Reasonable growth, attractive valuations for life insurers' stocks

The October-December quarter of the 2022-23 financial year (Q3FY23) and the nine-month (April-December 2022) performances of life insurers is expected to be satisfactory but there are divergent trends in December 2022.

Overall, APE (annual premium equivalent) growth will ease off year-on-year (YoY) due to a high base in Q3FY22. Most insurers will see stable or better margins sequentially on the VNB (value of new business) side due to sustained rise in non-par savings in the product mix.

Retail premium trends should be better on a sequential basis. The APE trend is up for Life Insurance Corporation of India (LIC), SBI Life and HDFC Life, but muted for ICICI Prudential Life (IPRU) and Max Life.

LIC is likely to see strong growth, helped by high growth in the group business. HDFC Life is harder to analyse, given the merger with Exide Life but there’s been apparent growth pick up. SBI Life should see good YoY growth in Q3FY22 despite high base effects. Growth at IPRU and Max Life is expected to be weaker on account of issues at respective bancassurance partners.

In December 2022, retail APE grew at 11.9 per cent YoY, which means nine-month growth is around 16.1 per cent YoY. Among listed private players, SBI Life (+31 per cent YoY) and HDFC Life (+23 per cent YoY) delivered strong growth in December 2022, whereas IPRU Life (-8 per cent YoY) and Max Life (-10 per cent YoY) reported declines.

For December 2022, SBI Life’s retail APE market share reached 22 per cent. On the other hand, LIC’s growth in retail APE for Dec-22 was muted at 3 per cent YoY.

For the nine months, private players had 18.6 per cent YoY retail APE growth and LIC had 11.9 per cent YoY growth. The 3-year compounded annual growth rate for the entire sector stands between 8-9 per cent, which is excellent given the Covid-19 impact.

Going forward, most analysts expect 12-13 per cent YoY growth in retail APE for FY23, with the private sector delivering mid-teen growth and LIC in high single digits. In the medium-term, more robust growth is possible, especially from the aggressive private players.

The outstanding SBI Life and HDFC Life performances could be partly a combination of growth at key bank partners and agents pushing sales due to December-22 being the deadline for their MDRT (rewards and recognition) programmes.

Going ahead, growth should rebound for Max Life from January-23, as the base turns favourable and the Axis Bank channel, which was underperforming, should start seeing gradual improvement. IPRU’s poor performance in retail APE growth continued, with a 4.2 per cent YoY decline in retail APE for nine months. There are apparent issues with the key ICICI Bank channel, which is dragging down IPRU’s growth compared to its private peers.

The stocks in the life insurance sector have not had a very good year in terms of share price movements and given reasonable growth, this has led to valuations turning more attractive. SBI Life seems to be a favourite at the moment with 2 per cent rise in the last 30 days, and several analyst recommendations.

Max Finance (parent of Max Life) could be a rebound candidate. HDFC Life is either “neutral” or “buy” in recommendation but the stock has seen 9 per cent decline in the year and a rebound of 4 per cent in the last 30 days. LIC has undemanding valuations, given that it’s well below the initial public offering (IPO) price. But there is an overhang in the sense of investors who received IPO allotment cutting losses on every rise.