Behind the high increase in net profit: how to measure the true value of insurance companies?

Recently, the news that "the performance of listed insurance companies collectively surged" has stirred up a small wave in the industry and the market. In the first three quarters of 2025, the five listed insurance companies on the A-share market collectively achieved a net profit attributable to shareholders of 426.039 billion yuan, a year-on-year increase of nearly 34%. China Life Insurance and New China Life Insurance saw their net profit in the third quarter increase by 91.5% and 88.2%, respectively. However, after the celebration cools down, this impressive report card also brings up a topic worthy of deep consideration: can net profit alone fully measure the true value of a company? If not, then what indicators should investors focus on? Understanding the net profit indicator Analyzing the third quarter reports of listed insurance companies, it can be seen that the increase in investment returns is the main driver behind the high increase in net profit for insurance companies. In the third quarter of this year, the capital market showed a noticeable rebound, with the total return of the Wind All-A Index increasing by about 19.46%. Discussions of a "slow bull market" and a "long bull market" were circulating in the market. Against the backdrop of insurance companies increasing their allocations to equity assets, the "profit-making effect" was significant. For example, in the first three quarters, The People's Insurance achieved a total investment income of 86.25 billion yuan, a year-on-year increase of 35.3%; China Life Insurance's total investment income was as high as 368.551 billion yuan, a year-on-year increase of 41%. However, this profit growth that relies on investment gains is uncertain, and once the capital market experiences fluctuations, it will directly reflect in the profit indicators. For example, in the same period of 2024, with the rebound of the equity market, the investment income of insurance companies soared, driving the net profit to "skyrocket"; whereas in 2023, the performance of listed insurance companies was overall affected by market factors and declined. Such large fluctuations actually stem from the fact that since 2023, listed insurance companies have generally adopted new accounting standards, with more financial assets measured at fair value, and any changes are directly included in the current period's profit. This means that when the market rises sharply, insurance companies' net profits also rise significantly, but when the market declines, insurance companies' net profits also decrease. Of course, net profit fluctuations are not solely influenced by a single factor. Besides the asset side drivers, net profit is undoubtedly also impacted by the liabilities side of insurance companies. Industry insiders explain that the business rhythm and the timing of profit release on the liabilities side also have an impact on the profit. Specifically, insurance sales show significant seasonality, such as the "Chinese New Year" period in the first quarter of each year, where premium income may account for over 40% of the annual target. However, due to the long-term nature of insurance business, the profit release on the liabilities side is not achieved at the same time as premium income, but is gradually recognized throughout the entire policy period based on actuarial assumptions. This timing characteristic of profit release means that a sharp increase in premium income in the short term does not directly correspond to a significant increase in current profits. Therefore, in this quarter's reports, it can be seen that while the insurance business income of some companies has significantly increased year-on-year, the level of net profit has not shown significant growth, which is a typical manifestation of the lagging nature of profit indicators. In fact, whether it is factors on the asset side or the liabilities side, they only affect the short-term performance of insurance companies, and the inherent long-term characteristics of the insurance industry determine that the development of its business and the realization of its value often require a longer time span. If one only focuses on net profit indicators, they may overlook the true value of insurance companies. Therefore, surpassing the net profit indicator and constructing a more comprehensive evaluation system, or exploring directions that can more urgently match the value of insurance companies, is needed. A multi-dimensional perspective on measuring company value Sorting through industry and external analyses, a comprehensive value evaluation system relies on many indicators: New Business Value (NBV) If net profit reflects a company's past operating results for a certain period, then new business value can help us anticipate the company's future profit situation. Using actuarial models, new business value actually expresses in present value form all the after-tax profits that a new policy may potentially generate for shareholders in the future. Thus, it directly reflects the company's future inherent value and growth potential in operating profit. On the other hand, if a company's new business value continues to grow, it indicates a strong ability to generate continuous revenue and achieve internal growth. Among the many listed insurance companies, SUNSHINE INS has strong capabilities in terms of