208017 Insurance Sector

8/8/2019 208017 Insurance Sector

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INSURANCE SECTORFebruary 13, 2008.

...1 Indsec Securities & Finance Ltd.

Indsec Securities & Finance Ltd.

At 4.1% of penetration level, we believe that Indian Life Insurance sector has a long wayahead. With higher income levels and increased risk appetite, a spate of investmentlinked insurance products are very well received by the market and we believe that thiswill further boost the penetration levels to double digits in coming years. The general

(non life) insurance has the least penetration level i.e. 0.6%. Booming economy andincreased awareness coupled with the fully deregulated environment will augur well forthe industry.There are no standalone insurance companies listed in the stock market and one canhave an indirect exposure by investing in the parent companies holding stakes in theseinsurance ventures. We have covered the top private sector players in life insurance andgeneral insurance space.


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INDSEC

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3 Indsec Securities & Finance Ltd.

Insurance sectorcontributes to the

economic developmentimmensely by

generating huge

employment andmaking long term funds

available fordevelopmental

purposes.

It helps in stabilizingstock market by

pumping in stable longterm funds.

Insurance industry isdivided among the lifeand general insurance

in the ratio of 83:17respectively.

Introduction:

Insurance is a risk sharing tool, which involves redistribution ofcosts of unexpected losses. Insurers get exposed to similar kind of

risks and come together to share the losses of those who actually

incurred such losses. It is a hedging tool against risks.

Insurance paves way for unhindered growth of economy as all therisk elements are taken care off by procuring appropriate coverthereby accelerating the growth momentum of the economy. A

sound insurance industry will lead to the overall progress offinancial & capital markets and benefit the economy as a whole. Forexample in this financial year so far, insurance companies haveinvested around Rs 360 bn. in the stock markets against around Rs600 bn. invested by the FIIs. But the gap is expected to narrow inthe last quarter (January to March 2008), with the insurancecompanies estimated to pump in an additional Rs 240 bn.

Insurance can be primarily divided into life and general (non-life)insurance. A major difference between life insurance and generalinsurance is that life insurance contract is a long term contract and

general insurance contract is a short term contract. Life insuranceis intended to cover risk of death of an individual. Life insuranceneeds of an individual differ according to his financial needs, family,status, etc. General insurance can be divided into personal andcommercial. In personal insurance we have insurance covers likeaccident, health, travel, etc. In commercial insurance we haveinsurance covers like fire insurance, marine insurance, aviationinsurance, etc.

The total premium generated in FY02 stood at Rs. 631.3 bn., whichwas made up by Rs. 500.9 bn. from life insurance and balance Rs.130.4 bn. was contributed by general insurance, a mix of 79:21.Over the next 4 years life insurance grew rapidly generating apremium of Rs. 1058.8 bn. in FY06 while general insurancepremium earned in FY06 stood at Rs. 213.4 bn. thus we see thatlife insurance premium accounts for 83% of the total insurancepremium earned.


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The industry was nationalized in1972 and had just two players. These two state insurers

are, Life Insurance Corporation of India and General Insurance Corporation of Indiaconducting life and non life insurance businesses respectively. With the sector openingup in 2000 we saw a host of players establishing their operations in the Indian InsuranceSector, which is one of the least penetrated sector in India thereby providing immensegrowth opportunity. With the onset of liberalization the industry witnessed tremendousgrowth in premium incomes as more and more private sector companies are showinginterest to participate in the Indian Insurance Sector.

Insurance industry

600.0

800.0

1000.01200.0

1400.0

Rs.bn.

0.15

0.2

0.25

0.3

%

0.0200.0

400.0

FY02 FY03 FY04 FY05 FY06

0

0.05

0.1

premium earned growh rate

Source: IRDA & Indsec Research

Post liberalization, the sector grew at a CAGR of 19%.

PSUs

0200400600800

10001200


Rs.bn.

75%

80%

85%

90%

95%

100%

%

total premium market share

Private players'

0.0

50.0

100.0

150.0

200.0

250.0


Rs.bn.

0%

50%

100%

150%

200%

250%

%

premium earned grwth


Private players have grown at a CAGR of 129% during FY02 to FY06 thereby capturing amarket share of 16% of the overall insurance (life & general) industry, from the stateowned majors.

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Life Insurance Sector:

The industry size in terms of totalamount of premium earned by the lifeinsurance companies has doubled fromRs. 500.9 bn. in FY02 to Rs. 1058.8 bn.in FY06. The sector has grown at aCAGR of 20.6% during this period, whileprivate sector players have grownaggressively at a CAGR of 172.8%.These private sector players have takenaway 14% of market share from thestate owned life insurer, LIC. LICsmarket share in total premium earned,as on March 2006, has come down to86% and is still falling due to theaggressive growth strategies adopted by its private sector peers.

