Nirmal Bang initiates coverage on life insurance sector with two ‘buy’ calls; details here | Mint
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Business News/ Markets / Stock Markets/  Nirmal Bang initiates coverage on life insurance sector with two ‘buy’ calls; details here
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Nirmal Bang initiates coverage on life insurance sector with two ‘buy’ calls; details here

Brokerage house Nirmal Bang has initiated coverage on the life insurance space with 4 stocks - HDFC Life, ICICI Prudential Life, Max Financial Services, and SBI Life – with 2 ‘buy’ calls and 2 ‘accumulate’ ratings.

Brokerage house Nirmal Bang has initiated coverage on the life insurance space with 4 stocks - HDFC Life, ICICI Prudential Life, Max Financial Services, and SBI Life with 2 buy calls and 2 accumulate ratings.Premium
Brokerage house Nirmal Bang has initiated coverage on the life insurance space with 4 stocks - HDFC Life, ICICI Prudential Life, Max Financial Services, and SBI Life with 2 buy calls and 2 accumulate ratings.

Brokerage house Nirmal Bang has initiated coverage on the life insurance space with 4 stocks - HDFC Life, ICICI Prudential Life, Max Financial Services, and SBI Life.

"Low insurance penetration/density in India indicate huge scope for growth over a multi-decade horizon; outlook remains positive driven by strong inherent demand for protection and annuity products. Private players with an innovative product portfolio, well-entrenched distribution network targeting tier 2/3 cities and a growing protection franchise are best-positioned to capture the opportunity; prefer ICICI Prudential Life and SBI Life as top picks in the space," said the brokerage.

It further pointed out that the sector is in a transition phase with upcoming regulations (composite licenses, IFRS-17 implementation, risk-based solvency framework) which could disrupt the business model of traditional players. However, life insurers under coverage are resilient and quick to adapt to new changes, added Nirmal Bang.

The brokerage has initiated coverage with 2 ‘buy’ calls and 2 ‘accumulate’ recommendations.

It has ‘buy’ calls on ICICI Prudential and SBI Life with target prices of 660 and 1,600, indicating upside of 26 percent and 17 percent, respectively. Meanwhile, it has ‘accumulate’ ratings on HDFC Life and Max Financial Services with target prices of 675 and 1,035, implying upside of 6 percent and 12 percent, respectively.

Sector Outlook

The Indian life insurance industry has grown at a CAGR of 11.4 percent over the past two decades (FY03-FY23) to 1.04 lakh crore in FY23 (Individual APE basis). Its low penetration and density for India implies a large scope for growth (14 percent till FY33E), forecasted the brokerage. It remains bullish on long-term industry growth prospects over the next two decades with i) an increasing need for long-term guaranteed returns (low-ticket NPAR products) due to lack of social security ii) robust demand for annuity products over the next decade driven by NPS/aging population and iii) massive scope to increase protection penetration.

Nirmal Bang has also identified that incremental growth is coming from the rapidly growing protection and annuity segments. Growth in protection (higher at 25 percent vs. savings till FY33E) will be derived from an increase in both number of absolute lives and protection cover aided by higher financial awareness and rising disposable incomes.

The annuity market is in a nascent stage and it expects the market to develop as players come out with new and innovative product offerings to capture the customer.

Prefer private players over LIC

The brokerage expects private sector players to continue to ramp up over the next decade, led by market share gains from LIC.

"Private sector life insurance companies are set to expand market share over FY23-26E on the back of a more balanced product mix, diversified distribution network targeting tier 2/3 markets and increasing focus on the protection segment," it said.

It believes that private players are well-positioned to take advantage of a comprehensive product mix with an increasing focus on the growing Protection segment.

While margins would remain steady for most players, it estimated APE growth to be the main delta for outperformance. For large private insurers, the Protection segment contributes 4-17 percent to APE while LIC’s presence in the segment is almost negligible. Companies like IPRU Life and SBI Life with robust distribution channels, strong brand names and a growing protection franchise would be clear winners in the sector, it added. Q1FY24 management commentary suggests strong growth in demand for Retail Protection products. The Retail Protection business for Max Life/HDFC Life/IPRU Life clocked a growth of 36%/45%/62% YoY in Q1FY24 and Nirmal Bang expects the momentum to sustain going forward as well.

