CLSA bets on insurance sector as valuations near pre-COVID level; sees up to 33% rally in these stocks

With the recovery in the post-pandemic world and valuations nearing pre-COVID level, foreign brokerage firm CLSA is bullish on the insurance sector. Insurance sector valuations have mean-reverted and are now trading either close to pre-Covid-19 levels or in some cases higher than pre-Covid-19 levels. Since September 2020, private life insurers have recovered well from the pandemic with positive APE growth. The annual premium equivalent is the sum of annualised first-year premium on regular premium policies, and 10 per cent of single premiums, written by insurance companies during any period. CLSA has increased its FY20-23F APE/VNB growth estimates by 7-13 per cent. The brokerage firm also expects the insurance sector to return to steady compounding from FY22CL (16-19% APE and VNB (value of new business) Cagrs) as the pandemic provides a strong tailwind to the structural protection opportunity, and ULIP businesses could also be bottoming-out.

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Analysts at CLSA have downgraded HDFC Life and ICICI Prudential Life to ‘Outperform’ from ‘buy’ earlier. Max Financial is brokerage’s top pick as the firm has been the best performing life insurer. It has buy rating to Max Financial and SBI Life.

Max Financial Services: Completion of Max Financial-Axis Bank deal, will lead to further re-rating as not only would distribution uncertainty end but Axis Bank will be able to drive higher value accretion through stronger business momentum. CLSA sees 33 per cent rally in this stock with a price target of Rs 950 apiece even after factoring in a 10% discount for regulatory uncertainty

SBI Life Insurance Company: It will take SBI Life to jump 25.48 per cent from its previous close to touch the target price predicted by CLSA, as its distribution remains best in class. The brokerage firm notes that valuations of the firm are reasonable and 19 per cent below Jan-Feb 2020 levels. “SBI Life’s growth normalised slower than peers post-pandemic but we do not see SBI Life lagging peers on growth over the medium term,” it said.

HDFC Life Insurance Company: Even as the brokerage firm downgraded HDFC Life from ‘buy’ to ‘outperform’, it has increased its target price to Rs 765, implying a gain of 8.85 per cent. CLSA highlighted that post the recent re-rating, valuations are 5-10 per cent higher than 2019 and average 2018-19 valuations and flat versus Jan/Feb 2020 valuations. It also said that HDFC Life continues to have a balanced product mix and its ability to innovate on margin accretive products will continue to drive its best in class VNB margins and ROEV.

ICICI Prudential Life Insurance Company: CLSA has pegged a target price of Rs 580 apiece, an upside of 12.58 per cent from the previous close. It expects APE growth to mean revert to peer levels as ULIPs possibly would bottom out in FY21F. “ICICI Prudential Life Insurance’s new business APE trends have been weak due to its high dependence on ULIPs but VNB trends have been strongly driven by strong protection business,” it said.

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