Life insurance premium earned

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0


Rs.

bn.

0%

2%

4%6%

8%

10%

12%

14%

16%

Industry Private playersPvt. Players' Mkt. Share

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The Life Insurance Sector opened up for private players in the year 2000. With theopening up of the sector we have seen many players lining up to participate in theinsurance sector in India.

The list of private players operating in this space is as below:

Date of Name of the Company

23.10.2000 HDFC Standard Life Insurance Company Ltd.15.11.2000 Max New York Life Insurance Co. Ltd.

24.11.2000 ICICI Prudential Life Insurance Company Ltd.

10.01.2001 Kotak Mahindra Old Mutual Life Insurance Ltd.

31.01.2001 Birla Sun Life Insurance Company Ltd.

12.02.2001 Tata AIG Life Insurance Company Ltd.

30.03.2001 SBI Life Insurance Company Ltd.

02.08.2001 ING Vysya Life Insurance Company Private Ltd.

03.08.2001 Bajaj Allianz Life Insurance Company Ltd.

06.08.2001 Metlife India Insurance Company Pvt. Ltd.

14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.

06.02.2004 Sahara India Insurance Company Ltd.

Nov 2004 Bharti AXA Life Insurance Company Ltd.

Oct 2005 Reliance Life Insurance Company Ltd.

17.11.2005 Shriram Life Insurance Company Ltd.

04.09.2007 Future Generali India Life Insurance Company Ltd.

19.12.2007 IDBI Fortis Life Insurance Company Ltd.

Source: IRDA


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L if e I n s u r a n ce i n I n d i a

Insurance industry is highly capital intensive and has a long gestation period. Initially alllife insurers incur losses, as the new business premium earned is generally more thanthe renewal premium. The regulation in India is too stringent, which makes insurers toaccount all the acquisition and related expense upfront in the first year when thebusiness is been written instead of writing it off over the lifetime of the policy. Theacquisition cost by way of agent commission is generally very high in the initial yearsand if these are accounted fully in the first year it will lead to operational losses.

Revenue breakup of life insurers:

.


LIC

PVT

LIC

PVT

LIC

PVT

LIC

PVT

LIC

PVT

2

001-

02

2002-

03

2003-

04

2004-

05

2005-

06

0 100 200 300 400 500 600 700 800 900 1000

Rs. in Billion

First Year Premium Renewal Premium Single Premium


From the above chart we can see that first year premium forms 50% to 66% of the totalpremium earned by the private player, while for LIC it forms 15% to 21% of the totalpremium earned during the period of FY02 to FY06. Thus it will be normal to see privateplayers reporting losses due to the stringent accounting norms followed in India and

they will breakeven once the new business premium will be less than renewal premium,which will be possible in coming years.

In order to quench the thirst of aggressive growth some of the private players resortedon selling single premium policy in order to capture a greater market share only torealize that this wont help in sustaining the growth momentum, whereas the regularpremium policy assures steady cash flows in the coming year from the renewal premiumearned in subsequent years.


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Eve r em erg ing p roduc t baske t

The life insurance players offers different products the mostcommon among these are Endowment Assurance. The otherproducts are Money Back, Whole Life, Term Assurance and therecent hit, Unit Linked Insurance Scheme (ULIPs). The mostcommon among these are Endowment Assurance while the ULIPs,which has been started by the private players, is fast catching upand is very well received by the market. Even LIC has now rolledout its unit linked products to gain market share. A brief insight onsome of these different products is given under:

ULIPs is a typical insurance schemes were a part of the premium paid goes towardsthe life cover and the balance is invested in the units like mutual fund and theinsured enjoys the investment performance of that fund. The booming stock marketin India is the prime reason for ULIPs finding favour with most of the insurers.

The Endowment plans are the savings linked products, wherein, a certainpredetermined amount of payment is made at maturity or on death whichever isearlier.

Whole life insurance involves payment of certain sum on the death of the insured to

his family, these policy are generally not in demand.

Money Back policies provide periodical payments known as survival benefits to thelife assured. The periodical lump sums are paid to the life assured on surviving aparticular term. In case of an unfortunate death of the life assured full sum assuredis paid.

Term insurance is an exclusive risk cover which does not involve any savings linkedfeature. It covers the risk of death for an individual for a fixed term, in case theinsured survives through the term, he is not entitled to any refund of premium by theinsurer on maturity. The premium charged is comparatively low. Term insurance isyet to catch up in India.

Riders: these are additional features, which could be attached to any policy boughtby the insured. It involves payment of some additional amount along with the normalpremium and enjoy a special coverage under this rider. The most common ridersoffered by the insurers are accidental coverage, permanent disability rider, medicalcoverage, etc. It is a new concept in India.

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We believe that further product innovation will be seen in the coming years as

competition intensifies.