Life Insurance Companies

HDFC Life: Although HDFC Life was impacted by the new taxation laws on NPAR products (12 percent of topline vs 6 percent for peers), the brokerage believes the long-term opportunity in the segment will be intact due to innovative features. It expects the NPAR portfolio to recover in FY24 as the company adapts to new regulations while strong growth in Protection/Annuity is expected to drive demand. It also estimates APE to grow by 13 percent over FY23-FY26E.

HDFC Life has maintained a competitive edge, backed by differentiated product offerings, a well-established brand and strong execution capabilities. Its premium valuation (P/EV of 3.8x vs. average 2.2x for peers for the past 5 years) reflects this. The brokerage expects an EV CAGR of 18 percent over FY23-FY26E, led by expansion in the Protection portfolio in tier 2/3 markets, complemented by the growth of its main channel partner.

ICICI Prudential: IPRU Life managed to double VNB over FY19-FY23 despite low single-digit APE CAGR, supported by a sharp expansion in VNB margin. While FY24 growth is likely to remain subdued due to ICICI Bank slowing down, the brokerage expects sustained momentum in Protection and Annuity, resulting in APE growth of 19 percent over FY24-FY26E. A strong retail-protection-dominated franchise, innovative product offerings (RoP products) and an advanced direct channel are key catalysts to drive growth, it added.

The brokerage also expects IPRU Life to turn around on the back of strong growth in the Protection and Annuity segments. With the highest share of Protection (17.4 percent of FY23 APE vs. 4-11 percent for peers), it is best-placed to accelerate growth in Retail Protection, it noted.

"In our view, a pick-up in premium growth with a sustainable margin of 30 percent backed by the new CEO’s proven track record will be a key re-rating catalyst for IPRU Life, which trades at 1.8x FY25E EV, 26 percent discount to peers. It is the most attractively priced pick in the sector.," said the brokerage.

Max Financial Services: The company's APE has grown 3x from 260 crore in FY18 to 690 crore in FY23, led by Retail Protection (+24 percent CAGR over FY18-FY23). With recovery kicking in from Q1FY24 in Retail Protection, rising contribution from Annuity (5 percent of APE in FY23) and steady growth in ULIP/Savings portfolio (PAR/NPAR), it expects Max Life to witness strong growth in volume. “We expect APE to grow by 14 percent over FY23-FY26E, driven by the Protection and Annuity segments. VNB's margin has seen a sharp increase from 21.6 percent in FY20 to 31.2 percent in FY23. While the FY24 VNB margin could stabilise at 28.5 percent, NB sees it expanding to 29.5 percent in FY26E," it said.

"Max Life has delivered a strong EV growth of 17 percent over FY18-FY23. But, long-standing uncertainty surrounding the lack of a big bank-backed distribution infrastructure (vs. peers) has been reflected in valuation at 1.9x FY25E EV for the past 3 years (post adjusting for 20 percent holdco discount). We expect the discount to narrow as the Axis Bank channel stabilizes," it added.

SBI Life: SBI Life has consistently delivered all-round growth (APE CAGR of 15 percent over FY18-FY23) with individual APE market share expanding by 237bps. A stable product mix (with steady growth in ULIP/NPAR) and a growing portfolio of Protection and Annuity products will help the company gain momentum over FY23-FY26E, leading to APE growth of 17.5 percent, said the brokerage. It has the lowest cost ratio among peers (9.4 percent for FY23 vs 16-21 percent for most private players). On the margin front, it expects the trend to be 28-30 percent over FY24-FY26E.

"Recent concerns around lower APE growth, the possibility of higher commission pay-outs to SBI and VNB margin compression seem adequately priced-in, with the stock trading at 2.2x 1-year forward EV," it said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie. We advise investors to check with certified experts before taking any investment decisions.

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Published: 23 Oct 2023, 12:03 PM IST
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