Growth of private players in life insurance shows sign of profit booking

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During August, growth in insurance industry is much less than expected due to fair performance by private players.

The industry grew 14 percent in comparison to 22 percent in August 2018 which is far below than expectations, shows dent of 8 percent.

Even in July the growth was 17 percent, a sequential drop of only 3 percent. But it is true to state that in the insurance industry, sequential comparison is not suitable due to its volatile nature.

Hence, it is better to compare on year-on-year (YoY) basis which shows sign of substantial reduction in growth.

The major dent of growth is from private players’ side. Out of total 14 percent YoY growth in industry, private players contributed only 11 percent in August compared to 22 percent in July, which is half in number. Whereas, LIC delivered spectacular growth of 18 percent over previous year.

Though, insurance sector would continue to do well in the next five-six years span and give double digit returns. However, it cannot be denied as well that this industry has matured over the years.

As, on one hand, the number of private insurance players are increasing, companies are focusing more on innovating their product, working efficiently, cost management for healthy margins and boosting profits.

On the other side, increasing market share of LIC is becoming hurdle for private players as their growth is mainly because of ULIPS and equity market did not support in this regard.

Quite true for HDFC Life, this continues to be one of the best in the industry. But it has also shows fall in growth in August 2019. Hence, our earlier recommendation for HDFC Life Insurance at a price of Rs 356 is now trading at rich valuations.

During Q1 FY20, HDFC Life enjoyed leadership with a growth of 47 percent in the new business premium and higher value of new business (VNB) margins.

But, AUM growth remained steady at 18 percent. At Rs 19,230 crore embedded value (EV) as on June 2019, the market cap/EV translates to 5.5x, which is overvalued. Thus, we recommend to book profit at current level (CMP at Rs 540) & exit once.

Similarly, ICICI Prudential Life Insurance in Q1 FY20 recorded a growth of 21 percent in VNB while annualized premium equivalent (APE) recorded a nominal growth of 5.3 percent.

However, in July APE growth remained muted & even in August it declined to 7.8 percent. No doubt, company is focusing on higher margins segment of protection policies, but this is not enough to give rich valuations. Exit at CMP at Rs 416.

Even in case of SBI Life Insurance, it is trading at an EV of 3.5x, which looks expensive at this level. Therefore, one may book profit at CMP of Rs 798.

No doubt, that majority of private players are focusing to offer new products, currently having lower penetration & high potential. However, expected higher double digit CAGR growth for next two years is now turning to lower double digit growth, and shows a sign of profit booking. Hence, we recommend booking profit at current levels, exit once and wait for sometime till they deliver better growth prospects.

Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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Author: Loki