Soochow: Why has the trend of institutional investors increasing their holdings in listed companies resurfaced?

Soochow released a research report stating that 2024 is the third wave of insurance funds raising stakes in the past decade, mainly focusing on H-share high dividend stocks. Since 2023, traditional insurance products such as increasing endowment insurance have been selling well, driving rapid growth in industry premiums and creating a significant demand for asset allocation on the asset side. With domestic long-term interest rates continuing to decline, insurance companies face significant pressures from interest spread losses and asset shortages, requiring them to find suitable asset allocations. Starting from 2023, listed insurance companies began implementing new financial instrument standards, where stock assets must be chosen between FVTPL and FVOCI. Currently, listed insurance companies mainly invest in stocks through FVTPL, and stock market fluctuations significantly impact current net profits. By opting for long-term stock investments or high dividend (OCI) strategies, this issue can be moderately improved, and the current wave of raising stakes reflects the execution of the aforementioned strategies. Key points from Soochow are as follows: 2024 is the third wave of insurance funds raising stakes in the past decade 1) Insurance stake raising refers to insurance companies holding or jointly holding 5% of the shares of listed companies with their related parties and acting in concert, and any subsequent additional holdings of 5% must be disclosed according to regulations. 2) Between 2015 and 2024, there were a total of 162 instances of insurance companies raising stakes, with peaks in 2015 (62 times), 2020 (26 times), and 2024 (20 times). The characteristics of the three waves of raising stakes are different, with the main focus in 2024 being on H-share high dividend stocks 1) 2015: Under the asset-driven liability model, small and medium-sized insurance companies boldly surged. Before 2015, small and medium-sized private insurance companies represented by Heng An Life, CHINA BEST Life, and Anbang Insurance were the main players in raising stakes, with the targets concentrated in retail, real estate, and banking industries, and some raising stakes for the purpose of controlling the invested companies. The aggressive stake raising behavior in 2015 was mainly driven by the rapid expansion of universal insurance business, loose policy environment, and convenient accounting standards, followed by a tapering off with the tightening supervision of universal insurance and insurance stake raising. 2) 2020 vs. 2024: Shift from large insurance companies to leading medium-sized insurers, weakening of high ROE characteristics and highlighting of high dividend characteristics. In terms of stake raising entities, large insurance companies such as Ping An and China Life were the main players in 2020, while medium-sized insurance companies such as Changcheng Life and Rui Zhong Life were the typical participants in 2024. In terms of target characteristics, both waves of stake raising mainly focused on H-share targets, but the industries involved shifted from banking, non-ferrous metals, and real estate in 2020 to utilities, transportation, and environmental protection in 2024. The high ROE characteristics of companies raised in 2024 weakened, while the high dividend characteristics were significant. In terms of investment methods, in 2024, stake raising was mainly done through secondary market purchases, with more self-owned funds involved. Both waves of stake raising were mainly carried out through secondary market purchases, but in 2020 there were also cases of cornerstone investments in IPOs and subscription of additional issuance, while in 2024, the majority of investments were made in the secondary market. In 2024, 35% of stake raising cases used self-owned funds, mainly led by Changcheng Life, while in 2020, investments were mainly made using insurance liability reserve funds. The intent of insurance stake raising mainly falls into two categories: strategic cooperation and financial investment 1) Strategic cooperation: Promoting business synergy through equity ties or control. Taking China Life Insurance for example, since 2018, they have raised stakes in Wonders Information six times and became the largest shareholder with a current ownership percentage of 20.34% in 2019. Through close equity ties, China Life Insurance can leverage the advantageous resources of Wonders Information in areas such as healthcare and smart cities for business synergy. 2) Financial investment: Mainly obtaining investment returns through long-term equity investments or holding FVOCI. Taking Changcheng Life as an example, from 2023 to 2024, the company has raised stakes in seven listed companies and also continued to increase stakes in two H-share companies. Changcheng Life primarily favors local state-owned enterprises with high ROEs in stake raising, and generally attains board seats, with stake raising strategies aimed at improving profit performance. Multiple factors have fueled the current wave of insurance stake raising 1) High premium growth + declining interest rates lead to interest spread losses and asset shortage pressures for insurers. Since 2023, traditional insurance products such as increasing endowment insurance have been selling well, driving rapid growth in industry premiums and creating a significant demand for asset allocation on the asset side. With domestic long-term interest rates continuing to decline, insurers face significant pressures from interest spread losses and asset shortages, requiring them to find suitable asset allocations. 2) Under the new accounting standards, stock investments face a dilemma between returns and volatility. Since 2023, listed insurance companies have begun to implement new financial instrument standards, where stock assets must be chosen between FVTPL and FVOCI. Currently, listed insurance companies primarily invest in stocks through FVTPL, and stock market fluctuations significantly impact current net profits. By opting for long-term stock investments or high dividend (OCI) strategies, this issue can be moderately improved, and the current wave of stake raising reflects the execution of the aforementioned strategies. 3) Insurance stake raising needs to consider solvency pressure. Under the Solvency II framework, long-term equity investments and market risks from certain stock investments have increased, consuming more capital and potentially leading to a decrease in solvency, which could become an important factor limiting insurance stake raising. Risk warnings: Structural downward trend in long-term interest rates; continuous sluggish stock market; new business growth not meeting expectations.