Seven reasons why life insurance is a great sector to invest in

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Investors long attuned to investing in Fast-Moving Consumer Goods (FMCG), consumption and banking sectors for sustained returns have one more sector to choose from and that is the life insurance. While it may sound perplexing, the life insurance business has been in India since 1818, when Oriental Life Insurance Company was established in Calcutta. Then why is this opportunity of recent origin?

Well, while this business was in vogue for many years, you could not buy any share directly in a life insurance company till the first Initial Public Offering (IPO) of a pure life insurance company, ICICI Pru came in September 2016. This was followed by the SBI Life IPO, which came in September 2017 and then HDFC Life in November 2017 (Not under coverage as it is a group company).

Now one can take direct exposure in life insurance companies. There are other listed ventures also in the markets, but these are essentially holding companies, which come with holding company discounts. The largest of them all is Life Insurance Corporation (LIC) of India, but it is currently not listed.

Low penetration
Simply because penetration of Life Insurance in India is very low it makes an exciting high growth sector. Consider this, the ratio of premium to Gross Domestic Product (GDP) in India is only 2.7 percent as against a world median of 3.5 percent, or Thailand’s 4 percent or South Africa’s 11 percent. That leaves a lot of gaps to catch up with. Another way to look at the opportunity is the number of life policies in comparison to the population. That ratio is abysmally low at 2 percent as compared to 80 percent in developed countries.

Grossly underinsured
Surprisingly, even people who are aware and have taken an insurance policy are grossly underinsured. Conduct a dip test amongst the people around you and you will soon realise, how grossly underinsured India is. So in India, we not only have the issue of lower penetration, but also under-insurance. Both these factors mean faster growth opportunities.

We are the fastest growing economy in the world
Amongst the world’s largest economies, India is the fastest growing economy. And, to add to that our population is only growing at about 1.2 percent. This means, the per capita income will grow at a much more rapid pace.

Foreign institutional investors (FIIs) and pension funds like them
Long-term institutional investors like pension funds and other FIIs love the life insurance sector for the visibility it offers. They have benefitted from their investments in this sector globally. This sector is the best player, especially for India’s demographics. And knowing the growth possibilities in the sector, they are likely to behold these stocks for a really long term. FIIs have long held the parents of these companies like ICICI Bank and SBI. But now that these insurance subsidiaries have been independently listed, they are taking a direct exposure to the desired extent.They are now playing the India story directly through these companies.

The long term capital gains gift
This year’s budget on 1st February, gave the insurance sector a gift, exempting the investments through Unit Linked Insurance Plan (ULIPs) from the Long Term Capital Gains (LTCG) tax. While direct equity and mutual fund units will bear the LTCG impact, the ULIPs will be exempted. This gives the ULIPs a tax differential, which will make them a preferred vehicle of equity investments. As more money flows into ULIPs the Assets under management (AUMs) of these insurance companies will rise, enabling them to improve their returns to their shareholders.

High growth
New business in life insurance premium has increased at a Compound Annual Growth Rate (CAGR) of 24.3 percent for 2015-17. This growth was registered before the differential tax benefits plugged in. Going forward, the growth could be higher because of these tax breaks.

Currently, life insurance companies enjoy a lower corporate income tax rate of 14.3 percent. Going forward, there are chances that this rate may be hiked to match the rest. This may happen at the time of the next budget. On the other hand, the life insurance premium is subject to 18 percent GST at this time. There is a demand to reduce the tax slab to 12 percent to make insurance more affordable. This might change at any of the future GST Council meetings, as and when the matter needs to be addressed.

Life insurance companies are one of the best ways to participate in the India growth story and benefit from the changing demographics. I expect the sector to give better than the market returns for the simple reason that is growing at a higher rate than the economy and will continue to do so in the foreseeable future. There is no need to hurry. Make them the core of your investments and buy as per your investment strategy. But before you place the order for your first stock, ask yourself how much you are worth and take out a hefty term plan policy first.

Disclosure: The author holds shares in HDFC Life

The author is Head PCG & Capital Market Strategy at HDFC Securities and has an experience of 29 years in the Capital Markets, both Primary and Secondary.

The thoughts and opinions shared here are of the author.