FPIs continue to repose faith in private insurers

It appears that foreign investors’ appetite for private insurance stocks knows no bounds. After a net investment of ₹27,514 crore - highest inflow among all the sectors in FY20, foreign portfolio investors (FPIs) pumped in ₹6,166 crore in the first quarter of FY21 in the insurance sector, out of which ₹6,090 crore was invested in June alone.

The sector witnessed a net outflow of ₹328 crore in April and ₹128 crore in May while there was an inflow of ₹524 crore between July 1-15, up to which data is available with depositories.

“FPIs are known for making long-term structural investments. Insurance sector in India has strong potential for growth,” Nirali Shah, Senior Research Analyst, Samco Securities said, adding, “India is battling through a health crisis and India’s insurance penetration is around 2.7% compared to the world average of 3.3%.”

FPIs’ optimism on the insurance sector has been growing over the years. In FY18-19, insurance was among the top gainer of FPI investment of ₹9,623 crore even when the FPIs were net sellers in the overall equity category. However, their presence in PSU insurance stocks remains negligible.

“All categories of investors - FPIs, DIIs, HNIs and retail - are increasing their investments in private insurers. The main reason for this increasing optimism of the sector is its growth potential,” V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services said, adding, “Threats like the Covid-19 pandemic lead to increased demand for protection. This reflects the potential for growth for the industry,”

FPI shareholding in the listed insurance players have also gone up significantly. On a year-on-year basis, FPI holdings in HDFC Life doubled to 23.55 per cent as on June 2020 from 11.75 per cent during the same period last year.

ICICI Lombard General Insurance - 26.61 per cent (18.53 per cent), ICICI Prudential Life - 15.06 per cent (11.48 per cent) and SBI Life - 26.15 per cent (19.42 per cent) have all witnessed increased FPI holding during this period.

Betting on growth

Dilution of stake by promoters of listed insurance companies to comply with SEBI's norms of minimum public shareholding of 25 per cent was also one of the reason for spike in FPI holdings in insurance companies.

For instance the UK’s Standard Life divested nearly 2 per cent of its stake in HDFC Life Insurance in June through open market transactions.

The transaction saw huge buying from mutual funds and FPIs including Morgan Stanley, Nomura and Societe Generale.

Similarly, In June, SBI’s Board also approved divestment of 2.1 per cent of its stake in SBI Life, a joint venture between State Bank of India and global insurance company BNP Paribas Cardif.

“Promoter disinvestment to comply with minimum public shareholding norms could certainly be one of the reasons for the optimism in the insurance space as FPIs prefer buying large quantities at a stable price from the open market,” Shah said. However Shah feels that promoter disinvestment is not the only reason for FPIs increasing their stake but future potential and growth prospects of the industry are the key parameters driving the renewed interest.

“On the backdrop of recession worries and fears of slowdown due to Covid-19, there was a general market perception of severe hit on premium growth, persistency of the existing book and profitability going ahead,” Shah said, adding, “Much to everyone’s surprise private players managed to bring back their APE growth momentum on a YoY basis.”

“It is worthwhile to add that the share of private players on an annual premium equivalent (APE) basis continued to improve on a sequential basis,” Shah added.

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