Life insurance stocks in focus; LIC, HDFC, SBI, ICICI Pru gain up to 5%

Kotak Institutional Equities has initiated coverage on Life Insurance Corporation of India (LIC) with a 'buy' rating and a fair value of Rs 1,000

Shares of life insurance companies were in focus on Tuesday, gaining up to 5 per cent on the BSE, even as benchmark indices remained range-bound.

Individually, Life Insurance Corporation of India (LIC) gained 2.5 per cent to Rs 727 in the intra-day trade after Kotak Institutional Equities initiated coverage on the stock with a ‘buy’ rating. The brokerage firm considers fare value of LIC to be Rs 1,000, which is 41 per cent higher against its Monday’s closing price of Rs 710.

Meanwhile, HDFC Life Insurance Company (up 5 per cent at Rs 597), ICICI Prudential Life Insurance Company (up 3.5 per cent at Rs 467.85), and SBI Life Insurance Company (up 3 per cent at Rs 1,272) surged between 3 per cent and 5 per cent on the BSE. In comparison, the S&P BSE Sensex was up 0.16 per cent at 61,267 at 11:46 AM.

LIC, India's insurance behemoth, despite ceding share to private players, has retained around 37 per cent market share in individual annualised premium equivalent (APE) in FY22. Its enormous agency franchise remains the cornerstone of its success, driving 96 per cent of individual new business premium (NBP) in FY2022, analysts at KIE said in report dated January 3.

Moreover, the high productivity of its agency force, coupled with the benefits of scale, drove cost leadership. Listed private peers, on the other hand, largely depend on banks (44-65 per cent of individual NBP) to drive their business. "We remain positive about LIC's ability to steer the product mix to the high-margin, non-par segment from the large share of the participating business (29 per cent of APE in FY2022)," the brokerage firm added.

Analysts expect LIC to deliver a value of new business (VNB) CAGR of 18 per cent in FY2023-25 owing to an APE CAGR of 13 per cent and 180bps margin expansion.

The bifurcation of funds led to a sharp increase in EV, a large part of which reflects unrealized gains in the equity book, thereby compressing RoEV (operating RoEV of ~10 per cent for FY2023-25E). Better economics for shareholders due to the 100 per cent share in the non-par book and 10 per cent (5 per cent earlier) in the par book will likely support high growth in earnings (Rs 25,800 crore in FY2025E versus Rs 4,100 crore in FY2022)," KIE said.

Key risks to LIC's business stem from competition from private players that have a more diversified product mix and sourcing.

A correction in the equity market can pose a significant risk to EV because of its large equity investment book, especially in the non-participating segment, analysts said.

"With a host of reforms by the regulator and the government on the anvil, growth volatility in the sector and the individual company-specific, non-operating issues would mean that stocks will remain volatile in the near term. Notwithstanding near-term noises, the private sector’s market leaders, powered by their formidable brand and distribution combination, are in a position to deliver robust growth in the medium term coupled with improving business margins. The recent underperformance of stocks in the life insurance sector and valuations turning more attractive provide a good opportunity to accumulate them," analysts at Emkay Global Financial Services had said in a December report.