CMSC: Five Questions and Five Answers about Insurance Companies Investing in Gold

CMSC released a research report stating that on February 7th, the China Banking and Insurance Regulatory Commission issued a notice on conducting a pilot program for insurance funds to invest in the gold business. The pilot program for insurance funds to invest in gold business will be launched from the date of the notice's release. The notice requires pilot insurance companies to invest in gold with a total book value not exceeding 1% of the company's total assets at the end of the previous quarter. It is estimated that the 10 pilot companies will bring approximately 200 billion yuan of investment funds to the gold business market. In the current environment, exploring the pilot program for insurance funds to invest in gold business will help relax restrictions on investment types, alleviate asset shortage pressure, and is an important measure to deepen the reform of insurance fund utilization. The industry's "recommended" rating is maintained. The main points of the CMSC are as follows: On February 7th, the China Banking and Insurance Regulatory Commission issued a notice on conducting a pilot program for insurance funds to invest in the gold business, which will be launched from the date of the notice's release. The following points are discussed in response to market concerns. 1. What is the background of the introduction of this policy? Against the background of low interest rates and asset shortage, insurance companies' investments have been under continuous pressure in recent years, especially due to factors such as the decline in real estate prices and the securitization of local government debts, leading to a significant decrease in the level of alternative asset allocation. Coupled with the pressure of rigid liability costs, long-term potential interest rate spreads have become a major challenge facing the industry. As an important channel for diversified asset allocation, gold has various advantages such as risk diversification, value preservation and appreciation, hedging properties, and strong liquidity, and its low correlation with other assets also helps in building a stable and effective investment portfolio, but it is subject to strict restrictions in the investment use of domestic insurance funds. Therefore, there has been increasing calls in recent years to open up insurance funds for investment in the gold business, and policy levels have been continuously exploring possibilities. In February 2020, "Opinions on Further Accelerating the Construction of Shanghai International Financial Center and Financial Support for the Integrated Development of the Yangtze River Delta" proposed exploring pilot projects for insurance funds to invest in gold and other commodities through Shanghai's relevant exchanges; in May 2021, "Opinions on Accelerating the Construction of Shanghai Global Asset Management Center" proposed promoting insurance funds to invest in gold through Shanghai's related exchanges; In June 2024, Li Yunze, Party Secretary and Director of the China Banking and Insurance Regulatory Commission, stated at the 15th Shanghai Lujiazui Finance & Trade Zone Development Forum that active exploration will be made for insurance funds to pilot invest in Shanghai Gold Exchange gold contracts and related products. The bank believes that this formal supervision, which confirms that pilot insurance companies can engage in gold business with the purpose of medium- to long-term asset allocation, will help broaden the channels for the use of insurance funds, optimize insurance asset allocation structure, further promote insurance companies to enhance their asset-liability management level, and promote the high-quality development of the insurance industry. 2. What is the business scope and participating entities of the pilot investment in gold? (1) Scope of pilot investment in gold: Gold spot live contracts, gold spot deferred delivery contracts, Shanghai gold centralized pricing contracts, gold inquiry spot contracts, gold inquiry swap contracts, and gold lending business listed or traded on the main board of the Shanghai Gold Exchange. (2) Participating entities in the pilot project: PICC Property and Casualty, China Life Insurance, Ping An Life, Sinosure, Ping An Property & Casualty, Ping An Life, Taiping General Insurance, Taiping Life Insurance, Taikang Life, and New China Life. 3. What are the requirements for the gold investment ratio of pilot insurance companies? The notice requires pilot insurance companies to invest in gold with a total book value not exceeding 1% of the company's total assets at the end of the previous quarter. According to the bank's calculations, based on the third-quarter 2024 data of various companies, the total assets of the remaining 9 pilot insurers, except Sinosure, were 19.7 trillion yuan. According to regulatory requirements, they can invest up to 197 billion yuan in the gold market; considering Sinosure's scale (total assets of 197.6 billion yuan at the end of 2023, corresponding to a gold investment limit of about 20 billion yuan), it is estimated that the 10 pilot companies will bring approximately 200 billion yuan of investment funds to the gold business market. At the same time, the calculation of the investment ratio of pilot insurance companies should fully and truthfully reflect the investment situation, with gold spot deferred delivery contracts based on the market value of the gold spot contracts of that business, and gold inquiry swap contracts based on the net open position of gold holdings in that business, with a single-sided outstanding scale not exceeding 1% of the company's total assets at the end of the previous quarter. The scale of gold lent out by pilot insurance companies should be included in the investment ratio management. 4. What are the other requirements for pilot investments? (1) Staffing with qualified personnel: Pilot insurance companies should have personnel matching the scale of the gold investment business, including at least 2 personnel who have passed the national gold trading proficiency examination for investment research and trading and delivery positions, and at least 1 personnel who have passed the national gold trading proficiency examination for risk control, compliance, clearing and accounting positions. (2) Adhere to a cautious investment philosophy: Pilot insurance companies should flexibly use bulk trading, inquiry trading, and competitive trading to gradually build positions when investing in gold, to avoid causing market impact due to abnormal trading behavior. Pilot insurance companies should use monetary funds when investing in gold and should not engage in physical gold storage and warehousing transactions. (3) Reasonable control of trading counterparty: When pilot insurance companies invest in gold inquiry spot and swap contracts, the trading counterparties should be limited to financial institutions, with credit limits management in place to effectively guard against credit risks. When pilot insurance companies engage in gold lending business, the trading counterparties should be limited to financial institutions, and the concentration of trading counterparties should be reasonably controlled, with the lending scale of a single trading counterparty not exceeding 20% of the pilot insurance company's holding of gold spot contracts. 5. Will there be any relaxation of restrictions on insurance fund investment in gold ETFs in the future? Currently, there are various ways to invest in gold domestically, but gold ETFs are undoubtedly one of the most direct and convenient investment methods, with low trading costs, low participation thresholds, and low holding costs, high asset security, and easy entry and exit. According to Wind statistics, the total size of gold ETF funds in domestic commodity funds is nearly 70 billion yuan, with the performance benchmark mostly based on the Shanghai Gold Exchange AU99.99 spot contract, low transaction fees, and a direct relationshipTracking error is small, which can meet the gold allocation and trading needs of various investors, including insurance companies.The industry believes that including gold ETFs in the allocation can significantly optimize the insurance asset portfolio, achieve diversified asset allocation and risk management. The future policy breakthroughs are worth looking forward to. Investment advice: Maintain the industry's recommended rating. In the current environment, exploring pilot projects of insurance funds investing in the gold business can help relax restrictions on investment varieties for insurance funds, alleviate asset shortage pressures, and is an important measure to deepen the reform of the use of insurance funds. Risk warning: Decrease in product attractiveness; Market volatility; Tightening regulations, etc.