According to estimates of Kotak Securities, HDFC Life is the most expensive of the lot, and trades at a price to embedded value (P/EV) of 5.1 times.
By Urvashi Valecha
Shares of life insurance companies have risen between 83.1% and 93.2% from their March 23 lows. These stocks have outperformed the Nifty 50, which is up by 45.5% from its March lows, and are expected to continue their out performance.
HDFC Life is the first insurer to make its way to the Nifty from Friday. The stock, which has replaced Vedanta in the Nifty, has risen by 83.1% since its March 23 lows.
SBI Life Insurance, ICICI Prudential Life Insurance Company and Max Financial, the holding company for Max Life Insurance, have rallied 69.13%, 89.25%, and 93.25%, respectively. During the same period, Nifty Financial Services and the Nifty have risen by 29.9% and 45.5%.
Madhukar Ladha, institutional research analyst (AMCs, brokers, insurance), HDFC Securities, said insurance companies are better placed than banks.”‘I do not expect stock prices of life insurance companies to correct even though they are trading close to their fair values. Stock prices of life insurers are expected to outperform the markets. This is because they are better placed compared to lending financials. When it comes to their PAR and U-Lip portfolio, risks are passed on to customers, and only the non-PAR portfolio could hurt them. On the other hand, banks and NBFCs have a huge risk because of the uncertainty of the NPL situation and earnings. This makes insurance a safe haven.” He added that life insurance companies have a sticky customer base with long term contracts since switching insurers is not easy, which is why they could be better placed.
According to estimates of Kotak Securities, HDFC Life is the most expensive of the lot, and trades at a price to embedded value (P/EV) of 5.1 times, whereas that of ICICI Prudential Life Insurance Company and SBI Life trade at a P/EVof 2.5 times and 3 times.
Rusmik Oza, executive vice president – head of fundamental research, Kotak Securities, said: “Insurance stocks have outperformed the banks and NBFCs since they have a better AUM, they are more conservative in asset allocation and most importantly, they have a non-lending model. So, the business is seen as less risky and considered safe. The stocks could have received institutional flows too, which is why they have rallied.”
He believes there is good long-term potential in these stocks. “The long-term story is a secular one for insurance companies, they can generate good returns in the five-year horizon,” said Oza.