The fundamental improvement trend in both the asset and liability sides of the insurance industry is clear, maintaining an ‘overweight’ rating for the sector.

According to Zhitong Finance, Xiangcai Securities published a research report stating that since the beginning of this year, expectations for the improvement of insurers’ fundamentals have continued to strengthen. On the asset side, the expansion of long-term equity investment pilots has enabled insurers to diversify and balance their equity asset allocation, driving expectations of improved investment performance and leading to a valuation recovery for insurance stocks. On the liability side, the establishment of a dynamic adjustment mechanism for preset interest rates and the implementation of regulatory policies such as ‘reporting consistency’ have driven insurers to reduce costs and fees. The accelerated transition to products like participating insurance has alleviated asset-liability duration mismatches, effectively lowering overall interest rate spread risks. Continued improvement in insurers’ fundamentals is expected to steadily enhance their investment value. The industry rating remains at ‘Overweight.’

The main viewpoints of Xiangcai Securities are as follows:

Accelerated product transformation brings new growth opportunities for dividend insurance.

New regulations for health insurance present development opportunities for dividend-type health insurance. In recent years, with strengthened regulatory focus on risk prevention and the decline in guaranteed interest rates weakening product competitiveness, life insurance companies have actively adjusted their product strategies, making dividend insurance a key direction for strategic transformation. After more than two decades, dividend-type health insurance is set to return to public attention. The National Financial Regulatory Administration issued the “Guiding Opinions on Promoting High-Quality Development of Health Insurance,” which encourages well-rated insurance companies to develop long-term dividend-type health insurance products, potentially accelerating the growth of health insurance business.

The development of dividend-type health insurance helps optimize insurers’ product mix and cost structure. Compared to pure protection products facing intense price competition, dividend-type critical illness insurance falls under ‘floating returns + protection’ business, which is expected to increase new business value margins for insurance companies. The success of dividend-type critical illness insurance depends heavily on the sales capabilities of agents. Among listed insurers, China Pacific Insurance (CPIC), Ping An, and China Life Insurance have relatively high per-agent New Business Value (NBV), while CPIC, Ping An, and PICC maintain higher levels of per-agent new premium income.

Dividend-type health insurance is expected to enhance the stability of premium income for life insurers. Dividend insurance products can address interest margin risks in low-interest-rate environments while increasing the attractiveness of policy returns, thereby reducing uncertainties in profit sources from protection-oriented product development. The introduction of dividend-type health insurance aligns with the developmental needs of life insurers, offering new opportunities for growth in premium income.

Equity asset allocation becomes more balanced and robust.

The rising potential for interest margin risks has increased the importance of equity investment allocation, with the transition toward floating-return products like dividend insurance driving the development of equity investments by insurance funds. Insurers’ asset allocation and risk management capabilities are the foundation for sustaining the long-term development of dividend insurance businesses. The recovery of dividend insurance largely hinges on capital market performance and insurers’ stable track record of dividend payouts. By optimizing equity asset allocation strategies, insurers aim to bridge gaps in asset-liability returns.

Policy optimization improves the long-term equity investment environment for insurance companies and supports insurance capital in long-term stock investments. First, a favorable long-term equity investment environment is being fostered, along with the optimization of insurers’ assessment mechanisms to encourage insurance institutions to focus on long-term value investment strategies. Second, adjustments are made to the upper limit of equity asset investment ratios corresponding to solvency adequacy rates, directly expanding the theoretical space for insurance capital equity investments. Third, efforts are underway to promote and further expand the scope of pilot programs for long-term stock investments by insurance funds, providing more institutions with a platform to participate in long-term stock investments. Additionally, against the backdrop of the full implementation of the new accounting standards, increasing holdings of FVOCI assets has become a new trend.

The proportion of insurance funds invested in equities tends to increase, with a more diversified equity allocation structure. In the first half of this year, the combined scale of insurance fund investments in stocks, funds, and long-term equity reached an increase of over 900 billion yuan, among which investments in stocks and long-term equity grew relatively faster. Following the expansion of pilot programs for long-term stock investments since last year, insurers participating in these pilots have seen a growing trend in long-term equity investments. The proportion of insurers’ stock investments is significantly higher than that of fund investments, with the industry widely adopting an active stock investment strategy. The proportion of assets in OCI accounts is expected to continue rising as insurers seek more opportunities in long-term equity investments. From the perspective of equity allocation, there is potential to maintain a base position in value stocks characterized by stable ROE and high dividends, enhancing the robustness of portfolio investments. Meanwhile, as the economy undergoes a shift between old and new drivers, the contribution of emerging industry investments to portfolio performance is also expected to increase further.

Fundamentals continue to improve, with investment value steadily rising.

Since the second half of 2024, insurance stocks have performed exceptionally well in the market, primarily driven by expectations of continued improvement on the asset side, which has propelled the valuation recovery of insurance stocks. On the liability side, in recent years, under regulatory guidance, insurance companies have implemented dynamic预定 interest rate adjustment mechanisms, along with ongoing cost reduction initiatives such as ‘unified reporting and execution,’ laying a solid foundation for optimizing product costs. Currently, the earnings elasticity of insurers’ asset side has strengthened, favorable investment policies continue to emerge, and the liability side is advancing the process of product transformation, consolidating premium income while reducing costs. The fundamentals of insurance stocks are expected to continue improving, boosting their equity investment value.

Risk Factors

Stricter industry regulatory policies have led to premium income growth falling short of expectations; capital market volatility has resulted in weaker-than-expected investment performance, exacerbating the risk of interest margin losses.