Life Insurance Sector: Momentum takes a breather, Outlook continues to be strong

Despite a rebound in equity markets’ performance, Sharekhan expects customer preference likely to be tepid for equity market linked products (ULIPs) in the near future. Going forward, Sharekhan expects protection and annuity products to continue to see higher growth; however, volatile capital markets/tepid growth in bancassurance channels are likely to keep sentiments and inflows soft, especially in ULIPs for the near term. Sharekhan sees life insurance as an attractive long-term bet with a long runway for growth supported by India’s demographics and underpenetrated / underinsured Indian insurance market. Sharekhan believes players with a strong balance sheet and business metrics would be able to tide over the challenges.

Strong private players are expected to continue to gain. Sharekhan believes most bank-backed insurance companies are showing resilience, along with players such as Bajaj Allianz Life Insurance Company and Max Life Insurance who also have strong and stable bancassurance partners. Among major players, HDFC Life outperformed peers, aided by its higher protection share, improving prices, and resumption of bancassurance channels business. Sharekhan believes the private insurance sector has generally been agile and were quick to deploy digital tools and operational tweaks to ensure business growth and continuity.

Customer demand for protection policies has increased of late, as indicated by management commentary post COVID-19. Insurers’ ability to manage product delivery (for sales and costs) will be important where Sharekhan believes strong private players can steal a march over other peers in the long run. Sharekhan expects that the industry is likely to see improved consolidation in market share, going forward, favouring strong private players at the expense of smaller/weaker players. The industry’s return to growth is an encouraging sign, aided and facilitated by the rising share of digital channels. Going forward, with normalisation of operating conditions, Sharekhan expects that the agency and bancassurance channels will improve, which will be positive for the savings business.

Structural growth drivers in place, Sharekhan stays Positive:

YTD performance indicates that the insurance industry is bouncing back successfully from the shadows of the pandemic. Sharekhan’s view on the insurance sector remains positive, particularly for the protection and retiral product segments. The need for insurance across mortality, morbidity, and longevity coverage remains high. The protection gap in India is wide, with insurance premium as a percentage to GDP low as compared to that of developed countries. Therefore, the opportunity and scope for growth in life insurance remains immense. Life insurance is a long-term oriented industry and we believe it would stay attractive in the years to come.

Investment picks:

Bajaj Finserv (holding company of Bajaj Allianz Life), HDFC Life, ICICI Prudential and Max Financial are some key picks in the Insurance Sector. Sharekhan believes these companies have a strong balance sheet, are well capitalised (for the long term), have healthy operating metrics, and would be able to ride over medium-term challenges.

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Key Risks:

Delayed recovery in economic growth and rating downgrades may impact premium growth as well as investment income for insurance companies.