GF SEC: The insurance sector has a strong fundamental performance, driven by the AI trend, the market has clearly shown an upward trend.

GF SEC released a research report stating that the fundamentals of the insurance sector are strong, but the market style has caused the sector to significantly underperform the market. Looking ahead to the asset side, short-term focus is on high growth in interim performance, while long-term attention is on the level of central investment yield. There is a significant deviation between the valuation of the insurance sector and its fundamentals, with the prosperity of the liability side continuing to rise and the cost of liabilities expected to continue to decrease. However, the influence of market style has caused the sector's valuation to be at a relatively low level. GF SEC's main points are as follows: Looking back at the first half of 26, the fundamentals of the insurance sector were strong but under the influence of market style, the sector significantly underperformed the market. As of June 25, the insurance index fell by 26%, while during the same period, the Shanghai and Shenzhen 300 Index/CSI 800 Index/GEM Index increased by 6.8%/9.9%/34.2% respectively. Due to geopolitical conflicts at the beginning of the year, the sector retreated, but as market risk appetite increased and the technology sector reached new highs, other sectors suffered. The fundamentals of the insurance sector were strong, with the first quarter new business value growth rate compared to the previous year being as follows: China Life (75.5%) > New China Life (24.7%) > Ping An (20.8%) > AIA (17.4%) > PICC (9.6%), achieving value growth for four consecutive years. Looking ahead to the asset side, short-term focus is on high growth in interim performance, while long-term attention is on the level of central investment yield. In the outlook for the performance of the 26 interim report, the AI trend clearly drove the market upwards, with the CSI 800 Index/Equity Fund rising by 9.6%/19.3% this year, compared to only 0.9%/5.4% during the same period last year. Considering the significant increase in market size by insurance companies in the second half of 25, the scale of stocks and funds held by insurance companies increased significantly in Q2 of 26 compared to the same period last year, which is expected to amplify the market's influence on performance growth. Based on the sensitivity analysis disclosed in the 25 annual report, if the equity prices change by 10%, the pre-tax profits of China Life, Ping An, PICC, and New China Life would increase by RMB 93.47 billion, RMB 38.14 billion, RMB 17.27 billion, and RMB 17.86 billion respectively. Therefore, the corresponding increase in forecast performance for the 26 interim report is 209%, 50%, 56%, and 109% respectively. In the long term, influenced by the decline in interest rates, the net investment yield estimated by the bank has dropped from around 3.4% in 25 to 2.7% in 30. Considering stable capital gains of 4%-6%, the average stable total investment yield is expected to be 3.7%-4.1% from 25 to 30, significantly higher than the investment yield implied by current valuations. Looking ahead to the liability side, in a time of great change, prosperity is rising. There has been a shift in product structure, with the industry's mainstream products starting to shift from critical illness insurance to traditional insurance in 2021. By 2026, as interest rates remain low and traditional insurance has lower predetermined rates, products are expected to accelerate towards dividend insurance. Looking ahead, the sales of dividend insurance are positively correlated with industry investment yields and negatively correlated with competitor yields. The clear market uptrend from 24 to 26 has pushed investment yields upwards, combined with the decline in deposit rates favoring dividend insurance. Additionally, the thickening of special reserves in recent years has favored the actual calculation rates of medium and long-term dividend insurance, and it is expected that dividend insurance will continue to drive industry liabilities up in the medium to long term. There has been a major change in the distribution structure, with the industry's distribution structure changing with adjustments in product structure, shifting from bank insurance channels to individual insurance channels. Starting in 24, savings-type products have taken the lead, and the integration of banking and insurance has promoted the increase in the value rate of bank insurance channels, with the percentage of bank insurance channels continuing to rise. In 2025, the percentage of bank-insurance in new policies of listed insurance companies is as follows: New China(61.5%) > PICC(43.1%) > CPIC(38.7%) > China Life (25%) > Ping An(19.8%). There has been a major change in product costs, as regulatory measures at the beginning of 23 protected the industry and reduced overall liability costs. This included the integration of banking and insurance, which promoted a decrease in expense ratios (the commission fees and commissions of listed insurance companies decreased continuously from 24 to 25, and key indicators such as commission fees and commissions/the premium for new policies were continuously reduced). The decrease in predetermined rates and the control of actual settlement rates of floating products pushed down the industry's cost of funds rate. "NBV flat yield rate" and "VIF flat yield rate" continued to decrease. When the bank calculated the future flat yield rate, it was estimated that the flat yield rate would drop to around 2.2% by 2030, and the premium inflow flat yield rate would drop to a level of 1.84%. Risk warnings: Decline in long-term interest rates, market fluctuations, slower-than-expected growth in premium income, tightening of regulations, etc.