Warren Buffett: Can Warren Buffett’s favourite sector deliver D-Street’s biggest compounder this decade?

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NEW DELHI: Does Insurance stand today where HDFC Bank was 20 years ago?

That’s the question running in the minds of several long-term investors in India, who are hunting for stocks that can compound steadily over the next few years. After all, even legendary investor Warren Buffett loves insurance stocks. Over a quarter of Berkshire Hathaway’s holding is in the insurance business.

“Insurance is a great play on the emergence of the middle class in India. When people graduate into middle class, what they generally do is buy insurance. It is a great structural story to just own whether the market is going up or not. Although it benefits from a rising market, because insurance companies typically own large equity portfolios,” says Mark Matthews, Head of Asia Research, Julius Baer.

As the insurance industry is relatively nascent in India compared with its developed market peers, the runway for growth is much longer. Just the way Covid accelerated the adoption of digital technology by a few years, the pandemic might also give a fillip to the insurance industry in India.

“Insurance companies will get bumper underwriting opportunities like what happened till March. People are scared; they will definitely like more insurance. Insurance rates have also gone up. It is going to be an opportune sector,” says Raamdeo Agrawal, a value investor and Co-founder and Chairman of

.

Along with HDFC Bank, HDFC Life Insurance featured in a list of 25 stocks for the next 25 years that Agrawal put out last year.

Dalal Street’s blue-collared fund manager Saurabh Mukherjea is also betting big on HDFC Life, which had a market share of 21.5 per cent in the private life insurance market in FY20.

Citing three trends that are working in favour of the stock, Mukherjea says HDFC Life is at a very powerful intersection of the migration of market share from public sector to private sector and the shift of market share to strong and well-run financial services companies. The company will also benefit from financialisation of savings. “It does have strong competitive advantages around data analytics and their underwriting capabilities are the best in the country,” Mukherjea said.

Foreign brokerage Nomura, which has a target price of Rs 725 on the stock, said in a note this month that it continues to believe HDFC Life remains a good compounding story.

Near-term challenges
While on the one hand, the awareness about insurance might have gone up during the first and second wave of Covid, most insurers reported higher claims in FY21. In the second wave, deaths have already exceeded last year’s numbers. New business premium (NBP) growth also declined 5.5 per cent year on year at the industry level.

Jefferies said its talks with top insurers indicate claims come with a lag and the industry is expecting a 2-3 times rise claims from Covid 2.0 compared with the first wave.

ICICI Securities said the increase in mortality and morbidity rates induced by the pandemic is an area of concern for the industry in the short term. Yet, the brokerage has a ‘buy’ rating on

, HDFC Life and SBI Life. Nirmal Bang also has a ‘buy’ rating on all the three listed insurers.

Volatility factor
Saurabh Mukherjea-run PMS firm Marcellus Investment Managers believes life insurance as a business is likely to have a relatively low correlation with lenders and can, therefore, act as a natural hedge and reduce portfolio volatility.

“While life insurers do not have a long history of being listed in India, the past year has shown that even though insurance and lending are parts of the larger financial services universe, the balance sheet structures and business models of insurers and lenders are quite different and uncorrelated with each other,” the PMS said in a recent note to investors.

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