don’t bank on insurance
India’s current largest IPO, that of Paytm, is not faring all that well for its investors. on January 19, its price crashed ~5% to a lifetime low of Rs 990/share (from an issue price of Rs 2,150/share), rounding off a 26% drop in 12 trading sessions. perhaps that tag is weighing too heavy on the mainly-fintech player. but it might soon be free of that burden, as it shifts to the Life Insurance Corporation of India (LIC) which is in the final legs of preparation for an IPO that might be worth as much as $12.2 billion (~Rs 90,000 crore).
LIC is expected to fare better in its initial days on the market, but should investors expand that optimism to its peers?
the pandemic has brought mixed tidings for businesses, with clear winners and losers, and some in between. while big tech and e-commerce companies have made big gains, insurance firms have been hit hard. despite 2021 being a standout year for the Indian stock market, three of the seven listed insurance firms showed negative returns over the trailing one-year period as of January 19 (including Star Health which made its debut in December).
there seems to be little relief in sight in the immediate future either, as evidenced by the quarterly report of ICICI Prudential Life Insurance. despite being one of the firms delivering positive returns over the trailing-year period, it lost over 5% on the day after falling short of analyst expectations with net profit falling 30% over the preceding quarter.
the insurance firms’ future prospects are further dimmed by the fact that the pandemic is still raging, and constantly evolving. as on January 3, following the surge in cases due to the rise of the Omicron variant, the general insurance industry had received 17.86 lakh Covid-19 claims in FY22 for a claim amount totaling over Rs 20,000 crore . the number of claims is 80% higher than in all of FY21. health insurers have settled 16.38 lakh Covid-19 claims, amounting to Rs 14,916 crore. this has naturally exerted heavy pressure on their margins, and despite hiking reinsurance and new policy rates, they are far from returning to their pre-pandemic cash flows.
on top of this, that upcoming behemoth LIC owns more than two thirds of the overall insurance market share in India. a successful listing would only strengthen its position, pushing the others to compete for a decreasing not-very-profitable chunk.
as long as the pandemic refuses to go away, there is always the risk of a surge in cases and accompanying insurance claims. of course it is crucial that these firms continue to remain healthy and support their policyholders in their time of need. however, from the perspective of an investor, this may not be the most lucrative time to be buying into them.