Vidhi Shah of Prabhudas Lilladher is
optimistic on HDFC Life but is less
on SBI Life. “HDFC Life deserves
the valuation it quoted,” according
to her. “Its stock price has corrected,
but it is still a good buy. However, we
are not keen on SBI Life.”
Insurance is a complex business.
Retail investors are advised to stay
focused on a few key parameters
while deciding on stock purchases.
For one, general insurers could
look at a company’s underwriting
profit. “Focus not only on the market
share, but also ascertain whether
these companies are making
underwriting profits, or if they’re
moving in that direction. Hardly any
company posts underwriting profits
today,” explains Devare.
Profit over time
If the prospects of the sector – life
and general – are bright, why are
a majority of the insurance stocks
trading at a discount to their issue
price? (See: A Mixed Bag)
“This scenario is somewhat
expected in case of insurance sector
as it is a slow-moving business. And,
that is why insurance should be
considered from the long-term view,”
says Pandya. Global actuarial firm
Milliman’s principal and consulting
actuary, Sanket Kawatkar, however,
strikes a note of caution. “The
stock prices of Indian life insurance
companies seem to be out of line
against its Asian peers,” he states in
Milliman’s annual report on the life
insurance sector. The report further
states: “Unless insurers are able
to maintain business growth and
profitability [not just value of new
business (VNB) margin, but
absolute growth of VNB], the high
embedded value (EV) multiple
currently enjoyed by the insurers
cannot be sustained.”The report also stresses on the
importance of monitoring changes
in the embedded value of stocks.
“High operating variances would
adversely impact investor confidence
in life insurance stocks,” it said.
Simply put, retail investors should
study various metrics to rate a
company stock. Also, they need
to look at the combined operating
ratio (COR). COR is the total claims,
commissions and expenses to the
net premium earned. “The COR
is an important indicator for the
industry’s profitability,” says Devare.
As the market debutants are
yet to prove themselves, it makes
sense to stay alert. “Unlike the
pre-listing era, the listed insurers
declare their quarterly results
in the exchanges. This gives the
investors an opportunity to track
the performance of these companies
over the next six to eight quarters,
thus, providing clarity on their long-
term growth and likely investment
gains,” says Pandya.
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Insurance is a slow-
moving business;
it should be
considered from the
long-term view58 Outlook Money March 2018 http://www.outlookmoney.com
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