IGI Logo

Banca-led compounding story in the offing!

Bancassurance efficiency improvement to drive growth

* Canara HSBC Life Insurance (CANHSBC) is one of the top-10 life insurance companies in India. It has a diversified product mix, with ULIP/NonPar/Par/Protection contributing 50%/34%/8%/8% in 1HFY26. The business is primarily led by the bancassurance channel, with Canara Bank/HSBC contributing 70%/15% in 1HFY26.

* Over the past decade, CANHSBC has outperformed the overall industry and private segment with a CAGR of 22% in APE. Resultantly, its market share has increased by 90bp/110bp during the period within the industry/private segment.

* We believe the industry is well positioned to deliver strong growth traction, aided by 1) increasing penetration (India’s penetration at 2.8% vs. global 2.9%), 2) GST exemption tailwind, 3) narrowing protection gap in the country (83% in India, highest among peers), and 4) expected favorable regulations such as riskbased solvency, composite license etc.

* Within this industry framework, we believe CANHSBC can continue to gain market share as it increases its penetration among Canara Bank customers, scales up cross-selling in the HSBC channel, builds a strong agency channel, and develops relationship with new-age distributors.

* CANHSBC has just 1.7% penetration among Canara Bank’s (72.5% of FY25 individual APE; FY22-25 CAGR of 21%) ~120m customers and its branch productivity is at just INR1.6m vs. INR5m+ for other private banks. With Canara Bank investing significantly in digital tools to do customer segmentation, we see a strong growth trajectory for CANHSBC going ahead.

* HSBC (13% of FY25 individual APE; FY22-25 CAGR of 19%) provides access to highquality customers like NRIs, affluent segments, employer-employee groups, and ~1m credit card base. The expansion plans of HSBC, along with its retail focus, can further expand the premier and profitable clientele for CANHSBC.

* We expect the product mix to shift back to Linked/Non-Linked mix of 40:60 over the next couple of years as demand for protection gets a natural fillip from GST exemption, credit protection picks up with increasing attachment rates, and interest rate cuts drive up the Non-Par share.

* We expect CANHSBC to report a CAGR of 20%/23% in APE/VNB during FY25-28E. VNB margins are likely to expand by 50bp each year over the next couple of years owing to a favorable product mix and scale benefits, which are partially offset by investment in the agency channel. Operating RoEV is likely to be above 17% and solvency is likely to be above 200% in the foreseeable future.

* We value the company at 1.7x FY28E P/EV to arrive at a TP of INR180. Initiate coverage with a BUY rating.

Life insurance industry well poised for strong growth

* India’s life insurance industry continues to be underpenetrated, with premium/sum assured as a percentage of GDP standing at 2.8%/85%, much lower than its Asian peers – Singapore at 7.4%/332%, Thailand at 3.4%/143%, and Malaysia at 3.7%/153%. Protection gap for India is at 83% vs. 55%/71%/74% in Singapore/Thailand/Malaysia.

* APE growth in India has been 12% for the past decade, and private players have increased their market share to 65% from 47%. This growth has been achieved despite several regulatory changes in the past five years, such as the implementation of new surrender charges, taxation changes, and EOM regulations

* Going ahead, we expect favorable regulatory changes such as implementation of risk-based solvency, which should release capital for future growth, and composite license, which will allow insurance companies to offer more products. With under-penetration and strong regulatory support, we expect the industry to clock 16-18% APE CAGR over the medium term.

* In terms of channels, the bancassurance channel will continue to dominate for the private players, but proprietary channels such as agency and online should grow as insurers enter lower-tier cities. In terms of the product mix, we expect the share of protection (led by GST exemption) and non-par savings (declining interest rates) to increase at the cost of ULIPs.

Canara Bank will be the growth bedrock

* Canara Bank’s customer segmentation, complete focus on analytics-driven business model, TAT-tracked lead disposition, and performance-linked branch activation have opened the doors for long-term growth for CANHSBC.

* Productivity in FY25 was just INR1.6m premium/branch against SBI’s INR6.8m, reflecting a massive headroom for growth. Even a partial convergence to ~INR2.8m premium/ branch will lead to a FY25-28 CAGR of 21%.

* The embedded base of ~80m insurable customers ensures long-duration, lowCAC growth visibility.

HSBC to further augment growth

* HSBC serves as a structurally important second pillar in the distribution architecture. The bank’s distribution model is characterized by deeper advisoryled selling, higher RM engagement per customer, and more consistent renewal behavior.

* Additionally, HSBC’s distribution capability extends through corporate salary accounts, international banking clients, and digitally engaged users across its expanding India network, enabling the insurer to widen its reach without proportional fixed-cost buildup.

* The bank has recently gotten approval to add 20 more branches (current branch count is 26). If the bank improves its existing branch productivity to INR115m premium/branch and 75% productivity in new branches, will result in a FY25-28 CAGR of 19%.

Investing in agency channel, spreading wings among other partners

* Diversification through the agency channel is expected to be a low-capex model that leverages existing bancassurance tech and onboarding infrastructure. The Canara brand offers a natural right-to-win in agent recruitment similar to how SBI Life scaled its ~270,000 agent base. While it may dilute margins by ~200bp, the agency channel materially improves its reach into underserved geographies and aligns with long-term VNB growth.

* CANHSBC also benefits from eight regional rural banks, providing access to deep rural geographies, 13 brokers, and three corporate agents, expanding thirdparty flows. The company’s digital direct channel is seeing efforts to scale online traffic through multilingual content marketing. The defense channel offers stable group savings and long-term protection to army personnel. These channels, while still small, provide a long-term hedge against concentration risk and will grow as digital adoption rises.

VNB margin expansion backed by operational efficiency

* The insurer is witnessing a shift in the product mix, with non-par demand rising (~17% of APE) as guaranteed-return preference strengthens. Protection (~8% of APE) is being supported by differentiated offerings (Promise2Protect, Term ULIP) and rising rider attachment rates. Consistent focus on credit life, with loan attachment rates of 45-50%, continues to be a strong VNB contributor.

* Opex as a percentage of gross premium improved from 13.1% in FY24 to 12.4% in FY25 and is expected to improve further to ~10% by FY28 as automation and AI-driven processes scale up.

* Margin accretion from the product mix shift and operating leverage will more than offset the agency ramp-up costs and the loss of ITC impact by FY28. The company has already passed on the loss of ITC on renewal commissions to the distributor and is in discussions with respect to vendor negotiations to reduce the impact.

* VNB margin has improved from 19.1% in FY25 to 19.6% in 1HFY26 (including 50bp impact from loss of ITC). We expect VNB margin to reach 20.5% in FY28 despite ITC loss and agency ramp-up, driven by (1) product mix shift, (2) higher protection and rider attachments, (3) tech-driven cost efficiency, and (4) stronger persistency.

Valuation and view

* CANHSBC offers a rare multi-year compounding opportunity anchored in a structurally improving banca engine, rising contribution from premiumized HSBC flows, and disciplined agency expansion. With one of the most underpenetrated PSU-bank funnels and clear visibility on branch activation, product mix upgrades and operating leverage, we expect the company to deliver 17%+ operating RoEV going ahead despite near-term ITC and agency drag. ? Over FY25-28, we expect a CAGR of 20%/23% in APE/VNB for CANHSBC. We initiate coverage on the stock with a BUY rating and a one-year TP of INR180 (based on 1.7x FY28E P/EV).

* Slower-than-expected branch activation at Canara Bank, weaker persistency, or adverse regulatory changes in banca commission norms could delay the margin and APE compounding trajectory.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412