Why FPIs are bullish on the Indian insurance sector

Foreign investors continue to pour money into the Indian insurance space. The sector received a record inflow of foreign equity investment in the first half of the current fiscal year. Data available with depositories shows that foreign portfolio investors (FPIs) made a net investment of ₹16,976 crore in insurance equities in the April-September period. The inflow into the sector is nearly 13 times higher than the ₹1,331 of net investment made during the same period last year.

FPIs are generally known for taking long-term structural bets. Their continued investment in the insurance sector reflects FPIs’ bullishness about the sector and its growth potential. Despite being net sellers of Indian equities worth ₹30,011 crore in July and August, FPIs remained net buyers in the insurance sector, making a net investment of ₹5,203 crore in that period.

Insurance products gaining popularity

“Insurance companies have seen a lot of buying from FPIs and domestic institutions over the 4-6 quarters. New SEBI regulations on mutual funds banning up-front commissions has also played in favour of insurance companies, which so far did not face any such restrictions. This has made insurance products more popular among financial product distributors,” said Deepak Jasani, Head, Retail Research, HDFC Securities.

Also, Insurance is the only major sector that witnessed a net inflow of FPI equity investment in the last 10 months of the current calendar year. FPIs made a net investment of ₹24,714 crore in the January-October period.

Consequently, FPIs’ stake in all listed private insurance companies has increased anywhere between 3-20 per cent in the last 12 months. SBI Life Insurance witnessed the highest increase in FPI shareholding to 23.72 per cent as on September 2019 from 4.45 per cent a year earlier.

A long-term play

“With the changing demographic landscape and call for higher protection, largely by millennials, the margin profile of companies has started to improve, reflecting in their improving product mix and value of new business (VNB) margin. The protection gap, at 92 per cent, is the highest in India. We thus believe that insurance is a long-term play and has got its due attention by FPIs interested in its growth story,” said Emkay Global Financial Services.

Although all the listed private insurers recorded flat or marginal growth in net profits for Q2FY20, they have shown significant growth in new business annualised premium equivalent (APE) and value of new business.

“The advent of private players since 2000 has resulted in the introduction of new products and newer marketing styles. These players have undertaken digital initiatives, cost efficiency measures, improved protection business proportion, strong NBP (New Business Premium) growth and rising VNB margins,” Jasani said.

SBI Life reported strong growth of 33 per cent Y-o-Y in VNB in the first half of FY20 while its new business APE for the same period grew by 26 per cent. ICICI Prudential Life, whose VNB grew by 20.2 per cent in H1FY20, saw its Protection Annualised Premium Equivalent grow by 87 per cent during the same period.

“We expect private players to register growth of 15-20% over the next decade with protection and annuity products seeing much faster growth than the savings product portfolio, auguring well for the insurance space,” research firm Emkay Global added.

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