Long-term prospects to strengthen investment in life insurance stocks

The 2023 Budget set off a downtrend in the listed life insurance company stocks.

The key reason was a proposal to tax income from insurance policies (other than unit-linked insurance plans or ULIPs) with a premium, or aggregate premium, of above Rs 500,000 per annum.

This impacted the traditional savings profile since it affected the returns for these products.

In addition, there were fears that rising interest rates would lead to more moderate ticket sizes for policies.

As a result, analysts reduced expectations for key variables such as the Value of New Business (VNB) and for Annual Premium Equivalent (APE).

The returns from non-participating policies also look unattractive due to rising fixed deposit rates, if the tax advantage is nullified.

As a result, there has been a significant correction across the universe of listed life insurance stocks.

Every listed life insurer is now trading well below its pre-Budget levels.

However, there has been some selective buying in the last few sessions as investors have decided that the current valuations have an inbuilt safety factor as the negatives are all priced in.

According to an analyst, the current stock prices are under-valuing long-term APE growth rates, which are discounted as lower than nominal growth expectations whereas growth in the segment has comfortably outpaced nominal GDP in the past.

The latest February data also indicates that ticket sizes have not dipped, indeed they appear to have increased, but of course, the tax has not become applicable yet.

Savvy investors may, however, continue to prefer non-par policies to fixed deposits since the locked in long-term return is safer, and if we look at asset allocation patterns in ULIPs, where taxes were imposed in 2021, inflows have not been badly affected.

In the long term, life insurance penetration remains low, especially in rural/semi-urban geographies.

This is one reason why growth is likely to exceed nominal GDP for years to come as insurers build better networks and online penetration also improves.

Given all this, there’s a persuasive case to invest in life insurance stocks for the long term, although the short-term growth trend may be moderating.

Another trend worth noting is that LIC has lost market share, dropping from 67.7 per cent in November 2022, to 63.8 per cent in February 2023.

In February 2022, Indian Life Insurance had 10.5 per cent year-on-year (YoY) growth in retail APE for February 2023, with diverging trends between private players (up 18 per cent YoY) and LIC (down 3 per cent YoY).

The retail APE growth in February 2023 was largely driven by ticket-size growth, with the average ticket-size for retail regular premium policies growing by 32 per cent YoY (LIC up 24 per cent and private players up 17 per cent).

This may be due to investors pre-booking high-ticket (greater than Rs 5 lakh) non-ULIP policies, to escape the impact of taxation changes.

Incidentally, the number of policies sold declined for most insurers.

These trends – big ticket sizes and lower policy count could continue through March but the acid test will be from April onwards.

All the listed private life insurers are currently trading at price/embedded value ratios which are below their average price to enterprise value.

There could be 20-25 per cent upsides across the segment.