Cathay Pacific Haitong: The life insurance industry has entered a new stage of capital management, and it is recommended to increase holdings in the insurance sector

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that China's life insurance industry has entered a new stage of capital management, and it is recommended to increase PEV holdings in the insurance sector, which is generally undervalued. Interest rates are currently abnormally low. Insurance companies that have established a medium- to long-term interest rate risk management business model based on solvency will increase significantly and surpass their peers during the interest rate recovery period; the market pays too much attention to the profit pressure of the new standards in a low interest rate environment and ignores the potential of insurance companies to increase when interest rates are normalized, causing the PEV sector to be seriously undervalued.

Cathay Pacific Haitong's main views are as follows:

Using European insurance history as a reference, capital management ability based on medium- to long-term interest rate risk management is the core competitiveness of life insurance companies

The growth of the European life insurance market has continued to be sluggish in recent years. The main reason for this is that the debt structure has been excessively adjusted according to the current interest rate environment: mass sales of high-guarantee, long-term traditional insurance during the high interest rate phase solidify current high interest rates into long-term debt costs; the low interest rate phase also overshifts to market-linked products such as investment-linked insurance, which missed opportunities for profit improvement when interest rates rebounded.

China's life insurance industry has gone through four stages of asset management. Under abnormally low interest rates, the industry has entered a period of financial management transformation

The resumption of business until 1999 was the beginning of capital management. The degree of marketability of the industry increased, and the business philosophy of scientific identification and measurement of long-term debt was gradually established; from 2000 to 2017, the higher interest rate environment enabled asset returns to meet debt requirements more stably. The operation was mainly driven by debt growth, and the asset side focused on income matching and liquidity management; from 2018 to 2024, the long-term interest rate center declined. At the same time, the transition from second-generation payment to phase II also promoted the further maturity of the capital management system by increasing long-term bonds. A moderate increase in equity allocation strengthens long-term and income matching; since 2025, interest rates have been abnormally low, asset management based on long-term matching has gradually failed, and the industry has entered a period of asset management transformation. Life insurance companies with capital advantages should establish an asset management system based on medium- to long-term interest rate expectations, balance traditional insurance and dividend insurance on the debt side, and build on the asset side to add assets with great value-added potential in the long term.

The phenomenon of high fluctuations in insurance companies' profits in a low interest rate environment should be correctly understood

Insurance is a long-term business. In a low interest rate environment, companies with sufficient solvency will also cause large fluctuations in profits under the current new standard based on medium- to long-term interest rate risk management. However, referring to European insurance history, in a low interest rate environment, the cost rigidity of traditional insurance with low interest rates and high profit fluctuations due to asset price fluctuations in emerging industries are reasonable phenomena of abnormally low interest rates, and should not affect corporate value.

EVs based on medium- to long-term interest rate assumptions are still the most effective tool for valuation

Interest rates are currently low, and some voices in the market believe that EV investment assumptions should be adjusted simultaneously, and even that “net assets+CSM” can more fairly reflect shareholder value. This actually ignores the long-term operating attributes of insurance companies and extrapolates the linear decline and fluctuation of insurance companies' profits in a low interest rate environment to the long term. The bank believes that in a low interest rate environment, attention should be paid to EVs based on medium- to long-term reasonable interest rate assumptions, and investment opportunities in situations where insurance is undervalued.

Risk warning: long-term interest rate decline; equity market fluctuations; regulatory policy changes.