How insurance sector will gain from FM Sitharaman's Budget booster

What do the Budget proposals, as well as the proposed LIC IPO and privatisation of one general insurance company mean for the sector? Nikita Vashisht explains

One of the most important yet under-penetrated sectors in India, insurance, has been making headlines for the past few weeks. The spotlight was first put on the sector in early February, when Finance Minister Nirmala Sitharaman proposed to increase the permissible foreign direct investment (FDI) limit in insurance companies to 74 per cent from 49 per cent and allow foreign ownership and control with safeguards.

The law currently says that an Indian insurance company has to be ‘Indian-owned and -controlled’. The measure proposed in the Budget would give the Indian partner the right to appoint a majority of directors or control the management of a company.

The move, analysts say, is credit-positive for the entire sector and would especially benefit smaller insurance firms struggling to raise capital. The financial support from foreign portfolio investors (FPIs) will also enable insurance firms to augment customer acquisition and thus improve insurance penetration in the country, analysts explain.

"FII holding in life insurers is currently low at 30-35 per cent. Large private insurers may see increased competition if smaller players get better capitalised," Neelkanth Mishra, managing director, India Strategist and co-head of equity strategy for Asia Pacific, Credit Suisse, wrote in a recent note he co-authored with Abhay Khaitan and Prateek Ancha.

At the end of December 2020, FPIs held a 25 per cent stake in HDFC Life, 27 per cent in SBI Life, 16 per cent in ICICI Prudential Life Insurance, and 28 per cent in ICICI Lombard General Life Insurance, data show. As regards state-owned players, FPIs held just 0.04 per cent stake in The New India Assurance, and 0.19 per cent in General Insurance Corporation of India.

Insurance penetration in India, according to the Economic Survey 2019-20, improved only marginally to 3.76 per cent in 2019 from 2.71 per cent in 2001. In contrast, insurance penetration in 2019 in other Asian countries like Malaysia, Thailand and China stood at 4.72, 4.99 and 4.30 per cent, respectively.

Divestment buzz and LIC IPO

The second shot in the arm for the insurance sector came in the form of a privatisation hope for one of the state-owned firms. While proposing Budget for 2021-22, FM Sitharaman announced a big-ticket privatisation agenda, including the privatisation of one general insurance company.

Reports now suggest that the government may consider privatising Oriental Insurance and/or the United India Insurance Co as "their financial health has improved after a series of capital infusions".

Vinit Boljinkar, head of research at Ventura Securities, suggests state-owned insurance firms are well poised to attract bidders because their legacy businesses have a very deep penetration in the Indian ecosystem. For those interested in the Indian insurance sector, the government's divestment agenda in public-sector insurance plays offers a good opportunity, Boljinkar believes.

"Due to Covid-19, insurance companies have gained huge attraction, covering new markets. At the same time, the government is also pushing the public to have insurance and has proposed various plans for it. Overall, the step to privatise state-owned players may have a positive impact on the insurance sector as the demand for insurance is increasing in the country because of a large untapped market and increasing awareness about the same," opines Gaurav Garg, head of research, CapitalVia Global Research.

That apart, the proposed initial public offering of Life Insurance Corporation (LIC), which is expected to materialise during financial year 2021-22 (FY22), has also kept sentiment upbeat in the sector. While the government will continue to be the majority shareholder and retain management control, it will reserve 10 per cent of the LIC IPO issue for policy holders.


 

The road ahead

Against this backdrop, the outlook for the sector remains robust. Private life insurers have recovered well from the Covid-19 pandemic and returned with positive annual premium equivalent (APE) growth when compared with the first half of 2020-21. Values of New Business (VNB) margins were also strong for players like HDFC Life, Max Financial and ICICI Prudential Life for the first nine months of financial year 2021-22 (9MFY21), as compared to FY20, note analysts at Sharekhan.

"Furthermore, going forward, management commentary indicates that there is a recovery in unit-linked insurance plan (ULIP) and credit life business as well (spurred by bancassurance/agency channels resumption) which were hitherto subdued due to the pandemic and the impact thereof and thus will add to the growth outlook in FY2022E," it said in a report dated February 19.

Supported by India’s demographics and underpenetrated/underinsured Indian insurance market, analysts believe players with a strong balance sheet, strong banking tie-ups and robust business metrics would be able to tide over challenges. That said, the proposal to levy capital gains tax on ULIPs from April 1, 2021 may hit recovery in the segment, they caution.

"While the introduction of long-term capital gains tax (in 2018) did not lead to a big swing of flows into ULIPs, we think the Budget proposal further makes ULIPs a difficult product to push and will likely have a bearing on the sector’s growth," said Nomura.

Those at Edelweiss Securities, meanwhile, say that ULIP growth in earnest may require cyclical support, but a market share recapture in the same and resumption of protection momentum are keenly awaited.