By Mahesh Patil
Over the past three months, private life insurers have outperformed the Sensex and Nifty 50, delivering returns of 17-20% while the indices remained largely flat. This strong performance comes despite regulatory concerns and skepticism regarding the impact of increased surrender values on policies.
The sector’s positive outlook remains intact due to several factors. The top line growth is exceeding expectations, regulatory changes are having less impact on value of new business margins than initially feared and valuation comfort remains solid based on price-implied embedded value growth and new business profits. That said, margins for this year may face some pressure due to a higher mix of ULIPs and effects of increased surrender values on the non-par side.
In recent years, private life insurers faced multiple regulatory changes, including taxation of high-ticket size ULIPs (over Rs 250,000), taxation of non-linked savings products above Rs 500,000 and increased surrender values for non-linked policies, effective from October 2024. Despite these challenges, private life insurers have managed to grow their annualised premium equivalent at a CAGR of 13% from FY19 to FY24. This growth can be attributed to significant savings of Indian households, which amount to around $650 billion annually. Currently, private insurers have about 50 million active policies, covering approximately 30 million households, indicating a long runway for growth.
When evaluating life insurance companies, the strength of their distribution franchise and brand play a more critical role than product offerings. While products can easily be replicated by competitors, the distribution network and brand strength largely define the growth and profitability prospects. The product mix has shifted over the time, starting with ULIPs, transitioning to non-participating products and now returning to ULIPs. In addition, individual protection products are seeing signs of revival. Companies are also innovating, introducing high-protection ULIPs, single-pay annuity and pension plans and critical illness riders, all aimed at enhancing customer value.
In terms of valuations, private life insurers are currently trading in line with, or at a discount to, their long-term trading multiples. As growth returns to the sector, this is not yet fully reflected in stock prices, signalling the potential for another round of re-rating for these stocks.
On the non-life insurance front, the outlook is mixed. Retail health volume growth has slowed to under 5%, down from 18% post-COVID. Rising claims are contributing to this slowdown. While price hikes may help alleviate competitive pressures, the near-term outlook for profit growth in the health insurance segment remains cautious.
(The author is CIO, Aditya Birla Sun Life AMC)