CLSA's ratings upgrades trigger gains in life insurance stocks

Foreign research and broking firm, CLSA Asia-Pacific Markets has upgraded its ratings for selected life insurance stocks, including HDFC Life Insurance Co, Max Financial Services, and SBI Life Co.

The firm highlighted that life insurers have experienced a correction ranging from 7-24 percent since the budget, and current valuations only factor in medium-term growth of 0-4 percent.

Despite maintaining a conservative base case, CLSA projects a modest 5-10 percent growth in annual premium equivalent (APE) and value of the new business (VNB) for life insurers over FY23-25, after accounting for the 30% tax applied to policies with premiums over Rs 5 lakh.

While acknowledging potential growth headwinds in the first half of the upcoming financial year due to pre-buying of policies before FY23 ends, CLSA remains optimistic about life insurers' efforts to address these challenges.

The firm does not anticipate changes in the tax limit but believes there is a small possibility of long-term capital gains that could reduce the internal rate of return (IRR) to 30 basis points from 115 basis points, reversing a significant portion of the budget's negative impact.

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Considering all the negatives, CLSA upgraded its ratings for SBI Life and Max Financial to Buy, and HDFC Life to Underperform. The firm retained its Outperform recommendation on ICICI Prudential.

The positive news bodes well with investors as these stocks posted gains in the market on March 22. At 12.11 pm, shares of HDFC Life Insurance Co and SBI Life Insurance Co were up 2.59 percent and 1.82 percent, respectively, on the National Stock Exchange. The stocks were also among the top gainers on the Nifty.

ICICI Prudential Life Insurance Co and Max Financial Services also shot up 3.31 percent and 4.12 percent, respectively.

CLSA also sees a 4-24 percent upside potential from Monday's close across these counters.

Life insurance stocks have remained under pressure since Nirmala Sitharaman announced that income from traditional insurance policies where the premium is over Rs 5 lakh will no more be exempt from taxes in the Union Budget 2023-2024.