Insurance Scrips: Is It The Best Time?

Stock market in 2016 went euphoric when ICICI Prudential life insurance became the first company to go public. In 2017, there were a spate of life insurance and non-life insurance initial public offerings (IPOs) including SBI Life, New India Assurance, GIC RE, HDFC Life and ICICI Lombard General Insurance. And immediately after their launch all their stocks were oversubscribed. However, the slowdown in the broader markets majorly on account of long-term capital gain (LTCG) being introduced in the Union Budget, concerns over steep valuation and reclassification of mutual fund schemes by Sebi impacted the primary market in 2018. Further, the liquidity crisis and risk aversion post defaults by IL&FS group also had huge impact on the availability of funds to businesses, investors and consumers.

Although major private life insurance companies like SBI Life, ICICI Prudential and HDFC Life were already listed; the equity markets in 2018 were not conducive for IPO especially for smaller players. With that, 2018 saw a long pause in the IPOs since quarter fourth of Financial Year (FY) 2018. “As against an IPO fund raise of Rs81,553 crore in FY 2017-18,  the current FY 2018-19 saw a massive decline of 82.5 per cent with a fund raise of only Rs14,243 crore. The dampened sentiment impacted the launch of IPOs including Insurance IPOs,” said Amishi Kapadia, Group President and Global Head (Merchant Banking), Yes Securities.

Amendment in Insurance Laws (Amendment) Act, 2015 was implemented in August, 2016, in which Insurance Regulatory and Development Authority came with a mandate for the insurance sector for IPO within three years from the release of the guidelines. “In a slow cycle insurance industry, 19 general insurance firms with over eight years in business and 16 life insurance firms with over 10 years came under purview with the new mandate which later resulted in limited IPO issuances from large and more profitable four life-insurance firms and three general insurance firms (including re-insurance firm GIC Re),” said  Sachin Mittal, Senior Research Manager,BFSI, Karvy Stock Broking. However, protest from remaining 12 smaller life insurers and 16 general insurers and newly-added insurers, which came under the new mandate, forced the regulator to modify the proposal with deletion of Section 6AA of the Insurance Act, 1938 at the end of FY2017. This ultimately led to the slowdown of insurance IPO issues  from 2018 onwards explained Mittal.

As an investment income generator both in the equity and debt market, insurance firms today have created prudent risk managed products with features similar to mutual funds’ investments. Further without attracting any LTCG tax, it provides investors a good alternative investment options to choose for the long-term horizon, Niraj Shah, CFO, HDFC Life, said, “The insurance industry is one of the fastest growing industries, growing at about 20 per cent CAGR in the last three years on the basis of new business premium (NBP). Further today, India has the highest protection gap in the Asia region at 92.2 per cent and this protection gap has increased 4x in the last 15 years.” India’s insurable population is anticipated to touch 750 million by 2020. Today, the insurance industry has witnessed a robust growth with total premium growing more than 3X over last decade. However, the penetration level is far less in Tier III and below cities and towns due to the lack of awareness and they have a vast potential to grow. “Insurance penetration was at 2.7 per cent in 2016 versus global average of 3.5 per cent, reflecting immense potential for growth in the Indian market. The life insurance premium has grown from approximately Rs3.3 trillion in FY15 to approximately Rs4.6 trillion in FY18 at a CAGR of 11.8 per cent,” highlighted Kapadia.

Most experts remain very optimistic on the growth in this space especially in terms of private insurance. Even on the non-life side, listed private players continue to perform well on the back of emerging sub segments for future growth. Hemang Kapasi, Portfolio Manager, Equity, Sanctum Wealth Management, explained, “The listed life insurance players saw some price correction in range of 15-30 per cent over the last 12 months due to overall market correction. Post that, stocks look reasonably attractive for long-term investors as year-to-date (YTD) private life insurance new business premium growth has been approximately 22 per cent. Hence, our recommendation is to stay invested.” Admitting with that, Hitesh Agrawal, EVP and Head, Retail Research, Religare Broking, said, “The recent correction in insurance stocks (life and general) has certainly provided a good entry opportunity for medium-to-long-term investors. Investments can be considered in HDFC Life, SBI Life, ICICI Prudential Life and ICICI Lombard, as their growth prospects look bright and investors can expect healthy returns over the next two to three years.”

