Insurance Set To Emerge As A Dominant Industry, Says Prabhudas Lilladher
Why life insurance industry is set to grow...
Life insurance will emerge as a dominant industry as household savings move to financial instruments like insurance and equities in the coming years, backed by strong economic growth.
That’s what brokerage Prabhudas Lilladher said while initiating coverage on HDFC Standard Life Insurance, Max Financial Services Life insurance and SBI Life Insurance with a ‘Buy’ rating, and ICICI Prudential Life Insurance with an ‘Accumulate’. The outlook for insurance in India has changed from a savings or investment tool to a protection product, it said in a report.
While the ratio of household savings to the GDP is falling, financial savings rose from 44 percent to 58 percent of the GDP in five years to March, Prabhudas Lilladher said. The share of insurance in financial savings improved from 21 percent to about 25 percent during the period, it said.
The latest push came from last year’s demonetisation that funnelled cash into equities and insurance, a Reserve Bank of India report had said.
Many macro factors like the revival of the economy, better GDP growth and a push from the government will help the insurance business to grow, Prabhudas Lilladher said. Moreover, life insurance penetration in India declined from the peak of 4.6 percent of the GDP to 2.7 percent in eight years year to March 2015, providing room for growth. The brokerage expects the gross life insurance premium to grow at an annualised rate of 18 percent to Rs 2.9 lakh crore by March 2020.
The embedded value, or the consolidated value of shareholders’ interest in the business, is expected to grow at 15-20 percent CAGR in next two-three years led by higher margins of 18-25 percent. Solvency ratios remain above the regulatory requirement for the companies, providing room for robust dividend payouts, the report said.
Here’s the brokerage’s take on life insurers:
HDFC Standard Life
- Rating: Buy
- Target Price: Rs 430 (Upside of 12.6 percent)
- Balance product mix, the highest new business margins of 22.4 percent in the six months to September will aid growth.
- Expect margins to expand to 23.5 percent in three years to March 2020.
- Will continue to benefit from a strong distribution network of HDFC Bank
- Expect an average operating return on embedded value (RoEV) at 22 percent over in three years to March 2020.
Max Financial Services
- Rating: Buy
- Target Price: Rs 700 (Upside of 25.9 percent)
- Steady growth despite being a non-bank promoted insurer; expect annualised premium equivalent to grow at 14.2 percent CAGR in three years to March 2020.
- Margins to improve from 18.1 percent in the six months to September to 20.5 percent by March 2020.
- A strong distribution network, a tie-up with Axis Bank and a strong persistency ratio will help. Persistency refers to the volume of business that a life insurance company is able to retain.
SBI Life Insurance
- Rating: Buy
- Target Price: Rs 840 (Upside of 24.4 percent)
- Strong growth in new business premium, mainly led by unit-linked plans.
- Highest 61st month persistency ratio and lowest expense ratio due to a strong distribution network.
- Expects margins to improve slowly due to a higher share of Ulips.
- Expect operating RoEV of 20 percent and embedded value to grow at 19 percent CAGR in three years to March 2020.
ICICI Pru Life Insurance
- Rating: Accumulate
- Target Price: Rs 450 (Upside of 20.6 percent)
- Less-profitable unit-linked plans contribute 86 percent of the product mix; the company is now focusing on profitable protection products.
- A strong improvement in 13th-month persistency ratio.
- Expect operating RoEV of 16 percent in three years to March 2020, led by improving margins
- A strong distribution network with bancassurance contributing 61 percent and agency 23 percent of the business.
- Operating expenses and commission ratio remain lower than peers.