Life insurance to enjoy growth optionalities By ICICI Securities

Life insurance players continue to enjoy significant growth optionalities in terms of Embedded Value (EV) driven by higher financialisation, increasing insurance penetration/density, and positive regulations. Chinese life insurers have continued to grow despite softer economy driven by regulatory reforms and change in product mix. Similarly, Indian private life insurers have shown high growth in EV and Value of New Business (VNB) margins driven by growth in protection as well as non-par guaranteed savings. We expect continued growth in EV for Indian life insurers from:

(1) increasing product optionalities between asset management and protection,

(2) improvement in currently low VNB margins and low persistency compared to global peers, and

(3) improved distribution and cost efficiency led by technology. Maintain BUY on HDFC Life and SBI Life.

* Prefer life over non-life under relative weaker economic growth. Change in product mix towards higher margin protection/savings products remains a structural opportunity for Indian life insurers considering the penetration and density of life insurance in India coupled with the fact that VNB margins are among lowest in the region. We have seen similar case in China where the life insurance premiums reported strong 23% CAGR between 2013 and 2017 when GDP growth declined from 7.8% to 6.9% respectively. Non-life insurance premium CAGR was relatively lower at 12% during the period. Higher entry barrier, long gestation time and robust distribution moat are additional pointers for life insurance players.

* HDFC Life (HDLI) business performance has surprised positively in CY19; margin and product leadership expected to continue. FY20-TD APE/NBP growth for HDLI has been 31%/26%. We maintain APE/NBP growth estimates of 25% for FY20E factoring-in possible lower growth in H2FY20. The expense ratio (commission plus operating expenses) for H1FY20 increased to 19% compared to 18% in H1FY19. While FY19 expense ratio moderated to 17%, we factor-in 17.7% for FY20 (16.6% earlier). This higher expense ratio is driven by higher commissions (up 49% higher on a YoY basis in H1FY20). Efficiency of new business strain has mostly been stable as measured by the ratio of VNB plus new business strain to new business strain. This ratio has declined from 2.3 in FY17 to 2.2 in FY18 to 1.9 in FY19. However, it has improved to 2.0 in H1FY20 (1.97 in H1FY19). We assume 30% increase in VNB margin by FY21E. Major drivers for the same include:

(1) better outlook on APE growth as was shown in FY19/H1FY20 with possible positive surprise in FY20E (uptick in credit growth will also aid the same),

(2) improvement in output factor of new business strain, and

(3) expected moderation in expense ratio in FY20. New product and technological investments in sourcing as well as partner integration are key enablers.

* SBI Life (SBLI): Expect operating outperformance to continue. FY20-TD APE/NBP growth for SBLI has been 22%/39%, significantly higher than consensus expectations of ~15%-20% growth in APE/NBP. In line with FY20-TD performance, we have increased APE/NBP growth estimates to 20%/35% in FY20E and 22%/25% in FY21E respectively. The expense ratio for H1FY20 declined to ~10.4% compared to 12% in H1FY19. While FY19 expense ratio moderated to 10.5%, we factor-in 10.2% for FY20E/FY21E (10.7/11% earlier). We take into account steady increase in VNB margin to 23% in FY21E (effective tax rate basis). Major drivers for the same include:

(1) better outlook of APE growth as was shown in FY19/H1FY20 with possible positive surprise in FY20E,

(2) sustained low expense ratio, and

(3) increased product diversification as a margin lever. While revenue less operating cost and benefit paid out grew significantly (33% in FY19 and 44% in H1FY20), reserving remains the drag in bottom line.

* Maintain BUY on HDLI with a revised target price of Rs682 (Rs700 earlier) based on 40xFY21E VNB. Maintain BUY on SBLI with a revised target price of Rs1,126 (Rs1,023 earlier) based on 25x FY21E VNB.

Source: Investment Guru India