SBI Life, HDFC Life: Analysts pick top insurance stocks after May biz data

Insurance stocks to buy: In the immediate future, analysts said the revised surrender charges regulations, as and when they are announced, will be vital for growth trajectory in FY25

Top insurance stocks: Insurance policy sales data for May 2024 has eased analysts' concerns over the slowdown in the life insurance sector. Though headwinds remain in the near-term, especially from any changes in surrender charges, analysts believe the ongoing financial year of 2024-25 (FY25) may turn out to be better than the year gone by.

"The growth of the Indian life insurance sector in FY24 was slower than the previous year. It is , however, expected that the sector will continue to experience growth in FY25, owing to improvements in technology and increased efforts to expand its market penetration," wrote Karan Kamdar, research analyst at Deven Choksey Research.

In May 2024, individual annual premium equivalent (APE) of the life insurance industry grew by 18.7 per cent year-on-year (Y-o-Y) to Rs 7,250 crore. While the private sector grew by 25.4 per cent Y-o-Y, LIC saw a growth of 7.2 per cent Y-o-Y.

In contrast, the previous fiscal of FY24 had begun softly for life insurers with individual APE growing by just 2 per cent Y-o-Y in April-May 2023.

Industry-wide total APE surged by 23.1 per cent Y-o-Y in April-May 2024, against a contraction of 3.3 per cent during the same period last year.

Further, in FY24, the industry had reported a sub-par growth of 4.1 per cent in total APE terms, against a 5-year CAGR of 11.4 per cent over FY18-FY23 – with weakness in both individual (up 4.8 per cent Y-o-Y) and group business (up 0.7 per cent Y-o-Y).

Individually, SBI Life's Individual APE grew 25 per cent Y-o-Y in May 2024, as against an 8 per cent Y-o-Y growth in May 2023, and 20 per cent Y-o-Y in April 2024. It has registered a year-to-date rise of 23 per cent Y-o-Y thus far in FY25.

SBI Life also gained market share of 80bp to 15.7 per cent last month.

HDFC Life, meanwhile, clocked 23 per cent Y-o-Y growth in individual APE last month versus 10 per cent in May 2023 and 30 per cent in April 2024. Its YTD FY25 growth stood at 26 per cent Y-o-Y with a market share gain of 40bp at 11.1 per cent in May 2024.

ICICI Prudential Life, meanwhile, clocked the strongest growth of 57 per cent Y-o-Y in individual APE in May 2024, driven by a low base of 4 per cent Y-o-Y. The growth moderated from 72 per cent Y-o-Y seen in April 2024. For YTD FY25, individual APE growth was at 63 per cent Y-o-Y , and market share gain stood at 183 bps 7.5 per cent in May 2024.

State-owned Life Insurance Corporation's (LIC's) individual APE, however, grew just 7.2 per cent Y-o-Y last month.

Analysts at Kotak Institutional Equities attributed the strong APE growth for private life insurers to higher volumes with non-participating policy (NoP) - up 17 per cent Y-o-Y and a two-year CAGR of 11 per cent.

Drivers for growth

During the January-March quarter, value of new business (VNB) margins were reported in the range of 21.5 per cent to 28.3 per cent. The aggregate fall in margins were 503 bps Y-o-Y and 72 bps Q-o-Q led by a change in the product mix from non-par segment to ULIPs.

"All private life insurers saw margin hit in FY24, with ICICI Prudential, SBI Life, and HDFC Life seeing contraction of 740 bps, 190 bps, and 130 bps, respectively. A strong APE growth in FY25, however, can offset the product mix impact," said a note by JM Financial.

It forecasts 18-20 per cent VNB growth over FY24-FY26e for the sector, led by APE growth.

Against this, the management's commentary on FY25 business outlook; expected trends in high-margin segments; VNB margin guidance for FY25E; and pricing changes remain key monitorables.

Near-term pain points

In the immediate future, analysts said the revised surrender charges regulations, as and when they are announced, will be vital for growth trajectory in FY25. Besides, with some banks facing challenges pertaining to deposit growth, the focus on the agency channel is expected to increase.

Granular growth in low-tier cities, they added, will entail investments.

JM Financial bets on HDFC Life; Nuvama Institutional Equities picks SBI and HDFC Life; and Nomura likes SBI Life.

On the bourses, shares of all the private sector insurance firms have underperformed the Nifty50 over the past one year.

While HDFC Life's shares are down 1.7 per cent in one year, those of SBI Life, and ICICI Pru have gained 16 per cent and 17.5 per cent, respectively.

By comparison, the Nifty50 has advanced 25.3 per cent over the past year, and state-owned Life Insurance Corporation's share has surged 67.2 per cent during the period.