Insurance Sector Update : FY2025: A year of two halves Kotak Institutional Equities
What happens next?
Life insurance stocks had a good month with a 5-17% rally following an inline 4Q performance and optimistic outlook. Management guidance remains moderate/mixed—we believe falling rates will buoy non-par policies; while ULIP sales remain challenging to forecast, the outlook on protection remains strong—all of the above providing tailwinds to VNB. Non-life’s earnings were distorted by the 1/n rule; while low vehicle sales remain a concern, pricing for commercial lines seems to have improved. HDFC Life remains our preferred pick; LIC has strong equity tailwinds. ICICI Lombard is well-placed in the nonlife space; PB Fintech remains SELL.
FY2025: A year of two halves
Life insurance companies (listed private sector players) reported 9-18% APE growth in FY2025, largely front-ended with (-)4% to +11% APE growth in 4QFY25. The annual margin compression, down 35-300 bps yoy, largely reflects a shift in business mix (higher ULIPs, lower credit protect) and the impact of surrender value guidelines, although lower than initially expected.
Uneasy weakness over the past few months; we remain assertive
APE growth for the private sector has moderated progressively in FY2025:
7% in 4QFY25 and 13% in 3QFY25, from 24% in 1HFY25. This may be due to two reasons—(1) lower ULIP sales versus 1H and (2) lower momentum at agency likely reflecting the impact of surrender value guidelines. Insurance companies are using a combination of clawback and deferrals to align distributor incentives with new surrender value guidelines. A high base of 1H may lead to weaker business. LIC has reported maximum slowdown (APE down 24% in 3Q and 11% in 4Q). As such, the management outlook (detailed later) is moderate/mixed.
Non-par, ULIPs, retail protection and credit life. We believe (bank) deposit rate cuts will prompt sales of long-term savings, mainly non-par policies. ULIP sales may hold on as well, after the recent bounce in equity markets; inflows to MFs declined marginally in April. Credit life, which faced the heat from the meltdown in MFI, will likely benefit from an increase in disbursements on a low base in FY2026E; the non-MFI book is growing steadily. Retail protection has grown at a brisk pace and the momentum will continue; SA growth has been more impressive.
Margins versus growth. Life companies have focused on growing the agency business. Most companies continue to guide for sustaining investment to grow a number of policies; as such, margin expansion may be muted despite a shift in higher-margin products. Our forecasts remain moderate with upside risks if all the catalysts play out. Valuations stay low; we continue to be the most bullish on HDFC Life, which has toggled well on products and channels.
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