That said, insurance stocks will always be on investors’ radar as they have a good scope for growth on the back of huge untapped opportunity. Vineeta Sharma, Head of Research, Narnolia Financial Advisors, said, “Prior to 2017, Indian insurance companies comprised of 0.2 per cent of BSE S&P 500 as against the US where insurance companies comprised of 2.7 per cent of the US S&P 500 and 4.2 per cent in China broader index. With 2017 listing of shares, now insurance sector in India also comprises more than three per cent of the broader index. Also it should be noted, majority of insurance companies getting listed in 2017 was part of divestment programme by parent financial arm which were already suffering from NPA related stress.”

In life insurance as the company gets older, the positive inflows from premium renewal make up for the first year strain from new policies. This means there are losses for the business in initial years as strain on new policies wipe out profits on old policies. “Stability in operations can be reached only in seven to 10 years due to high business strain from new business acquisition in the first year with clawback clause and free look period considerations which always bring the negative underwriting margin in first year of the policy,” said Mittal. However when it comes to general insurance as a business, it is a highly competitive sector where stability in operations can be reached only in five to seven years in India as renewal of policies is not a compulsion after one year.

Life insurance segment is expected to grow further driven by protection policies versus their past growth which was mainly driven by unit linked insurance policies (ULIP). Protection policies offer better margins, especially in a market like India, with a huge working population, where the underwriting risk would be lower with increasing economies of scale. Life insurers are now looking to strike a balance between ULIP’s and protection in their portfolio. Investors should carefully look at mix between ULIPs and protection products when it comes to life insurance companies stocks. They should look at the trend of persistency ratio as it is the most common parameter for quality of business representing the percentage of retail policies that continue paying premium. In short, it indicates how long a customer stays with the policy.

Mittal explained “Continued higher proportion of business on risk weighted premium collection on higher persistency ratio increases premium renewal for higher value of in-force business particularly during 37th month persistency for protection products and 49th month persistency for saving products and continued growth in new business premium for small ticket market on volume particularly on 13th month persistency.”

Another important figure one should look at is the embedded value (EV) which is disclosed by companies at the end of the quarter. EV is nothing but the sum of the adjusted net worth and the discounted value of profits from in-force policies. “For life insurance particularly, the EV helps determine if the company is richly or cheaply valued, this is just like how banks are valued in terms of price to book. Price to EV below three is considered a fair valuation and anything above is rich,” said Umesh Mehta, Head of Research,  Samco Securities.

Experts also suggest looking at the Value of New Business (VNB) which is the present value of profits for the business written during a year post adjusting for persistency, mortality and maintenance costs. In case of general insurance companies, the combined ratio is the key metric reflecting the company’s underwriting performance. “The combined ratio which indicates the outflow of the company in terms of operating costs and the level of claims settled (a ratio over 100 per cent means the cash outflows are more than the earnings).

Meanwhile, solvency ratio shows whether the insurer has enough funds to settle all the claims in case of a crisis situation,” said Payal Pandya, BFSI Analyst (Wealth), Centrum Broking.

Post the success of the above-listed insurance companies, Reliance General Insurance in February 2019, filed fresh papers with the Sebi to float an initial share-sale after the regulatory approval for its IPO lapsed in November 2018.

As per media reports the PNB Metlife is planning for an IPO to hit the market in this fiscal year. Market experts continue to see the rising investor interest in the insurance sector. According to Kapadia, “Some of the recent deals that have taken place in the sector are the Offer for Sale (through stock exchange platform) of both HDFC Standard Life (INR 3,366 crore) and ICICI Prudential life (Rs1,683 crore) that were well subscribed.

Also, BNP Paribas divested in SBI Life once to Carlyle for approximately Rs5,500 crore and very recently divested through a block deal for approximarely Rs3,000 crore.  In September 2018, SBI also divested four per cent stake in SBI General Insurance to Axis AMC and Premji Invest for approximately Rs482 crore.”

Taking into account the larger picture, and with revival in the Indian economy, it can be said that there is huge potential for growth in insurance. The gradual increase in market penetration is a proof of  the same.

Further, the growth in insurance remains intact with comfortable stock valuations which is expected to generate more demand and healthy returns over the long run. 

himali@outlookindia.com