Guotai Junan Securities: Maintains "Overweight" rating on the insurance industry, expects equity asset allocation to increase under the guidance of medium-to-long-term funds entering the market.

Guotai Haitong released a research report stating that, from the perspective of liabilities, interest rate adjustments, increase in dividend-linked insurance, and the implementation of all-channel online banking will push down the industry's liability costs, with the expected return of NBV of listed companies to stable growth by 2025. Looking at investments, due to the rise in rigid liability costs in recent years, it is expected that the pressure on the investment return target of insurance companies will significantly increase, and under the guidance of long-term fund entry into the market, equity asset allocation is expected to increase. It is expected that insurance companies will focus on strengthening the link between assets and liabilities to enhance profitability and growth stability. The industry maintains a "hold" rating. Guotai Haitong's views are as follows: Investment boosts profits, life insurance NBV shines, property insurance COR under pressure: 1) Improvement in value rate drives NBV prosperity growth: Comparative NBV growth rates for 2024 are: PICC Life Insurance (114.2%) > New China Life Insurance (106.8%) > Ping An Life Insurance (90.0%) > Sunshine Life Insurance (88.0%) > Taikang Life Insurance (57.7%) > Ping An Life Insurance (28.8%) > China Life Insurance (24.3%). 2) Property insurance COR increases slightly due to higher catastrophic loss payments: 2024 COR figures are: Ping An Property Insurance (98.1%,-0.3pt), Ping An Property Insurance (98.3%,-2.4pt), Taikang Property Insurance (98.6%,0.9pt), PICC Property Insurance (98.8%,1.0pt) and Sunshine Property Insurance (99.7%,1.0pt). 3) The rebound in the equity market drives a significant increase in investment return rates, with a focus on traditional fixed income investments dominated by interest rate bonds and a slight increase in core equity proportions. Under the new accounting standards, there is a general increase in FVOCI fixed income and FVOCI equity to promote asset-liability matching. 4) Under the resonance of assets and liabilities, the net profit attributable to listed insurance companies significantly improved in 2024. Net profit growth in 2024: New China Life Insurance (201.1%) > China Life Insurance (108.9%) > PICC(88.2% > AIA (81.6%) > China Pacific Insurance (64.9%) > Ping An Insurance (47.8%) > SUNSHINE INS (45.8%) > CHINA TAIPING (36.2%). 5) Thanks to the profit improvement, listed insurers have generally increased their absolute dividend amounts, with varying dividend rates. Decreasing interest rates impact CSM and net assets, asset-liability matching urgently needs optimization: Against the backdrop of declining interest rates, the market has concerns about the long-term profitability and dividend-paying capabilities of insurance companies. 1) Decreasing interest rates reduce the capitalization rate of insurance companies' profits, with overall net asset increases lower than net profit due to fluctuations in "other comprehensive income" putting pressure on the net assets of listed insurers. 2) Decreasing interest rates make it difficult for insurance companies' investment return rates to cover liability costs. 3) Decreasing interest rates put pressure on the growth of the service margin for life insurance contracts (CSM). 4) The impact of adjustments to investment return rates and risk discount rate assumptions on the embedded value is increased by decreasing interest rates. It is expected that the liability side will grow steadily in 2025 and equity allocation will increase on the investment side. It is expected that by 2025, internal and external factors will lead to the return of high-quality development of life insurance premiums and value growth, with three main reasons: 1) Reduction in interest rates and earlier concentrated release of customer demand; 2) Shift of insurance company product strategy towards dividend-linked insurance, increasing sales difficulty; 3) Regulatory push for industry to rationalize and reduce liability costs. With the guidance of long-term incremental fund entry into the market, it is expected that insurance companies will increase their equity allocation proportion, benefiting the improvement of investments. Risk warnings: Long-term interest rate declines; Equity market volatility; Improvement in liability costs falls short of expectations.