Updated – Dec 2022
In this article, we will cover
– Overview of Insurance stocks
– Types Of Insurance
– Summary Table of Best Insurance Stocks to Buy now in India
– What should an investor look at while picking the best insurance stocks to buy?
– Detailed profile, pros, and cons of stocks in the model portfolio
– Video on how you can select the Best Insurance Stocks
– A detailed table with various parameters for Best Insurance Stocks to buy
In this article, you shall get a complete list of Best Insurance stocks to buy in India. This list is collated by our research experts for our readers.
Overview of Insurance stocks
2017 was technically the birth of major life insurance private players in the eyes of investors with a frenzy of IPOs hitting D-Street. Since then insurance has mostly been one of the niche sectors in the market and today it is definitely the need of the hour given that India is battling through a health crisis and India’s penetration of life insurance is at 3.2% compared to world average of 3.3%, while penetration for non-life insurance is further lower at 1% in comparison to global non-life insurance segment’s at 4.1% as of FY22. With the recession worries and fears of slowdown due to Covid-19 there were expectations of a decline in premium growth, persistency of the existing book being hit and profitability being hampered. But much to everyone’s surprise there was improvement in APE and GWPI growth in May 2020 compared to April 2020 which gave a sense of renewed hope from these players. Growth since then has been extremely strong especially in October this year given the low base from the last year.
Recently, the Parliament approved a bill to increase Foreign Direct Investment (FDI) limit in the insurance sector from 49% to 74% with the Lok Sabha. Piloting the Bill, Finance Minister Nirmala Sitharaman said hiking the FDI limit in the insurance sector will help insurers raise additional funds and tide over the financial problems.
The FDI limit in the insurance sector was increased significantly after the government decided to raise the cap from 26% to 49% in the year 2015. As much as Rs. 26,000 Crs has come as FDI in the sector since 2015 and the asset under management in this sector has grown by 76% during the last five years.
Types Of Insurance
Insurance is categorized into life and general insurance.
Life insurance continues to be a key component of household financial savings and from FY15 the contribution of these life insurance premiums has increased by 3-5% points. Their product mix comprises of individual savings, group savings, individual protection, and group protection. Individual savings are further sub-divided into Par, Non-Par, and ULIPs product segments. All these together make up the new business premium for a life insurance company.
Non-life insurance, on the other hand, covers diverse lines of business relating to the protection of assets such as vehicles (Motor TP third party and Motor OD own damage), property, marine, crop, fire, healthcare, and various business and individual liabilities.
Major developments in Insurance Sector
Let us discuss some of the significant developments in the Insurance Sector that will have a say in determining the list of best insurance shares to buy
Development of New Channels
The evolving channel mix from agency to multichannel distribution network has enabled the industry to reach various participants on convenience and ease. The major shift that was experienced in insurance distribution was with the rapid development of new channels such as bancassurance, corporate agency, and broking which included dealerships. But the combined force of regulatory actions altered this landscape in the last decade with a rising role of digital as channel productivity and channel economics came to the foray. With the need to reduce fixed costs, companies are now looking for corporate partnerships and a higher digital presence to make sales.
Moreover, there are a number of drivers that have a hand in shaping this industry and changing the distribution dynamics. In FY17 a significant development was allowed in the form of open architecture in bancassurance. This allowed banks to enter into corporate agency alliances with upto 3 life, 3 non-life, and 3 standalone health insurance (SAHI) companies. Exclusive access to banking partners was a competitive advantage for many players but this changed the competitive landscape among the industry.
Emergence of Digital Direct
Another major development was the emergence of digital direct to consumer channels and web aggregators. The convenience of comparing policies, increase in online footprint, lockdowns due to Covid-19, and additional digital influence will boost digital sales further. Bundling and cross-selling of policies is a trend as companies’ partner with e-commerce websites, car-sharing apps, travel portals, etc.
In the life insurance segment too IRDAI introduced guidelines to curb mis-selling back in FY10 which resulted in an increased proportion of non-linked products. There has been a gradual change in the product mix of the life and non-life insurance industries depending on various regulatory actions and government impetus. For instance, the increase in the third-party (TP) liability premiums has increased growth significantly. From 37% in FY09, the proportion of TP premiums has grown to over 50% of motor insurance premiums now. Long term TP policies will also curb the decline in TP policies after the first year.
