CITIC Securities: Leading life insurance listed companies are expected to interpret beta trends with the adjustment of real estate policies

According to the financial news app Zhitong Finance, CITIC Securities released a research report stating that life insurance faces severe challenges from economic downturn and low interest rates, with the market having fully reflected the major negative factors. Leading listed companies in the survivorship bias are expected to benefit from supply-side reform, potentially interpreting a beta market trend along with macro policy adjustments including real estate. It is recommended to balance the allocation of major listed life insurance companies and maintain an "outperform the market" rating for the industry. In the long term, it is advisable to focus on companies with relatively stable operations. The demand in the property insurance industry is stable, the market structure is solid, and regulators and companies continue to drive cost reduction in the industry, optimize the pricing mechanism for new energy vehicles, and are expected to further improve underwriting profitability, with a sustainable bottom line for profit and growth in the long term.

Matters:

On May 17, 2024, the People's Bank of China announced that for resident households purchasing commercial housing with loans, the minimum down payment ratio for the first commercial individual housing loan is adjusted to not less than 15%, and for the second commercial individual housing loan is adjusted to not less than 25%. Based on this, the provincial branches of the People's Bank of China, and the local offices of the China Banking and Insurance Regulatory Commission, according to the control requirements of the city government and the principle of tailored policies, autonomously determine the minimum down payment ratio for first and second commercial individual housing loans in their respective jurisdictions. Starting from May 18, 2024, the interest rate for individual housing provident fund loans is reduced by 0.25 percentage points, with the interest rates for first-time individual housing provident fund loans of 5 years or less (including 5 years) and over 5 years adjusted to 2.35% and 2.85% respectively, and for second-time individual housing provident fund loans of 5 years or less (including 5 years) and over 5 years adjusted to not less than 2.775% and 3.325% respectively.

The life insurance sector and the real estate cycle are directly or indirectly related and will benefit from the accelerated shift in real estate policies.

The shift in real estate policies is conducive to improving the pessimistic expectations of insurance stocks and to some extent improving company fundamentals. Life insurance licenses have multifunctional attributes, including protection, savings, asset allocation, and wealth inheritance; at the same time, life insurance has a long duration, forming a large long-term fund pool for diversified, cross-cycle investment in financial assets and connecting with the real economy. Therefore, from a direct impact perspective, as optional consumption, the wealth effect generated by real estate affects the sale of policies, and the asset supply based on real estate affects the asset allocation of insurance; the impact of real estate on economic growth, inflation levels, credit risks, etc., also indirectly affects various aspects of the balance sheet of insurance companies.

Therefore, the stabilization of the real estate sector has a significant impact on the fundamentals of insurance companies. Currently, insurance stocks are generally undervalued, to some extent reflecting the pessimistic expectations of real estate and other macroeconomic factors. The timely adjustment and shift in real estate policies play a role in stabilizing economic confidence, improving the pessimistic expectations of insurance companies regarding interest rate losses, credit risks, and policy sales pressure. Although the issue of oversupply in real estate remains serious, as long as first and second-tier cities stabilize substantially, it is enough to bring about significant marginal economic improvement and will also have a substantial positive impact on the fundamentals of insurance companies The life insurance sector as a whole has a high beta, and is also benefiting from various regulatory policy adjustments marginally.

In terms of absolute pressure, life insurance companies face challenges from the downward trend of assets and the rigid cost of liabilities. The current series of policies are forming marginal benefits. Specifically:

1. In terms of the capital market, the new nine national policies emphasize the importance of dividends and strict delisting standards, which is conducive to enhancing the dividend income of insurance companies holding equity assets, and also beneficial to the stock price performance of blue-chip stocks that insurance companies focus on holding.

2. From the perspective of the bond market, the operation of the MLF by the central bank demonstrates an attitude of maintaining relatively stable interest rates. At the same time, the government's increased issuance of ultra-long-term national bonds is also conducive to the stabilization of long-term interest rates.

3. From the perspective of real estate policies, the battle to dispose of unfinished risks in commercial housing is also beneficial for resolving the risks of real estate-related assets held by some insurance companies. In addition, the China Banking and Insurance Regulatory Commission is actively promoting the insurance industry to reduce the cost of liabilities and distribution channels, adjusting parameters to alleviate the core capital pressure of various companies. We look forward to further regulatory efforts to push for a reduction in the benchmark interest rate, promoting the industry's transformation from traditional insurance to dividend insurance and universal insurance. Therefore, as a high-beta sector in the life insurance industry, with increasing marginal improvements and positive factors, we continue to be optimistic about the beta trend in the second half of the year.

The beta trend of life insurance stocks needs to consider the valuation range, which is currently overall within a safe range in terms of PB levels.

Beta trends often require holding stocks for a period of time, and it is necessary to combine valuation to find a reasonable range for holding stocks. From an experiential perspective, when economic expectations are relatively pessimistic, the market looks at PB and ROE, because insurance companies mainly value their assets on a fair value basis, with net assets and ROE being relatively reliable; when economic expectations are optimistic, PEV and ROEV are considered, as this is when the medium to long-term actuarial assumptions of insurance companies have a basis for linear extrapolation. Currently, in an economically pessimistic phase, the decision to allocate or not is mainly based on PB and ROE. Currently, the PB levels of insurance companies are within a reasonable range over the past three years, and are expected to continue to interpret the beta trend with the accumulation of more marginal benefits.

From the perspective of insurance company profitability, in 2023, mainly affected by factors such as the stock market decline and real estate devaluation, net profit is at a low level. It is expected that profit will begin to improve in 2Q24, with a potential increase in year-on-year growth rate. From the perspective of policy sales, the new business value and new business value rate in 1Q24 have performed well. It is expected that in 2Q24, there will be a slight decline year-on-year due to the high base effect last year, but the growth rate in the second half of the year will return to normal. At the same time, under the combined effect of regulatory assistance in cost reduction and product structure adjustment, the trend of gradual improvement in policy value rates is continuing