Guotai Haitong: New asset-liability regulations officially implemented, improving the stability of insurance companies' profits and supporting valuation recovery.

Guotai Haitong released a research report stating that the China Banking and Insurance Regulatory Commission (CBIRC) has issued the "Regulations on Asset-Liability Management for Insurance Companies," which strengthens the orientation of asset-liability matching. It is expected to guide insurance companies towards balanced asset-liability development and enhance profit stability. Currently, the PEV valuation of insurance stocks still reflects relatively pessimistic expectations for investment returns. The bank believes the core reason lies in the high uncertainty of ROE caused by asset-liability mismatches. It is anticipated that the "Asset-Liability Management Regulations" will profoundly impact the development of insurance business and asset allocation behavior of insurance companies from both governance systems and operational levels. Effective asset-liability matching management will benefit the improvement of profitability stability for insurance companies, thereby constituting effective support for valuation recovery and maintaining an "overweight" rating. Guotai Haitong's main points are as follows: Event: On August 21, the CBIRC issued the "Regulations on Asset-Liability Management for Insurance Companies" (hereinafter referred to as "the Regulations"), which will take effect on January 1, 2027, with a three-year transition period for non-compliant insurance companies. The purpose of the issuance of the Regulations is expected to guide the establishment of an effective asset-liability management system for insurance companies. 1) The 2024 version of the insurance "Ten National Policies" clearly states to "strengthen the dynamic supervision of asset-liability coordination," and the Regulations are an important measure to implement the spirit of the State Council's important documents and improve the prudent regulatory system; 2) In response to the low interest rate market environment, promote insurance companies to improve their asset-liability management structure, policies, and procedures; 3) In the context of the comprehensive implementation of new accounting standards in the industry, the impact of interest rate fluctuations on assets and liabilities has significantly increased, posing higher requirements for asset-liability management. The Regulations strengthen the orientation of asset-liability matching and further optimize relevant indicators compared to the draft for public consultation. 1) In terms of regulatory indicators and monitoring indicators (core changes): The interest rate risk hedging ratio replaces the duration gap indicator (interest rate risk hedging ratio = cash flow inflow interest rate sensitivity / outflow interest rate sensitivity), which more intuitively reflects the degree of hedging against interest rate risks in assets and liabilities; the effective duration gap has been lowered as a monitoring indicator for personal insurance to serve as an early warning, no longer a rigid compliance red line; the liquidity coverage ratio removes pressure scenario limitations; and improves the calculation criteria for the coverage ratios of deposited funds, comprehensive investment income, and liquidity. 2) In terms of asset-liability management goals and principles: "Matching of term structures" is modified to mean reasonable matching of asset-liability cash flows over a longer-term structure, and the order of three principles on the asset side is modified to "safety, liquidity, profitability." 3) In terms of governance structure: The department for asset-liability management is changed from "set up" to "set up or designate," allowing for moderate flexibility in rigid independent department requirements. 4) In terms of business planning and product development: It requires consideration of changes in both asset and liability sides. 5) In terms of entrusted investment relationships: It clarifies that the entrusting party must provide necessary information to the entrusted party such as duration targets, required investment yields, and expected cash flow changes. 6) Implementation requirements: The intended implementation date is January 1, 2027. The first quarterly report and annual report will be the fourth quarter report of 2026 and the annual report of 2026, respectively. For insurance companies that do not meet the regulatory indicators after the implementation of the Regulations, a three-year transition period will be allowed, and they must report to the regulatory authorities by the end of March 2027. Guiding balanced asset-liability development, it is expected that leading insurance companies will benefit more. On the liability side, the Regulations strengthen the requirements for asset-liability coordination and guide reasonable cost control; on the asset side, the Regulations emphasize interest rate risk management, support the allocation of high safety and high liquidity assets, and focus on matching costs and returns. It is expected that leading insurance companies that align with the regulatory requirements for asset-liability matching will benefit more. Risk warning: Long-term interest rates may decline; equity market volatility; improvements in liability costs may not meet expectations.