The key to determining the direction of insurance funds - What is FVOCI?

With the comprehensive implementation of the new accounting standards in the insurance industry, the FVOCI category is profoundly affecting the allocation pattern of insurance funds.

The Sun Ting team at Dongxing Securities believes that the application of this category will directly determine the volatility of insurance companies' income statements, thereby influencing their investment strategies and asset allocation directions.

There is no unified standard for the accounting classification proportion of insurance companies' assets; each insurance company needs to make choices suitable for its own situation. Companies that require stable profit volatility may be more inclined to increase the proportion of FVOCI assets; companies that are confident in their investment capabilities and hope to enhance profitability through investments may be more inclined to increase the proportion of FVTPL assets.

Full Implementation on January 1, 2026

FVOCI (financial assets measured at fair value with changes recognized in other comprehensive income) is an asset classification under the new financial instrument standards, along with financial assets measured at fair value with changes recognized in profit or loss (FVTPL) and financial assets measured at amortized cost (AC), forming a "three-category" system that replaces the previous "four-category" model.

According to the Ministry of Finance's requirements, non-listed insurance companies must implement the new standards by January 1, 2026, at the latest. Insurance companies facing genuine difficulties in implementation can apply to the regulators for a deferral. China Ping An began implementing the standards as early as 2018, while China Life will start implementing the new standards in 2024. Currently, listed insurance companies have fully implemented the new accounting standards.

According to the standards, bonds and stocks can be designated as FVOCI assets, but funds cannot be designated as FVOCI assets. The designation of equity instruments as FVOCI is irrevocable, and the accumulated gains (losses) in other comprehensive income cannot return to the profit and loss statement; only dividends can be included in investment income.

Significant Impact on Insurance Companies' Income Statements

Dongxing Securities emphasizes the importance of investment income contributions to profits for insurance companies.

Data shows that in the first half of 2025, the total investment income of China Life, China Ping An, China Pacific Insurance, New China Life, and China People's Insurance accounted for 192%, 194%, 260%, 163%, and 156% of their respective net profits attributable to shareholders.

Due to the relatively high proportion of stock assets in insurance companies and significant fluctuations in fair value, stocks will have a considerable impact on the annual profit volatility of companies under different accounting classifications. Dongxing Securities pointed out that almost all stocks can be designated as FVOCI items, but from the perspective of insurance companies, only stocks that reach a certain dividend yield will be designated to FVOCI items.

In terms of asset conversion, bonds can be reclassified, but equity assets (stocks) cannot be reclassified. Although the standards do not restrict the disposal of assets under FVOCI items, insurance companies themselves may impose certain restrictions on their disposal in terms of investment behavior systems.

Dongxing Securities stated that under the new financial instrument standards, insurance companies face a dilemma between FVTPL and FVOCI for stock asset investments.

If the proportion of stock assets classified as FVTPL is large, fluctuations in fair value will greatly affect the income statement;

If the proportion of stock assets classified as FVOCI is large, fluctuations in fair value have limited impact on the income statement, but insurance companies cannot transfer stock price difference gains to the income statement.

Dongxing Securities believes that the long liability duration operating model of insurance companies determines that they need a long-term stable income statement, so insurance companies inherently have a demand to reduce income statement volatility. Therefore, in the choice of stock accounting categories, FVOCI may be a more preferred option for insurance companies.

If other listed companies have similar operational goals to insurance companies (for example, reducing income statement volatility), then FVOCI may be a more suitable choice in the accounting classification of stocks.

Asset Allocation Without Standard Answers

Data shows that as of mid-2025, the proportion of FVOCI stock assets for China Life, Ping An, China Pacific Insurance, New China Life, and PICC increased by 10.6 percentage points, 5.2 percentage points, 4.0 percentage points, 1.9 percentage points, and 1.1 percentage points, respectively, to 22.6%, 65.3%, 33.8%, 18.8%, and 46.4%.

Dongxing Securities analyzes that the continuous increase in FVOCI equity allocation by insurance companies is mainly based on two reasons:

First, the low interest rate environment combined with insufficient non-standard supply has led to a severe asset shortage, and FVOCI stocks can serve as a short-term substitute for bonds; second, there are relatively sufficient high-dividend targets in AH shares.

In terms of bonds, as of mid-2025, the proportion of FVOCI bond assets for China Life, Ping An, China Pacific Insurance, New China Life, and PICC increased by 1.8 percentage points, remained flat, 1.8 percentage points, 3.5 percentage points, and 0.5 percentage points, respectively, to 87.3%, 64.3%, 83.8%, 57.9%, and 65.6%.

Dongxing Securities believes that there is no unified standard for the proportion of asset accounting classification for insurance companies, and each insurance company needs to make choices suitable for its own situation Different insurance companies have different operational requirements. Companies that have requirements for profit volatility may be more inclined to increase the proportion of FVOCI assets; companies that are confident in their investment capabilities and hope to enhance profitability through investments may be more inclined to increase the proportion of FVTPL assets.