Right from Pradhan Mantri Fasal Bima Yojana to Ayushman Bharat Yojana, these comprehensive schemes are playing a big role in covering a wider population under the insurance bucket. Future of insurance is extremely bright as the players have gained a significant amount of experience from the various regulatory changes over the course of years, they have built a solid foundation now and the underpenetrated nature with a digital presence will give them a firm footing going ahead. Covid-19 can bring a small dent in the new business premiums, especially into the ULIPs category, however, once demand normalizes and equities show a rosier trajectory, insurance will regain importance.
Summary Table of Best Insurance Stocks to Buy now in India
|Sr. No||Company Name||BSE Scrip Code||NSE Symbol||CMP (Rs.) 26th Dec 2022||Rating|
|1||HDFC Life Insurance||540777||HDFCLIFE||568.9||3||Life Insurance|
|2||SBI Life Insurance||540719||SBILIFE||1236.1||3||Life Insurance|
|3||ICICI Prudential Life Insurance||540133||ICICIPRULI||445.65||2||Life Insurance|
|5||New India Assurance||540769||NIACL||113.8||0.5|
|6||ICICI Lombard General Insurance||540716||ICICIGI||1235.2||3|
What should an investor look at while picking the best insurance stocks to buy?
There are not many listed players in the insurance space and in challenging times it is better to stick to the leaders which have the highest solvency ratios, strong banca partners, a wide distribution network, and a diverse product mix.
Annual Premium Equivalent or Gross Written Premiums
Profit and Loss statement of an insurance company is extremely different than any other industry. Here the revenue is in the form of APE or GNP. Annual premium equivalent (APE) which forms the topline in life insurance players is a key parameter to observe. In simple terms, APE forms the premiums received by the companies from its various products. It usually measures the volume of new business premiums written in the course of the year. An investor should look for consistent improvement in APE growth. NBP is the term used for new business premium which should continuously grow for a life insurance player. While life insurance companies call it APE, general insurance companies call their topline Gross written premiums (GWP).
New Business Margin
New Business Margin (NBM) is used to measure the profitability of the insurance business. A higher percentage which is rising YoY or QoQ is preferable. Similarly, PAT or Profit after Tax should also show continuous improvement.
Value of New Business Margins
Value of New Business Margins (VNB) is the present value of future profits that is associated with new businesses. This parameter helps to gauge if the operational efficiency and scale are enabling the value of the business to improve.
Embedded value (EV) on the other hand is a valuation measure to estimate the consolidated value of shareholders’ interest in the insurance company. P/Ev and P/VNB are used as valuation multiples and India’s current average is 3.5 P/EV and 42.9 P/VNB. An investor should check for higher VNB margins as they translate to higher EV in the longer term.
Persistency is another important factor to measure how long customers stick with the policies. Policy retention and policy renewals both contribute to this factor. The most common persistency ratios are measured for 13th month (1-year retention), 25th month (2 years), 37th, 49th and 61st month. Persistency ratios have been the lowest in India compared to the globe and efforts should be made by companies to improve this ratio. Higher rates of persistency translate into increased profitability, reduced costs, overall growth with optimal long term income.
Higher persistency ratios in the non-par and protection businesses of a company can lead to an increase in new business share, thus improving margins. But an investor must remember that a higher push towards protection can also lead to a rise in costs. Hence, he should look for a company which balances it out against higher VNB margins.
Claims ratio is also something an investor should check. It is the compensation asked for by the insurance holder for a covered loss or policy event. A lower claims ratio is beneficial for an insurance company.
Combined ratio (COR) is also an important measure to gauge whether a business is profitable or loss-making. It is the addition of claims ratio and opex ratio. A COR below 100% indicates that the company is making an underwriting profit. The profitability scorecard of a General Insurance business is measured by the companies’ ability to generate underwriting profits.
In insurance business, an investor must always look out for a higher proportion of product mix which is long-tailed in nature. As a long-tailed business carries a longer settlement period which gives access to the investment float for a longer period. This will inturn lead to higher ROEs and this higher investment leverage will result in better returns. For eg. Motor TP and engineering or liability insurance are all long-tailed in nature. General insurance companies with a higher proportion to any of the above is expected to generate better returns.
