Article/Chen Guanglei, columnist of Sina Financial Opinion Leader
From 2015 to 2016, insurance companies, especially life insurance companies, increased their holdings of more than 5% (including) of voting shares of listed companies in the A-share capital market (commonly known as "show of cards"), which became a hot spot in the capital market and attracted the attention of regulators. For example, in 2015, a total of 36 A-share listed companies and insured companies raised their cards, forming a concept plate of raising their cards, and the stock price also continued to rise [1]. After years of silence, since 2020, the phenomenon of insurance companies listing A-shares has reappeared in the market. For example, in June 2023, Zhejiang Hi Tech and Zhongyuan Expressway Great Wall Life Insurance has increased its stock holdings to 5.03% and 5% through the secondary market, respectively. From the external announcement, Great Wall Life Insurance aims to achieve asset allocation (value) by raising signs. In terms of nature, Zhejiang Jiaoke Both Zhongyuan Expressway and Zhongyuan Expressway belong to infrastructure industry, with stable profits, high dividend yield, and P/B lower than 1, which may lead to undervaluation. In October 2015, Qianhai Life Insurance, a subsidiary of "Baoneng Family", occupied the largest shareholder Zhongju High tech After the change of ownership of the largest shareholder in July 2022, there will be an escalation of shareholder infighting in July 2023, which will again make the phenomenon of insurance companies listing companies the focus of the capital market [2].
When listing A-share listed companies, many insurance companies claimed that they aimed to reduce earnings volatility and improve investment returns. However, under the new financial instrument standard, can insurance companies really achieve accounting profit smoothing and improve asset allocation value by listing A-share listed companies [3]?
1、 The New Accounting Standards for Financial Instruments' Treatment of Equity of Listed Companies
The new accounting standards for financial instruments change the characteristics of "psychoanalytic accounting" in the past, and classify them from the business model of managing financial assets and the characteristics of contractual cash flow of financial assets. For the increase of A-share equity of listed companies, when there is no significant impact, joint control or control, accounting treatment shall be carried out according to the fair value measurement and the change shall be included in the current profit and loss (FVPL), or the fair value measurement and the change shall be included in other comprehensive income (FVOCI). In this case, insurance companies hold equity of listed companies to gain investment appreciation (changes in fair value), which is reflected in the business model as financial investment (or passive investment) rather than strategic investment to achieve synergy. However, when an insurance company conducts accounting treatment according to FVPL or FVOCI, especially when the A-share capital market, which is dominated by individual investors, fluctuates greatly, it will inevitably lead to relatively large fluctuations in the book profit or comprehensive income of the insurance company in regular reports (such as quarterly reports), and correspondingly intensify the fluctuations in the rate of return on investment and the comprehensive rate of return on investment, And increase the difficulty of assessment and imbalance between years. Therefore, for the sake of investment safety and profitability, insurance companies generally conduct accounting treatment for major equity instrument investments as long-term equity investments to avoid large fluctuations in operating performance in regular reports [4].
The Securities Law and the Measures for the Administration of Equity Acquisitions of Listed Companies have made strict provisions on equity acquisitions of listed companies. For example, the Securities Law stipulates that when holding 5% of the issued voting shares of a listed company, a written report shall be made to the CSRC and the stock exchange within three days from the date of the occurrence of this fact, and the listed company shall be notified and announced. In addition to the 5% threshold, we also made strict regulations on the subsequent increase and decrease announcements. The securities regulatory laws and regulations have made strict regulations on tender offer. From the perspective of accounting standards for financial instruments, when holding voting shares of a listed company has a significant impact (an associated enterprise), an insurance company should recognize and measure them using the equity method in accordance with the Long term Equity Investment [5]. Under the equity method, the insurance company recognizes the current investment income and other comprehensive income (OCI) according to the share of the changes in the owner's equity arising from the net profit and other comprehensive income (OCI) realized in the A-share listing year, adjusts the book value of the long-term equity investment, and reduces the book value of the long-term equity investment accordingly when the cash dividends are actually received.
Therefore, when an insurance company's listing of A-share listed companies has a significant impact, the fluctuation of the listed company's share price will not affect the current profit and loss of the insurance company, but will only be directly related to the current net profit of the listed company. Formally, the equity method adopted by insurance companies to invest in equity instruments of A-share listed companies seems to be able to smooth accounting profits between years [6].
2、 Investment income has an important impact on the net profit of insurance companies, but it is not unique
（1） Insurance companies should pursue underwriting profits as the leading goal
Insurance naturally has the attribute of public goods. This determines that insurance companies are not financial institutions that simply pursue profit maximization, or investment institutions that pursue profit maximization (such as mutual funds, venture capital or private equity funds), but risk diversification and responsibility sharing. Therefore, insurance companies should pursue profit maximization on the basis of sharing responsibility, and underwriting profits should be the main source of profits for insurance companies. Although this has a great pressure on domestic small and medium-sized insurance companies to promote business transformation while relying on high costs to drive business development, it may also be an inevitable choice to return to the original insurance, otherwise this behavior will continue to oppress the investment side and cause short-term asset allocation.
