initiating coverage 01oct 2019 general … insurance...initiating coverage 01oct 2019 general...

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INITIATING COVERAGE 01 OCT 2019

General Insurance

Set for the long term With a penetration level of just 0.9% of GDP, the general insurance (GI) industry has multi-year growth headroom in India. Unlike life, GI is non-discretionary, making it virtually indispensable. But most contracts are annually renewable and switching costs remain low.

The GI business has real moats in the form of claim service network, service quality and experience data. In an unorganized economy such as India, these are not easily replicable. Scale advantages can be significant, but competition will keep pricing in check.

Pvt. insurers to grow : Low capital levels and poor strategic choices have resulted in PSU insurers losing ~1,000bps market share over the trailing decade. Despite plans of a mega PSU insurance merger (with capital infusion), private insurers will gain marketshare with their sales aggression, better products and customer service.

Under penetration is high in the two largest lines, motor and health. We estimate that the motor line (at 100% compliance) is an opportunity of Rs 1.8tn (2.8x FY19). Health can grow at ~15% CAGR till FY30E to hit Rs 2tn (4.4x FY19), assuming only 60% penetration. Other lines (property, liability, home owners and renters insurance, etc.) also offer growth opportunities.

Regulatory tailwinds in motor TP are expected to drive growth (the Supreme Court has made long term TP policies for new 2Ws and PVs mandatory). Additionally, the Motor Vehicles Act (2019) increases penalties and reduces the time period for filing claims to 6 months.

Expectations, valuations : running ahead of reality!

We believe, competitive forces will limit profitability of the motor-line and general Insurers will be conservative in releasing reserves (only with better experience), reporting limited profit growth. They also risk regulatory action on commission payouts and TP product pricing. Accordingly, our estimates are lower than consensus. We believe that the business can generate structural RoEs of 24-30%, with multi-year growth headroom. Valuations of private insurers - BAGIC and ICICIGI are stretched. Investors must taper down expectations.

Key risks include competition from web-aggregators, catastrophe risks, judicial inflation risk, increase in re-insurance rates, and life insurers entering health-line.

Industry deep dive + ICs + Visit notes + Company profiles

GICRE: We initiate with a BUY and TP of Rs 250 (+9.8%). Our TP implies a FY20/21E P/E of 11.2/9.8x and P/B of 0.83/0.76x for an FY21E RoE of 8.3%.

ICICIGI: We initiate with a SELL and TP of Rs 1,040 (-13.6%). Our TP implies a FY20/21E P/E of 34.1/28.3x and P/B of 7.2/6.0x for an FY21E RoE of 22.8%.

NIA: We initiate with a NEUTRAL and TP of Rs 116 (+8.2%). Our TP implies a FY20/21E P/E of 13.3/9.5x and P/B of 0.57/0.55x for an FY21E RoE of 6.2%.

Visit note: Our FV estimate for BAGIC works out to be Rs 350bn (18% of SOTP)

Company profiles: Chola MS GI, HDFC Ergo, Royal Sundaram GI, SBI GI.

Company Reco TP (Rs)

GIC Reinsurance BUY 250

ICICI Lombard SELL 1,040

New India Assurance NEU 116

Madhukar Ladha [email protected] +91-22-6171-7323 Keshav Binani [email protected] +91-22-6171-7325

GENERAL INSURANCE: INITIATING COVERAGE

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ContentsExecutive summary ................................................................................................................................................ 3 Industry ................................................................................................................................................................... 8 Evolution of General Insurance in India.................................................................................................................. 9 General insurance industry size and segments ................................................................................................... 15 Motor segment .................................................................................................................................................... 17

OD segment .................................................................................................................................................... 18 TP segment ..................................................................................................................................................... 22

Regulatory changes provide tailwind ................................................................................................................... 27 The Motor Vehicles (Amendment) Act, 2019 ...................................................................................................... 29 Health insurance .................................................................................................................................................. 32 Personal Accident ................................................................................................................................................. 43 Property (Fire) ....................................................................................................................................................... 48 Crop insurance ..................................................................................................................................................... 52 Regulations ........................................................................................................................................................... 55 Accounting ............................................................................................................................................................ 58 Reserving Analysis (Provisioning) ......................................................................................................................... 59 Key risks ................................................................................................................................................................ 61 Valuation and comps along with global comparison ............................................................................................ 63 Industry in FY20TD (Apr-19 to Aug-19) ................................................................................................................. 65 Solvency level for Insurers .................................................................................................................................... 68 Benchmarking ....................................................................................................................................................... 69 Reinsurance ........................................................................................................................................................... 77 Companies Initiating Coverage GIC Reinsurance .................................................................................................................................................... 83 ICICI Lombard ........................................................................................................................................................ 92 New India Assurance ........................................................................................................................................... 110 Visit Notes Bajaj Allianz General Insurance .......................................................................................................................... 126 Company Profiles Cholamandalam MS ............................................................................................................................................ 141 HDFC ERGO ......................................................................................................................................................... 145 Royal Sundaram .................................................................................................................................................. 149 SBI General Insurance ......................................................................................................................................... 153


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Executive summary Unlike life insurance, general insurance is a non-discretionary, staple product, making it indispensable for customers. The flip side in this business is that most contracts are short term in nature and are renewable every year. Given the low switching costs, price competition to retain and gain customers is intense.

The GI business also has real moats in the form of claim service network and service quality, experience data, and client service. In an unorganized market such as India, these moats are not easily replicable.

Despite mandatory requirements for auto insurance and a strong need for health insurance, both these segments remain massively under penetrated.

Under penetration is high in motor, health and property:

Less than 30% of two wheelers in India are insured after one year of purchase. For passenger vehicles this no. is estimated at < 70%.

We estimate that at 100% compliance the auto-line (OD+TP) is an opportunity of Rs 1.8tn i.e. 2.8x of current size.

Only ~9% of the Indian population is insured outside of the government health schemes. This number assumes that no single person has both employer and his own insurance. Thus actual number is much lower.

We estimate that health has the potential to grow at a CAGR of ~15% until FY30E to achieve a size of Rs 2tn i.e. 4.4x of FY19. In this calculation we assume only 60% penetration i.e. 33% government (28% in FY19) and 27% in retail (9% in FY19).

In the case of property (fire) we learned that under penetration is high as a lot of building stock in India is not insured. We have not extensively studied the market potential in this report.

Penetration is also low in products such as renters’ insurance, home owners insurance, liability insurance.

Regulatory changes to aid growth:

The Indian Supreme Court has made it mandatory for all new two wheelers and passenger vehicles to purchase five and three year long term motor TP insurance policies, respectively. Historically, non-compliance as has been high causing this ruling of the court.

Compulsory purchase drives up persistency and increases market size. Premiums received in advance boost float income.

The new Motor Vehicle Act, 2019 too increases penalties, limits claim intimation period and provides for faster claim settlement. This too, over time should aid in lowering claim ratios.

The IRDAI has also been revising motor TP pricing allowing for claims inflation. This has also aided profitability.

Pvt. insurers gaining mkt. share: PSU insurers have been consistently losing market share (despite lowering prices), however the intensity of mkt. share loss has further increased in last 2-3 years as PSUs lack adequate capital to write incremental business. Private insurers have gained 1,000bps market share over last 10 years, by improving underwriting quality. Though the government is talking about a merger and capital infusion in the 3 bleeding PSU insurers, we foresee little or no improvement in their market share.

We estimate that at 100% compliance the auto-line (OD+TP) is an opportunity of Rs 1.8tn i.e. 2.8x of current size. Even in the case of property (fire) our checks indicate that under penetration is high as a lot of building stock in India is not insured. The new Motor Vehicle Act, 2019 increases penalties, limits claim period and provides for faster claim settlement. This too, over time should aid in lowering claim ratios.


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Scope for new products: The Indian market also has a large scope for product innovation. Examples of new products include cyber insurance, wedding insurance etc.

Market is optimistic: Near term change in this business is being driven by the regulatory changes around motor TP. We believe that the market is overly optimistic about this, as:

Intense competition caps abnormal gains: Channel checks suggest that insurers are offering heavy discounts and paying high commissions, in the OD business, to capture market share in the long term sub-segment. This offsets the benefits of TP pricing.

Benefits of Motor Vehicles Act, 2019 sometime away, and regulator may limit the same: The Act limits the claims intimation period to 6 months. This should substantially reduce fraudulent cases. Additionally, the new Act increases penalties for not having insurance and other offences- this should increase compliance and act as a deterrent to breaking law, thereby reduce claim instances. On the other hand, the Act also increases minimum claim payouts for death and injury to Rs 500K and Rs 250K respectively. In our assessment, these changes should lower overall claims ratios, although the market is overly optimistic about underwriting profits and is factoring in higher reserve releases. We believe that the companies will be conservative in reporting earnings as (1) experience data is at least 18 months away, and (2) IRDAI may not be as liberal as it has been in the recent pass to award TP price inflations, thus limiting inherent profitability of the business.

Intense competition from SAHIs limiting growth for multi-line insurers in health. SAHIs are increasingly capturing higher market share in the health and PA lines. Market share in the health segment has increased by 1,200bps (over FY14-19) to 24% in FY19.

Underwriting profits appear distant: While there is scope for improvement of underwriting profitability- through product innovation, analytics, better claim service, and use of technology, the number of private insurers has increased from 12 in FY02 to 33 in FY19 resulting in intense competition. Given these factors coupled with high commission rates for new business acquisition, we expect underwriting profits to be some time away for the industry.

Investment profits in recent times have taken a hit: In the recent corporate default cycle several insurance companies have taken a hit on their exposures to IL&FS and other stressed names such as DHFL, ADAG companies and other downgraded papers. This has depressed investment portfolio yields for FY19 to around 7-9% (-20-150bps). Companies such as BAGIC and HDFC have been most impacted. BAGIC is also currently reviewing risk management for investments. Most private multi-line insurers have just ~3-10% of investment portfolio invested in equity. Exposure to equity is much higher for PSU insurers eg. NIA has 43% of portfolio in equities. Subdued equity markets have also had a bearing on returns. We expect inv. income to pick up as the economy picks up.

Reserving is adequate: A look at ICICIGI and BAGIC’s loss triangles gives us comfort that the two large private insurers are adequately providing for IBNR and IBNER. ICICIGI and BAGIC have adequately provided since AY11 and AY10, respectively. We have also analyzed the 3 yr avg. claims to NEP and find it adequate.

Intensity of market share loss by PSUs has increased over last 2-3 years. We believe benefits of Motor Vehicle Act, 2019 is some time away as (1) experience data is at least 18 months away, and (2) IRDAI may not be as liberal as it has been in the recent pass to award TP price inflation, thus limiting inherent profitability of the business.


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Valuation Despite lack of visibility of underwriting profits,

companies do have multi-year growth headroom and can deliver structural ROEs of 24-30%.

Using a two stage dividend discount model with explicit forecasts until Mar-23E, post which we assume a growth rate of ~14-16% until FY30E. We assume a gradually increasing dividend payout ratio.

Assuming a cost of equity of 10-11%, a terminal RoE of ~24-28%, we derive distribution ratios setting a terminal growth rate of 5%.

Our assumptions lead us to conclude that private general insurers are priced to perfection.

Additional supply of shares expected Indian regulations require a public float of at least

25%. Overall at current market prices, we expect additional

Rs 52bn of India general insurance paper to hit the markets over next 12-15 months.

NIA and GICRE have public floats of only 14.6% and 14.2% respectively, thus at CMP the Government of India has to sell additional Rs 18bn in NIA and Rs 34bn in GICRE.

FAL Corporation may also look to sell its 4.9% stake in ICICIGI.

In this report, we briefly cover segments such as fire and crop, and reserving, accounting and other regulations for both general insurers and reinsurers.

Key risks Competition from web-aggregators, catastrophe

risks, judicial inflation risk, increase in re-insurance rates, life insurers given the option of covering health and lastly other factors such as price competition, interest rate and counter-party risk.

A look at ICICIGI and BAGIC’s loss triangles gives us comfort that the two large private insurers are adequately providing for IBNR and IBNER. We believe private multi line insurers can deliver structural ROEs of 24-30%. NIA and GICRE have a public float of only 14.6% and 14.2% respectively, thus at CMP the Government of India has to sell additional Rs 18bn in NIA and Rs 34bn in GICRE.


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Companies

Initiating Coverage GIC Re: GICRE is India’s largest reinsurer but

continues to make underwriting losses mainly in its foreign portfolio. It has a higher share of the low margin treaty business and a weakening competitive position due to entry of foreign branches. With a hardening cycle on the anvil, we estimate FY22E adj. RoE of just 10.0%, and with stable growth we can at best assign a valuation of just 0.8x Sep-21E ABV. We assign a discount of 10% for the additional share sale expected, accordingly we rate GIC Re a BUY with a TP of Rs 250. (0.8x Sep-21E ABV).

ICICI Lombard: ICICIGI is a pvt. mkt. leader (8.5% share) with strong underwriting (COR: 99.6%), reserving and investment management practices. It is best positioned to benefit from changing regulations in motor and also has a strong virtual office strategy to increase penetration. We expect high competitive intensity to restrict underwriting margins and see lower than consensus earnings. We expect ICICIGI to deliver an FY19-22E EPS CAGR of 23.4% / RoE of 22-23%. We assign a SELL rating to ICICIGI and value it on a two stage DDM basis at Rs 1,040 (Sep-21E P/E of 26x and a P/ABV of 5.5x). Additional expected share sale of ~4.9% of market cap is a risk.

NIA: India’s largest general insurer (mkt. sh.: 14.1%) is still making high underwriting losses (CoR: 123.6%). We believe that the intensely competitive environment in the motor-line is forcing adverse risk selection. We expect NIA to continue to cede market share to private insurers and expect an adj. RoE of just 8%. Accordingly, we rate NIA a NEUTRAL with TP of Rs 116 (10% discount to 0.6x Sep-21E ABV). We apply 10% additional discount on account of expected float to come.

Visit Note

Bajaj Allianz General Insurance Company (BAGIC): We recently met the management of Bajaj general and noted that while increasing scale has and will put pressure on combined ratios at BAGIC, the company has consistently delivered industry leading underwriting margins. We believe that margins will improve over time with growth. BAGIC is set to benefit from changing motor regulations. We expect BAGIC’s PAT to grow at CAGR of 20.8% over FY19-22E. ROEs are expected at 16-18%. We value BAGIC at Rs 28x (DDM derived) Sep-21E APAT to arrive at FV of 350bn (18% of SOTP). Our FV estimate for Bajaj Finserv works out to be Rs 7,770/share (refer SOTP).

We rate GIC Re a BUY with a TP of Rs 250. (0.8x Sep-21E ABV). We assign a SELL rating to ICICIGI and value it at Rs 1,040/share (Sep-21E P/E of 26x and a P/ABV of 5.5x). We rate NIA a NEUTRAL with TP of Rs 116 (10% discount to 0.6x Sep-21E ABV). We value BAGIC at Rs 28x (DDM derived) Sep-21E APAT to arrive at FV of Rs 350bn (18% of SOTP). Our FV estimate for Bajaj Finserv works out to be Rs 7,770/share


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Company Profiles Chola MS General Insurance: Chola MS GI is a JV

between Chola Financial Holdings (60%) and Mitsui Sumitomo (40%). Implied valuations are cheap, at CMP of Chola Fin. Holdings and Chola Inv. and Finance (after adjusting for 30% holding company discount), we observe that Chola MS GI is available at just 5.7x FY19 EPS.

HDFC ERGO: HDFC ERGO, a JV between HDFC (50.5%) and ERGO International (48.3%), is the 3rd largest pvt. general insurer in India. HDFC ERGO’s FY19 market share is 5.1% (+130bps over FY15). Market share gain has been organic and inorganic. HDFC Ergo has acquired L&T General Insurance in FY17 and Apollo Munich (SAHI with mkt. sh. 1.3%) in FY19.

Royal Sundaram: Royal Sundaram GI is the general

insurance arm of Sundaram group and is a subsidiary of listed company Sundaram Finance. In Nov-18, Sundaram Finance entered into JV agreement with Ageas Insurance (international insurance group) and sold 40% stake in the company at Rs 15.2bn. This transaction values the company at Rs 38bn (FY19 P/B: 3.3x, P/E 31.3x).

SBI General: SBI GI is a JV between SBI (70%) and Insurance Australia Group (26%). The company is the 7th largest private insurer in India with FY19 market share of 2.8% (+90bps vs. FY15). Premiums have grown at a robust pace of 30.5% (5 yr CAGR) to Rs 23.8bn. Growth was supported by crop insurance. Ex-crop FY14-19 growth is 27.8%. SBI has sold 4% stake in SBI GI to PI Opportunities (2.35%) and Axis AIF (1.65%). The deal has valued the company at Rs 120bn (FY19 P/B: 6.6x, P/E: 36x).

Chola MS GI needs capital as it’s solvency is low at 1.55x. Recently, SBI’s chairman has announced that it will not be listing SBI GI in FY20E.


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Industry Low penetration indicative of large growth headroom Global comparison of general insurance premium as

percentage of GDP across countries indicates that at 0.9% of GDP, penetration in India is low.

Developed economies such as the US and UK have a penetration of 4.3% and 2.4% respectively. South Korea has the highest penetration at 5.0%

India’s GDPI per capita has increased from Rs 268 in FY09 to Rs 1,241 in FY19 i.e. CAGR of 15.8% p.a. This has resulted in insurance penetration increasing from 0.6% in FY09 to 0.9% in FY19.

Increase in insurance per capita over F17-19 is as a result of increase in crop insurance.

Global comparison of insurance penetration (%) Rising insurance density

Source: Swiss Re, HDFC sec Inst Research Note : Insurance penetration is ratio of premium to GDP

Source: Swiss Re, HDFC sec Inst Research Note: Insurance density is defined as GDPI/population

28

6

329

398

488

572

614

657

724

958

1,11

5

1,24

1

0.6 0.6 0.6 0.7 0.7 0.7 0.7 0.7

0.8 0.9 0.9

-

0.2

0.4

0.6

0.8

1.0

-

200

400

600

800

1,000

1,200

1,400

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Insurance density (Rs) - LHSInsurance penetration (%) - RHS

Rs %

Increase in insurance per capita in FY17-18 is due to the introduction of crop insurance. General Insurance penetration still continues to remain abysmally low in India compared to economies of similar size.

5.0

4.3

4.1

3.5

3.4

3.4

3.4

3.2

2.8

2.7

2.4

2.3

1.9

1.8

1.7

1.6

1.4

1.0

0.9

0.6

0.3

-

1.0

2.0

3.0

4.0

5.0

6.0

Sout

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USA

Switz

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Germ

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Japa

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Sing

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Russ

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anka

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%


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Evolution of General Insurance in India In 1999, the Insurance Regulatory and Development

Authority of India, (IRDAI) was constituted as an independent body to regulate and develop the insurance industry. The IRDAI was integrated as a statutory body in April, 2000.

The key objectives of the IRDAI include promotion of competition so as to improve customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market.

The evolution of the tariff regime for key product segments is set out below:

IRDAI over the years has de-tariffied most of the segment with the exception of motor TP.


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Fixed tariff Era (2001-07) The IRDAI allowed the entry of private sector

companies in general insurance. Foreign ownership was limited to 26%.

During this period, tariffs were regulated in all segments except for marine hull segment, which was detariffed in FY05.

This was a phase of high growth as private multi-line insurers were focused primarily on capturing market share. In this phase the retail segment of the non-life insurance sector grew; earlier the sector was predominantly focused on commercial customers.

GDPI grew at a CAGR of 17.2% from FY02-07 and private multi-line insurers gained around 33% GDPI market share by FY2007 and insurance penetration was 0.6% at the end of this phase.

Pricing on the basis of product wise risk was not possible and more profitable products (such as fire insurance) cross subsidised less profitable products (such as auto insurance, group health insurance and marine insurance). Private multi-line sector’s combined ratios were below 100% over FY04-07.

From Jan-07, IRDAI de-tariffied all segments except third party motor insurance. Risk sharing in TP motor insurance was implemented through, the formation of the India motor third party insurance pool (IMTPIP) in 2007.

All multi-line insurers were part of the pool, which distributed losses on motor TP insurance in the ratio of the overall market share of insurers, and not share of business actually underwritten.

The number of private insurers (excluding specialised health insurers) as of 31-Mar-07 was 9.

De-tariffication (2008-12) As tariffs were de-regulated competition shifted to

defending and gaining market share as the PSU insurers reduced rates.

GDPI grew at a CAGR of 18.5% from the end of FY08 to FY12. Private multi-line market share, in terms of GDPI, reached 38% by FY12, an expansion of just ~500bps over the previous phase. Insurance penetration was 0.7% at end of this phase.

From Jan-09, IRDAI also allowed insurers to vary deductibles, offer add-on covers, and extend the scope of policies which resulted in some additional changes.

The IMTPIP resulted in increased combined ratios as the presence of the IMTPIP encouraged insurers to settle claims without implementing adequate controls.

This resulted in reduced industry profitability as loss ratios surged.

Capital ratios of state run insurance companies were depleted as they continued to write unprofitable business to maintain market share.

De-tariffication after motor TP pool dismantling (2012-19) GDPI grew at a CAGR of 18.1% from the end of FY11

to FY17. Growth improved as proactive regulatory steps presented new avenues for growth and eased restrictions on existing product lines.

The IRDA allowed revision of motor TP tariffs annually beginning 2011 vs. the earlier practice of revising tariffs once every five years. The IMTPIP was discontinued in 2012 and was replaced by the

Fixed tariff era: Insurance companies witnessed good profitability as pricing was predetermined. De-tariffication: Pricing declined as PSUs focused on retaining market share and let go of pricing. IRDAI started revising motor TP tariffs annually beginning 2011 vs. revising tariffs once in five years.


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Declined Risk Pool (DRP), which had all motor insurers as members and provided the option to insurers to transfer policies that they had underwritten to the DRP, which were not as per the insurers’ underwriting guidelines. Dismantling of the IMTPIP resulted in an industry wide improvement in combined ratios.

In FY16, quota based system was introduced, prescribing the minimum amount of third party motor insurance to be underwritten by each insurer. Further in FY16, the DRP was also dismantled.

Foreign ownership limit was increased from 26% to 49% in FY15.

Both quality of underwriting and pricing improved for the pvt. companies, which resulted in lower loss ratios (88% in FY12 to 75% in FY19).

Private general insurers gained market share from 38% in FY12 to 48% in FY19 as lower capital position impaired the underwriting capability of the public general insurers and most players were also more focused on profitability. At the same time, SAHIs also gained traction and their market share improved from 3% in FY13 to 7% in FY19.

Loss ratios also improved as most players had to amortize motor TP losses over 3 years and post the dismantling of the motor TP pool in FY12 losses reduced.

Industry growth has remained strong across phases

Source: CRISIL, HDFC sec Inst Research

118

143 164

185

215 261 295

325

380

469

581

692

776

847

964

1,28

1

1,50

7

1,70

0

0

5

10

15

20

25

30

35

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Gross direct premium (Rs bn) Growth YoY (%) - RHS

Phase I Phase IIIPhase II

Industry growth has remained strong across all phases.


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Private players continue to grab market share

Source: CRISIL, IRDAI, HDFC sec Inst Research

Claims ratio across phases

Note: FY19 claims ratio excludes data for Reliance general (3.6% Market share) & National Insurance (8.8% Market Share) Source: CRISIL, IRDAI, HDFC sec Inst Research

93 88

81 75

70 62

57 56 54 54 53 51 50 50 50 47 45

40

4 9 14

19 25

33 37 38 37 37 38

40 41 41 41 42 43

48

- - - - - 0 1 2 3 3 3 3 3 4 4 5 6 7

-10 20 30 40 50 60 70 80 90

100

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Pub. multi-line insurers Pvt. multi-line insurers Pvt. SAHI Specialized Insurers


101

75 70

65 68 68

72 77

81 87 88

80 80 80 80 79 75 75

93

83 82 85

92

85 90 91

88

97

89 85 83 82

89

100 94

102

93

83 81 82 88

81 85 86 86

93 89 83 82

81 86

92

85 87

50

60

70

80

90

100

110

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Pvt. multi-line insurers Pub. Multi-line insurers Total multi-line insurers


Private insurers now have a larger market share than that of PSUs. In Phase 2, pvt. Insurers gained only 500bps in mkt. share compared to 33% in phase 1 ; this is because price competition restricted profitability. SAHIs have grown at a faster pace. Pvt. insurers’ claims ratio continues to trend lower. Claims ratio differential between PSUs and private insurers, has increased significantly in the last 3 years.


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Combined ratio across phases

Note: FY19 combined ratio excludes data for Reliance general (3.6% Market share) & National Insurance (8.8% Market Share) Source: Crisil, IRDAI, HDFC sec Inst Research

170

110

9892 95 96

103111 112 112

118 116106 108 111 107

102 102

123116

121 123132

118124 126 124

134

120 116 114 117123

132123

130

124115 119 119

126

113117

121 120 128 119 112111 113 118

122

113115

8090

100110120130140150160170180

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Pvt. multi-line insurers Pub. multi-line insurers Total multi-line insurers


Industry combined ratios increased during Phase–II. Owing to superior underwriting quality, combined ratios continue to improve for pvt. insurers.


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Industry in Recent Times Particulars GDPI (Rs bn) Growth (%) Market Share (%)

Company FY15 FY16 FY17 FY18 FY19 FY20TD FY16 FY17 FY18 FY19 FY20

TD FY15 FY16 FY17 FY18 FY19 FY20TD

Bajaj Allianz 52 58 76 94 111 51 11.5 30.9 23.7 17.1 18.6 6.2 6.1 6.0 6.3 6.5 7.1 Cholamandalam MS 19 25 31 41 44 18 29.7 27.8 30.9 8.0 4.7 2.2 2.5 2.5 2.7 2.6 2.6 HDFC ERGO 32 34 58 73 86 31 6.2 72.8 24.8 18.1 10.2 3.8 3.5 4.6 4.8 5.1 4.4 ICICI Lombard 67 81 107 124 145 54 21.2 32.6 15.2 17.2 (9.4) 7.9 8.4 8.4 8.2 8.5 7.6 IFFCO Tokio 33 37 56 56 70 34 10.8 50.7 1.2 24.3 20.8 3.9 3.8 4.4 3.7 4.1 4.8 Reliance General 27 28 39 51 62 32 2.8 40.9 28.8 22.1 25.4 3.2 2.9 3.1 3.4 3.6 4.4 Royal Sundaram 16 17 22 26 32 12 8.5 29.4 19.0 21.0 (0.6) 1.9 1.8 1.7 1.7 1.9 1.7 SBI General 16 20 26 35 47 22 29.4 27.6 36.1 32.8 39.2 1.9 2.1 2.0 2.4 2.8 3.1 Tata-AIG 27 30 42 54 77 34 9.0 40.9 30.4 42.4 28.5 3.2 3.1 3.3 3.6 4.6 4.7 Universal Sompo 7 9 13 23 28 8 28.9 42.4 79.6 22.5 15.0 0.8 0.9 1.0 1.5 1.7 1.1 Others 55 59 66 76 114 55 6.5 13.4 14.6 49.2 40.5 6.5 6.1 5.2 5.1 6.7 7.7 Private Insurers 351 397 537 654 816 351 13.1 35.4 21.7 24.7 16.2 41.4 41.2 42.1 43.5 48.0 49.2 National 112 120 140 163 150 56 6.5 16.9 16.7 (8.0) (7.2) 13.3 12.4 11.0 10.9 8.8 7.8 New India 132 152 191 227 239 107 14.7 26.1 18.8 5.4 15.1 15.6 15.7 15.0 15.1 14.1 15.0 Oriental 74 83 108 115 132 52 12.2 29.9 6.0 15.7 5.1 8.7 8.6 8.5 7.6 7.8 7.3 United India 107 123 158 173 164 60 14.6 29.0 9.5 (5.3) 2.5 12.6 12.7 12.4 11.5 9.6 8.4 Public Insurers 426 477 597 678 686 275 12.1 25.2 13.5 1.2 5.2 50.2 49.5 46.8 45.0 40.3 38.6 General Ins Sub Total 776 874 1,134 1,332 1,502 627 12.6 29.8 17.4 12.7 11.1 91.7 90.7 88.9 88.5 88.4 87.8 Aditya Birla - - 1 2 5 3 NA NA 350.0 104.4 82.4 - - 0.0 0.2 0.3 0.4 Apollo Munich 8 10 13 17 22 9 27.3 27.4 32.0 27.7 37.3 0.9 1.1 1.0 1.1 1.3 1.2 Cigna TTK 0 1 2 3 5 2 559.6 54.2 55.9 40.1 3.5 0.0 0.1 0.2 0.2 0.3 0.3 Max Bupa 4 5 6 8 9 4 27.7 24.8 26.9 25.6 33.1 0.4 0.5 0.5 0.5 0.6 0.6 Reliance - - - - 0 0 NA NA NA NA NA - - - - 0.0 0.0 Religare 3 5 7 11 18 10 82.4 44.3 50.4 67.2 63.1 0.3 0.5 0.6 0.7 1.1 1.4 Star Health 15 20 30 41 54 22 36.6 47.6 39.9 30.6 34.5 1.7 2.1 2.3 2.8 3.2 3.1 SAHI Sub total 29 42 59 83 114 50 41.1 41.1 41.6 37.0 39.7 3.5 4.3 4.6 5.5 6.7 7.0 AIC (Crop) 27 35 71 78 72 34 28.1 101.3 10.8 (8.3) 45.4 3.2 3.6 5.5 5.2 4.2 4.7 ECGC (Export & Credit) 14 13 13 12 12 4 (3.0) (4.0) (2.2) 0.6 (10.9) 1.6 1.4 1.0 0.8 0.7 0.6 Specialized Ins Sub Total 41 48 83 91 84 38 17.7 72.5 8.8 (7.0) 36.3 4.8 5.0 6.5 6.0 5.0 5.3

Grand Total 847 964 1,276 1,506 1,700 714 13.8 32.4 18.0 12.9 13.8 100.0 100.0 100.0 100.0 100.0 100.0 Source: IRDAI, HDFC sec Inst Research

PSUs have focused on top line and market share gains rather than underwriting quality. PSUs have consistently lost mkt. share to pvt. insurers. Baring NIA, other 3 PSUs are struggling for meeting solvency requirements. SAHIs are growing at a much faster pace.


