Nomura Bullish On Bank-Led Life Insurers; Initiates New Buy On Three Firms

Life insurers led by banks will continue to retain their competitive edge among peers.

That's the word coming from Japanese brokerage Nomura as it initiates coverage on HDFC Standard Life Insurance Co. Ltd., ICICI Prudential Life and SBI Life Insurance Co. Ltd. with a ‘Buy' rating. It also maintained a ‘Buy' rating on Max Financial Services Ltd. which owns Max Life Insurance Co. Ltd.

These bank-led private insurers would see their new business grow at a compounded annual growth rate of of 18 percent through financial year ending March 2025, it said in a report. With further profitability and robust growth, valuations are unlikely to get cheaper in the near term, the brokerage firm said.

Here's the brokerage's take on these life insurers:

HDFC Standard Life

• Rating: Buy
• Target Price: Rs 450 (upside of 12 percent from current levels).
• HDFC Life ranks top on relative benchmarking.
• Strong distribution franchise, balanced product mix and leadership in protection business leads to highest margins among private players.
• Improving persistency due to lower business mix in unit-linked insurance products. (Persistency is the percentage of insurance policies remaining in force with the insurance company.)
• Product innovation and technology investments to provide edge over other players.
• Expect value of new business margins to improve to 24 percent in next two years.

ICICI Prudential Life

• Rating: Buy
• Target Price: Rs 490 (upside of 29 percent from current levels).
• Strong bank-led insurer with one of the lowest cost structures.
• Largest private insurer by individual new business premium.
• ULIP-heavy business remains a key concern in the near term.
• Lowest value of new business margins among peers due to higher share of ULIP
• Increasing protection share, stable persistency to drive growth. The insurer remains the top pick despite near-term concerns.

SBI Life

• Rating: Buy
• Target Price: Rs 840 (upside of 20 percent from current levels).
• Best distribution parent network along with most efficient agency force.
• Given the parentage advantage, it has the lowest operating ratios of 9 percent as compared to 14-17 percent for peer's despite of high ULIP mix.
• Low cost provides an edge in selling ULIP's and deliver over 15 percent margins.
• Market share increased by 6-7 percent over the last 3 years.
• Expect SBI to deliver faster growth in next 2-3 years.

Max Life Insurance

• Rating: Maintains Buy
• Target Price: Rs 680 (upside of 16 percent from current levels).
• Market share increased to 5 percent in FY17 due to tie-up with Axis and Yes bank.
• Cost base higher than peers given the focus on agency-led business.
• Higher traditional mix (high protection & lower ULIP share) business helps to absorb higher cost but also deliver healthy margins.
• Persistency ratio lower than peers.
• Discount to peers justified due to holding company cost and distribution risk.