Illustration: Binay Sinha
Insurance was among key themes that played out last year, whether life or general. Yet, barring HDFC Standard Life, which more than doubled since its listing, not all stocks received the same investor interest. That phase is slowly changing and foreign brokerages, such as Nomura and Citi, feel life insurers could be a viable option in the financial sector. Analysts at Citi defend their premium valuations and say they are in line with the superior multiples enjoyed by private sector banks and non-banking finance companies. “Life insurance is a retail financial services product with significant under-penetration in India. With a shift towards financial savings, which is underway, the life insurance sector should deliver healthy growth,” the analysts add. Given that there are only four listed players, investor interest is expected to be well-spread between them. For Nomura though, the pecking order is ICICI Prudential Life (I-Pru Life), SBI Life, HDFC Standard Life (HDFC Life) and Max Life.
HDFC Life: Too much, too fast
With strong listing gains, HDFC Life was quick to grab the attention of many analysts. While its December quarter (Q3) numbers didn’t disappoint, with the insurer yet again posting the superior value of new business (VNB) margin of 22 per cent, a rise in unit-linked insurance plans (Ulips) from 50 per cent in FY17 to almost 59 per cent in Q3 came as a surprise. While Ulips are still within the guided range of 50-60 per cent of HDFC Life’s total portfolio, analysts say they would monitor it’s performance on this front. Yet, the major concern for HDFC Life isn’t its financials, but steep valuations, due to the recent stock rally. Analysts say that it trades at a significant premium to SBI Life and I-Pru Life. Citi, for instance, has initiated ‘sell’ on the stock primarily for its valuations. Those at Nomura also feel that this factor could restrict HDFC Life stock’s near-term performance. A decent correction, however could provide entry to long-term investors.
I-Pru Life: Improving product profile
Nearly six quarters after listing, investors are acknowledging that it could be foolhardy to avoid I-Pru Life for its high exposure to equity-oriented Ulips. The latest Q3 results stand testimony to the same. Despite 82 per cent of its revenues coming from Ulips, I-Pru Life’s VNB margin stood at 17.5 per cent; a near two-fold increase over the past year. While the share of high-yielding participating policies increased from 10 per cent last year to 13.5 per cent in Q3, better realisations of newly launched products (including Ulips) and improvement in persistency ratio (reflects business retained) have also played a key role in bettering the margins. Analysts at JP Morgan, who are overweight on the stock, say I-Pru Life has emerged from tough six-seven years of low growth. “We see 20 per cent top-line growth in FY16-20, driven by improving penetration and robust markets,” they note.
Max Life: Uncertainties remain
Unlike others, the Max stock has been an underperformer lately. Initially, the Street wasn’t perturbed when the merger with HDFC Life was called off last year. In the September’17 quarter, however, there were signs of slowing growth, even as overall numbers met expectations. Growth was optically lower due to a tilt towards lower-ticket protection business and muted growth in higher-ticket Ulips, a fast-growing segment. This apart, if the distribution channel with Axis Bank, which accounts for over half of Max Life’s new business is disturbed, it could affect financials further. With this likely overhang, Nomura recently said that Max is the lowest in their pecking order among the listed life insurers.
SBI Life: Helped by diverse products
Despite being the second largest player, SBI Life is Citi’s top pick in the sector. Its strong distribution network led by State Bank of India and balanced product mix work in its favour. Increasing the share of Ulips in the past few years and reducing dependence on low-yielding non-participative products has helped SBI Life substantially improve its financials. Likewise, increased business from individual products, which tend to have better realisations, is also positive. While its Q3 numbers are awaited, analysts at Citi expect SBI Life to deliver annualised premium equivalent (APE) growth of 28.1 per cent in FY17-FY20 and VNB growth of 32.4 per cent helped by a well-diversified product portfolio and multichannel distribution strategy.