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Through the past year, performance of insurance stocks has predominantly been shaped by regulatory changes, instigated by the IRDAI, shifts in taxation policies regarding non-linked high-value policies, and actions taken by both – direct and indirect tax authorities. Although life insurance stocks currently face numerous challenges, including: i) a slowdown in the growth of life insurance premiums, ii) margin contraction due to shifts in product offerings, and iii) ongoing regulatory adjustments, we maintain a positive outlook on its longterm growth prospects in India. Such optimism stems from favorable demographic trends, increasing wealth among the populace, and the persisting need for comprehensive protection & longevity coverage. Considering the likelihood of Q4 performance for life insurers being impacted by a high base effect owing to exceptional sales in Mar-23, the attention now turns towards the outlook for FY25. Given the appealing sector valuations, we favor companies with robust brand recognition, established franchise strength, and operational cost efficiencies that pave the way for sustainable profitability. Our preference remains for SBI Life, IPRU Life, MAX Life, and HDFC Life.

We remain positive on the medium term structural growth story

Following alterations in the taxation of high-value non-linked policies, the life insurance sector encountered a range of challenges during FY24, including a slowdown in growth and a notable impact on VNB margins. Moreover, a significant portion of regulatory interventions has now subsided, particularly with the IRDAI maintaining status quo on Surrender Value. Further, buoyed by favorable demographics, increasing wealth, and a widening protection gap, we maintain a positive outlook on the sector’s medium-term growth prospects. Given over 25 years since the liberalization of the industry, regulatory changes remain an integral aspect of the sector, positioning it for long-term growth opportunities. Against such a backdrop, listed life insurers, equipped with strong franchises, established brands, extensive distribution networks, and cost advantages, are poised to capitalize on the journey towards profitable growth.

Life Insurance: Base effect impacts Q4; focus shifts to FY25

Subsequent to the decent APE growth witnessed during 9MFY24, we anticipate that life insurers will report modest APE growth in Q4FY24; this would primarily be due to the elevated base effect experienced in Q4FY23, resulting from the advance booking of highvalue non-par policies that were prompted by changes in taxation policies. With a higher proportion of ULIPs and par products in the product mix, life insurers are expected to see negative impact on VNB margins. Additionally, the substantial sale of non-par products during Q4FY23 and the influence of interest rate fluctuations are likely to lead to a significant decline in margins on YoY basis. Overall, considering that the challenges of growth moderation and margin impact have already been factored into stock prices, the attention now shifts to FY25.

General Insurance: Expect a good quarter

We expect General Insurers to clock in decent premium growth, driven by robust growth in the Retail Health and Motor segments. We expect the Claims Ratio for general insurers to improve during Q4FY24, owing to moderation in health claims and lower impact of catastrophic events. Overall, we believe ICICIGI would report Combined Ratio of 102.9%, whereas Star Health would log 91.4% CoR; this would result in 34.1% and 18.2% PAT growth, respectively, during Q4FY24. Given that most tailwinds have played out for ICICIGI and due to concerns over new policy growth for Star Health, we maintain our REDUCE rating on both these General Insurance stocks.

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