Three Best Insurance Stocks To Buy Now: IIFL Research Report

Dynamics of Indian life insurance

The Indian life insurance industry has progressed rapidly by capturing significant opportunities arising from favorable demographic profile. Increased workforce participation (~40% – 2011 census) coupled with higher financial savings is leading to the surge in demand for insurance products.

Private life insurers are witnessing improvement in persistency since FY15 with focus towards protection products (more structural) vs. traditional saving / investment offerings (cyclical).

We expect banking-led insurance players to gain market share over the medium term considering stable regulatory regime and strong distribution framework.

Protection coverage backed by favorable demographics

Inadequacy of pure protection coverage in India (~$8,560bn protection gap in 2015), as compared to other emerging and developed markets, provides an excellent opportunity to capture new business under this segment. Thus, the next leg of growth is explicitly big for protection products with private players focusing on these owing to their high margin nature.

Banca channel, digital foray to expand market share

Bancassurance dominates the channel mix for the top three private sector insurers (cumulative market share increased from 43.6% in FY14 to 53% in FY18) by virtue of having a strong bank as their distribution partner.

Additionally, insurance companies tend to benefit as banca provides cost advantage vis-à-vis other channels. Further, we see higher traction for banca players under digital platform for sourcing new business owing to the brand recognition of their respective banks.

Outlook & valuation

Banking-led insurance players, in our view, have a substantial medium to long-term outlook and are trading at attractive valuations, which offers a favorable entry point for investors.

We recommend (1) ICICI Prudential Life Insurance (IPru Life; FY20E P/EV target multiple of 2.3x) owing to improvement in product mix; persistency to drive VNB margin coupled with robust digital platform; (2) SBI Life Insurance (SBI Life; 2.6x) due to operating cost leadership in the industry; and (3) HDFC Standard Life Insurance (HDFC Life; 4.3x), owing to best-in-class VNB margin.