Life insurance stocks need cover

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Against this backdrop, life insurance companies have put up a decent show in the December quarter (Q3FY23), though the performance has been mixed. Large listed life insurance companies reported margin expansion ranging from 12 basis points to 1,441 basis points, leading to high (20-50% year-on-year) value of new business (VNB) growth in Q3, said a report by Kotak Institutional Equities. The VNB margin expansion was broadly led by margin accretive products and healthy channel distribution too has helped. HDFC Life Insurance Co. and SBI Life Insurance Co. saw strong annual premium equivalent (APE) growth of 19-26% year-on-year, while ICICI Prudential Life Insurance Co. and Max Financial Services have seen a drop. In general, retail protection products have remained weak. Management commentary across life insurers suggests a slow revival in retail protection. Further, life insurance companies have been improving their persistency ratio across products in the past few quarters and the same continued in Q3 as well. Persistency ratio measures how many policies are renewed by the customers of the total policies sold by the insurers.

While the pricing power of life insurance firms have supported VNB margins in Q3, it remains to be seen if the same momentum can be maintained. As such, the ongoing March quarter is expected to be robust. With the tax filing season around the corner, the industry is likely to see a jump in growth, owing to higher sales of big ticket-size policies that are tax-exempt until March.

But investors have their eyes on FY24 to assess the impact of the tax changes on margins and growth. Listed insurance companies have 2-12% of APE that would be affected owing to the government’s move to tax policies where the aggregate premium is over ₹5 lakh.

There could be pressure on margin and APE. “While it’s early to call for any impact, we expect companies to shift focus on lower-ticket business. This may require higher investments in growing partnerships and franchise in the lower-end, in turn, putting pressure on near-term margins,” said analysts from Kotak. Shifting focus to non-participating, higher product level margins and declining share of low-margin ULIPs are the key likely drivers, they added. While companies’ managements are confident of growth, the upcoming quarters would offer a clearer picture on the pace of growth. “The main attention now swings to what changes life insurers bring to their product mix which, in turn, will affect VNB margins,” said Emkay Global Financial Services analysts. However, concerns on slowdown in growth may cloud outlook for the stocks in the near term. Shares of HDFC Life, SBI Life, Life Insurance Corp. of India, Max Financial, and ICICI Pru Life have declined by about 6-15% since 31 January. “Overall, we expect life-insurance stocks to remain range-bound in the near term, supported by valuations amid the current uncertain environment, with the effect of such changes being visible and measurable by H2FY24,” said Emkay’s analysts.