Huachuang Securities: The cost of personal insurance for listed insurance companies has decreased year-on-year for 25 years, and the long-term "spread loss" risk is expected to be basically eliminated.

Huachuang Securities released a research report stating that the new single cost, as a "fast variable," has continued to decrease significantly for three consecutive years, reflecting the dynamic adjustment of regulatory and industry-driven predetermined interest rates, the effectiveness of the reform of unifying online and offline channels in the entire distribution system, and a significant decrease in product and channel costs. The existing cost is a "slow variable," affected by the dual impact of new single inflows and some existing policies expiring. It is expected that over time, the cost reduction effects of new policies will gradually be reflected in the existing costs. The bank believes that the PEV valuation of the life insurance sector is generally below the 50th percentile level of the past 10 years, indicating concerns about "interest rate spreads" in the market in addition to short-term disturbances on the asset side. However, new policies serve as leading indicators or predict the future downward trend of existing costs, as asset-side interest rates stabilize, insurance companies actively position themselves in high-interest equity assets to solidify the net investment yield safety cushion. In the medium to long term, with the simultaneous efforts of regulation and the industry, the risk of "interest rate spread" is expected to be mostly eliminated, and PEV valuation is expected to recover to 1x. Main points of Huachuang Securities are as follows: - The average new single cost for listed insurers is 2.03%, and the existing cost is 2.76%. - By 2025, based on sensitivity analysis of embedded value, the VIF break-even yield rate (i.e., existing policy comprehensive liability cost, hereinafter referred to as "existing cost") for listed insurers is in the range of [2.18%,3.49%], and the NBV break-even yield rate (i.e., new policy comprehensive liability cost, hereinafter referred to as "new single cost") is in the range of [1.48%,2.74%]. There is a significant differentiation among insurers, expected to be influenced by factors such as product strategies, term structures, deferred premium ratios, and channel fee control. Currently, new single costs are lower than existing costs, and it is expected that with the continuous inflow of new policies, existing costs may decline. - The average year-on-year decline in new single costs is 73 bps, while existing costs change marginally and differentially. - In 2025, there is a noticeable decrease in the new single costs of listed insurers in the life insurance sector, with an average decline of 12 bps from 2025H1 and an average year-on-year decline of 73 bps, mainly expected to be driven by reductions in predetermined interest rates and the integration of personal insurance channels. Existing costs have changed minimally, with Ping An, PICC, and New China Life witnessing slight increases, while Taikang and Sunlight have seen decreases, and China Life has remained relatively stable. Although new single costs are lower than existing costs, the latter are also affected by new policy inflows and the partial exit of existing policies. It is expected that some insurers' low-cost policies expiring will offset the dilution effect of new policies. - On average, the net investment yield rate outperforms the existing cost by 61 bps, and the total investment yield rate exceeds it by 300 bps. - The net investment yield rate is the cornerstone of insurers' investment returns, with nearly 90% of total investment returns coming from it over the past five years. In 2025, despite fluctuations in short-term interest rates, the downward trend in rates persists, keeping the net investment yield rate under pressure, with an average of 3.37% for listed insurers, higher than the existing cost by 61 bps. There is differentiation among companies, with New China Life having a net investment yield rate lower than the existing cost, expected to be influenced by a lower proportion of bonds and high-dividend stocks. Other insurers all have net investment yield rates higher than the existing cost. The total investment yield rate is significantly influenced by the current performance of the equity market, with an average of 5.78% for listed insurers in 2025, exceeding the existing cost by 300 bps. - Recommended order: China Life Insurance, China Pacific Insurance, PICC P&C - Risk warning: Modeling errors, slower-than-expected transformation, accelerated decline in interest rates.