The Zhitong Finance App learned that Haitong Securities released a research report saying that it once fell below 2.3% in 2024. As of May 6, 2024, the 10-year Treasury yield was 2.31%, down 25 bps from the beginning of the year. In the short term, interest rates are mainly affected by domestic economic growth recovery and monetary policy. However, from a long-term perspective, the economic growth rate determines the level of interest rates, and the interest rate center gradually declines as the potential growth rate of the economy declines. As the growth rate of the domestic economy shifts, a decline in the interest rate center in the future is a probable event.

The low interest rate environment will have a negative impact on insurers' profitability and valuation

1) The decline in interest rates will put pressure on yields and shrink the room for interest spreads. Interest spreads currently account for the largest share of domestic insurance companies' profit sources, and the allocation of major types of domestic insurance capital assets is mainly fixed income assets. Bonds are the single asset class that accounts for the highest share, which determines the high sensitivity of insurance companies' investment side to the interest rate environment. The decline in the return on net investment of insurance companies during the period of falling interest rates will cause the spread space to be compressed, thereby putting pressure on profit levels.

2) The decline in interest rates affects the calculation of reserves, thereby affecting the financial reports of insurers. Insurance companies' reserve accruals are affected by discount rate factors. A decline in interest rates will lead to a decrease in the discount rate, which will result in more reserves being calculated, leading to a decrease in profit before tax. The new accounting standards change the discount rate base from a 750-day moving average curve to actual market interest rates, further amplifying the impact of interest rate changes, but at the same time, they also give insurers the right to designate OCI to stabilize profits, and also raised the requirements for insurance companies' asset liability management. It should be noted that if interest rates fall too much and cause insurance policy losses, then the loss will still be reflected in current profit and loss.

3) In a low interest rate environment, insurance companies' EV evaluation assumptions are facing adjustments. The impact of interest rate factors on EV assessments is complex. The core impact is changes in long-term return on investment and risk discount rate assumptions. Listed insurers concentrated on lowering long-term return on investment and risk discount rate assumptions in 2023, which had a negative impact on EV and NBV evaluation results. Among them, the impact on NBV was greater than that of EVs. As the sensitivity of listed insurers EV/NBV to return on investment has further increased in recent years, if interest rates continue to decline in the future, it will lead to further distortion of EV results.

4) Falling interest rates will increase pressure on insurers' solvency and cash flow. The decline in interest rates will lead to a decrease in the actual capital of insurance companies and an increase in the minimum capital, leading to a decrease in the level of solvency adequacy ratio, and the solvency of insurance companies with long-term gaps in assets and liabilities will be more significantly affected by the decline in interest rates. From the perspective of cash flow, falling interest rates may cause consumer confidence in insurance companies to decline, leading to an increase in surrender insurance and increasing pressure on insurance companies' cash flow.

Currently, the insurance industry is already facing short-term profit decline and insufficient capital pressure, but there is still a big difference with interest spreads in the 90s

1) In 2023, due to falling interest rates and stock market fluctuations, the net profit of insurance companies generally declined. Judging from the overall data of the insurance industry, the total net profit of the insurance industry in 2023 was 181.7 billion yuan, -17.2% year-on-year, of which the net profit of life insurance companies was -18.7%. Judging from the listed company data, the total net profit of the five A-share listed insurers in 2023 was 190.6 billion yuan, -27.2% year-on-year, and -9.2% year-on-year in the first quarter of 2024.

2) Some insurance companies are expected to face greater capital pressure. At the end of 2023, the comprehensive and core solvency ratios of the insurance industry were 197.1% and 128.2% respectively. Among them, life insurance companies were relatively low, at 186.7% and 110.5% respectively. As of April 17, 20 out of 180 domestic life insurance+industrial insurance companies failed to disclose solvency reports, while 14 insurance companies did not meet solvency standards.

3) Historically, rapid interest rate cuts in the 90s of the last century triggered serious interest rate spreads in the domestic life insurance industry. Major insurers are still affected by stock business, but Haitong Securities believes that there is a significant difference between the current internal and external environment of the market and the 90s.

On the one hand, the decline in domestic interest rates in recent years is far less drastic than in the 90s, and after years of development, the industry's product structure and asset allocation have become richer and more diverse, and there are also insured insurance policies that contribute high to dead margins as a safety cushion for interest loss. However, on the other hand, the current number of players in the domestic life insurance market and the scale of premiums far exceeds that of the 90s. If a risk of systemic interest spreads and losses occurs, then it is obviously more difficult to dispose of, so risk prevention is still particularly important.

Risk warning: long-term interest rates are trending downward; the stock market continues to be sluggish; new premium growth falls short of expectations.