Since 2024, high-dividend strategies have remained popular, and the high-dividend and undervalued insurance sector has quietly emerged from the rebound market. Since mid-April, the Futu Hong Kong Insurance Sector Index (LIST1003) has risen more than 40% from the bottom; A-share insurance stocks have also risen significantly in the past month, with Xinhua Insurance (601336.SH) and China Life Insurance (02628) both rising by about 20%.

Previously, the insurance sector operated at an overall low level, which was mainly affected by two major factors: poor performance and declining interest rates in the macro market. However, according to recent news, risk-free returns have steadily rebounded under the credit leniency policy, compounded by the real estate industry's introduction of a number of major favorable policies, which are expected to have a positive impact on the investment income of insurance companies; the premium income of various listed insurers for the first four months was announced one after another, continuing the growth trend of the first quarter.

First quarter results “no increase in revenue, no increase in profit”

Since 2024, the insurance industry has shown a recovery trend. According to data disclosed by the General Financial Supervisory Authority, in the first quarter of this year, the insurance industry's original insurance premium income reached 2.15 trillion yuan, an increase of 5.1% over the previous year on a comparable basis.

According to the Zhitong Finance App, among the 8 leading insurance companies listed on A shares and H shares, the total premium income for the first quarter was 1133.707 billion yuan, an increase of 0.97% over the previous year. Among them, the total premium income of the life insurance business was 762,068 billion yuan, a year-on-year decrease of 1.04%; the premium income from the financial insurance business reached 355.059 billion yuan, an increase of 5.15% over the previous year.

As of April 2024, the industry's premium income continued to grow positively. According to Guoxin Securities statistics, the five listed insurers achieved a total of 1250.6 billion yuan in premium income in the first 4 months, an increase of 1.5% over the previous year.

Among them, China Life Insurance's cumulative premium income increased by 3.9% year on year, ranking first among the five A-share listed insurers. With the exception of Xinhua Insurance, which was affected by the restructuring of banking insurance channels and the decline in premium income payments, premium income fell 11.7% year-on-year in the first 4 months, while the remaining four companies all achieved positive year-on-year growth in premium income in the first 4 months.

Despite the obvious recovery in the industry, the performance of leading listed companies has been divided, mainly due to factors such as regulations strengthening industry asset liability management and implementation of new accounting standards. In the first quarter of 2024, the five A-share listed insurers achieved a total revenue of 657.55 billion yuan, an increase of 1.4% over the previous year.

In terms of net profit, factors such as natural disaster compensation and declining investment income dragged down profit performance. The net profit of Q1 listed insurers reached 83.09 billion yuan, a year-on-year decrease of 9.1%. Among them, only China's Taibao (02601) achieved a slight year-on-year increase of 1.1%, while the other four companies experienced varying degrees of decline.

Regarding the “increase in revenue without increase in profit” phenomenon, most of the listed insurers are due to natural disasters being paid more and investment returns are under pressure. For example, China People's Insurance (01339) pointed out, “First, there are many economic losses caused by natural disasters. Second, as economic activity continued to pick up, customer travel increased, leading to an increase in car insurance coverage in the first quarter. Third, due to the impact of the capital market, the company's equity investment income declined year-on-year.”

Looking back at 2023, the insurance industry's investment “report card” is generally “underpaid”, and both indicators of return on financial investment and return on comprehensive investment have been low for more than 10 years. According to industry sources, the return on financial investment of 2.23% hit the lowest level since 2008 and fell below 3% for the first time since 2008; the comprehensive return on investment of 3.22% is the second lowest since 2011, and is only better than 1.83% in 2022.

As time comes to the first quarter of 2024, the overall return on investment of listed insurers is still under pressure. In the first quarter, the Shanghai and Shenzhen 300 Index had a cumulative increase of 3.10%, a decrease of 1.53 pcts compared to the same period in 2023; the annualized total return on investment of 3 of the 4 companies all declined.

The debt-side transformation of the industry continues to be strong, and the trend is clear

According to the Zhitong Finance App, in recent years, there has been serious homogenized competition in the personal insurance industry, and insurance companies' expense management is generally extensive, resulting in actual expenses exceeding the level at the time of product reporting. Not only is this not conducive to the development of industry standards, but it is also easy to cause problems such as false fees, false insurance applications, and false surrenders, and even breed “proxy black production.” Therefore, over the past year, the supervisory authorities introduced a number of policies to strengthen the “integration of reporting and banking” of products and focus on promoting the insurance industry to reduce debt-side costs.

The so-called “integration of reporting and banking” means that each company should actually pay commission fees to the channel, and actual expenses such as commissions should be consistent with the filing materials. Under the new policy, banking insurance channels with high handling fees became the first channel to be regulated, and in the future, the “integration of reporting and banking” work for personal agency channels and brokerage channels will gradually begin.

In addition to the risk of fee differences brought about by “inconsistent reporting,” the overall low interest rate investment environment over the past year has also put more pressure on life insurance investment, and the risk that the actual return on investment in life insurance products is lower than the interest rate scheduled in the contract has gradually increased. In order to prevent the risk of interest spreads, the new policy lowered the upper limit of the predetermined interest rate for ordinary personal insurance from 3.5% to 3%, while the maximum guaranteed interest rate for dividend products and universal insurance products was lowered to 2.5% and 2%, respectively.