Page | 15

General insurance industry size and segments The total size of the Indian general insurance industry

was Rs 1.7tn in FY19. Over the last 10 years the industry has grown at a CAGR of 18.0%.

Due to the addition of crop insurance, industry GDPI CAGR has increased to 19.9% over the last 3 years, and the crop-line contributed ~20% (FY19) to total GWP vs. ~5% in FY16.

The total number of general insurers have increased from ~12 in FY02 to 33 in FY18.

Motor and health are the largest segments with shares of 38% and 27% respectively.

Levers to growth

Improving penetration

Changing regulations

Improving underwriting ability

Policies sold

Source: IRDAI, HDFC sec Inst Research

Source: IRDAI, HDFC sec Inst Research Note: Data for FY19

Non-Life InsuranceRs 1.75 tn

5Y CAGR: 16%

Crop (20%)Rs 350 bn

60%

Fire (7%)Rs 148 bn

9%

Motor (38%)Rs 659 bn

14%

Health (27%)Rs 458 bn

21%

PA (3%)Rs 55 bn

24%

Other (5%)Rs 87 bn

2%

Motor OD (16%) Rs 280 bn

7%

Motor TP (22%)Rs 380 bn

20%

EngineeringAviationLiability

Marine CargoMarine Hull

Workers CompensationPublic Utility

86

89

97

107

113

122

122

150

165

155

2 2 3 2 2 3 4

5 6

7

0 1 1

1 1 1 1

7

12 8

-20 40 60 80

100 120 140 160 180 200

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

General insurers SAHI Specialised InsurersMn

Number of general insurers has increased from ~12 in FY02 to 33 in FY18.


Page | 16

Industry product mix : Motor and Health are the Largest segments

Source: GIC, HDFC sec Inst Research

Pvt. Industry product mix : Mimics the industry mix, less focus on mass/gov. health

Source: GIC, HDFC sec Inst Research

1 1 1 1 1 0 0 0 11 12 12 12 11 9 9 8

22 24 24 23 22 19 18 16

23 17 19 20 21 20 21 22

4 4 4 3 5 16 16 20

20 21 22 23 24 23 24 26

-

20

40

60

80

100

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Aviation Engineering Fire Liability Marine Cargo Marine Hull

Motor OD Motor TP Crop Health PA Other Misc%

1 1 0 0 0 0 0 0 9 10 10 10 11 9 9 10

33 35 33 33 32 27 25 22

26 20 22 23 24 22 23 24

- - - - 5 19 18 22 14 15 14 13

13 11 12 13

-

20

40

60

80

100

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Aviation Engineering Fire Liability Marine CargoMarine Hull Motor OD Motor TP Crop HealthPA Other Misc Total

%

Product mix has been dominated by retail products including motor and health. Motor and health’s proportion has broadly remained stable at 60-65%. From FY17, due to implementation of government crop insurance scheme under PMFBY, share of crop insurance has increased to ~20%.


Page | 17

Motor segment Size and profitability The total motor (OD + TP) segment in FY19 was Rs

659bn (38% of total); with OD at Rs 279bn and TP at Rs 380bn.

Industry Loss ratios were 67% in OD vs. 98% in TP for FY18.

The total no of registered motor vehicles in India has grown at about 9.7% CAGR over FY01-19 to an estimated 289mn.

The total no of motor insurance policies sold in FY18 were however only 125.9mn. We also estimate that only ~59% of the policies issued are comprehensive while the remainder are third party liability only.

Auto sales growth continue to moderate 2Ws have a lion share in vehicle mix

Source: MOSPI, SIAM, HDFC sec Inst Research Source: MOSPI, HDFC sec Inst Research

59

67

73

82

90

97

105

115

128

142

159

176

191

210

230

247.

9 26

7.8

289.

2

7.2

13.7

8.

5 12

.1

10.0

7.

9 8.

9

9.1

11.1

11.1

12

.4

10.4

8.3

10.1

9.

5 7.

8 8.0

8.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

-

50

100

150

200

250

300

350 FY

02FY

03FY

04FY

05FY

06FY

07FY

08FY

09FY

10FY

11FY

12FY

13FY

14FY

15FY

16FY

17E

FY18

EFY

19E

Registered motor vehicles (mn) -LHSGrowth YoY (%) - RHS

4 4 4 4 4 4 4 4 4 3 4 3 3 3 3 3 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4 5

13 13 13 13 13 13 13 13 13 15 14 14 14 14 14 13

70 71 71 71 72 72 71 72 72 71 72 73 73 73 74 74

7 7 7 6 7 6 6 6 6 6 6 6 5 5 5 5

-

20

40

60

80

100

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

PV Goods vehicles Four wheelers Two wheelers Misc

Industry growth has slowed down particularly on the OD side due to increased price comptetion and slowdown in auto sales. Industry loss ratios have also deteriorated.


Page | 18

OD segment Unlike the TP segment, the OD segment is de-tariffed.

The OD line in FY19 was Rs 279bn and had grown at a CAGR of 7.3% over FY14-19.

Given that only ~125mn vehicles are insured in a total on road vehicle size of ~289mn, the underpenetration and hence growth opportunity for this segment is huge.

Our understanding from the industry sources is that until sale of long term polices started less than ~35% of two wheelers were insured after first year of registration.

Overall segment has the potential to be Rs 1tn, i.e. 3.9x of FY19 size- see motor segment market sizing (refer table).

As competitive intensity to grow long term (OD + TP) business has increased companies have heavily discounted OD pricing and profitability of the segment has taken a hit.

Growth decelerating due to slump in auto sales Private insurers gained 900bps over FY19

Source: GIC, HDFC sec Inst Research Source: GIC, HDFC sec Inst Research

84

88

101

124

153

181

196

208

227

252

278

279

-

5

10

15

20

25

-

50

100

150

200

250

300

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Motor OD GWP (Rs bn) - LHS Growth (%) - RHS

48 49 52 54 55 56 56 57 57 58 59 68

52 51 48 46 45 44 44 43 43 42 41 32

-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

100.0

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Private (%) Public (%)

Industry growth has slowed down particularly on the OD side due to increased price competition and slowdown in auto sales. Market share loss for PSUs was gradual, however PSUs lost considerable market share after implementation of MISP guidelines.


Page | 19

Robust growth lead by M. Share gains Growth decelerating due to M. Share shift


Industry distribution mix Most players cede only the mandatory ~5%.


91.2 90.4 90.1

86.8 87.6

84.0 85.0 86.0 87.0 88.0 89.0 90.0 91.0 92.0

FY14 FY15 FY16 FY17 FY18

Industry Retention ratio (%)

45 46 40 34 33

5 7 7 11 11

28 30 29 38 37

17 12 20 13 8

-

20

40

60

80

100

FY14

FY15

FY16

FY17

FY18

Ind. agents Corp. agents - banksCorp. agents - others BrokersDirect Others%

40

43

53

67

83

101

110

117

130

146

165

189

-

5

10

15

20

25

30

-20 40 60 80

100 120 140 160 180 200

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Private GWP (Rs bn) - LHS Growth (%) - RHS

44

45

48

57

69

80

86

90

97

105

115

90

(25)(20)(15)(10)(5)-5 10 15 20 25

-

20

40

60

80

100

120

140

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Public GWP (Rs bn) - LHS Growth (%) - RHS

Pvt. insurers have gained substantial mkt. share. OEMs dominate OD market hence brokers have a lion share in the distribution mix. Since claims are of low ticket size, most insurers retain most of the OD business.


Page | 20

Motor OD Particulars FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 207.6 227.3 251.6 277.6 264.7 6.2

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 9.5 9.4 8.2 7.6 7.9 (155) Chola MS 2.9 3.3 3.7 3.6 3.9 70 HDFC ERGO 3.0 2.6 1.7 4.9 6.2 294 ICICI Lombard 10.3 11.1 11.0 11.0 12.9 77 NIA 17.3 18.2 17.7 16.7 17.3 41 Royal Sundaram 3.9 3.8 4.3 4.5 4.6 93 SBI 1.4 1.9 1.8 2.3 2.3 97 Premium growth (%) 5Y CAGR (%) Bajaj 9.7 5.7 2.4 1.3 0.1 3.8 Chola MS (2.2) 9.3 31.0 13.3 (18.9) 5.2 HDFC ERGO 2.6 (11.4) (26.1) 175.5 30.5 19.3 ICICI Lombard (18.2) 10.3 22.8 16.6 18.0 8.8 NIA 15.0 10.7 8.7 7.4 2.2 8.7 Royal Sundaram 0.3 8.0 19.3 3.2 (2.1) 5.5 SBI 23.9 37.7 28.1 11.9 25.8 25.2 Retention rate (%) 5Y avg (%) Bajaj 94.4 93.6 93.9 94.6 94.6 94.2 Chola MS 94.7 94.7 94.6 85.0 74.4 88.7 HDFC ERGO 74.7 73.9 73.9 74.7 77.1 74.9 ICICI Lombard 65.1 74.8 75.4 85.0 85.2 77.1 NIA 94.6 93.3 93.0 92.6 93.2 93.3 Royal Sundaram 94.5 94.3 94.6 74.9 74.5 86.5 SBI 94.9 94.8 94.7 94.8 92.0 94.2 Claims ratio (%) 5Y avg (%) Bajaj 56.5 62.3 63.0 56.1 60.0 59.6 Chola MS 50.8 53.0 58.2 49.0 53.5 52.9 HDFC ERGO 73.4 71.1 73.7 68.9 78.3 73.1 ICICI Lombard 61.8 65.6 64.2 53.7 59.2 60.9 NIA 67.6 78.3 81.1 74.2 85.2 77.3 Royal Sundaram 58.6 63.3 68.2 63.7 66.1 64.0 SBI 62.9 77.4 91.0 70.3 75.9 75.5

Source: GIC, Respective Companies, HDFC sec Inst Research

Motor OD segment growth has been challenged as (1) intense competition to acquire long term business (2) low penetration and renewability. Bajaj has a lower mkt. sh. due to brand conflict within 2Ws. Premium growth for ICICIGI has remained robust. Our channel checks suggest ICICIGI has high market share within the OEMs leading to superior growth. SBI GI and HDFC ERGO have gained the most market share. OD business is sourced mainly through OEMs and banca channel. Most pvt. insurers retain most of the business; however the retention is even higher amongst PSUs. Claims ratios depend most on the vehicle mix of the portfolio.


Page | 21

Particulars FY15 FY16 FY17 FY18 FY19 5Y avg (%) Combined ratio (%) Bajaj 85.2 92.6 93.4 89.0 101.1 92.3 Chola MS 84.1 92.2 93.9 81.0 95.0 89.2 HDFC ERGO 119.6 118.6 98.5 101.0 112.3 110.0 ICICI Lombard 83.7 94.2 97.2 86.5 93.2 91.0 NIA 100.9 112.4 112.9 109.4 124.2 112.0 Royal Sundaram 104.1 109.4 114.5 104.4 96.9 105.9 SBI 101.3 115.4 130.0 110.3 118.2 115.1 Pre tax ROE (%) 5Y avg (%) Bajaj 48.5 25.7 28.4 36.7 0.4 27.9 Chola MS 71.6 46.7 46.7 81.8 35.5 56.5 HDFC ERGO (27.1) (27.9) 27.4 18.6 (26.0) -7.0 ICICI Lombard 64.7 25.4 26.6 50.7 36.3 40.8 NIA 35.3 (4.0) (0.5) 10.4 (20.1) 4.2 Royal Sundaram 5.3 (11.5) (28.3) 14.9 35.3 3.1 SBI NA (42.9) (52.7) (25.4) (16.4) -34.3 Source: GIC, Respective Companies, HDFC sec Inst Research

ICICIGI and Chola MS GI, have the best combined ratios and both companies have been able to consistently make underwriting profits in this segment. In ROE terms, Motor OD has been reasonably profitable with 5Y avg. ROE within the range of 30-60% for select companies. We expect competitive pricing to further drive down the RoEs.


Page | 22

TP segment Total size of Motor TP segment is Rs 380bn (22% of

total premium) and the premium for this segment has grow at a CAGR of 19.6% over FY14-19.

Unlike other countries the TP segment in India allows for unrestricted (time) and unlimited (value) liability for any accident injury/death to a third party. Thus reserving requirements are high for this segment.

The motor TP segment is also under regulated pricing and companies have to compulsorily provide TP insurance to any customer wanting the same.

Insurers have an obligation to underwrite a minimum of average of (overall market share and motor TP market share) X 90% of total industry motor TP business underwritten in the previous year.

IRDAI has been revising motor TP pricing consistently over after the dismantling of the motor TP pool in 2012. On an average motor TP rates have increased at a CAGR of 10.8% over FY15-20.

While claims ratios are high for motor TP line, low commissions (regulated) and high float income boost return ratios.

Industry GWP grew at 17% CAGR during FY08-19 Private insurers continue to gain M. Share


67

76

83

96

156

128

155

180

213

266

330

380

(30)(20)(10)-10 20 30 40 50 60 70

-

50

100

150

200

250

300

350

400

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Motor TP GWP (Rs bn) - LHS Growth (%) - RHS

34 38 39 41 42 46 46 45 45 45 46 54

66 62 61 59 58 54 54 55 55 55 54 46

-

20.0

40.0

60.0

80.0

100.0

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19


After implementation of Motor Vehicle Act, 2019 we expect TP growth to accelerate. On an average motor TP rates have increased at a CAGR of 10.8% over FY15-20.


Page | 23

Private GWP grew at 22% CAGR during FY08-19 Growth slowing down for PSUs

Source: GIC, HDFC sec Inst Research Source: GIC, HDFC sec Inst Research Agents bring most of the business Most insurers retain most of the business written


58 48 58 55 56

4 6

8 10 11 17

16 19 17 17

16 27 12 14 8

-

20

40

60

80

100

FY14

FY15

FY16

FY17

FY18


90.2

91.892.4

89.7

87.6

85

86

87

88

89

90

91

92

93

FY14

FY15

FY16

FY17

FY18


23

29

32

39

66

59

72

82

96

119

152

204

(20)(10)-10 20 30 40 50 60 70 80

-

50

100

150

200

250

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19


44

47

51

57

90

69

83

98

117

148

179

177

(30)(20)(10)-10 20 30 40 50 60 70

-20 40 60 80

100 120 140 160 180 200

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19


Private players’ growth is accelerating while PSUs’ growth continues to trend lower. As losses are granular and smaller, most insurers cede only the mandatory 5%.


Page | 24

Motor TP Particulars FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 180.1 212.9 266.5 329.6 379.8 19.6

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 5.2 5.4 5.6 6.2 7.3 183 Chola MS 3.8 4.3 4.7 5.0 5.2 112 HDFC ERGO 2.4 2.7 1.1 2.9 3.8 123 ICICI Lombard 7.3 7.6 6.7 6.6 7.9 32 NIA 16.5 16.5 17.1 17.5 15.4 48 Royal Sundaram 1.9 1.9 2.4 2.4 2.2 34 SBI 1.5 1.3 0.8 1.0 0.8 (66) Premium growth (%) 5Y CAGR (%) Bajaj 18.9 15.7 25.3 37.4 32.9 25.8 Chola MS 19.4 21.3 41.0 31.2 23.4 27.0 HDFC ERGO 15.4 12.1 (39.8) 194.5 37.2 25.8 ICICI Lombard 27.7 30.0 15.9 17.5 26.0 23.3 NIA 41.1 18.6 27.4 30.9 15.5 26.4 Royal Sundaram 3.5 16.4 50.0 30.6 20.1 23.2 SBI 43.2 10.4 (8.0) 4.5 26.2 13.9 Retention rate (%) 5Y avg (%) Bajaj 94.6 94.7 95.5 94.8 94.9 94.9 Chola MS 94.7 94.8 94.7 94.8 95.0 94.8 HDFC ERGO 74.3 74.4 74.5 74.5 76.8 74.9 ICICI Lombard 94.1 94.3 94.3 94.5 94.6 94.4 NIA 90.5 91.5 95.0 95.0 94.6 93.3 Royal Sundaram 94.1 94.2 94.4 94.7 94.6 94.4 SBI 92.8 94.3 93.8 94.4 94.2 93.9 Claims ratio (%) 5Y avg (%) Bajaj 104.0 91.3 79.1 69.4 64.5 81.6 Chola MS 99.6 97.7 96.6 100.2 97.8 98.4 HDFC ERGO 117.1 104.1 117.4 106.6 86.5 106.3 ICICI Lombard 105.8 97.7 97.4 107.1 90.8 99.8 NIA 113.5 86.8 88.5 84.5 88.6 92.4 Royal Sundaram 124.1 118.0 103.3 110.7 112.3 113.7 SBI 145.5 147.9 126.8 133.6 108.6 132.5 Source: GIC, Respective Companies, HDFC sec Inst Research

Industry growth has been robust as (1) adequate price increases have been allowed by IRDAI (2) lower drop-offs as Motor TP is mandatory, (3) improving persistency due to sale of long term TP policies. Premium growth has remained robust ~20-30% for most companies. Barring HDFCERGO, all companies retain 95% TP business. Bajaj has consistently maintained best in class claims ratio. Claims ratio for ICICIGI has declined considerably in FY19.


Page | 25

Particulars FY15 FY16 FY17 FY18 FY19 5Y avg (%) Combined ratio (%) Bajaj 127.5 116.0 103.9 89.9 87.3 104.9 Chola MS 125.9 124.5 123.5 126.7 124.1 125.0 HDFC ERGO 147.4 131.4 141.3 120.1 99.3 127.9 ICICI Lombard 136.6 128.3 130.4 134.9 110.9 128.2 NIA 135.5 108.8 108.8 101.9 109.0 112.8 Royal Sundaram 136.6 130.9 114.4 122.3 124.3 125.7 SBI 172.6 178.6 161.4 163.0 131.3 161.4 Pre tax ROE (%) 5Y avg (%) Bajaj 49.2 84.3 123.0 161.5 137.7 111.1 Chola MS (0.4) (16.2) 2.7 (9.8) (6.5) -6.0 HDFC ERGO (38.8) (0.4) (2.6) 54.3 74.7 17.4 ICICI Lombard 25.2 48.1 45.6 34.5 84.9 47.7 NIA 33.9 83.4 81.2 92.8 79.4 74.1 Royal Sundaram (20.9) 2.1 34.4 10.6 8.0 6.8 SBI NA (99.5) (25.0) (42.1) 8.8 -39.5 Source: GIC, Respective Companies, HDFC sec Inst Research

Combined ratios have improved considerably over the years. This is expected to continue with the implementation of the new Motor Vehicles Act, 2019. Investment income drives profitability for this segment. 5Y avg. ROEs are extremely strong for Bajaj and NIA. Profitability for ICICIGI has improved materially in FY19.


Page | 26

Motor TP Premium rates FY15 FY16 FY17 FY18 FY19 FY20 5Y CAGR (%)

Private Cars <1000 cc 1,129 1,468 2,055 2,055 1,850 2,072 1000-1500 cc 1,332 1,598 2,237 2,863 2,863 3,221 >1500 cc 4,109 4,931 6,164 7,890 7,890 7,890

Two wheelers

<75 cc 455 519 569 569 427 482 75-150 cc 464 538 619 720 720 752 150-350 cc 462 554 693 887 985 1,193 >350 cc 884 884 796 1,019 2,323 2,323

Goods carrying vehicles (Public carriers)

GVW < 7500 kg 14,390 14,390 14,390 14,390 14,390 15,746 7500-12000 kg 15,365 15,365 15,365 19,667 24,190 26,935 12000-20000 kg 16,360 19,632 22,577 28,899 32,367 33,418 20000-40000 kg 16,471 19,766 24,708 31,626 39,849 43,047 >40000 kg 16,539 19,846 25,800 33,024 38,308 41,561

Goods carrying vehicles (Private carriers)

GVW < 7500 kg 8,721 8,721 7,849 7,938 7,144 8,438 7500-12000 kg 10,077 8,868 11,528 14,330 15,620 17,204 12000-20000 kg 8,972 8,972 9,390 9,871 9,871 10,876 20000-40000 kg 10,323 11,149 12,821 14,805 15,397 17,476 >40000 kg 11,566 13,879 16,655 21,318 21,318 24,825

Growth (%)

Private Cars <1000 cc 20 30 40 - (10) 12 17 1000-1500 cc 20 20 40 28 - 13 24 >1500 cc 20 20 25 28 - - 18

Two wheelers

<75 cc 10 14 10 - (25) 13 3 75-150 cc 10 16 15 16 - 4 12 150-350 cc 10 20 25 28 11 21 23 >350 cc 10 - (10) 28 128 - 24

Goods carrying vehicles (Public carriers)

GVW < 7500 kg 10 - - - - 9 4 7500-12000 kg 10 - - 28 23 11 14 12000-20000 kg 10 20 15 28 12 3 18 20000-40000 kg 10 20 25 28 26 8 24 >40000 kg 10 20 30 28 16 8 23

Goods carrying vehicles (Private carriers)

GVW < 7500 kg (10) - (10) 1 (10) 18 (3) 7500-12000 kg (10) (12) 30 24 9 10 9 12000-20000 kg (10) - 5 5 - 10 2 20000-40000 kg (10) 8 15 15 4 14 9 >40000 kg (10) 20 20 28 - 16 14


We believe price hikes offered by the regulator have been adequate. For some niche segments price hikes have been extremely robust (FY15-20 CAGR of ~25%). Price hikes have been limited in FY20, moreover long term TP rates have not been changed.


Page | 27

Regulatory changes provide tailwind Motor insurance service providers (MISP) regulations Changes in the Motor insurance service provider

regulations adopted w.e.f. 1 Nov, 2017 brought about the first level of change in the industry.

Under the new MISP regulations: A MISP may work for one or more insurers either

directly or through insurance intermediaries.

MISPs books shall be reviewed periodically for compliance to controls, systems, procedures, and safeguards. This review shall be carried out at least once a year by the sponsors.

Review of the MISP shall also check compliance to the Act, rules and regulations, circulars, guidelines, etc issued by the IRDAI.

Under these regulations every MISPs are required to offer choice of motor insurance policies along with the various price points.

MISPs are also required to have a separate bank account to receive all payments from insurers or intermediaries.

MISPs are now required to share the contact and other data submitted by the policyholder.

MISPs are also required to submit periodical returns as required by the IRDAI.

MISPs are not allowed to receive any payment for outsourcing activity, or force the prospect/ policyholder to necessarily buy motor insurance policy.

MISPs are also not allowed to directly or indirectly control or interfere in determination of premium of policies, product design or in the appointment of surveyors and loss assessors’ assessment activities.

An MISP is also not allowed to solicit business to persons who have not bought the automobile from it.

The MISP shall ensure that only those features of the motor insurance policies which are approved by the Authority under product filing procedures are shared with the policyholder.

The regulation also puts caps the maximum distribution fees payable to MISP

Max. Distribution Fees payable to MISP

Max. Remuneration & Reward payable to

insurance intermediary by

insurer* 2 wheeler automotive vehicle

22.5% of the OD portion of the

automotive vehicle


automotive vehicle Other than 2 wheeler automotive vehicle


automotive vehicle


automotive vehicle

*- the insurer shall not pay both the remuneration & reward and distribution fees on the same motor insurance policy Source: IRDAI, HDFC sec Inst Research

Prior to the MISP regulations there was no capping of commissions leading to large payouts by insurers to acquire business.

Sponsor and MISP jointly and severally liable to pay penalties incase found to be guilty under law.

Prior to the MISP regulations there was no capping of commissions to dealers leading to large payouts. Channel checks indicate that commission caps were strictly followed only for 4-6 months.


Page | 28

Implications The new MISP policy has severely restricted

commission payments to auto dealers thereby reducing the cost of distribution (expense ratios) for insurers.

Part of this cost reduction has also been passed on the customer thereby reducing cost of insurance for customers.

MISPs also have to provide data to insurers and intermediaries.

Having said the above it is our understanding that the regulations were truly followed only for a few months after the same were implemented. Other arrangements are used by most insurers to compensate MISPs and hence compliance is low.

Long term Third Party (TP) insurance Following the Supreme Court’s order beginning 1st

Nov, 2018 IRDAI made purchase of long term TP insurance compulsory for new passenger vehicles and two wheelers.

Thus, buyers of all new passenger vehicles have to compulsorily purchase three years TP insurance cover while buyers of new two wheelers have to compulsorily purchase five years TP insurance cover.

Long term TP insurance will help expand the market as currently industry estimates that drop-off rates are ~30% and 70% for PVs and 2Ws respectively. This move will increase compliance for PVs and 2Ws.

Long term TP will result in higher floats for insurers. Current TP pricing seems to be building in reasonable claims inflation, although price hike for FY20 has been moderate and IRDAI has not hiked long term premium pricing.

Attractive pricing of 3/5 year long term policies

TP premium

(Rs pa)3/5 yr pay

(Rs)Implied

inflation (pa) Private cars <1000cc 2,072 5,286 -9.1% 1000cc to 1500cc 3,221 9,534 6.6% >1500 cc 7,890 24,305 10.9%

Two wheelers <75cc 482 1,045 -31.6% 75cc-150cc 752 3,285 3.1% 150cc-350cc 1,193 5,453 13.5% >350cc 2,323 13,034 14.2% Note: We have assumed a 8% cost of capital Source: IRDAI, HDFC sec Inst Research

Additionally, even commission rates for the TP part of the business are capped. This will result in lower payouts for this business.

While we believe these long term 3/5 year policies build in adequate claims inflation, collecting premium upfront improves persistency, increases market size and allows companies to earn high float incomes.

We understand that drop-offs after first year of insurance were ~30% and 70% for PVs and 2Ws respectively. It is now mandatory for buyers of all new PVs and 2Ws to purchase 3 and 5 yr TP policies, respectively. Long- term policies will result in vast improvement in persistency and penetration. Since CVs are mostly used for commercial purposes, drop offs rates are lower.


Page | 29

The Motor Vehicles (Amendment) Act, 2019 The new The Motor Vehicles (Amendment) Act, 2019 has been passed by the parliament. The Act significantly changes the following:

Time limit for claim intimation The Act has reduced the time limit until which

accident claims have to be intimated to insurance companies to 6 months.

In the prior Act, there was no time limit to file claim, allowing claim reporting to take place after several years and provided plenty of opportunity for insurance fraud.

Almost 30-35% % of claims are filed after 12 months of accident.

We believe that this change itself has the potential of considerably improving claims ratios.

Structured formula based compensation The owner of motor vehicle or authorized insurer will

be liable to pay Rs 0.5mn in case of death or Rs 0.25mn in case of injury. The claimant is not required to prove the fault of the motorist. This will result in higher payouts.

Any compensation payable under any other law is allowed to be deducted from the above mentioned limits of Rs 0.5 and Rs 0.25mn, as the case may be.

Shortening claims settlement cycle As per the new Motor vehicles Act, insurance

companies will be required to appoint an officer after receiving information of the accident.

The officer is required to make an offer to the claimant before the claims tribunal within 30 days of

receiving information and after following the prescribed formula.

If the claimant accepts the above offer, the claims tribunal shall make a record of such settlement, and the insurer is required to pay the claim within 30 days.

If claimant rejects above offer, hearing shall be fixed by the claims tribunal to adjudicate such claim on merits.

Increase in penalties The amended Act substantially increases penalties for

non-compliance to motor driving law. Fines have been increased 5-10x of the amounts previously charged.

This we believe will reduce errant behavior. The new fines have already been notified w.e.f. 1-Sep-19.

Newspaper reports indicate that higher penalties are forcing higher level of compliance and sales of TP policies have increased in recent times.

Increase in Penalties in the new Motor Act Particulars (Rs) Section Revised

PenaltyExisting Penalty

Increase (%)

Driving without license 180 5,000 1,000 5x

Fine for over speeding 183 1000-2000 400 2.5-5x

Rash driving 184 5,000 1,000 5x Drunk driving 185 10,000 2,000 5x Driving without insurance 196 2000 1000 2x

Not wearing a seatbelt 194B 1,000 100 10x


The Act limits the time for claim intimation to six months from date of accident. Industry sources suggest that only ~30-35% of claims were filed within one year of incident. Structured formula based compensation will lead to higher payouts. Increase in penalties should at least in theory, result in increased driving discipline reducing accident occurrence, thereby reducing claims.


Page | 30

Free pricing for Motor TP As discussed earlier, currently pricing in the motor TP

segment is administered by the IRDAI.

Motor TP pricing has steadily increased over the last few years.

Motor Segment Market Sizing Motor TP: We estimate as of FY19, if all on road

vehicles were to buy at least TP policies the TP market size would work out to be ~ Rs 809bn i.e. ~2.1 times FY19 premium.

Motor OD: We estimate a market size of Rs 1.0tn i.e. 3.8x if all vehicles were to obtain OD cover.

Total auto-line potential is Rs 1.8tn i.e. 2.8x of FY19Motor market opportunity

Particulars (Rs mn) Insurance cost per vehicle (Rs)

Blended Private car/Taxis Two wheeler PV/CVs

Insurance cost per vehicle (Rs) (a) Motor OD 5,226 387 19,919 3,555 Motor TP 2,961 711 14,647 2,800 Total

Vehicles (mn) (b) 38 214 38 289

Market Opportunity (Rs bn) (a*b) Motor OD 196 83 749 1,028 Motor TP 111 152 546 809 Total 1,838

Premium written FY19 (Rs bn) Motor OD 265 Motor TP 380 Total 645

Size of opportunity Motor OD 3.8x Motor TP 2.1x Total 2.8x Note: Registered vehicle estimated as of Mar-19 Source: IIB, HDFC Securities Institutional Research estimates

We believe the market size is immense, since the penetration is low in both OD and TP. With implementation of MVA, we believe the penetration will improve materially in TP.


