Diversification of your portfolio across various sectors decreases the risk of losing money. One sector may be the Insurance sector. You should include Insurance sector stocks in your portfolio. Insurance shares yield better returns in the long run in spite of the economy being in the recession phase.
Now, at the time of investment in the best insurance stocks to buy in India, ask yourself the following 3 questions.
Have you built an emergency fund? Before investing in the best insurance stocks in India do create an emergency fund. An emergency fund will help you to tackle emergency conditions namely unexpected hospital expenses, finance unplanned traveling expenses, and even meet the household expenses when you have lost your job.
Have you diversified your portfolio? Don’t allocate all your investment capital into the insurance stocks. Instead of doing so diversify your stock portfolio across various sectors namely Airlines, Auto, Pharma, Consumer Durables, and Insurance to minimize the risk profile.
Do you understand the business model of a sector? First of all, understand how companies make money. If you are investing in insurance companies do consider by offering which products i.e. vehicle insurance, property insurance, life insurance, health insurance travel insurance, etc. the insurance company makes money.
5 Points to Consider before investing in Insurance companies
When you are in a witch hunt to pick the best insurance stocks to buy in India, analyze the following numbers before including insurance sector shares in your stock portfolio.
Annual Premium Equivalent
When the total annualized premium, be it a regular or recurring premium received, is added with 10% of the single premium received for the first time in a fiscal year, we will get the Annual Premium Equivalent.
The APE of a company shows exact numbers about the total revenue a company generates by selling various insurance products in a fiscal year. When the APE of a company witnesses a steady increase year on year, the company is worth investing in.
Persistency Ratio
The persistency ratio reveals the duration a customer is pays premiums regularly after buying a premium policy. When a consumer sticks to the policy and also makes a renewal, the chances are higher that the profitability of the company is on the rise.
Embedded Value
This is one of the widely accepted metrics to find the value of the life insurance companies. It is calculated when the present value of future profits is added with its net asset value of capital and surplus that has been raised in the past from the shareholders.
Value of New Business Margins
This metric helps you to gauge the profitability of the company. This ratio helps a retail investor to find whether the company is successful to limit the cost of product development and makes a significant profit from writing new policies.
Solvency Ratio
This ratio helps to gauge the financial health of a company. The higher the solvency ratio is, the better the financial health of the company is.
How to pick the best insurance stocks to invest in India
If you are looking for the best insurance stocks to buy now in India, do consider the following 10 parameters.
Parameter #1. Debt to Equity Ratio
When the debt liabilities of a company is divided with its total shareholder’s equity, you will get the Debt to Equity Ratio.
To gauge the risk debt to equity ratio is one of the key metrics used by analysts. When the Debt to Equity ratio is greater than 1, then it’s a clear signal that the company has witnessed rapid growth by pumping the external capital. If the interest payable on the debt is greater than the income growth, share prices tend to move lower.
A debt-free company or a company with marginal debt [D/E ratio <0.25] is the best company to invest in.
Parameter #2. Profit Margin
By calculating the profit margin we can have a clear picture of how much profit a company makes by carrying out the business operation.
Profit margin simply interprets what percentage of profit a company makes when the company generates $1 in sales.
Suppose, a company reports a 25% profit margin during the last quarter. It is a clear signal that the company has made a net income of $25 when its total sales are $100.
Do remember that different sectors have a different profit margin. Take the example of the Software sector and Auto sector.
Software companies invest havoc initially to develop a particular software. After that, they sell millions of copies without any significant cost. We can take the example of Windows and MS Office. They invested huge capital to develop, but now are selling millions of copies with a strategic partnership with laptop manufacturers i.e. Dell, HP, Lenovo, etc.
Contrary to that, take an example of the Automobile Sector. This sector has a low-profit margin because there is immense competition with peer companies, consumer demand on the fence, etc.
Parameter #3. Earnings Per Share
Earnings per share is one of the widely used key matrices to gauge the profitability of a company from its operation. By dividing the company’s net earnings/profit to its total shares outstanding, you will get earnings per share of that company.
A company with a high EPS seems lucrative for the investors. Naturally, the investors will pay a higher price to own the company’s share if they assume that the company has higher profits relative to the company’s market price.
Parameter #4. Dividend Yield
When the Dividend payout of a company in a financial year is divided with its current market price, the end result is Dividend Yield.
A high dividend yield stock creates high possibility to generate good return during the volatile market. You will still get money in the bank account via preferred dividends. But of course, consider the track record of the dividend-paying stocks.
Parameter #5. Return on Equity
To calculate the profitability of a firm, analysts make use of Return on Equity. When the Net income of a firm in a financial year is divided with the firm’s shareholders’ equity, we get Return on Equity.
The Return on Equity takes an account of assets and liabilities a company has. It gives a clear signal about how effectively the management of the company generates profits from running a business operation by utilizing the company’s assets.
When it’s time to pick a stock you should analyze if the company has delivered a higher ROE in comparison to its peer companies. Different sectors have different ROE. As a rule of thumb pick a company that has delivered a 15% ROE during the past 10 years.
Parameter #6. Return on Capital Employed
To gauge the financial performance in capital intensive sectors that have a significant debt level, Return on Capital Employed is a useful metric.
