Life insurance may be a good option for investors in long run: Experts

A relatively new industry for stock markets, investors will take time to understand the business dynamics

Recent data on insurance premiums earned by life insurance companies points to a positive trend, with May being the second consecutive month of strong 27 per cent premium growth for private-sector life insurers. Some of the robust growth is reflected in the stock prices of top-listed life insurers such as HDFC Standard Life (HDFC Life) and SBI Life, which are up 16 per cent since April 2019, while ICICI Prudential Life (I-Pru Life) is yet to make a mark. However, on a one-year time frame, the performance has been dismal for all three stocks, with flat gains. This is why Nilesh Shah of Envision Capital cautions that with the industry still at early stages, investors have to be mindful of some risks they carry. “Unlike banks, life insurance is relatively new businesses at the bourses. Given the regulatory framework and change in management strategies, they may be a good option in the long run and for investors having patience to wait it out,” he points out. 

Company-specific reasons substantiate Shah’s concerns. I-Pru Life recalibrated its unit-linked insurance policy or ULIP model, a product which hinges heavily on the performance of the equity market and accounted for about 80 per cent of the insurer’s business in FY19. The tight market-share fight between SBI Life and HDFC Life limited the scope for gains in their respective stocks. On the whole, FY19 was a period of rediscovering strengths, weakness and potential for most players and hence, FY20 is expected to be incrementally better. 

Analysts at JM Financial forecast 16 per cent annually compounded growth in average premium equivalent (APE) in FY19–FY21 for the life insurance industry. “The recent sharp run-up in the equity market augurs well for ULIPs and declining interest rates reducing the competitive intensity from other saving products especially term deposits,” they state. 

Individually, I-Pru Life’s loss has benefited its two large peers significantly, especially SBI Life, which has lately taken the lead in the ranking chart, whether in terms of value of new business or average premium equivalent or APE (see table). 

Going into FY20, analysts say SBI Life may keep up its leadership. Those at Kotak Institutional Equities expect 20 per cent year-on-year growth in APE and 21.3 per cent growth in the value of new business (VNB). “Higher margins in the savings business and marginal increase in the protection business, coupled with improving persistency, will likely be the key drivers,'' they note.  

HDFC Life has been steady at the second position and at 25 per cent VNB margin it maintains its position as the most profitable insurer. As per CLSA, the firm may see 19 per cent annually compounded APE growth in FY19-21, while its VNB margins may climb up further to 26 per cent. However, with its key bancassurance partner HDFC Bank’s alliance beginning to pay off for Tata AIG (a deal sealed in FY18), it needs to be seen if HDFC Life’s bank-led growth, currently contributing to 64 per cent of APE, could see some disturbance in FY20 given that its share has already reduced by about 7 per cent in FY19.

I-Pru Life, though, is facing some challenges. The insurer needs to prove that its new strategy on ULIPs is effective enough to arrest fall in APE and help scale back some lost market share. With just 1 per cent growth in individual APE in May, analysts at Emkay Global Financial Services say the insurer is late to the game of portfolio rejig, leading to a higher new business strain and expectation of muted profitability over the next three years. Analysts at Jefferies expect 14.7 per cent VNB growth in FY19-21 as against 68.3 per cent seen in FY15-18, largely owing to slower APE growth. 

Valuations, though, have turned favourable for all stocks, with I-Pru Life and SBI Life trading at 2.3–2.6x FY20 embedded value (EV), while HDFC Life maintains its premium–3.3x price to EV, despite the moderation it has seen in the past year.  The key risk, though, is whether companies can sustain the early growth trends in FY20. Analysts at SBICAP Securities warn that growth varies across players and could reverse over the course of the year. “It’s imperative that the growth momentum continues in the upcoming quarters in order to exceed FY19 growth,” they add.