Insure Your Portfolio With Life Insurance Stocks!

Insurance sector in India is poised to grow in the coming years. With very few listed players in the life insurance segment in India, it would be useful to know if these listed insurance players should be part of a diversified portfolio. Amir Shaikh explains…

India's life insurance sector is one of the newest sectors wherein three top private life insurance players have got listed on the bourses. The journey for the life insurance sector has not been smooth so far, with the sector witnessing an upswing only in recent years. The sector has shown improvement in growth and profitability, increasing protection and has been supported by rising equity markets. 

The life insurance sector continues to remain in the growth zone structurally due to favourable demographics and increasing financialisation. However, in the near to medium term, there are risks that exists from regulatory changes. The regulatory changes can impact product structures, pricing and could end up denting profitability for the insurance providers. The changes, if any, may especially impact disproportionately higher pricing in credit protection. In such a scenario, should a listed private life insurer be a part of diversified portfolio? 

Life insurance industry overview :- 

Life insurance sector in India has moved from a monopoly to a market-driven competitive sector. As of now, there are 23 private companies and 1 state-owned company operating in the life insurance sector. The way insurance products were distributed has changed. Bancassurance and online channel for distribution has replaced the agency channel With continuous product innovation, the value proposition for customers has improved and technology has taken the centre-stage to provide competitive advantages to the insurance providers. 

The life insurance industry grew by 11 per cent in FY18, garnering Rs 1,939 billion of new business premium as against Rs 1750 bn in FY17. The growth rate for the private insurers was much higher at an impressive 24 per cent in individual business. For the group business, the growth was muted at 4 per cent. LIC grew by 13 per cent in individual business and 5 per cent in group business even as it retained the dominant position in the sector. 

Private insurers consolidated their market share in FY18. The market share of private insurers increased to 56 per cent in FY18 based on individual WRP (weighted received premium). Some of the key reasons behind such improvement were:- 

1. Development of distribution channel
2. Product innovation
3. Digital transformation
4. Capital inflows
5. Focused customer-centric approach 

A combination of captive partnerships and strategic alliances with banks have helped top 7 private insurance players gain market share. 

One can expect good traction in unit-linked insurance plans (ULIPs) for private insurers in the coming years. ULIPs for savings and pure term for protection may show greater traction in the coming years for life insurers.

ULIPs hold a better value proposition today as the regulations introduced in 2010 with stringent cap on surrender charges, lower distributor commissions, regulated charge deductions and minimum product lock-ins offer better value for money to investors when compared to the traditional savings products. 

Also, investors' awareness about the equity markets is increasing and hence their participation can be much higher and better in ULIPs in the coming years. The product offerings from the private insurer has improved and the surrender charges have been lower lately, thus making them popular among the investors 

India is under-insured and the protection gap in India stands at 92% (the highest among all countries in Asia-Pacific as per a Swiss Re 2014 report).

A buoyant stock market coupled with establishment of strong bancassurance distribution has allowed insurers to increase the share of unit-linked products since FY2015 

As insurers will strive to strike a right balance between the traditional savings and unit-linked savings for long-term savings and pension needs of customers, the focus on protection products in the life and health space will continue to remain high 

Bancassurance 

There is a clear trend of bancassurance assuming an increasingly high share of distribution. The share of bancassurance has reached to 54 per cent in 9M FY18 from 33 per cent in FY11. IRDAI permitting each bank to tie up with up to three life insurers this year saw banks tying up with new life insurers. 

This will intensify the competition in the bancassurance space. Bancassurance is proving to be the most effective distribution channel. Even as the life insurance sector is expected to grow by 15-odd percentage points, the business is expected to grow at a much faster rate for those insurance companies having strong banks distributing their products, viz. SBI Life, ICICI Prudential, Kotak Life and HDFC Life. 

SBI Life Vs ICICI Pru Life Vs HDFC Standard Life 

Looking at the above table, HDFC Standard Life commands higher return ratio and VNB margin and that may be the reason for higher valuation of HDFC Standard Life. 

VNB is used to measure profitability of the new business written in a period. It is present value of future profits to shareholders as measured at the end of the year in which the business is written. VNB margin is calculated by dividing the value of new business by one year’s annualised premium and it indicates the profit margin of a company. 

What VNB margin tells you? 

HDFC Standard Life's 23.20 per cent VNB margin tells us that if the company underwrote new business premium for a certain products of Rs 5000 in a year, the expected profit over the life of that business would be Rs 1160. Thus, higher the VNB margin, better it is for the insurance company 

Looking at the valuation of the each of the top three life insurance listed player , clearly HDFC Life is most richly valued while ICICI Prudential is most conservatively valued. Investors will need to bet on that insurance player which will penetrate and grow market share for itself using deftly the bancassurance model. HDFC Standard Life is expected to see a change in leadership and it will be interesting to see if the change in leadership shifts the strategic focus for HDFC Standard Life Insurance 

Bank led insurance players may continue to gain market share within private players 

HDFC Standard Life registered a growth of 16% in its assets under management (AUMs), while the new business margin (NBM) increased to 23.2% in FY2018.

Group business is the most dominant part of the business for private life insurers and forms more than half of the industry's new business being written. 

Conclusion :- 

For the life insurance sector, a stable regulatory environment, solid macroeconomic environment along with the increasing trend of financialisaton of savings are the biggest positives. The growth opportunities for the sector, and especially for the private insurers, are huge. Players that are able to proactively capture market share using the latest technology and are able to adopt the most appropriate digital strategy can expect to do well in the coming years. 

There is clearly greater awareness among the customers about insurance products and there is wider availability of life insurance products across multiple distribution channels. All of this should keep the private life insurers on a growth trajectory. Investors should remember that the speed of digital adoption in India, rise of millennial generation and emergence of new ecosystem, viz. e-commerce, digital payments, etc. makes the industry prone to disruption. 

This may dampen the profitability for those companies that are not ahead of the curve in adopting the changes in technology. Private insurers that are able to intelligently use technology and have top-notch execution capabilities will create wealth for their stakeholders in the coming years considering the sizeable and attractive opportunity in life insurance sector. 

Indian life insurance sector remains under-insured and under-penetrated. The penetration of life insurance was a mere 2.7 per cent in FY17. The protection gap is amongst the highest in the world, which presents a profitable opportunity for private 

insurers. As of now investors-both global and domestic-have valued private life insurance players in India richly. Any correction in the listed private life insurance players, that is SBI Life Insurance, ICICI Prudential, HDFC Life Insurance, could be a buying opportunity