Top 2 Indian Companies Riding the Insurance Megatrend

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  • Mar 8, 2022 - Top 2 Indian Companies Riding the Insurance Megatrend

Top 2 Indian Companies Riding the Insurance Megatrend

Mar 8, 2022

Top 2 Indian Companies Riding the Insurance Megatrend

Insurance companies have the potential to be long term wealth creators that can be passed on as an asset for generations.

However, with only a few companies listed, investors have very limited access to this industry.

But that might change after the government passed a new law - The General Insurance Business (Nationalisation) Amendment Act, 2021. The act aims to increase the participation of private sector and retail investors in the general insurance business.


What are the provisions of the act?

As per the report published by the Ministry of Law and Justice, the law allows the government to dilute its stake in specified insurers namely, General Insurance Corporation (GIC), National Insurance, New India Assurance, Oriental Insurance, and United India Insurance.

Moreover, the government will not have any control over the above insurance companies after it dilutes the stake.

What does this mean for an individual investor?

Though an age-old sector, insurance is one of the recent entrants on the bourses. Until 2017 no insurance company was listed on the stock exchange. The sector was opened up for individual investors after ICICI Bank sold its stake in ICICI Prudential Life Insurance Company.

Though the sector has more than 24 life insurance companies and 34 general insurance companies, only a handful of these are listed on the stock exchange.

With the government's move to reduce its stake in public sector enterprises, a new investment avenue has opened up for retail investors. They can now participate in the insurance sector through public sector undertakings, which is considered to have the most tax advantages.

Here are two listed insurance companies where the government owns the majority stake and can be possible candidates for divestment.

#1 General Insurance Corporation of India (GIC)

First on our list is General Insurance Corporation of India (GIC), the only reinsurance company in India.

The company provides reinsurance to several business lines, including fire, marine, engineering, health agriculture, aviation, and life insurance.

It's the largest reinsurance company in India, with a market share of around 64%. The Government of India (GOI) holds an 85.8% share in the company.

GIC also has an international presence and operates through its offices in the UK, UAE, Russia, Brazil, and South Africa.

In the last three years, the company's revenue saw a degrowth (CAGR) of 11.2%.

However, in the financial year 2021, the revenue grew by 238%, led by growth in the health, agriculture, and motor insurance sectors.

Its net profit grew almost five folds to Rs 19.9 bn in the financial year 2021, after reporting a loss of Rs 3.59 bn in the previous year due to higher claims due to catastrophe events.

GIC's solvency ratio also improved to 1.74x in the financial year 2021, from 1.53x the previous year.

The solvency ratio helps determine an insurance company's ability to meet all the claims. As per the guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), an insurance company must maintain a solvency ratio of 1.5 to avoid bankruptcy.

The reinsurance industry is experiencing a hard market situation due to higher natural disaster claims. With premiums going up, it's getting challenging to increase the size of new business premiums.

However, going forward, the industry is expected to grow in tandem with the economy. This is mainly due to the uncertainty of the pandemic, indicating a higher growth prospect for GIC driven by the health, motor and agriculture sectors.

To know more about GIC, check out its factsheet.

#2 New India Assurance Company

The second company on our list is New India Assurance Company, India's largest non-life insurance company.

It's primarily engaged in the business of providing insurance, including motor, rural, fire, aviation, marine, and travel insurance, among others.

The company is the market leader in domestic general insurance, with a share of 14.3% as of the financial year 2021. The Government of India holds an 85.4% share in the company.

Its long-established track record, and superior market reach, has helped the company retain its market leadership.

New India Assurance also has a dominant presence outside India. Its international presence is spread across 28 countries through a network of three subsidiary companies, seven agencies, and 19 branch offices.

In India, it has a strong network of 31 regional offices, 477 divisional offices, 594 branch offices, and 1,257 micro-offices.

In the last three years, New India's revenue has grown at a healthy rate of 52.5% (CAGR), driven by an increase in health and motors insurance.

Its profit has also grown at a CAGR of 39.1% during the same time.

In the financial year 2021, New India Assurance's solvency ratio improved to 2.13x from 2.11x in the previous financial year.

Going forward, the growth will be driven by the health sector due to increased market awareness. Moreover, with increased premiums, the revenue growth is expected to be higher than last year.

To know more about New India Assurance, check out its factsheet.

Why should you invest in insurance stocks?

Insurance stocks provide an excellent investment opportunity as they can be potential permanent wealth creators. The new law allowing the government to dilute its stake in public sector insurance companies is just a bonus.

These companies help diversify your portfolio and help in value addition. This is mainly because insurance companies make money from underwriting profit and investing.

Moreover, they don't pay taxes on the entire premium amount they receive. They only pay taxes on the income they receive as a surplus from expired policies.

However, insurance companies are not similar to financial services companies

Their financial statements differ a lot. Moreover, valuating these companies is tricky, and there is a wide gap between Indian companies and their global peers.

Investors who wish to participate in this industry have to understand how the companies make money and also have to know which parameters to check. Select only those companies with a credible track record of managing the investible funds.

Alternatively, one can consider investing in companies with a significant stake in insurance companies to participate in this sector.

It's important to remember that proper research is required before considering investing in any company.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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