CMB International: Investment risk factors are to be further optimized, and insurance capital can be expected to increase capital and speed up market entry

The Zhitong Finance App learned that CMB International released a research report saying that recently, the Central Bank, the General Financial Supervisory Authority, and the Securities Regulatory Commission announced a package of financial policies at the press conference of the State Information Office, which includes a series of incremental policies relating to the insurance industry. This is a strong complement to the regulation's increase in the upper investment ratio of insurance funds in early April. According to estimates, if all of the minimum capital released in response to stock investment risk factors is used to allocate 300 stocks in Shanghai and Shenzhen, it is expected to bring in more than 150 billion yuan of incremental market entry capital; after the adjustment, the average comprehensive solvency ratio of the industry in 24 years will rise to 200.6% (original: 199.4%), an increase of 1.3 percentage points. With regard to the proposed additional 60 billion yuan pilot scale, it is expected that participants will further expand from leading insurers to medium-sized institutions.

CMB International's main views are as follows:

On May 7, the Central Bank, the General Administration of Financial Supervision, and the Securities Regulatory Commission announced a package of financial policies at the press conference of the State Information Office. Among them, incremental policies relating to the insurance industry include 1) further expanding the scope of the long-term investment pilot of insurance funds, and recently approving an additional 60 billion yuan to inject more incremental capital into the market; 2) adjusting solvency supervision rules to further reduce the risk factor for stock investment by 10% (further lowered after the “Notice on Optimizing the Solvency Supervision Standards of Insurance Companies” on September 13, 2023); 3) Improving the long-term assessment mechanism to promote long-term investment of long-term money.

CMB International believes that this is a strong complement to the regulation after raising the maximum investment ratio for insurance funds in early April (link to the report). According to estimates, if all of the minimum capital released in response to stock investment risk factors is used to allocate 300 stocks in Shanghai and Shenzhen, it is expected to bring in more than 150 billion yuan of incremental market entry capital; after the adjustment, the average comprehensive solvency ratio of the industry in 24 years will rise to 200.6% (original: 199.4%), an increase of 1.3 percentage points.

The scale of the pilot long-term investment of insurance funds will be raised to 222 billion yuan

Since the launch of the long-term insurance capital investment reform pilot in 2023, 8 leading insurance companies have now been approved to participate, with a total scale of 162 billion yuan. Specifically, in October 2023, China Life Insurance and Xinhua jointly established a private equity investment fund (Honghu Fund Phase I) with a registered capital of 50 billion yuan; 2) In January 2025, Taibao Life Insurance (20 billion yuan), Taikang Life Insurance (12 billion yuan), and Sunshine Life (20 billion yuan) were approved to launch the pilot project, with a total scale of 52 billion yuan; 3) In March 2025, People's Insurance (10 billion yuan), China Five insurance companies, Life Insurance and Xinhua (Honghu Fund Phase II, each party invested 10 billion yuan), China Taiping (10 billion yuan), and Ping An Life (20 billion yuan) were approved to launch pilot projects, with a total scale of 60 billion yuan.

The scale of the pilot long-term investment of the second batch of insurance funds was 1,120 yuan, which exceeded the 100 billion yuan proposed by regulations at the beginning of the year, reflecting the enthusiasm of leading insurers to participate. It is expected to mainly invest in large-cap blue chips and high-yield stock stocks with stable operating qualifications. With regard to the proposed additional 60 billion yuan pilot scale, it is expected that participants will further expand from leading insurers to medium-sized institutions.

It is estimated that lowering the risk factor for stock investment could release more than 150 billion yuan in incremental capital

At the press conference, it was proposed that solvency supervision rules would be adjusted to lower the stock investment risk factor by 10%. Following the September 2023 “Notice on Optimizing the Solvency Supervision Standards for Insurance Companies”, the regulation once again mentioned optimizing equity risk factors. The solvency ratio of an insurer determines its equity asset investment limit. The specific constraint is that equity risk factors affect the minimum capital requirement.

Assuming that the risk factors for investing in the Shanghai and Shenzhen 300 constituent stocks and common stocks listed on the Science and Technology Innovation Board were reduced by 10%, the corresponding new risk factors were 0.27 (original: 0.3) and 0.36 (original: 0.4), respectively. By the end of 2024, the balance of industry insurance funds used was 33.26 trillion yuan, of which personal insurance and property insurance companies had a stock investment balance of 2.43 trillion yuan at the end of the period, accounting for 7.3%.

Assuming that the Shanghai and Shenzhen 300 constituent stocks account for 50% of the insurance second-tier stock investment and 5% of the common stock on the Science and Technology Innovation Board, the corresponding estimate can release a minimum capital of 41.3 billion yuan (without taking into account the risk dispersion effect). If all of this is used to allocate the Shanghai and Shenzhen 300 stocks, it will bring in incremental capital of 152.9 billion yuan (CMB International estimates).

By the end of the fourth quarter, the industry's comprehensive solvency adequacy ratio was 199.4%; after considering the 50% risk diversification effect, the minimum capital release could increase the industry's comprehensive solvency adequacy ratio by 1.3 percentage points to 200.6% (CMB International estimates).

High dividends are an important direction for insurers' future equity asset allocation

By the end of 2024, listed insurers' core equity assets (including stocks and equity funds) accounted for 9%-18%, of which OCI shares accounted for 1%-6%. In the future, there is plenty of room for insurance capital to increase the allocation of high-interest stocks, and regulation will further reduce the risk factors for stock investment, help ease the pressure on capital consumption of high-equity positions, open the upper limit of equity investment, and accelerate the process of entering the long-term market.

Allocation suggestions: Optimistic about the medium- to long-term trend of listed insurers increasing OCI stock allocations

To maintain the industry's “superior to market” rating, the recommended configuration: 1) financial insurance defensive leader, recommended to buy China Financial Insurance (02328, rating “buy”, target price: HK$15.8). Strengthening active management is expected to achieve strong performance guidance throughout the year; 2) regional insurers recommend buying AIA Insurance (01299, rating “buy”, target price: HK$89). The diversified market layout drives steady growth in the value of the new business; the US$1.6 billion repurchase plan is completed ahead of schedule to support the rise in stock prices.

Risk Alerts

The equity market fluctuated sharply; interest rates in the market declined markedly; premiums for new policies fell short of expectations.