After triggering the disclosure requirements, such assets may be classified as equity securities or measured at fair value through other comprehensive income (FVOCI). It is expected that insurance funds will face certain difficulties in increasing their shareholding of equity assets within the framework of large asset allocation. The industry suggests paying attention to structured opportunities that are bullish on assets with high ROE and dividends.
As long-term money in the capital markets, how insurance funds increase their participation in the market and play the role of ballast and stabilizer has been of great concern to the market. On the evening of July 1, City Development Environment (000885.SZ) announced that the company received a notice of shareholding increase from shareholder Great Wall Life on the same day, which stated that it increased its holding of the company's shares by a total of 6.421 million shares, accounting for 1% of the total share capital of the company, through centralized trading on the securities exchange from May 17 to June 28, 2024. After this increase, Great Wall Life's latest number of shares held is 38.5253 million, and its shareholding ratio has increased to 6.0001%.
According to incomplete statistics by the Caixin reporter, in addition to increasing its holdings of City Development Environment, Great Wall Life has recently also increased its holdings of individual shares such as Dynagreen Env, Qinhuangdao Port, and Jiangxi Ganyue Expressway.
"In the opinion of Xu Kang, chief analyst of Huachuang Securities' financial industry research department, since 2024, insurance funds have not reduced their enthusiasm for takeover bids. Judging from the characteristics of the industry and individual stocks, the target with high ROE, high dividends, high stock dividends and other characteristics that are in line with the style of insurance companies' investments attracts the attention of patient capital and value investment properties. The ROE and dividend assets with high ROE are expected to continue to be favored by insurance companies. "Considering solvency constraints, it is expected that insurance companies will have some difficulty in increasing their holdings of equity assets in the framework of major asset allocation categories, but it is still recommended to pay attention to structural opportunities for ROE and dividend assets." Xu Kang said.
Great Wall Life intensively increases its holdings in the equity market, and patient capital favors high ROE and dividend assets.
In order to enliven the capital market and boost investor confidence, a series of policies have been introduced at the regulatory level to encourage long-term funds to enter the market, and insurance funds are among them. Recently, Great Wall Life's intensive increase in holdings has attracted high attention from the market.
On the evening of July 1, City Development Environment announced that it received a notice of shareholding increase from shareholder Great Wall Life on the same day, which stated that it increased its holding of the company's shares by a total of 6.421 million shares, accounting for 1% of the total share capital of the company, through centralized trading on the securities exchange from May 17 to June 28, 2024.
It is reported that after this increase, Great Wall Life's latest number of shares held is 38.5253 million, and its shareholding ratio has increased to 6.0001%.
According to incomplete statistics by the Caixin reporter, in addition to increasing its holdings of City Development Environment, Great Wall Life has recently also increased its holdings of individual shares such as Dynagreen Env, Qinhuangdao Port, and Jiangxi Ganyue Expressway.
The latest equity disclosure information from HKEx shows that on June 27, Dynagreen Env received a $148.97 million increase in holding of 500,000 shares from Great Wall Life at an average price of HKD2.9794 per share on the trading floor. After this increase, Great Wall Life's latest number of shares held is 56.777 million, and its shareholding ratio increases from 13.92% to 14.04%.
On June 26, Qinhuangdao Port received a HKD465.5 million increase in holding of 2.544 million shares from Great Wall Life at an average price of HKD1.8297 per share on the trading floor. After this increase, Great Wall Life's latest number of shares held is 67.456 million, and its shareholding ratio increases from 7.82% to 8.13%.
On the same day, Ganyue Expressway announced that Great Wall Life increased its holding of the company's shares by a total of 23.3541 million shares, accounting for 1% of the total share capital of the company, through centralized bidding on the securities exchange from June 18 to June 25, 2024. After this increase, Great Wall Life's shareholding ratio in Ganyue Expressway increases to 6.0001%.
"After triggering the takeover bid, such assets may be included in long-term stocks or FVOCI. When the shareholding ratio is greater than 20%, or when it has a significant impact or joint control, it will be included in long-term equity investments; otherwise, it may be included in the FVOCI category under the new regulations." Xu Kang said.
