CITIC SEC: Both the liabilities and investment sides are exerting force, and the slow bull characteristics of the insurance sector have emerged.

CITIC SEC released a research report stating that as seen from the annual report of 2024, the performance elasticity of listed insurance companies is significant, with steady growth in dividends. By lowering the liabilities assumptions, solidifying the embedded value, improving channel quality, and reducing costs while increasing efficiency, the value rate drives rapid growth in new business value. On the asset side, the continuation of a dual-dumbbell strategy, along with increasing allocation to OCI accounts, indicates that there is still room for increased equity allocation. The bank believes that the supply side of life insurance companies is significantly clearing out, with top companies returning to their core positions, and their differentiated features are expected to contribute significantly to alpha. From the perspective of the insurance sector, the bank believes that it now shows characteristics of a slow bull market and recommends long-term positioning. Looking ahead to 2025, it is predicted that interest rates may end the continuous downward trend, maintaining low volatility for a longer period, and insurance companies need to simultaneously promote asset-liability transformation. Key points from CITIC SEC: Financial performance: significant performance elasticity, steady growth in dividends. Investment performance driving force, in 2024, except for two AIA companies, the average net profit attributable to shareholders of 9 listed Chinese insurance companies increased by 79.0% year-on-year. Profits increased combined with strong performance in OCI accounts, with an average year-on-year growth of 4.9% in net assets of the 9 insurance companies in 2024. DPS increased year-on-year, with New China Life Insurance showing a significant increase exceeding expectations. Liabilities side: solidifying the embedded value, improving channel quality. 1) Premiums: due to the combined effects of the report convergence and stopping the sale of high base products, the average growth rate of total premiums for 7 listed life insurance companies in 2024 was 5%. From a product structure perspective, in 2024, the premium structure of the 7 listed life insurance companies is still mainly traditional insurance, accounting for an average of 54.3%, with an increasing trend. Premiums for participating insurance products accounted for an average of 17.9%, a decrease of 3.5 percentage points from 2023, with contributions still being insufficient. 2) EV: following 2023, listed insurance companies have generally again adjusted their actuarial assumptions parameters, with long-term investment return rate assumptions decreasing from 4.5% to 4.0%, and risk discount rate adjustments showing structural differences, with most insurers reducing risk discount rates by 50 basis points. With these adjustments, the embedded value of the 7 listed life insurance companies all showed significant negative changes from the old assumptions, with most companies experiencing negative impacts exceeding double digits. However, after the assumption adjustments, most companies' EV still achieved positive growth. 3) NBV: Value rate drives rapid growth in NBV. 4) Channels: In terms of the premium structure of the 7 listed life insurance companies in 2024, the overall channel structure remains stable. The individual insurance channel maintains a stable number of agents, contributing to premium and value growth. Due to the assumption adjustments, all disclosed companies' NBV showed more than a 20% discount from the assumptions before the adjustment. The NBV Margin of life insurance companies was impacted by the assumption adjustments by about 10 percentage points. The banks' channels implement the convergence of insurance and banking, with short-term pressure on new single premiums, but significant improvements in value rates resulting in a substantial increase in NBV. 5) Liabilities costs: In 2024, the bank's calculations show that the indicators of incremental liabilities costs of 6 listed life insurance companies have generally declined by 50 to 100 basis points in new business value parity rates, showing a significant utility for the decline in predetermined interest rates for insurers and actively promoting the transformation of products to participating insurance. Asset side: Contributing significantly to performance elasticity, continues to increase the allocation of OCI accounts. 1) Industry funds are rapidly increasing, and the bank expects it to maintain a growth rate of around 10% in the medium to long term. There is no significant change in the proportion of equity assets, with more changes expected to come from market gains. With the benefits of both stocks and bonds, the industry's total investment return rate in 2024 remained at high levels in recent years. 2) The net investment return rate of listed companies has slightly decreased, with high fluctuations in the total investment return rate. 3) In terms of allocation structure, a dual-dumbbell strategy is generally present, with an increase in bond allocations to lengthen the duration and an increase in equity to improve returns. Fixed-income asset direction is mainly dominated by life insurance companies with significantly higher bond allocations than property insurance companies, with a clear difference in bond allocation proportions. Standard bonds are the main fixed-income allocation for each company, with a higher allocation than the overall fixed-income assets, aiming to achieve long-term stable interest income. In terms of equity assets, there is a general increase in equity allocations, with differentiation in fund allocation strategies, and a widespread improvement in long-term equity investments is not common. There is a clear difference in allocation adjustments, except for PICC, where there is still a significant room for improvement in equity asset allocations. 4) Accounting measurement: Continuing to increase the proportion of FVOCI accounts to stabilize profit volatility. Overall, from a differentiation perspective, Xinhua has the lowest proportion of fixed-income assets, has less OCI stocks, and is more focused on strengthening the beta variety in the stock market; China Life has a higher proportion of equity assets accounted for in PL and also has a strong stock market flexibility; Ping An has the highest proportion of fixed-income assets, with bonds as the main asset, showing strong stability in net investment returns; PICC has a higher proportion of long-term equity investments, with higher equity proportions than its peers, and a higher proportion of OCI stocks, helping to improve overall investment returns; Ping An, Taibao, and Sunlight have relatively balanced allocation structures and accounting classification, showing strong stability. Outlook and recommendations for 2025: Interest rates may end the continuous downward trend, maintaining low volatility for a longer period, and insurance companies need to simultaneously promote asset-liability transformation. On the liabilities side, costs need to be reduced, transitioning to variable income products. On the asset side, there should be an increased allocation to equity assets, innovation in alternative assets, and seeking overseas investment opportunities. Seeking overseas investments is the fundamental solution to dealing with the low-interest rate environment and requires support from relevant regulatory policies and foreign exchange quotas. Currently, domestic insurance companies are also actively innovating in alternative investments, including participation in AIC equity investment pilots; establishing private equity investment funds; entering the gold investment business; and increasing REITs and asset-supported program allocations. Investment advice: Significant clearance on the supply side, potential on the demand side, top companies' differentiated operating strategies create alpha value. In the short to medium term, the supply side of life insurance companies is significantly clearing out, with top companies returning to their core positions and their differentiated features expected to contribute to alpha. From the perspective of the insurance sector, the bank believes that it now exhibits characteristics of a slow bull market and recommends long-term positioning. In the long term, 2025 marks the beginning of life insurance companies' business models transitioning from self-operation to asset management. The percentage of participating insurance is increasing, and it is expected that the valuation system may shift from PB to PEV in the next 1-3 years; meanwhile, there is a clear potential for an increase in equity asset allocation, except for PICC, where there is still significant room for improvement. Overall, the report from CITIC SEC provides insights into the performance and strategic recommendations for the insurance industry, highlighting the key points to focus on for the future.The assumption of yield rate should take into account the possibility of CPI being around 2%.Risk Factors The sluggish sales of insurance policies affect the growth of business; interest rate decline exceeds expectations; significant fluctuations in the stock market or a weakening real estate market affect investment performance.