If the pandemic brings some relief to India’s under-penetrated insurance sector, could stocks stay behind?
Presently, out of the 57 insurance companies - with 24 in life and 33 in non-life business - six companies are listed on the Indian bourses. In fact, ICICI Prudential Life Insurance became first Insurance company to go public in the year 2016.
The year 2017 witnessed a spate of Initial Public Offerings (IPOs) in life and non-life insurance including SBI Life Insurance, The New India Assurance, General Insurance Corporation (GIC RE), HDFC Life Insurance and ICICI Lombard General Insurance. Stocks of all these companies were oversubscribed post their IPO launch.
These stocks saw a smart pull back from the recent lows of March 2020. A sharp rebound in stock prices was also observed. On an average, the stock prices of these six companies rose over 60 per cent since March.
Multiple factors have led to a sharp rebound in stock prices. “The rise in stock prices comes from the fact that participants took comfort from the data that the death rate due to COVID is low and thus it is not going to hit the insurance companies badly,” says Ajit Mishra, VP - Research, Religare Broking.
Data projects a sudden surge in demand for insurance products in India, which has so far been at an average of 3.7 per cent against the global average of 6 per cent.
As per the July report of HDFC Securities on life insurance, research on Google Trends indicate a steep rise in interest for both term and health insurance to a near all-time high.
Well, earlier too, sales of health and term insurance have surged during spread SARS (CY 2002-04) and MERS (CY 2013-14) in India. According to Madhukar Ladha, Analyst, HDFC Securities, “1QFY21 data indicates that protection sales have improved with the sum assured/ premium ratio (x) increased to 56.3 vs. 32.4 for FY20. This ratio was even higher in May 2020 at 61.0.”
Term insurance being a traditional product has a higher sum assured per rupee of premium paid by the consumer. This means higher the ratio higher is the sale of the term product. Savings-linked insurance products, on the other hand, have a lower sum assured per rupee of premium. As per research, the ongoing pandemic is expected to reset mindsets in terms of the importance of life insurance as a risk cover rather than a savings-linked investment product. This, according to experts, also means demand for protection products is likely to gain further momentum.
As per July data from Insurance Regulatory and Development Authority of India (IRDAI), released in August 2020, after a year-on-year drop in first year premium for the last four months, the life insurance sector has witnessed a positive growth. First year premium of life insurers grew by 6.9 per cent in the month of July 2020 to `22,986.1 crore, compared to `21,509.2 crore in July 2019, largely driven by the private insurance companies. Private insurers reported first year premium of `7,815.1 crore in July 2020, up 26.1 per cent from `6,197.4 crore in July 2019. Similarly, in July 2020, the non-life insurance industry has reported a growth in both, month-on-month as well as year-to-date figures. The monthly gross direct premium till July 2020 increased marginally by 1.6 per cent to `56,339.8 crore from `55,442.1 crore till July 2019. Public and private sector have grown at nearly the same pace for the period ended July 2020.
“A reason that could be attributed towards growth in life and non-life is that July 2020 was the last month for investing in insurance policies and claiming deduction under Section 80D and Section 80C of the Income Tax Act,” argues CARE Ratings in its report on ‘Life Insurance and Non-Life First Year Premium’. Lockdown has led to disruptions across channels. Moderation in protection business and weaker capital market appetite impacting insurance companies’ investment portfolio have been putting pressure on insurance stocks earlier.
It also resulted in a short-term impact on the sales volume of new policies since the Indian insurance industry has been largely following an offline sales model, believes some experts. “The Government of India has provided a grace period towards those citizens who are unable to meet their insurance premium obligations during the lockdown. This created a short-term pressure on both, the new premium business and the renewal premiums,” explains Siji Philip, Senior Research Analyst, Axis Securities.
Some market experts, are of the view that the lockdown has impacted the life insurance segment badly while general insurance has done well. In life insurance, the Annualised Premium Equivalent (APE) has gone down by 13 per cent in the first four months of FY21.
“Due to the pandemic the individual sum assured business in life insurance, in the first four months of FY21, has gone up by 9 per cent but due to the sharp de-growth of 43 per cent seen in the group assurance business and overall sum assured has seen a fall of 13 per cent,” says Rusmik Oza, Executive Vice President, Head of Fundamental Research at Kotak Securities.
When it comes to the Q1 FY2021 the performance for most life insurance business has not been good. “The Value of New Business (VNB) has declined between 29 per cent and 43 per cent for some leading players. The stocks, however, had a smart pull back from the recent lows of March and a few of them hit the valuation hurdle. We expect APE for most leading players to fall marginally in FY21 and then recover in FY22,” adds Oza.
In insurance business the measure of profitability is usually computed as the present value of future profits on the business and is sourced in a particular period (usually the preceding 12 months). This is known as VNB. Most experts agree that companies saw healthy growth despite a low penetration of insurance in India.
“We would reiterate our preference for insurance stocks such as HDFC Life, ICICI Prudential, SBI Life and ICICI Lombard are with only long-term view,” says Mishra.
For Kotak Securities, the five insurance companies they track, a decent upside of more than 15 per cent is seen in only one stock - SBI Life Insurance. After the sharp rally from the recent March lows, valuations of companies are slightly on the higher side. “Our long-term view on the sector and companies remains positive. One or two companies could also find space in the Nifty-50 in future as market cap of the leader HDFC Life is ~ `1.22 lakh crore and that of SBI Life is ~`86,000 crore,” says Oza.
Today the Insurance business, protects the livelihoods of people. The future earnings have a direct correlation with the earnings of people, their business performance and net worth. “With the increase in India’s per capita income, insurance penetration is expected to see a 50 per cent growth by 2023. It indicates that the prolonged earning visibility for the insurance sector in the future,” explains Siddharth Sedani, Vice President, Equity Advisory, Anand Rathi Shares and Stock Brokers.
Going forward, although the pandemic has played a major inflection point of awareness of Insurance amongst consumers, listed insurance players are going to enjoy the premium valuations hand-in-hand.