Insurance and AMC stocks, better alternatives in BFSI segment

Topics Nifty Bank index | Nifty Bank | BFSI

The brokerage also warns of a potential fall in persistency ratios due to shift in consumer preferences and high ULIP (unit-linked insurance policies) surrenders.
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.


Dear Reader,


Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.

We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel