Insurance sector fundamentals are robust, though the sector has significantly underperformed the broader market due to prevailing market trends.
Looking at the asset side, near-term focus should be on strong first-half results, while the long-term perspective requires acknowledging the central investment return level. A significant divergence exists between the sector's valuation and its fundamentals. While liability-side conditions are improving and liability costs are expected to continue declining, market trends have kept sector valuations at relatively low levels.
Review of H1 2026: Strong Fundamentals Amid Market Underperformance
As of June 25th, the insurance index has declined by 26%. In contrast, the CSI 300 Index, CSI 800 Index, and ChiNext Index gained 6.8%, 9.9%, and 34.2% respectively over the same period. The sector experienced a pullback early in the year due to geopolitical tensions. Subsequently, as market risk appetite increased, the technology sector repeatedly hit new highs, drawing capital away from other sectors.
Fundamentally, the insurance sector showed strong performance. First-quarter new business value growth rates were: China Life Insurance Co Ltd (75.5%) > New China Life Insurance Co Ltd (24.7%) > Ping An Insurance (Group) Company of China, Ltd. (20.8%) > AIA Group Limited (17.4%) > China Pacific Insurance (Group) Co., Ltd. (9.6%), marking four consecutive years of value growth.
Asset Side Outlook: Near-Term Strength and Long-Term Returns
Looking ahead to mid-2026 results, the AI trend is significantly driving the market upward. The CSI 800 Index and equity-focused funds have risen 9.6% and 19.3% this year, compared to just 0.9% and 5.4% in the same period last year. Furthermore, considering that insurance companies substantially increased their market participation in the second half of 2025, the scale of stocks and funds held by insurers in Q2 2026 has risen notably year-on-year. This is expected to amplify the impact of the market rally on earnings growth.
Based on sensitivity analyses disclosed in 2025 annual reports, a 10% change in equity prices would increase pre-tax profits for China Life, Ping An, CPIC, and New China Life by approximately 93.47 billion yuan, 38.14 billion yuan, 17.27 billion yuan, and 17.86 billion yuan, respectively. This corresponds to projected mid-2026 earnings increases of 209%, 50%, 56%, and 109%.
From a long-term perspective, influenced by declining interest rates, net investment returns are projected to decrease from around 3.4% in 2025 to 2.7% by 2030. Considering steady capital gains of 4-6%, the average steady-state total investment return from 2025 to 2030 is estimated at 3.7%-4.1%, significantly higher than the investment return implied by current valuations.
Liability Side Outlook: An Era of Major Transformation and Improving Conditions
Product structure is evolving. The industry's mainstream product began shifting from critical illness insurance to traditional insurance in 2021. In 2026, with interest rates remaining low and traditional insurance's guaranteed rates also low, the shift towards participating insurance is accelerating.
Looking forward, sales of participating insurance are positively correlated with industry investment returns and negatively correlated with competing product yields. The significant market uptrend from 2024 to 2026 has boosted investment returns, while declining deposit rates benefit participating insurance. Additionally, the recent accumulation of special reserves is favorable, keeping the actual crediting rate for medium- to long-term participating insurance at a competitively low level. Participating insurance is expected to continue driving improvement in the industry's liability side over the medium to long term.
Channel structure is undergoing major change, adjusting alongside product structure, shifting from bancassurance to a focus on agency channels. After 2024, the dominance of savings-type products and the implementation of unified reporting and operations have improved the value rate of the bancassurance channel. The proportion of bancassurance in new business for listed insurers in 2025 was: New China Life (61.5%) > CPIC (43.1%) > China Taiping Insurance Holdings Company Ltd (38.7%) > China Life (25%) > Ping An (19.8%).
Product costs are seeing significant reform. Since 2023, regulators have implemented multiple measures to support the industry and reduce overall liability costs. These include unified reporting and operations driving down expense ratios, reductions in guaranteed interest rates, and controls on the actual crediting rates of floating-rate products to lower the industry's cost of capital. Both the "NBV break-even yield" and "VIF break-even yield" have been on a continuous downward trend.
Projections for the future break-even yield estimate it will fall to around 2.2% by 2030, with the premium inflow break-even yield dropping to approximately 1.84%.
Key risks include declining long-term interest rates, volatility in equity markets, slower-than-expected premium growth, and tightening regulatory oversight.
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