Since late 2016, three major life insurance companies have got listed in India – ICICI Pru Life, HDFC Life and SBI Life. There are rumors of the market leader (LIC) also getting listed sooner than later – if and when, remains to be seen.

The sector has seen increased investor interest in the recent months. Reasons –

• Significant stock returns in the last 1 year – all three companies have given 50%+ returns compared with 12% of the nifty.
• High valuation multiples – P/Es of more than 60x and P/Bs of more than 10x

Out performance of the sector became more noticeable during this period given the overall cautious economic environment and significant under performance of the most other mid-cap companies (many of which corrected by 50-60% during the same period).

The result – everyone is confused whether to continue investing in this sector or not? Slower business growth in the recent months has further added to the doubts.

“If the business does well, the stock eventually follows” – Warren Buffett

Rest everything creates inefficiencies and provide opportunities to a disciplined investor.

Over the years, I have realized this to be the most powerful and effective input to my investing strategy. Valuations as well as quarter on quarter performances matter but if the overall business framework continues to remain solid, the chances of going wrong are mitigated to a very large extent.

Core offering of a Life Insurance Company is to offer protection against life to it’s customer. This itself is highly unique.

The only business where a customer doesn’t hope and expect anything in return during his lifetime.

I repeat – the only business where a customer doesn’t hope and expect anything in return during his lifetime !

Please don’t confuse this with the investment linked life cover as I consider that more as a value add offering and not as the core business. Core business is life protection.

India is vastly under life-insured in terms of both penetration (2.7%) and density (55$). It would be foolish to extrapolate and ponder too much on this in this post – it’s reasonable to assume that there is significant available growth for the foreseeable future.

The key to growth would be product awareness, product structuring and distribution architecture.

Advancement in healthcare facilities is expected to increase Average Life Expectancy from 68 years in 2015 to 75 years by 2055. This is positive for life insurance companies in terms of both claim ratios and better demand for pension linked products.

Life Insurance Companies receive periodical premiums from the insured over a pre-defined time frame. The risk of continuity is mainly in the first couple of years.

Once someone has paid the premium for the first 2-3 years, the continuity risk goes down drastically. Nothing special here, typical human behavior pattern whereby we continue to care for our past money.

Bad renewal rates in the initial years can be due to improper selling and/ or poor product structures. Good Companies would always be looking and working on these numbers very carefully.

Life Insurance also entails minimal threat of switch to the competition – reasons – high switching costs, concern for our past money and we don’t know what competition would do better.

Post demonetization, you must be hearing a lot about opportunity related with “financialisation of savings” i.e., how increasingly people are and will continue to move money away from gold and real estate towards the financial products (especially mutual funds).

I (as an equity investor) prefer life insurance companies over mutual fund companies to play this theme –

• With availability of extra money along with the lower costs of buying life cover, more people may first start opting for life covers vis-a-vis mutual funds (helps securing the family’s future).
• Insurance companies also offer investment linked life covers, offering an optically better proposition vs mutual funds.
• Insurance Companies given their annuity like inflows and muted return expectations have lesser market related risks vs mutual funds.

There were times when life insurance policies were only sold through the offline agents. All of us remember someone in the family acting as a LIC agent.

Then came internet but educating and making customers transact over internet was a challenge.

In both cases – the cost of customer acquisition was high and as a result product offerings continued to remain centered around the big ticket offerings i.e., investment linked life covers. Consequently, the products could not be targeted towards a significant chunk of the population.

All that is changing now – and I am excited…

Online banking, Amazon, PayTM, Flipkart, Uber, Big Basket, Swiggy etc etc etc – best of the technologies with a very loyal customer base. Cost of acquisition through these channels is more reasonable, allowing Life Insurance Companies to focus more on innovation and offer low cost life covers to the population at large.

I believe Life Insurance in India today is what banking was in early 2000s. If that were to be true, exciting times lie ahead !

Main risk that I would keep a watch on – regulations.

Disclosure: I have been regularly investing into the Life Insurance Companies and currently intend to continue holding them in my long term portfolio. Neither this nor the above post is any investment recommendation to the reader. He should do his own research before taking any investment related decision.

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