What Explains The Steady Rally In Life Insurance Stocks?

The debate over polarised valuations has been a steady under-current for the past many quarters and has only grown in pitch over the last six months, as the contributors to any up-move have narrowed even further. While consumption names have traditionally enjoyed higher multiples, the continued robustness in the performance of insurance company stocks has caught financial sector skeptics off-guard..In an environment where equity investors are extremely jittery about the asset quality of select lenders in India, participants seem willing to ascribe premium valuations to those non-lending financials which are still able to show long-term growth potential. As a result, the three large insurers – HDFC Life Insurance Co. Ltd., SBI Life Insurance Company Ltd., and ICICI Prudential Life Insurance Company Ltd. – have outperformed the banking index over the past 12 months..The fundamentals don’t appear to be in bad shape either. As per the latest data, HDFC Life and SBI Life continue to show robust individual annual premium equivalent growth. Meanwhile, ICICI Prudential Life has set a target of doubling its new business value in three to four years. For all three insurers, the product mix has been improving, aiding margins. The new business value growth is driven by volume growth..The sector currently enjoys a gust of tailwinds. While data from different pockets of the market suggests both over-penetration and under-penetration on basic life insurance, studies show India's protection gap being the widest in Asia..The protection business premium rates are competitive, compared to international peers, despite lower life expectancy rates..There is some proof that protection adoption is picking up, with protection premium growing by 37 percent in the last two years, as per a presentation by ICICI Prudential Life. This segment tends to have higher new-business value growth and margin compared to savings products. In addition, size is showing signs of benefits in term-plans. There is a significant variation in premium rates, with the rate charged by the three large private insurers for a standard case being at least 15 percent higher than the average rate charged by other private insurers, as per a report from HSBC Global Research..Sectoral tailwinds being the mainstay, each of the three large private insurers has strengths of their own..HDFC Life is the leader in the protection as well as the annuity segments. It also enjoys higher profitability compared to other large life insurers in terms of new business value margin.SBI Life’s core strength is its expansive distribution set-up, backed by its bancassurance tie-up with State Bank of India. Business scale and reliance on the bancassurance model have enabled it to become one of the most cost-efficient players in the market.ICICI Prudential Life is currently trading at a valuation lower than its peers as its business growth has lagged the other two on some counts. The street now expects 20-23 percent average growth in its protection business in the next two years..High Valuations No Bar?.What the street worries about these companies, and particularly HDFC Life, is the stratospheric valuations that they trade at. Both ICICI Prudential Life and SBI Life are trading at nearly 19-20-times FY21-estimated value of new business. HDFC Life, on a relative as well as absolute basis, trades at more expensive levels, 36-times FY21-estimated value of new business. Even on a price-to-enterprise value basis, the stocks aren’t cheap..Despite most analysts on the street believing that these stocks are expensive, they have continued to rally and are trading near their life-highs. .A foreign brokerage changed its rating on HDFC Life in September to a Hold, with an upward revision of the price target to Rs 510 a share, and the stock is trading nearly 20 percent above that target price..After the rally in the last few weeks, SBI Life and ICICI Pru have a return potential of 6.7 percent and 4.5 percent respectively against the average target prices of analysts tracked by Bloomberg..Yes, trees don’t grow all the way to the sky. But, like some of the other blue-chip stocks which are moving northwards despite jaw-dropping valuations, the insurance companies are marching on while skeptics continue to rub their eyes in disbelief..As one portfolio manager aptly surmised in a tweet - ‘The market is getting narrow by the day. The leaders continue to move up while the craps keep slipping by the wayside. To understand the theme this time one needs to read through all the past bull market history. Tweeting against them in frustration won’t help - buying them might!’.Niraj Shah is Markets Editor at BloombergQuint.

What Explains The Steady Rally In Life Insurance Stocks?

Despite most analysts on the street believing that life insurance stocks are expensive, they have continued to rally.

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