Long runway for growth in the insurance sector, say analysts

Insurance stocks underperformed the frontline indices on Tuesday following a faded listing of state-run giant Life Insurance Corporation.

HDFC Life, ICICI Prudential, SBI Life, and state-run players -- General Insurance and New India Assurance -- were up 0.5-2 per cent. In comparison, the Sensex and Nifty gained over 2.5 per cent each.

LIC delivered a weak listing on Tuesday, weighed by volatile market conditions, and jittery investor sentiment. The shares debuted at an 8.6 per cent discount at Rs 867 apiece on the BSE, as against the issue price of Rs 949.

Analysts, however, are optimistic on the domestic insurance industry as it remains sharply underpenetrated, leaving much room for growth.

“We have a strong conviction on the insurance space as personal savings and awareness regarding insurance is going to increase enabling the sector to outperform in the long-run. This will also benefit LIC as it is the market leader in this sector,” said Mohit Nigam, head-PMS, Hem Securities.

According to Manoj Dalmia, founder and director, Proficient Equities, the government’s initiatives to boost the insurance industry, such as the Ayushman Bharat Yojana, and allowance of 100 per cent FDI inflows in the sector have also paved the way for additional opportunities.

Despite Covid Delta wave-led excess mortality, listed private life insurers delivered respectable operating RoEV of around 16-19 per cent in FY22, with the exception of ICICI Prudential Life (11 per cent). They reported a 1-2 percentage point expansion in the value of new business (VNB) margin, which reached an all-time high for all.

“India has one of the highest and fastest growing Mortality protection and Retirement funding gaps in the world. India’s mortality protection gap stands at $16.5 trillion and is compounding at around 7 per cent over 2020-30, but accounts for only 83 per cent of what is needed. Meanwhile, the Retirement funding gap is expected to reach $85 trillion by 2050, at a CAGR of 10 per cent. These dual challenges provide life insurers a significant multi-decadal growth opportunity,” said a report by Emkay Global.

These structural growth drivers, the brokerage says, should ensure that the life insurance sector continues to deliver over 15 per cent total premium CAGR in the next two decades.

Meanwhile, as per estimates by Crisil, life insurance premium grew at an 11 per cent CAGR from FY16-21. LIC holds a 64 per cent share by total life insurance premium and grew at 9 per cent CAGR during the period, while private insurers grew at a 18 per cent CAGR.

New business premium, too, grew at 15 per cent CAGR in the past five years with LIC and private insurers growing at 14 per cent and 18 per cent CAGR, respectively.

Going forward, gross premium for India’s life insurance industry is expected to clock a 14-15 per cent CAGR over FY21-26 to reach Rs 12.4 trillion, Crisil said.

From investment viewpoint, Hem Securities believes SBI Life Insurance, HDFC Life and ICICI Prudential Life Insurance have strong upside potential in the long-term.

Emkay Global, too, opines that the current market prices of these stocks seem to be ignoring their growth potential.

“Shares of private life insurers have seen material unwarranted corrections in the last 3-6 months, which has happened amid no meaningful deterioration in the operating or financial outlook of these companies. Hence, these high-quality stocks are available at an attractive valuation, " it said.

SBI Life Insurance and HDFC Life Insurance have given returns of 49 per cent and 89 per cent, respectively, since their listing in 2017. Meanwhile, state-run General Insurance Corp and New India Assurance have returned losses of up to 74 per cent since their debut. Both the companies are trading below their respective issue prices.