Why Goldman Sachs Is ‘Constructive’ On India’s Life Insurers

Goldman Sachs initiated coverage on India’s three listed private life insurers, saying they have resumed growth trajectory after the Covid-19 disruption.

Acceleration in protection products driven by customer pull, increased appetite for capital guaranteed savings due to income uncertainty, greater technology adoption in sales and after-sales, among others, have helped the global financial services provider to turn ‘constructive’ on India’s life insurers.

Goldman Sachs recommends a ‘buy’ for HDFC Life Insurance Co. and SBI Life Insurance Co. and suggests a ‘neutral’ rating for ICICI Prudential Life Insurance Co.

“Insurers are increasing focus on profit growth rather than top line, driven by a better product mix, higher persistency and productivity gains,” Goldman Sachs said in a note. It expects the online individual insurance market opportunity to be $1.25 billion by FY25 compared with $365 million in FY20.

Goldman Sachs also expects HDFC Life to be best placed to capitalise on its leadership. “We further assess the positive impact on profitability as more insurers go direct to consumer, given lower take rates and better persistency,” it said.

The multinational investment bank expects profit for its coverage universe to grow at 19% CAGR over FY20-23 against a drop of 1% over FY18-20. It also expects the companies to generate sustainable RoEs of 18-20%. “Valuations, while close to historical average P/E, do not fully reflect the earnings uptick.”

Still, Goldman Sachs highlighted increasing competition, a potential rise in reinsurance costs, equity market volatility impacting ULIPs and interest rate risk on guaranteed products as some of the key concerns.

Here’s what Goldman Sachs have to say about the life insurers...

HDFC Life Insurance

• Initiates coverage with a ‘buy’ rating and price target of Rs 880 apiece.
• Potential upside of 24.8%.
• Poised for an earnings inflection led by diversified product franchise, sustainable online leadership and rising share of higher margin protection business.
• Sees 19% EPS CAGR over FY20-23E.

SBI Life Insurance

• Initiates coverage with a ‘buy’ and price target of Rs 1,080 apiece.
• Potential upside of 24.2%.
• On track to deliver 21% CAGR in EPS over FY20-23.
• Mining eligible SBI customers, while ramping up its retail protection offerings, including monetising the SBI YONO platform to aid EPS growth.

ICICI Prudential

• Initiates coverage with ‘neutral’ and price target of Rs 500 apiece.
• Potential upside of 6.2%.
• Earnings to recover as ULIP segment stabilises and improves in FY22.
• Sees limited valuation upside.

Stock Reaction

HDFC Life

• Shares gained as much as 1.5% in early trade on Wednesday to Rs 716.5 apiece.
• Of the 39 analysts tracking the company, 25 have a ‘buy’ rating, nine suggest a ‘hold’ and five recommend a ‘sell’, according to Bloomberg data.
• The stock has a 12-month return potential of 4.1%.

SBI Life

• The stock pared gains to fall as much as 0.7% to Rs 863.25 apiece.
• Of the 39 analysts tracking the company, 37 recommend a ‘buy’ and two suggest a ‘hold’, according to Bloomberg data.
• The stock has a 12-month return potential of 26.1%.

ICICI Prudential Life

• Shares are fluctuating between gains and losses.
• Of the 37 analysts tracking the company, 30 have a ‘buy’ rating, five suggest a ‘hold’ and two recommend a ‘sell’, according to Bloomberg data.
• The stock has a 12-month return potential of 21.6%.