In recent years, with the shift in residents' risk preferences and the breaking of the implicit guarantee attributes of other wealth management products, the rise of guaranteed income products such as increasing whole life insurance has further increased the rigid cost of insurance companies' liabilities, making them face certain interest spread risks against the backdrop of declining asset returns. As some insurance companies plan to reduce the guaranteed interest rates of increasing whole life insurance products, the liability costs of life insurance companies are expected to be further reduced.

It is reported that to meet the company's risk control requirements, some insurance companies will officially stop selling the 3.0% increasing whole life insurance on June 30 and will launch the increasing whole life insurance with a guaranteed interest rate of 2.75% on July 1, and the new product has been successfully filed.

As some insurance companies plan to reduce the guaranteed interest rates of increasing whole life insurance products, the liability costs of life insurance companies are expected to be further reduced; moreover, in the short term, it may bring forward the release of demand, which is to some extent good for the short-term new orders and NBV growth rate of life insurance. In the medium and long term, the regulatory attitude to help life insurance companies reduce liability costs is very determined, the continuous reduction of guaranteed interest rates and settlement interest rates, and the "reporting and implementation consistency" and product structure are expected to reduce the costs of existing and incremental liabilities. As a result, the market's worries about the interest spread risks of life insurance companies have been somewhat alleviated, and against the backdrop of the increasing attractiveness of dividend insurance, the market share of leading life insurance companies is expected to increase.

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Considering the significant increase in the value rate and the impact of the stop-sale wave, it is expected to catalyze the improvement of new orders in the second quarter of life insurance, and as a result, the NBV growth rate in the first half of 2024 may perform well. Looking at the whole year, the NBV is expected to achieve a high-quality growth in the low double digits, and the catalyst on the asset side is expected to drive the continuous rebound of the insurance sector valuation, and the business prosperity and policy side will provide support for the insurance sector to achieve excess returns.

Actively reducing liability costs

Under this background, the insurance industry actively reduces liability costs and the risk of asset-liability mismatch. In March 2024, the regulatory authorities provided window guidance to life insurance companies, further strictly implementing the principle of matching costs and benefits, reducing the settlement interest rates of universal insurance, and some small and medium-sized insurance companies' universal insurance settlement interest rate caps were reduced to 3.3%, while large insurance companies were reduced to 3.1%. At the same time, the dividend level of dividend insurance should also be implemented in reference to universal insurance.

Since 2024, various insurance companies have actively adjusted product design and sales models. Based on this analysis, it is expected that 2024 will be a transitional window period for the liability side of the life insurance industry, and with the high base in the second quarter of 2023, it is expected that the overall premium growth rate of the insurance industry will be relatively weak in the near future. In addition, the recent yields on 10-year and 30-year government bonds are about 2.3% and 2.53%, respectively, so it is expected that the 3% liability rigid cost will face a certain degree of asset allocation pressure, and the pricing interest rate of the insurance industry's increasing whole life insurance is expected to be systematically reduced to the range of 2.5%-2.75%.

Increasing whole life insurance is an emerging product in recent years, and its current stock proportion is relatively low. Its main advantage is the "rigid income" of the policy. Compared with annuity insurance, the flexibility of increasing whole life insurance is relatively high, and funds can be withdrawn through partial reduction or surrender; at the same time, the "break-even" time of this product is also relatively short, generally from the third to the fifth year after the payment is completed, "break-even" (i.e., the policy value is greater than the total premium paid) can be achieved. As the policy holding period increases, the cash value and the achievable IRR show a growth trend, and the investment value is highlighted. Overall, it is expected that the current stock scale of this product is relatively low, about 10%.

From the perspective of asset allocation, if the corresponding rectification is implemented, the incremental opportunities for insurance capital allocation will be concentrated on high dividend stocks and long-term bonds. With the increase in premium income, the allocation of high dividend (OCI equity) assets of insurance capital continues to be beneficial, and there is also a certain degree of incremental catalysis for the allocation of long-term bonds.

Overall, in 2024, insurance capital is overall under-allocated. In addition to the expansion of the liability side, considering the maturity of non-standard assets such as insurance bond plans and the re-allocation pressure brought by manual interest supplementation rectification, the overall state is asset-deficient.For insurance capital, on the one hand, dividend assets characterized by high dividends are still not fully purchased. In the first quarter, the annualized investment return of pension insurance was 3.5%, and the current dividend of representative sectors such as banks and coal is about 6%, which is obviously attractive. On the other hand, high ROE assets still have a high attraction for insurance capital. In 2024, the listed companies that the Great Wall Life Insurance has repeatedly raised its stake for six times are all high dividend, high ROE assets, including Wuxi Bank, Chengfa Environment, Jiangnan Water Affairs, Hua Guang Energy, Qinhuangdao Port Co., Ltd., and Ganyu Expressway.

In addition, in terms of bonds, the person in charge of the relevant department of the People's Bank of China previously stated that the yield of long-term national debt will operate within a reasonable range that matches the long-term economic growth expectations. Therefore, insurance capital is more cautious about long-term debt allocation, but with the expansion of the scale of funds, it is expected to still have a certain catalytic effect on the allocation of bond assets by insurance capital.

The results of life insurance reform are prominent.

From January to May 2024, the original insurance premium income of the five listed insurance companies in the A-share market was 145.64 billion yuan, a year-on-year increase of 2.2%. With the transition and stabilization of the liability side reform, the premium income continues to grow positively; among them, China Life Insurance, which benefits from the continuous realization of the reform results and the advantages of the life insurance leader, saw a year-on-year increase in cumulative premium income of 4.2%, and the increase further expanded; China Ping An, China People's Insurance, and China Pacific Insurance saw year-on-year increases in premium income of 3.4%, 2%, and 1.9%, respectively, with only New China Life Insurance's growth rate at -10.9%.

