The Indian stock market offers a wide array of sectors for investors to explore, but few have generated as much sustained conversation in recent years as insurance stocks. From private life insurers to the country’s largest public sector insurance company, this segment has come to represent a blend of financial security and growth potential that appeals to a broad spectrum of market participants. A significant part of this conversation naturally centres on the LIC share price, since Life Insurance Corporation of India continues to be the benchmark name in the domestic insurance business and a bellwether for how the wider sector is perceived by the market.
A Sector Built on Trust and Scale
Insurance as a category has a unique position, in that, the products that fall under it are mostly purchased on a mandatory basis, as compared to other discretionary purchase categories. This has led to the insurance sector providing steadier revenues to its shareholders, even in periods of economic downturn, and has made it an attractive proposition for value investors who are not as concerned with the cyclicality of revenues.
In this context, the state owned behemoth has a natural edge, as its distribution channels enjoy a far greater reach than their private counterparts, due to the legacy of its agents and bancassurance partnerships, as well as its recent digital foray. While private insurers have reported better growth numbers in some of the more lucrative segments like unit linked products, the public limited company continues to enjoy a larger overall share of the market.
Recent Developments in the Sector and its Impact
The insurance sector is witnessing rapid product innovation on a constant basis, as firms strive to meet the needs of an ever more sophisticated customer base that demands both products with pure protection as well as guaranteed savings schemes. The fact that different segments exhibit such divergent preferences has compelled insurers to launch multiple products that appeal to these varying sentiments, as it allows them to capture a larger share of wallets on both ends of the protection-savings spectrum. It is important for an investor to follow these developments, as the total number of new policies sold on a quarterly basis has direct implications for the insurers’ overall profitability.
Announcements pertaining to future business strategies on the other hand, also have bearing on the stock’s performance, as investors react to developments such as the likelihood of raising funds on other exchanges, statements made by company executives on growth strategies, and the overall digital transformation of the sector. In this regard, it is pertinent to keep in mind that the investment management capabilities of an insurer are directly linked to the performance of its investment portfolio, which is why insurers are often impacted by changes in interest rates in both equity and debt markets.
Key Metrics for Investors to Watch Out For
Any investor looking to gain exposure to the sector would do well to understand a few key metrics that are often used to value the stocks of insurers. Embedded value calculations, which attempt to capture the net present value of future profits that a firm is expected to generate from its existing book of business, are critical to understanding the underlying value of an insurance counter. Closely related to embedded value is the value of new business, which indicates the present value of all future profits that are likely to accrue from new policies bought in a given quarter. Similarly, analysts also keep a close eye on metrics such as price to earnings and price to book value multiples, so as to ascertain the relative value of an insurer, both in terms of its own past performance, as well as against its peers.
It is also worth keeping track of the dividend records of a counter, as many investors are drawn to the sector due to the potential for regular income that a larger, more established insurer might offer, due to its track record of uninterrupted dividend payouts.
Public vs. Private Sector: A Comparison
The Indian life insurance sector is a unique mix of public and private limited companies, each of which boasts a unique set of strengths. While the private insurers have been posting better growth numbers, especially in the more lucrative protection and unit linked space, the public sector enjoys an edge in terms of overall premium collection, as well as the number of policies in force, due to both its legacy status as well as extensive reach in the hinterlands. This competitive dynamic is likely to play out in the foreseeable future, with many investors comparing growth prospects on both ends of the spectrum.
A Note on Long Term Prospects
As far as long term prospects are concerned, it is important for an investor to be aware of the overall level of penetration that exists in the broader economy, as compared to more developed economies. It is evident that there is significant room for growth in terms of both penetration as well as overall premiums, due to the rising level of disposable income across the country, including in rural areas. In this regard, it is worth noting how the sector as a whole is being transformed by the twin forces of digitization and increased product sophistication, all of which bode well for the long term future of the sector, while individual counters may experience consolidation at various points in time. As always, due diligence on the part of the individual investor is crucial in order to understand the risk versus reward parameters that apply to a specific counter, within the larger context of an investment horizon.
