposits, bonds, stocks, and securities investments was 9.3%, 47.5%, and 12.7%, respectively. Listed insurance companies' asset allocation structures show a "largely similar" characteristic. The asset allocation structures of listed insurance companies reflect regulatory policies and the preferences of insurance funds. Currently, the asset allocation structures of the four listed insurance companies Ping An, China Life, CPIC, and New China Life exhibit a "largely similar" feature. The "largely similar" aspect is reflected in their consistent asset allocation structures, with fixed income assets accounting for the majority of their portfolios. As of the first half of 2024, the allocation to bonds for the four listed insurance companies was around 50%-60%. The "small differences" are displayed in the allocation proportions to specific assets, with New China Life and China Life having relatively higher allocation to equity assets. As of the first half of 2024, the allocation to equity assets for New China Life, China Life, Ping An, and CPIC was 24.7%, 24.1%, 20.8%, and 18.6%, respectively. What are the common features of the investment strategies of listed insurance companies? The investment strategies of the four listed insurance companies exhibit three main characteristics: 1) After the implementation of the new regulations, there has been an increase in the allocation to bonds while strictly controlling credit risks. From 2023 to the first half of 2024, the average allocation to bonds for the four listed insurance companies has increased from 53.9% to 55.7%, with most of the held bonds having a credit rating of at least AA grade. 2) Under low-interest rates and the new regulations, stocks with low volatility and high dividends have become more favored by insurance funds. From 2023 to the first half of 2024, the proportion of FVOCI stocks to total stocks for the four listed insurance companies has increased from 19% to 25%. 3) The allocation to real estate and non-standard assets has decreased. From 2023 to the first half of 2024, the average allocation to investment properties, other fixed income, and equity assets for the four listed insurance companies has decreased from 1.03%, 13.43% to 0.95%, 11.66%. Investment recommendation: Maintain a "stronger than the market" rating for the insurance industry Stock recommendations: Ping An Insurance (601318.SH) (benefiting from improved expectations in asset side and real estate risk mitigation), China Life Insurance (601628.SH) (more stable liability side, greater flexibility on the asset side), China Pacific Insurance (601601.SH) (better fundamentals), New China Life Insurance (601336.SH) (greater flexibility on the asset side, more significant improvement in new business value rate), PICC P&C (02328) & The People's Insurance (601319.SH) (performance expected to improve quarter by quarter, rare business model). Risk warning: Economic recovery falls short of expectations; long-term interest rates decline; increased volatility in capital markets.