On the one hand, from a long-term stock investment perspective, assets with high ROE are the focus of insurance funds' takeover bids.
It is reported that Great Wall Life has made multiple moves this year, and prior to this, it has triggered takeover bids and made multiple increases in holdings of Zhejiang Communications Technology and Henan Zhongyuan Expressway, involving the construction decoration and transportation industries respectively. The 2023 financial report of Great Wall Life shows that both Zhejiang Communications Technology and Henan Zhongyuan Expressway are included in its long-term equity investments using the equity method, with shareholding ratios of 7.30% and 8.5%, respectively.
According to the equity method of measurement, the current profit and loss of the target company is multiplied by the shareholding ratio and listed under investment income. Therefore, investing in high-ROE assets can improve the overall ROE level of the company. Data shows that in 2023, Zhejiang Communication Technology and Henan Zhongyuan Expressway had ROEs of 9.84% and 6.06%, respectively, while the ROEs of Great Wall Life in 2021-2023 were 2.46%, 2.59%, and 1.83%, respectively.
On the other hand, from the FVOCI perspective, dividend assets are continuously added to considerations such as standard switching, pre-determined interest rates, or further reductions.
In terms of shareholding ratio, Great Wall Life currently holds stakes in City Development Environment, Dynagreen Env, Qinhuangdao Port, and Jiangxi Ganyue Expressway, all of which are between 6% and 15%, but the possibility of being included in FVOCI under new rules cannot be ruled out. Xu Kang said: "From January 1, 2026, non-listed insurance companies will also switch to the new rules. We expect the asset end to prepare for the layout of OCI assets in advance to help the rules switch smoothly and reduce the impact on net income. High dividend and high stock dividend assets conform more to the definition of long-term holding in the FVOCI measurement standard, and funds may continue to be added."
What does Great Wall Life intend to do behind its frequent addition to the equity market?
Great Wall Life was established in September 2005, and its actual controller is the State-owned Assets Supervision and Administration Commission of Xicheng District, Beijing.
In 2023, Great Wall Life achieved insurance business income of 23.038 billion yuan, a significant increase of 55% year-on-year, mainly from traditional insurance, whose proportion increased from 77.2% to 84.3%. However, affected by the downward trend of interest rates, the investment end dragged down the overall net income performance, with a loss of 373 million yuan in 2023, compared with a profit of 97 million yuan in the same period last year. In the first quarter of 2024, Great Wall Life achieved insurance business income of 11.28 billion yuan, a year-on-year increase of 8.23%; net profit was -355 million yuan.
It is reported that at the end of 2023, Great Wall Life received approval for capital increase, with a total increase of 1.093 billion yuan, of which 688 million yuan was included in the registered capital. Boosted by this, the solvency adequacy ratio at the end of 2023 was slightly raised, and the comprehensive rating was upgraded from BB to BBB.
However, as of the end of the first quarter of 2024, the comprehensive and core solvency adequacy ratios of Great Wall Life were 151.31% and 75.66%, respectively, a decrease of 14.95 percentage points and 8.9 percentage points compared with the previous quarter, and the solvency pressure had increased slightly.
"From a business structure perspective, traditional insurance accounts for an absolute dominant position in Great Wall Life, with the proportions of health insurance and dividend insurance accounting for only 8.1% and 7.6% in 2023, and the source of profits mainly consists of interest spreads. It is expected that the downward pressure on interest rates in the long-term will create great pressure on interest spreads," said an industry insider.
Huachuang Securities Non-bank Team believes that the core reason for Great Wall Life's repeated equity holdings is still to increase investment income by means of equity, in order to partially offset the impact of the downward trend of fixed income asset income. But at the same time, it is necessary to pay attention to the fact that the company's overall solvency adequacy ratio is only 50% higher than the regulatory red line, and there is a slight downward trend. It is expected that structured adjustments and increased holdings of dividend assets will be the main means of balancing solvency adequacy and investment income.