I n n o v a t i v e p r o d u ct s n o t e n o u g h t o l e a d

In insurance sector, competitors can easily emulate products and thus innovativeproducts cannot help in maintaining leadership. It is more important to distribute theproducts to the right target segment in the lowest possible cost. Thus there is hugeemphasis to be laid on the distribution channels and network a company builds toenhance its presence.

Insurance products have been sold traditionally throughagents. However with intensifying competition the insurancecompanies can no longer rely on this channel of distribution,as there would be huge turnover of agents. The company hasto rely on direct distribution by opening up branches orextension counter at as many locations possible as it will helpin maintaining direct contact with the customer and servicethem convincingly. However this will involve lot of investmentand new players or smaller players may not be in a position todevelop such a network effectively.

.


The companies are also investing in setting up a good ITinfrastructure in order to serve the customers online throughtheir web sites. The insurance companies also rope incorporate agents. These corporate agents are companies thathave a huge customer base to which it can target these insurance products.

Since liberalization, the most buzzing form ofdistribution is bancassurance. Bancassurancerefers to the selling of insurance policies througha banks established distribution network. Withglobalization and intense competition, banks are

witnessing depressed spreads. In a bid to improve its margins banks are focusing on toshore up its fee based income. Thus banks have responded well by using their reach andcustomer base to sell insurance products and earn fee-based income (commission). Theprivate players who didnt have enough agent force, heavily relied on bancassurance forboosting its sales and distribution which is evident from the fact that bancassurancecontributed more than 15% of their businesses whereas it was a negligible source ofbusiness for LIC that heavily rely on its huge agent force.


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Financial analysis using CRAMEL model

We can analyze Insurance companies on the lines of CAMELmodel, which is used to analyze Banks. The key parameters inCAMEL model are: Capital adequacy, Asset quality, Managementquality, Earnings quality, L iquidity.To this, we can add one more parameter, Reinsurance, therebydesigning a CRAMEL model.

Cap i ta l adequacy: As we have CAR (capital adequacy ratio) insimilar regulatory parameter for insurance companies called as Solvency ratio.Solvency ratio implies an insurers financial soundness and its ability to pay claims.IRDA specifies that insurers must maintain a solvency margin of 150%. Solvencyratio is defined as shareholders funds divided by net earned premium. We can alsocompute ratios like capital/assets and capital/technical reserves to assess capitaladequacy.

banking, we have a

Reinsurance : We need to check the proportion of business being reinsured. Thisgives us a fair indication of the risk cessation undertaken by the company.

Asse t qua l i t y : Asset quality indicated the strength of the balance sheet and theability to pay claims. We can check ratios like debt investment/total investmentportfolio, equity investment/total investment portfolio.

Managemen t qua l i t y : Management quality is utmost important in any kind ofbusiness. We can evaluate this from surrender ratio, lapse ratios, persistency ratio,gross premium earned per employee, asset/employee.

Earn ings qua l i t y : Loss ratio i.e. net claims incurred/net premium earned andexpense ratio i.e. acquisition and underwriting cost/net premium written gives a fairindication of the earnings quality. We should also evaluate returns earned oninvestments.

L iqu id i t y : Liquidity position helps us to gauge the companys ability to meet nearterm liabilities and hence the best ratio to be used in this context is liquidassets/current liabilities.

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L on g w a y t o g o

One o f t he l ow es t penet r a ted sec to r i n I nd i a : Life insurance premium earned by the industry was just 4% of GDP in FY06indicating enough room for further penetration.

I n v e st m e n t o b j e ct :

Life insurance policies carry a tax saving incentive and arealso been viewed from an investment perspective rather than

just a risk cover. The economy growing at around 9% haslead to a secular bull rally in stock market, which hasgenerated huge demand for investment linked policies.

Nuc lea r fam i l i es : With the traditional joint family system taking a back seat, we notice that morenumber of nuclear families in modern India will call for more demand of insuranceproducts.

Pens ion p lans : As per the estimates of UnitedNation Organization, in 2005,7.5% of the Indian populationwas in the age group of 60+years and this proportion isgoing to increase to around12.2% by 2025, thereby callingfor a huge demand for pensionplans and other such annuityplans given the poor state ofsocial security measures takenby Govt.

% of population in 60+ yr age group

0

2

4

6

8

10

12

14

2000 2005 2010 2015 2020 2025

%

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Concerns:

Cap i ta l c ru nch : Insurance is a capital-intensive business. The FDI limit stipulated is 26%, which isunlikely to be raised to 49% in near term. This will make fund raising plans difficultfor the players. On top of this IRDA has also fixed high solvency margins.

Rura l reach :

The insurance companied need to tap the rural areas for further growth for which itneeds to have a very efficient distribution network to reach out in remote areas.

