With the full implementation of the new accounting standards in the insurance industry, the FVOCI category is profoundly reshaping the landscape of insurance capital allocation.

Analysts from Soochow Securities highlight that the application of FVOCI will directly influence the volatility of insurers' profit and loss statements, thereby impacting their investment strategies and asset allocation decisions.

There is no one-size-fits-all standard for the proportion of FVOCI assets in insurers' accounting classifications. Each insurer must tailor its approach based on its specific circumstances. Companies prioritizing stable profit margins may lean toward increasing FVOCI asset allocations, while those confident in their investment capabilities and seeking higher profitability may prefer allocating more to FVTPL assets.

**Full Implementation by January 1, 2026** FVOCI (Fair Value Through Other Comprehensive Income) is an asset classification under the new financial instrument standards. Alongside FVTPL (Fair Value Through Profit and Loss) and AC (Amortized Cost), it forms the "three-category" system, replacing the previous "four-category" model.

According to Ministry of Finance requirements, non-listed insurers must adopt the new standards by January 1, 2026, at the latest. Insurers facing implementation challenges may apply for deferred compliance. PING AN adopted the standards as early as 2018, while China Life Insurance began implementation in 2024. Currently, all listed insurers have fully transitioned to the new accounting standards.

Under the new rules, bonds and stocks can be designated as FVOCI assets, but funds cannot. Once designated as FVOCI, equity instruments cannot be reclassified, and their unrealized gains or losses in other comprehensive income cannot be transferred to the income statement—only dividend income qualifies as investment returns.

**Significant Impact on Insurers' Profitability** Soochow Securities emphasizes that investment returns play a crucial role in insurers' profits. Data shows that in the first half of 2025, investment income accounted for 192%, 194%, 260%, 163%, and 156% of net profits attributable to shareholders for China Life, PING AN, China Pacific Insurance, New China Life, and PICC, respectively.

Given the substantial proportion and volatility of insurers' equity holdings, the accounting classification of stocks significantly affects year-to-year profit fluctuations. Soochow Securities notes that while nearly all stocks can be designated as FVOCI, insurers are likely to assign only those with sufficiently high dividend yields to this category.

Bonds can be reclassified, but equity assets (stocks) cannot. Although the standards impose no restrictions on disposing of FVOCI assets, insurers may impose internal investment policy limitations.

**The FVTPL vs. FVOCI Dilemma** Under the new financial instrument standards, insurers face a trade-off between FVTPL and FVOCI for equity investments. A higher FVTPL allocation amplifies profit volatility due to fair value fluctuations, while a larger FVOCI allocation limits profit impact but prevents capital gains from being recognized in the income statement.

Soochow Securities suggests that insurers' long-term liability structures naturally favor stable profit margins, making FVOCI a more appealing choice for equity classification. This approach may also suit other listed companies aiming to reduce income statement volatility.

**No Standard Answer for Asset Allocation** As of mid-2025, FVOCI equity allocations at China Life, PING AN, China Pacific Insurance, New China Life, and PICC increased by 10.6, 5.2, 4.0, 1.9, and 1.1 percentage points year-to-date, reaching 22.6%, 65.3%, 33.8%, 18.8%, and 46.4%, respectively.

Two key drivers explain insurers' growing FVOCI equity allocations: 1. A low-interest-rate environment and scarce non-standard asset supply have created an "asset shortage," making FVOCI stocks a short-term bond substitute. 2. A relatively abundant pool of high-dividend A/H-share stocks.

For bonds, FVOCI allocations rose by 1.8, 0, 1.8, 3.5, and 0.5 percentage points at the same insurers, reaching 87.3%, 64.3%, 83.8%, 57.9%, and 65.6%, respectively.

Soochow Securities concludes that optimal asset classification ratios vary by insurer. Companies prioritizing profit stability may increase FVOCI exposure, while those focused on investment-driven earnings growth may favor FVTPL allocations.