Why JPMorgan And Citi Are Bullish On Insurers

Private life insurers, which are slowly eating into the market share of state-run Life Insurance Corporation of India Ltd., will continue grow on the back of new businesses.

That's according to brokerages JPMorgan and Citi, which said the insurance companies' new business margins—a measure of profitability—expanded on strong performance of protection products like accident and life covers.

The market share of LIC declined for the seventh straight month in July in terms of new business premiums. India's largest life insurer lost 4.5 percent of its share to 69.5 percent during the month, according to data compiled by the Insurance Regulatory Development Authority of India.

JPMorgan initiated a coverage on private life insurers saying the companies are now focusing on quality (product margins) over quantity. Citi, however, cut its target price for the companies even as it remains bullish.

New business for life insurance players is expected to grow over 20 percent, JPMorgan said, adding that India's relatively under-penetrated life insurance market and rapid growth justifies their premium valuations over Chinese peers. Indian life insurers trade at a price-to-embedded value multiple of 2.5-5.2 compared to China's 0.7, it said.

According to Citi, listed life insurers continued to increase the share of protection products in the quarter ended June. It now stands at 10 percent of the total premium compared with 7 percent in the previous financial year, it said, adding the value of new business margins expanded despite a high base of demonetisation-led sales in the first quarter of 2017-18.

Here's what brokerages had to say:

ICICI Prudential Life

JP Morgan

• Maintains ‘Overweight' and raises target price to Rs 560 from Rs 520, an upside potential of 44 percent.
• One of the top picks in the sector in context of growth outlook and earnings multiple.
• Offers a strong franchise network with a strong product mix.

Citi

• Maintains ‘Buy' but lowered target price to Rs 500 from Rs 525 to factor in revised premium growth and margins, an upside potential of 28 percent.
• Improving protection mix and growth recovery on track.
• Q1 saw lower yields on investment and higher cost of sales.
• Trades at 47 percent discount as compared to HDFC Life.

SBI Life Insurance

JPMorgan

• Initiates coverage with an ‘Overweight' rating and a target price of Rs 1,000—an upside potential of 53 percent.
• One of the top picks in the sector.
• Strong distribution channel of both agents and bancassurance to support new business.
• Expects new business to grow at an annualised rate of 25 percent over the next three years.

Citi

• Maintains ‘Buy' but lowered target price to Rs 810 from Rs 910 to factor in lower premium growth, suggesting an upside potential of 24 percent.
• Remains one of the preferred picks in the insurance space.
• Premium growth led by single premium protection products.
• Company to focus on launching new products, re-pricing existing products.

HDFC Standard Life

JP Morgan

• Initiates coverage with a ‘Neutral' rating and a target price of Rs 520, an upside potential of 13 percent.
• Strong retail franchise with a sector-leading product mix.
• Expects new business to grow at 26 percent in the next three years.
• Says current valuation multiple fully factors in the company's positives.
• Strong fundamental re-rating outlook.

Citi

• Maintains ‘Sell' but lowered target price to Rs 380 from Rs 400 to factor in lower premium growth, suggesting a downside potential of 18 percent.
• HDFC maintains leadership in protection via group credit protect portfolio.
• Raises earnings estimate by 10-18 percent on rising new business share; cuts premium growth from 29 percent to 24 percent.

JP Morgan on ICICI Lombard General Insurance

• Initiates coverage with a ‘Neutral' rating and a target price of Rs 710, a downside potential of 11 percent.
• Expects moderation in underwriting losses for non-life insurance companies in the next three years with a 5 percent underwriting margin enhancement. (Underwriting income is the difference between premiums collected and expenses incurred and claims paid out)
• Expects to see a turnaround in underwriting losses in the next few quarters due to better risk selection, growth scalability and diversified products or geographic exposures.

JPMorgan is also bullish on the country's largest non-life insurer and India's only reinsurer—which went public over the last year. Initiating a coverage, the brokerage said they will benefit from the government's crop insurance scheme.

JP Morgan On New India Assurance

• Initiates coverage with an ‘Overweight' rating and a target price of Rs 360, an upside potential of 36 percent.
• Largest non-life insurer in India with a market share of 15 percent.
• To benefit from strong market growth, government-led project developments for crop insurance.
• Prefers government-led insurers over private due to higher margins and underwriting leverage.
• Potential for solvency capital appreciation under new IFRS accounting is a key catalyst.

JP Morgan On GIC Re

• Initiates coverage with a ‘Neutral' rating and a target price of Rs 390, an upside of 16 percent.
• Dominant player in India's reinsurance market with a share of 60 percent.
• Crop insurance can be a strong near-term volume driver.
• Expects a combined ratio of 103 percent in the next three years.
• Increasing competition, a treaty-based business model suggests near-term underwriting margin expansion can be limited.
• Increasing overseas volumes pose a concern due to insufficient experience to handle overseas risk.