1 A g en t - 1 I n s u r e r : As per IRDA multiple agency is not allowed, thus one agent or bank can sell only onelife insurers product and one general insurers product. We believe this is in a waygood for the insurers as once the banks are allowed multiple agency then they mighttend to sell products of only those companies that offers higher commission. Alsothere may be lesser understanding of different products of different insurers and thismight lead to miss-selling products to the customers.

ULI Ps sa les cou ld s l ow dow n : Indian stock markets saw an unprecedented bull run in last few years and haverecently entered into a consolidation phase, this could have some impact on sale ofULIPs.

Recen t r egu la t o r y change :

In recent times, single premium ULIPs have been in greatdemand as a means to earn short term capital gains andwould ultimately result into high surrender/lapse rates. Tostop this practice IRDA has placed a 3 years lock in periodfor ULIPs.

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Va lua t i on :

Valuing an insurance company is difficult as the Indianinsurance industry is at a nascent stage and we cannot followglobally accepted methods as the insurance industry hasmatured in most other countries.

.


Globally, the insurance companies are valued on the basisof Appraisal Value. Appraisal value is a combination ofEmbedded Value and New Business Value.

Embedded Value takes into account the adjusted net worthand the value of in-force business.

While the new business value takes into account the present value of all the futurecash flows that a company is expected to generate from new business to be writtenevery year till perpetuity.

Life insurance companies lose money on new customers due to the acquisition costs, butmakes profit over the years. As the insurance industry is at a nascent stage in India, all

private players are making losses and hence Embedded value hardly contributes muchto the total valuation. Thus looking at the Indian perspective and considering the factthat all private players are reporting losses we believe that the most appropriate way tovalue them is the NBAP i.e. New Business Achieved Profit.


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We have valued the life insurance companies using the NBAP approach:

ICICI P rudential Life Insurance Company:

Lead ing p r i va t e sec to r l i f e i nsu rance com pany second on l y t o L I C o f I nd i a .

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, one ofIndia's foremost financial services companies and Prudential plc, a leading internationalfinancial services group headquartered in the United Kingdom. Total capital infusion ason Sept. 2007 stands at Rs. 29.32 billion, with ICICI Bank holding a stake of 74% and

Prudential plc holding 26%.

After receiving approval from IRDA in November 2000, the company began itsoperations in December 2000. Its nation-wide team comprises of over 735 offices, over243,000 advisors and 22 bancassurance partners.

0.0

5.0

10.0

15.020.0

25.0

30.0

35.0

40.0

45.0


Rs.inBillion

0.0%

0.5%

1.0%

1.5%2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

FY renewal single mrkt share (RHS)

ICICI s total premiumearned grew at a CAGR of

146% between FY02 toFY06 thereby capturing a

market share of 4% in

terms of total premiumearned in FY06.

0

10

2030

40

50

FY02 FY03 FY04 FY05 FY06 FY07

Rs.

inB

illion

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

FY mrkt share RHS

ICICI s first year premium

grew at a CAGR of 139%

between FY02 to FY07thereby increasing its

market share to 11% interms of first year

premium earned in FY07.

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ICICI Prudential Life Insurance has relied on regular premium for growth rather thanbanking upon aggressive sales of single premium policies, thus the growth seems to besustainable due to the flow of renewal premium. Single premium forms around 10% oftotal premium earned in FY07.

ICICI Prudential Life Insurance (Rs. bn.)

FY06 FY07 FY08(E) FY09(E)

FY Premium 22.9 43.7 83.0 149.5

Single Premium 3.1 7.9 11.1 14.9

Renewal Premium 16.6 27.5 45.4 74.9

Total Premium 42.6 79.1 139.5 239.3

New Business Premium 26.0 51.6 94.1 164.4

Annualised Premium Earnings 23.2 44.5 84.1 150.9

NBAP Margins 19%

NBAP 28.7

NBAP Multiple 16.0

NBAP Valuation 458.9

Economic Interest 74%

Valuation of ICICI's stake 339.6

ICICI's Equity 11.12

Value per share of ICICI Bank 305


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Bajaj Allianz Life I nsurance Co. Ltd.:

Bajaj Allianz Life Insurance Co. Ltd. is a joint venture between Bajaj Auto, India's largestexporter of two and three wheeler and Allianz AG, one of the world's largest insurancecompanies. Total capital infusion as on March 2007 stands at Rs. 7.01 billion, with BajajAuto holding a stake of 74% and Allianz AG holding 26%, however there is a put andcall option in the JV agreement which on exercise entitles Bajaj Auto an economicinterest of 26% in the JV.

After receiving approval from IRDA in August 2001, the company began its operations,which is now supported by a nation-wide branch network of 876 offices, over 213,000

advisors and 3 bancassurance partners.

.


