CITIC SEC: Hong Kong Stock Insurance Performance Accelerates, Valuation Space Expected to Further Open Up.

CITIC SEC releases research report stating that the performance of Hong Kong-listed insurance companies this year has followed the overall market trend, but their fundamentals are significantly better than the overall market. Whether compared within the financial sector or under the dividend asset framework, there are significant opportunities for rotation. Although Hong Kong-listed insurance companies have outperformed A-shares this year in terms of excess returns, there is still room for valuation recovery, especially in this current trend of recovery where the improvement in profitability has not been fully priced in. This continues to provide space for the performance of Hong Kong-listed Chinese insurance companies. From a cyclical perspective, insurance companies are entering a phase of benign balance sheet expansion. Policy-side measures to reduce costs and increase efficiency, product-side transitions to dividend insurance to alleviate operational pressures, channel-side efforts to convert savings deposits through bank-insurance channels, and investment-side increases in equity allocation to enhance market pricing power are expected to lead insurance stocks into a new upturn cycle. Key points from CITIC SEC are as follows: Accelerating performance of Hong Kong-listed insurance companies brings potential for rotation. Compared to the market-driven by valuation expansion this year, the Hong Kong-listed insurance sector has clear fundamental support. As of December 12, 2025, profit forecasts for 2025 have been raised by 37.5% compared to mid-March of the same year, while at the same time, the profit forecast of the Hang Seng Index for 2025 has been adjusted down by 3.5%. Profit forecasts for 2026 of Hong Kong-listed insurance companies have also increased by 17.1% since early August, while the Hang Seng Index is stabilizing its profit forecast for 2026 under material and insurance contributions. However, the valuation recovery of Hong Kong-listed insurance companies throughout the year has been significantly weaker compared to the overall market. In comparison within the financial sector, Hong Kong-listed insurance companies have continued to underperform brokerages and banks from 2023 onward. The valuation recovery is lagging behind the entire financial sector, while high dividend-yielding energy and utilities stocks are still pressured by performance expectations, insurance stocks have not recovered to their 2023 dynamic price-to-book levels. This indicates that insurance stocks not only have rotation opportunities within the financial industry but also present clear opportunities from a market comparison perspective. Profit support gives room for further valuation expansion of Hong Kong-listed Chinese insurance companies. As of December 19 this year, Hong Kong-listed insurance stocks have outperformed A-share insurance stocks by 22 percentage points and the A/H premium rate has declined from 62% at the end of 2024 to 30%. However, the current valuation of Hong Kong-listed insurance companies is still low compared to their historical levels, indicating strong potential for valuation adjustments. The MRQ price-to-book value (overall method) of Hong Kong-listed insurance companies currently stands at 1.31 times, still in the 31.2th percentile since 2011. Dynamic ROE of insurance companies continues to rise, driving the main dynamics of PB recovery this year. From a PB-ROE perspective (circulating market value weighted), the current dynamic PB of Hong Kong-listed insurance companies at 1.65 times and dynamic ROE of 16.4% are still significantly higher than the historical regression line of the past 15 years. In terms of individual stocks, Chinese insurance companies play an important role in boosting earnings expectations for Hong Kong-listed insurance stocks. With the support of an improving insurance cycle, Chinese insurance companies may offer better valuation performance. Although the A/H premium rate of Chinese insurance companies has significantly decreased, with the increased holding proportion of southbound funds and improved liquidity, the discount factor of H-shares may gradually ease. Stronger balance sheets signal a new upward cycle for insurance stocks. Since 2024, insurance companies have seen rapid growth in net assets, with their balance sheets expanding rapidly, indicating they are entering a new cycle of benign circulation. On the policy side, strict regulatory measures aimed at reducing profit and fee differentials continue, successive downgrades of benchmark interest rates have lowered the debt costs of insurance companies, and the integration of sales and operations is guiding the industry to weaken cost competition. On the product side, the transformation of dividend insurance has been significant, enhancing the asset-liability matching and profit certainty of insurance companies. On the channel side, with a large amount of savings deposits maturing and insurance product yields having a comparative advantage in a low-interest environment, the recovery of premium income through bank-insurance channels is expected to show rapid growth. On the investment side, insurance companies continue to increase equity allocation to enhance long-term returns, strengthening their beta attributes. Investment strategy: Focus on alpha opportunities in the insurance sector. Considering that the beta logic for 2025 has already been maximized, some companies are facing pressure from earnings declines due to high bases, which could suppress the pace of valuation recovery. Therefore, in 2026, it is important to focus on alpha opportunities in the insurance sector under the backdrop of market recovery and high-quality varieties that have significant valuation recovery potential. Risk factors: Sharp decline in long-term interest rates; substantial market volatility; policy sales falling short of expectations; continued attrition of agents; slower-than-expected growth of bank-insurance channels.