Page | 31

Renewal premiums are low in 2Ws – implying high drop-offs

Drop-offs for PVs are lower than that of 2Ws

Source: IIB, HDFC sec Inst Research Data as of FY17


2W and Passenger carrier have lowest death claims ~50% of claims are reported after 1 year of

accident


Source: IIB, HDFC sec Inst Research Data for FY16

2.5

11.6

10

.6

10.2

9.

1 9.5

8.5

7.7

5.8

4.7

4.2

3.4

2.6

2.3

1.7

5.7

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

Befo

re FY

03

Private Car: % of policies written based on year of registration

31.0

41

.0

11.5

5.

1 3.

1 2.

0 1.

5 1.

0 0.

7 0.

6 0.

5 0.

4 0.

3 0.

2 0.

2 0.8

-5.0

10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

FY02

Befo

re FY

02

Proportion of TP Reported Claims by Accident year

6.1

24.8

12

.6

10.7

8.

3 7.

4 6.

4 5.

0 3.

7 2.

9 2.

6 2.

4 1.

8 1.

4 1.

1 2.8

-

5.0

10.0

15.0

20.0

25.0

30.0

FY17

FY16

FY15

FY14

FY13

FY12

FY11

FY10

FY09

FY08

FY07

FY06

FY05

FY04

FY03

Befo

re FY

03

2 Wheeler: % of policies written based on year of registration

23 27 43

25 47

67 66 52

72 49

8 1 0 0 0 1 4 3 2 2 2 2 2 1 2

-

20

40

60

80

100

Two wheeler

Private car Goods carrier

Passenger carrier

Others

Death InjuryPersonal accident Property damageOthers

We learn renewal rates are highest in CVs followed by Private cars and the least is in 2Ws. Since CVs are used in commercial business, most business renew OD insurance. 2Ws and Passenger carriers are safe lines of business as they have the lowest death claims, hence claim payouts are limited.


Page | 32

Health insurance Nascent Domestic Health Industry At 3.8% of GDP, India currently is one of the lowest

spenders on healthcare in the world. Global average stands at 8.6%.

Additionally, most of health care spending in India is out of pocket (61%) vs. Global average (only 22%).

We believe as per capita income and health insurance awareness increases we should see an increase in penetration of health insurance.

Rising penetration

Source: GIC, IRDAI, HDFC sec Inst Research Out of pocket expenditure highest in India With increasing insurance penetration, out of

pocket expenditure is reducing

Source: World bank, HDFC sec Inst Research Source: World bank, HDFC sec Inst Research

64.6

37.6

37.3

35.9

31.2

15.1

14.6

13.5

12.1

11.1

9.8

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Indi

a

Mal

aysia

Indo

nesia

Chin

a

Sing

apor

e

UK

Cana

da

Japa

n

Thai

land

USA

Fran

ce

Out of pocket health care expenditure(%)

254

212

207

216

288

359

438

482

26.4

20.1 18.1 17.6 22.0

27.1

32.7 35.6

-5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0

-

100

200

300

400

500

600

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Lives covered (mn) Penetration (%) - RHS

74.1

73.4

73.4

72.5

73.1

72.3 70.8

69.1 66.8

65.2

62.2

63.0

69.0

67.0 64.7

64.6

55.0

60.0

65.0

70.0

75.0

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Out of pocket expenditure as % of total healthcare expenditure - India

Penetration is rising, however ~75% lives are covered through government schemes where cover is inadequate.


Page | 33

Health Insurance Market Size Over FY08-19, health insurance premiums have

grown at a CAGR of 22.2% to Rs 458bn. Growth has continued to remain strong even in the recent times as FY14-19 CAGR is at 20.8%.

The IRDAI allows for standalone health insurers (SAHI); SAHI’s have grown at a CAGR of 37.9% over FY14-19 leading to an increase in their market share from 12% to 24%.

SAHIs have posted higher than industry growth as 1) banks and corporate agents are allowed to deal with an additional three SAHIs, and 2) SAHI agents do not require additional training or insurance agent certification.

The second highest growth rate is seen in Private players (FY14-19 CAGR of 19.0%) vs. the PSU sector (FY14-19 CAGR of 16.7%).

Health insurance comprises three segments: 1) government business, 2) group business and 3) individual business.

Sizes of each of the three segments, growth rates and claim ratios differ significantly across the three segments. (See chart)

Retail health has the lowest claims ratios, while the government business is very low in profitability.

While growth has been the highest in the group business which is also the largest, claims ratio is the lowest for the individual business. (See chart)

As seen in the table as at end of FY18, 482mn i.e. only ~38% of the population is covered. Even this assumes no overlap between the lives covered in group and individual policies.

Of the 482mn lives about 359.3mn lives are covered under government sponsored schemes, while ~122.7mn lives are covered in group insurance and individual health schemes.

Thus only about 10% (this too does not count lives of several people who are covered both in group and individual health plans) of the population have some sort of health insurance for themselves.

We estimate an extremely large market size for health insurance in the several years ahead. Market size growth will continue as:

Income levels grow and individual purchase of health insurance increases,

Individuals upgrade their coverage: people come out of government schemes and are able to afford their own insurance and people continue to aspire for better medical facilities and coverage.

Individuals supplement health insurance provided by employers with their own.

Over FY08-19, health premiums have grown at a CAGR of 22.2% to Rs 458bn. SAHIs have been able to capture higher mkt. share- 24% in FY19 (+1,200bps over FY14). Retail health is the most profitable, while government business is least profitable.


Page | 34

Retail & Group health Government health


Retail premium grew at 21.6% CAGR during FY11-18 Rising share of Retail business


189 161 149 155 214

273 335 359

23 30 34 34

48

57

71 89

42 21 24 27

25

29

32 33

-50

100 150 200 250 300 350 400 450 500

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Government business Group business Retail business

Mn

20 17 15 12 12 10 10 11

35 37 38 42 44 42 41 41

45 46 47 46 44 48 48 48

-10 20 30 40 50 60 70 80 90

100

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Government business Retail business Group business %

123 31

8 454

330 1,

124

1,95

2

9.1

21.2

28.1

-

5.0

10.0

15.0

20.0

25.0

30.0

-

500

1,000

1,500

2,000

2,500

FY18 FY25E FY30E

Lives covered (mn) GDPI (Rs bn)Penetration (%) - RHS

359

451

526 40 54

66

26.6 30.1

32.6

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

-

100

200

300

400

500

600

FY18 FY25E FY30E

Lives covered (mn) GDPI (Rs bn)Penetration (%) - RHS

We expect penetration to improve materially in Retail segment. Most profitable retail segment has grown at the fastest pace (21.6% CAGR during FY11-18) Owing to decent price hikes in the corporate segment during FY17 & 18, premium growth was strong at ~26/21%.


Page | 35

~75% lives are covered through Gov. business Retail business premium per life on the rise


Retail business has the lowest claims ratio Improving industry claims ratio


189 161 149 155 214

273 335 359

23 30 34 34

48

57

71 89

42 21 24 27

25

29

32 33

-50

100 150 200 250 300 350 400 450 500

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Government business Group business Retail business

Mn

116

138

157

134

113

91

92

111

2,19

1

1,98

3

2,09

5

2,39

1

1,84

2

2,03

9

2,08

8

1,98

6

928

2,37

7

2,50

8

2,70

4 3,45

4

3,60

7

3,93

3 4,59

2

-500

1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Government business Group business

Retail businessRs

93 108 109

122 115

83 81 77 76 71

110 116 120

125

107

50 60 70 80 90

100 110 120 130

FY14

FY15

FY16

FY17

FY18

Government business Retail business

Group business %

106112

117122

108

87 84 81 84 80

67 6358 58 62

97 101 102 10694

405060708090

100110120130

FY14

FY15

FY16

FY17

FY18

Public Private SAHI Industry Average

%

Govt. schemes cover ~75% of lives covered by the industry, however premium contribution is only 11%. Industry pricing has improved the most for retail business. Retail business has grown ~5x during FY11-18. PSUs corrected pricing in the corporate segments during FY17-18, hence industry CORs have improved.


Page | 36

Industry GWP grew at a strong pace SAHIs have been able to gain higher market share


Private GWP growth has accelerated in last 4 years Growth continues to trend lower


50

66 84

115

134

157

179

206

250

312

380

458

-5 10 15 20 25 30 35 40

-

100

200

300

400

500

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Health GWP (Rs bn) - LHS Growth (%) - RHS

62

58

60

60

61

61

61

63

63

62

58

52

35

34

28

26

27

28

26

23

21

20

21

25

3

8 13

13

12

11

12

14

16

18

21

24

-

20

40

60

80

100

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

Public (%) Private (%) SAHI (%)

18

22

23

30

37

44

47

47

53

62

79

113

(5)-5 10 15 20 25 30 35 40 45

-

20

40

60

80

100

120

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19


31

39

50

69

82

96

109

130

157

194

219

237

-5 10 15 20 25 30 35 40 45

-

50

100

150

200

250

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19


SAHIs have posted higher than industry growth as (1) banks and corporate agents are allowed to deal with an additional three SAHIs, and (2) SAHI agents do not require additional training or insurance agent certification. Growing the profitable retail business has been a challenge for PSUs; hence growth has come at the cost of inferior risk selection.


Page | 37

SAHIs have been able to grow 40-50% Insurers ceding more business to re-insurers


Distribution mix has remained largely same


2 5 11

15

16

17

22

29

40

56

79

109

-

50

100

150

200

250

300

-

20

40

60

80

100

120

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

SAHI GWP (Rs bn) - LHS Growth (%) - RHS

84.1

88.9

90.8

89.6

85.2

79.8

74767880828486889092

FY13

FY14

FY15

FY16

FY17

FY18

Industry Retention ratio (%) Industry retention ratios have trended lower as companies reinsure government /group health business. Even pvt. companies cede business to reinsurers.

34 31 33 32 32

6 7 7 8 8

23 23 26 29 26

34 36 32 30 30

-

20

40

60

80

100

FY14

FY15

FY16

FY17

FY18



Page | 38

Health Portfolio facts – FY19 Particulars GDPI (Rs mn) No. of persons

covered (mn)No. of policies

(mn)Premium per

personPremium

mix (%) (1) Government Sponsored schemes including RSBY-Private 4,734 59.7 0.0 79 11.9 -Public 34,592 298.5 0.0 116 86.9 -SAHI 487 1.0 0.0 465 1.2 Total 39,812 359.3 0.0# 111 100.0 (2) Group Insurance Schemes excluding Govt Sponsored Schemes -Private 41,045 20.6 0.2 1,989 23.1 -Public 121,091 63.4 0.5 1,911 68.2 -SAHI 15,426 5.5 0.0 2,830 8.7 Total 177,562 89.4 0.6 1,985 100.0 (3) Individual family floater -Private 12,753 3.9 1.4 3,245 16.1 -Public 26,040 7.5 2.5 3,453 33.0 -SAHI 40,227 10.1 3.4 3,991 50.9 Total 79,020 21.6 7.3 3,667 100.0 (4) Individual other than family floater -Private 18,362 2.5 2.1 7,340 24.8 -Public 33,371 6.9 3.1 4,850 45.2 -SAHI 22,159 2.3 1.5 9,460 30.0 Total 73,892 11.7 6.8 6,302 100.0

Total -Private 76,893 86.8 3.7 886 20.8 -Public 215,095 376.3 6.1 572 58.1 -SAHI 78,298 18.9 4.9 4,139 21.1 Total 370,286 482.0 14.7 768 100.0 Note: Data as of FY18 #Policies issued are 263. Source: IRDAI, HDFC sec Inst Research

PSUs write more Gov and group health business. SAHIs have a higher market share than pvt. insurers in the most profitable retail segment. Retail, other than family floater has the highest pricing.


Page | 39

Health data Particulars FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 206.2 250.4 311.6 380.1 454.9 20.6

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 3.5 3.4 3.5 3.9 5.1 97 Chola MS 0.8 0.8 0.6 0.7 0.6 (49) HDFC ERGO 2.7 2.5 0.8 2.6 2.8 (65) ICICI Lombard 6.5 5.7 5.5 5.1 5.0 (357) NIA 19.5 19.8 19.5 18.9 18.5 (30) Royal Sundaram 1.0 0.8 0.7 0.7 0.8 (41) SBI 0.5 0.9 1.2 1.2 1.1 101 Premium growth (%) 5Y CAGR (%) Bajaj (2.6) 14.2 22.1 32.0 41.8 20.5 Chola MS (28.0) 7.9 13.0 15.2 9.1 2.0 HDFC ERGO (18.6) 4.7 (58.1) 223.0 43.2 10.6 ICICI Lombard (17.5) (1.3) 23.5 (3.5) 35.5 5.6 NIA 28.3 24.8 19.6 14.2 14.6 20.2 Royal Sundaram (7.4) (4.9) 2.2 9.7 25.7 4.4 SBI 474.7 166.2 84.2 55.3 23.7 122.2 Retention rate (%) 5Y avg (%) Bajaj 93.1 93.4 90.7 93.0 79.6 90.0 Chola MS 93.0 93.5 93.2 93.5 92.6 93.2 HDFC ERGO 59.7 61.3 58.8 56.8 59.9 59.3 ICICI Lombard 70.8 68.4 70.0 67.4 69.6 69.2 NIA 95.0 94.0 91.0 89.0 86.6 91.1 Royal Sundaram 94.5 92.4 84.4 79.2 79.0 85.9 SBI 95.0 95.0 95.0 95.0 94.3 94.9 Claims ratio (%) 5Y avg (%) Bajaj 75.5 76.2 81.4 82.3 89.5 81.0 Chola MS 55.1 44.0 36.9 38.8 40.0 43.0 HDFC ERGO 74.9 68.3 56.3 64.2 80.0 68.8 ICICI Lombard 88.3 84.7 97.9 77.6 85.0 86.7 NIA 99.4 111.4 114.5 103.9 99.5 105.7 Royal Sundaram 57.3 64.1 67.6 66.3 64.1 63.9 SBI 64.1 37.2 42.5 41.8 54.2 48.0 Source: GIC, Respective Companies, HDFC sec Inst Research

Health GWP has grown at a robust FY14-19 CAGR of 20.6% to Rs 455bn. Despite strong industry growth, most multi-line insurers have lost market share as SAHIs gained +1200bpsin mkt. sh. over FY14-19. ICICIGI has focused more on retail health, where profitability is higher but due to small ticket size nature of retail business, growth looks lower than other insurers. SBI’s growth has remained superior coupled with lowest claims ratio. Retention ratios differ within the industry; however most players retain more than 80% of the business. Lower share of Corporate and government health business has lead to best in class claims ratios for ICICIGI.


Page | 40

Particulars FY15 FY16 FY17 FY18 FY19 5Y avg (%) Combined ratio (%) Bajaj 107.4 108.8 112.5 108.8 115.2 110.6 Chola MS 93.6 74.7 77.7 77.8 73.3 79.4 HDFC ERGO 94.8 94.0 65.7 64.6 82.2 80.3 ICICI Lombard 137.8 135.7 103.5 81.4 92.1 110.1 NIA 128.7 140.5 140.4 128.6 124.2 132.5 Royal Sundaram 93.3 98.6 96.5 99.9 100.9 97.9 SBI 104.8 79.8 83.2 78.4 87.3 86.7 Pre tax ROE (%) 5Y avg (%) Bajaj (9.5) (16.1) (27.6) (23.3) (37.4) -22.8 Chola MS 20.3 62.9 84.8 84.0 89.9 68.4 HDFC ERGO 54.7 50.0 99.7 282.9 117.1 120.9 ICICI Lombard (50.7) (50.8) 37.4 84.4 70.6 18.2 NIA (39.2) (60.5) (52.6) (37.1) (27.8) -43.4 Royal Sundaram 29.7 12.8 21.1 (2.9) 11.7 14.5 SBI NA 26.7 30.8 79.4 68.1 51.2 Source: GIC, Respective Companies, HDFC sec Inst Research

Profitability differs significantly within players largely due to composition of portfolio. However for profitable companies, ROEs remain elevated at 50-120%.


Page | 41

Re-pricing health insurance As policies are renewable every year insurers are also

allowed to re-price the same.

Any re-pricing is based on insurer’s ability to demonstrate that claims are higher for the cohort as such.

Pricing may not be revised for an individual case just based on experience of that particular case.

Health Insurance Market size We believe that opportunity size of the health line is

immense given massive under-penetration.

Number of lives covered under Individual and group health plans is a mere ~123mn (~9.1% of population) as of FY18. Also we understand there will be a high overlap between group and individual health lives insured, hence penetration levels are even lower.

Growth in this segment has been very robust as it grew at an impressive 22.2% CAGR over FY08-19. We believe this segment can grow at ~15% CAGR over FY18-30E as (1) Income levels rise, (2) Rising awareness especially in growing urban areas and (3) Growing lifestyle related health demands.

~75% of lives covered under health business are through the government business, largely focusing on low income segment population.

Premium per life the lowest in government business at Rs 111 (FY18). Bulk of the business is through schemes like PMJDY, Ayushman Bharat etc.

Pricing has over period improved in both health and individual segments and are the key focus for

Insurers. average premium per life for group and Individual stands at Rs ~2,000 and ~4600 respectively.

We believe premiums can grow in tandem with inflations supporting growth prospects further in this segment.

If we were to assume that coverage were at 60%, then just the current market size would be Rs 2.0tn. Assuming that this market size is achieved in the next 12 years, the market can grow as 15.2% CAGR.

At 100% coverage this market has the potential to grow to Rs 3.3tn.

Health Market Sizing

Particulars FY18 FY30E FY18-30 CAGR (%)

Gov. Group & Retail Total Gov. Group &

Retail Total Gov. Group & Retail Total

Lives covered (mn) (a) 359 123 482 526 454 980 3.2 11.5 6.1

Penetration (%) 26.6 9.1 35.7 32.6 28.1 60.7

Price Per life (Rs) (b) 111 2,687 768 125 4,302 2,058 1.0 4.0 8.6

Market Size (Rs bn) (a*b) 40 330 370 66 1,952 2,018 4.3 16.0 15.2 Note: We have assumed price inflation in group & retail business at 4% and government business at 1%. Source: IRDAI, HDFC sec Inst Research

Assuming no double coverage, total number of lives covered under retail and group health plans, is a mere ~123mn (~9.1% of population) as of FY18. Actual penetration levels are even lower Much of penetration is under government plans, where the cover isn’t adequate.


Page | 42

Is Ayushman Bharat Yojana (ABY) a big opportunity? Ayushman Bharat Yojana (ABY) consolidates within

itself all previous schemes i.e. Pradhan Mantri Jan Arogya Yojana (PMJAY) or National Health Protection Scheme. ABY is a centrally sponsored scheme launched in 2018, under the Indian Ministry of Health and Family Welfare.

The scheme aims at making interventions in primary, secondary and tertiary care systems, covering both preventive and promotive health, to address healthcare holistically.

ABY aims to cover 100mn poor and vulnerable families i.e. ~500mn beneficiaries) and provide coverage of up to Rs 0.5mn (US$7,100)/family p.a. for secondary and tertiary care hospitalization.

Entitled citizens will be allowed to take cashless benefits from any public or private empanelled hospitals across the country.

ABY is an entitlement based scheme where entitlement will be decided on the basis of deprivation criteria in the Socio-Economic Caste Census (SECC) database.

The scheme covers pre-existing conditions right from day one and has no restrictions on family size.

Under the scheme, total expenses will be shared between centre and states.

The government has set aside ~Rs 12bn ($170 million) and allocated it towards 150k health and wellness centres. These centres will provide comprehensive health care, including non-communicable diseases and maternal and child health services, apart from free essential drugs and diagnostic services.

ABY has two models: Trust model- Central and state government pool in money to pay for claims in a trust; Insurer model- An insurer administers claims for premium received from the government.

The government will also upgrade existing Public Health centres to Wellness centres.

Our interaction with some leading pvt. hospitals in Mumbai indicates that payouts to hospitals and doctors under Ayushman Bharat are extremely low. Thus, most private hospitals have not participated in this scheme.

Examples of a coronary bypass surgery, where procedure costs range between Rs 180K-Rs 210K while Ayushman Bharat tariff for a hospital accredited by the National Accreditation Board for Hospitals (NABH) is fixed at Rs 140K which is almost half the total cost. Angioplasty, costs around Rs 90K–110K whereas Ayushman Bharat offers Rs 75K, which is 20-45% lower.

As pricing offered for both hospitals and insurers is abnormally low, we don’t see foresee this as a huge opportunity for private insurers.

States with Insurer model under Ayushman Bharat States Insurance Company Dadra and Nagar Haveli Oriental Daman and Diu Oriental J&K Bajaj Kerala Reliance Meghalaya Reliance Mizoram Bajaj Nagaland Apollo Munich Puducherry Star Health Punjab IFFCO Tokio Source: IRDAI, HDFC sec Inst Research

ABY aims to cover 100mn poor and vulnerable families i.e. (~500mn beneficiaries) and provide coverage of up to Rs 0.5mn (US$7,100)/family p.a. for secondary and tertiary care hospitalization. Our interactions with some of the leading pvt. hospitals in Mumbai indicates that payouts to hospitals and doctors under Ayushman Bharat are extremely low. Thus, most private hospitals have not participated in this scheme. We don’t see foresee this as a large opportunity for private insurers.


Page | 43

Personal Accident Compulsory personal accident cover The IRDAI had enhanced compulsory personal

accident cover (CPA) from Rs 0.1mn for two wheelers and Rs 0.2mn for passenger vehicles to Rs 1.5mn for both classes of vehicles.

IRDAI had initially priced the same at Rs 750 p.a. for an annual policy.

Earlier CPA was part of the TP portion, now it has been unbundled. This regulation change has come in to force only from 20th Sep-18. CPA purchase was further cancelled from 31-Dec-18.

Based on industry representation, which argued that the new policy did not provide for exemption to 1) multiple vehicle owners (as they would have to buy multiple CPA covers), and 2) individuals who separately already had individual personal accident covers as part of their health plans.

The above meant that w.e.f. 1st Jan-19 the CPA was unbundled allowing 1) stand-alone compulsory personal accident cover 2) the cover under the stand-alone CPA would be extended to all vehicles owned by the policy holder 3) duration of cover would be 1 year 4) unbundled cover will be available once the previous motor insurance cover expired and 5) free pricing as per actuarial models of insurers has been allowed.

PA GWP continues to grow at a fast clip Private and SAHIs gaining market share

Source: GIC,HDFC sec Inst Research Source: GIC,HDFC sec Inst Research

8 9 10 12 14 17 19 22

27

37

45

55

-5 10 15 20 25 30 35 40 45

-

10

20

30

40

50

60

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

PA GWP (Rs bn) - LHS Growth (%) - RHS

PA is one of the most profitable segments for most insurers. Most insurers make healthy underwriting margins in this segment. Industry pricing has deteriorated significantly after PA has been un-bundled from TP.

62

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63

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58

52

35

34

28

26

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26

23

21

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25

3 8 13

13

12

11

12

14

16

18

21

24

-10 20 30 40 50 60 70 80 90

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Public (%) Private (%) SAHI (%)


Page | 44

Private GWP grew at 22% CAGR during FY08-19 Public GWP growth slowing down

Source: GIC, HDFC sec Inst Research Source: GIC, HDFC sec Inst Research SAHIs growing at a fast clip High retention ratio


4 4 5 6 7 10

11

14

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4 5 6 6 7 7 7 7 9 15

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2

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1 1 2 3 4 6 -10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

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2

3

4

5

6

7

FY14

FY15

FY16

FY17

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FY19

SAHI GWP (Rs bn) - LHS Growth (%) - RHS

81.6

86.0 86.9

84.1 83.4 83.8

78.0 79.0 80.0 81.0 82.0 83.0 84.0 85.0 86.0 87.0 88.0

FY13

FY14

FY15

FY16

FY17

FY18


This is a small line of business, however the growth has been robust though on a low base. Since this line is very profitable for most insurers, retention ratios are high.


Page | 45

Distribution mix


23 20 20 15 20

34 41 38 33

35

16 15 15 13

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23 21 23 33 25

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20

40

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~35% of the business is sourced through banks.


Page | 46

Personal Accident Particulars FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 22.3 26.8 37.2 44.7 54.0 23.3

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 3.0 3.9 4.2 4.4 4.8 192 Chola MS 2.9 4.1 3.4 4.7 5.3 213 HDFC ERGO 17.4 17.2 3.4 13.3 12.9 (297) ICICI Lombard 10.5 10.4 9.7 10.2 9.8 (80) NIA 10.2 9.2 11.1 10.9 10.3 (211) Royal Sundaram 1.7 1.5 1.3 1.4 1.1 (113) SBI 12.9 11.2 11.3 10.4 11.3 169 Premium growth (%) 5Y CAGR (%) Bajaj 11.7 13.7 93.7 25.1 27.9 31.5 Chola MS 53.5 38.1 40.4 44.7 55.3 46.2 HDFC ERGO 23.2 16.3 (73.5) 334.4 13.5 13.4 ICICI Lombard 15.5 22.3 29.2 30.1 34.8 26.2 NIA 9.2 13.3 38.2 36.4 21.3 23.1 Royal Sundaram (15.8) (2.3) 19.4 18.5 1.4 3.4 SBI 63.3 31.2 16.9 39.8 19.1 33.0 Retention rate (%) 5Y avg (%) Bajaj 84.1 79.0 92.5 92.7 92.3 88.1 Chola MS 90.1 89.6 91.7 91.5 91.1 90.8 HDFC ERGO 89.6 70.5 69.3 70.8 69.7 74.0 ICICI Lombard 71.4 75.3 75.5 71.5 81.7 75.1 NIA 92.1 90.0 94.3 94.3 94.6 93.1 Royal Sundaram 89.6 91.0 89.7 79.9 82.7 86.6 SBI 91.7 89.7 87.0 88.9 94.7 90.4 Claims ratio (%) 5Y avg (%) Bajaj 52.5 60.5 58.1 42.0 50.2 52.7 Chola MS 43.5 46.1 46.7 41.9 29.7 41.6 HDFC ERGO 32.2 30.4 13.7 36.3 31.2 28.8 ICICI Lombard 79.7 64.3 41.3 23.9 35.8 49.0 NIA 58.5 79.0 74.1 93.6 160.4 93.1 Royal Sundaram 28.7 29.2 37.3 41.0 43.3 35.9 SBI 84.9 64.0 63.1 63.8 49.9 65.1 Source: GIC, Respective Companies, HDFC sec Inst Research

PA GWP grew at a FY14-19 CAGR of 23.3% to Rs 54bn. Growth has been led by SAHIs, thus most multi-line insurers have lost market share. Premium growth has remained robust for most insurers, as the product was sold in bundle with Motor TP. Since this is a very profitable segment, most companies retain majority of the business. Barring NIA, claims ratios have remained low for most insurers.


Page | 47

Particulars FY15 FY16 FY17 FY18 FY19 5Y avg (%) Combined ratio (%) Bajaj 86.3 98.0 109.8 88.9 96.5 95.9 Chola MS 72.1 68.3 82.7 50.8 56.5 66.1 HDFC ERGO 72.2 67.7 39.0 54.0 43.4 55.3 ICICI Lombard 96.5 87.0 64.5 50.4 77.9 75.2 NIA 93.2 114.5 103.1 117.2 184.3 122.5 Royal Sundaram 64.0 64.5 74.9 78.9 77.7 72.0 SBI 122.8 102.7 97.9 98.1 82.6 100.8 Pre tax ROE (%) 5Y avg (%) Bajaj 73.2 1.9 (27.3) 31.4 4.5 16.8 Chola MS 95.5 88.0 64.9 161.6 128.8 107.7 HDFC ERGO 47.9 92.7 76.1 162.0 73.2 90.4 ICICI Lombard 52.4 68.9 110.4 139.6 58.5 86.0 NIA 61.0 3.2 9.9 (12.5) (111.2) -9.9 Royal Sundaram 119.2 109.1 84.4 67.9 86.2 93.4 SBI NA 22.2 24.2 47.3 70.3 41.0 Source: GIC, Respective Companies, HDFC sec Inst Research

Combined ratio has inched up considerably for NIA in FY19. This segment is extremely profitable for most Pvt. Insurers as ROEs have consistently remained elevated.


Page | 48

Property (Fire) segment Industry GWP has grown at an FY08-19 CAGR of

11.9% to Rs 148bn. In recent times i.e. FY14-19 CAGR has been at 8.8%.

Under penetration is high even in this line of business.

Private insurers have consistently grown their market share from ~30% in FY12 to ~55% in FY19.

For private companies loss ratios are ~50%, this is significantly lower than PSUs (loss ratios of 90%+); thus making them reasonably profitable.

GIC has increased re-insurance rates across 8 occupancies driving higher avg. rates.

Premium grew at 12% CAGR during FY08-19 Fire was traditionally dominated by PSUs


Recently GIC Re has increased reinsurance rates, resulting in 40-60% avg. rate hike.

Rate hikes have been done across 8 major occupancies.

