According to Nuvama Institutional Equities, life insurers are anticipated to generate significant top-line growth due to two important factors: a typically strong Q4FY23 and changes in tax law for non-linked savings plans, which are anticipated to stimulate robust sales of high-value participating/non-participating (PAR/NPAR) products.
"We expect strong growth for listed life insurers; nearly 20% in Q4FY23E given a seasonally strong quarter and the likely advancing of purchase of PAR/NPAR products due to changes in taxation for high-ticket non-linked savings products. In the near term, we expect some revival in term insurance as supply-side constraints ease," the brokerage said.
The government proposed taxing profits from all non-ULIP (Unit Linked Insurance Plan) products, both par and non-par, in the FY24 budget when the total insurance premiums paid in a year exceed ₹5 lakh.
Therefore, the proceeds of life insurance policies other than ULIPs would no longer be excluded from income tax if the total yearly premiums paid on those policies exceed ₹5 lakh. The sum insured received in the event of the policyholder's death is the only situation where the entire income will continue to be exempt from taxes.
Value of new business (VNB) margins are projected to receive another boost in Q4FY23 as a result of rising interest rates, an increase in NPAR savings and protection, and operating leverage.
Basically, the VNB margin represents a life insurance company's profitability. It provides advice on the insurance premiums that investors should pay. By dividing the new business value by the annualised premium equivalent, one may get the VBN margin.
"For Q4FY23, we expect aggregate VNB margins to improve by nearly 217 basis points year-on-year (YoY) to 31.1%. We will keenly watch out for commentary on the impact of changes in regulations—commission, EoM, Budget 2023, possible introduction of composite insurance license, etc. on product innovation, margins and growth. We reiterate our positive stance on the sector; our preferred picks are SBI Life and HDFC Life," said the brokerage.
What does the brokerage say about its life insurance top picks ?
SBI Life: A robust agency network and distribution footprint together with competitive cost ratios will increase sales of traditional and protection products.
"We believe SBI Life can deliver a VNB compound annual growth rate (CAGR) of 15.8% with an operating return on enterprise value (RoEV) of ~20-21% over FY23E–25E. We recommend ‘buy’ with a target price of ₹1,690," said the brokerage.
HDFC Life: The business has the capacity to recognise areas of profit and produce long-term, profitable growth.
"We believe HDFC Life can deliver a FY23E–25E APE/VNB CAGR of 8.3%/10.6% with an operating RoEV of about 19% over FY23–25E. Recommend ‘buy’ with a target price of ₹650," added the brokerage.
The firm also anticipates a recovery in sales of term insurance as supply-side constraints loosen. The brokerage believes that as scale benefits materialize, sector-wide margins will increase.
It expects general insurers to record strong gross written premium (GWP) growth, with the motor segment accelerating and a good concentration on retail health; but, competitive intensity is likely to maintain the combined ratio high.
The positive trends in the retail health market and the sales of savings products may be favourable for intermediaries like PB Fintech.
"By stock, we retain our neutral stance on ICICI Lombard; and expect PB Fintech to deliver strong premium growth of 67.5% YoY. This is likely to drive revenue and push the companies towards a breakeven for Q4FY23," added the brokerage.
