Sharekhan investment picks are Bajaj Finserv (holding company of Bajaj Allianz Life), HDFC Life, ICICI Prudential, and Max Financial. Sharekhan believes these companies have a strong balance sheet, are well capitalised (for the long term), have healthy operating metrics and would be able to ride over medium-term challenges
1) Sharekhan has maintained a buy call on Bajaj Finserv with a target of Rs 7500. (27.5% upside potential)
2) Sharekhan has maintained a buy call on Max Financial Services with a target of Rs 720. (19% upside potential).
3) Sharekhan has maintained a positive call on HDFC Life with a target of Rs 671. (15% upside potential)
4) Sharekhan has maintained a positive call on ICICI Prudential Life Insurance with a target of Rs 532. (23% upside potential)
September Business Update
September business update for life insurance companies indicates a strong revival in new business premium and a return to normalcy for the sector. Overall, the sector clocked a growth of 26.5% (YoY) and private Insurers clocked a 20.1% (YoY) growth in total first year premium for September 2020 indicating a healthy traction in life insurance monthly numbers.
On a (MOM) basis, there was a smart growth of 19.6% for private players total new business premium. However, individual non-single premium growth was mixed in September for larger private sector players like HDFC Life which clocked growth of 41.2% YoY (up 12.6% over August), but ICICI Prudential Life saw a decline 25.9% YoY (but was up 9.7% over August), mainly as the company is seeing lesser traction in its ULIPs and savings business. Max Life reported a growth of 15.6% YoY (up 12.9% over August) and Bajaj Allianz Life registered a growth of 16.2% YoY (up 6.9% over August). Notably, performance in September continued to improve over the last six month which indicates that the market is steadily but surely reverting to normal.
Despite a rebound in equity markets performance, customer preference is likely to be tepid for equity market linked products (ULIPs) in the near future. Sharekhan expects protection and annuity products to continue to see higher growth; however, volatile capital markets/tepid growth in bancassurance channels are likely to keep sentiment and inflows soft, especially in ULIPs for the near term. The insurance space will remain attractive for private players with a strong balance sheet and good business metrics. Demand for protection policies and savings products would be likely growth drivers in future.
Strong private players to continue to gain:
Sharekhan believes most bank backed insurance companies are showing resilience, along with players such as Bajaj Allianz Life Insurance Company (BALIC) and Max Life Insurance who also have strong and stable bancassurance partners. Among major players, HDFC Life outperformed peers, aided by its higher protection share, improving prices and resumption of bancassurance channels business. Insurance companies also have generally been agile and were quick to deploy digital tools and operational tweaks to ensure business growth and continuity. For the near term, new business premium margin to see some pressure, also aided by capital market volatility, which may impact sales of savings/investments products, especially equity-oriented products. Management of companies have clearly indicated that customer demand for protection policies has increased of late post COVID-19. Insurers ability to manage product delivery (for sales and costs) will be important where strong private players can steal a march over other peers in the long run. Sharekhan expects the industry is likely to see improved consolidation in market share, going forward favouring strong private players, at the expense of smaller / weaker players. The insurance industry will return to growth in the third quarter of FY2021.
Structural growth story intact, sector outlook remains Positive:
The pick-up indicates that the insurance industry is bouncing back successfully from the impact of the outbreak. Despite uncertainties and challenges for the medium term, view on the insurance sector remains positive, particularly for the protection and retrial product segments. The need for insurance across mortality, morbidity, and longevity coverage remains high. The protection gap in India is wide, with insurance premium as a percentage to GDP low as compared to that of developed countries. Therefore, the opportunity and scope for growth in life insurance remain immense. Life insurance is a long-term oriented industry and it would stay attractive in the years to come.
A delayed recovery in economic growth and rating downgrades may impact premium growth as well as investment income for insurance companies.
(Authored by Rahul Kamdar)