0.00

5.0010.00

15.00

20.00

25.00

30.00

35.00


Rs.

inBillion

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

FY mrkt share

Bajaj Allianzs total

premium earned grew at aCAGR of 358% between

FY02 to FY06 thereby

capturing a market share of3% in terms of total

premium earned in FY06.

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00


Rs.

inBillion

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

FY renewal single mrkt share RHS

Bajaj Allianzs first year

prem

FY0

ter

ium grew at a CAGR of

242% between FY02 to7 thereby increasing its

market share to 7.8% inms of first year premium

earned in FY07.

RHS


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Bajaj Allianz Life Insurance has followed a very aggressive strategy to increase itsvisibility and market share by selling huge number of single premium policy. Singlepremiums contributed around 48% of the total premium earned in FY06, however thecompany is doing well to bring down its reliance on single premium income, which isevident from the fact that these single premiums contributed just 22% of the totalpremium earned in FY07.

Bajaj Allianz Life Insurance (Rs. bn.)


FY Premium 12.1 30.8 49.3 71.5

Single Premium 15.1 11.9 10.1 9.1

Renewal Premium 24.1 10.4 16.6 4.1

Total Premium 31. 53. 76. 104.3 1 0 7

New Business Premium 27. 42. 59. 80.2 7 4 6


NBAP Margins 19%

NBAP 13.7

NBAP Multiple 16.0



Value of Bajaj Auto's stake 57.2

Bajaj Auto's Equity 1.01

Va

lue per share of Bajaj Auto Ltd. 566

.



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INDSEC

HDFC Standard Life Insurance Company Ltd.:

DFC Standard Life Insurance Company Ltd. is one of India's leading private insurance

DFC s total premium

of

are

DFC s first year premium

arket

n

Hcompanies, which offers a range of individual and group insurance solutions. It is a jointventure between Housing Development Finance Corporation Limited (HDFC Ltd.), India'sleading housing finance institution and a Group Company of the Standard Life, UK. HDFCas on March 31, 2007 held 81.9% of equity in the joint venture. After recent 7.15%stake sale, the equity holding has now realigned to 74:26 between HDFC and StandardLife, UK, respectively. The company received approval in October 2000 and has over theyears developed a network of over 73,000 agents and 438 branches as on March 2007.

0

2

4

6

8

10

12

14

16

18


Rs.

inBillion

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

FY renewal single mrkt share

H

earned grew at a CAGR162% between FY02 to

FY06. It has a market sh

of 1.5% in terms of totalpremium earned in FY06.

.


0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00


Rs.

inBillion

0.0%

0.5%

1.0%1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

FY mrkt share

RHS

RHS

H

grew at a CAGR of 126%between FY02 to FY07

thereby increasing its mshare to 3.9% in terms of

first year premium earned i

FY06, which slipped to 3.3%in FY07.


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HDFC Standard Life Insurance is the third largest private life insurer howevercommanding an overall market share of just 1.5% in terms of total premium earned inFY06. The company has consistently achieved growth by selling regular policies ratherthan selling single premium policies. Single premium contributed just 11.6% of totalpremium earned in FY07. Thus it has the cushion to adopt aggressive selling of singlepremium policies to ramp up its visibility and market share.

HDFC Standard Life Insurance (Rs. bn.)


FY Premium 8.3 13.2 21.7 30.4Single Premium 2.2 3.3 2.3 1.8

Renewal Premium 5.3 1 2 32.1 0.5 5.9

Total Premium 15.7 28. 44. 68.5 5 2

New Business Premium 10.4 16. 24. 32.5 0 2


NBAP Margins 20%

NBAP 6.1

NBAP Multiple 17.0



Value of HDFC's stake 77.0

HDFC's Equity 2.82

Value per share of HDFC Ltd. 273


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Kotak Mahindra Old Mutual Life Insurance Limited:

otak Mahindra Old Mutual Life Insurance Ltd. is a joint venture between Kotak

ter receiving approval from IRDA in January 2001, the company began its operations,

Kotaks total premiumear

FY0

Kotaks first year premium

h

KMahindra Bank Ltd., and Old Mutual plc. Total capital infusion as on March 2007 standsat Rs. 3.28 billion, with Kotak Mahindra Bank Ltd. holding a stake of 74% and OldMutual plc. holding 26%.

Afwhich is now supported by a branch network of 93 offices, over 26,654 advisors and agood support of parent, Kotak Mahindra Bank as its bancassurance partner.

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00


Rs.

inBillion

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

FY renewal single mrkt share

ned grew at a CAGR of

201% between FY02 to

6 It has a market shareof just 0.6% in terms of

total premium earned in

FY06.

RHS

0.00

1.00

2.00

3.00

4.00

5.00

6.00


Rs.

inBillion

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

FY mrkt share RHS

grew at a CAGR of 150%

between FY02 to FY07. Itad a market share of just

1.7% in terms of first yearpremium earned in FY06,

which slipped to 1.4% in

FY07.

