Should you own the Life Insurance Business ?

Protection is the most profitable part of business. Life insurers will benefit from monetisation of opportunity in life-protection with rising awareness in post Covid, favourable demographics and reasonable costs. Penetration of protection is low at 10% of addressable population with scope for market to double in five years (+23% CAGR over three years).

Insurance stocks have fared well in the current environment due to their relative defensive nature as compared to banks/NBFCs. Recent growth trends are encouraging, significantly better than initial expectations. However, ability of insurance companies to deliver yoy stable/increase in VNB (Value of New Business) remains a crucial monitorable. Traction in protection business will provide tailwinds to all players. While capital market inflows / ULIPs will likely remain weak, ability of insurance companies to underwrite/scale up traditional business assumes importance. Better product-mix (higher protection & non-par savings share) should lead to margin expansion and aid ROEV of c.15%. Pressure on persistencies may be manageable & we see cost-controls. Hike in cost of protection-reinsurance can be absorbed.

HDFC Life Insurance HDFC Life is India‚Äôs most profitable life insurance company with a VNB margin of 26% and ROEV of 18% in FY20, reflecting higher share of protection and non-par savings products. While FY21 is likely to see weaker new premium growth, management’s efforts to grow protection and maintain persistency will bear-fruit. HDFC Life has aggressively scaled-up presence in the non-Par savings products where its product (Sanchay Plus) has gained almost 25% share in the sector. The risks here are from long-term guaranteed returns (premium paying term of 10-15 years and payouts over 10 years) which it is trying to hedge and opinions from insurance experts. HDFC Life trades at 4.9xFY21 P/EV, which is at significant premium to peer group, reflecting lead on profitability and backing from the HDFC group.

ICICI Prudential Life For long, ICICI Pru Life has been considered as a Ulip heavy company with 86% of new premiums in FY17 coming from Ulips and even in FY20 formed 65% of APE new premiums. However, over the past three years, the business has evolved significantly as it ramped-up the protection business, which now generates 60% of VNB. ICICI Pru Life has leveraged the benefit of bancassurance partnership with ICICI Bank that drives 55% of its APE new premiums. The channel is also going through a transition from being a heavily Ulip focused agent to VNB focused agent by switching focus towards protection segment. This may lead to lower premiums, but should be neutral to profitability. Ability to pass-through higher reinsurance cost in protection tariffs, without loss of market share, will be key to watch.

SBI Life Insurance SBI Life has a natural advantage of being part of a humongous ecosystem of SBI that boasts over 490m clients. So far, SBI Life may have capitalized only on 1.5%-2% of these clients and hence the runway for growth should be long. Its products are also designed according to SBI’s client base with Ulips having higher share of debt (~70% in debt – more than several of its peers) and even though it has been ramping up the protection business, a large part of it comes from return of premium (ROP) products which is a combination of protection & savings product. SBI’s profitability is also aided by lower cost of acquisition arguably reflecting lower commission structures from SBI. Hence, we believe that products that are originated through SBI, generate higher margins for SBI Life versus its peers.

Buying Strategy These companies will always trade at higher P/E compared to broader market. They can be added in the portfolio on correction and should not be chased for any Target Price and should be held for Long Term. For example HDFC Standard Life made it to the NIFTY 3 years after its IPO. Please consult your Adviser & act.