Guotai Haitong: The life insurance industry has entered a new stage of asset-liability management; recommends overweighting the insurance sector.

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, whose PEV is generally undervalued. At present, interest rates are at abnormally low levels. Insurance companies that have established 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 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. Guotai Haitong's main views are as follows: Using European insurance history 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, growth in the European life insurance market has remained sluggish, largely because the liability structure was excessively adjusted in response to the prevailing interest rate environment: during the high-interest-rate phase, large amounts of high-guarantee, long-duration traditional insurance products were sold, solidifying the then-current high interest rates into long-term liability costs; during the low-interest-rate phase, the market shifted excessively toward market-linked products such as unit-linked insurance, missing the opportunity to improve profitability 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 industry's degree of marketization increased and the operating philosophy of scientifically identifying and measuring long-term liabilities was gradually established; from 2000 to 2017 was the early stage of asset-liability management, when the relatively high interest rate environment allowed asset returns to meet liability requirements fairly steadily, 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 stage of asset-liability management, when the long-end interest rate center moved downward, and the transition of Solvency II from Phase I to Phase II also pushed the capital management system to become more mature, with the industry strengthening 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 focus on long-term increased allocation to assets with relatively large appreciation potential on the asset side. The phenomenon of high volatility in insurance company profits under a low-interest-rate environment should be correctly understood. 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-period 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. With interest rates currently low, 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 attributes 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 bank believes that in a low-interest-rate environment, attention should be paid to EV based on a medium- to long-term reasonable interest rate level as the investment return assumption, as well as investment opportunities when insurance is undervalued. Risk warning: decline in long-end interest rates; volatility in the equity market; changes in regulatory policy.