In 2024, all listed insurance companies actively adjusted the product form, with dividend insurance and increased whole life insurance and other products leading the premium growth rate; coupled with the gradual recovery of the bank insurance channel, its channel products and platform advantages still have a certain competitiveness. Looking at the single-month premium income performance, Taiping Life Insurance, China Life Insurance, New China Life Insurance, Ping An Life Insurance, and People's Insurance Life Insurance achieved a sequential growth rate of 38%, 32%, 13%, 5%, and -11%, respectively.

At present, the proportion of ordinary life insurance policies in the insurance industry in China is still relatively high. Against the background of the decline in asset-side returns, it brings certain pressure to the asset-liability matching of insurance companies, and the risk of interest rate difference loss is intensified. From 2000 to 2017, with the continuous improvement and innovation of the product structure of the insurance industry in China, coupled with the impact of accounting standards, the proportion of traditional life insurance represented by dividend insurance and universal insurance increased rapidly. This type of policy has a certain "long-term nature", based on this analysis, the current proportion of life insurance policies in the insurance industry is relatively high.

By the end of 2023, traditional life insurance accounted for 54% of the total premium income of the industry. At the same time, with the downward shift of residents' risk preferences in recent years, and the breaking of the rigid payment attributes of other wealth management products, the rise of guaranteed income-type products such as increased whole life insurance has further increased the rigid cost on the liability side of insurance companies, making them face a certain degree of interest rate difference loss risk under the background of declining asset returns.

Recently, some life insurance companies have successively reduced the预定 interest rate of increased whole life insurance to 2.75% (originally 3%). It is expected that the short-term benefits will promote the increase in premium income in June, and some companies may take this opportunity to "hype the sale stop"; in the middle term (July-August), there may be a certain degree of insurance demand overdraft impact, therefore, the premium growth rate may have a slight decline; in the long term, it is beneficial for the industry as a whole to reduce the cost of liabilities and reduce the risk of interest rate difference loss. From the perspective of asset allocation, if the corresponding rectification measures are implemented, with the increase in premium income, it will continue to benefit the allocation of high dividend (OCI equity) assets by insurance capital, and also have a certain degree of incremental catalytic effect on the allocation of long-term debt.

In addition, recently, the yield of 10-year and 30-year national debt is about 2.3% and 2.53%, respectively, so it is expected that the 3% liability rigid cost will face a certain asset allocation pressure. In the future, the pricing interest rate of increased whole life insurance in the insurance industry is expected to be systematically reduced to the range of 2.5%-2.75%.

With the gradual stabilization of insurance companies in channels, products, sales teams, and other aspects, the overall premium income continues to grow positively on a year-on-year basis since April. Coupled with the recent adjustment of the pricing interest rate of increased whole life insurance, it is expected that the industry will usher in an adjustment "window period" in the short term, and short-term premium income may usher in a certain catalyst.Open-source securities analysis suggests that in the short term, the impact of product suspensions may marginally diminish, while in the long term, regulatory commitment to reducing liability costs is firm. Since 2024, the 30-year government bond yield has dropped from 2.84% to 2.52% (as of June 12th). From the perspective of controlling interest rate risk, the life insurance industry may proactively further reduce the guaranteed interest rates on traditional insurance products, with attention to the product strategies of leading insurers in the future.

In the short term, the continuous suspension of products is expected to still stimulate the early release of demand, with the impact diminishing marginally. If the suspension of 3% products continues in 2024, it may bring forward demand in the short term, which is somewhat beneficial for the short-term new policies and New Business Value (NBV) growth of life insurance. However, considering that the reduction in the guaranteed interest rate may be 25 basis points, and the "3.5% suspension" in 2023 has led to a certain degree of demand overdraft, the impact of subsequent suspensions may diminish marginally.

In the long term, the reduction in guaranteed interest rates is expected to further lower the liability costs of new products. According to calculations by open-source securities, the break-even yields for listed insurers in 2023 are as follows: China Pacific Insurance 2.12%, China Life Insurance 2.23%, Ping An Insurance 2.39%, and New China Life Insurance 3.02%. The increasing term life insurance remains the main product supporting the growth of new policies in the life insurance industry in 2024. Subsequent product suspensions may further reduce the liability costs of incremental products. Coupled with the settlement interest rates of universal and dividend insurance, and the reduction in the guaranteed interest rates of traditional insurance in 2023, the industry's liability costs are expected to continue to decline, and the risk of interest rate damage is expected to be marginally alleviated.

The reduction in the guaranteed interest rates of increasing term life insurance is expected to further enhance the appeal of dividend insurance. Leading insurers with strong investment capabilities and the ability to obtain high-quality assets are expected to gain a larger market share for dividend insurance products.

From the liability side, the high base of new policies in the second quarter may face a slight pressure year-on-year, but considering the significant increase in value rates, coupled with the short-term catalyst brought by the suspension of 3% products, it is expected that the NBV growth in the first half of 2024 will be good, and the full-year NBV is expected to achieve a high-quality growth in the low double digits. The reduction in settlement and guaranteed interest rates, the integration of reporting and sales, and the optimization of product structure are expected to reduce the liability costs of the industry's existing and incremental products, alleviating concerns about interest rate damage risk.

As the risk of interest rate damage in the insurance industry continues to improve, attention is paid to the catalytic effect on the asset side. From the asset side, the relaxation of real estate policies, the central bank's statement on the low level of government bond yields, and the improvement of the equity market year-on-year are expected to bring about catalysts on the asset side. The business prosperity and policy side bring support for excess returns, and the catalyst on the asset side is expected to drive the continuous recovery of the sector's valuation.