Insurers’ Q1 Solvency Remains Robust; Resumption of Residual Margin Disclosure Benefits Earnings Tracking

Overview

J.P. Morgan’s report notes that major Chinese insurers demonstrated robust core solvency in Q1 2026, with average core solvency ratios of 139% for life insurers and 195% for P&C insurers. The report highlights that the resumption of residual margin disclosure enables clearer tracking of reserve balance trends. Data indicate resilient reserve growth across most major insurers (excluding Ping An Life), supporting positive earnings outlooks. Moreover, insurers have limited equity exposure increases and instead favored income-generating assets amid a low-rate environment. Based on strong channel advantages and improved risk-return profiles, the firm maintains Overweight ratings on China Life-H and Ping An Insurance-H.

Core views

Core Solvency and Capital Management: In Q1 2026, average core solvency ratios were 139% for major life insurers (up 2 ppts QoQ) and 195% for major P&C insurers (down 2 ppts QoQ). This stability stems from improved liability quality and extended duration, resulting in relatively stronger cash inflows versus outflows. Although fluctuations in long-end bond yields exerted some pressure on fair-value-bond portfolios, most large insurers have largely completed bond reclassification. Going forward, focus will shift to asset-liability management (ALM) to reduce volatility in solvency ratios. Resumption of Residual Margin Disclosure and Earnings Outlook: Following its suspension in December 2022 due to IFRS 17 implementation, life insurers resumed disclosing residual margin in their Q1 2026 solvency reports. While conceptually similar to the Contractual Service Margin (CSM), residual margin assumptions are fixed at policy inception, with differences recognized directly in P&L—not in reserves—making it a more direct indicator of current-period operating performance. Analysis shows that, except for Ping An Life—which exhibited relatively weaker performance due to high reserve release rates and comparatively smaller new business volumes—most major insurers displayed resilient growth in residual margin balances relative to end-2022 levels, signaling positive momentum for core earnings growth. Asset Allocation and Investment Strategy: Q1 data show that equity-related market risk increased by only 3% QoQ among major life insurers (excluding PICC Life), indicating limited equity exposure expansion and a continued preference for income-generating assets. This strategy aligns with the current low-funding-cost environment and declining sales of guaranteed-return products. With maturing 3.5% non-participating policies and stabilization of long-end bond yields, equity allocation growth is expected to remain moderate for the full year. Meanwhile, insurers are actively optimizing product structures—by increasing sales of interest-rate-sensitive participating products, promoting long-term premium-paying policies, and lowering crediting rates on existing policies—to mitigate reinvestment risk and improve reserve quality. Regulatory Ratings and Liquidity: Under the C-ROSS II framework, major listed insurers maintain Integrated Risk Ratings (IRR) of BB or higher, reflecting sound risk management capabilities. Liquidity Coverage Ratios (LCR) rose slightly under base-case scenarios, indicating manageable short-term liquidity risk. Among them, Ping An Life exhibits the lowest liquidity risk, while PICC Life faces relatively higher liquidity risk—though its solid capital base renders overall liquidity risk insignificant.

Analysis framework

The firm employs a three-dimensional analytical framework—'quantitative capital + qualitative capital + public disclosure'—aligned with the three pillars of C-ROSS II to assess insurer health. First, changes in core solvency ratios QoQ are used to gauge marginal improvements or deteriorations in capital strength. Second, movements in minimum capital requirements under Pillar 1 are dissected: drivers have shifted from historically equity-market-risk-dominant factors to a combination of insurance risk, interest rate risk, and loss absorption effects from special insurance contracts—suggesting that product mix optimization (e.g., toward long-term premium-paying and participating products) positively enhances capital quality. Third, newly resumed Pillar 3 residual margin disclosures enable cross-company comparisons of reserve balance trends versus historical levels—serving as a leading indicator for future core earnings release potential. This layered analysis—from capital adequacy to earnings quality to asset allocation—forms the logical foundation for the bullish stance on leading insurers.

Methodology notes

• Financial Industry-Specific MetricsSolvency analysis

  Core and Comprehensive Solvency Ratios under C-ROSS II (China’s Risk-Oriented Solvency System Phase II).

