Insurance Stocks Analysis Made Simple

Hello, I am Umesh Tripathi and we are learning the concepts of Fundamental Analysis. In this video we are going to understand how to analyze investable companies in the Insurance sector. Here we will take an overview of the overall Insurance sector. We will learn what are the types of Insurance, how the selling and marketing of Insurance happens, and how do we analyze Life and General Insurance companies in detail. 

When it comes to the Insurance sector, understanding the business model of Insurance sector companies is the key. Insurance companies basically fall into important categories like Life Insurance, General Insurers, Reinsurers and Health Insurance. 

Here whenever we talk about Life Insurance, basically it is long-term policies which focus on mortality. When it comes to General Insurance, it is mainly focused on covering cars, homes or liabilities. Reinsurers basically insure the Insurance companies. So here the Reinsurers are nothing but the Insurance companies which are actually providing protection against certain risk to the Insurance company. So here the insurers actually share the risk with the Insurance companies. Along with this, Health Insurers cover the medical costs. So knowing in which particular domain the Insurance company works is a key to the overall Insurance sector company analysis. 

As far as the overall Insurance industry is concerned, in India opportunities are very high. If we talk about market size, for 2023–24 data we have, total premiums are around 11.19 trillion. Life Insurance premiums are around 8.3 trillion. As far as General Non-Life Insurance premiums are concerned, it is around 1.73 trillion. Health Insurance premiums are around 1.7 trillion. Growth rate of the Life Insurance premiums is around 6.06% and the Insurance penetration is 3.3%. So the scope of overall Insurance sector growth is vast and we can see market opportunities in this particular sector. 

As far as companies are concerned, if we look carefully we can see that in the Life Insurance sector certain companies like LIC (Life Insurance Corporation of India) or HDFC Life Insurance are there. In General Insurance we have ICICI Lombard General Insurance, New India Insurance. In Health and Specialized Insurance we have Star Health and Allied Insurance as an example. 

When it comes to distribution and marketing of the Insurance overall, we need to understand how the distribution channel works and what are the marketing trends to be able to analyze the companies in the Insurance sector. As far as distribution channels are concerned, there are many kinds of agency networks where agents and advisors actually act as distribution channels. Along with this, bancassurance where a bank has a partnership with an Insurance company, where the bank sells the Insurance company’s products to its customers. Along with this, the distribution of Insurance also happens through digital platforms as well. There are certain company websites where customers can purchase Insurance policies from different insurers. Along with this, distribution of Insurance policies also happens through direct sales as well. 

Now if we talk about overall marketing trends, the Insurance companies basically come up with certain ideas where they have personalized Insurance policies for different age groups. For example, when you are planning to buy a certain Insurance policy, what happens is when you go to a certain website, they will basically ask for certain details like your age, location, health records and lifestyle, and based on these inputs, they will offer you personalized Insurance policies. For example, a 25-year-old non-smoker actually gets a cheaper term Insurance premium than a 45-year-old smoker. 

Along with this, under marketing trends, technology-driven underwriting also matters. So companies nowadays are using AI tools, wearables and even digital tools to assess the information of the customers and issue fast policies without physical paperwork or medical test. For example, instant policy is given to you on certain websites or apps based on the healthy behavior of the person. Insurance company rewards with a premium discount. So here overall fast processing happens. Along with this, better customer experience is achieved and higher sales perspective is also there. 

Now let’s discuss about important metrics which are required when we are analyzing the Insurance companies mainly for the purpose of investment. Different sectors have different important metrics. This we have been telling you in our videos. Here when it comes to the Insurance sector, mostly the key metrics are Net Premium Earned, Persistency Ratio, Value of New Business (i.e. VNB) and Embedded Value where the present value of future profits plus net worth of the overall company is calculated. These are all important key metrics. We have also discussed them in our earlier videos. 

For example, if we take HDFC Life in FY22, Persistency Ratio of the company at the 13th month was around 88%. Value of New Business, the margin they are earning from new businesses, was 26%. Embedded Value here is around 40,000 crores. So basically these key metrics we discussed are the metrics which are used for analyzing the Life Insurance company. 

Now when it comes to analyzing General Insurance companies, there are slightly different metrics which we focus on. These are mainly Combined Ratio where we have the claims plus expenses divided by premium. Loss Ratio where we have the claims incurred divided by net premium. Underwriting Profit — which is profit from the core business before the investments are made. And Investment Yield return on invested policyholders’ funds. 

So basically when it comes to General Insurance, the company also invests the policyholder’s funds. So in such cases Investment Yield becomes an important metric for General Insurance companies. So here also in the Insurance sector, General Insurance and Life Insurance have different important metrics which we need to focus on when we are analyzing these companies. 

For example, ICICI Lombard Combined Ratio is around 104% in FY2024. Underwriting profit here is marginal. Along with this, their investment income is significantly contributing to the profits. So in order to figure out the investable companies in the Insurance sector, we have to check the key financial metrics and also check the balance sheet strength where we look at Capital Adequacy Ratio, reserves, along with Solvency Ratio and Leverage Ratio. Along with this, regulatory and risk management factors are also important. We have to review the risk disclosures be it climate risk or pandemic exposure or cyber risk. We have to also evaluate the Enterprise Risk Management practices and the IRDAI regulatory requirements also have to be evaluated when analyzing an Insurance company. As far as growth prospects are concerned, we have to analyze the overall growth trend of the premiums. Along with this, we have to assess the geographical diversification and we also have to assess new product lines or digital innovations. Along with this, whether it is Life Insurance company or General Insurance or any kind of Insurance company, we have to always do the valuation study when it comes to finding the investable companies in the Life Insurance sector. So there are a few important valuation metrics that we need to take care of. These are Price-to-Book Ratio, Price-to-Earning Ratio and Embedded Value. Basically for the Life Insurance, it is an important factor. Embedded Value means the present value of future profits plus adjusted net asset value. 

So all in all, understanding the Insurance business model is the key when it comes to analyzing the Insurance companies. Life Insurance and General Insurance require different metrics for decision making. 

That is all in this video. See you in the next video. 

Investments and securities markets are subject to market risk. Read all the related documents carefully before investing.