Orient: 1H26 fundamentals continue to improve. It is suggested to keep focusing on the insurance industry.

Orient has released a research report stating that the fundamentals of the insurance industry continued to improve in the first half of 2026. The new business value (NBV), the contractual service margin (CSM), and the internal value of life insurance have all seen continued growth. The transformation of dividend insurance and the management of channel costs are driving a decline in the cost of liabilities for new business. The comprehensive cost ratio of property insurance has improved, enhancing the contribution from underwriting profits. Improvements in the equity market are releasing profit elasticity on the investment side. In the short term, net profit and the scale of life insurance premiums, as well as NBV, are facing high comparison bases in the third quarter of 2026, but the trends of declining liability costs, increasing value, and improved underwriting profitability in property insurance are still ongoing. In a low interest rate environment, high dividends provide valuation support, and the restoration of life insurance value and improved investment returns together support an increase in the valuation center. It is recommended to continue monitoring the insurance industry, which is characterized by robust management on both the asset and liability sides, sustained improvements in liability costs, and high shareholder returns. Orient's main points are as follows: Improvements in the equity markets are releasing profit elasticity, and high dividends continue to solidify the valuation bottom for insurance stocks. In the first half of 2026, the parent net profit of major listed insurance companies generally experienced high growth. China Life Insurance, Ping An Insurance, China Pacific Insurance, New China Life Insurance, The People's Insurance, CHINA TAIPING, and SUNSHINE INS reported year-on-year increases of +228.6%, +36.1%, +10.4%, +54.0%, +38.5%, +90.4%, and +38.3%, respectively. The investment side is the main source of profit growth. The fair value changes of FVTPL equity assets and increased income from the disposal of stocks and funds have driven profits to fully release elasticity in response to the rise in equity markets; the differentiation in profit growth rates among different insurers mainly depends on equity positions, stock accounting classifications, and investment strategies. Meanwhile, listed insurance companies continue to increase cash returns, with all five insurers in A-shares now implementing interim dividends. High dividends in a low interest rate environment further reinforce the allocation attributes of insurance stocks, while the restoration of life insurance value and improved investment returns together support the elevation of the valuation center. The growth rate of life insurance scale is stabilizing, and the declining costs of liabilities have become an increasingly important operating theme. In the first half of 2026, major listed insurance companies achieved positive growth in NBV, with the proportion of regular premiums increasing, one-time premiums from bank insurance decreasing, and channel costs improving, leading to further differentiation in the scale and value of new business. The CSM and internal value have both increased, and the accumulation of life insurance value continues to improve. The transformation of dividend insurance on the product side has accelerated significantly, with the combined premium proportion of the six disclosing companies increasing from 19.1% in 2025 to 36.1% in the first half of 2026. Coupled with lower preset interest rates and channel cost governance, the rigid cost of liabilities for new business continues to decline. On the channel side, enhancements in core personnel and per capita productivity of individual insurance have occurred, while bank insurance has further shifted from scale competition to value management under the constraints of regulatory Document No. 65, with the quality and sustainability of improvements on the liability side being significantly enhanced compared to previous periods. The growth of property insurance scale has slowed, and improvements in the comprehensive cost ratio have further elevated the importance of underwriting profits. In the first half of 2026, most major listed property insurance companies maintained low single-digit growth in premium income, with auto insurance essentially entering a low-growth phase and non-auto insurance becoming the main source of incremental growth. As the premium base for leading companies continues to expand, the marginal contribution of pursuing scale expansion to profitability is declining. During the same period, the comprehensive cost ratios for PICC Property and Casualty, Ping An Property and Casualty, Taiping Property and Casualty, Sunshine Property and Casualty, and Taiping Property and Casualty were 94.5%, 95.1%, 95.0%, 98.7%, and 98.0%, respectively, all below 100%, indicating significant improvements in underwriting profitability. Recent declines in comprehensive cost ratios mainly stem from the "unified reporting" in auto insurance, channel cost governance, and the shift towards online sales, while the central point of the payout ratios has not declined correspondingly. The current profitability improvements reflect better operational efficiency and optimization of business structure. The net investment return rate continues to be affected by reinvestment pressures, with equity allocations bearing more long-term yield and ROE-enhancing functions. In the first half of 2026, the annualized net investment return rates of major insurance companies continued to decline, as the yields on new bonds fell below those of existing assets, and historic high-yield bonds and non-standard assets continued to mature, leading to sustained reinvestment pressures on the asset side; significant improvements in the equity market have notably boosted the total investment return rate, with most companies seeing total investment returns clearly better than the same period last year. The division of asset allocation roles has further clarified: long-term bonds are used to match liability cash flows and interest rate risks, high-dividend equities supplement recurring income, and other equity assets enhance the elasticity of total investment returns. At the same time, the overall proportion of FVOCI stocks has risen, with more long-term, allocation-type stocks being placed in FVOCI accounts, thereby increasing the central position of equity allocations while reducing the direct impact of short-term market fluctuations on the profit and loss statement, with insurance companies' asset sides gradually adapting to the low interest rate environment. Risk warnings: Long-term interest rates may decline more than expected; significant fluctuations in equity markets; the effects of life insurance reforms may not meet expectations; product structure transformations may fall short of expectations; the comprehensive cost ratio of property insurance may rise more than expected; resident income may fall short of expectations; risks from changes in regulatory policies; risks from adjustments to actuarial assumptions.