  Core Solvency Ratio = Core Capital / Minimum Capital Requirement (regulatory threshold: 50%); Comprehensive Solvency Ratio = (Core Capital + Supplementary Capital) / Minimum Capital Requirement (regulatory threshold: 100%). These ratios are central regulatory metrics for assessing insurers’ capital strength and risk resilience—the higher the ratio, the stronger the capital position.

• Financial Industry-Specific Metrics

  Differentiation between Residual Margin and Contractual Service Margin (CSM).

  Residual Margin is a pre-IFRS 17 concept with fixed assumptions at inception; variances flow directly to P&L. CSM, introduced under IFRS 17, is dynamically updated, with variances partially absorbed into the CSM itself. The report leverages the resumed residual margin disclosures to more intuitively monitor genuine reserve growth trends and earnings release potential for in-force business.

• Financial Industry-Specific Metrics

  SARMRA (Solvency Risk Management Requirements and Assessment) Scores.

  A core component of C-ROSS II Pillar 2, SARMRA scores reflect regulators’ assessment of insurers’ risk management capabilities. Higher scores qualify insurers for minimum capital discounts—thereby indirectly boosting solvency ratios.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Life-H (2628.HK)

  Top Pick

  Strengths

  Strong core solvency (157% in Q1), significant residual margin growth (+11% vs. end-2022), low valuation (5x FY26E P/E), and ~3% dividend yield.

  Comparison

  Outperforms peers in residual margin recovery and has completed bond reclassification, driving notable net asset growth.

  Risks

  Persistent decline in long-end yields may pressure returns on new assets.

• Ping An Insurance-H (2318.HK)

  Top Pick

  Strengths

  Industry-leading dividend yield (5.2% FY26E), reasonable valuation (7x FY26E P/E), and synergistic comprehensive financial services model.

  Weaknesses

  Residual margin declined (-10% vs. end-2022), primarily driven by high reserve release rates and relatively modest new business volume.

  Comparison

  Though residual margin performance lags behind China Life, its high dividend yield and ecosystem advantages retain strong appeal.

  Risks

  Life insurance reform outcomes fall short of expectations; market volatility impacts investment returns.

• China Pacific Insurance-H (2601.HK)

  Overweight

  Strengths

  Residual margin up 10% vs. end-2022; stable solvency profile.

• New China Life-H (1336.HK)

  Neutral

  Strengths

  Residual margin up 6% vs. end-2022.

  Weaknesses

  Implied target price suggests downside (-12%); valuation less compelling.

  Comparison

  Risk-return profile slightly weaker than top picks.

Key data

• Average Core Solvency Ratio (Life Insurers)139%Q1 2026, up 2 ppts QoQ
• Average Core Solvency Ratio (P&C Insurers)195%Q1 2026, down 2 ppts QoQ
• Average Expected Dividend Yield (H-Share Chinese Insurers)4.8%FY2026 expectation; Ping An-H reaches 5.2%
• Change in Equity-Related Market Risk+3%Average QoQ increase among major life insurers, signaling modest equity allocation
• Three-Year Rolling Average Net Investment Yield3.3%Median level, above the 1.8% risk-free rate

Impact & implications

The report concludes that the risk-return profile is improving for major life insurers with strong distribution channels. On one hand, robust solvency and recovering residual margins lay the groundwork for future core earnings and dividend growth; on the other, current H-share valuations (e.g., China Life-H trading at just 5x FY2026E P/E) combined with attractive dividend yields (average 4.8%) make these stocks particularly appealing ahead of mid-year dividend proposals. Therefore, the firm recommends focusing on leading insurers capable of enhancing reserve quality through product mix optimization (e.g., raising long-term premium-paying and participating product shares) and effectively managing interest rate risk.

Risks

• Persistent decline in long-end yields exacerbates reinvestment risk and widens spread compression risk.
• Significant market volatility leads to underperformance in investment returns, affecting net profit and solvency ratios.
• Life insurance sales recovery remains sluggish, resulting in lower-than-expected new business value growth.
• Regulatory policy changes—including further tightening of solvency rules or restrictions on product design.

What to watch

• Consistency and comparability of residual margin disclosures in subsequent quarterly solvency reports.
• Trends in long-end government bond yields and their impact on insurers’ returns on new asset allocations.
• Specific dividend amounts and yield levels in insurers’ upcoming mid-year dividend proposals.
• Updates to SARMRA scores—particularly the latest 2026 scores for major insurers.