The performance of listed life insurance companies for the nine months ended December seemed to largely justify their valuations. But concerns have emerged that the stocks may have outrun the performance of their companies.
A case in point is HDFC Life Insurance Co. Ltd. The private sector life insurer’s stock trades at a multiple of 5 times its estimated embedded value for FY20. Shares have gained 58% so far in FY20 and the insurer has returned an impressive 109% to investors who picked up its share through the initial public offering in 2017. HDFC Life’s value of new business margins has been the key reason behind the valuations. For April-December, the insurer reported a margin of 26.6%, superior to that of SBI Life Insurance Co. Ltd and ICICI Prudential Life Insurance Co. Ltd.
Even so, HDFC Life’s margins dropped on a sequential basis and analysts expect a further reduction. “Overall growth was impressive, but we expect margins to moderate going forward," said analysts at Jefferies India Pvt. Ltd, adding that margins could normalize to 25%.
Margin moderation is expected for SBI Life and ICICI Pru Life as well. The reason is that the share of market-linked products and return-guarantee products are on the upswing. Jefferies India said this was an opportunistic play that could hurt insurers in the long run. Guarantee products do well in a falling interest rate scenario, but carry a risk when interest rates turn. Ergo, it will be tough for life insurers to push products in competition with bank deposits, going ahead.
That being so, analysts also said that new business growth will continue to remain high and the increase in protection business will support margins. Life insurers have hawked term plans aggressively and this is paying off for them. The share of protection products for all three insurers has risen sharply in the nine months under consideration.
As far as new business growth goes, SBI Life trumped the competition. The insurer reported new business premium growth of 35%, far higher than that of HDFC Life and ICICI Pru Life’s 22% and 20%, respectively.
“Management guidance, as well as monthly business performance, indicates no major stress in demand across categories driven by well spread distribution and lower ticket size compared to prominent peers," said ICICI Securities in a recent note on SBI Life.
That the SBI Life stock trades at a modest multiple compared with HDFC Life is also helping.
Finally, life insurers have been able to sell their wares faster, but have their customers stuck to them? A comparison of persistency ratios of the three life insurers shows that customers tend to stick with SBI Life for a longer period. The second largest life insurer’s 61st month persistency ratio was 58.5%, compared with HDFC Life’s 53% and ICICI Pru Life’s 56.3%.