The Rs 5,700 crore ICICI Lombard IPO kicked off on Friday with a dozen brokerages recommending a ‘buy’ on the issue. READ MORE
This would be the first non-life insurer issue after ICICI Prudential became the first domestic life insurer to get listed on the bourses. SBI Life’s IPO is hitting the market next week.
Various estimates put India’s insurance market size at $100 billion. Analysts say it can become a dominant theme on Dalal Street in the years to come. Is that alone making investors go gung ho on these IPOs?
Going by the buzz on the Street, here are the key factors that analysts find appealing about the sector.
Insurance is a very expensive business to set up and once you see penetration, you just cannot displace a company, says Former Chairman LIC SB Mathur.
Mathur said new entrants have faced great discomfort and that an entry into the sector requires new players to spend a few thousand crores.
Brokerages noted insurance companies are sustaining growth by adding new policies than mere ticket size increase. Low penetration and increase in market share all makes forthcoming IPOs potential money-spinners.
Numbers speak for themselves
In August, private life insurers gained market share by 250 basis points with 26 per cent YoY Annual premium equivalent (APE) growth. On the other hand, LIC the largest insurer grew 14 per cent YoY, leading to the industry recording healthy 19 per cent YoY APE growth.
“The industry growth stood at 24 per cent year-to-date with private insurers growing at a robust 34 per cent YoY and LIC at 16 per cent YoY. On an unweighted NBP basis, HDFC Life (27 per cent YoY), Max Life (22 per cent YoY) and Bajaj Allianze (23 per cent YoY) gained market share in August among major private players. Private insurers’ market share increased 350 bps this year, with ICICI Pru (42 per cent YoY) and HDFC Life (31 per cent YoY) outperforming industry average.
“We forecast strong industry growth at 16 per cent CAGR in APE over FY17-20, driven by resilience in equity markets, which augers well for unit-linked products and declining interest rates, which reduces the competitive intensity from other saving products, especially term deposits. We continue to prefer insurers with strong bancassurance, as they will generate significantly superior operating RoEVs over FY17–19E compared with 8-9 per cent for agency-dependent insurers,” JM Financial said in a note.
JM Financial, meanwhile noted that the non-life industry too is seeing healthy momentum, growing at 32 per cent YoY in August aided strong demand for crop insurance at the beginning of the Kharif sowing season; pick-up in auto sales and a 28 per cent increase in third-party premiums.
“We believe there is substantial potential for growth due to i) favourable demographics profile; ii) expanding coverage of crop insurance; iii) expected revival of the capex cycle and iv) increasing penetration of auto and health insurance. Also, upcoming listings of public general insurers would lead to companies improving underwriting discipline, driven by a price increase and better risk management,” it said.
LIC to lose market share, slowly
Mathur says as there are 24 players in the industry, with some of them becoming more aggressive, the market share of LIC is bound to come down.
“But I do not see it falling steeply, because LIC has still a great presence in semi urban and rural areas where private sector has yet to make a mark. So there will be a decline in the share of LIC, though it claims that it are not going to be touched even in terms of market share. But that does not mean that LIC will not grow. LIC on a huge base will continue to grow and numbers will be much- much higher, although in terms in market share may be two years, three years down the line, 70 per cent share may become 68, 67 or 65 per cent,” he said.
UBS in a note said the sector saw $3.3 billion in FDI flows in FY17, up from $1.2 billion in received last year, as many foreign companies raised their stakes in private sector insurance joint-venture partners after the government liberalised the FDI ceiling to 49 per cent from 26 per cent earlier.
Don’t forget this investment mantra
Nilesh Shah of Kotak Mahindra AMC says that low insurance penetration offers stupendous growth opportunity for the insurance industry, but at the end of the day one needs to be stock specific.
“Pick up those companies where valuations are in your favour, where business models are in support for long term growth. All these are great insurance companies and all of them will get lifted by the rising tide. But we have seen that in IT sector where Infosys and Mastek got listed on the same day, they were both in information technology business and both of them have done far better than Sensex. But still the difference between Infosys and Mastek is very wide. So insurance sector per se looks good but you cannot just pick up the insurance sector, you have to pick up the right stock within insurance stock to make money,” Shah said.
USE PRICE TO EMBEDDED VALUE
Santosh Singh, BFSI and Head of Research, Haitong Securities said that the basis benchmark for judging life insurance companies would be the embedded value and the new business profit multiples at which it trades. “Eventually you would be looking at price to embedded value,” he said.
“For life insurance companies if you look at the return on embedded values, SBI Life today has almost last year they reported more than 20 per cent return on embedded value and on operating basis around 17-18 per cent, which is not comparable to anywhere in the world. Globally if you look at some of the top insurance companies, they are around 11-12 per cent return on embedded value.”