Guotai Haitong: Life insurance has entered a new stage of asset-liability management; recommends overweighting the insurance sector where PEV is undervalued.

Guotai Haitong released a research report stating that China's life insurance industry has entered a new stage of asset-liability management, and recommends overweighting the insurance sector where PEV is generally undervalued. At present, interest rates are at abnormally low levels, and life insurance companies have entered a new stage of asset-liability management. Insurance companies that build an asset-liability management model based on solvency and medium-to-long-term interest rate risk management will see profits rise significantly and outperform peers during a period of interest rate recovery. The market is overly focused on the profit pressure under the new accounting standards in a low-interest-rate environment, ignoring insurers' potential for improvement when interest rates normalize, which has led to a severe undervaluation of the sector's PEV. The report recommends overweighting the insurance sector. Guotai Haitong's main views are as follows: Using the history of European insurance as a reference, asset-liability management capability based on medium-to-long-term interest rate risk management is the core competitiveness of life insurance companies. In recent years, the European life insurance market has experienced persistently sluggish growth, largely because the liability structure was excessively adjusted in response to the prevailing interest rate environment: during high-interest-rate periods, large volumes of high-guarantee, long-duration traditional insurance products were sold, locking in the then-current high interest rates as long-term liability costs; during low-interest-rate periods, there was an excessive shift toward market-linked products such as unit-linked insurance, missing the opportunity for profit improvement when interest rates rebounded. China's life insurance industry has gone through four stages of asset-liability management, and under abnormally low interest rates, the industry has entered a period of asset-liability management transformation. From the resumption of operations to 1999 was the embryonic period of asset-liability management, when the degree of marketization in the industry increased and the operating philosophy of scientifically identifying and measuring long-term liabilities was gradually established; from 2000 to 2017 was the early period of asset-liability management, when the relatively high interest rate environment allowed asset returns to meet liability requirements fairly stably, operations were mainly driven by liability growth, and the asset side focused on return matching and liquidity management; from 2018 to 2024 was the mature period of asset-liability management, when the long-end interest rate center declined, and the transition from Solvency II Phase I to Phase II also pushed the capital management system to become more mature. The industry strengthened duration and return matching by increasing long-duration bonds and moderately raising equity allocations; since 2025, interest rates have entered an abnormally low range, asset-liability management based on duration matching has gradually become ineffective, and the industry has entered a period of asset-liability management transformation. Life insurance companies with capital advantages should establish an asset-liability management system based on medium-to-long-term interest rate expectations, balance traditional insurance and participating insurance on the liability side, and on the asset side focus on long-term allocation to assets with relatively large appreciation potential. The phenomenon of high volatility in insurance company profits under a low-interest-rate environment should be correctly understood. As insurance is a long-term business, for companies with sufficient solvency in a low-interest-rate environment, asset-liability matching based on medium-to-long-term interest rate risk management will also lead to large fluctuations in current profits under the new accounting standards. However, referring to European insurance history, in a low-interest-rate environment, the high volatility of profits caused by the cost rigidity of low-interest-rate traditional insurance and by price fluctuations in emerging industry assets is a reasonable phenomenon at abnormally low interest rates and should not affect enterprise value. EV based on medium-to-long-term interest rate assumptions remains the most effective tool for valuation. At current low interest rates, some voices in the market believe that EV investment assumptions should be adjusted accordingly, and even that "net assets + CSM" can more fairly reflect shareholder value. This actually ignores the long-term operating nature of insurance companies and linearly extrapolates the profit decline and volatility of insurance companies under a low-interest-rate environment into the long term. The report believes that in a low-interest-rate environment, attention should be paid to EV based on an investment return assumption grounded in a reasonable medium-to-long-term interest rate level, as well as investment opportunities when insurance is undervalued. Risk warnings: decline in long-end interest rates; volatility in the equity market; changes in regulatory policies.