Insurance: A year of normalization with an eye on regulations

16 Apr 2024 , 11:26 AM

Indian private insurance sector outperformed the broader markets by 6% during FY24. Analysts of IIFL Securities believe this is attributable to (1) stable APE growth in Life (+9% FY24), despite the impact of the high ticket taxation in non-linked segment, (2) no negative surprises in the FY25 Interim Budget and scrapping off the initial recommendation to reduce surrender charges in non-linked products, and, (3) attractive valuations, as stocks were trading below historical valuations. Analysts of IIFL Securities believe FY25 will be a year of normalization in Life as growth should revert to teens while margins would start witnessing stability with an upward bias. Potential risk from regulatory changes post elections such as introduction of composite licences and changing competitive landscape due to EoM regulations may continue. Sector valuations are still below historical average and offer enough comfort. Analysts of IIFL Securities prefer SBILI in Life and STAR in General Insurance given attractive growth adjusted valuations. HDFCLI and ILOM are healthy compounding stories while IPRUs risk reward is balanced.

LI - Stable premium growth ahead:

The sector has been able to grow well in FY24 despite the impact of taxation of high ticket non-linked products from Apr-1, as the same was offset by strong growth in ULIPs. Analysts of IIFL Securities believe the sector is well poised to record consistent double digit APE growth over the next few years even as tax arbitrage wanes. While ULIPs may continue its strong trajectory in FY25, pick up in non-linked segment could lend support sector’s growth. Analysts of IIFL Securities forecast analysts of IIFL Securities covered LI companies to deliver 16% APE CAGR in FY24-FY26.

LI – Margins to stabilize with an upward bias:

Analysts of IIFL Securities expect VNB margins to stabilise in FY25 as FY24 headwinds recede, that came from 1) adverse product mix given a strong capital markets resulted in strong growth in low margin ULIPs, 2) higher commissions, especially in distribution channels with open architecture, led by new EOM regulations, and, 3) decline in premiums from high ticket non-linked cohort. These were partially offset by rebound in the protection business, both retail and group credit life after a downturn witnessed over the past few years. Hence, VNB growth would be largely driven by APE growth in FY25.

GI – Strong GDPI growth; cost ratios in focus:

GI industry has delivered strong GDPI growth in FY24 at 19% YoY for private players, on a strong base of last year. Growth has been driven by motor and health segments while fire and marine remained weak. Within analysts of IIFL Securities coverage, ILOM and BAGIC have delivered 18%/33% YoY growth. While ILOM’s growth is driven by Health and Motor OD, for BAGIC, it has been majorly driven by writing of mass insurance schemes. STAR recorded an 18% YoY growth, maintaining its dominant position in the retail health segment, with a 33% market share. While analysts of IIFL Securities believe FY25 could see a tad lower, but still healthy GDPI growth for the sector, market share dynamics may change as the GI companies prioritise EOM compliance, offering share gain opportunity to the compliant firms, such as ILOM, STAR and BAGIC.

Regulatory environment easing up but still cannot be ignored:

FY24 saw multiple regulatory headwinds for the sector which started with the introduction of the taxation policy on high ticket traditional savings products in Life, followed by EoM regulations, potential introduction of composite licenses, and proposal for lowering surrender charges. Some of these regulations have been largely enabling, in the direction of driving insurance penetration. Flexibility provided by the new EOM guidelines, scrapping of the proposed increase in surrender value regulations and no introduction of composite licences have brought some relief as well. The FY25 Interim Budget was free of any negative surprises for the sector, providing further comfort on regulatory headwinds easing up.

Prefer SBILI, STAR on attractive valuations:

While the sector valuations recovered from the Feb. 23 lows post the budget announcements, it remains below historical averages and have scope to revert to mean given a healthy growth outlook in FY25. Within analysts of IIFL Securities coverage, they continue to prefer SBILI (BUY) and STAR (BUY) where analysts of IIFL Securities see the highest potential upsides as valuations remain attractive, adjusted for growth. While ILOM has rallied recently, it remains a good compounding story, so is HDFCLI where a pick-up in growth in FY25 could trigger re-rating. Analysts of IIFL Securities believe IPRUs valuations have a scope for re-rating provided they can demonstrate improvement in growth and margins simultaneously, which may be difficult, in their view, given the heightened competitive intensity in multi-insurer banca and other distribution channels. Key risks to the sector remains around regulatory changes.