FPIs bullish on insurance stocks; holding touches new high in Sep quarter

So far this calendar year, FPIs' stakes in SBI Life, Insurance ICICI Lombard and HDFC Life have risen by 18.85, 8.62 and 7.71 percentage points, respectively, since the December 2018 quarter

Foreign portfolio investors (FPIs) lapped up insurance-sector stocks in the July-September quarter this year, with their holdings in these companies rising by one to four percentage points during the period.

So far this calendar year (CY19), FPIs’ stake in SBI Life Insurance has risen to 23.72 per cent from 4.87 per cent at the end of the December 2018 quarter. Their holding in ICICI Lombard has increased to 20.84 per cent from 12.22 per cent, and in HDFC Life to 15.94 per cent from 8.23 per cent during the same period, show data.

Their bullish stance has seen these stocks gaining 50-65 per cent on bourses on a year-to-date basis. Most of these stocks are now trading at their respective all-time highs on the BSE. By comparison, the S&P BSE Sensex has risen 8 per cent during the period.

Analysts at JP Morgan remain confident about Indian life insurers’ new business value (NBV) growth in the next 10 years, given their low penetration. However, they expect a softening in NBV growth rate in the near term as premium growth starts to moderate.

A recent report by Kotak Institutional Equities suggested that individual annual premium equivalent (APE) actually moderated in the September 2019 quarter (Q2FY20). Private sector players, according to Kotak, reported 3 per cent year-on-year (y-o-y) growth in overall APE in September 2019, with 3 per cent growth in individual APE. Overall individual industry APE dropped 3 per cent y-o-y as LIC reported a sharp decline of 11 per cent y-o-y.

“ICICI Prudential Life’s APE declined for a third month, albeit at a slower pace. Even HDFC Life declined after five months of consistently high growth rate. SBI Life and Max Life continued to moderate for a second consecutive month,” the Kotak report said.

As an investment strategy, however, most brokerages remain bullish on the stocks, despite the sharp run up seen thus far in CY19, and suggest investors should buy these stocks on a correction for the long term.

“We forecast 15-38 per cent y-o-y NBV growth potential for top-three private life insurers in Q2FY20. For the non-life sector, we would see a relatively small underwriting improvement potential in the next couple of months due to competitive pricing in the motor own damage (OD) and lower auto sales volume. The motor third party (TP) pricing and scale increase would be a source of mitigation for private players. (We) recommend adding quality names in any weakness during Q2 reporting season,” the brokerage firm said in its report dated October 15, 2019.

In July 2019, Christopher Wood, global head of equity strategy at Jefferies, had added SBI Life in his Asia ex-Japan long-only portfolio with a weight of 4 per cent. According to a recent Morgan Stanley report, both SBI Life and ICICI Life could be included in the MSCI EM Index during a scheduled review in November, as the stocks meet the market-capitalisation (market-cap) criterion of MSCI, which should see more money flow into these stocks going ahead.