Guotai Haitong Securities Co., Ltd. has released a research report stating that the total investment yield assesses an insurance company's ability to generate financial returns from its asset side, with the total investment yield of listed insurers showing significant improvement over the past three years. From a valuation perspective, the current valuation of the domestic life insurance industry reflects an extremely pessimistic expectation regarding the investment side. The firm believes that under neutral assumptions, listed insurers can achieve stable investment returns through flexible market opportunities in asset allocation and trading. It is optimistic about a potential recovery in the low valuation levels of listed insurers and maintains an "Overweight" rating on the sector. The main points from Guotai Haitong Securities Co., Ltd. are as follows:

Key Drivers of Improved Total Investment Yield

The significant improvement in insurance companies' total investment yield over the past three years is primarily attributed to contributions from fixed income returns, realized gains/losses from trading, and fair value changes. The total investment yield assesses the ability to generate financial returns from assets, showing notable improvement for listed insurers in recent years. Breaking it down, it mainly consists of the fixed income yield from held assets (net investment yield), along with realized gains/losses from trading and fair value changes. 1) Interest yield remains the core contributor to net investment yield, with the low interest rate environment and the maturity of existing assets being the main reasons for the trend of declining net investment yield among listed insurers over the past three years. 2) Some companies have benefited from dividend income and investments in associates/joint ventures, significantly boosting their net investment yield. PICC is expected to benefit from stable investment returns brought by its long-term equity investments in Industrial Bank and Hua Xia Bank, while Sunshine Insurance is expected to benefit from a higher proportion of OCI-listed stocks providing significant dividend income to supplement net investment returns. 3) The marked improvement in the total investment yield of listed insurers over the past three years is estimated to come mainly from realized gains/losses on securities trading and fair value changes, with TPL equity assets likely being the primary contributor.

Asset Allocation Trends and Diverging Equity Styles

Over the past three years, bond allocation strategies have shifted towards longer-duration government bonds, overall equity allocation has increased, and insurers' equity investment styles have begun to show differentiation. 1) Bonds remain the cornerstone of insurers' major asset allocation. With the decline in long-term interest rates in recent years, insurance companies have significantly increased their bond allocations to lock in higher fixed income yields in advance, with the bond proportion gradually rising from 45.4% in 2023 to 50.4% by the end of 2025. Looking at the internal structure of bond allocations, insurance institutions have continuously increased their allocation to ultra-long-term government bonds over the past three years, while allocations to financial bonds, corporate bonds, and credit bonds have decreased. 2) In a low-interest-rate environment, there is a strong impetus for insurance funds to passively seek excess returns from risk assets. Coupled with policy guidance for medium- to long-term funds to enter the market in 2025, insurance companies are gradually increasing their allocation to equity assets. On the other hand, under the new accounting standards, listed insurers' asset allocation is gradually balancing between TPL and OCI. Looking at the style of major equity holdings, the structure of equity investments has been shifting towards a more balanced approach over the past three years. 3) Regarding major fund holdings, listed insurers have significantly increased their allocation to growth-oriented and cyclical funds in recent years.

Outlook for Investment Yields

Net investment yield is expected to continue its phased decline, but total investment yield is anticipated to stabilize in the long term. 1) Expectations of economic stabilization, combined with a prudent monetary policy, are expected to lead to a phased stabilization and recovery in the 10-year government bond yield. On the other hand, insurance companies are using dividend income obtained from increasing allocations to high-dividend stocks to compensate for the gap in investment returns caused by declining interest income from fixed-income assets like bonds, aiming to stabilize the net investment yield. According to estimates, the net investment yield is expected to stabilize within a range of 2.5% to 3.1%. 2) It is expected that listed insurers, through proactive and prudent allocation and trading strategies, can achieve stable investment returns that withstand market cycles overall, with the predicted central level for total investment yield being around 3.5%.

Risk Warnings

Potential risks include liability cost improvement falling short of expectations, a decline in long-term interest rates, and volatility in the equity market.