Investors in life insurance stocks will need to be patient, say brokerages

Long-term story remains good and valuations attractive, but near-term overhangs may keep stock prices subdued

The latest IRDA data for February indicates that individual new business in the life insurance segment has seen some growth moderation. The giant PSU, LIC, could be happy, given that it has shown relatively higher growth vis a vis the private insurers. However, the share price corrections could mean that LIC gets a lower valuation at the IPO.

The Annualised Premium Equivalent (APE) dipped to 5 per cent YoY, versus a 2-year CAGR of 11.4 per cent. Private insurers’ growth moderated (on a high base) to 4 per cent YoY (versus 2-Year CAGR of 11 per cent). The PSU insurer’s business has grown at a steady 7 per cent run-rate since the past three months. The growth (including group life insurance) was even weaker for private insurers (up just 3 per cent YoY) while the PSU major recorded stronger growth in group.

Among listed life insurers, Max Life’s growth remains volatile (down 16 per cent in Feb 2022 after strong growth in Q3, 2021-22. SBI Life growth was flat in Feb 2022 on a high base. ICICI Prudential Life’s (ICICI Pru’s) growth momentum was negative at minus 7 per cent YoY in Feb 2022. However, ticket sizes for premiums were up 41 per cent month-on-month (vs 6 per cent MoM for industry) with larger volumes. HDFC Life grew 9 per cent YoY after a drop in Jan-22.

Share prices have corrected quite significantly for the listed insurers. HDFC Life is down 24.5 per cent in the last three months. SBI Life is down 11 per cent. Nippon Life is down 18 per cent. ICICI Pru Life is down 22 per cent. Max Financial (which holds the Life subsidiary) is down 11 per cent. This makes valuations look more attractive given that there is still growth even though it has moderated.

SBI Life may have gained a little market share, and it has good distribution. HDFC Life has seen sharp growth moderation but it had earlier market share gains. ICICI Pru Life has seen a jump in premium ticket size to compensate for a drop in units.

The other factor with any insurance business is assessing the return available from the float. The Return on Embedded Value (ROEV) is around 19 per cent for SBI Life. HDFC Life has an ROEV of around 18.5 per cent while ICICI Pru has an ROEV of 15 per cent and Max Fin (which has other business segments) has an ROEV of 18.6 per cent. 

Analysts from a couple of large brokerages retain their positive attitude about life insurance companies. Insurers are projected to report 15-18 per cent CAGR for Value of New Business (VNB) and the drop in share price makes valuations attractive. In the long-term, penetration across the population remains low, which means steady growth prospects. However, volatility in the stock market could lead to a drop in ULIP collections.

The elephant in the bedroom is of course, the LIC listing. Nobody is very clear if the government will hold back on the IPO given the overall drop in the stock market and the drop across the life insurance in particular. However, as and when LIC is listed, some investors may decide to spread their bets within the sector and it is also possible that LIC will become more aggressive once it is a listed entity. The government will have to find answers to another question which is whether it will bring down its stake further from the 95 per cent it will hold post-IPO. That would be an overhang that may affect valuations across the whole sector.