Insurance and AMC stocks, better alternatives in BFSI segment

On a day when the Nifty Bank Index fell over 6 per cent, stocks of insurance companies — mainly life insurers — bucked the trend, with gains between 3 and 5 per cent. New India Assurance was up over 13 per cent, the highest among these stocks. With heightened risk aversion to banking and non-bank lenders, analysts say insurance and asset management companies (AMCs) could turn out to be an interesting alternative in the banking, financial services and insurance (BFSI) segment. 

“Markets are moving towards non-lender-based financial sector stocks, such as insurers and asset managers, as they do not carry balance sheet risk and offer growth opportunities,” say analysts at ICICI Securities. Even those at Kotak Institutional Equities feel that stocks in the insurance segments may be better placed than the lending segment within the financial services space. The fact that these companies work towards the financialisation theme — which is aimed at improving the customers’ savings — positions them better than banks, especially at a time of slowing economic growth. Moreover, ahead of March’s market meltdown, these stocks didn’t find much favour because of their expensive valuation. With 30–37 per cent stock price correction in the past three months, concerns on valuations have also been addressed, making insurance and AMC stocks attractive for investors.

 

However, even if these stocks offer potential, there are some downside risks that investors should be cognizant of. For one, as the reinsurers have started increasing their pricing, insurance companies, too, may hike their price to customers. However, under the current conditions, the degree to which price hikes can be implemented is questionable. 

“Weak retail sentiment, on the back of Covid-19, and focus on growing the high-yielding protection segment (individual protection and credit life insurance), will likely deter insurance companies from raising protection pricing sharply over the next few quarters,” say analysts at Kotak Institutional Equities. 

The brokerage also warns of a potential fall in persistency ratios because of a shift in consumer preferences and high unit-linked insurance policies surrenders. Consequently, there may be some immediate-term pressure on pricing for insurance companies. For AMCs, one needs to be watchful of redemptions and persistency of systemic investment plans.