Investors seize opportunities in India’s life market

June 26 2020 by Nick Ferguson

Investors with an eye on the long term are picking up some bargains in India as Covid-19 and ownership rules encourage more than US$860 million of stake sales.

Most recently, Singapore government fund GIC bought a 1.5% stake in ICICI Prudential Life this week for Rs8.4 billion (US$110 million). The stake came from parent company ICICI Bank, which also sold a 3.96% holding in its general insurance unit ICICI Lombard on June 19 for Rs22.5 billion.

The bank said it was selling the shares to strengthen its balance sheet, while some other sales have also been attributed to a regulatory requirement to increase the minimum public shareholding of listed companies to 25%.

State Bank of India sold a 2.1% share in SBI Life on June 12 to raise Rs15.6 billion, citing the regulation, while Standard Life raised Rs18.9 billion on June 4 through a 2% block trade in HDFC Life Insurance to institutional investors including Aditya Birla Sun Life, Fidelity, Nomura and Vanguard.

Valuations
Ironically, the securities regulator relaxed the requirement to meet the public shareholding minimum in May after promoters and other market participants argued that investor appetite was weak and valuations had been beaten down by the Covid-19 sell-off.

Only one part of that complaint turned out to be true (because there is always appetite at the right price).

“The Indian life insurance industry is in a phase of high growth and lower penetration will ensure that the growth remains higher for the next couple of years.” Jaikishan Parmar, Angel Broking

Indeed, portfolio investors are bullish on the long-term opportunities in India’s insurance market, especially life insurance, and have shown plenty of appetite to buy into the sector at the current price level.

“The Indian life insurance industry is in a phase of high growth and lower penetration will ensure that the growth remains higher for the next couple of years,” said Jaikishan Parmar, an analyst at Angel Broking, when recommending that investors buy SBI Life’s offer.

The only insurance share sale that isn’t going ahead is the government’s US$10 billion-plus initial public offering of Life Insurance Corporation, which had been promised for this financial year but which is now expected to be delayed as the government wants to maximise the cash it can raise from the sale.

De-growth
There is no doubt that the short-term effect of India’s lockdown has hurt the industry. Among the private-sector insurers, year-on-year premium income was down 40% in April and 32% in May, which local analysts coyly refer to as “de-growth”.

ICICI Pru Life has been de-growing especially fast due to a focus on equity-linked savings products, which have suffered as a result of the volatility in stock markets.

All life insurers in India have taken a hit from the weakened demand, but ICICI Pru Life has the most pronounced exposure, according to Raghav Garg, an analyst at Nirmal Bang. SBI Life, which also has a big share of the unit-linked market, has fared better as its unit-linked products are more debt-focused.

“Protection and annuity products are poised to see higher growth,” said Garg. “From a near-to-medium term perspective, we are cautious on demand for savings products but optimistic on demand for protection and annuity products.”

As a result, insurers have been developing new products to support the growing demand for protection. Given the challenging conditions, insurance buyers in India are increasingly interested in buying products that are parcelled with loans. Health insurance has also gained steam given the heightened awareness caused by the pandemic.

“From a near-to-medium term perspective, we are cautious on demand for savings products but optimistic on demand for protection and annuity products.” Raghav Garg, Nirmal Bang

The real star performers of the past couple of months are among the unlisted players. Tata AIA Life has seen premium sales up more than 17% since March, with the result that it is now a close competitor to ICICI Pru Life in terms of market share, while Aditya Birla Sun Life has also seen premiums rising while the rest of the market has been de-growing.

Road to recovery
Investors who bought the recent share sales took advantage of 15% to 25% discounts compared to prices at the start of the year, which is clearly attractive for buyers such as the Singapore government that has a long-standing positive view on the sector.

That is already a big improvement on mid-March pricing levels, when ICICI Pru Life was more than 50% down on January. How quickly share prices bounce back into positive territory will depend on India’s post-lockdown performance.

Restrictions are due to be eased in July and all eyes will be on the health ministry data to see if the virus remains contained.

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