Open Source Securities: Both sides drive performance and dividend assumptions to improve the trustworthiness of EVs

The Zhitong Finance App learned that Open Source Securities released a research report saying that the insurance industry showed a unique development trend in 2024. Increased value ratios will drive high growth in new business value (NBV), which in turn will drive growth in performance and dividends. At the same time, embedded value (EV) showed different changes due to hypothetical adjustments and multi-factor hedging. In 2025, insurance companies' strategy transformation kicked off, and the debt side is expected to maintain steady growth throughout the year due to multiple factors. In the long run, the industry is actively transforming under policy guidance, and the direction of asset allocation will also change in the future.

The main views of Open Source Securities are as follows:

1. Both financial and negative sides drive performance and dividends, assuming that a reduction increases the credibility of EVs

(1) Increased value ratios in 2024 drive continued high growth in NBV. Total cash dividends increased steadily due to high performance growth, and new business and investment biases supported the positive growth of EVs under the adjustment of economic assumptions, and the credibility was further enhanced. The transformation of individual insurance paid off, and the value contribution of banking insurance increased. The NBV growth rate in 2024 is impressive: Xinhua Insurance +106.8% YoY, China Taibao +77.8% YoY, China Taibao +20.9% (comparable caliber +57.5%), China Life Insurance -8.5% (comparable caliber +24.3% YoY), China Ping An Comparable Caliber +25.6%. Due to natural disasters, compensation has increased, and COR has improved due to the risk of China Safety Benefit Guarantee Insurance.

(2) Looking ahead to the transition of insurers to dividend insurance in 2025, early release of short-term demand and product strategy changes or slight impact on new order performance. Looking at the low banking insurance base and 1+3 cooperation liberalization throughout the year, it is expected to support the growth of new orders. The debt side is expected to maintain steady growth throughout the year as individual insurance channel teams stabilize and production capacity increases.

(3) High quality insurance opinions indicate the long-term development direction. Listed insurers actively transform and embrace supervision. The transformation of dividend insurance strategies is conducive to reducing debt costs, optimizing long-term structures, improving asset matching, and adapting customer needs. Listed insurers' debt side is expected to continue high-quality growth; regulation supports insurers to optimize the assessment cycle and encourage medium- to long-term capital to enter the market. It is expected to prolong the longevity of assets, increase high-dividend assets, and high-quality long-term stock investment as the main allocation direction in the future. Life insurance valuations are expected to pick up under the steady recovery of long-term interest rates. With the equity market improving, pro-cyclical life insurance equity investment flexibility is prominent. We recommend China Life Insurance, which is stable on the debt side and has high asset side flexibility; recommend China Taibao, which has high quality growth on the debt side and low valuation; recommend Ping An of China, which has a high dividend ratio and continues to be effective in life insurance transformation; and China Financial Insurance, which is a leader in the financial insurance industry with high dividends, to benefit from China Insurance.

2. Assuming that the credibility of EVs will increase under adjustments, stocks and bonds will support high performance growth and stable dividends

(1) EV: Listed insurers generally lowered their return on investment by 50 bp to 4.0% in 2024, and the discount rate was generally lowered to 8.5% by 50 bp, while China Life Insurance's traditional insurance remained at 8.0%. Most insurers' EVs continued to grow due to high NBV growth, investment bias, and market value adjustments hedging the effects of hypothetical adjustments. Life insurance EVs listed at the end of 2024 and changes from the beginning of the year were: China Life Insurance 1.40 trillion yuan/ +11.2%, Ping An Life Insurance 835.1 billion yuan/ +0.5%, China Taibao 421.8 billion yuan/ +4.9%, Xinhua Insurance 258.4 billion yuan/ +3.2%, China People's Insurance 1,498 yuan/ +10.9%, and China Taiping 206.8 billion yuan, China Taiping 206.8 billion yuan, respectively.

(2) Performance performance: The net profit of listed insurers increased year-on-year in 2024, mainly due to high investment-side performance driven by equity and debt. CSM, a new business in 2024, supported the growth of CSM balances. China Taibao, Xinhua Insurance, and China People's Insurance performed well.

3. Life insurance continues to improve quality and efficiency. The disaster dragged down financial insurance COR improvement, and the investment side performed well

(1) Life insurance: Under comparable standards, NBV is growing strongly throughout the year. The year-on-year increase in the value of new businesses is mainly due to the adjustment of fixed interest rates, the integration of banking insurance reporting and the improvement of the payment structure, and the steady increase in new orders+continued growth in bank insurance payments due to the transformation of individual insurance channels. There is some differentiation between volume and price of insurance companies. China Life Insurance and China Ping An's new policies have maintained positive growth. Under uncomparable circumstances, the value ratios of China Taibao, Xinhua Insurance, and China People's Insurance have increased markedly.

(2) Financial insurance: COR was hampered by natural disasters, and China's safety performance was outstanding. 2024 COR: Human Insurance +0.9pct to 98.8%, Taibao Financial Insurance +0.9pct to 98.6%. People's Insurance and Taibao Financial Insurance were affected by the disaster, which led to a marked increase in payout rates. The new NEV insurance regulations are expected to improve compensation costs, and opinions on high-quality financial insurance development are expected to optimize the industry pattern.

(3) Investment side: The scale of investment assets has increased dramatically, and the total return on investment has benefited from both equity and debt. In terms of the asset allocation structure, the share of debt-type assets of listed insurers is still increasing. It is expected that they will mainly allocate ultra-long-term bonds. The share of equity assets has declined, but the structure has been optimized, and the share of FVOCI stock assets has increased markedly. The decline in long-term interest rates dragged down the net return on investment performance, and both stocks and bonds drove a sharp increase in total/comprehensive return on investment.

(4) Solvency: The core solvency ratio of some insurers declined significantly from month to month, and it is expected that capital supplement bonds will be issued to supplement core capital.