Detailed profile, pros, and cons of stocks in the model portfolio:
HDFC Life and SBI Life have comparatively performed better than peers and are currently leading the private life insurance space.
HDFC Life is the 3rd largest player by AUM and it is the leader by market cap in the private life insurance space. With 372 branches and a presence in 980+ cities and towns, HDFC Life has dominated the private insurance industry since inception. It leveraged its first mover advantage to gain presence in the online channel through a market share of 21.7% in its total new business and 15.2% share in standalone protection business. This has enabled it to gain robust VNB margins and a top spot in the private space. Additionally, it has witnessed strong traction in par products on the back of Sanchay Par Advantage. It has also delivered a sturdy topline APE CAGR of 15% from FY18-21. The balance sheet is well placed to tide through the crises with a solvency margin of 210%, well above regulatory requirements. Going forward, HDFC Life could emerge stronger because of its diversified product mix and well-established digital presence which will boost margins. An approval by IRDAI for a regulatory sandbox initiative to experiment on various innovative approaches will also aid HDFC Life to strengthen its product mix strategy. It is currently trading at higher valuations P/EV of 3.40x than peer average of 2.57/EV hence if you already own this stock you should continue holding it in your portfolio for the long term.
Going ahead, one challenge for HDFC Life could be its cost ratio which is higher, given the push towards protection business. Hence, it would be prudent to keep track that rising costs don’t impact its VNB margins in the future. Additionally, the open architecture model recently adopted by HDFC Bank has caused a deterioration in sales through its Bancassurance channel and there could be further declines as competition increases. Meanwhile, the company is shifting its focus towards scaling up its traditional partners and agents which could help cushion this decline.
SBI Life, a joint venture between SBI and BNP Paribas Cardif, is one of the largest life insurance players in India. It has an unrivalled distribution strength of over 1.8 lakh trained personnel with 15+ lakh policies issued. With an AUM of Rs. 2.5Tn, SBI Life has delivered a strong CAGR of 7.6% APE from FY17-22 mainly because of a 7% CAGR by ULIPs and a CAGR of 86% in the individual protection segment for the same period. Its NBP performance has also been robust with a CAGR of 17%. SBI Life’s strategy is to eventually increase its proportion of protection business and decrease dependence on ULIPs (currently 45.6% of NBP) as protection helps to gain the highest margin of 100%. With a lower allocation of human resource per branch and high productivity, it is the most cost-efficient player with the lowest commission ratio of 3.6%. All these measures translate to healthy margins. The company has maintained a good 13th month and 61st month persistency ratio of 85.2% & 52.5%. Further, it maintains healthy solvency margins which is one of the highest at 219% providing a strong cushion in these testing times. Currently, SBILife is trading almost at par with industry average valuations at around 3.2x P/EV which makes it a good pick for your portfolio.
Going forward too, SBI life is likely to battle these tough times by leveraging its wide banca distribution network and stronger agency channels to expand its rural reach. Its AUM continues to be debt heavy (70% of total) which will support persistency ratios during volatile equity markets. However, there are several challenges as it has a very high proportion of ULIPs in its APE mix which could affect its VNB margins. With economy slowing and change in tax slabs, its savings segment could also take a hit. Very low presence in the digital space is a big con amidst social distancing rules.
Key triggers for life insurance players could be price hikes as these players pass on the reinsurance rate hikes, shift to online channels to steer growth amidst social distancing, strong demand from Protection segment (past 3 years portrayed strong demand of 45-50%), faster recovery from non-banca channels and growth in insurance premiums. Historically, post SARS impacted China, MERS hit Saudi Arabia life premiums surged around 20-52% in the second year after the breakout. This time too it is expected that life insurers will witness a surge in demand once things settle down. However, a key challenge for the life insurance space would be if the persistency ratio softens as people focus on conserving cash and more individuals move towards the new tax slabs.