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Fire GWP (Rs bn) - LHS Growth (%) - RHS

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Page | 49

Private GWP grew at 17% CAGR during FY08-19 Business declined for PSUs in FY19


Distribution mix Retention ratio declining for the Industry

Source: IRDAI,HDFC sec Inst Research Source: GIC,HDFC sec Inst Research

24 20 20 20 18

16 16 17 15 16

25 26 28 30 30

33 36 33 33 33

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53.9 52.2

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50.0

55.0

60.0

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FY14

FY15

FY16

FY17

FY18


14

13

15

17

22

28

33

37

43

49

62

82

(10)

(5)

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35

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FY19


29

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Despite high growth seen for this line of business, penetration is still low. As claims are chunky, most direct insurers cede majority of the business to reinsurers. We expect retention to increase post recent price increases.


Page | 50

Fire segment Particulars FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 105.2 113.6 122.1 135.7 117.4 3.9

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 4.6 4.6 4.8 6.3 8.1 355 Chola MS 1.2 1.9 2.0 2.5 2.3 105 HDFC ERGO 4.0 4.2 1.5 5.1 6.1 240 ICICI Lombard 6.1 6.2 6.7 7.2 9.2 302 NIA 31.4 30.5 29.2 27.9 26.0 (476) Royal Sundaram 0.8 0.9 1.1 1.2 1.3 55 SBI 4.9 5.4 5.9 5.9 8.1 343 NEP growth (%) 5Y CAGR (%) Bajaj 1.4 13.1 6.4 1.8 4.5 5.3 Chola MS 6.0 7.3 5.7 64.9 14.1 17.7 HDFC ERGO 29.5 7.2 (65.6) 285.8 1.8 13.4 ICICI Lombard (29.1) (8.6) 24.3 16.5 9.6 0.6 NIA 16.2 6.3 1.6 (6.4) (2.8) 2.7 Royal Sundaram 8.7 19.2 11.7 23.2 3.0 12.9 SBI 25.1 9.6 12.5 (19.5) 11.0 6.6 Retention rate (%) 5Y avg. (%) Bajaj 33.3 35.4 36.2 29.9 29.7 32.9 Chola MS 49.4 54.5 52.1 62.4 23.1 48.3 HDFC ERGO 19.9 19.8 18.6 18.8 13.4 18.1 ICICI Lombard 17.5 15.0 17.2 16.0 16.6 16.5 NIA 61.1 62.1 56.7 51.7 51.1 56.6 Royal Sundaram 26.1 22.6 23.1 27.2 23.0 24.4 SBI 59.9 62.2 27.2 -31.6 27.3 29.0 Claims ratio (%) 5Y avg. (%) Bajaj 63.9 67.1 31.2 49.3 74.4 57.2 Chola MS 63.8 36.5 31.1 15.5 39.9 37.4 HDFC ERGO 87.9 50.7 47.5 65.9 53.3 61.1 ICICI Lombard 94.0 63.6 68.4 43.1 83.2 70.5 NIA 75.5 72.3 93.8 78.0 112.3 86.4 Royal Sundaram 51.2 50.4 48.1 44.7 78.0 54.5 SBI 40.9 64.8 40.3 42.2 74.0 52.4 Source: GIC, Respective Companies, HDFC sec Inst Research

Fire is a B2B business, traditionally dominated by PSU insurers NIA (best amongst PSU general insurers) continues to lose market share. Private players have steadily gained market share. GIC (re-insurer) has raised rates in 1QFY20, industry pricing has improved materially; hence this segment could grow at 30-40% for Pvt. Insurers in FY20E. Most players pass on most of the business to re-insurers as retention ratio for most private insurers remain within the range of ~15-30%. Owing to the nature of fire insurance, claims remain chunky in this segment, hence claims ratio remains very volatile.


Page | 51

Particulars FY15 FY16 FY17 FY18 FY19 5Y avg. (%) Combined ratio (%) Bajaj 77.3 83.2 52.6 76.5 92.1 76.3 Chola MS 92.6 61.9 51.7 38.5 -10.4 46.8 HDFC ERGO 103.4 69.1 144.3 126.0 96.6 107.9 ICICI Lombard 101.8 38.3 58.4 41.4 91.2 66.2 NIA 117.1 112.0 130.8 109.5 151.7 124.2 Royal Sundaram 88.1 75.3 79.0 82.9 117.2 88.5 SBI 79.1 105.2 44.9 117.2 33.2 75.9 Pre tax ROE (%) 5Y avg. (%) Bajaj 66.0 55.5 106.1 54.5 34.8 63.4 Chola MS 54.2 69.7 68.0 92.1 198.0 96.4 HDFC ERGO 28.4 57.0 (15.0) (5.4) 27.0 18.4 ICICI Lombard 46.4 109.8 92.7 92.0 40.4 76.3 NIA 22.1 28.7 (5.0) 55.6 (46.8) 10.9 Royal Sundaram 80.5 91.9 74.3 57.4 24.0 65.6 SBI NA (26.0) 147.5 271.9 139.3 133.2 Source: GIC, Respective Companies, HDFC sec Inst Research

For most pvt. insurers, fire segment continues to remain profitable with combined ratios below 90%. Combined ratio for Chola is negative in FY19 as the company earned high commissions on business ceded to re-insurers as it retained only ~23% business.


Page | 52

Crop insurance Under the PMFBY, (introduced in FY16) farmers have

to pay a maximum of 2% of the sum insured for kharif and 1.5% for rabi food and oilseed crops and 5% for commercial/horticultural crops. The remaining part of actuarial premium is shared equally between the central and state governments.

PMFBY: During FY17/18, total premium collected was Rs 221/262bn. Out of the said premium 81/83% of the premium was paid by central and state governments (~50% each).

Total claims ratio for PMFBY has been at 80.0/84.1% in FY17/18, while total farmers enrolled during FY17/18 were 57/52mn.

While crop/weather insurance may be sold separately, it is mostly offered as an add-on to

agricultural loans and sold primarily in relation to the two main crop seasons of India – Kharif and Rabi.

Under the PMFBY program, central and state governments subsidize yield-based crop insurance for farmers. The program provides coverage for all food crops, oilseeds, commercial and horticultural crops. Claims are paid based on the yield for a group of farms, as measured by a government-authorized surveyor.

Under the RWBCIS program, central and state governments subsidize weather-based crop insurance for farmers. Weather- based crop insurance products provide index-based cover to protect against variation in specified weather indices such as rainfall, humidity, temperature or a combination of these factors.

PMFBY: During FY17/18, total premium collected was Rs 221/262bn. Out of the said premium 81/83% of the premium was paid by central and state governments (~50% each). Profitability in this line is very volatile, leading to the exit of few insurers from this line.


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Crop Particulars FY17 FY18 FY19 Industry GWP (Rs bn) 215.5 254.5 NA

GWP Market Share (%) Bajaj 6.7 7.2 NA Chola MS 1.3 2.0 NA HDFC ERGO 3.8 8.6 NA ICICI Lombard 10.0 9.3 NA NIA 5.8 7.0 NA Royal Sundaram - 0.0 NA SBI 1.4 2.8 NA Premium growth (%) Bajaj NA 143.9 (43.7) Chola MS NA 81.9 (27.7) HDFC ERGO NA 141.9 6.0 ICICI Lombard 358.3 7.6 4.3 NIA 636.7 0.3 (35.3) Royal Sundaram NA NA NM SBI NA 330.8 151.6 Retention rate (%) Bajaj 15.9 29.5 18.7 Chola MS 15.0 13.5 13.4 HDFC ERGO 18.5 17.8 18.1 ICICI Lombard 23.5 22.9 23.2 NIA 30.8 21.7 21.1 Royal Sundaram NA 2.5 19.3 SBI 6.9 14.5 16.2 Claims ratio (%) Bajaj 114.1 94.4 74.9 Chola MS 68.8 103.9 166.7 HDFC ERGO -66.8 -53.0 -25.6 ICICI Lombard 84.2 135.0 106.5 NIA 92.9 91.7 168.9 Royal Sundaram NA -530.1 108.0 SBI 145.4 135.3 106.4

Crop insurance business expanded meaningfully in FY17, as the central gov. announced PYFBY. Most players ceded most of the business to GIC Re against commissions, since the claims could be chunky.


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Particulars FY17 FY18 FY19 Combined ratio (%) Bajaj 77.5 97.9 74.0 Chola MS -1.7 120.5 162.7 HDFC ERGO 152.5 118.2 143.1 ICICI Lombard 72.1 123.4 113.4 NIA 106.8 90.7 183.7 Royal Sundaram NA -674.6 99.0 SBI 180.6 163.9 144.1 Pre tax ROE (%) Bajaj 24.5 7.4 25.4 Chola MS 148.2 (54.0) (46.0) HDFC ERGO NA (5.8) (33.6) ICICI Lombard 73.2 (7.8) (3.2) NIA 14.0 37.5 (28.9) Royal Sundaram NA 145.5 25.1 SBI (23.3) (37.6) (34.7) Source: Company, GIC, HDFC sec Inst Research

BAGIC has consistently posted underwriting profits. Pre-tax ROEs remains negative for most insurers (except BAGIC) as most players made losses.


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Regulations Commissions The regulation defines an insurance intermediary as

an entity or person whose revenues from other than insurance intermediation is less than 50% of total revenues. An insurance agent is an entity or person whose entire revenue is from insurance sales.

Rewards are payable in addition to the commissions and are to be calculated separately for health insurance and other than health insurance. Rewards have to be calculated at an aggregate level and are capped at 30% of commission or remuneration paid to insurance agents.

Commission rates on different business lines.

(%) Maximum Commission Payable to Insurance Agent

Maximum Remuneration Payable to Insurance

Intermediary Fire-Retail 15.0 16.5 Fire-Corporate (Risks with SI* < Rs 25bn) 10.0 11.5 Fire-Corporate (Risks with SI> Rs 25bn) 5.0 6.3 Marine-Cargo 15.0 16.5 Marine-Hull 10.0 11.5 Miscellaneous – Retail 15.0 16.5 Miscellaneous – Corporate/ Group 10.0 12.5 Miscellaneous – Corporate (Engineering Risks with SI > Rs 25bn) 5.0 6.3 Motor (Comprehensive) - 15.0 Motor (Stand-alone TP) 2.5 - Health-Individual - 15.0 Health-Group (Employer-Employee only) - Annual 7.5 - Health-Group (Non Employer-Employee groups) – Annual - 15.0 Health – Group (credit linked up to 5 years) - 15.0 Health - Govt Scheme As specified in the Government Scheme Source: ICICI Lombard RHP, HDFC sec Inst Research

Insurance intermediary is an entity or person whose revenue from other than insurance intermediation is less than 50% of total revenue.


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Rural and social sector obligation Rural means the places or areas classified as “rural”

while conducting the latest available decennial population census (Census of India);

“Social Sector” includes unorganized sector, informal sector, economically vulnerable or backward classes and other categories of persons, both in rural and urban areas.

Health insurers have obligation to write 50% of the limits as prescribed (below) for general insurers.

Rural sector minimum requirements FY since inception % of GDPI to be 1st 2% 2nd 3 3rd to 7th year 5 8h 6 9th year onwards 7 Source: IRDAI, HDFC sec Inst Research Social sector requirement

Age of the insurer in years

“Percentage of social sector lives” computed on the total business

procured in the previous year 1 0.5% 2 1 3 1.5 4 2 5 2.5 6 3 7 3.5 8 4 9 4.5

10 + 5 Source: IRDAI, HDFC sec Inst Research

Solvency (Capital) requirements General insurance companies are required to

maintain a solvency ratio of at least 150%.

Solvency ratio is defined as a ratio between available solvency margin (ASM) and required solvency margin (RSM).

ASM is the excess of assets over liabilities.

RSM is a factor based calculation and is calculated on a segment wise basis as higher of A or B, where

A= 20% * Higher of (GWP * Factor A OR Net premium)

B= 30% * Higher of (Gross incurred claims * Factor B OR Net incurred claims)

Factors are as below No. Business line Factor A Factor B

1 Fire 0.5 0.5 2 Marine cargo 0.6 0.6 3 Marine- other 0.5 0.5 4 Motor 0.75 0.75 5 Engineering 0.5 0.5 6 Aviation 0.5 0.5 7 Liability 0.75 0.75 8 Health 0.75 0.75 9 Miscellaneous 0.7 0.7


General insurance companies are required to maintain a solvency ratio of at least 150%.


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Investment regulations Investments made by insurance companies are regulated to protect interests of policy holders.

Particulars Investment limits

1 Central government securities Not less than 20%

2 Central, state government, and other approved securities Not less than 30% (incl. 1 above)

3

Debentures, preferred equity (which have paid dividends in last two consecutive years), listed equity (which have paid out at least 10% dividends in last two consecutive years), unencumbered immovable properties, loans on life insurance policies upto surrender value, fixed deposits, CBLO, ABSs, CPs, money market instruments

Maximum of 70%

4 Investment in housing and infrastructure* Minimum 15%

Source: IRDAI, HDFC sec Inst Research *Subscription or purchase of Bonds/ Debentures, Equity and Asset Backed Securities with underlying infrastructure assets would qualify for the purpose of this requirement. In addition to above the IRDAI has also prescribed

exposure/prudential norms for maximum exposures to single instruments, companies and companies from the same promoter group.

Minimum investment in government securities only at 30%. These guidelines are only applicable on policyholders’ fund.


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Accounting Profits of Indian insurers are understated when

compared to that of other international insurers, as:

(1) All preference share and debt investments are measured at historical cost; while equity investments are marked to market, the change in fair value does not flow through the profit and loss. Thus compared to global peers, profits of Indian insurers are substantially lower.

Unlike, their international peers, Indian insurers provide for claims on a nominal basis and not on a discounted basis.

The above two factors results in understated profits and book values.

NIA’s book value is most understated as the fair value change account for ~50%.

PSUs have high equity in the mix

Source: Company, HDFC sec Inst Research, Data as of FY19.

International players provide for claims on a discounted basis and not on nominal basis. Unlike Indian insurers, foreign insurers account for investments on MTM basis allowing all incomes/losses to be routed through the income statement.

50.3

4.5 1.1 0.7

(0.1) (0.8) (1.0)(10.0)

-

10.0

20.0

30.0

40.0

50.0

60.0

NIA ICICI Bajaj Chola SBI RSGI HDFC

FV Reserve as % of ABV


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Reserving Analysis (Provisioning) o One of the key parameters to watch out for in

general insurance companies is the adequacy of provisioning.

Insurers have to provide adequately for:

Incurred but not reported (IBNR): claim events which have occurred but have not been reported, and

Incurred but not enough reported (IBNER): claim events which have occurred and reported but the final claim amount is still under development.

Adequate provision needs to be made for both IBNR and IBNER.

This becomes more important in the Indian context given the long tail of the motor TP business, which until recently allowed for unlimited reporting period.

Companies which do not create enough reserves may see lower earnings in future years, while companies which adequately reserve may see some reserve releases in future years.

Loss triangles: IRDAI has made publishing of loss triangles by general insurers mandatory. Reserving triangles are globally used in public disclosures to depict the adequacy of reserves. ICICI Lombard has been publishing loss triangles since FY16. Bajaj Allianz General insurance Company has started to publish the same since 1QFY20.

A review of loss triangles of both companies shows that adequate provisioning has been done.

Reserving Triangle - ICICI Lombard As of Mar-19 (Rs bn) Prior AY10 AY10 AY11 AY12 AY13 AY14 AY15 AY16 AY17 AY18 AY19 End of one year 39.0 15.1 20.7 22.5 28.0 36.0 34.2 39.1 49.5 52.4 65.3 One year later 39.9 15.2 20.4 22.0 27.0 34.6 34.0 38.6 49.2 51.1Two years later 39.9 15.4 20.4 21.7 26.5 34.4 33.5 38.1 48.8Three years later 40.5 15.5 20.4 21.9 26.4 34.3 32.9 37.8Four years later 41.2 15.6 20.5 21.8 26.5 33.9 32.7Five years later 41.3 15.7 20.5 21.8 26.2 33.7Six years later 41.9 15.9 20.5 21.8 26.2Seven years later 42.1 16.0 20.7 21.8Eight years later 42.2 16.0 20.7 Nine years later 42.4 16.1Ten years later 42.4Deficiency/ (Redundancy) (%) 8.7 6.1 0.0 (3.1) (6.4) (6.2) (4.2) (3.5) (1.3) (2.5)Source: Company, HDFC sec Inst Research

Reserving analysis becomes more important in Indian context given the long tail nature of the motor TP business. We see ICICIGI’s reserving as the most conservative amongst competitors.


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Reserving Triangle – Bajaj Allianz As of Mar-19 (Rs bn) Prior FY10 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Original estimate 33.8 11.5 13.0 14.0 17.1 24.1 28.0 31.7 35.6 42.6 52.9 One year later 33.6 10.8 12.4 13.0 16.7 23.5 26.6 30.5 33.6 38.8Two years later 33.9 10.8 12.3 13.0 16.5 23.0 26.3 30.4 32.8Three years later 34.0 10.8 12.4 13.0 16.5 22.7 26.1 30.1Four years later 34.2 10.9 12.4 13.2 16.2 22.5 25.9Five years later 34.1 10.8 12.4 13.3 16.1 22.4Six years later 34.2 10.9 12.5 13.2 16.3Seven years later 34.4 11.0 12.5 13.2Eight years later 34.6 11.0 12.5 Nine years later 34.6 11.0Ten years later 34.7Deficiency/ (Redundancy) (%) 2.5 (4.5) (3.8) (5.3) (5.2) (7.2) (7.5) (5.1) (8.0) (8.8)Source: Company, HDFC sec Inst Research Other measures: Given the lack of disclosure of loss triangles by other companies we use net claims outstanding/average 3yr net earned premium and net claims outstanding/average 3yr net earned motor TP premium (given most of the long tail business is the motor TP business).

Claims o/s as % of 3 year avg. NEP (%) FY15 FY16 FY17 FY18 FY19 5Y Avg Bajaj 87 95 106 117 114 104 Chola MS 102 114 129 147 156 130 HDFC ERGO NA 87 165 153 137 136 ICICI Lombard 179 200 233 149 144 181 NIA 134 125 117 112 118 121 Royal Sundaram NA 108 115 127 144 124 SBI NA 127 122 129 129 127 Source: Company, HDFC sec Inst Research Claims o/s as % of claims incurred (%) FY15 FY16 FY17 FY18 FY19 5Y Avg Bajaj 108 120 132 146 142 130 Chola MS 126 143 142 162 181 151 HDFC ERGO 99 116 313 130 122 156 ICICI Lombard 120 135 142 167 164 146 NIA 135 125 111 116 113 120 Royal Sundaram 128 134 126 137 152 135 SBI 103 116 132 148 142 128 Source: Company, HDFC sec Inst Research

Data suggests that ICICIGI has the highest reserving against NEP vs. other insurers. Claims o/s as % of claims incurred also gives a similar picture.


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Key risks Competition from web-aggregators and from new-age online insurance companies In India, price comparison websites (PCWs) are

largely used for motor and health business.

First time health insurers use PCWs. Changing health insurance service provider does not happen too often in this segment.

First time motor insurance is mostly purchased from the dealers. As long term insurance has become mandatory for both 2Ws and 4Ws online threat reduces for motor.

Having said the above innovative companies such as ACKO which are disrupting the auto insurance market continue to offer online only very competitive rates.

Even taking into account the digital model, customers like the comfort of trusted brand names and high claim settlement ratios.

Catastrophe risk Catastrophes continue to be a major risk for

insurance companies. Based on estimates, the global non-life reinsurance

industry faced catastrophic loss estimated around $ 136bn from the hurricane season in the Caribbean and the US in 2017. Harvey, Irma and Maria, the season´s three major storms, are estimated to have caused significant insured losses with combined ratios to the tune of 110%.

We do not believe catastrophic losses for Indian insurers to be of major concern as 1) insurance penetration continues to be low and 2) companies take reinsurance cover on their risk exposure.

As per the table below insured losses continue to be substantially lower than the total economic losses.

ICICI Lombard stated that its share of losses in Kerala 2018 floods is ~3.3% of that of the industry and that it incurred losses of ~Rs 250mn. BAGIC incurred losses of Rs 629mn.

Summary of CAT events

Date Event Place of event Economic

Losses (USD bn)

Insured Losses (USD

bn)

Un-Insured Losses as % of

Total Losses Aug-19 Floods Karnataka, Kerala,and Western Maharashtra NA NA NA May-19 Cyclone Odisha 1.7 0.5 71.3 Aug-18 Floods Kerala 4.5 0.5 89.3 Dec-15 Floods Tamil Nadu and Andhra Pradesh 2.2 0.8 65.9 Oct-14 Cyclone Hudhud Odisha and Andhra Pradesh 7.1 0.6 91.0 Sep-14 Severe Monsoon Floods Jammu and Kashmir 6.0 0.2 96.0

Sep-14 Severe Monsoon Floods Assam, Bihar, Meghalaya, Uttar Pradesh and West Bengal 6.1 0.2 96.0

Oct-13 Cyclone Phailin Odisha 4.5 0.1 97.8 Jun-13 Floods Uttarakhand 1.1 0.5 54.0 Sep-09 Floods Andhra Pradesh and Karnataka 5.3 0.1 98.9

Source: Crisil, ICICI Lombard RHP, HDFC sec Inst Research

New age online companies such as ACKO, are growing at a fast clip. High CAT losses have impacted profitability of most insurers and re-insurers in FY18/19.


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Motor TP pricing risk As described in the business segment section, pricing

for motor TP is determined by order of IRDAI and is not market driven.

While in the recent past insurers have been getting price hikes that do build in claim inflation, this may not be the case in the future.

Thus if price hikes are not granted, insurers may have to continue to write business as mandatorily required and combined ratios may rise further.

Rise in re-insurance rates Insurance companies pass on their business to re-

insurers. Any increase in these rates can have a negative impact on earnings.

When re-insurance rates harden for the sector, general insurance companies respond by increasing rates.

Any company specific increase in re-insurance rate will have a negative impact on the company.

Judicial inflation risk Claims inflation has also been caused by court

decisions especially for motor TP claims.

Courts at times have suddenly changed compensation formulas.

Judicial pronouncement may cause the capitalization rate to be revised downwards.

National Insurance v Pranay Sethi: The Court held that the calculation of future prospects for the purpose of compensating victims should be extended to persons who are self-employed or earn a fixed salary, and not just those having a permanent job. In order to regulate the calculation of compensation and keeping in view the principle of certainty, stability and consistency, the Court agreed to the "principle of "standardization" so that "a specific and certain multiplicand is determined for applying the multiplier on the basis of age" for claims where the deceased had a permanent job.

Life insurance companies given option to write health insurance as well Life insurance companies have made representations

to IRDAI for permission to write health products as well. The IRDAI is contemplating on the same. Competition may further intensify if permission is given to life insurers.

Price competition, interest rate risk. counter-party risk Price competition: a fight for market share has meant

lower prices. This is clearly visible in motor OD pricing.

Interest rate risk: companies carry this risk on their fixed income portfolios.

Counter party risk: Reinsurers failing to meet their obligation is always a risk. Companies mitigate this risk by their own analysis and credit ratings.

Motor TP pricing continues to remain one of the biggest risks. In India, most of re-insurance market is dominated by GIC Re. Any increase of re insurance rates may pose risk to profitability of general insurers. However we assign low probability to this risk, as we believe such price increase will be passed on to the end customer in most cases.


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Valuation and comps along with global comparison Company YE Price (lcl)

27 Sep 19 Market Cap.

US$ bn P/E P/B RoE (%) EPS CAGR

FY19-21E FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21EIndia GIC Re Mar-19 224 5.5 14.5 10.3 8.9 0.8 0.8 0.7 14.5 10.3 8.9 27.4 ICICI Lombard Mar-19 1,205 7.6 52.2 39.4 32.8 9.8 8.3 6.9 52.2 39.4 32.8 26.2 New India Assurance Mar-19 110 2.6 29.2 12.2 8.7 0.5 0.5 0.5 29.2 12.2 8.7 82.7 Mean 31.9 20.6 16.8 3.7 3.2 2.7 31.9 20.6 16.8 45.4 Median 29.2 12.2 8.9 0.8 0.8 0.7 29.2 12.2 8.9 27.4

USA Progressive Corp Dec-18 77 45.0 16.1 14.3 13.8 4.0 3.2 2.7 27.3 25.0 21.2 8.1 Travelers Cos Inc/The Dec-18 148 38.6 16.6 13.9 12.9 1.7 1.5 1.4 10.6 11.7 11.7 13.7 Allstate Corp Dec-18 108 35.6 13.6 11.1 10.6 1.8 1.6 1.5 13.3 15.0 14.0 13.5 American International Group Dec-18 56 48.6 24.9 10.8 10.8 0.8 0.7 0.7 3.2 7.3 7.2 52.0 Aflac Inc Dec-18 52 38.4 12.7 11.9 11.6 1.7 1.4 1.3 13.8 13.5 13.0 4.6 Hartford Financial Svcs Grp Dec-18 61 21.9 14.7 11.5 11.0 1.7 1.4 1.3 11.3 13.0 12.1 15.5 Principal Financial Group Dec-18 57 15.8 9.9 9.7 9.2 1.4 1.1 1.0 13.1 12.6 12.1 3.9 Cigna Corp Dec-18 150 56.6 10.5 8.9 8.0 1.5 1.4 1.2 16.8 12.4 13.5 14.6 Anthem Inc Dec-18 239 61.1 15.2 12.3 10.4 2.2 1.9 1.7 14.2 16.4 17.6 21.0 Humana Inc Dec-18 264 35.7 18.3 15.0 14.1 3.3 2.9 2.6 19.0 20.9 19.7 14.0 Mean 15.3 12.0 11.2 2.0 1.7 1.5 14.3 14.8 14.2 16.1 Median 15.0 11.7 10.9 1.7 1.5 1.4 13.6 13.3 13.2 13.8

UK Rsa Insurance Group Plc Dec-18 534 6.8 14.3 13.3 11.3 1.4 1.4 1.4 10.1 11.0 12.1 12.2 Admiral Group Plc Dec-18 2,090 7.5 16.4 16.7 16.2 8.4 7.4 6.8 53.3 45.6 44.4 0.6 Direct Line Insurance Group Dec-18 302 5.1 9.9 10.8 11.1 1.6 1.6 1.6 15.9 14.6 13.9 -5.9 Saga Plc Dec-18 50 0.7 3.8 6.4 6.2 0.4 0.5 0.5 12.0 8.7 8.6 -21.9 Hastings Group Holdings Plc Dec-18 204 1.7 9.4 14.1 11.4 2.0 2.0 1.9 21.0 14.9 17.9 -9.2 Mean 10.7 12.3 11.2 2.8 2.6 2.4 22.5 18.9 19.4 (4.8) Median 9.9 13.3 11.3 1.6 1.6 1.6 15.9 14.6 13.9 (8.2)

Comparing globally, ICICIGI is the most expensive multi line insurer. Progressive is one of the most richly valued P&C insurance cos. Cigna, Anthem and Humana are large US health insurers.


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Company YE

Price (lcl)

9/27/2019

Market Cap.

US$ bn

P/E P/B RoE (%) EPS CAGR

FY19-21E

FY19 FY20E FY21E FY19 FY20E FY21E FY19 FY20E FY21E

Asia Ping An Insurance Group Co-H

Dec-18 90 219.6 16.7 10.6 10.3 3.1 2.4 2.1 19.0 24.3 21.8 27.0

China Pacific Insurance Gr-A

Dec-18 36 41.6 18.8 11.7 11.4 2.2 1.9 1.7 12.7 17.0 15.1 28.5

Picc Property & Casualty-H

Dec-18 9 26.0 11.6 8.5 8.6 1.4 1.2 1.1 12.0 15.5 13.7 16.4

People'S Insurance Co Grou-H

Dec-18 3 46.8 9.0 6.9 7.0 0.9 0.8 0.7 10.5 11.8 11.0 13.7

Zhongan Online P&C Insuran-H

Dec-18 19 3.5 NM NM 155.5 1.7 1.8 1.7 -7.1 -3.2 0.7 NM

Mean 14.0 9.4 38.6 1.9 1.6 1.5 9.4 13.1 12.5 21.4 Median 14.1 9.5 10.3 1.7 1.8 1.7 12.0 15.5 13.7 20.0

Global Mean 16.3 12.8 17.9 2.4 2.1 1.9 14.3 14.9 14.7 16.3 Median 14.6 11.6 11.0 1.7 1.5 1.4 13.1 13.5 13.5 13.8 Source: Bloomberg, HDFC sec Inst Research


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Industry in FY20TD (Apr-19 to Aug-19) Segments (Rs mn) YTDFY20 YTDFY19 YoY (%) FY19 FY18 YoY (%) Fire 76,064 51,467 47.8 117,423 107,821 8.9 Marine Cargo 12,701 11,536 10.1 24,246 22,197 9.2 Marine Hull 3,246 2,738 18.6 8,173 6,750 21.1 Engineering 11,074 10,035 10.4 24,685 22,337 10.5 Motor OD 104,806 107,248 (2.3) 264,732 263,299 0.5 Motor TP 159,260 142,011 12.1 379,816 329,181 15.4 Health 202,695 172,473 17.5 454,889 377,118 20.6 Aviation 2,423 2,242 8.1 5,441 4,074 33.6 Liability 12,932 11,304 14.4 24,465 20,522 19.2 P.A. 21,018 18,834 11.6 54,017 43,903 23.0 Other Misc. (including crop) 107,798 97,370 10.7 341,762 308,727 10.7 Total GDPI 714,016 627,260 13.8 1,699,650 1,505,928 12.9 GPDI (ex-crop) 606,218 529,889 14.4 1,357,888 1,197,201 13.4 Source: GIC, HDFC sec Inst Research

Despite moderation of growth in the Indian economy,

GI industry continues to grow across segments at a fast clip.

Price revisions have helped FY20TD fire-line grow at 47.8%. ICICIGI and BAGIC’s fire segment premium grew 72.6/44.9% over Apr-Aug-19.

