The Zhitong Finance App learned that CITIC Securities released a research report saying that looking at undervaluation+strong beta attributes in the short term and debt-side adjustments in the long term, maintaining the “better than the market” rating for the life insurance industry. From a medium- to long-term perspective, current valuations and stock prices reflect existing pessimistic factors, but they do not reflect the long-term benefits of the industry's future cost reduction and supply-side concentration. Therefore, the short-term investment value of the life insurance sector lies in undervaluation and strong beta attributes. Once economic growth confidence is restored in the second half of the year, it is expected to bring strong upward beta returns; long-term investment value lies in the improvement of the industry pattern, and leading life insurance companies to achieve a more benign business model by reducing debt costs and adjusting debt structures.
Matters:
According to a report by the Financial Services Association on March 22, 2024, recently, in order to strengthen asset liability management and prevent the risk of interest spreads and losses, the supervision provided written and window guidance to a number of personal insurance companies, requiring that the settlement interest rate level of Universal Insurance for small and medium-sized companies should not exceed 3.3%. Furthermore, the actual dividend level of dividend insurance also requires that it be reduced to the same level as universal insurance, or even lower. For some large insurance companies, the regulatory authorities have put forward stricter requirements, hoping that their settlement interest rates and dividend levels can be reduced by another 20 BP on the basis of small and medium-sized companies.
The views of CITIC Securities are as follows:
Investment pressure is high, and the long-term return on investment of insurance capital is expected to exceed 4%, which is challenging.
Listed insurance companies' 2023 annual reports generally lowered the long-term return on investment containing value to around 4.5% to reflect the negative impact of investment pressure. However, judging from the net return on investment of insurance capital in the last three years, it is still very difficult to achieve the hypothetical level of 4.5% in the long term, and indicators including value will still be questioned by the capital market. Judging from the sensitivity of embedded value to return on investment, if the long-term return on investment is further lowered to 4%, it is expected to have a significant negative impact on the implied value and new business value of most insurance companies. According to our current estimate of the 10-year Treasury yield of 2.3% and the 5-year LPR of 3.95%, the assumption that insurance funds achieve a long-term return on investment of 4% will still be challenging.
Global allocation is urgently needed; in reality, it is difficult to find a way out from the asset side.
Judging from the experience of countries and regions such as Japan and Taiwan, insurance funds can be used to hedge against local investment pressure through large-scale global allocation. The allocation ratio of overseas assets in the Chinese insurance industry is only about 2%, so there is plenty of room for improvement, and there is an urgent need for policy and foreign exchange quota support from relevant departments. Insurance companies will also continue to increase the dumbbell allocation of bonds and equity assets in 2023, but the 2024 market environment is facing greater difficulties, the allocation strategy is failing, and it is currently difficult to find a fundamental solution from the asset side.
Consider asset-side constraints, and regulation helps reduce debt costs.
Multiple regulatory measures are carried out in parallel, which helps the industry reduce the risk of fee differences and interest spreads. Since 2019, the Banking Insurance Regulatory Commission has cut scheduled interest rates twice. Traditional insurance has been lowered from 4.025% to 3.0%, driving the industry as a whole to reduce debt costs. According to the Financial Services Association, according to the supervisory window guidance requirements, the universal insurance settlement interest rate should not exceed 4% from January 2024, and the upper limit will be 3.5% to 3.8% from June.
Since the second half of 2023, market interest rates have declined further, and there is a need to continue to lower life insurance interest rates. However, because the life insurance industry is still in a difficult transformation cycle, small and medium-sized insurance companies are facing a stage of loss of interest, insufficient capital, and pressure on cash flow. Further lowering scheduled interest rates requires balancing various factors.
Judging from the Central Financial Work Conference and the report on the work of the government, it is unswerving to deal with the risks of small and medium-sized financial institutions and promote strict financial supervision in the future. On the one hand, it is possible that by amending the Insurance Law, insurance companies that are taken over may have the risk of not being able to fully pay the policy value in the future, which will help customers raise risk awareness and value the capital and strength of insurance companies; on the other hand, through “integrated reporting” of expenses and yield window guidance, it will reduce industry cost investment and reduce the yield level of dividend/universal insurance, which will help insurance companies focus on customer service capacity building. Therefore, the parallel implementation of multiple measures will help the industry reduce the risk of fee differences and interest spread losses.
The policy favors the industry in the short term and promotes the healthy development of leading companies in the industry in the long term.
From a short-term perspective, the current regulatory policy has reduced the customer appeal of insurance policies to a certain extent, and has also reduced the enthusiasm of channel agents for insurance policies. At the same time, the one-sided perception of “breaking the deal” has also had a certain negative impact. The bank believes that leading companies with sufficient capital in the market are expected to maintain the long-term security of their insurance policies, and are also expected to continue to operate for a long time and give customers a steady long-term return. Overall, with one-sided perceptions being eliminated and short-term pain, the industry is expected to usher in a continuous and healthy development. It is expected that high-quality leading companies will continue to enjoy at least a medium- to long-term growth rate of M2 with steady management, sufficient capital, and yield advantages of capital protection guarantees. The concentration of the life insurance industry is quite high. Currently listed insurance companies are all companies with obvious advantages in the industry. Overall, it is expected that they will continue to benefit from the supply-side concentration of the industry.
The supply side of the industry is being concentrated at an accelerated pace, breaking up parallel opportunities to nurture beta opportunities.
In the short term, leading companies are also under pressure from investment pressure and underwriting regulations, but they have beta value. From an investment perspective, large, and medium companies face the same pressure, waiting for China's economy to improve and interest rates and asset prices to rise steadily; from an underwriting perspective, large, medium, and small companies will also face the problems of declining attractiveness of insurance policies and weak premium growth in the short term. The main advantage of large companies is that their stock balance sheet has a strong sustainability advantage. The asset side has relatively long-term assets with a stable return on net investment; the debt side has relatively low cost of ownership, relatively stable premiums with stable cash flow, and is strong enough to cross the economic cycle to meet the next round of industry development opportunities. In particular, they are more likely to become beneficiaries of supply-side concentration. As a result, leading insurance companies currently show a certain negative beta attribute, but their current low valuation is a target that has a cost-effective valuation and a chance of interpreting positive beta in the future.
In the long run, the leading company Alpha comes from restructuring its business model, promoting debt-side restructuring, and increasing the value ratio of insurance policies. In a situation where future return on investment is not optimistic, in addition to reducing debt costs under regulatory guidance, life insurance companies also need to consider actively promoting the restructuring of the company's debt side. On the one hand, efforts are still needed to develop a guaranteed business to significantly increase the value ratio of insurance policies; on the other hand, it is necessary to develop floating income products to ensure that assets and liabilities are matched and linked. In the new stage of development, it is more difficult to increase the value ratio of insurance policies and transform the product structure. Insurance companies need to adapt to local conditions, clarify customer positioning, understand customer needs, deepen customer value, and accurately match products and services in order to achieve high policy value rates and correct product strategies. Overall, it is necessary to plan for the long term to develop a high-quality talent team. At the same time, it is also necessary to actively open up cooperation and work together to provide high-quality services to high-value customers such as banks.
Risk factors: Asset prices fall, interest rates continue to decline, credit risk increases, and premium growth is weak.