Life insurance stocks are currently significantly undervalued, with short-term pressures mainly stemming from capital flow factors. From a medium to long-term perspective, the market may have mispriced expectations regarding the "spread loss" risk for insurers, with the investment return assumptions embedded in PEV valuations appearing excessively pessimistic. Assuming interest rate trends remain within their current narrow range, the profitability of life insurers could potentially bottom out and recover over the next three years, driving valuation increases. The life insurance sector currently presents both offensive and defensive opportunities, with low valuations providing a margin of safety, while the positive effects of a rising equity market have yet to be fully reflected in stock price elasticity.
Reasons for the Current Low Valuation of Life Insurance Stocks
The key factors influencing PEV valuation are: (1) The interest rate anchor: In a low-interest-rate environment, pressure on net investment returns is a core factor for PEV valuation discounts. The essence is the diminished credibility of Embedded Value (EV) due to potentially unsustainable investment return assumptions. (2) New Business Value (NBV) growth rate: The sustainability of NBV growth may face some challenges after policy stimulus fades. However, it is believed that participating insurance products possess attributes similar to "fixed income plus" strategies and benefit from value-added services, which could support continued positive growth in new premiums. (3) The ability to generate excess returns from equity assets: Historically, the insurance sector has moved in tandem with the broader market. While equities have rebounded since April, insurance stocks may not have risen significantly due to short-term capital flow influences. It is anticipated that once selling pressure subsides, positive equity market momentum could help drive a "catch-up rally" for insurance stocks.
Have Equity Assets Replaced Interest Rate Trends as the Core Influencing Factor?
No. On one hand, net investment returns have contributed over 90% to profits in the past decade. On the other hand, although a sustained bull market since September 2024 has boosted the insurance sector, PEV valuations have still not surpassed the 1x ceiling, reflecting the constraining effect of interest rates. The impact of equities on valuation manifests in two stages: the first stage is reflected in current profit expectations, affecting static PEV valuations; the second stage of a rally influences valuation by raising long-term investment return expectations, reflecting the market's premium pricing for the investment management capabilities of certain insurers. Furthermore, the PE valuation method is affected by differences in accounting measurement choices, making EPS comparisons across peers less meaningful. While the PB valuation method is not subject to these influences, it underestimates the future value of in-force policies, and ROE also suffers from comparability issues under new accounting standards.
Deconstructing Life Insurance Profits: The Linkage Between the Three Profit Margins, Financial Reports, and the EV Framework
The three profit margins represent the target profit structure in policy design, financial reports reflect current operating conditions, and Embedded Value (EV) explains the timing of profit release over the entire policy lifecycle. After a policy is issued and sold, it forms a Contractual Service Margin (CSM). The amortization of CSM and operational variances constitute the core of insurance service performance, while investment service performance reflects the profit generated for the company by the asset side in the current period after deducting liability funding costs. EV integrates these accounting period fragments into a complete value picture over the lifecycle and, through EV movement analysis, explains the drivers behind changes in value.
The Applicability of PEV Valuation
(1) The Embedded Value system provides a more complete depiction of the life insurance industry's cross-cycle business model. (2) EV reflects a company's "liquidation value," while NBV growth rate reflects the growth potential of EV, guiding PEV valuation. (3) The PEV multiple reflects the market's recognition of EV and the pricing of NBV growth potential.
Comparison Between PEV and P/(B+CSM)
Comparing Adjusted Net Worth (ANW) with net assets, the latter may be more objective under the new accounting standards. However, when comparing Value of In-Force (VIF) with CSM, the former represents an economic perspective focused on shareholder value, while the latter is an accounting perspective focused on fulfillment obligations. Overall, the PEV valuation method may hold an advantage, primarily because the economic language offers a more accurate expression of the life insurance industry's long-cycle business model, potentially serving as a more reliable "anchor" for long-term value judgment.
How to Determine a Reasonable Valuation Range?
The generalized rate of return (the difference between the comprehensive investment return rate and the VIF break-even return rate) is one of the core factors explaining PEV valuation. Since 2018, the average generalized rate of return has continued to decline, and PEV valuations also trended downward from 2018 to 2022. During the 2023-2025 period, these two factors diverged, with PEV valuations primarily driven by the comprehensive investment return rate and NBV. Empirical historical data shows that the generalized rate of return, NBV growth rate, comprehensive investment return rate, and market share all have a significant impact on PEV valuation.
Risk warnings include: declining interest rates, equity market volatility, policy changes, slower-than-expected business transformation, and model calculation errors.
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