Motor OD premiums have declined 2.3% YoY due to lower pricing and slowing new vehicle sales. Motor TP continues to benefit from the 3/5yr mandatory

policies. Recent price hike in Motor TP annual rates is also aiding growth. With the current slowdown in the auto sector, Motor TP growth may moderate in the near term.

Most large sized private insurers have stayed away from crop insurance and have maintained a cautious stance.

Health and PA continues to grow at ahead of industry growth, with private insurers gaining market share.

Industry trends largely remain the same in FY20TD except in fire and Motor OD. Fire is growing at a fast pace, after the recently announced price hikes. Motor OD business has declined as (1) Industry pricing continues to deteriorate (2) slump in new auto sales. We expect industry Motor TP growth to accelerate further.


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Private insurers growing ahead of PSUs (Rs mn) YTDFY20 YTDFY19 YoY (%) FY19 FY18 YoY (%) Bajaj Allianz 50,831 42,868 18.6 110,590 94,452 17.1 Cholamandalam MS 18,234 17,420 4.7 44,281 41,025 7.9 HDFC ERGO 31,138 28,248 10.2 86,129 72,900 18.1 ICICI Lombard 54,252 59,861 (9.4) 144,882 123,569 17.2 IFFCO Tokio 34,390 28,473 20.8 70,018 56,319 24.3 Reliance General 31,710 25,296 25.4 61,910 50,691 22.1 Royal Sundaram 12,079 12,146 (0.6) 31,726 26,234 20.9 SBI General 21,871 15,715 39.2 47,065 35,442 32.8 Tata-AIG 33,834 26,338 28.5 77,427 54,359 42.4 Universal Sompo 7,893 6,866 15.0 28,309 23,109 22.5 Others 55,027 39,165 40.5 113,631 76,098 49.3 Private Insurers 351,258 302,396 16.2 815,968 654,197 24.7 National 55,879 60,227 (7.2) 150,349 161,935 (7.2) New India 107,149 93,116 15.1 239,108 227,188 5.2 Oriental 52,233 49,679 5.1 132,463 114,520 15.7 United India 60,057 58,582 2.5 163,846 174,300 (6.0) Public Insurers 275,317 261,604 5.2 685,766 677,942 1.2 General Insurers Sub Total 626,575 563,999 11.1 1,501,733 1,332,140 12.7 Aditya Birla 2,510 1,376 82.4 4,968 2,432 104.3 Apollo Munich 8,728 6,358 37.3 21,944 17,175 27.8 Cigna TTK 2,113 2,041 3.5 4,848 3,464 40.0 Max Bupa 4,369 3,283 33.1 9,470 7,545 25.5 Reliance 8 - NA 41 - NA Religare 9,718 5,958 63.1 18,256 10,916 67.2 Star Health 22,318 16,598 34.5 54,135 41,611 30.1 SAHI Sub total 49,764 35,614 39.7 113,662 83,143 36.7 AIC (Crop) 33,668 23,150 45.4 71,779 78,242 (8.3) ECGC (Export & Credit) 4,009 4,496 (10.9) 12,475 12,404 0.6 Specialized Insurers Sub Total 37,676 27,646 36.3 84,254 90,646 (7.1) Grand Total 714,016 627,260 13.8 1,699,650 1,505,928 12.9 Source: GIC, HDFC sec Inst Research

ICICI Lombard has posted negative growth as company has stopped writing any crop business. SBI and Reliance are the fastest growing cos. FYTD: Private insurers have grown at 16.2%, however PSUs’ growth has been lackluster at 5.2%. SAHIs continue to grow at a fast pace on back of new tie-ups.


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ICICI Lombard (Rs mn) YTDFY20 YTDFY19 YoY (%) FY19 FY18 YoY (%) Fire 7,785 4,510 72.6 10,846 9,165 18.3 Marine Cargo 1,988 1,747 13.8 3,367 2,879 17.0 Marine Hull 298 339 (12.2) 1,070 783 36.6 Engineering 1,360 1,337 1.7 2,849 2,481 14.8 Motor OD 13,211 12,394 6.6 34,078 30,622 11.3 Motor TP 10,796 9,318 15.9 30,158 21,872 37.9 Health 12,207 10,536 15.9 24,398 20,223 20.6 Aviation 280 298 (6.2) 713 670 6.4 Liability 2,035 1,707 19.2 3,632 2,947 23.3 P.A. 2,222 2,298 (3.3) 5,292 4,530 16.8 Other Misc. (including crop) 2,071 15,375 (86.5) 28,480 27,396 4.0 Total GDPI 54,252 59,861 (9.4) 144,882 123,569 17.2 GPDI (ex-crop) 52,180 44,486 17.3 116,402 96,172 21.0 Source: GIC, HDFC sec Inst Research Bajaj Allianz (Rs mn) YTDFY20 YTDFY19 YoY (%) FY19 FY18 YoY (%) Fire 5,472 3,776 44.9 9,461 8,210 15.2 Marine Cargo 787 645 22.2 1,507 1,317 14.4 Marine Hull 70 82 (14.9) 103 59 74.6 Engineering 666 588 13.3 1,412 1,168 20.9 Motor OD 8,451 8,188 3.2 21,028 21,196 (0.8) Motor TP 12,023 10,097 19.1 27,542 20,330 35.5 Health 9,696 10,820 (10.4) 23,364 14,967 56.1 Aviation 34 26 32.5 236 41 474.6 Liability 1,877 1,775 5.8 3,099 2,407 28.8 P.A. 1,177 947 24.3 2,601 1,964 32.4 Other Misc. (including crop) 10,578 5,925 78.5 20,236 22,793 (11.2) Total GDPI 50,831 42,868 18.6 110,590 94,452 17.1 GPDI (ex-crop) 40,253 36,943 9.0 90,354 71,660 26.1 Source: GIC, HDFC sec Inst Research

Despite negative growth for the industry in Motor OD, ICICIGI has posted a +6.6% growth. GDPI (ex-crop and misc.) growth continues to remain robust at 17.3%. BAGIC has posted underwriting profits in crop in FY17/18/19, hence continues to write crop business. Despite having lower mkt. Sh. than that of ICICIGI, BAGIC has written higher TP business on FYTD basis. Growth has been better even on a larger base.


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Solvency level for Insurers During the year FY18, IRDAI, given the size of

agriculture insurance, has recognized agriculture insurance as a separate segment with a factor of 0.50. This is expected to reduce capital requirement for the line.

During the year FY17, IRDAI has granted dispensation to National Insurance, United India Insurance, and Oriental Insurance to amortize Motor TP Liability on straight line basis over a period of 3 years commencing FY17. However, Oriental Insurance had accounted for the entire liability of Motor TP in the year FY17 itself.

During the year FY18, the Authority had granted dispensation to National Insurance Co. Ltd, to amortize the remaining Motor TP Liability in the year FY18 and to consider 100% of Fair Value Change Account for solvency purpose.

The Authority granted dispensation to United India Insurance Co. Ltd and Oriental Insurance Co. Ltd to consider 20% and 30%, respectively, of Fair Value Change Account for solvency purpose.

With the above dispensations, all PSU insurers (except National) have complied with the stipulated Solvency Ratio of 1.50 as on March-19.

PSU insurers struggling to maintain solvency

Source: Respective companies, HDFC sec Inst Research Note: Data as of FY19.

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The regulator has granted specific dispensations to PSU insurers, hence these companies (except National) have been able to comply with minimum solvency requirements.


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Benchmarking Gross written premium (Rs bn) FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Bajaj 53.0 59.0 76.9 94.9 111.0 19.3 Chola MS 19.0 24.7 31.4 41.1 44.4 18.9 HDFC ERGO 32.6 34.7 22.5 74.0 87.2 23.8 ICICI Lombard 69.4 83.0 109.6 126.0 147.9 15.6 NIA 169.9 192.3 232.3 267.5 282.3 13.3 Royal Sundaram 15.9 17.1 22.1 26.5 32.0 17.0 SBI 16.1 20.4 26.0 35.5 47.2 31.3 Source: Company, HDFC sec Inst Research Market Share (GWP basis) (%) FY15 FY16 FY17 FY18 FY19 M.Share

gain/loss (bps) Bajaj 5.9 5.8 5.7 6.1 6.5 99 Chola MS 2.1 2.4 2.3 2.6 2.6 35 HDFC ERGO 3.6 3.4 1.7 4.7 5.1 145 ICICI Lombard 7.7 8.1 8.2 8.0 8.5 (12) NIA 18.8 18.8 17.3 17.1 15.8 (242) Royal Sundaram 1.8 1.7 1.6 1.7 1.9 11 SBI 1.8 2.0 1.9 2.3 2.8 131 Source: Company, HDFC sec Inst Research Product mix (%) Bajaj Chola MS HDFC ERGO ICICI

Lombard NIA Royal Sundaram SBI

Fire 2.7 3.0 2.6 1.9 8.8 1.4 6.4 Marine 1.5 0.6 1.6 2.8 2.0 0.8 0.5 Motor OD 28.3 24.2 30.6 32.4 20.0 43.1 25.7 Motor TP 31.8 54.9 22.4 27.7 25.9 36.1 13.2 Health 23.8 7.6 17.6 18.0 32.1 11.7 20.7 PA 2.9 6.5 10.0 3.8 2.4 2.2 20.3 Crop 4.1 1.7 10.2 6.8 1.2 3.5 9.9 Others 5.0 1.5 4.9 6.6 7.6 1.1 3.3 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Data as of FY19 Source: Company, HDFC sec Inst Research

Premium growth has been robust for top pvt. insurers. HDFCERGO and SBIGI have gained market share. Gain in the mkt. sh. of HDFCERGO looks optically high also due to acquisition of L&T general. Chola and Royal Sundaram have the highest share of motor business within their mix at ~79% as of FY19.


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Claims ratio Claims ratio (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 71.9 72.3 70.4 66.7 68.6 70.0 Chola MS 74.6 72.4 72.9 72.5 76.6 73.8 HDFC ERGO 78.7 72.8 77.8 74.4 76.4 76.0 ICICI Lombard 81.4 81.6 80.4 76.9 75.3 79.1 NIA 84.3 87.0 92.2 85.6 95.1 88.8 Royal Sundaram 78.0 77.7 78.1 80.4 84.8 79.8 SBI 85.8 83.0 75.0 71.5 72.0 77.5 Source: Company, HDFC sec Inst Research Net Commission ratio (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 1.2 2.1 0.7 4.7 4.8 2.7 Chola MS 2.1 1.7 0.6 1.3 0.4 1.2 HDFC ERGO -5.4 -7.9 -15.3 -7.8 -3.5 (8.0) ICICI Lombard -7.8 -6.0 -6.6 -3.6 2.3 (4.3) NIA 9.2 8.8 7.1 8.7 9.9 8.7 Royal Sundaram 4.1 3.8 3.1 2.6 3.8 3.5 SBI 5.7 6.0 1.3 -8.2 -0.3 0.9 Source: Company, HDFC sec Inst Research

BAGIC has consistently posted the lowest claims ratio amongst top insurers. ICICIGI’s claims ratio has improved materially over FY14-19. Commission ratio depends largely on product mix and segment-wise reinsurance policy. NIA continues to have the highest commission ratio amongst top insurers.


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Opex Ratio (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 23.7 25.3 26.1 21.4 23.6 24.0 Chola MS 27.9 26.6 27.9 27.4 29.5 27.9 HDFC ERGO 35.0 40.3 46.6 30.5 25.9 35.7 ICICI Lombard 31.7 31.8 31.1 27.3 22.0 28.8 NIA 22.1 22.2 20.4 17.0 18.5 20.1 Royal Sundaram 30.8 30.9 29.6 26.6 20.1 27.6 SBI 29.4 30.9 30.6 33.1 23.2 29.5 Source: Company, HDFC sec Inst Research Combined ratio (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 96.9 99.7 97.2 92.8 97.1 96.7 Chola MS 104.6 100.6 101.4 101.3 106.5 102.9 HDFC ERGO 108.3 105.3 109.1 97.1 98.7 103.7 ICICI Lombard 105.2 107.4 104.9 100.6 99.6 103.6 NIA 115.6 118.0 119.8 111.3 123.6 117.7 Royal Sundaram 112.9 112.5 110.9 109.6 108.8 110.9 SBI 120.9 119.8 106.9 96.4 94.9 107.8 Source: Company, HDFC sec Inst Research

As companies grow, opex ratio is expeted to improve as operating leverage plays out. NIA has consistently posted best in class opex ratio as the company is the largest in size. BAGIC’s opex ratio increased materially in FY19 and is expected to remain elevated as it is investing in banca distribution. BAGIC is the only player to consistently post combined ratios below 100%. ICICIGI, Royal Sundaram and SBIGI have shown consistent improvement in combined ratio over years. NIA’s combined ratio degraded considerably in FY19 as company was severally hit by CATs.


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Investment book (Rs bn) FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Bajaj 70.1 86.8 102.7 139.9 167.9 22.8 Chola MS 31.6 38.6 48.9 63.6 76.0 26.7 HDFC ERGO 37.7 41.1 69.3 81.6 91.0 23.7 ICICI Lombard 102.0 115.6 150.8 181.9 222.3 19.1 NIA 453.6 449.7 519.3 560.2 598.0 10.9 Royal Sundaram 24.9 27.2 33.6 42.9 50.8 17.9 SBI 26.7 33.0 43.6 52.9 63.6 30.9 Source: Company, HDFC sec Inst Research Investment yield (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 10.8 10.9 11.0 9.1 8.3 10.0 Chola MS 10.8 8.9 10.4 8.5 7.1 9.1 HDFC ERGO 9.5 8.4 5.3 8.2 6.0 7.5 ICICI Lombard 12.7 10.6 13.0 9.8 7.1 10.6 NIA 21.8 0.5 18.9 8.2 9.2 11.7 Royal Sundaram 9.7 8.9 10.6 8.6 7.9 9.1 SBI 9.5 8.7 9.0 7.9 6.8 8.4 Note: Investment income includes FV change Source: Company, HDFC sec Inst Research Portfolio mix (%) Bajaj Chola MS HDFC ERGO ICICI


Debentures/Bonds 16.0 31.0 18.7 22.2 4.8 33.1 16.5 Equity Shares 8.6 1.8 3.7 9.6 43.2 5.8 2.8 Government securities 44.3 40.3 27.2 30.3 34.8 31.1 28.3 Infrastructure and housing 29.0 18.2 33.0 29.9 9.9 21.3 34.5 Others 2.0 8.8 17.4 8.1 7.4 8.7 17.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC sec Inst Research

Private insurers’ investment book grew at a strong pace of ~18-30%. With decline in benchmark interest rates, we suspect investment yields could decline over next 2-3 years. Equity share remains low between 1-10% for most players except NIA.


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AUM to NEP ratio AUM/NEP (x) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 1.8 2.1 2.1 2.3 2.4 2.1 Chola MS 2.1 2.3 2.2 2.3 2.5 2.3 HDFC ERGO 2.2 2.4 7.0 2.7 2.4 3.4 ICICI Lombard 2.4 2.4 2.4 2.6 2.7 2.5 NIA 3.4 3.0 2.9 2.8 2.8 3.0 Royal Sundaram 1.9 2.0 2.0 2.2 2.3 2.1 SBI 2.9 2.7 3.0 2.9 2.7 2.8 Source: Company, HDFC sec Inst Research NEP to Net worth ratio NEP/Net Worth (x) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 2.0 1.7 1.6 1.5 1.5 1.6 Chola MS 2.3 2.2 2.3 2.3 2.2 2.3 HDFC ERGO 1.8 1.7 0.8 1.8 2.0 1.6 ICICI Lombard 1.5 1.4 1.6 1.4 1.5 1.5 NIA 0.5 0.6 0.6 0.6 0.7 0.6 Royal Sundaram 2.4 2.5 2.8 2.3 2.0 2.4 SBI 0.8 0.9 1.0 1.2 1.4 1.1 Source: Company, HDFC sec Inst Research Note: Net worth includes FV change reserve. Investment Leverage AUM/Net worth (x) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 3.6 3.5 3.2 3.5 3.5 3.5 Chola MS 4.9 4.9 5.0 5.3 5.5 5.1 HDFC ERGO 4.0 4.0 5.4 4.9 4.9 4.6 ICICI Lombard 3.5 3.4 3.8 3.8 4.1 3.7 NIA 1.8 1.7 1.9 1.8 1.9 1.8 Royal Sundaram 4.6 4.8 5.5 5.1 4.7 5.0 SBI 2.4 2.5 3.0 3.4 3.8 3.0 Source: Company, HDFC sec Inst Research Note: Net worth includes FV change reserve.

Higher investment leverage boosts the ROE of the company. With introduction of long term Motor business, we expect investment leverage for most insurers to improve further. Chola and Royal Sundaram have the highest investment leverage. Motor business has the longest tail for claims, hence float stays for the longest time. We believe higher investment leverage for Chola and Royal Sundaram is as a result of high share of motor business within their mix (~79% for both) and low solvency.


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Adjusted BVPS ABVPS FY15 FY16 FY17 FY18 FY19 5Y CAGR Bajaj 202 253 320 405 467 25.3 Chola MS 24 29 36 44 49 20.3 HDFC ERGO 19 20 25 29 32 14.2 ICICI Lombard 71 77 94 112 123 17.1 NIA 179 164 188 199 199 6.0 Royal Sundaram 17 18 20 23 25 8.7 SBI 65 65 72 72 85 10.4 Source: Company, HDFC sec Inst Research FV change as % of BV (%) FY15 FY16 FY17 FY18 FY19 Bajaj - - 0.5 0.2 1.0 Chola MS (0.0) (1.7) 3.2 (0.5) 0.0 HDFC ERGO 0.0 (0.0) 0.0 (0.0) (0.0) ICICI Lombard 7.7 (1.4) 8.7 1.1 (7.1) NIA 17.5 (14.3) 15.3 (2.2) (1.9) Royal Sundaram 0.7 (1.0) 1.9 (1.1) (1.0) SBI (0.0) (0.3) 0.2 (0.4) 0.2 Source: Company, HDFC sec Inst Research Return on equity (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 28.9 22.5 23.0 23.0 16.2 22.7 Chola MS 21.1 18.8 21.4 20.2 12.9 18.9 HDFC ERGO 11.0 14.6 8.9 24.9 19.6 15.8 ICICI Lombard 20.4 14.9 17.7 17.8 19.2 18.0 NIA 5.6 3.6 3.2 7.2 1.9 4.3 Royal Sundaram 4.1 4.8 7.0 9.9 11.2 7.4 SBI (9.5) (9.1) 10.6 25.6 19.9 7.5 Source: Company, HDFC sec Inst Research

We have adjusted the BV to incorporate post tax FV change reserve. Book values have consistently compounded for most insurers. CAGR is highest for BAGIC and Chola at 25.4 and 20.2%, respectively. Equity indices delivered handsome returns in FY17 (Nifty Return: ~19%), hence FV change for all companies was positive. BAGIC and ICICIGI have consistently posted market leading ROEs. ICICIGI’s ROE improved materially FY17 onwards as (1) combined ratios improved materially and (2) company issued subordinated debt of Rs 4.85bn (D/E: 0.07)


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Reserving Claims o/s as % of 3 year avg. NEP (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 87 95 106 117 114 104 Chola MS 102 114 129 147 156 130 HDFC ERGO NA 87 165 153 137 136 ICICI Lombard 179 200 233 149 144 181 NIA 134 125 117 112 118 121 Royal Sundaram NA 108 115 127 144 124 SBI NA 127 122 129 129 127 Source: Company, HDFC sec Inst Research Claims o/s as % of claims incurred (%) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 108 120 132 146 142 130 Chola MS 126 143 142 162 181 151 HDFC ERGO 99 116 313 130 122 156 ICICI Lombard 120 135 142 167 164 146 NIA 135 125 111 116 113 120 Royal Sundaram 128 134 126 137 152 135 SBI 103 116 132 148 142 128 Source: Company, HDFC sec Inst Research

Data suggests that ICICIGI has the highest reserving against NEP vs. other insurers. Claims o/s as % of claims incurred also gives a similar picture.


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Claims Settlement Ageing of claims: Motor OD (No of claims) Bajaj Chola MS HDFC ERGO ICICI Lombard NIA Royal

Sundaram SBI

<1 month 89.2 72.1 89.0 93.6 37.5 88.3 65.3 1-3 month 8.0 21.7 9.3 4.4 41.6 9.2 27.8 3-6 month 2.1 4.4 1.2 1.8 13.2 1.9 5.9 6-1 year 0.7 1.4 0.4 0.2 6.0 0.5 0.8 >1 year 0.1 0.4 0.1 0.0 1.7 0.1 0.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Data as of FY19 Source: Company, HDFC sec Inst Research Ageing of claims: Health (No of claims) Bajaj Chola MS HDFC ERGO ICICI Lombard NIA Royal

Sundaram SBI

<1 month 96.9 96.3 92.7 99.9 85.6 90.8 91.0 1-3 month 2.3 2.5 6.8 0.1 9.8 9.2 8.8 3-6 month 0.5 0.6 0.5 0.0 2.9 - 0.1 6-1 year 0.1 0.3 0.1 - 1.4 - 0.1 >1 year 0.1 0.2 0.0 - 0.4 - - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Data as of FY19 Source: Company, HDFC sec Inst Research

ICICIGI has the best claims settlement with ~94% claims getting settled within a month of reporting. Since Motor TP cases are settled by court we have compared claims settlement time for only Motor OD. Even in health claims, ICICI has best in class claims settlement time.


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Reinsurance Industry The reinsurance industry is similar to the general

insurance line of business as accounting and nature of business (1 yr products, risk underwriting) are similar.

Reinsurance is a more B2B line of business vs. direct insurance which is a more B2C business. The primary insurers enter into reinsurance contracts with reinsurers to limit their risk exposures, free up capital, reduce specific risk exposure such as CAT risk or nuclear risk.

Key considerations for primary insurers to deal with reinsurers include: pricing, and credit rating. Credit ratings become even more important for any long term reinsurance arrangements- more so in the case of life. Reinsurers with ERM (enterprise risk management) processes are preferred.

Top 20 reinsurers in the world with size

Sr.No. Company

Gross (Total premiums)

(in $ mn)

Gross (Non Life premium) (in $ mn)

1 Munich Reinsurance 36,976 19,319 2 Swiss Re Ltd. 32,249 19,561 3 Hannover Rueck S.E. 18,651 10,204 4 SCOR S.E. 14,665 6,254 5 Lloyd’s 12,740 12,740 6 Berkshire Hathaway Inc. 12,236 7,049 7 Reinsurance Group of 9,371 N/A 8 China Reinsurance 8,283 4,743 9 Everest Re Group Ltd. 5,876 5,876

10 Partner Re Ltd. 5,548 4,277 11 Korean Reinsurance 5,443 4,812 12 Great West Lifeco. 4,173 N/A 13 Transatlantic Holdings, 3,662 3,662 14 General Insurance 2,786 2,751 15 XL Group plc 2,583 2,273 16 MAPFRE RE, Compania 2,289 1,724 17 R+V Verischerung AG 2,164 2,136 18 The Toa Reinsurance 2,067 2,067 19 Axis Capital Holdings Ltd 2,021 2,021 20 RenaissanceRe Holdings 2,011 2,011

Source: GIC Re RHP, HDFC sec Inst Research

The reinsurance industry is similar to the general insurance line of business as accounting and nature of business (1 yr products, risk underwriting) are similar. Munich Re is the largest Re-insurer globally.


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Type of reinsurance contracts

Broadly there are two type of reinsurance contracts namely 1) Treaty and 2) Facultative

Treaty- In treaty reinsurance, the cedent seeks reinsurance for certain type of insurance or class of risks insured under a direct contract of insurance or specific risks within a certain period. The cedent enters treaty reinsurance contracts in advance with the reinsurer, which set out their rights and obligations including the type of treaty contract, scope of business, treaty limit, account settlement and exclusions.

Facultative- Facultative reinsurance constitutes a separately negotiated contract of reinsurance in respect of each original contract of insurance. This permits the reinsurer to decide in each case whether to underwrite each risk and to more accurately price the reinsurance to reflect the risks.

Proportional (quota-share): Losses are shared proportionately between insurer and re-insurer.

Non-Proportional (excess): Once the losses incurred by the cedent exceed the agreed amount the reinsurer will be liable for a specified portion or all the excess loss. These are known as excess of loss agreements.

Alternative capital products: In recent years, alternative capital products have emerged as a substitute for traditional reinsurance contracts. Alternative capital refers to a source of reinsurance capacity which is based on investors directly investing into certain reinsurance risks such as catastrophe bonds, collaterized reinsurance, and insurance-linked securities.

Reinsurance market cycles Reinsurance capacity available in each period for a

given risk is largely dependent on the level of losses in the market in the previous period.

The interplay and movements among the elements of capacity, loss and price of reinsurance drives the reinsurance cycle.

There are two types of market conditions in the reinsurance market cycle: soft market conditions and hard market conditions.

Hard market: upswing in the reinsurance market cycle, when premiums increase as capacity for reinsurance is low. Upswing may be caused by a number of factors such as falling investment returns, increases in frequency or severity of losses, and regulatory intervention.

Soft market: A soft market is the downswing in the reinsurance market cycle, when prices decline and capacity increases resulting often in high limits, flexible contracts and a high availability of coverage.

A The size of the global reinsurance market is estimated to be around USD 230 billion in 2016, with the non-life segment accounting for 70% of the market. (Source: CRISIL Report) According to CRISIL Research, the reinsurance industry is in a deep soft market cycle which began in 2013. The troika of weak underlying demand growth, low interest rates and the expansion of alternative capital has impacted the global reinsurance market over the past few years. With the supply of capital far exceeding the demand, the market has been extremely soft.

To generate returns, reinsurance companies, in conjunction with alternative capital sources, have been writing coverage over riskier assets, thus bringing down prices. (Source: CRISIL Report) The

In India, most business is done through proportional treaty. The interplay and movements among the elements of capacity, loss and price of reinsurance drives the reinsurance cycle


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lower-than-anticipated incidence of large natural catastrophes has helped companies post good underwriting profits. (Source: CRISIL Report) This lower incidence, coupled with the release of redundant reserves for earlier years’ claims, has supported the industry’s profitability. (Source: CRISIL Report).

Reinsurance Regulations The General Insurance Regulations, 2016 have been

issued by the IRDAI in respect of reinsurance of general insurance risks.

Pursuant to the above regulations, the reinsurance program of every general insurer and reinsurer operating in India, is required to be guided by the following objectives: (1) maximize retention within the country, (2) develop adequate capacity, (3) secure best possible reinsurance protection at a reasonable cost, and (4) simplify administration of business.

For Life Insurers through the Life insurance-reinsurance Regulations, 2013, IRDAI maintains all objectives as above for general insurers and adds the objective of ensuring that the reinsurance policy does not lead to fronting of insurance business.

Minimum ceding to Indian reinsurers: Under the IRDAI (General Insurance-Reinsurance)

Regulations, 2016, general insurers are required to make a minimum level of cessions to Indian reinsurers.

Previously, the IRDAI had prescribed that all general insurers should compulsorily cede 20% of their gross premium to Indian reinsurers.

As the size of the general insurance industry increased, this limit has been progressively reduced to 15% in 2007, 10% in 2008 and 5% in 2013 onwards.

Reinsurance program submission Every Indian and foreign insurer or reinsurer or

branch of foreign insurer is required to submit its board-approved reinsurance program along with retention policy to IRDAI for a financial year, 45 days prior to commencement of the financial year.

Any subsequent amendment too is required to be filed with the regulator along with the board’s approval within 30 days of commencement of financial year.

The reinsurance program is required to include among other things: 1) proposed retention limits on every product of each insurance segments (with previous year comparables) and structure of reinsurance program with details of proportional arrangement for each insurance segment and non-proportional arrangements.

The IRDAI is empowered to call for additional information and may, if necessary, direct alteration of reinsurance programs.

Order of preference Every Indian insurer, in order of preference, shall

offer for participation in its facultative and treaty surpluses:

(a) to the Indian reinsurer (registered under regulation 4(a)).

(b) Other Indian registered reinsurers (currently mainly foreign reinsurers) who are granted certificate of registration (under regulation 4(b)), only after having offered to at least three entities in (a) above.

Under the IRDAI Regulations, , general insurers are required to cede a minimum level of 5% business to re-insurers.

We understand that as the size of industry grows, IRDAI may revoke this regulation. This poses a limited risk to Indian re-insurers business.


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(c) to the offices of insurers set-up in Special Economic Zone, only after having offered to at least three entities in each of (a) and (b) above.

(d) the balance may then be offered to overseas reinsurers, only after having offered to at least three entities in each of (a), (b) and (c) above. For life insurers 1) the order of preference has been waived w.e.f. 1-Jan-2019, 2) Compulsory cessation of 5% to Indian insurer is not applicable, and 3) Life insurers need to take approval from IRDAI for financial reinsurance on a case by case basis.

Eligibility criteria for cross border reinsurers The IRDAI has also laid down eligibility criteria for

cross-border reinsurers (“CBR”) with whom insurers or reinsurers can carry on reinsurance business outside India.

IRDAI requires that:

The financial strength, quality of management, and adequacy of technical reserving methodologies of the CBR to be monitored by its supervising authority in the home country.

At least BBB or equivalent international rating for preceding three years.

Investment regulations Reinsurers have following restrictions on investments Security type Allocation limits Central government securities At least 20% State govt. securities and other approved securities incl. central govt. securities

At least 30%

Housing and infra At least 15% Approved securities Maximum 70% Others Not more than 15% Source: IRDAI, HDFC sec Inst Research

For Life insurers the compulsory ceding of 5% business and order of preference requirements have already been revoked effective Jan-19.


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Global Reinsurance Market The global non-life reinsurance premium in 2018

grew 5% to USD 180bn.

The hurricanes and typhoons that struck the US and Japan coasts respectively, caused an estimated insured loss of USD 23.8bn.

