CITIC SEC: The operational logic and market landscape of the insurance industry are being reshaped, and outstanding leading insurance companies are expected to continue consolidating their advantages.

CITIC SEC released a research report stating that the issuance of new regulations is a cornerstone for the insurance industry to shift from scale expansion to high-quality development. In the short term, there is a divergence between the pressure on funds in the first half of the year and the good performance of fundamentals. Currently, the PB valuation and dividend yield provide a margin of safety. In the medium to long term, the industry opportunities lie in a cycle reversal that will bring a dual impact on valuation and fundamentals. It is recommended to focus on leading insurance companies. CITIC SECs main points are as follows: Event On August 20, 2026, the National Financial Regulatory Administration officially released the "Asset and Liability Management Measures for Insurance Companies," which will take effect on January 1, 2027. 1) The new regulations propose three major management objectives and four basic principles. The three major objectives are: matching of duration structure to prevent interest rate risks and reinvestment risks; matching of cost and returns to prevent interest spread loss risks; and liquidity matching to prevent liquidity risks. The four basic principles are: comprehensive coverage, reasonable matching, prudent and steady, and overall coordination, requiring the management of all assets and liabilities of general accounts as a whole while considering differentiated allocation based on different types of liability characteristics. 2) The new regulations are accompanied by the release of regulatory and monitoring indicator documents for property insurance and life insurance. Property insurance: Three regulatory indicators are set: coverage ratio of idle funds (100%), income coverage ratio (the sum of insurance service income and aggregate investment income over the past three years aggregate cost over the past three years, 100%), and liquidity coverage ratio (100%). Four monitoring indicators include interest spread one, interest spread two, and interest spread one under two stress scenarios. Life insurance: Four regulatory indicators are set: interest rate risk hedging ratio (50%-150%, sensitivity to inflows not lower than 5% when below 50%), comprehensive investment income coverage ratio (the sum of comprehensive investment income over the past five years the sum of liability funding costs over the past five years, 100%), net investment income coverage ratio (the net investment income over the past three years the liability guarantee cost over the past three years, 100%), and liquidity coverage ratio (100%). Eight monitoring indicators include effective duration gap, change rate of basis point value, interest spread three, interest spread four, and income-cost differential under multiple stress scenarios, and liquidity matching rate. 3) Changes in the formal draft compared to the previous consultation draft: The formal draft reduces the effective duration gap for life insurance from a regulatory indicator to a monitoring indicator, eliminating the hard threshold of 5 years; upgrading the interest rate risk hedging ratio to a regulatory indicator. For insurance companies that do not currently meet the regulatory indicators, a three-year transition period is allowed. Impact of the new regulations: Operational logic shifts to full-chain collaboration, and leading insurance companies are expected to expand their relative advantages. The implementation of the new regulations is expected to drive the industry to strengthen long-term operational capacity. The traditional growth model some companies adopted, characterized by high-cost liabilities combined with high-risk assets, will completely exit the historical stage. Large insurance companies, with diverse investment channels and professional teams, are more likely to achieve cost-return matching; they can reverse-engineer liability products based on asset-side capabilities; and they have the ability to build integrated information systems to support complex indicator monitoring. Small and medium-sized insurance companies still need to address shortcomings in departmental independence, data governance, modeling tools, and third-party validation, facing relatively greater pressure for compliance investment and business structure adjustment. From the overall industry perspective, the rigid requirement for cost-return matching will suppress the disorderly expansion of high-cost liability products, the target of duration structure matching will promote corresponding allocation of long-term liabilities to long-term assets, and the dual-track supervision of liquidity coverage ratios will enhance the industry's risk resistance capabilities. The compliance costs and capability thresholds will accelerate industry consolidation, further reinforcing the trend of resource concentration toward leading firms. Investment logic impact: The new regulations will reshape the valuation framework for insurance stocks from three dimensions. 1) Mitigation of interest spread loss risks leading to valuation recovery. For a long time, one of the core reasons for the pressure on insurance stock valuations has been market concerns about interest spread loss risks. The new regulations incorporating cost-return matching and interest rate hedging ratio into hard regulatory indicators mean that insurance companies must proactively control liability costs and optimize asset duration matching. The ability of listed large insurance companies to cover liability costs with investment returns is relatively strong, and the alleviation of concerns about interest spread losses will drive PE valuation recovery. 2) Independence requirement for asset-liability management accelerates industry differentiation, expanding the premium for leading firms. Listed insurance companies, due to their significantly greater investment capabilities in organizational structure, talent reserves, and information systems than small and medium-sized insurance companies, are able to more rapidly complete the construction of independent departments and cross-departmental coordination mechanisms. This disparity in compliance ability will directly reflect on business expansion space and regulatory ratings, which in turn will differentiation in market share and profitability. 3) Shift in allocation logic based on asset-liability linkage. Listed insurance companies, with stronger brand credibility and capital scales, have clear advantages in areas such as alternative investments, long-duration interest rate bonds, and infrastructure debt plans, enabling them to better achieve duration structure matching. At the same time, the asset-liability linkage logic will also suppress dependence on short-term high cash value products, promoting a transformation of business toward protection and long-term savings, improving new business value rates. Risk factors: Long-term downward trend in interest rates; significant fluctuations in the stock market leading to investment losses; phase of stagnation in premium growth or growth below expectations.