Insurance, specifically life insurance company stocks, have been on fire so far in 2019. The 41-62% gains the three large listed life insurers raked in so far this year sprung from the enviable business margins the companies reported. Growth, too, has been robust as private sector insurers continued to claw market share from public sector behemoth Life Insurance Corporation of India. Close on the heels of the massive rise in valuations, the first warning bells have been sounded by analysts now.
Jefferies India Pvt. Ltd, in a note dated 8 December, said a cyclical downturn was expected in the insurance sector as the allure of bank deposits would be back once the interest rate cycle turns. This would be especially true for traditional return guarantee products. “We believe that the sharp increase in this segment is an opportunistic play by life insurers at a time when bank deposit rates are low. Net returns offered to policyholders are 4-5.5% in return guarantees and even less in annuities," said the brokerage firm.
As the adjoining chart shows, the pickup in growth in new business premium, and even on the basis of annualized premium equivalent, was higher in November, largely due to a low base.
The slowing savings rate in the economy could be a damper for life insurers. After all, if the overall savings pie shrinks, the share of insurance is likely to get affected too. Add the returning allure for bank deposits, and growth is bound to get slow.
Given the sharp run-up in share prices, analysts say valuations do not price in the potential slowdown in growth. In fact, valuations also don’t reflect potential compression in margins, they say.
Consider the stellar 62% rise in the stock price of largest private insurer SBI Life Insurance Co. Ltd. At this level, the stock trades at a multiple of nearly three times the estimated embedded value for FY21, pointed out Nomura Financial Advisory and Securities India Ltd. That is steep in light of the slower pace of growth and the expected compression in margins.
To be sure, insurance penetration in India is low compared with other markets, and that will have to be factored into the valuations. Still, analysts say going forward, these stocks are not likely to witness a significant upside. “We had lowered our growth expectations for FY20F for select insurers (SBI Life and HDFC Life) in October and expect a moderate growth of 4-15% for insurers, except for HDFC Life, which we believe will have a favourable base from Nov-2019," said Nomura.
It is clear that from here on listed private sector life insurers are likely to see sedate pace of gains in their share prices. The outlook on their business growth, too, is similar.