According to a recent report from Xiangcai Securities, the expectations for improvement in the fundamentals of insurance companies have been steadily strengthening since 2025. On the asset side, the stability of the capital market is continuously consolidating, with the expansion of pilot projects for long-term stock investments leading insurance companies to diversify and balance their equity asset allocations. This is expected to drive valuation recovery for insurance stocks as the investment performance improves. On the liability side, the establishment of a dynamic adjustment mechanism for predetermined interest rates, along with the implementation of regulatory policies like "integration of reporting and business," is facilitating cost reductions for insurers. The transformation of products such as participating insurance is helping to alleviate duration mismatch pressures between assets and liabilities, effectively reducing the risk of overall interest margin losses. The ongoing improvement in the fundamentals of insurance companies is likely to enhance investment value steadily.

Key points from Xiangcai Securities include: Accelerating product transformation creates new growth opportunities for participating insurance. New health insurance regulations present opportunities for the development of participating health insurance. In recent years, as regulators have strengthened risk prevention and the downward adjustment of predetermined interest rates has weakened product competitiveness, life insurance companies are actively adjusting their product strategies, positioning participating insurance as a key focus for strategic transformation. After more than twenty years, participating health insurance is returning to the public's attention. The National Financial Regulatory Administration has issued guidelines to promote high-quality development in health insurance, proposing support for insurers with good regulatory ratings to conduct participating long-term health insurance business, which is expected to accelerate growth in health insurance operations. The development of participating health insurance will help optimize the product and cost structures of insurers. Compared to fiercely priced pure protection products, participating critical illness products represent a "floating return + protection" business model that is likely to bring new value rates to insurance companies. The success of participating critical illness insurance relies on the sales capabilities of agent channels. Among listed insurers, China Pacific Insurance, Ping An, and China Life have high per capita new business value (NBV) for their individual insurance channels, and their per capita new premium levels are also high. Participating health insurance is likely to enhance the stability of premium income in the life insurance segment. Participating insurance products can mitigate interest margin loss risks in a low-interest environment while increasing the attractiveness of policy returns, reducing uncertainty in profit sources from protective product developments. The introduction of participating health insurance aligns with life insurers' development trends and is expected to bring new opportunities for premium income growth.

Equity asset allocation has become more balanced and robust as potential interest margin loss risks increase, underscoring the importance of equity investment allocation. The transformation of products represented by participating insurance is driving the growth of insurers' equity investments. The asset allocation and risk management capabilities of insurance companies are fundamental to the sustainable development of participating insurance, with the revival of this segment largely dependent on capital market performance and insurers' stable record of dividend disbursements. Insurance companies are enhancing their equity asset allocation strategies to close the yield gap between assets and liabilities. Policymaking has optimized the long-term equity investment environment for insurers, supporting them in making long-term stock investments. This includes creating a favorable long-term equity investment environment and optimizing evaluation mechanisms to encourage insurance entities to focus on long-term value investments. Additionally, the regulatory cap on the proportion of equity investments in solvency requirements has been adjusted, directly expanding the theoretical space for insurers' equity investments. Efforts are underway to further expand the pilot program for long-term stock investment by insurance funds, providing platforms for more entities to participate in such investments. Moreover, with the comprehensive implementation of new accounting standards, increasing the proportion of FVOCI assets has become a trend. The share of insurance fund equity investments is rising, with a more diversified equity allocation structure. In the first half of 2025, the total scale of insurance funds in stocks, funds, and long-term equity investments increased by over 900 billion yuan, with a rapid growth in stocks and long-term equity investments. As the pilot program for long-term stock investments was expanded since last year, insurance companies participating in the pilot have seen growth in long-term equity investments. The proportion of stock investments by insurers is significantly higher than that of fund investments, indicating a generally proactive stock investment strategy across the industry. The ratio of assets in OCI accounts for insurers is expected to continue rising, alongside the pursuit of more long-term equity investment opportunities. From an equity allocation perspective, there is potential to continue focusing on value stocks with steady ROE and high dividends as the foundation, enhancing the robustness of portfolio investments. Furthermore, as the economy transitions, the contribution of investments in emerging industries to portfolio performance will also be further enhanced.

Continuous improvement in fundamentals is expected to steadily enhance investment value. Since the second half of 2024, insurance stocks have performed well in the market, primarily due to ongoing positive expectations for asset-side improvements driving valuation recovery. On the liability side, with guidance from regulatory authorities, insurers have established dynamic predetermined interest rate adjustment mechanisms for product pricing. Ongoing measures to reduce costs, such as the "integration of reporting and business," have laid a solid foundation for optimizing product costs. Currently, insurers' asset performance is exhibiting greater elasticity, with favorable investment policies continually being introduced, while product transformation processes are progressing on the liability side, strengthening premium income and reducing costs. This favorable trend in fundamental performance for insurance stocks is likely to continue, driving improvements in investment value.

Investment suggestions point towards life insurance companies with strong asset-liability management capabilities, a quick transformation to participating insurance, and significant investment performance elasticity, as well as leading property insurance firms benefitting from industry cost reductions and efficiency enhancements, recommending China Pacific Insurance (02328) and China People’s Insurance (601319.SH), maintaining an "overweight" rating for the industry. Risk warnings include tightening industry regulations leading to slower-than-expected premium income growth, and capital market fluctuations potentially causing investment performance to fail to meet expectations, thus enlarging interest margin loss risks.