Huachuang Securities: Is it ineffective to find the anchor of life insurance valuation PEV?

Huachuang Securities released a research report stating that the current life insurance sector is significantly undervalued, mainly influenced by the capital market in the short term. In the medium to long term, the market may have a different expectation of the "interest spread loss" for insurance companies, and the investment return implied by PEV is overly pessimistic. Assuming that interest rates continue to fluctuate within the current narrow range, the profitability of life insurance companies may bottom out and rebound in the next three years, driving valuation growth. The current life insurance sector is both offensive and defensive, with low valuations providing a safety margin. The positive effect of the stock market rally is yet to be fully realized. Key points of Huachuang Securities' view: Why is the current valuation of life insurance cheap? The factors affecting PEV valuation mainly include: (1) Interest rate center: The core factor affecting the discount of PEV valuation under low interest rate environment is the pressure on net investment income, which is essentially the damage to the confidence of EV caused by the assumption of investment income rate not being realized. (2) NBV growth rate: After the policy retreat, the sustainability of NBV growth rate may face some challenges, but the bank believes that dividend insurance has a "fixed income +" attribute and value-added services, and expects new business to maintain positive growth. (3) Excess return ability of equity assets: Historically, the insurance sector has resonated with the market trend. Although equities have warmed up since April, insurance companies have not shown a clear upward trend due to short-term capital market influences. The bank expects that after the chips are exhausted, the positive equity outlook may help drive the "catch-up" of insurance stocks. Is equity assets replacing interest rate trends becoming a core influencing factor? No. On the one hand, the contribution of net investment income rate has been more than 90% in the past decade; on the other hand, the long bull market since September 2014 has helped boost the insurance market, but the PEV valuation has still not exceeded 1x, reflecting the constraint of interest rates. The impact of equities on valuation is manifested in the current profit expectations in the first stage, affecting static PEV valuation; in the second stage of uptrend, it is through raising long-term investment income expectations to raise valuation, reflecting the excess pricing of some insurance companies' investment management capabilities. In addition, the PE valuation method is affected by accounting measurement differences, resulting in lack of comparability between EPS in the industry. Although the PB valuation method is not affected by the above factors, it undervalues the future value of existing policies, and ROE also has comparability flaws under the new regulations.