Insurance stocks have been re-rated sharply in the last quarter, helped by the strong value of new business (VNB) growth and a continued diversification of earnings towards protection/annuities.

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On a year-to-date basis, the three large life insurers SBI Life, ICICI Prudential Life, and HDFC Life rose 68 percent, 61 percent, and 47 percent, respectively. Other insurance companies ICICI Lombard gained 57 percent, Max Financial Services added 7 percent, while only General Insurance company fell 4 percent during this period.

As per a report by Morgan Stanley, the drivers for the rise in these companies include strong VNB growth despite weak macro conditions, attractive valuations, and high earnings pressure on other financials.

"They have strong distribution franchises, good cost, and persistency metrics, and are well placed to gain market share. Moreover, the share of non-par premiums is improving at a faster pace than what we had previously expected, led by protection/annuities. We expect continued strong growth in this segment, and a further improvement in protection contribution to VNB," the global brokerage firm said in a report.

It also expects VNB growth to be strong at 20-30 percent over the next couple of years but see limited near-term upside given rich valuations. Meanwhile, the key downside risks include slower growth and weaker persistency trends.

As per the report, SBI Life is their top pick. "We raise margin estimates, driving stronger VNB CAGR led by better than expected mix shift towards the non-par segment. This, rolling forward, and higher medium-term earnings forecasts lift our price target 17 percent, to Rs 1,150. It implies 26 times VNB for the 12 months ending December-21," the report explained.

As for ICICI Prudential, the brokerage said that it likes the company as a long-term compounding story, and expect a further rise in the share of higher-margin products. To get more constructive, however, the brokerage said that it would wait for better execution on growth, stabilization on persistency, or digestion of valuation.

Meanwhile, HDFC Life remains one of the best plays on India's insurance story, Morgan Stanley noted but added that it awaits a better entry point for the stock. "We like its balanced product mix, high protection focus, widening distribution, high technology focus, and experienced management. We raise our VNB multiple to 30 times from 28 times given stronger than expected growth in higher-margin products, but the stock remains fairly valued on this basis leading to an 'equal-weight' rating." the brokerage stated in its report.

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