Guosen: The investment yield of insurance in the fourth quarter of 24 has significantly rebounded. We continue to be optimistic about the opportunity to allocate long-term bonds and high-dividend stocks.

Guosen released a research report stating that in the fourth quarter of 2024, the bond market continued to strengthen, combined with the rush of "opening red envelope" funds, insurance companies continued to increase their allocation of bonds, and investment yields significantly improved. Against the background of rapidly declining long-term interest rates, insurance companies significantly increased their capital gains from bond investments, reducing the asset-liability matching pressure under the new regulations. In terms of equities, by the end of 2024, listed insurance companies continued to increase the scale of direct stock investments in the capital market, with Hong Kong stock allocations showing cost-effectiveness. Insurance institutions represented by Ping An Insurance (02318) and New China Life Insurance (01336) continued to increase their allocation of Hong Kong dividend assets, using the discounted advantages of Hong Kong stocks and the policy of exempting corporate income tax to further increase equity investment returns. In the background of "asset shortage", expanding insurance investment channels has become an important means to stabilize the level of medium and long-term investment returns, and the bank continues to be optimistic about the opportunities for long-term bonds and high-dividend stocks. Guosen's main points are as follows: Capital market rebound, investment returns improve By the end of the fourth quarter of 2024, industry investment returns had significantly improved year-on-year. In 2024, long-term interest rates continued to decline rapidly, leading to a significant increase in capital gains from bonds measured at fair value held by insurance companies. Some insurance companies also increased bond trading, maintaining a high level of overall investment yields. By the end of the fourth quarter, life insurance companies, property insurance companies, and the industry as a whole achieved composite investment returns of 7.45%/5.51%/7.21%, a year-on-year increase of 4.08pt/2.64pt/3.99pt, respectively. In addition, the fair value of equity assets, represented by stocks, at the end of the third quarter showed a significant increase, which drove the improvement in the investment returns of the insurance industry year-on-year. In the fourth quarter of 2024, while the financial investment returns of property insurance companies showed a slight decrease quarter-on-quarter, the comprehensive investment returns of property insurance companies, life insurance companies, and the industry as a whole all showed some improvement. In terms of market performance, the insurance industry experienced a stock and bond "dual-drive" situation in the second half of 2024, driving the reassessment of insurance assets. In the first three quarters of this year, the Shanghai and Shenzhen 300 Index rose by 17.10%, the dividend index rose by 15.85%, leading to a rapid increase in equity asset returns. In terms of the bond market, as of the end of 2024, the yields of 10-year and 30-year government bonds stabilized at 1.68% and 1.91%, respectively. The "asset shortage" persists in the fourth quarter, and insurance companies continue to increase their allocation of bonds In the fourth quarter of 2024, the bond market continued to strengthen, combined with the rush of "opening red envelope" funds, and the insurance industry continued to increase its allocation of bonds. In terms of life insurance, against the background of the "asset shortage", the life insurance industry continued to increase the allocation of assets represented by long-term bonds to lengthen the duration of assets and optimize the level of asset-liability management. By the end of the fourth quarter of 2024, life insurance companies' bond allocation exceeded 50%, and against the backdrop of rapidly declining long-term interest rates, there was a significant increase in capital gains from bond investments by insurance companies, reducing the asset-liability matching pressure under the new regulations. In terms of equities, by the end of 2024, listed insurance companies continued to increase the scale of direct stock investments in the capital market, and Hong Kong stock allocations gradually attracted attention from insurance funds in terms of cost-effectiveness. Insurance institutions represented by Ping An Insurance and New China Life Insurance continued to increase their allocation of Hong Kong stocks, utilizing the advantages of discounted Hong Kong stocks and the policy of exempting corporate income tax to further increase equity investment returns. In terms of property insurance, the industry continued to increase the allocation of bonds and equity assets. By the end of the fourth quarter, the bond investment ratio of property insurance companies reached 39.14%, a further increase of 1.86pt compared to the third quarter; and the stock investment ratio reached 7.21%, an increase of 0.16pt quarter-on-quarter. In recent years, the "asset shortage" combined with a low interest rate environment has brought certain challenges to insurance fund allocations. Expanding insurance investment channels has become an important means to stabilize the level of medium and long-term investment returns. Firstly, insurance funds continue to lengthen the duration of bonds. The proportion of bonds held by insurance companies is 40%-50%, with a focus on national bonds with a duration of over 20 years and a decrease in the allocation of bonds with a term of less than 5 years. Secondly, encourage insurance funds to explore credit opportunities while maintaining a certain level of risk control, such as focusing on private debt securities. However, due to the mismatch between risk and potential returns, few domestic insurance funds currently apply this strategy, but there is still relatively ideal incremental space in the future. Thirdly, increase overseas asset allocations. The proportion of overseas asset allocations for Japanese insurance companies has increased to between 25% and 40%, while China is currently only around 2%, a significant gap from the 15% upper limit of allocations. Therefore, it is necessary to increase the QDII quota for domestic insurance funds. Fourthly, increase equity asset allocations. Looking at the experience of Japan, the ratio of overseas and domestic equity asset allocations is around 25% each, with a stock investment ratio of about 50%, whereas the equity allocation ratio in China is about 10%, leaving room for significant increase. Fifthly, appropriately increase bond and stock trading, especially moving from pure allocation to a combination of trading and allocation, seizing structural and cyclical investment opportunities. Sixthly, increase alternative assets such as private equity. Referring to the Yale Endowment model, the institution increases its income by investing in various illiquid assets such as private equity, hedge funds, real estate, natural resources, etc. For China, there are potential opportunities in high-quality real estate and private equity investments. Analysis of the linkage between insurance fund utilization balance and incremental premium ratio The bank mainly summarized the ratio of the quarterly incremental fund utilization balance of life insurance companies, property insurance companies, and the industry as a whole to the premium income of that quarter since the third quarter of 2023. This analysis helps to understand the conversion rate between premium income pace and fund allocation size, and interpret the situation of the impact of premium income on the pace of insurance asset allocation. Historically, due to the significant increase in incremental funds received at the beginning of the year on the liability side of the insurance companies, the fourth quarter of each year and each quarter are the stages with higher demands for fund allocation in the insurance industry. At the end of the fourth quarter, insurance companies may use leverage to allocate assets including long-term bonds in advance, adjusting the solvency adequacy ratio while seizing the timing of market allocation, hence the corresponding fund conversion rate is relatively high. Taking the fourth quarter of 2023 and the first quarter of 2024 as examples, the industry's overall fund conversion rate was 73% and 83%, respectively.In terms of quarters, driven by the "red envelope" fund grabbing and the bull market in bonds, the conversion rate of insurance funds in the current quarter reached 123%, with life insurance at 183% and property insurance at 24%. In contrast, in the second and third quarters, influenced by factors such as adjustments in sales teams and slowing premium growth, the demand for asset allocation on the insurance company's side has decreased, and the conversion rate of funds is usually slightly lower than that of the fourth and first quarters. The fund conversion rates in the third quarter of 2023 and the second quarter of 2024 were 36% and 67% respectively. In addition, factors such as the company's own asset maturity schedule, asset allocation strategy, and market conditions will still have a certain impact on the pace of asset allocation in the insurance industry. Therefore, the above analysis has certain reference significance for understanding the timing of insurance premium income and asset allocation.Risk alert: Premium income growth is lower than expected; Decrease in channel fees leads to reduced sales enthusiasm; Decline in asset side returns, etc.