When taking underwriting profit as the leading business objective, insurance companies should focus on the development and design of insurance products, such as the development of high-value long-term guaranteed life insurance products, rather than high-yield dividend insurance or universal insurance and other high-value life insurance products with financial properties, as well as the construction and effective control of distribution channels, For example, we rely more on excellent insurance marketing personnel than wholesale bancassurance channels. Of course, the dominance of underwriting profit does not mean that investment ability and investment level are not valued, but that investment income is taken as an important means to improve customer value and the ability of insurance companies to maintain and increase their capital.
（2） High cash dividends should not be the main criteria for determining the investment object of equity instruments
In the 1980s, with the gradual shift of income recognition from revenue and expense to balance sheet, the income statement gradually gave way to the balance sheet, and the net change in owner's equity at the beginning and end of the period was more decision-making related than net profit.
When the equity instrument investment is recognized as FVPL or FVOCI, insurance companies pay more attention to the changes in the fair value of equity instruments than cash dividends. When equity instrument investment has a significant impact (pooling), the asset allocation strategy of insurance companies is not financial investment, but strategic investment. Under the equity method, the accounting profit and other comprehensive income (OCI) realized in the current period of the investment object of the equity instrument is more important than the cash flow, rather than the annual cash dividend ratio. When the cash dividend of equity instrument investment object is distributed, the insurance company shall offset the long-term equity investment according to. Therefore, when an insurance company is listing A-share listed companies, it should focus on enterprises that can create more value, rather than enterprises with a high proportion of cash dividends. What's more, the factors that determine the level of investment returns are more capital appreciation (valuation improvement) than cash dividends. In the capital market, these enterprises that can create more value generally have higher growth and relative market competitive position [7].
（3） Investment income of equity instruments accounted by equity method is more uncertain
Compared with the equity instruments recognized as FVPL or FVOCI, in order to prevent stock price fluctuations and protect the interests of small and medium-sized investors, the regulatory authorities give higher market constraints to more than 5% (including) (institutional) investors, such as higher information disclosure costs. In addition to putting forward eligibility requirements for acquirers, the Measures for the Administration of Takeovers of Listed Companies impose different levels of information disclosure requirements on different proportions of listing. For example, after the shares owned by investors and their persons acting in concert have reached 5% of the issued shares of a listed company, for every 1% increase or decrease in the proportion of the shares owned by investors and their persons acting in concert in the issued shares of the listed company, the listed company shall be notified and announced the next day after the occurrence of this fact.
The A-share capital market is a capital market dominated by individual investors, which is bound to have higher volatility. The concept of insurance companies' listing has often become a hot topic in the market, which has pushed up the share prices of listed companies being listed, increased the cost of subsequent shareholding increase, and attracted the attention of regulators. This will undoubtedly increase the investment costs and transaction costs of insurance companies. When an insurance company reduces its holdings, it will inevitably attract the attention of the capital market, which will further depress the share prices of listed companies and reduce investment returns. In addition, the stock trading activity of listed companies that have been listed will also have a significant impact on the increase and decrease of holdings of insurance companies [8]. For example, Regulatory Rule No. 7 Minimum Capital for Market Risk clearly stipulates that CSI 300 Index The characteristic coefficient k2 of constituent shares is -0.05. This is because the trading behavior of insurance companies as institutional investors has been reflexive or included in the changes of stock prices, which will further increase the volatility of the listed companies' stock prices. Therefore, the volatility of A-share capital market is relatively large, which cannot determine the main purpose of insurance companies to achieve smooth profits. For example, many insurance companies failed in the wave of raising cards in 2016.
In reality, the listing of A-shares by insurance companies does not necessarily reduce the volatility of profits, or even in the long run may increase losses, or increase volatility (such as impairment or recognition of non operating income in the current period), which is directly related to the nature of insurance companies as institutional investors [9]. This is because whether A-share listed companies can achieve returns is not only directly related to the rising investment costs caused by the raising of the listing effect, but also related to the quality of listed companies to be listed, the level of activity in trading and investment, the overall situation of the capital market and many other factors. For example, after being passively underweight and announced in July 2022, Zhongju Hi tech, which was listed as "Baoneng", has continued to fall sharply from the peak of 82.4 yuan/share in August 2020, and the lowest share price was only 22.82 yuan/share. On July 12, 2023, Zhongshan Runtian, the former largest shareholder, reported in real name that Torch Group, the current largest shareholder, and other shareholders were suspected of committing criminal acts against Zhongju Hi tech, such as false litigation and manipulation of the securities market, resulting in a loss of 50 billion yuan.
