Zhongtai: The insurance sector's asset-liability management shows results; August is expected to continue the relative and absolute return contributions seen in July.

Zhongtai released a research report stating that in the current low interest rate environment, insurance companies face challenges related to duration gaps and income gaps. On one hand, the regulatory indicators for life insurance companies guide the effective duration gap to remain within 5 years, pressuring insurers to extend the duration of fixed-income assets and increase their allocation to interest rate bonds. On the other hand, in a persistently low interest rate environment, the cost of liabilities for insurers remains relatively rigid, making the need to guard against potential interest margin losses a concern that cannot be ignored. Objectively, it can be seen that after a series of regulatory policies have been deeply implemented, the overall industry has effectively narrowed its duration gap, enhancing asset-liability matching capacity, and supporting a potential bottom for sector valuations. The rebalancing of funds is expected to continue, with the sector likely maintaining its relative and absolute yield contributions from July into August. Zhongtai's main viewpoints are as follows: Duration gap management is at the core of asset-liability management for life insurance companies in the current low interest rate environment. A negative duration gap indicates that the liability term is longer than the asset term; when the interest rate curve moves in parallel, the change in asset value will be smaller than that in liability value, exposing the company to interest rate risk and reinvestment risk. Based on the availability and comparability of data, this report selects the size-adjusted modified duration gap as the analytical standard. The draft of the new asset-liability regulations requires optimizing the calculation method for this indicator, adjusting the pressure scenarios according to macroeconomic changes, and incorporating the risk-hedging effect of financial derivatives into the duration calculation. This report reviews duration gap data disclosed in the bond rating reports of major life insurance companies in the industry, indicating that before 2024, the expansion of the duration gap primarily stemmed from both asset and liability sides; however, since 2025, signs of a narrowing duration gap have appeared in sample companies. The bank predicts that the average duration gap in the insurance industry is currently around -9 years; since 2025, the life insurance industry has shown a trend of reduction in duration gaps. The life insurance industry exhibits a "Matthew effect." This report divides the analysis of duration gap data into large life insurance companies and small to medium-sized life insurance companies to accurately reflect the asset-liability characteristics and duration management differences among companies of varying scales. According to comprehensive statistics from the Insurance Asset Management Association and the Insurance Yearbook, from 2020 to 2022, the duration gaps of life insurance companies in China were -6.67 years, -6.57 years, and -6.28 years, respectively, with a continuing trend of narrowing since 2025. The duration gap for small and medium-sized life insurance companies is relatively large, mostly expanding year by year from 2022 to 2024, and showing a narrowing trend from 2024 to 2025. The bank calculated that the weighted average of the duration gap for small life insurance companies in the sample from 2022 to 2025 was: -9.26, -9.82, -11.10, and -8.74 years, respectively. The narrowing of the duration gap during 2024-2025 mainly arises from the coordinated adjustments on both the asset and liability sides. On the asset side, the duration of cash inflows for sample companies increased by 0.26 years to 7.82 years compared to the previous year, primarily benefiting from the widespread increase in long-duration interest rate bonds by various institutions while compressing exposure to credit assets, along with a moderate increase in equity assets to enhance long-term return elasticity, collectively extending the duration of the asset side. The adjustment on the liability side has been more significant, with the duration of cash outflows shortening by 3.56 years to 16.21 years compared to the previous year, becoming a decisive factor driving the narrowing of the gap. Companies are transforming towards floating-rate income businesses to reduce the rigid costs of liabilities while adjusting product term structures to lower liability duration, along with dynamically managing new business pricing to control costs, optimizing the liability duration structure from multiple dimensions. Overall, the lengthening of the asset duration and the shortening of the liability duration jointly contribute to the narrowing of the duration gap, where the effectiveness of liability duration management is particularly pronounced. The duration gaps of leading insurance companies are generally controlled around -3 years. In 2025, China Life's duration gap is low, at only -1.5 years, with China Life, TaiPing, Ping An, and PICC Life Insurance showing a trend of narrowing duration gaps. Overall, due to the continuous increase in long-duration bonds, the asset-liability matching of leading insurance companies is relatively robust, and the duration gap is in a phase of continuous narrowing. TaiPing's "barbell strategy" typifies this trendone end focuses on long-duration interest rate bonds to lengthen asset duration, the other end on equity assets to increase long-term return elasticity, while compressing exposure to credit assets in between. However, they also face dual challenges of reinvestment pressure in a low interest rate environment and volatility in the equity market. Risk warnings: risks of deviation in interest rate assumptions; underperformance in derivative applications; risks associated with liability structure adjustments; differences in data disclosure and metrics; risks of untimely updates to research reports.