December updates indicate good health of life insurers, stocks rally

Business updates of listed life insurance companies for December once again point to healthy growth prospects, a key reason for the rally in their stocks. Barring HDFC Life Insurance, the share price of other three life insurers, ICICI Prudential Life Insurance, SBI Life Insurance and Max Financial Services (holding company of Max Life Insurance) is up 13-24 per cent in the last three months versus about 10 per cent rise in the BSE Sensex.

HDFC Life may have underperformed peers with 6 per cent rise in its stock price during the said period (possibly due to sharper gains in earlier part of the year), but at 22 per cent its annual premium equivalent (APE) is the highest among the four players for December quarter (Q3) of FY20.

Though ICICI prudential Life and SBI Life has witnessed some moderation in year-on-year APE (a common revenue measure for life insurers) growth in the month of December, most listed players reported double-digit growth even despite the higher base of last year. The year-on-year APE growth of listed players for Q3 and for April-December 2019 period stands at 11-22 per cent and at 10-31 per cent, respectively, driven by retail or individual segment.

Rising awareness about life insurance, new product launches and a supportive industry dynamics for distributors are helping the sector fare better. Higher distribution commissions paid by life insurance companies (vis-à-vis mutual fund distributors) is giving them an edge.

The trend of strong business growth is expected continue even in the final quarter of FY20. According to Neeraj Toshniwal, analyst at Emkay Research, “March quarter is a seasonally strong quarter, accounting for 35 per cent annual policy volumes.” Even on a medium to long term basis, new product launches, push towards protection products and scaling up of non-par savings business like annuities should lead to strong APE growth, he adds.

Apart from rising awareness about life insurance as a protection product rather than a savings asset, the good solvency position of listed players should lead to faster growth in high-margin protection products such as term policies. Even in December 2019 quarter, the listed players are likely to see up to 410 basis point year-on-year expansion in VNB (value of new business) margin, as per Emkay Research.

On the whole, life insurers offer good investment option for investors. However, awaiting for some correction to enter these stocks is advisable given the rally in recent months.

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