In addition, in December 2021, the CBRC issued the Solvency Supervision Rules for Insurance Companies (II), aiming to promote the high-quality development of the insurance industry, return to the source of protection and focus on the main business. For long-term equity investments that meet control, joint control or significant influence, the recognized value is determined according to the equity method, and the impact of the difference between the recognized value and the book value on net capital is analyzed. For example, for long-term equity investment (subsidiary) in non insurance main business with control, 100% full deduction of capital will be implemented to encourage insurance companies to focus on main business and prevent capital from growing savagely in the financial field.
3、 Insurance companies should return to the main business of security and earnestly improve their investment level
The aim of listing A-share listed companies is to achieve smooth returns, which is just a strategy of asset liability management, but it can not effectively change the commercial nature of insurance fundamentally, nor can it effectively improve the level of investment returns through asset liability allocation strategies. Therefore, insurance companies should focus on returning to the nature of security and improve their profitability from the following three main aspects.
First, return to the security level, constantly develop security products, and reduce the proportion of the overall operating income of high cash value products. For insurance products of guarantee type, insurance companies should go deep into the market, study consumer demand, launch high-value insurance products and constantly improve them.
The second is to focus on underwriting profits, improve marketing channels and strengthen expense management.
Third, combining the development strategy, we should continue to do a good job in asset allocation strategy, and effectively improve the professional ability and level of investment. We should focus on the solvency adequacy ratio, focus on doing a good job in asset allocation from a cyclical perspective, and strengthen investment research.
[1] From 2015 to 2022, the number of A-share listed companies raised by insurance companies showed a U-shaped feature. Among them, after experiencing the climax in 2015 (36 times), it declined year by year, but rebounded sharply to 23 times in 2020. Since 2021, with the downturn of the capital market, insurance companies have raised fewer cards.
[2] On July 6, 2023, Torch Group, the largest shareholder of Zhongju Hi tech, held an extraordinary general meeting of shareholders and proposed to remove four directors, including the chairman of the board (as of December 31, 2022, there were nine directors on the board of directors of Zhongju Hi tech, of which four were sent by "Baoneng Family", but the nomination of independent directors was not clear). On July 12, Baoneng Group issued a statement on its official website that Zhongshan Runtian reported that Torch Group and other six companies were suspected of false litigation and manipulation of the securities market, causing losses of 50 billion yuan to Zhongju Hi tech and its shareholders; On the 18th, an announcement was issued to reorganize the management.
[3] Strictly speaking, the accounting standards for financial instruments should cover the accounting treatment of all financial instruments, including equity instruments and fixed income instruments. Considering the importance and particularity of long-term equity investment, special accounting treatment is made for equity instrument investment such as pooling, joint control and control.
[4] Compared with unlisted companies, A-share listed companies are more dispersed in terms of ownership structure. For example, more than 5% usually has a significant impact, especially when the controlling shareholders have related transactions to avoid voting, or the cumulative voting system is implemented. Although some insurance companies do not send directors, they still have a significant impact on the operation and financial decisions of listed companies in essence.
[5] From the disclosure of the annual report, without considering other factors, according to the shareholding information released in the simple statement of changes in equity, Great Wall Insurance Climate ranks the second and third largest shareholders of Zhejiang Jiaoke and Zhongyuan Expressway. Among them, Zhongyuan Expressway is displayed as dividend insurance product.
The equity of listed companies is relatively dispersed. Although the nomination right of 10% of voting shareholders is not satisfied according to the Company Law, more than 5% of shareholders can exert significant influence on listed companies in combination with securities regulatory laws and regulations. Even if the insurance company does not send directors, if it can have a significant impact on the operation and financial decisions of A-share listed companies, it can still have a significant impact in essence, and it is not necessarily that accounting treatment can be carried out according to the joint venture based on the proportion of 20% voting rights. In reality, when an insurance company holds more than 5% (including) of the voting shares of the listed company, it will generally send directors to participate in decision-making.
[6] For unlisted insurance companies, they generally need to submit annual reports in accordance with regulatory provisions. When it has a significant impact on A-share listed companies, unlisted insurance companies usually only need to publish annual reports in accordance with regulatory requirements, which can significantly reduce the fluctuation of quarterly and semi annual net profits.
[7] High growth listed companies generally have a high beta coefficient (if greater than 1), while mature companies have a low beta coefficient. From the beta coefficient of the two listed companies listed by Great Wall Insurance, as of July 14, 2021, the beta coefficient of Zhongyuan Expressway is 1.28, while that of Zhejiang Jiaoke is 0.78. In terms of stock price performance, Zhongyuan High speed shares are more active and volatile.
[8] Compared with CSI 300 stocks, the average daily trading volume of small and medium-sized board or low market capitalization stocks is relatively small. This will lead to the "multiplier" effect on the share prices of listed companies that have been listed.
(The author of this article introduces: Vice President and Chief Financial Officer of Tibet Ningjian Technology Group Co., Ltd., Executive Director of Zhongcheng Huace (Beijing) Management Consulting Co., Ltd.)
