If you have a life insurance policy, or even if you’ve ever considered buying one, chances are that you’ve been bombarded with a tonne of complicated options.
The purpose of insurance is pretty simple - you pay a small amount of money for someone to pay you a large amount of money in case you die within a certain time frame - typically, during your earning years, so your dependents don't really have to start hustling.
But there’s a fundamental psychological problem here. You paying a small amount of money is compulsory. However, you dying within a certain time frame is not a necessary (and desirable) event. You don't die, you don't get any money, and all that money you’ve contributed doesn't come back to you. No ROI in case of no death.
This gave birth to several policies that would pay your premiums back if you didn't die, or even invest that money to give you some returns, not just the assured sum. In a country like India with an underdeveloped investment market, this proposition picked up. Soon people were buying life insurance policies for their kids.
But with a higher amount of awareness and transparency, and the evolution of a robust investment market, insurance is going back to what it should be. In this structural change, some insurance providers will win, and some will lose.
Here’s your opportunity to make some investment decisions - in insurance companies, and not in their investment products.
Product/Market - Shift to Simplicity
For simplicity, broadly, there are two types of policies:
Protection - plain, simple insurance. No-nonsense
Savings - where there’s an element of investment on top of insurance
- Participating (par) - you get a share of the profits that are made on the premiums that an insurance company invests
- Non-participating (non-par) - you’re guaranteed a certain amount back at the end of the term, and you don't get any share if additional profits are made on the premiums invested
- ULIPs - where you can choose how the invested portion of premiums gets invested, and it is linked to a return and a NAV is disclosed every day so you can keep track of performance
Over the last 5 years, there has been a distinct shift away from participating policies and ULIPs to protection and non-participating products. People seem to either want plain simple insurance, their money back later, or just guaranteed returns.
A giant like LIC still has 93-95% of its product mix being dominated by the par segment, with the remainder being non-par, a ratio that is yet to change materially.
Whereas, private players like HDFC Life, SBI Life and Max Life have all seen a change in composition - increasing share of protection and non-par, and a reduction in par and ULIPs
No wonder private players have gained market share over the last 5 years from 56% in FY18 to 65% now. They have well-placed in terms of where demand is.
Within private players, HDFC Life has done a remarkable job of capitalising on current trends. Their share of business form protection and non-par has gone up from just 14% in FY18 to 80% in FY22.
Distribution Channels - Goodbye, Agents
The other thing that’s now very passe about insurance selling is - pushy agents. They became rather infamous because of their rampant mis-selling, absence of servicing unless premium payments were due and people realising over time what they’ve really bought.
LIC can host a masterclass on this, considering around 95% of their business as of FY22 came in via their agency force of more than 13 lakh people, with a mere 3% coming in from bancassurance channels (selling of life assurance and other insurance products and services by banking institutions).
For private players, agent dependency has always been far lesser. Individual and corporate agents sold about 31% of policies in FY18 and just about 25% in FY22.
Private players instead depend on banks - which form half their distribution mix. However, that’s not working too well lately, and distribution is rapidly moving to selling directly or through brokers (thanks to direct online sales and new web marketplaces/aggregators like PolicyBazaar), which together form a fifth (~20%) of the total distribution.
In short, selling insurance door-to-door on foot or through the doors of a bank is becoming an outdated and rather expensive model to maintain, paving the way for direct sales of insurance via digitised mediums of apps and websites!
This is set to further grow by leaps and bounds, with the IRDAI and the GoI attempting to provide “Insurance For All” by 2047, and to facilitate this, a huge push for the digitisation and dematerialisation of insurance policies has been undertaken by the government and the insurers alike.
LIC still relies on its ageing agency force, a number that has barely dwindled in recent times. A shift towards a more modernised approach is the need of the hour for the household name.
On the other hand, HDFC Life and SBI Life have been changing with the tide - depending minimally on agents, leveraging their own banking networks, and pushing aggressively towards selling online.
