Over the past few months, foreign institutional investors (FIIs) have sent the Indian markets on a roller coaster ride. The introduction of an additional surcharge in the budget dented their confidence. They reacted by pulling out huge investments from the market. Then came the recent announcement of a slew of measures, including the withdrawal of the additional surcharge and a major reduction in the corporate tax rate. That reinforced their confidence to some extent.
Against this backdrop, we delved into the large-cap space to identify stocks that have caught the fancy of FIIs. We came across the growing interest of FIIs in the country's insurance sector, especially in life insurance companies. All three life insurers listed below feature among the top ten companies wherein FIIs increased their stake the most in the last quarter.
SBI Life Insurance
Starting its journey as a joint venture between SBI and BNP Paribas back in 2001, it offers individual and group insurance plans, including traditional and unit-linked plans. Its products comprise health, annuity, life, pension and variable insurance.
The insurance business has unique parameters of its own to analyse its profitability and value. When it comes to profitability, the value of new business (VONB) and value of new business margin are what reflect the earnings from new policies written during a given period. VONB is the present value of expected future earnings from new policies written during a specified period and reflects the additional value to shareholders expected to be generated through the activity of writing new policies during a specified period. This saw a growth of 33 per cent year-on-year in Q2FY20. The value of a life insurance business is measured by using embedded value which computes future profits from existing policies. The embedded value grew 24 per cent in Q2FY20 as compared to Q2 FY19. Another important ratio is the persistency ratio, which is the ability of the company to retain customers. This has been consistently increasing for the company, which stood at 85 per cent as of FY19 as against 81 per cent as of FY17.
Continuous renewals and improving persistency have enabled the company to reduce costs continuously, bringing down the total cost ratio (as a percentage of gross written premium) to 10.4 per cent in the first half of FY20 as against 12 per cent in the first half of FY19. This actually makes SBI one of the lowest-cost life insurers in the country. However, the company did make a provision for diminution in the value of its investments of 70 crore in Q2FY20 of which, 67 crore was towards its exposure to DHFL.
HDFC Life Insurance
It is a joint venture between HDFC and Standard Life Aberdeen. The company offers a range of individual and group insurance solutions, covering a range of customer requirements, such as health, savings, investment, annuity, etc. By the end of FY19, the company had 38 individual and 11 group products in its portfolio. The company has a wide reach with 412 branches and additional distribution touch points through several tie-ups and partnerships.
The VONB of the company saw a growth of 57 per cent in the first half of FY20 as against the first half of FY19. VONB margins came in at 27.5 per cent for the first half of FY20 as compared to 24.3 per cent in the first half of FY19. In addition, the company has been doing well with its strategic partnerships where it sold 30 lakh policies through its partnership with Airtel and another 7.7 lakh policies through its partnership with Paytm. The company's persistency ratio improved to 89 per cent in the first half of FY20 as compared to 87 per cent in the first half of FY19. The embedded value saw a growth of 23 per cent in the first half of FY20 as compared to the same period in FY19. However, on the other hand, the total cost ratio of the company increased to 19 per cent in the first half of FY20 as against 18 per cent in FY19.
ICICI Lombard General Insurance
One of the largest private general insurers in the country, ICICI Lombard is involved in providing services like general insurance, reinsurance, claims management and investment management. The company offers various insurance products for corporates (fire, group health, etc), central and state governments and rural customers (crop, cattle, mass health), retail (health, home, motor, etc) and shared services (actuarial, marketing, fraud control,etc).
A major chunk of the company's business has always come from motor and health,travel and personal accident insurance and this, in fact, has increased in the first half of FY20 wherein these two segments formed 72 per cent of the product mix as against 56 per cent in the first half of FY19. The combined ratio (a measure of insurers profitability calculated by taking the sum of claim-related losses and general business costs and then dividing that sum by the earned premiums over the period) stood at 101.5 per cent as of Q2FY19 - which is up from 100.1 per cent in the first half of FY19. The loss ratio (the ratio of total losses incurred (paid and reserved) in claims plus adjustment expenses divided by the total premiums earned, insurers that consistently experience high loss ratios may be in bad financial health) came down from 78.8 per cent in the first half of FY19 to 75 per cent in the first half of FY20.