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Kotak is a small player in the life insurance space, commanding a negligible marketshare, however it commands a good brand image, which makes it attractive as apossible take over target. We see a drastic change in revenue mix in FY06. Singlepremium contributed almost 40% of the total premium earned in FY05 however thecontribution came down to 5.2% in FY06 and 6.3% in FY07. Thus the company hasfocused heavily on regular premium policy to ensure stable growth.

Kotak Mahindra Old Mutual Life Insurance (Rs. bn.)


FY Premium 3.6 5.5 9.1 14.4

Single Premium 0.3 0.6 0.6 0.6Renewal Premium 2.3 3.6 5.2 7.8

Total Premium 6.2 9. 15.7 0 22.8

New Business Premium 4.0 6. 9.2 8 15.0


NBAP Margins 19%

NBAP 2.8

NBAP Multiple 18.0

NBAP Valuation 49.5


Value of Kotak Bank's stake 36.6

Kotak Bank's Equity 3.4

Value per share of Kotak Mah. Bank 108

ther parameters for valuation:

part from looking at NBAP valuation we can also value these insurance companies on

parameters would increase the subjectivity while valuing these companies.

O

Acertain qualitative grounds like their branch network, number of agents andbancassurance tie-ups. One should also look at the quality of agent force as this couldminimize the risk of miss selling complex products. However these qualitative


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INDSEC

General (Non-Life) Insurance Sector:

he industry size if premium earned by the general

.


T n terms of total amountoinsurance companies has grown from Rs.130.4 bn. in FY02 to Rs. 213.4 bn. in FY06.The sector has grown at a CAGR of 13.1%during this period, while private sectorplayers have grown aggressively at a CAGRof 83.8%. These private sector payershave taken away 25% of market sharefrom the state owned insurers. PSUinsurers market share in total premiumearned, as on March 2006, has come downto 75% and is still falling due to theaggressive growth strategies adopted by its p

General insurance premium earned

0.0

50.0

100.0

150.0

200.0

250.0


Rs.

bn.

Industry Private players

rivate sector peers.


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The General Insurance Sector is opened up for private players in the year 2000. Withe opening up of the sector we have seen many players lining up to participate in the

The list of private players operating in this space is as below:

thinsurance sector in India. It is the least penetrated sector in India, the total generalinsurance premium paid is aggregating to 0.6% of GDP (considering FY06 figures).

Date of Reg. Name of the Company23.10.2000 Royal Sundaram Alliance Insurance Company Limited

23.10.2000 Reliance General Insurance Company Limited.

04.12.2000 IFFCO Tokio General Insurance Co. Ltd

22.01.2001 TATA AIG General Insurance Company Ltd.

02.05.2001 Bajaj Allianz General Insurance Company Limited

03.08.2001 ICICI Lombard General Insurance Company Limited.

15.07.2002 Cholamandalam General Insurance Company Ltd.

27.08.2002 HDFC-Chubb General Insurance Co. Ltd.

03.08.2007 Apollo DKV Insurance Company Limited

04.09.2007 Future Generali India Insurance Company Limited

16.11.2007 Universal Sompo General Insurance Company Ltd.

all we have 15 players in this space including the state owned players like, Orientalsurance Co. Ltd., The New India Assurance Co. Ltd., National Insurance Co. Ltd. and

Source: IRDA

InInUnited India Insurance Co. Ltd. with effect from Dec 2000, these subsidiaries have beende-linked from the parent company and made as independent insurance companies.Whereas, with effect from Dec 2000, GIC has become a National Reinsurer.


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Business Mix

psu

pvt

psu

pvt

psu

pvt

psu

pvt

20

01-

02

20

02-

03

20

03-

04

20

04-

05

20

05-

06

pvt

psu

0 25 50 75 100 125 150 175

Rs. in Billion

Fire Misc Marine

Source: IRDA

t types of general insurance are, Fire Insurance, Marine Insurance andiscellaneous, which includes many types of risk covers that do not fit into fire orarine category. Under the head Miscellaneous Insurance we have a host of products

nd 40% to 45% of the overallremium earned by general insurers. Of the total

The differenMmlike Motor insurance, Burglary insurance, engineering insurance, cattle insurance, crop

insurance, aviation insurance, personal accident cover, liability insurance and risk coverfrom calamities.

Auto insurance (included under miscellaneoushead) forms arou

.


ppremium earned from auto insurance, aroundtwo-third of the premium comes from auto owndamage policies, while the rest comes from theauto third party policies. Fire insurance accountsfor around 19% of the total premium incomewhile marine insurance accounts for 6% to 7%and the rest accounted under miscellaneoushead, arising from health insurance, aviationinsurance, personal accident, engineering, etc.

Business Mix - Gen. Insurance

Industry

arine

Misc.

