According to the research report of Soochow Securities, the "hidden worry of interest rate spread loss" is still hovering above the valuation of insurance companies at present. Although the sword of Damocles has not been removed, the central bank has set the bottom long-term interest rate by "selling bonds", and the rebound strength of interest rates determines the height of life insurance repair. China Pacific Insurance (with the best comprehensive performance at both ends of assets and liabilities) and New China Life Insurance (with the greatest elasticity of interest rates to financial report) are the recommended choices.

The main viewpoints of Soochow Securities are as follows:

Event: On July 1, the central bank issued a notice stating that in order to maintain the stable operation of the bond market, based on a cautious observation and evaluation of the current market situation, the People's Bank of China decided to carry out national debt borrowing operations targeting some primary dealers in the open market business in the near future, and the long-term interest rate rises in response.

Since April 2024, the central bank has continued to "call out" that the long-term interest rate should not be too low on multiple occasions. We believe that the main reason for this statement may be that the long-term bond yield is approaching the central bank's "bottom line" again. In the monetary policy implementation report for May, the central bank stated that "at the end of April, the yield on 30-year government bonds at maturity had risen to more than 2.5%, and the marginal improvement of the supply-demand relationship in the bond market," and then the Financial Times said that "2.5% to 3% may be a reasonable range for the long-term government bond yield," both indicating that 2.5% may be the bottom line in the heart of the central bank. On June 19, Pan Gongsheng said at the Lujiazui Conference: "The risk event of Silicon Valley Bank in the United States gives us a hint that... we need to pay special attention to the maturity mismatch and interest rate risk of non-bank entities holding a large amount of medium and long-term bonds, maintain the normal upward sloping yield curve, and maintain a positive incentive effect on investment in the market." Although the market's response to the central bank's "callout" seems to be increasingly dull, the short-term future will still revolve around the expected management of the central bank, and further attention is needed to the central bank's "selling of bonds" operation. We believe that the bottom of the long-term interest rate has been basically explored.

The reversal expectation of the asset side bottom is the core of the current valuation repair. As of the end of June, the yield on 10/20/30/50-year government bonds in China was only 2.22%, 2.38%, 2.44%, and 2.45%, respectively, all below the 2.5% threshold. Since late June, there have been signs of accelerated decline, and at the end of 2023 they were 2.56%, 2.73%, 2.8%, and 2.91%, respectively. Since the beginning of this year, they have fallen sharply by 33.3%, 35.9%, 38.3%, and 41.5 bps, and the interest rate curve has further flattened, posing challenges to insurance companies' current net investment income and re-allocation income.

Under the new regulations, we focus on the growth rate of net assets attributable to the parent company and comprehensive income attributable to the parent company of listed insurance companies, reflecting the balance of asset-liability matching ability. The impact of interest rate declines on different types of financial assets is different. The value of financial assets (FVOCI) measured by fair value and whose changes are included in other comprehensive income changes with market interest rate fluctuations. When interest rates decline, the fair value of assets rises, generating positive income that is included in other comprehensive income, which can offset the negative impact of the increase in the measurement of insurance contract liabilities caused by the decrease in interest rates on net assets. At the end of 1Q24, the ratio of FVOCI assets in listed insurance companies to investment assets ranked from high to low: China Pacific Insurance (60%), China Life Insurance (49%), PICC (31%), and New China Life Insurance (25%). China Pacific Insurance has the highest proportion of FVOCI assets, with other debt investment accounting for 55.4% and other equity instruments accounting for 4.7%. At the end of 1Q24, the average ROE of A-share listed insurance companies increased by 0.5% from the beginning of the year, with China Pacific Insurance having the highest increase rate (3.3%) and New China Life Insurance having the largest decrease (-10.5%). At the end of 1Q24, the ratio of other comprehensive income/net income of A-share listed insurance companies was -87.7%, with China Pacific Insurance (-30.0%) having the smallest difference in this ratio, benefiting from the strongest asset-liability matching ability (the highest proportion of FVOCI assets in the company), and New China Life Insurance (-323.8%) having the largest difference in this ratio, mainly due to the lower proportion of FVOCI assets in the company.

Investment advice: The "hidden worry of interest rate spread loss" is still hovering above the valuation of insurance companies at present. Although the sword of Damocles has not been removed, the central bank has set the bottom long-term interest rate by "selling bonds", and the rebound strength of interest rates determines the height of life insurance repair. China Pacific Insurance and New China Life Insurance are the recommended choices. China Pacific Insurance (with the best comprehensive performance at both ends of assets and liabilities) and New China Life Insurance (with the greatest elasticity of interest rates to financial report) are the recommended choices.

Risk warning: The long-term interest rate continues to hover at a low level, and the bearish equity market drags down valuation and performance.