As the insurance industry enters a period of deep adjustment, China's insurance industry still has huge potential market space. Comparing countries around the world horizontally, in 2022, China's insurance density (per capita premium) was 489 US dollars, lower than the global average of 853 US dollars, and lower than major developed economies (such as the US is 8885 US dollars); in terms of insurance depth (premium/GDP), China's insurance depth in 2022 was 3.9%, lower than the global average of 6.8%, and lower than that of major developed economies (such as the US 11.6%).

Furthermore, the savings rate of Chinese residents has always been at a high level in recent years, which helps support the transformation of China's huge potential demand for insurance into reality. In 2020, China's savings rate (total savings as a share of GDP) was 44%, far higher than the world average of 26%.

As of the first quarter of 2024, multiple challenges such as the raging Blizzard freeze disaster, increased “integrated reporting” of car insurance, and losses in NEV insurance all contributed to the continued intensification of the Matthew effect in the insurance industry.

According to incomplete market statistics on 2024 Q1 performance data, most of the profits in the personal insurance industry are still concentrated in a few leading insurers, such as China Life Insurance, Taibao Life Insurance, Xinhua Insurance, China Post Life Insurance, and China Post Life, accounting for 94% of the total net profit of 36 profitable personal insurance companies;

In the property insurance industry, the “old three” insurance business accounts for up to 65% of all property insurance companies. Profits account for 85% of the net profit of all property insurance companies, while the combined net profit of more than 80 other property insurance companies in the industry accounts for only 15% of the industry.

Fangzheng Securities's non-bank research report pointed out that in the short term, fee cuts due to “integration of reporting and banking” may lead to agent team structure optimization, premium growth rate, or pressure. In particular, small and medium-sized life insurance companies with a high banking insurance channel business will be greatly affected; however, in the medium to long term, products after fee reduction can increase their ability to benefit customers, leading insurance companies have a competitive advantage, and the situation of strong industry players will continue in the future.

Financial insurance is growing steadily, and there are still variables in personal insurance

In order to meet the challenges of the transformation of the insurance industry, various insurance companies “made surprising moves” to find new growth points.

According to the Zhitong Finance App, Prudential (02378) actively lays out high growth potential in the Asian and African markets. In 2023, annual premium equivalent sales in the Indonesian market increased 15% to US$277 million, overall new business profit increased 16% to US$142 million, Malaysian new business profit increased 8% to US$167 million, and annual premium equivalent sales increased 11% to US$384 million;

AIA Life promotes the construction of an industrial ecosystem and launched a new “residential care” section based on the existing three segments of “home care, institutional care, and medical care assistance”. The first batch of AIA Life contracted residential pension hotel institutions covered the 7 popular domestic and international residential cities of Sanya, Hangzhou, Chengdu, Dali, Zhuhai, Qingyuan, and Huahin, Thailand. Currently, nearly 3 million customers enjoy AIA ecosystem services;

Sunshine Insurance (06963), on the other hand, used technology as a starting point to establish our Sunshine App, Official WeChat, Mini Program, etc. for customers, and created a new model of “Sunshine E Store” without a counter, effectively opening up online+offline services. The company's innovative and upgraded “Lingxi 3.0” version has also undergone comprehensive upgrades in terms of scenario coverage and customer service, greatly improving the customer service completion rate.

Looking forward to the future, at the macroeconomic level, long-term interest rates are expected to rise steadily to ease investment pressure on insurers. At the specific business level, market demand for commercial pension insurance is growing rapidly in the context of an aging population, which is expected to boost the life insurance business of listed insurers to continue to grow throughout the year;

In terms of financial insurance, although the decline in Q1 car insurance premiums dragged down the premium growth rate in the industry, there is limited room for car insurance premiums to decline, and non-car insurance businesses such as agricultural insurance, commercial health insurance, and liability insurance are expected to continue to grow relatively rapidly. Ge Yuxiang, a non-bank financial analyst at Dongwu Securities, pointed out that the overall development of the financial insurance industry is expected to maintain a steady and upward trend in 2024. The auto insurance business is still a competitive Red Sea market, and it is expected that businesses involving green insurance and other fields will usher in significant development.

Notably, a number of agencies have recently emphasized the need to be wary of the impact of natural disaster risks exceeding expectations. For example, Fitch Ratings, the world's third-largest rating agency, pointed out in a research report that natural catastrophe risk in the non-life insurance industry and asset risk in the life insurance industry are still the main weak points of the industry's credit and may weaken insurance companies' surplus growth; Jefferies also published a research report pointing out that the data shows that the incidence of cancer in China is still rising rapidly, and the trend of increasing critical illness insurance claims will worsen insurers' reserve adequacy ratios.

Overall, although the insurance industry will still face a series of risks such as stricter regulations in 2024, in anticipation of a recovery in demand and profit recovery, there are still structural investment opportunities in the insurance sector, and leading companies with differentiated competitive advantages will have higher allocation value.