insurance: Insurers may rally on expected demand for protection products

Mumbai: Changes in consumer behaviour and rising demand outlook for protection products post Covid-19 could lead to insurance stocks outperforming in the next one year.

The past experiences of China and Hong Kong after health scares such as SARS and H1N1point to strong sales growth potential in the protection segment over the next couple of quarters, said analysts. The six listed insurance stocks could gain between 20 per cent and 100 per cent by March next year, according to their estimates.

“Our analysis of previous epidemics suggests a sharp rise in demand for term and health insurance policies during these periods,” said Nischint Chawathe, analyst, Kotak Securities. “While it is difficult to quantify the rise in premium volumes due to Covid-19 as the intensity and spread of this pandemic in India remains unclear, life and health insurance companies will likely be the key beneficiaries of any rise in volumes.”

Insurance stocks were hammered recently due to the collapse in premiums in March as a result of the Covid-19 induced lockdown. The life insurance sector witnessed 32 per cent decline year-on-year in new business profit margins and 49 per cent decline in annual premium equivalent in March, usually its strongest month.

SBI Life Insurance and ICICI Prudential Life are down by 34 per cent and 37 per cent respectively from their 52-week highs while HDFC Life Insurance has declined 30 per cent. General Insurance Corporation and New India Assurance are currently trading below 60 per cent and 38 per cent from their respective 52-week highs.

Prior to the global outbreak of Covid-19, life insurers had traded at 2.5-4.5 times price to embedded value (PEV) multiple or 25-37 times new business value multiple. Currently they are trading 1.8-4.1times PEV. The market has already priced in the first order negative impact of the lockdown, said analysts.

“More meaningful stock declines make us conclude that short-term challenges from lockdown and unfavourable tax proposals are being priced in,” said Deepika Mundra, analyst, JP Morgan. “The possibility of 1-2 quarters of potentially very weak front book growth does little to dent our enthusiasm for Indian insurers’ long-term fundamental thesis.”

HDFC Standard Life currently trades at 4.1 times its FY21 estimated EV, while SBI Life and ICICI Prudential trade at 2.4 and 1.8 PBV respectively.

“Insurance is the sector to focus on because a large part of its business is digital and there will be a strong demand for pure protection products in the next couple of quarters,” said Abhimanyu Sofat, head of research, IIFL Securities.