(excl.

auto)

Auto

Fire

M

19%

7%

32%

42%


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Deta r i f f i ca t i on th e ma in th eme t o focus on

dia is adopting the deregulation of the premium in a phased manner.

Prior to 2007 pricing deregulation was applied to some

more class of insurance viz. fire, engineering and auto own

mplete pricing freedom without prescribingallows complete freedom in product designing as well.

ce of excessive price cuts andnsure a smooth transition from regulated tariff to free pricing.

f these policies whileaditionally profitable policies like fire, engineering, etc. are witnessing major price cuts.

In

.


selected products and then it has been enforced on three

damage whereas the third part liability policies were stillkept under the tariff purview of the regulator. During thisfirst phase, IRDA had set maximum discount of around 50%

of the old regulated rates and around 20% for auto owndamage rates.

In the second phase of detariffication, which is applicable fromhas allowed co

January 2008, IRDAany floor price and also

This approach of adopting a phased manner to deregulate pricing and liberalize productdesigning is commendable, as it would minimize the instane

The auto third party liability insurance has had a high claim ratio of 150%. With thesecond phase of detarrifing, we have seen spurt in prices otrThus we see the industry moving away from cross subsidizing to risk based pricing whichis a very good development.


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Recen t deve lopm en ts and the w ay ahead

roperty insurance rates fell by 75% to 80% on themium

aw a further drop of 20% to 30% over an above the

could beeen. The risk of prolonged price war could be seen in case if state owned insurers are

eventually the industry would be headed for a stable and risk basedricing practice, which would benefit the industry and consumers at large.

P

.


first day of free pricing while fire insurance pres51% cut announced in the previous year. While theprice war is expected to continue, there was amarginal change in auto cover premium rates. In thissegment we may see higher discounts on expensivecars while higher rates charged for small cars.

We expect the current price war to continue for couplemoving to the risk based pricing model there

of years and with the industrysome sort of price stabilization

stoo aggressive to cut prices in order to gain atleast a part of the lost market share.However we do not expect unjustified price cuts as we believe General Insurance Councilwill intervene in such kind of price wars to curb irrational price cuts and also there arereinsurers who will assess the feasibility of giving a reinsurance cover at a particularpremium level.

In this deregulated environment we see that price volatility would be a temporary

phenomenon andp


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Em erg in g space

Agr i cu l tu re i nsu r ance:

More than two-third of Indian population is directly or indirectly linked to agriculture,we see, agricultural insurance as an emerging space. Different products thought of in

surance reachable and affordable to a majority of cultivators in the

rement to grow a particular crop for which the cultivator has taken a

expenses. We are also witnessing higher expenses for

to rapid advancement in the medical field. Currently in

this space are:

o Crop insurance Agriculture Insurance Company of India Limited (AIC) have

passed through the leaning curve in all areas of crop insurance and are looking tomake crop incountry.

o Weather insurance This is a new concept were in the cultivators need not waittill harvesting the crop but could claim a relief in case the weather is not as perthe requiweather risk cover.

Heal th i nsu rance :

Rising life expectancy levels due to modern medical science and also stressful lifestyle calls for huge medical

medical treatment owingIndia, total health insurance undertaken covers just 2% of the total medical expensesincurred, which represents immense penetration opportunity in this segment.

.



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We have valued the general insurance companies using the forward PE

pproach:

ard General Insurance Co. Ltd.

ead ing p r i va te secto r gene ra l i nsu rance com pany i n I nd i a .

ICI Lombard General Insurance Company is a joint venture between ICICI Bank, oned $ 26 billion Fairfax

inancial Holdings which is a diversified financial corporate engaged in general

Year Award at the 11th Asian Insurance Industry Awards held iningapore. It is the first Indian company to be given this prestigious Award.

evenue Mixet premium):

a

ICICI Lomb

L

ICof India's foremost financial services companies and Canada baseF

insurance, reinsurance, insurance claims management and investment management.ICICI Bank holds 74% equity stake while its foreign partner holds 26% in this jointventure. Lombard Canada Ltd, a group company of Fairfax Financial Holdings Limited, isone of Canada's oldest property and casualty insurers. ICICI Lombard General InsuranceCompany received regulatory approvals to commence general insurance business inAugust 2001.

ICICI Lombard General Insurance was recently awarded as the General InsuranceCompany of theS

R

.


(N

0 5000 10000 15000Rs. in Million

FY02

FY03

FY04

FY05

FY06

FY07

Fire Marine Motor Misc.


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.


The net premium earned from writing new business has grown at a CAGR of 266%uring FY02 to FY07. The company has huge exposure to motor insurance, whichontributed more than 50% of premium in FY07.

dc

ICICI Lombard General Insurance (Rs. mn.)


