There are crucial parameters such as expected growth of new business premiums (NBP) and new business premium margins (NBP margins) and of course embedded value that analysts look at. “If we look at existing listed life and non-life insurance companies, valuations are looking rich. In the insurance industry, we look at three broad numbers for their valuations, which are embedded value, expected growth NBP and NBP margins.
If we look at the current scenario, SBI Life looks attractive on all the fronts as they are market leaders in new business premium collection, along with robust distribution network and consistently showing steadily improving operational metrics,” said Ashutosh Kumar Mishra, senior research analyst-Banking and Financials, Reliance Securities. The embedded value of SBI Life as of March 2017 was Rs 16,537.9 crore and the issue was valued at 4.2x. In comparison, ICICI Prudential Life Insurance’s was valued slightly less at 3.8x, according to a report by Angel Broking.
However, most analysts are bullish on this sector because of its long-term prospects. According to Crisil Research, new business premium for life insurers is set to grow at 11-13 per cent compounded annual growth rate (CAGR) from FY17 to FY22, compared with nine per cent CAGR between FY12 and FY17. It also expects total premium to grow at 13-15 per cent CAGR over the next five years, from Rs 4.1 lakh crore in FY17 to Rs 7.9-8.1 lakh crore by FY22.
Given this, investors can look at these stocks as a long-term bet. But, the question is should they enter it using the initial public offering route or wait and buy these stocks in the secondary market when the valuations are cheaper. “While insurance could be a good business to have in the portfolio, one cannot ignore the valuations (at which) one is entering it. A great business bought at obscene valuation often proves to be a bad investment, which is what happened with a couple of recent IPOs,” said Jatin Khemani, founder & chief executive officer, Stalwart Advisors, a Delhi-based Sebi-registered equity research firm.
The answer lies in the way the investor is willing to approach this sector. “I would suggest investors stay invested for at least three years in the insurance companies, as few months or a year is too short a time for them to showcase their performance. Investing for the longer duration will be rewarded by the performance and returns,” Parekh said. In other words, if you are a short-term (one year or less) kind of investor, this sector may not be the best option. And it may also not be a great bet if you are looking for listing gains. Whether buying in the IPO or secondary market, the holding period has to be significantly higher.