Margin improvement likely to boost life insurance companies' stocks

Some life insurers have seen corrections in stock prices due to concerns about potential Insurance Regulatory and Development Authority of India (IRDAI) regulations affecting bancassurance channels. Bancassurance is a significant contributor to annualised premium equivalent (APE).

 

If bancassurance share is capped, or if the parent bank’s share is capped, it could have a negative impact and either regulatory action would lead to valuation downgrades. Diversified insurers like ICICI Prudential Life Insurance or IPRU may be better positioned while those reliant on parent bancassurance, such as SBI Life and HDFC Life, would face higher risks of adverse regulation.

 

In the first 11 months of financial year 2025 (FY25), the life insurance industry has performed well with nearly 20 per cent growth led by strong ULIP sales. However, a higher share of unit linked insurance plans or ULIPs also means reduced margins.  HDFC Life has diversified its product mix, offering ULIPs with higher sum assured and riders, while ICICI Prudential and SBI Life have reduced dependence on parent for bancassurance business.

 

The negative impact of new surrender norms implemented in October 2024 was less than expected in Q3FY25. The industry responded with deferrals, reductions in commissions and adjustment in client benefits. In FY26, critical variables would include bancassurance growth and value of new business or VNB margins as ULIPs reduce, and group protection picks up.

 

In previews of Q4FY25, analysts believe the total APE of private companies may grow slower in the quarter at 7-8 per cent Y-o-Y versus 18 per cent Y-o-Y growth during 9MFY25 owing to a relatively high base of Q4FY24, a trend of sharp declines in group APE, and a focus on improving product mix. 

 

LIC may actually see a fall in APE while other life insurers could see growth rates of anywhere between 2-3 per cent to around 15 per cent.

 

However, Q4FY25 VNB margins may rise by 40-50 basis points Y-o-Y for SBI Life and IPRU, and by over 150 basis points for LIC due to improving product mix. The impact of new surrender value regulations has largely been absorbed. Product mix has improved with few non-par products launched in Q4 and the share of ULIP (probably peaking), and margins have probably bottomed out and started to recover.

 

In February 2025, individual weighted received premium (WRP) growth for private players was very low, at 1.6 per cent Y-o-Y while LIC reported 17.4 per cent Y-o-Y decline.

 

The highest growth was registered by Max Financial Services (Max Life) among listed players at 9.5 per cent Y-o-Y, while HDFC Life posted 1 per cent growth and IPRU and SBI Life reported declines.

 

The total market share of private players in WRP increased 130bp month-on-month (M-o-M) to 73.4 per cent in February 2025, with HDFC Life leading with 12.8 per cent market share in individual WRP, and SBI Life at 12.6 per cent.

 

Aggregated new business premium declined 11 per cent Y-o-Y in February 2025 owing to a 22 per cent Y-o-Y decline reported by LIC, while private players reported growth of 3 per cent Y-o-Y.

  There was a wide spread in terms of new business premium or NBP with HDFC Life seeing growth at 24 per cent Y-o-Y while SBI Life reported an 18 per cent decline. Premium growth saw a decline.

 

There are several factors which could drive premium growth in the medium-term, including more awareness about the need for financial protection after the pandemic.

 

Demographics are favourable with a working-age population of roughly 900 million individuals between the ages of 18-60 years. The market for life products is underpenetrated at around $70 equivalent premium per capita compared to $274 in China, $2,245 in Japan, $8,200 in the US and $900 at the global average. This implies ample room for growth.

 

Given good brands, established channels and products, private life insurers may offer decent investment opportunities, since these stocks are at valuations (in terms of PE) lower than the Nifty. LIC faces increasing competition from private players and the PSU’s market share has fallen in terms of both NBPs and in renewal premiums. The sector presents long-term opportunities.