CLSA stays positive on life insurance sector amid COVID-19; rates SBI Life outperform

India’s life insurance sector presents a structural growth opportunity with COVID-19 positively impacting demand potential for protection/annuity business, global brokerage firm CLSA said in a recent report. The brokerage, in this report, initiated SBI Life with an 'outperform' call but downgraded 2 other stocks. However, it added that it maintains a positive view on the sector overall.

As per the brokerage, the stocks in the space have moved up 50-80 percent from COVID-19 lows and now trade at similar valuations to pre-COVID-19 levels, reflecting faster-than-expected APE sales normalisation and an improved long-term outlook for protection/retirement business," the report stated. However, this rise in valuation has led to the brokerage's 'outperform' rating on life insurance stocks as compared to a 'buy' rating earlier.

CLSA believes that the current valuations of ICICI Prudential, HDFC Life are close to fair valuations and thus have downgraded then to 'outperform' call from 'buy'. It also initiates SBI Life coverage with an outperform rating and a Rs 1,000 target price.

It also sees a potential for rerating in Max Financial if the deal with Axis Bank goes through.

"Max Financial trades lower than our fair valuation due to regulatory uncertainty on the Axis Bank deal. Regularity uncertainty leads to a binary outcome and hence we rate Max Financials Outperform now from BUY previously," said the brokerage. Deal clarity could drive rerating for Max Financial, with 34 percent upside if the deal goes through, it added.

During FY16-20, APE grew at 10-20 percent while VNB enjoyed a 23-40 percent CAGR, driven by improvement in protection and non-par mix from a low level.

The brokerage expects new-business annual premium equivalent (APE) growth at 9-10 percent YoY in FY20-23 and with an increasing protection mix. It also sees higher CAGR growth in the value of the new business (VNB) at 10-14 percent during FY20-23.

CLSA, however, notes that the above forecast includes COVID-19 impact in FY21 which is a 2-20 percent YoY contraction in FY21. But excluding FY21, it expects a 15 percent APE CAGR for FY21-23 and an 18-21 percent VNB growth CAGR during the same period.

As per the brokerage, the term life protection remains higher unpenetrated. It estimated about 65 lakh such policies as compared to a demand of 2.5-3 crore. Hence, CLSA believes that COVID-19 should b able to accelerate demand for term life policies and thus lead to VNB margin improvement.