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Insurance stocks are currently exposed to a motley of divergent influences, including: 1) moderating growth and margin of life insurers in the previous as well as the upcoming quarter; 2) constant noise around regulatory changes, including surrender charges, mis-selling and claims repudiation; 3) besides the near-term uncertainty, the structural growth story of Insurance in India—led by rising affluence and the lack of protection & longevity cover—being very much intact; and 4) the sector’s attractive valuation (against the backdrop of its own historical trend and relative to other sectors) supporting share prices. We continue to prefer players with strong brand, distribution & cost advantages, which give them the right to grow profitably. We maintain our preference for SBILIFE (Buy), HDFCLIFE (Add), and ICICIGI (Add). LICI (Buy) is our valuation pick.

Near-term uncertainties in stock price; cost efficiencies remain the key

Noise around a host of regulatory issues (Surrenders, mis-selling, etc), moderate growth (on account of bumper sales in Q4FY23 base), and the VNB margin profile (lower VNB margin on account of lower non-par savings) will weigh on life insurers’ share price in the near term. However, the sector’s attractive valuation (relative to its historical logs and versus other sectors’), intact structural growth in the medium-to-long term on account of rising affluence amid the high protection and longevity gap, and franchise strength of listed players continue to offer substantial support. Amid increased news-flow on regulatory changes related to enhancing & protecting policyholders’ interest, the key to protect shareholder value would be increased focus on cost efficiencies in order to control operating cost, including distribution.

Life Insurance: Moderate APE and VNB growth

Following the decent APE growth in H1FY24, we expect listed private life insurers to report moderate APE growth during Q3FY24. In our view, this lower growth would be owing to sluggish growth in higher-ticket policies given the changes in taxation and decline in the group fund-based business. Driven by buoyant equity markets during Q3FY24, ULIPs are likely to contribute a higher share in the product mix, possibly leading to some negative implications for VNB margins. Listed private life insurers’ VNB margins are likely to witness some contraction on YoY basis due to reduced share of Non-Par in the product mix and movement in interest rates. Overall, we expect performance of life insurers to be low-key against the backdrop of moderating APE growth and VNB margins. (Exhibit 3)

General Insurance: Expect a good show from ICICIGI

We expect general insurers to clock decent growth in premiums, driven by growth in Retail health and Motor OD. We believe the Claims Ratio for general insurers would remain slightly elevated due to natural catastrophes and an elevated health claims ratio. Additionally, we believe the stronger performance in investment income should help profitability this quarter. Overall, we expect ICICIGI to report a combined ratio of 104.3% (-0.1ppt YoY) and PAT of Rs4.8bn (over 37% YoY). STARHEALTH is likely to register a muted performance in Q3, as we expect the elevated combined ratio of 98.5% (up by 3.7ppts YoY) to lead to PAT of Rs 1.9bn (-12% YoY). (Exhibit 4)

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