SBI Life, HDFC Life Are Centrum's Top Picks As Brokerage Initiates Coverage On Life Insurers — Here's Why

Centrum has initiated coverage on five life insurance companies as it remains constructive on the industry. The favourable macro factors call for a positive outlook, while there are also a few unexpected regulations to be cautious about.

The brokerage expects Annual Premium Equivalent to clock an average 17% CAGR for the private listed players over financial years 2024-27. Unit Linked Insurance Plans continue to gain traction in a thriving equity market as non-par were relatively out of favour.

Life insurance industry is poised to grow depending on favourable macro factors, due to the rise in household savings, per capita income and working age population. These factors are also paired with a largely underpenetrated industry, according to the brokerage.

Buoyant equity markets led to an increase in the sale of ULIPs as evident from the listed private players’ share of ULIPs in the product mix rising from 20% to 47% at the end of the first quarter of financial year 2023. This increased to 23% to 63% by the first half of financial year 2025.

There were few unexpected regulations over the last few years like taxing on ULIP maturity if premium exceeds Rs 2.5 lakh in February 2021. There was taxation on maturity for par and non-par policies for premium exceeding Rs 50 lakh in February 2023 as well.

Private players have been able to gain a higher market share with its share in the individual APE, increasing from 56% at the end of financial year 2018 to 68% by the end of the second quarter in financial year 2025. LIC has maintained a 32% market share over the last few quarters. Similarly, the private sector grew from 31% to 42%, according to the brokerage.

"The listed players command a combined market share of up to 60% in the private space. We have forecasted APE growth of 14 to 19% CAGR over FY24-27E in the private space, whereas LIC’s APE is expected to clock 8%," according to the brokerage.

The VNB margin is expected to remain comparatively low on account of higher share of ULIPs in the product mix, and new surrender regulations. The brokerage expects the companies to mitigate the impact through various measures.

"For our coverage companies, we expect the VNB margin of 25-27% for private players whereas LIC’s VNB margin is expected to increase to 18% at end FY27E," according to Centrum.

The companies are focusing on beefing up the agency network as evident from about 4 lakh net new agents added to the system. With 75% of this being added in the private sector, LIC employs about 50% of the agency force.

Bancassurance plays an important distribution part especially for the private players, though LIC is also now focusing on bank partnerships. Notably, media has reported limiting parent banca business can play a spoilsport as bigger players derive significant businesses from these, according to the brokerage.

The expense ratios have inched up and are expected to remain elevated, according to the brokerage. This is after the IRDA replaced the earlier cap on commission payments, with an overall cap on expenses for life insurers.

The total expense ratios for all private listed insurers inched up in the first half of fiscal 2025. We have estimated the total expense ratio of 10-22% for private insurers, whereas LIC is expected to clock an expense ratio of up to 15% for the forecast period, according to Centrum.

SBI Life and HDFC Life are its top picks. Both SBI Life and HDFC Life have moved aggressively to raise their agent count by 11% and 23% year-on-year, respectively.

The brokerage has initiated 'buy' on SBI Life with a target price of Rs 1,930 per share, an upside of 33%. SBI Life maintained its position as a market leader, with the highest premium growth among the coverage universe.

HDFC Life also got a 'buy' rating with a target price of Rs 780 apiece, with a 23% upside. Owing to the new surrender regulations, the company successfully relaunched more than 40 top products contributing to about 95% of the business as on Oct. 1 last year. The company also plans to relaunch other products during the course of the third quarter of financial year 2025.

The 'buy' rating on ICICI Pru Life is supported with an upside of 16%, with a target price of Rs 780. Max Financial Life also gets a 'buy' from Centrum with a target price of Rs 1,400, implying an upside of 26%. Centrum also initiated coverage on LIC with a 'buy' rating and target price of Rs 1,220. The upside on this stocks is 34%.

The expense ratios continue to remain relatively elevated and this is expected to continue. The industry continues to strengthen its distribution network, however, the media reported unconfirmed banca regulations would be negative.