new business value. According to statistics, since its listing, SUNSHINE INS has maintained consistent growth in new business value, increasing from 30.2 billion yuan in 2022, 36 billion yuan in 2023, 51.5 billion yuan in 2024, to 40.1 billion yuan in the middle of this year, showing a strong growth trend that cannot be ignored; more notably, it has maintained positive growth in new business value throughout the industry's transformation, a rare phenomenon among insurance companies, revealing this company's long-term profit potential. Contract Service Margin (CSM) Contract Service Margin (CSM) is a core concept introduced by International Financial Reporting Standard 17 (IFRS 17), and it can be understood as the "total expected profit pool" that has not yet been recognized, that a life insurance contract can bring to a company in the future this indicator does not reflect the money that the company has already earned but rather the profits that will gradually be released and recognized in the profit statement over the period in which insurance services are provided. This is like a reservoir, slowly releasing water and generating electricity over time. According to Huatai research reports, in terms of the size of CSM, China Life Insurance and Ping An Insurance maintain a leading position in the industry, while The People's Insurance and SUNSHINE INS have seen faster growth. For instance, in the mid-year performance report in 2025, SUNSHINE INS showed a life insurance CSM balance of 56.08 billion yuan, a growth of 10.3% from the end of the previous year. Many industry insiders believe that CSM fills the gaps of many traditional evaluation indicators because CSM is amortized over time after initial recognition and is less affected by short-term capital market fluctuations. Therefore, it can better reflect the continuous profit capabilities of a company's core insurance business compared to net profit. It is important to note that while both NBV and CSM are future profit evaluation indicators, there are significant differences in methodology, logic, and assumptions. Therefore, if a company claims that its new business value (NBV) is growing quickly, but its total CSM balance is weak or even declining, this may indicate that the profitability of the new business (such as the new business value rate) is under pressure, or that past profit estimations for certain businesses were overly optimistic, necessitating a "squeeze" (i.e., negative adjustment due to operating discrepancies). In comparison, companies like SUNSHINE INS, with significant increases in both NBV and CSM balance, demonstrate strong new business contribution capabilities and solid value accumulation. Non-financial indicators Customer satisfaction, market share, research and development investment, team capabilities, corporate governance, and other non-financial indicators, though difficult to quantify, are important components of a company's long-term value. For example, managing customers directly affects a company's profitability and is the fundamental cornerstone for a company to thrive across different cycles, especially when the market has transitioned from incremental competition to the new phase of stock competition, customer feedback determines whether a company can stand firm in the market. This can also be seen in the business practices of SUNSHINE INS. SUNSHINE INS's life insurance subsidiary, Yangguang Life, has implemented extensive customer demand research since the beginning of this year. Based on in-depth customer insights, they have optimized their customer classification management system, expanded product and service offerings, and enhanced the customer service experience. In the first half of this year, high-net-worth customer operations steadily increased, with a 20.5% growth in the number of customers with accumulated first-year standard premiums of 150,000 yuan or more, and a 17.5% growth in the number of customers with accumulated first-year standard premiums of 50,000 yuan or more. On the other hand, Yangguang Property & Casualty has won positive market feedback by upgrading its customer service, with personal auto insurance customer satisfaction ratings exceeding 9 points (out of 10). Additionally, in the first half of 2025, the proportion of non-auto insurance products purchased by personal auto insurance customers reached 60.9%, an increase of 5.4 percentage points year-on-year, demonstrating customer recognition of Yangguang Property & Casualty's comprehensive protection. For corporate clients, Yangguang Property & Casualty has continued to deepen the implementation of risk management services through the "Partner Action" initiative, providing various risk management services covering levels L1-L4 to 18,000 enterprise clients in the first half of 2025, further expanding its market presence. Moving forward, with the background of anticipated interest rate cuts, the release of the fourth life table, and the convergence of non-auto insurance reporting, models that solely rely on investment income growth may face challenges. The real value of a company lies not in the surge in profit in a single quarter, but in its long-term stable profit capability and sustainable business model. For investors, only by examining a company's value from multiple perspectives can they navigate through the fog of net profit fluctuations and discover high-quality assets truly worth holding onto for the long term.