By calculating the Return on Capital Employed you will find how much revenue a company generates by running a business operation for each rupee of capital invested.
Take the example of SBI Life. A ROCE of 17% in 2020 means that the company is generating 17 from running business operations when the total capital employed is 100. To determine whether SBI Life’s ROCE is good, compare the ROCE with the other peer companies namely HDFC Life, ICICI Pru, etc.
Parameter #7. Price to Sales Ratio
By dividing the market capitalization of a company with the total sales in a financial year, we can calculate the Price to Sales ratio.
The Price to Sales ratio reveals what the market is willing to pay per rupee of sales generated by the company. Compare the Price to Sales ratio within the same sector to calculate whether the stock is overvalued or undervalued.
Parameter #8. Price to Earnings Ratio
The Price to Earnings Ratio can be calculated by dividing the market price of a stock with its Earnings per Share.
The Price to Earnings Ratio is the key metric to check whether the stock is undervalued or overvalued. The P/E ratio gives a snapshot of what the market is willing to pay for each dollar of earnings either for past performance or in the future. Suppose a company’s P/E is 10. It means an investor is willing to pay ₹10 for ₹1 of current earnings.
A high Price to Earnings ratio doesn’t signify that the stock is overvalued. Maybe this is the signal that the investors are willing to pay a higher price. They are quite optimistic that the company is able to generate higher revenue in the long run especially when the company is debt-free or has marginal debt. When a mature company steadily delivers robust earnings, the chances are higher that the company is increasing dividend payout year on year. As a result, the stock price will be heading to the upper level.
Parameter #9. Price to Book Ratio
Price to Book Ratio gives the snapshot of the market capitalization of a company and book value per share. The Price to Book Ratio is calculated by dividing the market price per share with its book value per share.
Simply, Book value reveals what you will get when a company liquidates all of its assets and clears all of its debt. Like the Earnings per Share, the Price to Book Ratio varies from sector to sector. It’s hard to deliver an ideal P/B ratio.
A P/B ratio may be less than one. It doesn’t necessarily mean that the stock is undervalued. The stock prices may be trending lower when the company has delivered a deteriorating number for the last 3 consecutive quarters or generating poor returns on its assets.
Apart from that, when you find companies with a P/B ratio is between 1 and 3, investigate deep whether the company is earning a higher return on its assets or the share price is skyrocketing in comparison to its book value.
Parameter #10. Current Ratio
The current ratio is one of the best key matrices to gauge the creditworthiness of a company. It is used to evaluate the financial health of a company.
Simply, the Current ratio gauges the ability of the company to pay off the current debt obligations in the short term by liquidating its current assets.
Pick a stock when a company has a current ratio of 1.5. When the Current Ratio of a company is less than 1, it indicates that the company may struggle to repay its current short-term debt obligations. But when the current ratio is 1.5, the chances are higher that the company still has left with the fund to carry out daily operations. It is still left with an ample amount after liquidating all of its current assets to repay the current liabilities.
- Read also: How to Pick Best Stocks in India
- Read also: 10 golden rules of investing in stock markets
3 Best insurance stocks to buy in India
When you are hunting high and low for the best Insurance stocks to buy in India for long term, here are the 3 best Insurance stocks to buy now in India.
HDFC Life Insurance Company
HDFC Life is a good stock to pick. It has the capacity to yield the best returns in the long run. HDFC Life is the leading life insurer in India. As of 2021, HDFC Bank operates across India with 400+ branches and offers a wide array of products including Term insurance plan, annuity, pension, and Investment under one roof.
HDFC Life is a debt-free Insurance company that has delivered a robust 24% Return on Equity for the past 5 years. Since the Insurance industry grows at 21%, the chances are higher that HDFC Life is the biggest gainer.
SBI Life Insurance Company
SBI Life started its journey back in 2001. It was started as a joint venture of State Bank of India and BNP Paribas Cardif. State Bank of India and Cardifhave a stake of 62.1% and 22% respectively in SBI Life. As of 2021, SBI Life operates around the globe with 947 offices. It offers a wide array of products including insurance policies and investment management under one roof.
SBI Life has delivered not only a double-digit sales growth but also a double-digit profit margin growth. The company is debt-free and has a healthy 1.93 Current Ratio as compared to its peer companies.
ICICI Lombard General Insurance Company
ICICI Lombard is a general insurance company engaged in the business of General insurance, reinsurance. It also suggests investment management solutions to retail investors. ICICI Lombard offers a wide variety of products namely Health insurance, Car insurance, travel insurance, home insurance, etc. ICICI Lombard operating across India with 250+ branches across the country.
ICICI Lombard has a marginal debt [0.09]. It has delivered not only 19% Growth in sales but also a 39% growth in profit margin for the last 10 years. About the ROE and ROCE, the company has delivered a robust 20.92% ROE and 28.05% ROCE.
- Read also: 15 Best Indian Stocks to Buy for Long Term Investment
- Read also: 7 Best Undervalued Stocks to Buy Now in India
Hope this article will help you to find the best insurance stocks to buy in India for the long-term. When you have got the post helpful, feel free to share it with your loved ones that will help them to invest in the insurance sector.