High losses for last two years resulted in few reinsurers and ILS funds withdrawing from the market and some stability in rates over FY19.

According to S&P Global Ratings, reinsurers have seen some green shoots during the April and June renewals of 2019, with 15%-25% rate increase in the property catastrophe rates on loss affected accounts.

At the current stage, the current market is characterized as a hardening market rather than a hard one.

S&P Global Ratings has maintained a stable outlook on the global reinsurance sector and on the majority of the reinsurers it rates, reflecting reinsurers’ still-robust capital adequacy although below historical levels due to active catastrophe years in 2017-2018.

While re-insurance capacities remain high due to excess capital- several catastrophes over last two years and low investment yields call for a continued hardening environment.

Indian Reinsurance Market The Indian reinsurance market size was ~US$ 7bn in

FY18. Out of that ~ US$ 1.7bn is re-insurance premium written by GIC from foreign operations.

So effective domestic re-insurance market size is about ~ US$ 5.3bn.

For FY18 GIC Re accounts for 62.1% of the total reinsurance accepted premium pool. However if we consider only domestic premium of Re-insurers, GIC Re has a lion share of ~82.7%.

The domestic reinsurance industry is dominated by the non-life line, which contributes ~98% of total reinsurance premium.

Primary insurers have tended to re-insure higher percentage of the property and agriculture lines.

FY18 Reinsurance market size and GICRE share Particulars (Rs mn) Re-ins. Industry premium (a) 480,150 GIC Re - Domestic premium (b) 298,130 GIC Re market share (%) (b/a) 62.1

Re-ins. Industry domestic premium (c) 360,290 GIC Re - Domestic premium (d) 298,130 GIC Re market share (%) (d/c) 82.7 Source: Company, HDFC sec Inst Research

While re-insurance capacities remain high due to excess capital- several catastrophes over last two years and low investment yields call for a continued hardening environment. The domestic reinsurance industry is dominated by the non-life line, which contributes ~98% of total reinsurance premium.


Page | 82

Initiating Coverage GIC Reinsurance ICICI Lombard General Insurance New India Assurance


GIC Reinsurance BUY


Worst is behindGICRE is India’s largest reinsurer but continues to make high underwriting losses mainly in its foreign portfolio. It has a higher share of the low margin treaty business and a weakening competitive position due to entry of foreign reinsurers in India. With a hardening cycle on the anvil, we rate the stock a BUY with a TP of Rs 250 (0.8x Sep-21E ABV).

Largest reinsurer, but making underwriting losses: In FY18, GICRE wrote Rs 275bn in domestic reinsurance premium (72% of total premium). With a domestic market share of 87.1%, the company is India’s largest reinsurer. GICRE, however has been consistently making underwriting losses; FY16-19 CORs are in the range of 101.4-106.4%. CAT losses also impacted FY18/FY19 by Rs 17/5bn mainly due to a rise in foreign CORs (FY17/18/19 at 99/117/117%). We believe that the worst is behind as since Apr-19, GICRE has significantly increased rates for 8 high risk occupancies in the fire segment. Further, high losses, and low cost of capital, have also resulted in a rationalization of global underwriting capacities and the recent hardening of rates.

Weak business mix and deteriorating competitive positioning: Approximately 92.5% of GICRE’s business is primarily the low margin highly competitive treaty business. We believe that the facultative market is more specialized and needs more sophisticated risk underwriting expertise, which GICRE currently lacks. Additionally, IRDAI w.e.f. Apr-17 has opened up the Indian market to foreign insurer branches, making the treaty business even more competitive. We expect GICRE to lose market share.

Moving towards unchartered territory: Given, competitive headwinds in the domestic market, GICRE plans to increase international business. Domestic / international mix was ~70/30% in FY19 and company targets a mix of 50/50 in the next 4-5 years. While we believe that this is a risky strategy, we note that GICRE has got Lloyd’s accreditation which should aid growing its international business profitably.

Stock is cheap: We estimate an FY22E adj. RoE of just 10.0%, and with stable growth we can at best assign a valuation of just 0.8x Sep-21E ABV. We build in an additional discount of 10% for the additional share sale expected to arrive at a TP of Rs 250.

Key risks: Continued underwriting losses, lower market share, and higher than expected investment portfolio losses. Additional float of 10.8% of market cap is further required to be sold by GoI, by Oct-20.

Financial Summary (Rs bn) FY18 FY19 FY20E FY21E FY22EPremium (NEP) 382.0 382.5 436.1 479.7 527.6Growth (%) 44.8 0.1 14.0 10.0 10.0Underwriting profits (17.0) (20.6) (22.9) (22.3) (21.3)EBIT 36.2 37.1 51.2 58.9 68.6EBIT margin (%) 9.5 9.7 11.7 12.3 13.0Growth (%) 6.4 2.6 37.9 15.2 16.4PAT 31.5 27.6 38.9 44.7 51.9PAT growth (%) 0.2 (12.3) 41.2 14.9 16.1P/B (x) 0.9 0.8 0.8 0.7 0.6 P/E (x) 12.7 14.5 10.3 8.9 7.7 RoE (%) 7.3 6.0 7.9 8.3 8.7Source: Company data, HDFC sec Inst Research

INDUSTRY REINSURANCE CMP (as on 01 Oct 2019) Rs 228 Target Price Rs 250 Nifty 11,360 Sensex 38,305 KEY STOCK DATA Bloomberg GICRE IN

No. of Shares (mn) 1,754 MCap (Rs bn) / ($ mn) 399/5,612 6m avg traded value (Rs mn) 39 STOCK PERFORMANCE (%) 52 Week high / low Rs 332/154 3M 6M 12M Absolute (%) (0.2) (7.6) (28.3) Relative (%) 3.3 (6.2) (33.2) SHAREHOLDING PATTERN (%) Promoters 85.8 FIs & Local MFs 7.4 FPIs 2.8 Public & Others 4.1 Source : BSE as of Jun 30 Madhukar Ladha [email protected] +91-22-6171-7323 Keshav Binani [email protected] +91-22-6171-7325

GIC REINSURANCE: INITIATING COVERAGE

Page | 84

GICRE: Largest reinsurer but making underwriting losses For FY18, GICRE had a domestic market share of

~87.1%. For FY19, domestic premium is 69% of total premium.

For FY19, 98.7% of premium written is non-life, while 1.3% is life. Over last 5 years domestic non-life premium has grown at a CAGR of 22.8%.

GICRE continues to report underwriting losses. Underwriting losses have risen in the last couple of years mainly due to international catastrophes in FY18 and FY19.

Growth lead by agriculture business COR to improve as CAT impact ease off

Source: Company, HDFC sec Inst Research


136 153

264

382 383 436

488 547

(10.0)-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0

-

100

200

300

400

500

600

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Premium (Rs bn) - LHS Growth (%) - RHS

87.6 84.5

81.6 86.5 88.8 88.3 87.8 87.3

111.7 106.4

101.4 104.9 105.1 104.7 104.1 103.5

60.0

80.0

100.0

120.0

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Claims ratio Combined ratio

Premium growth jumped in FY17 as GI industry started writing crop business. Premium growth (ex-agri) has also remained robust at 15.9% CAGR during FY14-19.


Page | 85

Deteriorating competitive positioning Approximately 92.5% of GICRE’s business is primarily

has the low margin highly competitive treaty business. The facultative market is more specialized and needs more sophisticated risk underwriting expertise.

IRDAI w.e.f. Apr-17 opened up the Indian market to foreign branches. This has made the treaty business more competitive.

In our opinion, GICRE currently lacks experience to write the more sophisticated facultative business. We believe this will also result in market share loss as foreign insurers will be able to provide more specialized facultative quotes.

Business mix Share (%) FY15 FY16 FY17 Treaty (proportional) 76.0 76.1 82.8 Treaty (non-proportional) 11.7 12.4 9.7 Facultative (proportional) 10.7 9.2 6.2 Facultative (non proportional) 1.5 2.3 1.2 Total 100.0 100.0 100.0 Source: Company, HDFC sec Inst Research

Foreign Re-insurers operating in India Company (Rs mn) M.Share (%) Swiss Re 20,467 4.3 Munich Re 13,068 2.7 SCOR SE 11,859 2.5 AXA France Vie 7,587 1.6 Hannover Re 5,683 1.2 XL SE 1,871 0.4 RGA 705 0.1 Gen Re 673 0.1 Amlin Syndicate (Lloyd's) 242 0.1 Total 62,156 12.9 Note: Data as of FY18. Source: Company, HDFC sec Inst Research

With foreign re-insurers setting up Indian branches, we foresee GICRE losing market share. We understand IRDAI may eventually get rid of the compulsory 5% ceding by general insurers to GICRE.


Page | 86

Moving towards unchartered territory As the company is facing competitive headwinds in

the domestic markets, it is planning to increase business internationally.

Currently the domestic/international business mix is ~70/30 and the company targets a mix of 50/50 in the next 4-5 years.

We believe that the company lacks the expertise and knowledge to underwrite risks in more diverse geographies. Profitability of this segment is expected to remain sub-dued.

Management aspires to take foreign mix to 40%+. Overall product mix : Agri is now the largest segment

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

27 29 30 21 19

7 7 6 3 2

28 27 27

21 23

14 14 15

13 15

5 5 6 31 31

18 17 14 9 9

-

20

40

60

80

100


Fire Marine Motor HealthAgriculture Life Others

53.4 54.3 67.2 72.3 69.0

46.6 45.7 32.8 27.7 31.0

-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

100.0

FY15

FY16

FY17

FY18

FY19

India (%) Foreign (%)

GICRE had two good years in foreign business when CORs were lower at 96.7/98.8% in FY16/17, however with increased CAT losses overseas, COR jumped to 117.0/117.2% in FY18 & 19. With reinsurance rates hardening globally, we foresee improvement in foreign COR. Fire and property forms ~50% of business written for foreign locations. Fire COR increased to 117.1/133.8% in FY18/19, leading to significant deterioration in overall foreign COR.


Page | 87

Claims ratio: Foreign business suffered due to huge CAT losses

Combined ratio inching up in foreign business

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Segment wise combined Ratio comparison for India vs Foreign (%) Segments FY17 FY18 FY19

India Foreign Total India Foreign Total India Foreign Total Fire 157.2 94.1 103.6 95.4 117.1 111.0 119.6 133.8 127.1 Motor 104.1 101.6 114.1 67.9 126.7 92.2 86.3 101.6 100.1 Health 118.3 107.4 110.4 88.2 96.7 92.1 107.1 101.3 104.7 Agriculture 93.1 120.3 92.2 119.2 163.1 119.8 96.4 138.6 97.5 Life 133.8 NM 148.4 118.3 (58.1) 109.3 124.6 137.1 124.3 Total 105.1 98.8 103.1 98.9 117.0 104.0 100.8 117.2 104.9 Source: Company, HDFC sec Inst Research

Indian COR declined as company posted underwriting profits in agriculture business (~30% share, COR: 97.5%) in FY19. On the back of high CAT losses, foreign CORs increased materially. With significant price hikes in the range of 40-50% across 8 occupancies (~10% of business), we believe Fire COR will improve materially. Prior to price hike, these 8 occupancies were posting CORs of 150%+. Company posted underwriting profits in Fire segment in 1QFY20.

114.6 116.3

105.1

98.9 100.8

105.3

96.7 98.8

117.0 117.2

90.0

95.0

100.0

105.0

110.0

115.0

120.0

FY15

FY16

FY17

FY18

FY19

India Foreign%

94.8 96.7

87.2

85.7 88.5

79.4

70.1 70.1

88.6 91.8

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

FY15

FY16

FY17

FY18

FY19

India Foreign%


Page | 88

Product mix (%) FY17 FY18 FY19

India Foreign Total India Foreign Total India Foreign Total Fire 6.2 52.0 21.2 5.9 53.9 19.2 8.5 50.1 21.4 Motor 23.8 15.9 21.2 25.2 16.2 22.7 24.3 17.1 22.0 Health 13.3 10.9 12.5 17.9 8.5 15.3 14.7 7.2 12.4 Agriculture 45.5 2.2 31.3 42.1 2.3 31.0 42.0 3.3 30.0 Life 1.4 (0.1) 0.9 1.3 0.2 1.0 1.8 0.2 1.3 Others 9.8 19.2 12.9 7.6 19.0 10.7 8.8 22.1 12.9 Total 100 100 100 100 100 100 100 100 100

Total NEP (Rs bn) 177,337 86,410 263,747 275,427 105,533 380,961 259,977 116,814 376,791 % 67.2 32.8 100.0 72.3 27.7 100.0 69.0 31.0 100.0 Source: Company, HDFC sec Inst Research


Page | 89

Management team Co CEO - Reena Bhatnagar Mrs. Reena Bhatnagar began her career with the NIA

in 1982. She is a post graduate and a Fellow of the Insurance Institute of India.

Co CEO & CFO– M. Sashikala, M. Sashikala, a Graduate in Commerce from

University of Madras, ICWAI Intermediate and an Associate of Insurance Institute of India, began her career in the insurance industry with NIA in Dec-83.

Shareholding Promoter – Government of India Central government holds 85.8% stake in the

company.

Government will need to sell 10.8% stake in the company till Oct-20 to comply with SEBI’s norm of 25% public shareholding. At CMP this would mean a supply of Rs 34bn.

Shareholding pattern

Source: Company, HDFC sec Inst Research Top 10 Institutional Shareholders Institutional Shareholders (%) LIC 8.66 ICICI Pru AMC 0.29 L&T AMC 0.27 Plymouth Rock Assurance 0.08 TATA AMC 0.06 IDBI AMC 0.03 Reliance AMC 0.02 Wisdom Tree Investments 0.02 UTI AMC 0.01 Birla AMC 0.01 Source: Company data, HDFC sec Inst Research

Central Government

85.8

LIC8.7

MFs and FIs/Banks

3.4

FPIs0.3

Public and others

1.9


Page | 90

Du-pont Particulars FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Claims 87.6 84.5 81.6 86.5 88.8 88.3 87.8 87.3 Commission 20.7 22.9 20.3 16.7 16.0 15.9 15.8 15.7 Opex 3.0 1.2 2.0 1.0 1.2 1.0 1.0 1.0 Foreign exchnange loss/(gain) 0.4 (1.0) 0.1 0.2 (0.6) - - - Underwriting margin (11.7) (7.7) (4.1) (4.4) (5.4) (5.2) (4.6) (4.0) Investment income (net of provisions) 30.7 25.8 17.0 13.9 15.1 17.0 16.9 17.0 EBIT 19.0 18.1 12.9 9.5 9.7 11.7 12.3 13.0 Interest/(other income) (1.7) (1.6) (0.1) (0.0) (0.4) (0.0) (0.0) (0.0) PBT 20.7 19.7 13.0 9.5 10.1 11.8 12.3 13.0 Tax 0.2 2.2 1.6 1.1 3.2 3.1 3.2 3.4 PAT (%) 20.5 17.5 11.4 8.4 6.9 8.7 9.1 9.6 Share of profit in associate companies 0.7 0.9 0.5 (0.1) 0.3 0.2 0.2 0.2 RPAT (%) 21.2 18.4 11.9 8.2 7.2 8.9 9.3 9.8 Asset turnover (x) 0.3 0.4 0.6 0.7 0.7 0.7 0.8 0.8 Assets/Shareholders equity (x) 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.2 ROE (%) 9.0 8.0 8.3 7.3 6.0 7.9 8.3 8.7 Source: Company, HDFC sec Inst Research


Page | 91

Income Statement (Consolidated) (Rs mn) FY18 FY19 FY20E FY21E FY22ENet earned premiums 382,000 382,501 436,059 479,665 527,631Growth (%) 44.8% 0.1% 14.0% 10.0% 10.0%Claims incurred 330,582 339,696 385,080 421,190 460,671Commission (net) 63,801 61,164 69,354 75,795 82,830Operating expenses 3,948 4,534 4,495 4,945 5,439Foreign exchange loss/(gain) 656 (2,305) - - -Underwriting profit/(loss) (16,987) (20,589) (22,871) (22,265) (21,309)Investment Income 54,031 64,477 76,912 83,254 92,187Provisions (Other than taxation) 882 6,795 2,884 2,081 2,305Operating profits 36,162 37,093 51,157 58,908 68,573Operating profit margin (%) 9.5 9.7 11.7 12.3 13.0Interest expense - - - - -Other income 134 1,450 100 100 100PBT 36,296 38,543 51,257 59,008 68,673Tax 4,349 12,159 13,327 15,342 17,855APAT 31,947 26,385 37,930 43,666 50,818APAT Growth (%) 6.3% -17.4% 43.8% 15.1% 16.4%RPAT 31,456 27,576 38,942 44,729 51,934RPAT Growth (%) 0.2% -12.3% 41.2% 14.9% 16.1%AEPS 17.9 15.7 22.2 25.5 29.6EPS Growth (%) -1.8% -12.3% 41.2% 14.9% 16.1%


Balance Sheet (Consolidated) (Rs mn) FY18 FY19 FY20E FY21E FY22E SOURCES OF FUNDS Share Capital 4,386 8,772 8,772 8,772 8,772 Reserves 237,161 246,152 285,094 329,823 381,757 Total Shareholders Funds 241,547 254,924 293,866 338,595 390,529 Fair Value Change Account 298,343 304,240 313,149 323,159 334,124 Long-term Debt - - - - - Short-term Debt - - - - - Total Debt - - - - - Net Deferred Tax Liability (175) (26) - - - TOTAL SOURCES OF FUNDS 539,716 559,138 607,015 661,754 724,653 APPLICATION OF FUNDS Net Block 1,722 1,976 2,075 2,178 2,287 Investments 737,914 820,453 961,395 1,040,677 1,152,337 Loans 2,821 2,579 2,579 2,579 2,579 Total Non-current Assets Cash & Equivalents 142,571 129,331 139,539 143,899 147,737 Advances and Other assets 239,639 267,722 273,966 318,210 345,663 Total Current Assets 382,211 397,053 413,505 462,110 493,400 Current Liabilities 460,542 521,114 616,636 674,358 737,472 Provisions 124,410 141,809 155,903 171,432 188,478 Total Current Liabilities 584,951 662,923 772,539 845,790 925,950 Net Current Assets (202,740) (265,870) (359,034) (383,680) (432,550) TOTAL APPLICATION OF FUNDS 539,716 559,138 607,015 661,754 724,653



Page | 92

Key Ratios FY18 FY19 FY20E FY21E FY22EPROFITABILITY (%) Claims ratio 86.5 88.8 88.3 87.8 87.3Commission ratio 16.9 15.5 15.4 15.3 15.2Expenses ratio 1.4 0.8 1.0 1.0 1.0Combined ratio 104.9 105.1 104.7 104.1 103.5Underwriting profit (4.4) (5.4) (5.2) (4.6) (4.0)Investment yield 7.3 8.2 8.7 8.8 8.8Investment Income /NEP 13.9 15.1 17.0 16.9 17.0EBIT 9.5 9.7 11.7 12.3 13.0PAT 8.2 7.2 8.9 9.3 9.8ROE 7.3 6.0 7.9 8.3 8.7Adjusted ROE 7.0 6.9 9.1 9.4 9.8Core RoCE 10.6 8.5 10.9 11.3 11.6RoCE 7.3 6.0 7.9 8.3 8.7EFFICIENCY Tax Rate (%) 12.0 31.5 26.0 26.0 26.0Asset Turnover (x) 0.7 0.7 0.7 0.8 0.8Claims os/NEP (x) 1.1 1.2 1.2 1.2 1.2Technical reserves/NEP (x) 1.4 1.5 1.6 1.6 1.6Investment leverage (x) 1.7 1.8 2.0 1.9 1.9NWC (ex-cash) (days) (330) (377) (417) (401) (401)Debt/EBIT (x) NA NA NA NA NANet D/E NA NA NA NA NAInterest Coverage NA NA NA NA NAPER SHARE DATA AEPS (Rs/sh) 17.9 15.7 22.2 25.5 29.6CEPS (Rs/sh) 20.1 24.4 25.8 35.0 43.8DPS (Rs/sh) 17.9 15.7 22.2 25.5 29.6ABV (Rs/sh) 256.7 266.7 299.6 329.3 363.5VALUATION P/E 12.7 14.5 10.3 8.9 7.7 P/BV 0.9 0.8 0.8 0.7 0.6 Dividend Yield (%) 2.6 3.0 3.9 4.5 5.2



ICICI Lombard SELL


Excellent franchise but lofty valuationsICICIGI is the pvt. mkt. leader (8.5% share) with strong underwriting (COR: 99.6%), reserving and investment management practices. It is best positioned to benefit from changing regulations in motor and also has a strong virtual office strategy to increase penetration. We expect high competitive intensity to restrict underwriting margins and see lower than consensus earnings. Accordingly, we rate ICICIGI a SELL with a TP of Rs 1,040 (Sep-21E P/E of 26x and a P/ABV of 5.5x). Private market share leader, stable underwriting

and strong claim reserving: With a FY19 market share of 8.5% (7.9% in FY15), ICICIGI is the largest private general insurer. ICICIGI has delivered a reduction in COR (105.5% in FY14 to 99.6% in FY19). It has strong reserving- consistently and adequately provided since AY2012. We believe ICICIGI will continue to capture higher market share and prudent underwriting should keep CORs in-check.

Largest beneficiary of changes in Motor: Long term compulsory motor insurance will benefit ICICIGI as it is empanelled with 95% of the OEMs and penetrates 90%+ dealers. Implementation of Motor Vehicle Act, 2019 should result in reduction of TP claims ratios. With a high TP claim ratio of 90.8% in FY19, ICICIGI is set to benefit. However, we believe obtaining higher pricing for motor TP will be difficult and profitability will eventually reduce. Companies will also undercut on the OD line to write higher long term business.

Prudent investment management: Debt portfolio is well managed with ~39% of debt assets invested in long duration (7years+) bonds and low exposure to risky names. Downgrades in its debt portfolio have been limited. Equity exposure is low at just 9.6%.

Thrifty virtual office and investment in technology: ICICIGI has added ~900 virtual offices over FY17-19; additionally investment in technology has helped ICICIGI to increase staff productivity. ICICIGI has reduced employee expense/NWP from 7.0% in FY14 to 6.0% in FY19.

Better customer service: Amongst top 7, ICICIGI has the lowest turnaround times- claims settled within 1 month are at 93.6%/99.9% for motor TP/Health.

Stock is pricey! We expect ICICIGI to deliver an FY19-22E EPS CAGR of 23.4% / RoE of 22-23%. We assign a SELL rating to ICICIGI with a TP of Rs 1,040 We expect high competitive intensity to restrict underwriting margins and profit growth. We forecast lower than consensus earnings.

Key risks: ICICIGI has higher dependence on OEMs and as other insurers tie-up with OEMs the co may lose market share. Additional expected share sale by FAL Corporation of ~4.9% of market cap is a risk.

Financial Summary (Rs bn) FY18 FY19 FY20E FY21E FY22EPremium (NEP) 69.1 83.8 91.8 104.2 117.2Growth (%) 12.1 21.2 9.6 13.5 12.5Underwriting profits (2.6) (2.5) (2.9) (2.8) (2.1)EBIT 12.3 16.2 19.0 22.8 26.9EBIT margin (%) 17.8 19.4 20.7 21.9 22.9Growth (%) 31.3 32.2 17.1 20.0 17.7PAT 8.6 10.5 13.9 16.7 19.7PAT growth (%) 22.8 21.8 32.4 20.3 17.9P/B (x) 10.7 9.8 8.3 6.9 5.8 P/E (x) 63.4 52.2 39.4 32.8 27.8 RoE (%) 17.8 19.2 22.5 22.8 22.6Source: Company data, HDFC sec Inst Research

INDUSTRY GENERAL INSURANCE CMP (as on 01 Oct 2019) Rs 1,203 Target Price Rs 1,040 Nifty 11,360 Sensex 38,305 KEY STOCK DATA Bloomberg ICICIGI IN

No. of Shares (mn) 454 MCap (Rs bn) / ($ mn) 547/7,688 6m avg traded value (Rs mn) 1,389 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,285/639 3M 6M 12M Absolute (%) 9.0 18.5 52.6 Relative (%) 12.5 20.0 47.7 SHAREHOLDING PATTERN (%) Promoters 55.9 FIs & Local MFs 18.6 FPIs 18.5 Public & Others 7.0 Source : BSE as of Jun 30 Madhukar Ladha [email protected] +91-22-6171-7323 Keshav Binani [email protected] +91-22-6171-7325

ICICI LOMBARD : INITIATING COVERAGE

Page | 94

Private Market Share Leader, stable underwriting and strong claim reserving Private market share leader The company is the 4th largest general insurer and

leader amongst private names in India with a market share of 8.5% (FY19).

Company has been able to protect its market share despite being cautious on risky and high growth crop and other corporate segments.

Premium growth has been robust at 14.0%, ex-crop premium growth has been at 12.4% during FY14-19.

We believe ICICIGI can continue to deliver strong premium growth at ~12% over FY19-22E on back of - (1) Rising urbanization (2) Regulatory tailwinds supporting growth and persistencies (Motor TP) (3) Rising penetration (4) Product innovation (5) Gain of market share from PSUs.

Market share has remained stable at 7.7-8.6% Growth has remained healthy in key segments


Company has increased penetration within retail segments and has maintained a cautious and conservative approach to institutional business.

26.2

23.3 22.3

14.0

8.8 8.6 5.6

0.6 -

5.0

10.0

15.0

20.0

25.0

30.0

PA

Mot

or T

P

Othe

rs

Tota

l

Mot

or O

D

Mar

ine

Heal

th

Fire

Premium growth FY14-19 (CAGR %)

7.9 8.4 8.4 8.2 8.5

15.6 15.7 15.0 15.1

14.1

-

5.0

10.0

15.0

20.0


Bajaj Chola MS HDFC

ICICI NIA Royal Sundaram

SBI%


Page | 95

Stable underwriting Claims and combined ratios have improved

consistently from FY16, despite writing crop business where combined ratios were 124/114% in FY18/19.

Improvement in combined ratios is lead by improvement in segmental combined ratios and not just by change in product mix.

Company has been cautious on corporate segments and has focused on the granular retail business.

We also note that the management has been very proactive and has stopped writing business where profitability and business visibility is bleak. ICICIGI has not written any crop business for FY20TD.

Claims ratio to decline further Motor and health contribute 78% to premium

v


83 81 82 80 77 75 74 75 75

106 105 107 105 101 100 100 99 99

50

60

70

80

90

100

110

120

FY14

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Claims ratio (%) Combined ratio (%)

Improvement in underwriting is led by vast improvement in combined ratio of Motor TP (~28% share) from 129% in FY14 to 110% in FY19. We believe that the implementation of Motor Vehicle Amendment Act, will result in improvement of Motor TP claims ratio. Company has refrained from writing any crop insurance beginning FY20E.

41 34 33 32 33 32

19 25 28 25 27 28

26 22 19 19 16 18

-- 2 8 8 7

5 10 8 8 8 7

-

20

40

60

80

100

FY14

FY15

FY16

FY17

FY18

FY19

Fire Marine Motor OD Motor TPHealth PA Crop Others


Page | 96

Strong claims reserving Loss triangles suggest that the company has provided

adequately for claims since AY11.

Claims provided have consistently been more than the ultimate losses realized till date.

Since AY11 reserving has been optimal

Source: Company, HDFC sec Inst Research Incurred Losses and Allocated Expenses (Ultimate Movement) As of Mar-19 (Rs bn) Prior AY10 AY10 AY11 AY12 AY13 AY14 AY15 AY16 AY17 AY18 AY19 End of one year 39.0 15.1 20.7 22.5 28.0 36.0 34.2 39.1 49.5 52.4 65.3 One year later 39.9 15.2 20.4 22.0 27.0 34.6 34.0 38.6 49.2 51.1Two years later 39.9 15.4 20.4 21.7 26.5 34.4 33.5 38.1 48.8Three years later 40.5 15.5 20.4 21.9 26.4 34.3 32.9 37.8Four years later 41.2 15.6 20.5 21.8 26.5 33.9 32.7Five years later 41.3 15.7 20.5 21.8 26.2 33.7Six years later 41.9 15.9 20.5 21.8 26.2Seven years later 42.1 16.0 20.7 21.8Eight years later 42.2 16.0 20.7 Nine years later 42.4 16.1Ten years later 42.4Deficiency /(Redundancy) (%) 8.7 6.1 0.0 (3.1) (6.4) (6.2) (4.2) (3.5) (1.3) (2.5)Source: Company, HDFC sec Inst Research

Since AY11 claims assessments have been lower than the provision made in the first year.

8.7

6.1

0.0

-3.1

-6.4 -6.2-4.2

-3.5-1.3

-2.5

-8-6-4-202468

10

Prio

r AY1

0

AY10

AY11

AY12

AY13

AY14

AY15

AY16

AY17

AY18

Deficiency/(Redundancy) (%)


Page | 97

Largest beneficiary of changes in Motor Net earned premiums (NEP) have grown at a modest

8.8% CAGR during FY14-19, largely due to deteriorating pricing and rising competitive intensity.

ICICIGI continues to benefit from strong relationship with OEMs, hence continues to enjoy a healthy 12.9% mkt. share. With rising competitive intensity, ICICIGI may lose some market share.

Premium Market Share


Claims and combined ratio Vehicle Mix (%)


Motor OD business may remain weak as long as price discounting continues and new vehicle sales don’t pick up meaningfully. Renewal rate within Motor OD segment is much lower than TP thus having a bearing on overall premium growth. ICICIGI is actively trying to push comprehensive long term motor policies (3+3 or 5+5 motor OD + TP), in order to capture higher market share and gain higher float.

