Guolian: Tighter regulation expected to drive leading insurance companies to expand their advantage by 2025.

Guolian released a research report that stated with the implementation of the "separation of sales and underwriting" in the individual insurance channel, continued lowering of product reserved interest rates, and active adjustment of product structures by insurance companies, it is expected that NBV Margin will further improve by 2025, thereby supporting the continued positive growth of NBV. Under strict supervision, the enforcement of the "separation of sales and underwriting" in auto insurance is expected to increase, leading to a continued improvement in the expense ratio of property insurance by 2025. At the same time, the regulatory authorities have repeatedly proposed to deepen the comprehensive reform of auto insurance, and it is expected that new energy vehicle insurance will be a key focus of the reform in the future. As the independent pricing factors and pure risk premiums of new energy vehicle insurance become more market-oriented, the claims ratio of new energy vehicle insurance is expected to significantly improve. Key points from Guolian: Review: Stock prices and performance both show impressive results Since 2024, improvements in the asset side environment and better-than-expected performance have driven the rise of the insurance index. As of December 24, 2024, the insurance index and the CSI 300 index rose by 44.8% and 16.1% respectively. The insurance index achieved positive absolute and relative returns. The performance of listed insurance companies in the first 9 months of 2024 was impressive. Looking at the liability side, the significant improvement in the NBV Margin of life insurance in the first 9 months of 2024 has driven high growth in NBV; the performance of the COR of property insurance has varied, but leading property insurance companies have still achieved underwriting profits. From the asset side, the recovery of the equity market has led to a substantial improvement in investment income for insurance companies, thereby supporting significant year-on-year growth in net profit. Prospects for the liability side of life insurance: Improved value ratio is expected to support continued improvement in NBV From the perspective of new premiums, in the context of low risk preferences among residents, savings-type insurance products are expected to continue to be favored by customers due to their liquidity attributes. Benefiting from this, the new premiums of life insurance in 2025 are expected to remain relatively stable. In terms of NBV Margin, with the implementation of the "separation of sales and underwriting" in the individual insurance channel, continued lowering of product reserved interest rates, and active adjustment of product structures by insurance companies, NBV Margin is expected to further improve in 2025, thereby supporting the continued positive growth of NBV. Considering that the cost of liabilities for life insurance is expected to marginally improve, the risk of interest rate spread is expected to continue to be resolved. Prospects for the liability side of property insurance: Tightening regulations are expected to drive leading insurance companies to expand their advantages Under strict regulatory background, it is expected that the enforcement of the "separation of sales and underwriting" in auto insurance will continue to increase by 2025, leading to a further improvement in the expense ratio of property insurance. The regulatory authorities have also repeatedly proposed to deepen the comprehensive reform of auto insurance, and it is expected that new energy vehicle insurance will be a key focus of the reform in the future. As the independent pricing factors and pure risk premiums of new energy vehicle insurance become more market-oriented, the claims ratio of new energy vehicle insurance is expected to significantly improve. In this context, the underwriting profitability of the property insurance industry is expected to marginally increase. Leading property insurance companies, with advantages in pricing and risk control, are expected to maintain a leading underwriting profitability level in the industry. Asset side outlook: Bonds and high-dividend stocks are expected to remain key investments for insurance funds Under the background of the downward trend in long-term interest rates and the implementation of new regulations, the pressure of asset allocation for insurance companies has significantly increased. To alleviate the pressure of asset-liability matching and resolve the risk of interest rate spread, it is expected that in 2025, insurance companies may: 1) Increase allocation to bonds: An increase in the proportion of bonds is beneficial for insurance companies to lengthen the duration of their assets, thereby shortening the duration gap of their assets and liabilities and ensuring relative stability of net assets. 2) Increase allocation to high-dividend stocks: An increase in the proportion of high-dividend stocks is beneficial for thickening the investment income of insurance companies, thereby alleviating the pressure of declining investment income and reducing fluctuations in the profit and loss statement. Investment recommendation: Maintain a rating of "outperforming the market" for the insurance industry Currently, the valuation of the insurance sector is still at a historically low level and has a safety margin. Looking ahead, life insurance NBV is expected to continue to improve, and property insurance profitability is expected to steadily increase. Furthermore, with the continued implementation of favorable policies, the equity market is expected to recover and real estate risks are expected to gradually be resolved. In this context, the investment income of insurance companies is expected to improve, thereby supporting the valuation recovery of the sector. Maintain a rating of "outperforming the market" for the insurance industry. Key stock recommendations: New China Life Insurance (601336.SH) (greater flexibility on the asset side, larger increase in NBV Margin), China Life Insurance (601628.SH) (more stable liability side, greater flexibility on the asset side), China Pacific Insurance (601601.SH) (leading performance on the liability side, relatively better fundamentals), Ping An Insurance (601318.SH) (benefiting more from the improvement in the asset side), PICC P&C (02328) & People's Insurance (601319.SH) (the business model has scarcity). Risk warning: Economic recovery falls short of expectations; continued decline in long-term interest rates; increased volatility in the equity market; natural disasters exceed expectations.