Insurance share price target

We highlight key comments made by companies in recent conference calls (of Q1FY24) regarding the impact of the Expense of Management (EOM) on the sector. Initial trends include: (1) Rejig between opex and commissions in many cases. This also true for earnings of distributors which might undergo some shuffle between line items.

The key trends from insurance sector results in Q1FY24 were: 1) volume growth focus over margin expansion, 2) uptick in protection growth and 3) continued focus on distribution across channels. While sum assured growth had led expectations of margin increase, decline in non-par mix and increase in ULIPs and investment in channels to increase number of policies resulted in muted margin performance in Q1FY24.

General insurance GDPI has grown strong at 18% in Q1FY24 with healthy contributions from motor, health as well as crop. However, profitability is likely to be key considering the backdrop of (1) increasing combined ratio for all players in FY23 and (2) room for increasing opex ratios basis the EOM guideline where we see 10 out of top 18 multi line players in the industry operating under the 30% benchmark and 2 out of 4 SAHIs operating below the 35% mark.

First-year premium of private insurers rose 27.3% MoM to Rs 11,990.9 crore in June 2023, while LIC's premium increased by 77.6% MoM to Rs 24,970.8 crore. Overall, private insurers sold around 6.4 lakh policies in June 2023, while LIC sold 13 lakh schemes. Its market share fell by 4.5 percentage points YoY to 67.2%.

Growth in sum assured (27/47% for individual/total for private life insurers) in Q1FY24 elicits a positive surprise in our view. This comes against the heels of 8/8.4% individual/total APE growth in Q1FY24.

General insurers in India are facing a growth vs profitability conundrum. This is at crucial cross roads in FY24 against the backdrop of (1) increasing combined ratio for all players in FY23 (refer Table 1) and (2) room for increasing opex ratios basis the EOM guideline where we see 10 out of top 18 multi-line players in the industry operating under the 30% benchmark and 2 out of 4 SAHIs operating below the 35% mark (refer Charts 2).

FY24 would test the business performance of life insurers post the removal of select tax incentives. Volumes were muted in Apr/May’23 (private players/LIC have grown APE by 3.5 / (-)13% respectively in FY24-TD). However, we remain constructive on the back of the following factors: (1) high-VNB products typically have low ticket-size.

Non-life insurance companies reported a healthy growth of 18% YoY in May’23. ICICI Lombard (ICICIGI) reported 21% growth in GDPI in May’23 vs 17% in Apr’23 while Star Health’s GDPI growth was 16% in May'23 compared to 25% in Apr'23. On YTD basis, growth for ICICIGI/Star Health stood at 18%/20%, respectively.

While we are constructive on the long-term growth prospects of the LI sector, we believe major tectonic shifts will create near-term challenges, albeit preparing the industry for a cleaner insurance penetration. Contrary to expectations of relief in the Union Budget, life insurers are expected to be adversely impacted by the first-order and second-order changes proposed in the Finance Act'23. Conversation with industry experts suggest that the top four private life insurers are likely to witness 20-27% adverse impact on FY24E APE predominantly on account of the impending transition to the new tax regime. We flag high ceding charges in guaranteed NPAR savings as the next potential target as policymakers look to protect policyholder interest and improve life insurance (LI) penetration. While the demand for retail term protection remains subdued and the Apr-23 growth print was soft, we await evidence of medium-term growth momentum.

We enlist some transactions from non-life insurance space over the past 5-6 years. Notable implications include: (1) Private transactions have happened at a premium to listed valuations. This could be driven by the control premium (like acquirers could get a Board representation) usually available in private deals.