Gross written premium 15829 29891 47826 66956

Net premium income 7339 14508 23913 32808

PAT 503 684 1076 1440

PE Multiple 18

Value of the business 25912

ICICI's stake 74%

Value of ICICI's stake 19175

ICICI's Equity 11125

Value per share of ICICI Bank 17


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Bajaj Allianz General Insurance Company Limited:

econd l a rges t p r i va te secto r g ene ra l i nsu re r i n I nd i a .

ajaj Allianz General Insurance Company Limited is a joint venture between Bajaj Autopaid up capital of Rs 1,100

n. Bajaj Auto holds 74% and the remaining 26% is held by Allianz, SE. However there

to conduct General Insurance business (includingalth Insurance business) in India. Bajaj Allianz today has a network presence in over

0 mn. Bajaj Allianz hasade a profit before taxes of Rs.1,170 mn. and emerged as the first private insurance

et premium):

S

BLimited and Allianz SE. The Company has an authorized andmis a put and call option in the JV agreement which on exercise, entitles Bajaj Auto, aneconomic interest of 51% in the JV.

Bajaj Allianz General Insurance received regulatory approvals to commence generalinsurance business on May 2nd, 2001He200 towns spread across the length and breadth of the country.

As on 31st March 2007 Bajaj Allianz General Insurance maintained its premier positionin the industry by garnering a premium income of over Rs.18,00mcompany to make profit before taxes of more than Rs.1,000 mn. The company also wasthe one of the highest profitable insurer among private insurance companies and made aprofit after tax of Rs.750 mn. Bajaj Allianz is the only company to make underwriting

profits for the last three years consecutively.

Revenue Mix

.


(N

0 2000 4000 6000 8000 10000 12000

Rs. in Million

FY02

FY03

FY04

FY05

FY06

FY07

Fire Marine Motor Misc.


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The net premium earned by writing new business has grown at a CAGR of 165% duringY02 to FY07. The company is doing well to realign its business mix, which was highlyclined towards motor insurance. In FY07, motor insurance contributed 61.5% of the

Finnet premium earned. We observed that Bajaj Alliance has a lower reinsurance rate,which means more risk exposure and better margins.

Bajaj Allianz General Insurance (Rs. mn.)


Gross written premium 12846 18033 23443 30476

Net premium income 6987 10398 13128 16762

PAT 516 754 961 1265

PE Multiple 18

Value of the business 22765

Bajaj Auto's stake 51%

Value of Bajaj Auto's stake 11610

Bajaj Auto's Equity 1012

Value per share of Bajaj Auto Ltd. 115

ther parameters for valuation:

part from looking at forward PE, we can also value thesealitative grounds like

eir branch network and number of agents. Employee

O

.


Ainsurance companies on certain quthstrength is also of great importance and one needs to

check the companys ability to design innovative products,as these would be in vogue with complete derugaltionbeing enforced by IRDA. However these qualitativeparameters would increase the subjectivity while valuingthese companies.


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.


Concluding remarks:

ith the opening up of the insurance space since the year 2000, we have seen numbero have a pie of this emerging space. The growth in insurance

ector looks very robust on the back of low penetration levels coupled with increasing

time frame for achieving break-even. As such all the private players, owingthe above expected business growth, are posting losses till date. We believe that the

ain the top two private sectorlayers are ICICI Lombard and Bajaj Allianz General Insurance that command a market

Wof players plunging in tsawareness.

The business of life insurance and the recommended accounting practice in India callsfor a longertolife insurance companies will take couple of years to break even. In this space the toptwo private sector companies are ICICI Prudential and Bajaj Allianz Life Insurance that

command a market share (on the basis of first year premium during the period April toDecember, 2007) of 9% and 7% respectively. Due to its aggressive growth strategiesand huge distribution network, we find these two companies to continue to performbetter and command higher value compared to its peers.

The general insurance business breaks even soon after commencement of businessesand most of the private players are posting profits. Here agpshare (on the basis of gross premium underwritten during the period April to December,2007) of 12.6% and 8.2% respectively. Bajaj Allianz General Insurance is the onlyprivate sector company to have generated underwriting profits in a competitive and

difficult market. We believe that these two companies would continue to commandbetter value.


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Disclaimer: This document has been prepared and issued on the basis of publicly available information, internally developeddata and other sources believed to be reliable. Whilst meticulous care has been taken to ensure that the facts stated areaccurate and opinions given are fair and reasonable, neither the analyst nor any employee of our company is in any wayresponsible for its contents. The company may trade in securities, which are the subject of this document or in relatedinstruments and may have acted upon or used the information contained in this document or the research or the analysis on

which it is based, before its publication. The company or its owners may have a position or be otherwise interested in theinvestment referred to in this document. This is just a suggestion and the company will not be responsible for any profit orloss arising out of the decision taken by the reader of this document. No matter contained in this document may bereproduced or copied without the consent of the company.

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208017 Insurance Sector