Cathay Pacific Haitong: The equity investment style of insurers shows fragmentation, domestic life insurance valuations respond to extremely pessimistic investment expectations

The Zhitong Finance App learned that Cathay Pacific Haitong released a research report saying that the total return on investment assesses the ability of insurance companies to obtain financial profits on the asset side, and the total return on investment of listed insurers has increased markedly in the past three years. Judging from the valuation level, the current valuation of the domestic life insurance industry responds to extremely pessimistic investment-side expectations. The bank believes that under a neutral assumption, listed insurers will achieve steady investment returns by flexibly grasping market opportunities through asset allocation/transactions. It is optimistic that the low valuation levels of listed insurers will be repaired and maintain the industry's “gain” rating.

Cathay Pacific Haitong's main views are as follows:

The total return on investment of insurance companies has improved markedly in the past three years, mainly due to the significant increase in fixed interest income contributions, trading price differences, and fair value changes in fair value

The total return on investment assesses the ability of insurance companies to obtain financial profits on the asset side. The total return on investment of listed insurers has increased markedly in the past three years. Looking at the split, it mainly includes the fixed rate of return on assets held (return on net investment), as well as profit and loss from changes in trading price and fair value. 1) Interest yield is still the core contribution to the return on net investment. The low interest rate environment and the maturity of stock assets are the main reasons for the trend decline in the net return on investment of listed insurers in the past three years. 2) Some companies have benefited from dividend income & joint ventures to significantly increase net return on investment. China People's Insurance expects to benefit from the steady investment income of Industrial Bank/Huaxia Bank through long-term equity investment, and Sunshine Insurance expects to benefit from the relatively high share of OCI shares to provide significant dividend income to supplement the net investment income. 3) The total return on investment of listed insurers has improved markedly in the past three years. It is expected to be mainly due to differences in securities trading prices and profit and loss from changes in fair value. TPL equity assets are expected to be the main contribution.

In the past three years, the bond allocation strategy has increased long-term interest rate bonds, the overall equity allocation has improved, and the equity investment style of insurers has shown differentiation

1) Bonds are still the ballast stone for the allocation of major insurance assets. Long-term interest rates have declined in recent years, and insurance companies have significantly increased their bond allocations to lock in higher fixed interest returns in advance. The share of bonds gradually increased from 45.4% in '23 to 50.4% at the end of '25. Judging from the internal share of the bond structure, insurance institutions have continued to increase the allocation of ultra-long-term interest rate bonds in the past three years, and the allocation of financial bonds/corporate bonds/credit bonds has declined. 2) In a low interest rate environment, insurance funds passively seek excess returns from risky assets. Combined with 25 medium- to long-term capital entry guidance, insurance companies gradually allocate equity assets; on the other hand, the asset allocation of listed insurers gradually balances TPL/OCI under the new standards. Judging from the heavy stock style, the equity investment structure has changed to balance in the past three years. 3) Looking at heavy-held funds, listed insurers have clearly increased their allocation of growth and cyclical funds in recent years.

Return on investment outlook: The net return on investment is still declining, and the overall return on investment will stabilize in the long run

1) Economic stabilization expectations are compounded by prudent monetary policy. The yield on ten-year treasury bonds is expected to rise steadily in stages; on the other hand, insurance companies make up for the investment income gap caused by falling interest on fixed income assets such as bonds by increasing the dividend income obtained by allocating high-dividend stocks to stabilize the net return on investment. According to estimates, the net return on investment is expected to stabilize in the 2.5%-3.1% range. 2) It is expected that through active and steady allocation/trading strategies, listed insurers can achieve stable investment returns over the cycle as a whole, and the total return on investment is predicted to be around 3.5%.

Risk warning: Debt cost improvement falls short of expectations; long-term interest rate decline; equity market fluctuation.