Ending a strong year on a stronger note. Private sector ended the year with 31% yoy APE growth in March translating into 26% growth for FY2017—highest in past nine years. HDFC Life had the most notable catch-up with 44% growth in March to end at 13% for the year; Bajaj Life, ICICI Life and SBI Life reported some fatigue. We tweak our APE estimates, revise target prices of ICICI Prudential Life (ADD) to Rs400 (from Rs380) and Max Life (ADD) to Rs675 (Rs595 earlier).
What a year it was!
FY2017 was the best year for private life insurance players since FY2008. Private sector reported 26% yoy APE growth (much lower than 85% in FY2008 though) and LIC was up 16%, translating into 21% growth for the industry. Strong capital markets, shift to financial savings and increase in bank balances fuelled by demonetization led to high growth for almost all players; the only exception being Reliance Life (down 24%) that is consciously slowing down. While the larger players did well, smaller companies such as India First and Star Union Daichi almost doubled their market shares with 60-80% yoy growth. After years of weakness, Bajaj Life and Birla Life caught up with 30-35% growth.
HDFC Life catches up... finally
After months of weakness and raising some concerns on the trajectory of its business, HDFC Life caught up in the last lap with 48% growth in individual APE (versus -15% to +15% over the past 9 months), translating into 9% growth in individual APE (13% in overall APE) for the year; this was a considerable upside to our 2% yoy growth forecast.
Max Life, on the back of single-digit growth in past two months, bounced back with 40% growth in individual APE to end the year with an impressive 26%, again higher than our 15% growth expectation.
On the other hand, ICICI Life reported some weakness with 14% individual APE growth after a massive run (28-79% since November, i.e. demonetization) translating into 29% growth for the year versus 25% baked in our forecasts.
SBI Life has been a bit volatile over the past few months; it was up 21% in individual APE segment to end the year with 39% growth.
Bajaj Life, post 40-70% in the initial few months of the year, moderated to 20% to end the year at 41% in individual APE.
Birla SL delivered 10-30% in the initial month but caught up silently in past four months to end the year at 35%.
Let the good times roll
We expect current momentum in life insurance/capital market inflows to continue in FY2018E as investors continue to shift to financial savings from physical savings. Two anecdotes: (1) Mutual fund inflows remain strong; of the Rs200 bn of inflows in equity mutual funds during 4QFY17, about 60% are from SIPs. (2) Equity market volumes in the cash segment were up 48% in 4QFY17 (some of it being non-recurring; but even excluding these, growth would be about 30%) versus 18-20% growth over the previous two quarters. Additionally, life Insurance companies are investing in their proprietary channels and some of the smaller banks are activating their bancassurance business, which will push the business as well.
Raising target prices, retain ADD on ICICI Prudential Life and Max FS
We are tweaking up APE assumptions to factor in the current momentum. We expect ICICI Life to deliver 22% APE over the next two years and about 17% at HDFC+Max. Our forecasts will translate into 19-20% medium-term operating RoEV for HDFC+Max and about 17% for ICICI Life. We are raising our appraisal valued-based target price of ICICI Prudential Life to Rs400 and also rolling over our target price of Max FS to March 2019, translating into revised target price of Rs675. At our target price, ICICI Prudential Life will trade at 29X FY2019E EV while Max FS will trade at 3.2X FY2019E EV.