Yes Securities upgrades life insurance stocks on likely higher savings, growth

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Shares of SBI Life Insurance Company, ICICI Prudential Life Insurance and HDFC Life Insurance Company gained 1.5-2 percent intraday on June 9 after Yes Securities upgraded the stocks, citing expectations of long-term value of new business (VNB) growth on likely growth in savings and protection.

"We are upgrading our stance on the Indian Life Insurance sector from cautious to positive. The key drivers for the upgrade are 1) increase in our assumptions on profitability (VNB margins), 2) Channel check outcomes suggest better than expected persistency in April and May 2020, 3) Cut in interest rates has led to lowering of discount rates in our discounted VNB approach to valuations, and 4) Online channels (both direct and aggregators) have scaled up their capabilities and adaptability of customers to the same has also improved," said the brokerage.

The brokerage is more confident that the companies will now be able to pass on the increase in reinsurance rates (first round of hike absorbed by the market), which as a result may boost VNB margins.

The research firm has raised its long-term value of new business (VNB) growth forecasts as it believes that while growth in protection will continue, savings should make a stronger comeback as economy bounces back.

Based on this, Yes Securities has upgraded its rating on HDFC Life from reduce to add and that of SBI Life and ICICI Prudential Life from add to buy.

"A second wave of COVID-19 outspread remains a key risk to our call," said the brokerage which explained the reason for each stock.

ICICI Prudential Life: Buy | Target: Rs 537 | Upside: 35 percent

Yes Securities rated ICICI Prudential Life as the top pick in the sector, citing attractive valuations and trading at steep discount to peers.

"Product mix changing towards higher profit protection segment, faster than peers. Current market recovery bodes well for ULIP segments NBP growth and persistency. Quality of embedded value (EV) (measured as contribution of operating variance + assumption changes to EV) saw significant improvement in FY20," the brokerage said.

SBI Life: Buy | Target: Rs 1,006 | Upside: 29 percent

SBI Life has healthy product mix with rising share of protection and non-par book, resilient ULIP portfolio, said the brokerage, adding the company has significant scope of penetration for the bancassurance channel, nascent in the online channel.

"Quality of EV is improving with regards to assumption changes. Attractive valuations, trading at a discount to HDFC Life," said Yes Securities.

HDFC Life: Add | Target: Rs 567 | Upside: 9 percent

"It is the best franchise in terms of a diversified product mix as well as distribution channel, having an earlier mover advantage in the protection segment and online distribution channel," said the brokerage, adding quality of EV is the best with constant decline in both parameters.

"HDFC Life deserves premium valuations, currently trading at FY22E P/EV of 3.6x a premium of 64 percent to SBI Life and 89 percent to ICICI Prudential Life. The gap would narrow down," said the brokerage.

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.