17,7

95

14,5

58

16,0

62

19,7

23

22,9

99

27,1

36 (18.2)

10.3

22.8

16.6 18.0

-25-20-15-10-50510152025

-

5,000

10,000

15,000

20,000

25,000

30,000

FY14

FY15

FY16

FY17

FY18

FY19

Motor OD NEP (Rs mn) Growth (%) - RHS

61.8 65.6 64.2

53.7 59.2

83.7

94.2 97.2

86.5 93.2

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

FY15

FY16

FY17

FY18

FY19

Loss Ratio (%) Combined ratio (%)

10.3

11.1 11.0 11.0

12.9

8.0

9.0

10.0

11.0

12.0

13.0

14.0

FY15

FY16

FY17

FY18

FY19

Motor OD - Market Share (%)

47.7 47.3 49.6 50.0 50.0

29.3 30.8 32.3 33.0 28.0

23.0 21.9 18.1 17.0 22.0

-10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 90.0

100.0

FY15

FY16

FY17

FY18

FY19

PV 2W CV


Page | 98

Motor TP Segment NEP grew at a strong 23.3% over FY14-19 as

the focus continues on sound underwriting within business mix dominated by profitable segments like private cars and 2W.

Claims and combined ratio


Premium Market Share


With change in regulations, we believe loss ratios in Motor TP should improve. Improved profitability, however may impact future price increases from IRDAI. ICICIGI is also now focused on writing CV business as TP price increase has been good. Company believes there are profitable niches within this space and it continues to write such business.

105.8 97.7 97.4

107.1

90.8

136.6 128.3 130.4

134.9

110.9

60.0 70.0 80.0 90.0

100.0 110.0 120.0 130.0 140.0 150.0

FY15

FY16

FY17

FY18

FY19


8,15

5

10,4

10

13,5

29

15,6

75

18,4

23

23,2

21

27.7 30.0

15.9 17.5

26.0

0

5

10

15

20

25

30

35

-

5,000

10,000

15,000

20,000

25,000

FY14

FY15

FY16

FY17

FY18

FY19

Motor TP NEP (Rs mn) Growth (%) - RHS

7.3 7.6

6.7 6.6

7.9

5.5

6.0

6.5

7.0

7.5

8.0

8.5

FY15

FY16

FY17

FY18

FY19

Motor TP - Market Share (%)


Page | 99

Prudent investment management The insurers investment book has grown at a rapid

pace (19.1 % CAGR over FY14-19), further contributed by change in regulations (related to Motor TP) leading to receipt of advance long term premium.

35% of the debt book in invested in sovereign debt, while 65% is in corporate bonds. AAA+ bonds form 47% of the portfolio.

Share of equity within the portfolio mix has gradually increased to ~14-15% however it has declined considerably in FY19 to 9.6%. Also the FV change declined 54% in FY19 to Rs 3.3bn.

The fixed income investment book has faced NIL defaults since inception and securities downgraded (refer table) were comparatively less burdensome as compared to portfolios of other companies and other ‘suspect papers’ floating in the market.

With bond yields declining, we believe investment income will continue to remain strong in the short term.

As of Jun-19, only ~39% of the debt portfolio is invested in 7 year+ bonds, hence owing to decline in benchmark yields we suspect investment yields will decline in the long run and to that extent pricing has to improve to support overall profitability.

Investment book growth has been very robust Share of equity has remained low

Note: Yield includes FV change Source: Company, HDFC sec Inst Research


93

102

116

151

182

222

275

332

378

10.0

12.7

10.6

13.0

9.8

7.1

8.7

8.6

8.3

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

-50

100 150 200 250 300 350 400

FY14

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Investment book (Rs bn) Yield (%)

We rate the investment function of ICICIGI as one of the best within top insurers. Due to higher market share within OEMs and push to sell long term comprehensive polices, we believe ICICIGI will be able lever 4-5x of capital. Advance motor premium stood at Rs 18.7bn as of 1QFY20.

39.9 30.0 29.9 30.3

24.6 26.5 26.6 29.9

11.2 15.9 22.0 22.2 13.1 14.8

14.3 9.6 11.2 12.7 7.2 8.1

-

20.0

40.0

60.0

80.0

100.0

FY16

FY17

FY18

FY19

Government securities Infrastructure and housingDebentures/Bonds Equity Shares Others


Page | 100

Downgrading of Investments Period Investments downgraded

1QFY20 IDFC First Bank PNB Housing Finance

FY19 IDFC First Bank PNB Housing Finance

FY18 NIL FY17 Hindalco

FY16 Hindalco Magma Fincorp

FY15 Hindalco Magma Fincorp EID Parry


Maturity profile of debt portfolio Maturity Market Value (Rs mn) Share (%) Upto 1 year 21,197 10.5 1-3 year 36,004 17.9 3-7 year 66,060 32.9 7-10 year 48,494 24.1 10 years + 29,314 14.6 Total 201,069 100.0 Source: Company, HDFC sec Inst Research

ICICIGI has successfully navigated the ongoing credit crisis, and is not exposed to any stressed name. Since only ~39% of the debt book is invested in long duration bonds (7yr +), we suspect with decline in bond yields, inv. yields for most insurers will decline over the medium term.


Page | 101

Distribution and expansion The company recently announced bancassurance tie-

up with Standard Chartered Bank. The company now has tie up with ICICI, RBL and SCB.

The company has invested in virtual offices to drive penetration in remote locations. No of virtual offices have increased from 140 in Mar-17 to 910 as of Mar-19.

Virtual offices are offices without any physical infrastructure and are used to cater to small and remote locations.

Staff costs / NWP has declined over years Distribution mix


The company has not added branches aggressively as branch count has grown from 249 as of Mar-17 to only 265 as of Mar-19.

3,14

2

3,21

6

3,59

9 4,46

9

4,93

6 5,71

9

4.7 2.

4

11.9

24.1

10.5

15.9

7.0 7.3

6.6 6.8 6.3 6.0 -

5.0

10.0

15.0

20.0

25.0

30.0

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000 FY

14

FY15

FY16

FY17

FY18

FY19

Staff costs (Rs mn) -LHS Growth (%) - RHSAs % of NWP - RHS

44 43 43 38 28

28 32 30 34 41

11 9 14 15 13

17 16 12 12 11

- 1 8

-

20

40

60

80

100

FY15

FY16

FY17

FY18

FY19

Direct Broker Corporate agentsIndividual agents Others

%


Page | 102

Better customer service

Amongst top 7, ICICIGI has the lowest turnaround times- claims settled within 1 month are at 93.6%/99.9% for motor TP/Health.

Ageing of claims: Motor % basis no of claims Bajaj Chola MS HDFC ERGO ICICI Lombard NIA Royal Sundaram SBI <1 month 89.2 72.1 89.0 93.6 37.5 88.3 65.3 1-3 month 8.0 21.7 9.3 4.4 41.6 9.2 27.8 3-6 month 2.1 4.4 1.2 1.8 13.2 1.9 5.9 6-1 year 0.7 1.4 0.4 0.2 6.0 0.5 0.8 >1 year 0.1 0.4 0.1 0.0 1.7 0.1 0.2 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Data as of FY19 Source: Company, HDFC sec Inst Research

Ageing of claims: Health % basis no of claims Bajaj Chola MS HDFC ERGO ICICI Lombard NIA Royal Sundaram SBI <1 month 96.9 96.3 92.7 99.9 85.6 90.8 91.0 1-3 month 2.3 2.5 6.8 0.1 9.8 9.2 8.8 3-6 month 0.5 0.6 0.5 0.0 2.9 - 0.1 6-1 year 0.1 0.3 0.1 - 1.4 - 0.1 >1 year 0.1 0.2 0.0 - 0.4 - - Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Note: Data as of FY19 Source: Company, HDFC sec Inst Research

ICICIGI has the best claims settlement with ~94% claims getting settled within 1 month of reporting. Since Motor TP cases are settled by court we have compared claims settlement time for only Motor OD. Even in health claims, ICICIGI has best in class claims settlement time.


Page | 103

Health Premium Market Share


Claims and combined ratio


With the recent approval received by FAL corporation (Lombard Canada), we could see large supply come in the market. FAL currently owns 9.9% stake in the company.

Premium growth has remained volatile however we believe company is on the right tracking by writing more retail business. Company is focusing on growing corporate group health with SMEs and MSMEs and hence growth has been pretty robust in FY19. Company posted underwriting profits for corporate health in 1QFY20.

11,4

83

9,46

9

9,34

9

11,5

49

11,1

46

15,1

06

(17.

5)

(1.3

)

23.5

(3.5

)

35.5

-30

-20

-10

0

10

20

30

40

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY14

FY15

FY16

FY17

FY18

FY19

Health NEP (Rs mn) Growth (%) - RHS

88.3 84.7

97.9

77.6 85.0

137.8 135.7

103.5

81.4 92.1

50.0

70.0

90.0

110.0

130.0

150.0

FY15

FY16

FY17

FY18

FY19


6.5

5.7 5.5

5.1 5.0

4.0

4.5

5.0

5.5

6.0

6.5

7.0

FY15

FY16

FY17

FY18

FY19

Health - Market Share (%)


Page | 104

Valuation We assign a SELL rating to ICICIGI and value it on a

two stage DDM basis at Rs 1,040 (Sep-21E P/E of 26x and a P/ABV of 5.5x).

We have used a cost of equity of ~10.5% and assuming a terminal RoE of ~27% we work out a distribution ratio of 67.9% implying a terminal growth rate of 5%.

Our TP will increase by ~20% i.e. to Rs 1,248/share, If we assume no dividend distribution tax.

Our TP is sensitive to our cost of equity and terminal RoE assumptions. The sensitivity table is given below

Sensitivity Table Co

st o

f equ

ity (%

) Terminal ROE (%)

23% 25% 27% 29% 31% 33% 8.5% 1,770 1,808 1,840 1,868 1,892 1,913 9.5% 1,297 1,324 1,347 1,367 1,385 1,400

10.5% 1,001 1,022 1,039 1,055 1,068 1,080 11.5% 801 817 831 843 853 863 12.5% 657 670 682 691 700 707 13.5% 550 561 570 578 585 591



Page | 105

Management team CEO – Bhargav Dasgupta Bhargav Dasgupta, aged 51, is the MD and CEO of the

company. He holds a bachelor’s degree in mechanical engineering from Jadavpur University and a post graduate diploma in business administration from the IIM, Bengaluru.

He has been associated with our Company since May 1, 2009 as the MD and CEO.

He has experience in project finance and corporate banking, e-commerce and technology management, international banking and life insurance.

Previously, he worked with ICICI Bank from May-92 and with ICICI Pru Life as executive director from Oct-06 till April-09.

CFO– Gopal Balachandran Gopal Balachandran joined ICICI Lombard in 2002. He

completed his CA course in 1998 and CS in 1999.

After completing his CA course, he worked with ICICI Bank in the Corporate Accounts and Taxation department for 2 years after which he joined ICICI Lombard.

He has also been handling the risk management function since the last one year.

Shareholding Promoter – ICICI Bank ICICI Bank currently holds 55.9% in the company. The

bank sold 7% stake through IPO in Sep-17.

FAL Corporation FAL corporation is an affiliate of Fairfax financial

holdings. FAL currently holds 9.9% in the company. These shares were under lock in as per IRDAI guidelines, which on request of FAL in Sep-19 the regulator has approved.

Red Bloom Investment Red Bloom Investment is a company wholly owned by

private equity funds managed by Warburg Pincus LLC. Red Bloom trimmed its stake in the company from 9.0% in FY18 to 5.9% in FY19 (Open market at an average price of ~Rs 800/share). The company further sold 3.15% stake during 1QFY20 (Open market at an average price of ~Rs 1,110/share), its reduced shareholding now stands at 2.7%.

Shareholding

Shareholding as of Jun-19 Source: Company, HDFC sec Inst Research

ICICI Bank55.9

FAL Corporation

9.9

Red Bloom Investment

2.7

FIs and Local MFs

6.0

FPIs18.5

Public & Others

7.0


Page | 106

Top 10 Institutional Shareholders Institutional Shareholders (%)Fidelity International 1.49Vanguard group 1.27Kotak AMC 1.12Nomura Holdings 0.99Blackrock Inc 0.98Motilal Oswal AMC 0.85Wasatch Advisors Inc 0.77St. James Place Inc 0.76Goldman Sachs 0.74Royal Bank of Canada 0.71Source: Company data, HDFC sec Inst Research

Du-pont Particulars FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Claims 81.4 81.6 80.4 76.9 75.3 74.5 75.4 75.0 Commission (8.2) (6.8) (7.0) (4.1) 2.7 2.5 2.5 2.3 Opex 33.1 35.8 33.3 31.0 25.0 26.2 24.8 24.5 Underwriting margin (6.3) (10.7) (6.7) (3.8) (3.0) (3.2) (2.7) (1.8) Investment income (net of provisions) 22.9 25.0 21.8 21.6 22.4 23.9 24.6 24.7 EBIT 16.6 14.3 15.2 17.8 19.4 20.7 21.9 22.9 Interest (0.0) (0.3) 0.4 0.5 0.3 0.3 0.24 0.21 PBT 16.6 14.6 14.8 17.3 19.1 20.5 21.7 22.7 Tax 2.8 4.1 3.4 4.8 6.6 5.3 5.6 5.9 PAT (%) 13.8 10.5 11.4 12.5 12.5 15.1 16.0 16.8 Asset turnover (x) 1.5 1.4 1.5 1.3 1.4 1.4 1.3 1.3 Assets/Shareholders equity (x) 1.0 1.0 1.1 1.1 1.1 1.1 1.1 1.1 ROE (%) 20.4 14.9 17.7 17.8 19.2 22.5 22.8 22.6 Source: Company, HDFC sec Inst Research

We believe company can earn ROEs in the range of 21-24% in medium term. Increase in leverage can further boost ROEs.


Page | 107

Assumptions (Rs mn) FY18 FY19 FY20E FY21E FY22E Net earned premium (Rs bn) 69.1 83.8 91.8 104.2 117.2 Growth (%) 12.1 21.2 9.6 13.5 12.5

Product mix (%) Fire 2.1 1.9 2.6 2.5 2.4 Marine 2.8 2.8 2.9 2.9 2.8 Motor OD 33.3 32.4 31.0 29.5 28.3 Motor TP 26.7 27.7 31.6 32.9 33.9 Health 16.1 18.0 19.8 20.5 21.2 PA 3.4 3.8 4.2 4.4 4.5 Crop 7.9 6.8 1.5 1.5 1.4 Others 7.7 6.6 6.3 5.8 5.4 Total 100.0 100.0 100.0 100.0 100.0

Premium growth (%) Fire 16.5 9.6 50.0 10.0 10.0 Marine 1.9 20.9 14.0 12.0 10.0 Motor OD 16.6 18.0 5.0 8.0 8.0 Motor TP 17.5 26.0 25.0 18.0 16.0 Health (3.5) 35.5 20.0 18.0 16.0 PA 30.1 34.8 22.0 18.0 15.0 Crop 7.6 4.3 (75.0) 8.0 8.0 Others 14.9 2.7 5.0 5.0 5.0 Total 12.1 21.2 9.6 13.5 12.5

Combined ratio (%) 100.6 99.6 99.7 99.5 98.6 Source: Company, HDFC sec Inst Research

We build no material crop business in our estimates.

We believe with passage of Motor Vehicle Amendment Act, 2019, motor TP business growth should accelerate, hence we build in higher growth for FY20E. With rising competition and industry pricing trending downwards, we project slowing growth for OD.


Page | 108

Income Statement (Rs mn) FY18 FY19 FY20E FY21E FY22ENet earned premiums 69,117 83,753 91,767 104,192 117,228Growth (%) 12.1 21.2 9.6 13.5 12.5Claims incurred 53,147 63,081 68,351 78,595 87,907Commission (net) (2,840) 2,229 2,293 2,606 2,715Operating expenses 21,455 20,976 24,033 25,833 28,734Underwriting profit/(loss) (2,645) (2,533) (2,909) (2,841) (2,128)Investment Income 15,605 18,369 22,134 25,884 29,230Provisions (Other than taxation) 679 (405) 200 210 221Operating profits 12,281 16,241 19,025 22,833 26,882Operating profit margin (%) 17.8 19.4 20.7 21.9 22.9Interest expense 400 400 400 400 400Other income 82 143 146 149 152PBT 11,962 15,984 18,771 22,582 26,634Tax 3,345 5,492 4,880 5,871 6,925APAT 8,618 10,493 13,891 16,711 19,709APAT Growth (%) 22.8% 21.8% 32.4% 20.3% 17.9%RPAT 8,618 10,493 13,891 16,711 19,709RPAT Growth (%) 22.8% 21.8% 32.4% 20.3% 17.9%AEPS 19.0 23.1 30.5 36.7 43.3EPS Growth (%) 21.9% 21.6% 32.4% 20.3% 17.9%


Balance Sheet (Rs mn) FY18 FY19 FY20E FY21E FY22E SOURCES OF FUNDS Share Capital 4,539 4,543 4,543 4,543 4,543 Reserves 40,872 48,662 59,212 71,905 86,875 Total Shareholders Funds 45,412 53,205 63,755 76,448 91,418 Fair Value Change Account 7,339 3,384 2,950 3,212 3,507 Long-term Debt 4,850 4,850 4,850 4,850 4,850 Short-term Debt - - - - - Total Debt 4,850 4,850 4,850 4,850 4,850 Net Deferred Tax Liability (2,114) (3,013) (3,163) (3,321) (3,487) TOTAL SOURCES OF FUNDS 55,486 58,426 68,392 81,188 96,288 APPLICATION OF FUNDS Net Block 4,060 4,652 4,949 5,188 5,327 Investments 181,927 222,308 275,210 331,882 378,115 Total Non-current Assets Cash & Equivalents 5,918 4,017 4,130 4,480 4,924 Advances and Other assets 103,478 100,037 100,529 105,186 121,150 Total Current Assets 109,396 104,053 104,659 109,667 126,074 Current Liabilities 195,112 216,228 247,262 282,122 314,061 Provisions 44,784 56,359 69,163 83,426 99,167 Total Current Liabilities 239,896 272,587 316,426 365,548 413,228 Net Current Assets (130,500) (168,534) (211,767) (255,881) (287,154) TOTAL APPLICATION OF FUNDS 55,486 58,426 68,392 81,188 96,288



Page | 109

Key Ratios FY18 FY19 FY20E FY21E FY22E

PROFITABILITY (%) Claims ratio 76.9 75.3 74.5 75.4 75.0Commission ratio (3.6) 2.3 2.2 2.2 2.0Expenses ratio 27.3 22.0 23.0 21.8 21.6Combined ratio 100.6 99.6 99.7 99.5 98.6Underwriting profit (3.8) (3.0) (3.2) (2.7) (1.8)Investment yield 9.8 7.1 8.7 8.6 8.3Investment Income /NEP 21.6 22.4 23.9 24.6 24.7EBIT 17.8 19.4 20.7 21.9 22.9PAT 12.5 12.5 15.1 16.0 16.8ROE 17.8 19.2 22.5 22.8 22.6Adjusted ROE 19.5 14.6 22.4 23.4 23.1Core RoCE 17.9 19.5 22.6 22.9 22.8RoCE 16.7 18.1 21.3 21.8 21.7EFFICIENCY Tax Rate (%) 28.0 34.4 26.0 26.0 26.0Asset Turnover (x) 1.3 1.4 1.4 1.3 1.3Claims os/NEP (x) 1.28 1.23 1.22 1.24 1.23Technical reserves/NEP (x) 2.9 2.6 2.8 2.8 2.9Investment leverage (x) 3.8 4.1 4.5 4.5 4.3NWC (ex-cash) (days) (720) (752) (859) (912) (909)Debt/EBIT (x) 0.4 0.3 0.3 0.2 0.2Net D/E (0.0) 0.0 0.0 0.0 (0.0)Interest Coverage 30.7 40.6 47.5 57.1 67.2PER SHARE DATA AEPS (Rs/sh) 19.0 23.1 30.5 36.7 43.3DPS (Rs/sh) 1.5 5.0 6.1 7.4 8.7BV (Rs/sh) 112.0 122.6 145.1 173.5 206.9VALUATION P/E 63.4 52.2 39.4 32.8 27.8 P/ABV 10.7 9.8 8.3 6.9 5.8 Dividend Yield (%) 0.1 0.4 0.5 0.6 0.7




New India Assurance NEUTRAL

Challenging times to continueNIA, the largest general insurer (mkt. sh.: 14.1%) is still making underwriting losses (CoR: 123.6%). We believe that the intensely competitive environment in the motor-line is forcing adverse risk selection. We expect NIA to continue to cede market share to private insurers and expect an adj. RoE of just 8%. Accordingly, we rate NIA a NEUTRAL with TP of Rs 116 (10% discount to 0.6x Sep-21E ABV).

Largest insurer, still underwriting losses: With FY19 market share of 14.1% (15.6% in FY15), NIA is the largest Indian general insurer. NIA’s strategy to defend market share has come at a cost. CORs have remained elevated at above 110% and FY19 at 123.6%. NIA was also hit by large CAT losses of Rs 7.4bn in FY19.

Intense competition in motor forcing adverse risk selection: Higher commission payouts by private insurers for the long term and other more profitable businesses have allowed them to gain higher share. NIA is thus left underwriting sub-segments with low profitability: FY19 CORs for both OD/TP at ~124.2/109.0% were highest! We expect regulatory action in near future, to force a level playing field.

Health marginally improving: Health business comprises group health (55%), retail (30%), and government health schemes (15%). NIA undertook price corrections across its portfolio in FY17 and launched several additional features to policies in FY18. Further, over FY18 and FY19, NIA also added a team of doctors to improve underwriting abilities. This resulted in lowered claims ratios over FY17/18/19 at 115/104/100%.

Large unrealized gains: NIA investment book is Rs 598bn for FY19 and has an equity exposure of ~43%. Fair value change MTM on balance sheet for FY19 was at Rs 223bn (86.5% of equity). Given large MTM, we evaluate NIA on an adj. book value basis and derive that it is generating an adj. RoE of just 4-6%. While the company has potential to write more business its NWP/Capital is just 0.6, its ability to write the business profitably in the current environment remains tough.

Stock is cheap: We estimate an FY21E adj. RoE of just 6%, and with moderating growth we can at best assign a valuation of just 0.6x Sep-21E ABV. We further apply a discount of 10% for expected float to arrive at a TP of Rs 116.

Key risks: Continued underwriting losses, rapid loss of market share in more profitable segments, lackluster equity markets, absorption of additional 10.4% float.

Financial Summary (Rs bn) FY18 FY19 FY20E FY21E FY22EPremium (NEP) 198.3 216.1 235.0 254.0 276.1Growth (%) 12.2 9.0 8.7 8.1 8.7Underwriting profits (25.7) (52.7) (37.5) (32.4) (31.1)EBIT 26.2 6.3 19.4 28.1 36.0EBIT margin (%) 13.2 2.9 8.3 11.1 13.1Growth (%) 254.9 (75.8) 206.2 44.7 28.2PAT 21.9 6.0 14.6 21.0 26.8PAT growth (%) 155.3 (72.4) 141.3 43.8 27.8P/B (x) 0.5 0.5 0.5 0.5 0.5 P/E (x) 8.1 29.2 12.2 8.7 7.0 RoE (%) 7.2 1.9 4.5 6.2 7.4Source: Company data, HDFC sec Inst Research

INDUSTRY GENERAL INSURANCE CMP (as on 01 Oct 2019) Rs 107 Target Price Rs 116 Nifty 11,360 Sensex 38,305 KEY STOCK DATA Bloomberg NIACL IN No. of Shares (mn) 1,648 MCap (Rs bn) / ($ mn) 175/2,459 6m avg traded value (Rs mn) 13 STOCK PERFORMANCE (%) 52 Week high / low Rs 238/98 3M 6M 12M Absolute (%) (28.6) (43.8) (51.7) Relative (%) (25.2) (42.4) (56.6) SHAREHOLDING PATTERN (%) Jun-19 Promoters 85.4 FIs & Local MFs 13.5 FPIs 0.1 Public & Others 0.9 Pledged Shares - Source : BSE Madhukar Ladha [email protected] +91-22-6171-7323 Keshav Binani [email protected] +91-22-6171-7325

NEW INDIA ASSURANCE: INITIATING COVERAGE

Page | 111

Largest Insurer but still underwriting losses With a FY19 market share of 14.1% (15.6% in FY15),

NIA continues to be the largest Indian general insurer.

The company’s strategy to defend market share has come at the cost of underwriting profits.

Combined ratios have remained elevated at above 110% and ended FY19 at 123.6%.

India was hit by Kerala floods in Aug-18, followed by Titli and Gaja cyclones in Oct-18 and Nov-18, respectively.

Foreign offices were hit by typhoons in HK, Manilla and floods in the middle east and earthquakes and typhoos in Japan.

Co also suffered large losses in UK and faced adverse development of losses for CAT events of IRMA at Curacao and Aruba.

Total CAT losses in FY19 were Rs 7.4bn (Rs 6bn- international and Rs 1.4bn domestic).

Growth to moderate further lead by Mkt. Share losses.

FY19: Adversely impacted due to CAT losses in FY19


NIA is the largest insurer and has the best metrics amongst PSU insurers. Foray into foreign markets has supported growth, however due to high CAT events in FY18 & FY19, combined ratios have increased materially. We see company losing market share to pvt. players as distribution is weak and co pays lower commissions.

134

152

177

198

216

235

254

276

-

5.0

10.0

15.0

20.0

25.0

-

50

100

150

200

250

300

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Premium (Rs bn) - LHS Growth (%) - RHS

84 87 92

86

95 87 86 84

116 118 120 111

124 115 112 110

60

70

80

90

100

110

120

130

140

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E



Page | 112

Premium share : Rising share of Indian operations Growth moderation aggravated by foreign ops.


Claims ratio to improve hereon Foreign combined ratio inched up


As a result of an increase in international loss ratios, NIA has maintained a cautious outlook. Motor, fire and property is ~80% of foreign business written in FY19. Baring health, all segment witnessed increase in claims ratio in FY19. High CAT losses impacted claims ratio in FY19, however we also believe that the company’s risk selection and pricing is weak. We expect gradual recovery hereon.

78.8 80.5 81.4 83.5 85.7

21.2 19.5 18.6 16.5 14.3

-

20.0

40.0

60.0

80.0

100.0

FY15

FY16

FY17

FY18

FY19

India Foreign

24.2

15.1 19.3

15.1

10.1

11.4 9.0

2.7

(2.4)2.1

21.5

13.9 16.2 12.2 9.0

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

30.0

FY15

FY16

FY17

FY18

FY19

India Foreign Total

91 91 97

88

95

57

68 68 72

94

40

50

60

70

80

90

100

FY15

FY16

FY17

FY18

FY19

India Foreign

122 122 124

113

123

89

100 99 103

125

80 85 90 95

100 105 110 115 120 125 130

FY15

FY16

FY17

FY18

FY19

India Foreign


Page | 113

Intense Competition in Motor forcing adverse selection Long term motor policies remain an extremely sought

after business opportunity.

With significantly higher commission payouts for the more profitable business, private sector companies aggressively acquire a higher proportion of this business. NIA automatically is left underwriting lines where profitability is lower.

This is seen in the higher combined ratios for both the OD/TP (FY19) at 124.2/109.0.

The only glimmer of hope is the implementation of MV Act, 2019 which is expected to increase compliance and reduce TP losses.

We expect some regulatory action in the near term to force a level playing field for both the private and public sector companies.

Motor OD : Premium growth is challenged While loss ratios inch up


Motor OD (20% premium share) growth has decelerated significantly to 7.4/2.2% in FY18/FY19. After implementation on long term motor policies, motor OD pricing has come under significant pressure. Private players have been aggressively gaining market share due to sale of comprehensive policies and ability to give higher commissions in other forms. Significant reduction in new vehicle sales have dampened both volume and pricing in FY20E. We don’t see price improvement in the near future, hence premium growth could remain sluggish.

33 36

39 42 43

15.0 10.7 8.7 7.4

2.2

-5

10 15 20 25 30 35 40 45 50

FY15

FY16

FY17

FY18

FY19

OD Premium (Rs bn) Growth (%)

68 78 81

74

85

101

112 113 109

124

50

60

70

80

90

100

110

120

130

FY15

FY16

FY17

FY18

FY19

Claims Combined


Page | 114

Motor TP: Growth tapering off but still healthy TP: Claims ratio to improve further


Advance premium grew 185% for NIA


Motor TP (26% share) growth has remained robust (5Y CAGR: 26%) however it moderated in FY19 to 15.5%. Claims and combined ratios have improved significantly over the year. Due to long tail of claims, float stays for a long period of time hence, inv. Income is significant in Motor TP thus is immensely profitable for NIA NIA has lagged other large players in growing advance premium from the motor business.