General insurance is a long-term structural story with the rise in underwriting profits, positive regulatory regimes by IRDA and pickup in economic activity. There are multiple opportunities for this space as the largest segment as per GWP is motor (OD and TP over 36%) having majority of cars and two wheelers uninsured. Health (27.3%) the next largest segment currently covers only 3.1% of total Indian population and OPD as a percentage of healthcare expenditure is the highest in India in the world. Crop being the next, as per the PMFBY scheme 100mn hectare of land needs to be covered under insurance. Total premiums in the private space grew by 20.6% CAGR from FY10-20 while PSUs grew by 12.8% in the same period. Private and SAHI players are expected to grow much faster than public players, ICICI Lombard being one of them. It stands out because of its long-tailed business and hence its investment leverage is higher at around 4.09x compared to peer average of 3.5x. This allows ICICI to deliver higher investment returns. Driven by strong tie-ups with OEMs, ICICI has benefitted dis-proportionately over other insurance players attaining the highest share of 13.9% in motor OD. Additionally, adoption of innovative methods to speed up the process of claims through video calls and virtual offices will prove to be extremely effective for them in the long run. ICICI has a lower share of 5.3% in health compared to SAHI health players (26.8% share) and has scope for improvement. There is a lot of potential to ramp up share in the fire business which is currently dominated by New India Assurance through their direct or broker channels. With 9.7% share in personal accident, ICICI can improve its profitability as the claims ratio for private players is only close to 27% compared to PSUs 112%, making it a good place for them to improve profitability under the individual segment. ICICI didn’t participate in the Ayushman Bharat scheme due to subdued pricing but this can stab them in the back as other players will steal a large chunk of the rural pie. This could be a big negative for this stock.
Key Triggers for General Insurance Players would be larger renewal rates which will lead to higher GWP and tie-ups with OEM dealers will increase bargaining power and in turn sales. With the mandatory long-term TP insurance going live, the role of the OEM dealer network has become more important. Introduction of Long-term TP Policy was a positive development in terms of increasing persistency, which will help in reducing loss ratios and growing the investment float income; this in-turn should be RoE accretive. Higher investment float will in the end translate to operating profits. Some of the risks general insurance players could face is from the lower-ticket size of two-wheeler insurance since it results in greater lapse rate post the sale of new 2Ws, which already have a mandatory insurance component. Distributors should concentrate on the higher-ticket size insurance segments. Life insurers are now allowed to sell health plans, this will also add to competition among the players.
Here’s a quick video from our team on how you can select the Best Insurance Stocks:
If this is a standalone thematic portfolio of only insurance specific stocks, you would need a total of Rs. 13,200/- for this portfolio as of 26th Dec, 2022.
|HDFC Life Insurance||34.50%||568.9||8||4551.2|
|SBI Life Insurance||28.10%||1236.1||3||3708.3|
|ICICI Lombard General Insurance||37.40%||1235.2||4||4940.8|
Detailed table with various parameters for Best Insurance Stocks to buy:
|Sr. No||Company Name||BSE Scrip Code||NSE Symbol||CMP (Rs.) 26th Dec 2022||Rating||Industry||VNB Margin||VNB growth (YoY)||Total APE Growth (YoY)||13th Month Persistency||61st Month Persistency||Total AUM (Rs. in Bn)||Solvency Ratio||PAT Growth (YoY)||ROE|
|1||HDFC Life Insurance||540777||HDFCLIFE||568.9||3||Life Insurance||27.60%||16.00%||11.00%||88.00%||54.00%||2,249||210%||18.00%||10.00%|
|2||SBI Life Insurance||540719||SBILIFE||1236.1||3||Life Insurance||31.00%||24%||22.00%||85.20%||52.50%||2,826||219%||36.00%||13.70%|
|3||ICICI Prudential Life Insurance||540133||ICICIPRULI||445.65||2||Life Insurance||31.00%||25%||10.10%||85.90%||61.20%||2,443||201||37.00%||6.30%|
General Insurance and Reinsurance
|Sr. No||Company Name||BSE Scrip Code||NSE Symbol||CMP (Rs.) 26th Dec 2022||Rating||Industry||GWP Growth (YoY)||Combined Ratio||Solvency Ratio||Claim Ratio||PAT Growth (YoY)||ROE|
|5||New India Assurance||540769||NIACL||113.8||0.5||General Insurance||-30.00%||117.06%||177.00%||97%||-89%||0.68%|
|6||ICICI Lombard General Insurance||540716||ICICIGI||1235.2||3||General Insurance||23.00%||104.60%||247.00%||47.00%||15.10%|
* Includes consolidated PAT growth of Max Financial Services and not standalone for Max Life Insurance
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