These insurance stocks are up more than 10% in the past month. here’s why
The country’s life insurers have faced major headwinds in recent months, mainly due to complications from Covid-19.
In addition to weighing on profitability, attributable to higher than usual claims, it also dampened revenue growth.
Companies were unwilling to underwrite new policies in a highly uncertain environment, significantly affecting new businesses.
This has affected investor sentiment, driving down the share price of all life insurers by 5-10% since the start of the year.
But that trend has reversed over the past month, with most of them yielding double digits.
So what triggered this change? Let’s find out.
#1 SBI Life
At the top of the list we have SBI Life.
One of the country’s top three life insurers, SBI Life outperformed the BSE Sensex index to deliver a one-month return of 6.1%, 5% better than the index.
This outperformance was driven by improved margins (new business value (NBV) margin, a measure of profitability in the life insurance industry) made possible by a healthier business mix.
The company announced a VNB margin increase of 100 basis points in the March 2022 quarter compared to the prior year period.
This VNB margin expansion is likely to persist as the company’s business mix continues to change.
However, total revenue (represented by annual premium equivalent (APE), a common sales metric calculation used by insurance companies) has not increased much, rising a meager 4% over of the same period.
The company’s net income increased by a CAGR of 11% over 5 years. The average 5-year dividend yield stands at 0.2%, slightly below the industry average of 0.9%. The return on equity (ROE) amounts to approximately 18.5%.
A direct subsidiary of India’s largest bank, State Bank of India, SBI Life has over Rs 2 billion in assets under management (AUM).
Being a bank-backed insurer has many benefits. In addition to a vast distribution network at its disposal, SBI Life also benefits from a mark of trust in the field of insurance.
#2 HDFC Lifespan
Next on the list is one of India’s largest private sector life insurers, HDFC Life, which also outperformed the BSE index by 5.8%.
While the BSE Sensex index rose 1.2%, the company posted a return of 6.9% over the past month.
This disparity is due to the company’s improved VNB margins, which are also attributable to a slightly better sales mix. However, there is a good chance that this expansion will be constrained in the short term, due to the acquisition of Exide’s life insurance business.
The company recently completed the acquisition of Exide Life Insurance, whose VNB operating margins are well below those of HDFC Life.
But management is confident that Exide’s VNB margins will soon converge to group levels.
HDFC Life has built a strong franchise and brand, monetizing its relationships with HDFC and HDFC Bank.
The company has built a strong network of cross-selling its products to the HDFC bank client and manages total assets of over Rs 2tn.
The company has grown well, recording a 5-year net profit CAGR of 8.5% and a 5-year average ROE of 20.1%. The 5-year average dividend yield is 0.3%, below the industry standard of 0.9%.
#3 ICICI Prudential Life Insurance
Third on the list is ICICI Prudential Life Insurance.
The stock has also outperformed the BSE Sensex index, rising more than 10% over the past month.
This excellent performance is the direct result of improved revenue growth and less reliance on less profitable businesses.
According to March 2022 results, ICICI Prudential’s revenue increased by 25% compared to the previous quarter.
This jump reassured investors, especially as revenues have declined over the past three years. However, concerns about a product mix more exposed to market risks remain.
But despite weak revenue growth, the company’s VNB margins have improved. They stood at 28%, up 3% compared to the same quarter last year.
On a 5-year CAGR basis, ICICI Prudential’s net income fell 14.5% but managed to generate a 5-year average return on equity (ROE) of 15.5%.
The company’s average dividend yield over the same period is 0.7%, close to the industry average of 0.9%.
#4 Max Financial Services
Fourth on the list, Max Financial Services.
The stock generated a 14.7% return for its shareholders, 13.5% more than the BSE Sensex last month. But before this jump, the title fell to Rs 708, a fall of 37% from its 52-week high.
The decline is attributable to the problems of the promoters and the weak growth of the APEs.
And while news of family feuds and embezzlement allegations won’t hamper the company’s long-term performance, the big promoter pledging (more than 64% of the 14.5% stake) raise a big red flag.
The recent surge in share price may be a function of an 88.8% jump in net income, despite an 8.2% drop in total revenue.
The company’s profit, reflected in VNB, rose 22% on a higher basis, further fueling the share price.
Max Financial claims total assets under management of Rs 1 tn. Earnings have skyrocketed over the past 5 years, posting a 5-year CAGR of 7.5%. The company has generated an average 5-year return on equity (ROE) of 20.1% and the company does not distribute dividends.
Now you might be wondering why the insurance giant, Life Insurance Corporation of India (LIC) didn’t make the list.
The only wild card in the pack, unlike its peers, LIC underperformed the BSE Sensex index. The stock has fallen 13.5% since its listing less than a month ago.
In addition to weak macro-economic factors and high inflation, the credit for the fall goes to the weak results posted by the company. Even more so in light of its peers reporting high numbers.
The company posted a 17% year-on-year decline in consolidated net income for the March 2022 quarter, even as its net premium income jumped 17.9% year-on-year.
With their strong and trusted brands and solid distribution networks, the private sector leaders seem to be doing well.
The advent of the “LIC era” did not affect their stock prices and valuations.
Although there are still lingering concerns about competition in particular segments of life insurance, private players appear to be on the fast track to recovery.
Disclaimer: This article is provided for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)