The Life insurance sector witnessed a sharp downturn at the onset of the pandemic with a shift of preference towards liquidity and fear of income loss. Recovery in the economy and fear for the loss of life sentiment has given the much-needed push to Protection products. That apart, annuity and other guaranteed return products have been in flavour due to declining interest rate regime.
Premium growth in the protection segment got a fillip from the price hikes implemented by the companies. This also drove value of new business (VNB) margins for most companies given that protection and guaranteed return products have higher margins when compared with ULIPs and par products. ULIP has remained subdued for a while now, but we believe the same will start recovering with improved market sentiments (usually a lag of 6-8 months).
HDFC Life Insurance has been the outperformer in the sector in FY21, nevertheless, SBI Life Insurance and ICICI Prudential Life Insurance can be seen catching up in terms of stock performance in the last one month. We believe ICICI Prudential Life Insurance and SBI Life Insurance offer a favorable risk-return ratio and accordingly remain our top picks for the sector.
The General Insurance Industry, too, witnessed the pain in the initial 2-3 months of the lockdown. However, Q3 CY20 saw a sharp recovery in the GDPI mainly led by a price hike in the Fire segment and a rush in demand for Health products. However, the demand was seen fizzling out during the festive seasons due to a shift towards consumption spends.
The recovery in vehicle sales also will translate into an upswing in Motor segment, aiding the overall premium growth. The insurers are also expected to benefit from lower overall claims ratios for FY21 on the back of lower Motor and health claims.
We believe the Indian General insurance industry is well-positioned to benefit from the increased focus on product innovation and health awareness driven by the occurrence of the pandemic. ICICI Lombard although rich in terms of valuations remains our preferred play in the sector with its journey towards underwriting profits, strong distribution franchise, and balanced product mix. Impending merger with Bharti AXA will be a key monitorable.
AMC in 2020 & Outlook for 2021
The Mutual Fund Industry was badly hit with the sudden fall in equity markets at the end of March 2020. However, the rally seen in the past few months in the Indian equity market has benefited the AUM growth with an increase in the share of equity AUM. The redemptions were in check during the market fall, however, with market recovery, the industry witnessed huge outflows in the Equity segment on the back of profit-booking by investors.
We believe the trend should reverse driven by benign interest rates and the need for optimum returns. Although the sector didn't get a head start in FY21, the stocks have started showing traction in the last 1 month. We continue to believe that the AUM growth story remains intact with the benefit of mark to market (MTM) gains more than compensating for the stressed inflows. In addition to that, the Debt segment is expected to remain resilient as economic recovery will lead to improved cash flows for India Inc which get invested in debt funds.
Nippon Life India Asset Management (NAM) remains our top pick in the sector and positioned well with the change in brand name, strong retail base, focus on other business avenues, and reasonable valuations. Computer Age Management Services (CAMS), a proxy play on the AMC story, is our top mid-cap pick in the non-lending financial space as its leadership position, 17 percent PAT CAGR, RoE of over 35 percent and dividend payout of 65 percent warrant premium valuations.
(Prayesh Jain is the Lead Analyst – Institutional Equities at Yes Securities.)
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