Life insurance sector not as attractive as you think; Citi initiates sell on HDFC Life

Global research firm Citi has initiated a sell on HDFC Life Insurance and has a neutral rating on ICICI Prudential Life Insurance Company while SBI Life Insurance is the top pick for the research firm. It believes that larger private players are likely to gain market share.

However, the house is of the view that India life insurance sector penetration level is lower than that of the many regional and global peers.

Citi has put forward a report related to growth and profitability dynamics of the top private insurers in India and compare with state-owned company Life Insurance Corporation of India. The house expects the larger private life companies with strong bancassurance partners to post healthy new business growth driven by market share gains.

“With companies selling more protection business, we expect better Value of New Business (VNB) margin and improving persistency should help EV growth. We expect VNB margin and RoEV to be the key stock drivers,” it said.

“We have initiated HDFC Life as a sell with a target price of Rs 380 per share and has a neutral rating onICICI Prudential with a target of Rs 450 on valuation.

Balanced product and distribution mix to drive market share gains

Citi believes that the top 4-5 private life companies will continue to gain market share helped by a balanced product and distribution mix. While LIC is a formidable competitor, it is almost entirely reliant on agency channel and does not sell much ULIP products, both of which mean that it could lose some of its existing market share of 50 percent in new business. The firm is of the view that most of the 23 private life companies lack a strong bancassurance partner, which could hamper their growth.

Steady improvement in operating parameters

Weak business growth during FY10-13 led to increased focus on cost control and improving persistency. Since FY15 business growth has improved, cost

ratios have steadily declined and there has been a strong improvement in persistency ratios. Increased focus on selling higher protection, esspecially via credit insurance which should lead to better VNB margins.

“Combining the outlook for growth, VNB margin, RoEV and current valuation, SBI Life is top pick. HDFC Life has the highest VNB margin among top three private players due to its better product mix, but the stock is up 64 percent from its IPO issue price and trades at very expensive valuation of 5.2x FY19E P/EV.  As a result, we initiate a sell on HDFC Life,” it said.

While IPRU’s valuations are lower than HDFC Life and SBI Life, we find the stock fairly valued at 2.7x FY19E P/EV, as we expect it to deliver lower RoEV given its lower VNB margin.

Here are the 3 insurance stocks where Citi has initaited a trade:

SBI Life Insurance: Rating: Buy, target: Rs 880a

SBI Life’s industry individual rated premium (IRP) market share has increased to 12.2 percent in H1FY18 compared to 5.1 percent in FY13. It plans to increase the share of protection by growing its credit life business and at the same time reduce its focus on group fund management business.

Citi expects SBI Life to deliver APE CAGR of 28.1 percent over FY17-20E and VNB CAGR of 32.4 percent helped by a well-diversified product portfolio and

multi-channel distribution strategy.

SBI Life trades at FY19E P/EV of 3.0x, which is 43 percent discount to HDFC Life valuation of 5.2x. Over FY17-20E Citi estimates average RoEV of 21

percent for SBI Life compared to 22 percent for HDFC Life.

HDFC Standard Life Insurance: Rating: Sell, target: Rs 380

HDFC Life has been steadily improving its product proposition by launching products like credit protect, online term insurance. It has the highest profitability among the top three private life cos with VNB margin of 22.4 percent in H1FY18. Citi expects HDFC Life to deliver APE and VNB CAGR of 28 percent and 24 percent over FY17-20E and average RoEV of 22 percent.

The stock is up 64 percent post its IPO on November 2017 and now trades at expensive valuation of 5.2x FY19E P/EV, which is 76 percent premium to SBI Life and 90 percent premium to IPRU.

ICICI Prudential Life Insurance: Rating: Neutral, target: Rs 450

The stock has delivered strong IRP CAGR of 18 percent over the past five years. IPRU consistently ranks No.1 in terms of IRP market share among private players; for M8FY18 its industry IRP market share was 9.4 percent. While VNB margin has improved from 5.7 percent in FY15 to 11.7 percent in H1FY18 helped higher share of protection, it is still lower than peers due to large reliance on ULIP.

Citi believes at 2.7x FY19E P/EV for a likely RoEV of 16 percent, current valuation captures the potential growth and margin improvement.

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