Life insurance stocks: Investors need to pause, wait for better cues

Growth challenges coupled with pricing issues and recent stock market rally doesn't bode well

There are two ways of looking at the recently released life insurance premium collection data for the month of August. Certainly, when compared to months under lockdown, when premia collected declined by 23 - 28 per cent year-on-year, August month’s eight per cent decline seems better. In other words, more people seem willing to meet their premium dues or buying new insurance plans.

However, it is important to dissect the data finely before turning optimistic on the sector. Consider this, much of the growth has come from group insurance premium (up 30 per cent year-on-year) and single premium products (up 60 per cent) in August for private insurers and less from the retail (individual) business. Group insurance is a corporate-centric business and tends to do well in the June and September quarters every fiscal. August month’s growth may indicate pent-up demand getting adjusted.

As for the single premium plans - often tax-saver instruments and similar to a fixed deposit scheme, analysts at Jefferies warn that guaranteed return businesses can raise risk (for life insurers) from volatility in interest rates. These products tend to make up for bulk of growth as they are easy to sell during a falling interest rate cycle and when capital markets are volatile. “While the leading private players are taking steps to hedge such risks as well as investing in government securities or AAA-rated corporate paper, any miss can also affect the availability of hedging instruments,” they add. It also suggests that the cost of rebalancing the portfolio would go up.

Yet, the disturbing aspect about August month’s data is that when compared against July’s flat premia growth, there is a claw back in trend. It could hence be too soon to judge normalisation of business for the industry. Analysts at Jefferies expect growth to return only by FY22 – a six months wait from now.

There are also other dimensions to factor – that of claims and pricing.

Covid-19 has emerged as the fourth largest category of claims based on data from April – August, according to news reports. In a recent life insurance sector Round Table organised by Business Standard, several industry leaders said that while life insurers were fast to introduce products to cover the pandemic, such products may not have been priced very accurately. Therefore, how these claims will impact financials is something that would become evident from September quarter onwards.

That apart, whether the life insurance companies have the bandwidth to pass on the cost of higher reinsurance in a sustained manner would remain a grey area. For instance, among the listed players, ICICI Prudential Life Insurance (I-Pru Life) has hiked its price for term products by 10 - 41 per cent, followed by a 6 – 39 per cent increase by HDFC Life and 9 – 18 per cent revision by Max Life. These hikes have been implemented during April – August, according to a report by ICICI Securities. SBI Life hasn’t implemented any hikes so far. However, when I-Pru Life introduced a new product this month, it was a lower-priced product with fewer features, ICICI Securities' analysts note. 

Product launches will be very critical for companies to sustain the momentum in the current fiscal, especially in the term-protection segment which is finding greater preference post Covid. “Insurers will face a volume versus margin conundrum; those that experience weaker volume growth can lower pricing, and vice versa. Absolute value of new business will depend on a combination of growth and margin,” say analysts at ICICI Securities.

In addition, analysts at Kotak Institutional Equities highlight that growth in the protection business, too, may have moderated post rate hikes earlier implemented.

Similar to the banking sector, premia growth is the foundation of the business for insurers. Growing at less than five per cent even ahead of Covid, the sector came under pressure due to weak economic conditions since January.

Yet, brushing aside multiple concerns, life insurance stocks have appreciated significantly in the past six months. Currently, they are close to or higher than the levels seen in February (pre-Covid times). Given the run up in valuations, it may be prudent for investors to pause and wait for better fundamental cues before taking fresh exposure to these stocks.