Growth Is In The Numbers
Although LIC is a Goliath to the two Davids in this situation, its prestigious position might be at risk.
Offering the right products, and through the right channels, HDFC Life and SBI Life have been able to successfully cut into LIC’s share.
With a continued decline in overall market share and a slowdown in AUM growth, the other players might just overtake this old-timer!
Term | Meaning | LIC | HDFC Life | SBI Life |
|---|---|---|---|---|
Market Share | A piece of the market that is controlled by a particular company In this case, we are referring to the company’s market share in New Business Premiums | 63% | 10% | 7% |
Asset Under Management | The total market value of the funds or assets that a company manages | Rs. 41 lakh crore 5Y CAGR = 3% | Rs. 2.04 lakh crore 5Y CAGR = 14% | Rs. 2.67 lakh crore 5Y CAGR = 18% |
At What Cost?
An optimum operating ratio sets the tone for how profitable the company really can be, measuring the cost associated with underwriting as against the actual net premium earned in a given year.
Here, the product mix and distribution channels make a reappearance, considering the right balance between the two can really cut costs and improve profitability for an insurance company. What are the margins like for the different segments in the product mix?
Linked (ULIPs) | 6-10% |
|---|---|
Par | 9-15% |
Non-Par | 25-40% |
Protection | 50%+ |
Source: Broker reports
The ideal combination for lower costs would be to have a higher concentration in the latter half of the table of products, whilst leaning towards a more direct approach towards selling those policies.
LIC is unfortunately in total reverse in this regard, with the highest opex ratio of 14.5%, owing to the large agency force and their reliance on the par segment of their portfolio.
HDFC Life is at 12.3% and has only reduced this ratio by 2% in 5 years, while SBI Life is the lowest among the three, with a mere 5% opex ratio, christening them as one of the lowest-cost life insurers in the market currently.
Valuations
Life insurance companies commonly get valued on the basis of Price to Embedded Value. For context, embedded value is a way to measure the corporate value of an insurance company, using the summation of its net worth and the present value of future profits.
Taking the 1HFY23 numbers and current prices into consideration (as of 10th February 2023), here is what we found:
| LIC | HDFC Life | SBI Life |
|---|---|---|---|
Market Cap | Rs. 3.8 lakh crore | Rs. 1.1 lakh crore | Rs. 1.2 lakh crore |
Embedded Value | Rs. 5,44,291 crore | Rs. 33,000 crore | Rs. 42,410 crore |
Price/Embedded Value | 0.7x | 3.6x | 3x |
LIC is the cheapest, but in this case, cheaper may not mean better. With its outdated model and declining share in the market, it could just be its fair value. After all, any stock needs high growth and/or re-rating for outperformance.
With lacklustre growth, no reason for re-rating and supply pressure from possible divestments by the government, the stock seems to have little promise unless it is able to change its product offerings and distribution modes to match current/future market trends.
HDFC Life and SBI Life seem pretty comparable in terms of size, growth, strategic direction, synchronisation with market trends, product mix and profitability. However, SBI Life still trades at a 20% discount to HDFC Life.
While some of the discount for SBI Life could be explained by state ownership, we reckon trading at par with HDFC Life is justified. A comparable business available at a 20% discount in an industry with multi-year tailwinds, makes SBI Life our favourite play in the sector.
Zindagi Ke Saath Bhi, Zindagi Ke Baad Bhi
The David and Goliath battle between these budding players and the giant that is LIC will continue to chip away at its volume, paving the way for the private, digitised, modern age of insurance that can surely lead to the entire nation being insured in the coming decades, with SBI Life leading the chariot.
While our top bet is SBI Life, there is no denying that in the long term, HDFC Life looks well placed to capitalise on structural changes. At the same time, the recent move from LIC to transfer up to 1.8 lakh crore from its non-par fund to the shareholders’ fund will act as a near-term catalyst for the stock.
That said, we aren’t too excited about the prospects of LIC and would rather favour private players, who are swimming with the tide and not against it.
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