CITIC Securities stated in a research report that while Hong Kong-listed insurance stocks have moved in line with the market this year, their fundamentals are significantly stronger than the overall market. Whether compared within the financial sector or under the dividend asset framework, there is significant opportunity for rotation. Although Hong Kong insurance stocks have already delivered substantial excess returns compared to their A-share counterparts this year, there remains considerable potential for valuation repair in Hong Kong-listed Chinese insurers, both from a static comparison and when combined with the return of profitability. Particularly in this recovery cycle, the improvement in profitability has not yet been fully priced in, continuing to provide room for performance. From a cyclical perspective, insurance companies are entering a phase of healthy balance sheet expansion. Regulatory anti-internal competition measures are aiding cost reduction and efficiency gains, the product shift towards participating policies is reducing operational pressure, the bancassurance channel is driving the continuous conversion of savings deposits, and increased allocation to equities on the investment side is enhancing market pricing power. Insurance stocks are expected to begin a new upward cycle.
CITIC Securities' main views are as follows: Earnings for Hong Kong insurance stocks are accelerating, presenting rotation opportunities. Unlike the broader Hong Kong market's rally this year, which was primarily driven by valuation expansion, the insurance sector's performance has clear fundamental support. As of December 12, 2025, profit expectations for 2025 have been revised up by 37.5% since mid-March this year, while the Hang Seng Composite Index's 2025 profit expectations were revised down by 3.5% over the same period. Profit expectations for Hong Kong insurers in 2026 have been revised up by 17.1% since early August, while the Hang Seng Composite Index's 2026 profit expectations, supported by materials and insurance sectors, have stabilized. However, the valuation repair for Hong Kong insurance stocks for the full year has been significantly weaker than the overall market. Within the financial sector, Hong Kong insurance stocks have consistently underperformed brokers and banks since 2023. Beyond lagging the overall financial sector in valuation repair, energy and utilities stocks with dividend attributes have seen their valuations approach highs again despite pressured earnings expectations. In contrast, the dynamic price-to-book ratio for insurers has not yet recovered to early-2023 levels, indicating rotation opportunities not only within the financial industry but also from a broader market perspective.
Supported by profitability, the valuation upside for Hong Kong-listed Chinese insurers is expected to further expand. As of December 19 this year, Hong Kong insurance stocks have delivered 22 percentage points of excess returns over A-share insurers, with the A/H premium narrowing from 62% at the end of 2024 to 30%. However, the current valuation of Hong Kong insurance stocks remains low compared to their own history, suggesting strong certainty for upward revision. The MRQ P/B ratio (aggregate method) for Hong Kong insurers is currently at 1.31x, still at the 31.2 percentile since 2011. The continuous rise in insurers' dynamic ROE has been the main driver of PB repair this year. From a PB-ROE perspective (float-adjusted market cap weighted), the current dynamic PB of 1.65x and dynamic ROE of 16.4% for Hong Kong insurers remain significantly above the regression line of the past 15 years. At the individual stock level, Chinese insurance companies are key drivers of the upward earnings revisions for Hong Kong insurers. Supported by the positive insurance cycle, Chinese insurers may offer high valuation attractiveness. Although the A/H premium for Chinese insurers has narrowed significantly, the discount for H-shares may gradually ease as southbound capital holdings increase and liquidity improves.
With improving balance sheets, insurance stocks are beginning a new upward cycle. Since 2024, insurance companies' net assets have resumed rapid growth, and their balance sheets are trending towards faster expansion, entering a new cycle of a virtuous circle. On the policy front, stringent regulations targeting spread and expense differentials are progressing, successive reductions in guaranteed interest rates are lowering liability costs, and the full implementation of "reporting conformity" across channels is guiding the industry to weaken price competition. On the product side, the transition to participating policies has yielded significant results, improving asset-liability matching and profit certainty. For distribution channels, the maturity of large amounts of savings deposits, coupled with the comparative yield advantage of insurance products in a low-interest-rate environment, is driving rapid premium growth recovery in the bancassurance channel. On the investment side, insurers continue to increase allocations to equities, enhancing medium-to-long-term returns and strengthening their beta characteristics.
Investment Strategy: Focus on alpha opportunities within the insurance sector. Given that the beta logic for 2025 has been largely played out, and some companies face pressure from earnings declines off a high base, which could suppress the pace of valuation repair, the focus for 2026 should be on alpha opportunities arising from the sector's improving fundamentals, as well as high-quality names with significant room for valuation recovery.
Risk factors: A significant decline in long-term interest rates; substantial stock market volatility; lower-than-expected policy sales; continued attrition of agent forces; slower-than-expected growth in the bancassurance channel.
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