Xiangcai Securities: The fundamental improvement trend of insurance assets and liabilities is clear, maintaining an "overweight" rating for the industry.

Xiangcai Securities released a research report stating that since the beginning of the year, the improvement in the fundamentals of insurance companies has been continuously strengthening. On the asset side, the pilot expansion of long-term equity investments, which leads to more diversified and balanced equity asset allocations by insurance companies, is expected to drive investment performance improvement and valuation repair of insurance stocks. On the liability side, the establishment of a dynamic adjustment mechanism for predetermined interest rates and the implementation of regulatory policies such as "unifying reporting and supervision" are pushing insurance companies to achieve cost reduction and fee reduction. In addition, the accelerated transformation of products such as dividend insurance helps alleviate the pressure of mismatched assets and liabilities and effectively reduce overall interest rate risk. The continuous improvement in the fundamentals of insurance companies is expected to boost investment value steadily. The industry maintains a "hold" rating. Key points of Xiangcai Securities are as follows: Accelerated product transformation, dividend insurance embraces new growth opportunities The new regulations on health insurance bring opportunities for the development of dividend-type health insurance. In recent years, as regulatory policies strengthen risk prevention and the downward trajectory of predetermined interest rates weakens product competitiveness, life insurance companies have actively adjusted their product strategies, with dividend insurance becoming the product layout direction for promoting strategic transformation of life insurance companies. After more than twenty years, dividend-type health insurance will once again come into the public eye. The China Banking and Insurance Regulatory Commission issued the "Guiding Opinions on Promoting the High-Quality Development of Health Insurance," proposing to support insurance companies with good regulatory ratings to carry out dividend-type long-term health insurance business, accelerating the growth of health insurance business. The development of dividend-type health insurance helps optimize the product structure and cost structure of insurance companies. Compared to intensely competitive pure protection products, dividend-type critical illness products belong to the "floating income + protection" business, which is expected to bring about an increase in new business value rate for insurance companies. The development of dividend-type critical illness insurance business depends on the sales capabilities of agent channels. Among listed insurance companies, Taikang, Ping An, and China Life have relatively high per capita NVB in individual insurance channels, while Taikang, Ping An, and PICC have per capita new single premiums in individual insurance channels at a high level. Dividend-type health insurance is expected to enhance the stability of life insurance premium income. Dividend insurance products are able to cope with the interest rate risk in a low-interest rate environment, while enhancing the attractiveness of policy returns and reducing the uncertainty of profit sources for protection products. The launch of dividend-type health insurance caters to the development requirements of life insurance companies and is expected to bring new opportunities for growth in life insurance premium income. More balanced and stable equity asset allocation The importance of increasing equity investment allocation to counter potential interest rate risk, as well as the transformation of products like dividend insurance that represent floating income-type products, is driving the development of insurance funds' equity investments. The asset allocation and risk management capabilities of insurance companies are fundamental to the sustainable development of dividend insurance, as the recovery of dividend insurance largely depends on the performance of the capital market and the stable dividend payment record of insurance companies. By optimizing equity asset allocation strategies, insurance companies can bridge the gap in asset-liability income. Policies optimize the long-term equity investment environment for insurance companies and support insurance funds to engage in long-term equity investments. Firstly, creating a favorable long-term equity investment environment and optimizing insurance company evaluation mechanisms to encourage insurance institutions to focus on long-term value investments. Secondly, adjusting the cap on the proportion of equity assets corresponding to the solvency adequacy ratio to expand the theoretical space for equity investments by insurance funds. Thirdly, promoting and further expanding the scope of long-term stock investment trials for insurance funds to provide a platform for more institutions to participate in long-term stock investments. In addition, with the comprehensive implementation of new accounting standards, increasing investments in FVOCI assets has become a new trend. The proportion of insurance fund stock investments is trending upward, making the equity allocation structure more diverse. In the first half of this year, the total scale of insurance fund stock, fund, and long-term equity investments increased by over 900 billion yuan, with stock and long-term equity investment growing rapidly. With the expansion of long-term stock investment trials since last year, insurance companies participating in the trials have seen growth in long-term equity investments. The proportion of stock investments by insurance companies is much higher than that of fund investments, and the industry generally adopts an active stock investment strategy. The proportion of OCI account assets in insurance funds is expected to continue to rise, seeking more opportunities for long-term equity investments. In terms of equity allocation direction, it is expected to continue to focus on value stocks with stable ROE and high dividends as the core positions, enhancing the stability of portfolio investments. At the same time, as the economy shifts from old to new growth drivers, investments in emerging industries will further contribute to portfolio performance. Continuous improvement in fundamentals, steady increase in investment value Since the second half of 2024, the insurance stock market has performed well, mainly due to the continuous improvement in asset-side expectations driving the valuation repair of insurance stocks. On the liability side of insurance companies, in recent years, under the guidance of regulatory authorities, product pricing with dynamic predetermined interest rate adjustment mechanisms has been used as a guide, and cost reduction actions such as "unifying reporting and supervision" are continuously advancing, laying a solid foundation for optimizing product costs. Currently, the performance elasticity of insurance companies' assets has been enhanced, favorable investment policies continuously introduced, product transformation processes on the liability side are ongoing, consolidating premium income and reducing costs. The fundamentals of insurance companies are expected to continue to improve, driving the increase in the value of stock investments. Risk Warning Tightening of industry regulatory policies may lead to slower-than-expected growth in premium income; fluctuations in the capital market may result in investment performance falling short of expectations, and the risk of interest rate spread may increase.