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buffett stocks: Warren Buffett spots value in this sector but Indian investors ignoring it

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NEW DELHI: Sitting on a cash pile of $147 billion in February this year, Warren Buffett, who heads Berkshire Hathaway, could not find any stocks worth buying. But, a month later when share prices across the world tumbled thanks to war and rising inflation, he announced his biggest deal since 2016—Berkshire said it will buy insurance company Alleghany for $11.6 billion.

Contrast it with the insurance segment in India that has only bled money during the current year amid the lack of buyers on Dalal Street. Share price of insurance stocks have fallen up to 16 per cent year to date, compared to about 1 per cent gain in Nifty.

Buffett is a known proponent of buying what he understands, and if there is one industry he knows very well, it is the insurance sector. So if Buffett is seeing value in the sector, why can’t Indian investors?

“The material underperformance of life insurance stocks relative to the broader market in the last six months has been puzzling, given that the major challenges relating to second Covid wave losses and reinsurance price hikes are already known,” said Avinash Singh of Emkay Global. “Even after accounting for the recent softness in monthly new business volumes, the changes in fundamentals will not be enough to explain this.”

One factor that some analysts attribute behind its underperformance is the upcoming initial public offer (IPO) of the Life Insurance Corporation (LIC). However, it has no bearing on the fundamentals of private players.

From product offering to distribution to cost structure, private players are very different from LIC. In this context, the trend of private players expanding faster by targeting young and affluent customers with innovative product offerings will continue, analysts said.

Despite downward adjustments in estimates due to softness in new business volumes, Singh said he sees major upside in life insurance stocks and reiterates his positive stance as current prices seem to be pricing in too many near-term negatives while ignoring the growth potential of the sector and the franchise strength of top private life insurers.

The Emkay analyst on Wednesday upgraded ICICI Prudential Life Insurance to ‘buy’ from ‘hold’. His pecking order in life insurance is: SBI Life (Buy, target: Rs 1,615), Max Financials (Buy, target: Rs1,110), HDFC Life Insurance (Buy, target: Rs 670) and ICICI Pru Life Insurance (Buy, target: Rs 620).



A similar sentiment has been expressed by Morgan Stanley analysts who are “going the whole hog on insurers”. The broker said life insurers have posted strong numbers but poor narrative is driving the fall in share prices. Risk-reward has improved further and it still remains “most preferred” space for the broker.

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“Risks to growth and capital costs are rising. We cut forecasts, but see strong risk reward at insurers. SBI Life is our top pick. We upgrade HDFC Life and PB Fintech to overweight after a sharp correction,” said Subramanian Iyer, a research analyst at Morgan Stanley.

It is not just life insurers that have caught the fancy of analysts. Some general insurers are also attractively positioned. Iyer said in the non-life insurance segment, ICICI Lombard ticks all the right boxes in FY23. With its focus on profits, the company has delivered on RoE and profit market share, but investors are concerned about loss of top-line market share.

“ICICI Lombard has been closing the GDPI (gross direct premium income) growth gap versus the industry. We think the optics will be good in FY23E and expect [it] to deliver double-digit GDPI growth and 20 per cent in RoE,” he said.

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