In CY2019, insurance has been one of the outstanding sectors: Avinash Singh, SBICAP Securities
Insurers are no longer focussing on top line. The eventual end game is the bottom line.
Within the private space, mid-sized insurers are seeing better growth as opposed to the bigger players. How do you see this trend emerging and do you think midcaps will become larger whereas for the largest, the pie would shrink from here onwards?
Yes. But one should not get carried away by monthly data because there is bound to be volatility as well as some seasonality factor. and nevertheless, the impact on certain products on the market what is happening in the broader financial markets. However, within that space, in the first half of the year, most of the larger private players have got strong bank distribution and are still showing reasonable growth. The only place where despite being a good bank the growth is still struggling is ICICI Prudential. But there also, you have to bear in mind that management has reiterated its plan and is focussing on protection product and the target is more on profitability and not on top line growth.
So as of now, if you see the growth at the larger private players, there is no signs of worry. You cannot assume that if the growth has been 30% or 40% for a couple of months, that cannot be the trend. In the first half, be it HDFC Life or SBI Life or Max, all have grown 20% plus and that is a healthy growth on a larger base.
Are there particular players that you are tracking in terms of valuations or otherwise? Why is some of these data important in predicting the trends going forward as well?
September definitely shows some signs of moderation in growth. So far in calendar 2019, insurance has been one of the outstanding sectors with most of the listed names. Banks have outperformed the broader market by 30% to 50%. Right now, the easy money is gone and the valuation is definitely not as cheap. Premium multiple has come into play and if some part of that has been built around the strong growth in the new business premium seen in the first quarter of this financial year, then definitely there could be some moderation.
Also insurers are no longer are just focussing on top line because top line is a good way to get market share and visibility and the size, but the eventual end game is the bottom line and that is where most of these private players have started focussing more on protection product that is profitable and also addressing the cost structure to bring in profitability.
On that front, as of now, you can see VNB growth of 20% plus and operating return on embedded value in the range of 20%. That is something most of the listed private players should achieve. As of now, valuations seem to be not under risk. However, if this outperformance is the result of strong growth seen in the first quarter, then there could be a bit of correction. The first quarter growth that the sector saw this year is very difficult to sustain over the long term.
Over the medium term, you can expect that for the private players as a whole, the APE (annual premium equivalent) growth should be somewhere between 15% and 20%.