During last significant correction few months back, I did an introspection on some sectors/companies I have and had made a significant decision on QSR segment - First step was consolidating from 5 to 3 only and second step was to limit the allocation with no further incremental addition. I had decided to revisit QSR thesis at later date when sector is faring better. So far there is status quo with the first two steps taken and need to revisit again later. (3% current allocation by market value)
Another sector which has underperformed and has been on my revisit radar is Consumer durables (Appliances). I have decided to keep its allocation capped with bare minimum incremental additions (5% current allocation by market value)
Recent Sector for revisit: The story of Insurance - The “I” in BFSI
The third sector which has been bothering me off late is Life Insurance. My tryst & affinity with this sector has been rather old. It started with the erstwhile Max India (prior to demerger) when Max Life as well as Max Health insurance was part of Max India. I had written earlier about that experience and major learning was to focus on pure plays.
Why did I like the “I” piece of BFSI?
Having burnt fingers in lenders such as PSU & even some solid NBFCs, I somehow felt that Insurance is a relatively safer sector where there is no question about asset quality, NPAs etc. (although a bigger insolvency risk may exist which can be mitigated only by prudent underwriting capabilities - something where Promoter & management quality becomes paramount) while the liabilities side risk is mitigated by strong government regulations in terms of where these insurance companies invest their float.
Why the inclination towards Life Insurance over General? - I decided to chose Life because I felt that General insurance have greater risk of Bankruptcy. Mass destructive events concerning Crops, property etc. can be more common than Life. Also, people generally insure full value of their property, businesses etc. as compared to life where they do not and opt for bare minimum protection in case of life and more inclined towards other instruments…Also, past history in US & other developed economies have shown greater Non-Life bankruptcies as compared to Life.
Having said above I was and am only interested in the “Health” part of the General Insurance because of the greater retail prospects.
With this backdrop, I initially chose a basket with Max Financial, ICICI Pru (as it got listed first), HDFC Life & lastly SBI Life. There being no pure listed Health player (until recent Star Health listing). Over a period of time, I have completely exit the first two and currently hold only HDFC Life & SBI Life, while I track Star Health.
Recent Thoughts
Most recently, I have seen these Life insurance companies decently mitigate one of the largest pandemic in the century. They have shown agility, perseverance, vision as well as growth. They have the capabilities & product mix which can benefit retail customers.
What I do not like - Is the perception of these insurance firms in minds of retail customers. Life insurance is still a push product and with past experiences of results in some of their products, many shun it. Moreover, globally Life insurance is kind of stagnated and over last 10-20-30 years, I have not come across a global life insurance firm generating wealth in developed economies (Pls correct me if wrong).
Health, on the contrary, has fared somewhat better. Mr. Buffet, on other hand, has built GEICO from its ashes to what it is today and has been one of the strongest lever in his group. No success stories yet for any Life insurance firm…(8% current allocation by market value)
There is now this strongly emerging dilemma to whether continue to hold Life insurance firms, replace some percentage by Health Insurance or exit this space when time is right? As is evident from my earlier dilemmas, I usually get such at the extreme testing phase of any sector…
Thoughts Welcome!
Disc: Invested, hence critical & biased. Thoughts for academic & self learning purposes. Not eligible for any advice or recommendations