113

87 88 84

89

135

109 109 102

109

60

70

80

90

100

110

120

130

140

FY15

FY16

FY17

FY18

FY19

Claims Combined

24 29 37 48 56

41.1

18.6

27.4 30.9

15.5

-

10

20

30

40

50

60

FY15

FY16

FY17

FY18

FY19

TP Premium (Rs bn) Growth (%)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Bajaj Chola MS ICICI Lombard

NIA

FY18 FY19


Page | 115

Motor OD Particulars FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 207.6 227.3 251.6 277.6 264.7 6.2

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 9.5 9.4 8.2 7.6 7.9 (155) Chola MS 2.9 3.3 3.7 3.6 3.9 70 HDFC ERGO 3.0 2.6 1.7 4.9 6.2 294 ICICI Lombard 10.3 11.1 11.0 11.0 12.9 77 NIA 12.8 12.6 12.7 12.1 11.7 -36 Royal Sundaram 3.9 3.8 4.3 4.5 4.6 93 SBI 1.4 1.9 1.8 2.3 2.3 97

Premium growth (%) 5Y CAGR (%) Bajaj 18.8 9.7 5.7 2.4 1.3 3.8 Chola MS (2.2) 9.3 31.0 13.3 (18.9) 5.2 HDFC ERGO 2.6 (11.4) (26.1) 175.5 30.5 19.3 ICICI Lombard (18.2) 10.3 22.8 16.6 18.0 8.8 NIA 17.0 10.1 7.0 10.8 1.7 9.3 Royal Sundaram 0.3 8.0 19.3 3.2 (2.1) 5.5 SBI 23.9 37.7 28.1 11.9 25.8 25.2

Retention rate (%) 5Y avg (%) Bajaj 94.4 93.6 93.9 94.6 94.6 94.2 Chola MS 94.7 94.7 94.6 85.0 74.4 88.7 HDFC ERGO 74.7 73.9 73.9 74.7 77.1 74.9 ICICI Lombard 65.1 74.8 75.4 85.0 85.2 77.1 NIA 94.9 94.8 94.8 94.9 94.1 94.7 Royal Sundaram 94.5 94.3 94.6 74.9 74.5 86.5 SBI 94.9 94.8 94.7 94.8 92.0 94.2 Source: GIC, Respective Companies, HDFC sec Inst Research

NIA has lost domestic market share in OD business. Premiums have declined in recent times due to intense competition for long term business.


Page | 116

Particulars FY15 FY16 FY17 FY18 FY19 Average (%) Claims ratio (%) 5Y avg (%) Bajaj 56.5 62.3 63.0 56.1 60.0 59.6 Chola MS 50.8 53.0 58.2 49.0 53.5 52.9 HDFC ERGO 73.4 71.1 73.7 68.9 78.3 73.1 ICICI Lombard 61.8 65.6 64.2 53.7 59.2 60.9 NIA 67.7 78.5 84.1 76.4 86.7 78.7 Royal Sundaram 58.6 63.3 68.2 63.7 66.1 64.0 SBI 62.9 77.4 91.0 70.3 75.9 75.5

Combined ratio (%) 5Y avg (%) Bajaj 85.2 92.6 93.4 89.0 101.1 92.3 Chola MS 84.1 92.2 93.9 81.0 95.0 89.2 HDFC ERGO 119.6 118.6 98.5 101.0 112.3 110.0 ICICI Lombard 83.7 94.2 97.2 86.5 93.2 91.0 NIA 102.3 115.3 117.8 113.9 129.9 115.8 Royal Sundaram 104.1 109.4 114.5 104.4 96.9 105.9 SBI 101.3 115.4 130.0 110.3 118.2 115.1

Pre tax ROE (%) 5Y avg (%) Bajaj 48.5 25.7 28.4 36.7 0.4 27.9 Chola MS 71.6 46.7 46.7 81.8 35.5 56.5 HDFC ERGO (27.1) (27.9) 27.4 18.6 (26.0) -7.0 ICICI Lombard 64.7 25.4 26.6 50.7 36.3 40.8 NIA 35.3 (4.0) (0.5) 10.4 (20.1) 4.2 Royal Sundaram 5.3 (11.5) (28.3) 14.9 35.3 3.1 SBI NA (42.9) (52.7) (25.4) (16.4) -34.3 Source: GIC, Respective Companies, HDFC sec Inst Research

NIAs claims and combined ratios have picked up indicating adverse risk selection. This has been happening as private insurers have been paying high commissions. Motor OD for NIA has delivered losses in FY19.


Page | 117

Motor TP Motor TP FY15 FY16 FY17 FY18 FY19 5Y CAGR (%) Industry GWP (Rs bn) 180.1 212.9 266.5 329.6 379.8 19.6

GWP Market Share (%) M.Share gain/loss (bps) Bajaj 5.2 5.4 5.6 6.2 7.3 183 Chola MS 3.8 4.3 4.7 5.0 5.2 112 HDFC ERGO 2.4 2.7 1.1 2.9 3.8 123 ICICI Lombard 7.3 7.6 6.7 6.6 7.9 32 NIA 16.5 16.5 17.1 17.5 15.4 48 Royal Sundaram 1.9 1.9 2.4 2.4 2.2 34 SBI 1.5 1.3 0.8 1.0 0.8 (66)

Premium growth (%) 5Y CAGR (%) Bajaj 14.5 18.9 15.7 25.3 37.4 25.8 Chola MS 19.4 21.3 41.0 31.2 23.4 27.0 HDFC ERGO 15.4 12.1 (39.8) 194.5 37.2 25.8 ICICI Lombard 27.7 30.0 15.9 17.5 26.0 23.3 NIA 41.1 18.6 27.4 30.9 15.5 26.4 Royal Sundaram 3.5 16.4 50.0 30.6 20.1 23.2 SBI 43.2 10.4 (8.0) 4.5 26.2 13.9

Retention rate (%) 5Y avg (%) Bajaj 94.6 94.7 95.5 94.8 94.9 94.9 Chola MS 94.7 94.8 94.7 94.8 95.0 94.8 HDFC ERGO 74.3 74.4 74.5 74.5 76.8 74.9 ICICI Lombard 94.1 94.3 94.3 94.5 94.6 94.4 NIA 90.5 91.5 95.0 95.0 94.6 93.3 Royal Sundaram 94.1 94.2 94.4 94.7 94.6 94.4 SBI 92.8 94.3 93.8 94.4 94.2 93.9

Claims ratio (%) 5Y avg (%) Bajaj 104.0 91.3 79.1 69.4 64.5 81.6 Chola MS 99.6 97.7 96.6 100.2 97.8 98.4 HDFC ERGO 117.1 104.1 117.4 106.6 86.5 106.3 ICICI Lombard 105.8 97.7 97.4 107.1 90.8 99.8 NIA 113.5 86.8 88.5 84.5 88.6 92.4 Royal Sundaram 124.1 118.0 103.3 110.7 112.3 113.7 SBI 145.5 147.9 126.8 133.6 108.6 132.5 Source: GIC, Respective Companies, HDFC sec Inst Research

Industry growth has remained robust due to following (1) adequate price increases offered by the regulator in the past (2) lower drop-offs as Motor TP is mandatory as per law. Premium growth has remained robust at 20-30% for most companies. NIA has lost market share in FY19 as higher share of long term policies is being underwritten by private insurers. Combined ratios for NIA are comparable to that for other players in the industry.


Page | 118

Motor TP FY15 FY16 FY17 FY18 FY19 Average (%) Combined ratio (%) 5Y avg (%) Bajaj 127.5 116.0 103.9 89.9 87.3 104.9 Chola MS 125.9 124.5 123.5 126.7 124.1 125.0 HDFC ERGO 147.4 131.4 141.3 120.1 99.3 127.9 ICICI Lombard 136.6 128.3 130.4 134.9 110.9 128.2 NIA 135.5 108.8 108.8 101.9 109.0 112.8 Royal Sundaram 136.6 130.9 114.4 122.3 124.3 125.7 SBI 172.6 178.6 161.4 163.0 131.3 161.4

Pre tax ROE (%) 5Y avg (%) Bajaj 49.2 84.3 123.0 161.5 137.7 111.1 Chola MS (0.4) (16.2) 2.7 (9.8) (6.5) -6.0 HDFC ERGO (38.8) (0.4) (2.6) 54.3 74.7 17.4 ICICI Lombard 25.2 48.1 45.6 34.5 84.9 47.7 NIA 33.9 83.4 81.2 92.8 79.4 74.1 Royal Sundaram (20.9) 2.1 34.4 10.6 8.0 6.8 SBI NA (99.5) (25.0) (42.1) 8.8 -39.5 Source: GIC, Respective Companies, HDFC sec Inst Research

5Y avg. ROEs are extremely strong for Bajaj and NIA. Profitability for ICICIGI has improved materially in FY19.


Page | 119

Health marginally improving Health business comprises group health (55%), retail

(30%), and government health schemes (10%).

NIA undertook price corrections across its portfolio in FY17. Additionally in FY18 the company launched several additional features to policies.

Further, over FY18 and FY19, NIA also added a team of doctors to improve underwriting abilities. This resulted in lowered combined ratios over FY17/18/19 at 115/104/100%.

Growth moderating despite gov and group business Improving ratios, long way for underwriting profits


Share of Ind. Business has declined Pricing has remained weak in gov business.


Premium growth has been in-line with industry, but the growth has been lead by group and government business where loss ratios are higher. Group insurance continues to have a lion share within the portfolio at ~55%. Group insurance continues to remain highly competitive, hence most insurers are looking to grow their retail portfolios.

35 44

53 61

69

28.3

24.8 19.6

14.2 14.6

-

10

20

30

40

50

60

70

80

FY15

FY16

FY17

FY18

FY19

Health Premium (Rs bn) Growth (%)

99

111 114

104 100

129

140 140

129 124

80

90

100

110

120

130

140

150

FY15

FY16

FY17

FY18

FY19

Claims Combined

11 14 15 17

48 51 55 53

15 9

26 12

26 27 5

17

-

20

40

60

80

100

FY15

FY16

FY17

FY18

Government Group Individual FF Individual ex FF

189 108 111 187 2,000 2,335

3,038 3,404

2,835 2,646 3,569 3,185

4,438 4,329

6,049 6,515

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY15 FY16 FY17 FY18

Government GroupIndividual FF Individual ex FF

Rs


Page | 120

Large unrealized gains NIA’s investment book is Rs 598bn for FY19, with

~43.2% equity exposure. Fair value change for FY19 was at Rs 223bn.

We evaluate NIA on an adj. book value basis and derive that it is generating in adj. RoE of just 4-6%. In years of bad equity performance, like FY19, adj. ROE slumps to 0.5%.

NEP/Net Worth: While the company has potential to write more business its NWP/Capital is just 0.57x and it has investment properties which will further boost capital under IFRS, its ability to write the business profitably in the current environment remains difficult.

NEP/NETWORTH (x) FY15 FY16 FY17 FY18 FY19 5Y Average Bajaj 2.0 1.7 1.6 1.5 1.5 1.6 Chola MS 2.3 2.2 2.3 2.3 2.2 2.3 HDFC ERGO 1.8 1.7 0.8 1.8 2.0 1.6 ICICI Lombard 1.5 1.4 1.6 1.4 1.5 1.5

NIA 0.4 0.5 0.5 0.5 0.6 0.5

Royal Sundaram 2.4 2.5 2.8 2.3 2.0 2.4 SBI 0.8 0.9 1.0 1.2 1.4 1.1 Source: Respective Companies, HDFC sec Inst Research Adj. profitability is more volatile owing to high equity exposure.

Equity returns have boosted Adj. ROEs


Change in tax laws will result in full taxation of FV reserves as and when they are booked. We have adjusted our ABV estimates for tax liability on such gains.

14,1

59

9,61

3

8,57

9 21,8

99

6,04

7

49,1

57

(16,

605)

40,8

37

16,7

32

1,74

3

(20,000)(10,000)

-10,000 20,000 30,000 40,000 50,000 60,000

FY15

FY16

FY17

FY18

FY19

PAT Adj. PATRs mn

5.6

3.6

3.2 7.

2

1.9

19.3

(6.3

)

15.0

5.5

0.5

(15.0)(10.0)(5.0)-5.0 10.0 15.0 20.0 25.0 30.0

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

25.0

FY15

FY16

FY17

FY18

FY19

ROE Adj. ROE Nifty return (%) - RHS


Page | 121

Declining share of equity FV impact on BV is considerable

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research Portfolio mix (%) Bajaj Chola MS HDFC ERGO ICICI


Debentures/Bonds 16.0 31.0 18.7 22.2 4.8 33.1 16.5 Equity Shares 8.6 1.8 3.7 9.6 43.2 5.8 2.8 Government securities 44.3 40.3 27.2 30.3 34.8 31.1 28.3 Infrastructure and housing 29.0 18.2 33.0 29.9 9.9 21.3 34.5 Others 2.0 8.8 17.4 8.1 7.4 8.7 17.9 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Company, HDFC sec Inst Research

Amongst top insurers, NIA has the highest share of equity within portfolio. Share of equity in portfolio has declined. Impact of FV change has been material on BV, hence in years where equity returns are high, BV growth has been robust.

5 5 6 6 5

58 53 52 49 43

23 27 25 30 35

12 13 12 11 10

-

20

40

60

80

100

FY15

FY16

FY17

FY18

FY19

Debentures/Bonds Equity Shares Government securities Infrastructure and housingOthers

228

191

237

230

223

18.1

(14.

7)

15.8

(2.3

)

(1.9

)

(20.0)

(15.0)

(10.0)

(5.0)

-

5.0

10.0

15.0

20.0

-

50

100

150

200

250

FY15

FY16

FY17

FY18

FY19

FV Change reserve (Rs bn) - LHS Impact on BV (%) - RHS


Page | 122

Shareholding Promoter – Government of India Central government holds 85.4% stake in the

company.

Government needs to sell 10.4% stake in the company by Nov-20 to comply with SEBI’s norm of 25% public shareholding.

At CMP this would mean a supply of Rs 18bn.

Top 10 Institutioanl Shareholders Institutional Shareholders (%) LIC 8.67 GIC Re 1.31 SBI 1.26 SBI AMC 0.34 ICICI Pru AMC 0.05 Franklin Resources 0.04 Reliance AMC 0.03 UTI AMC 0.01 Birla AMC 0.01 IDBI AMC 0.01 Source: Bloomberg, HDFC sec Inst Research

Shareholding

Shareholding as of Jun-19 Source: Company, HDFC sec Inst Research

Central Government

85.4

LIC8.7

MFs and FIs/Banks

2.3

GIC Re1.3 SBI

1.3

Public and others

0.9 FPIs0.1


Page | 123

Income Statement (Rs mn) FY18 FY19 FY20E FY21E FY22ENet earned premiums 198,304 216,117 235,018 254,030 276,147Growth (%) 12.2% 9.0% 8.7% 8.1% 8.7%Claims incurred 169,751 205,487 203,811 217,564 232,842Commission (net) 18,327 22,106 22,912 22,324 24,255Operating expenses 35,889 41,258 45,785 46,573 50,188Underwriting profit/(loss) (25,663) (52,735) (37,490) (32,432) (31,139)Investment Income 51,875 59,582 57,345 59,921 65,283Provisions (Other than taxation) 9 501 752 526 500Operating profits 26,204 6,346 19,103 26,963 33,645Operating profit margin (%) 13.2 2.9 8.1 10.6 12.2Interest expense - - - - -Other income 1,020 424 445 467 491PBT 27,224 6,770 19,548 27,430 34,135Tax 5,332 722 5,083 7,132 8,875APAT 21,892 6,048 14,466 20,298 25,260APAT Growth (%) 160.7% -72.4% 139.2% 40.3% 24.4%RPAT 21,899 6,047 14,402 20,189 25,112RPAT Growth (%) 155.3% -72.4% 138.2% 40.2% 24.4%AEPS 13.3 3.7 8.7 12.3 15.2EPS Growth (%) 147.8% -72.4% 138.2% 40.2% 24.4%


Balance Sheet (Rs mn) FY18 FY19 FY20E FY21E FY22E SOURCES OF FUNDS Share Capital 4,120 8,240 8,240 8,240 8,240 Reserves 157,478 156,970 164,436 174,902 187,920 Minority Interest 279 348 464 626 828 Total Shareholders Funds 161,877 165,558 173,140 183,768 196,989 Fair Value Change Account 229,636 223,487 222,363 222,968 223,627 Long-term Debt - - - - - Short-term Debt - - - - - Total Debt Net Deferred Tax Liability (2,071) (2,069) (2,131) (2,195) (2,260) TOTAL SOURCES OF FUNDS 389,441 386,977 393,372 404,542 418,356 APPLICATION OF FUNDS Net Block 5,934 6,052 6,234 6,421 6,613 Investments 560,239 598,006 624,187 650,055 668,803 Loans 3,142 2,808 2,892 2,979 3,068 Total Non-current Assets Cash & Equivalents 91,817 97,088 98,708 104,152 110,459 Advances and Other assets 94,138 99,841 104,857 109,018 116,935 Total Current Assets 185,955 196,929 203,565 213,170 227,393 Current Liabilities 254,939 298,902 317,997 334,383 344,936 Provisions 110,889 117,915 125,509 133,700 142,586 Total Current Liabilities 365,829 416,818 443,505 468,083 487,522 Net Current Assets (179,874) (219,889) (239,941) (254,913) (260,129) TOTAL APPLICATION OF FUNDS 389,441 386,977 393,372 404,542 418,356



Page | 124

Key Ratios FY18 FY19 FY20E FY21E FY22EPROFITABILITY (%) Claims ratio 85.6 95.1 86.7 85.6 84.3Commission ratio 8.7 9.9 9.5 8.5 8.5Expenses ratio 17.0 18.5 18.9 17.8 17.6Combined ratio 111.3 123.6 115.1 112.0 110.5Underwriting profit (12.9) (24.4) (16.0) (12.8) (11.3)Investment yield 8.2 9.2 9.2 9.5 10.0Investment Income /NEP 26.2 27.3 24.1 23.4 23.5EBIT 13.2 2.9 8.1 10.6 12.2PAT 11.0 2.8 6.2 8.1 9.2ROE 7.2 1.9 4.5 6.2 7.4Adj. ROE 5.3 0.5 4.1 6.0 7.2Core RoCE 9.6 2.5 6.3 8.7 10.5RoCE 7.2 1.9 4.5 6.1 7.3EFFICIENCY Tax Rate (%) 19.6 10.7 26.0 26.0 26.0Asset Turnover (x) 0.5 0.6 0.6 0.6 0.7Claims os/NEP (x) 1.0 1.1 1.1 1.0 1.0Technical reserves/NEP (x) 1.5 1.6 1.5 1.5 1.4Investment leverage (x) 1.4 1.5 1.6 1.6 1.6NWC (ex-cash) (days) (510) (542) (531) (520) (493)Debt/EBIT (x) NA NA NA NA NANet D/E NA NA NA NA NAInterest Coverage NA NA NA NA NAPER SHARE DATA AEPS (Rs/sh) 13.3 3.7 8.7 12.3 15.2DPS (Rs/sh) 8.5 1.5 3.5 4.9 6.1ABV (Rs/sh) 199.5 199.5 203.6 210.3 218.6VALUATION P/E 8.1 29.2 12.2 8.7 7.0 P/BV 0.5 0.5 0.5 0.5 0.5 Dividend Yield (%) 7.9 1.4 3.3 4.6 5.7



Page | 125

Visit Note Bajaj Allianz General Insurance

VISIT NOTE 01 OCT 2019

Bajaj Allianz General Insurance NOT RATED


New growth phaseWhile increasing scale has and will put pressure on combined ratios at BAGIC, the company has consistently delivered industry leading underwriting margins. We believe that margins will improve over time as scale increases. BAGIC will also benefit from changing motor regulations. We value BAGIC at Rs 350bn.

Consistently generating underwriting profits with strong reserving: Driven by industry leading claim ratios, BAGIC has consistently delivered COR of <100% as a result of superior risk selection and claims management. Additionally, BAGIC also runs a profitable crop business.

Beneficiary of change in Motor regulations: With ~60% share of motor in the mix (OD/TP 29/31%), BAGIC too will gain from change in motor regulations, owing to high CV share (40%, prone to highest claims). However, we believe high discounting of OD premium would limit profit improvement for the total motor line. BAGIC has consistently lost market share on OD side (160bps over FY14-19).

Loss making health business: While premium growth has been robust (5Y CAGR: 20%), BAGIC has gained market share by writing less/unprofitable government and group business. Share of retail business has declined from ~49% in FY16 to 38% in FY18, consequentially claim ratios have deteriorated to 82.3% in FY18 (+610bps over FY16) and further to 89.5 in FY19. BAGIC is building its hospital network by writing high government and group business, which over time will help building and attractively pricing retail business.

Distribution to drive growth: BAGIC now has banca tie up with 2 large banks (HDFC Bank and Citibank). The banca channel aids growth in and highly renewable motor and high margin non-motor business. Until this channel scales (2-3 years) we expect comm. and opex. ratios to remain elevated.

Improving risk management for investment team: BAGIC’s FY19 profitability (-15.3% YoY) was hit due to write offs (Rs 564mn) of investment in DHFL, and IL&FS. We note company has investments in other downgraded papers such as Yes Bank. Company is enhancing risk mgt. for its investment portfolio.

Valuation: We expect BAGIC’s PAT to grow at CAGR of 20.8% over FY19-22E. ROEs are expected at 16-18%. We value BAGIC at Rs 28x (DDM derived) Sep-21E to arrive at FV of 350bn (18% of SOTP). Our FV estimate for Bajaj Finserv works out to be Rs 7,770/share (refer SOTP).

Key risks: Scale up may mean higher combined ratios, additional investment losses.

Financial Summary (Rs bn) FY18 FY19 FY20E FY21E FY22EPremium (NEP) 60.6 70.1 79.6 88.5 98.3Growth (%) 22.7 15.7 13.6 11.2 11.1Underwriting profits 2.6 (0.1) (1.7) (0.7) 0.6EBIT 13.5 11.5 12.5 15.5 18.6EBIT margin (%) 22.3 16.4 15.6 17.5 18.9Growth (%) 26.3 (14.8) 8.2 24.4 20.0PAT 9.2 7.8 9.2 11.5 13.8PAT growth (%) 26.6 (15.3) 18.2 24.4 20.0RoE (%) 23.0 16.2 16.5 17.6 18.0Source: Company data, HDFC sec Inst Research


BAJAJ ALLIANZ GENERAL INSURANCE: VISIT NOTE

Page | 127

Consitently generating underwriting margins with strong reserving The company has industry best combined ratios and

has been able to successfully maintain combined ratio below 100% for several years.

Motor TP combined ratios have remained below 90% for FY18 & FY19, keeping overall combined ratios within check.

The company is ramping up its distribution by investing in banca- this has caused combined ratios to go up in FY19. As business grows from banca, we expect combined ratios to come down.

Only player consistently posting COR<100 Motor and health have 84% share


Smartest underwriter: Company has not hesitated to exit segments where pricing pressure has been intense. BAGIC has also been successful in entering new segments. Amongst top insurers, only BAGIC has been able to generate underwriting profits consistently in crop.

47 47 45 40 33 28

20 22 23 25

28 32

19 17 17 18 19 24

-

20

40

60

80

100

FY14

FY15

FY16

FY17

FY18

FY19

Fire Marine Motor OD Motor TPHealth PA Crop Others%

72 72 72 70 67 69 69 68 67

98 97 100 97

93 97 99 98 96

50

60

70

80

90

100

110

FY14

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E



Page | 128

Strong reserving As of Mar-19 (Rs bn) Prior FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 Original estimate 33.8 11.5 13.0 14.0 17.1 24.1 28.0 31.7 35.6 42.6 52.9 One year later 33.6 10.8 12.4 13.0 16.7 23.5 26.6 30.5 33.6 38.8 Two years later 33.9 10.8 12.3 13.0 16.5 23.0 26.3 30.4 32.8Three years later 34.0 10.8 12.4 13.0 16.5 22.7 26.1 30.1Four years later 34.2 10.9 12.4 13.2 16.2 22.5 25.9Five years later 34.1 10.8 12.4 13.3 16.1 22.4Six years later 34.2 10.9 12.5 13.2 16.3Seven years later 34.4 11.0 12.5 13.2Eight years later 34.6 11.0 12.5 Nine years later 34.6 11.0Ten years later 34.7Deficiency/Redundancy (%) 2.5 (4.5) (3.8) (5.3) (5.2) (7.2) (7.5) (5.1) (8.0) (8.8) Source: Company, HDFC sec Inst Research

Reserving has been optimal since FY10


BAGIC also disclosed its loss triangles for the first time along with 1QFY20 earnings. Post FY10, the company has been providing adequately.

2.5

(4.5)(3.8)

(5.3) (5.2)

(7.2) (7.5)

(5.1)

(8.0) (8.8)(10.0)

(8.0)

(6.0)

(4.0)

(2.0)

-

2.0

4.0

Prio

r FY1

0

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

Deficiency/Redundancy (%)


Page | 129

Change in Motor regulations to benefit Despite a significantly higher share of CVs within the

motor TP revenue mix (CV share at 41% vs. 23% for ICICIGI), claims and combined ratios for BAGIC are much lower compared to that of ICICIGI

Traditionally, the company has faced brand conflict in two wheelers segment (as a result of usage ‘BAJAJ’) as a result of which BAGIC did not get business from other 2W OEMs.

About 40% of overall motor premium in FY19 is from sale of new vehicles vs. ~60% being renewal.

BAGIC is empanelled by most OEMs and hence is set to benefit from implementation of long term policies.

Changes in Motor Vehicles Act- implementation of higher fines, reduction in claim filing period to six months etc. are expected to reduce claims significantly.

TP growth accelerating


Best in class COR, despite high CV share M.Share gains continue


BAGIC has a superior legal and client service team which allows it to settle claims faster and more profitably. Advance premium received on long term motor policies was at Rs 4.63bn as of Jun-19.

Price increase for motor TP has been ~6-7% for FY20.

125.7

104.0 91.3

79.1 69.4 64.5

148.7

127.5 116.0

103.9

89.9 87.3

40.0

60.0

80.0

100.0

120.0

140.0

160.0

FY14

FY15

FY16

FY17

FY18

FY19


7,09

4

8,43

3

9,75

6

12,2

26

16,8

01

22,3

22

18.9 15.7

25.3

37.4 32.9

0

5

10

15

20

25

30

35

40

-

5,000

10,000

15,000

20,000

25,000

FY14

FY15

FY16

FY17

FY18

FY19

Motor TP NEP (Rs mn) - LHS Growth (%) - RHS

5.2 5.4 5.6 6.2

7.3

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY15

FY16

FY17

FY18

FY19

Motor TP - Market Share (%)


Page | 130

Motor OD Motor OD premium growth has been sluggish at 3.8%

(CAGR FY14-19) largely due to (1) Deterioration in pricing at the industry level (due to implementation of compulsory long term policies) and (2) Loss of market share to the tune of 160bps over FY14-19.

Loss and combined ratios have increased as a result of reduced pricing.

We believe that the motor OD segment will continue to remain competitive as companies target higher floats in motor TP segment.

OD pricing will also remain under pressure as auto OEMs force pricing down.

Our checks suggest that BAGIC’s pricing in the segment has been higher than competition, however management believes customers are ready to pay higher for better quality of service and quick claims settlement.

Growth decelerating with M.Share loss


COR inching up due to pricing pressure M.Share losses continue


Brand conflict has not allowed BAGIC to tie-up with other large 2W OEMs. Overall motor business: 40% of the business in FY19 came from OEMs while 60% of the business came from renewal by existing customers. Discounting from OEMs in Motor OD has been increasing as there is OEM pressure and companies want higher long term business.

16,4

69

18,0

67

19,1

00

19,5

67

19,8

25

19,8

40

9.7

5.7

2.4 1.3

0.1 0

2

4

6

8

10

12

-

5,000

10,000

15,000

20,000

25,000

FY14

FY15

FY16

FY17

FY18

FY19

Motor OD NEP (Rs mn) - LHS Growth (%) - RHS

54.0 56.5 62.3 63.0

56.1 60.0

81.9 85.2

92.6 93.4 89.0

101.1

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

FY14

FY15

FY16

FY17

FY18

FY19


9.5 9.4

8.2

7.6 7.9

6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5

10.0

FY15

FY16

FY17

FY18

FY19

Motor OD - Market Share (%)


Page | 131

Health Growth driven by group health segment, where

profitability is low. Higher group business over time translates into higher no of individuals visiting hospitals which in turn translates into a better bargaining position for insurer with hospitals.

The company predominantly writes indemnity based products (90%+ share) as it is concerned about regulators perception on defined benefit products.

Under Ayushman Bharat, the company has won tender in two states: J&K and Mizoram.

Robust growth at 20.5% CAGR


High COR due to low share of Ind. Business at ~38%

M.share gains driven by gov/group business


3.5 3.4 3.5 3.9

5.1

-

1.0

2.0

3.0

4.0

5.0

6.0


Health - Market Share (%)

During 1QFY20 management highlighted, loss making group health business has been tightened through underwriting and pricing guidelines. BAGIC is writing lower government business. Pricing will continue to remain competitive on the group health side. FY19, Government/Group/Retail health premium share was 15/50/35%.

6,55

1

6,38

4

7,28

8

8,90

0

11,7

52

16,6

59

(2.6)

14.2

22.1

32.0

41.8

-5051015202530354045

-2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000

FY14

FY15

FY16

FY17

FY18

FY19

Health NEP (Rs mn) - LHS Growth (%) - RHS

86.6

75.5 76.2 81.4 82.3

89.5

115.6

107.4 108.8 112.5

108.8 115.2

60.0

70.0

80.0

90.0

100.0

110.0

120.0

FY14

FY15

FY16

FY17

FY18

FY19



Page | 132

Distribution BAGIC has been substantially investing in the banca

channel and has recently tied up with HDFC Bank and Citibank. The company already had a tie up with, Vijaya, PNB and Canara bank.

Company expects growth to be higher for the banca segment over the next few years.

BAGIC has also added people as specified persons and sales staff in the banca channel. On an average the company is expanding its reach by mapping branches and adding sales staff to manage branches.

Branch per staff ratio may range from 1 to 15

The company has also reworked its sales strategy from being more branch led to more vertical led. This we believe may result in higher growth over the next few years.

Distribution mix Staff costs increasing owing to investment in banca


Almost 75% of the bancassurance business is small property, health and other personal lines of business. Given the company now has tie ups with banks such as HDFC Bank and Citibank, we believe banca channel can be a premium growth and profitable engine. With company continuing to be in investment mode for its banca channels, we foresee elevated opex ratios for FY20-21E.

23 24 19 20 21

7 7 5 8 12

14 13 12 9 5

36 40 36 32 37

- -- -

23 21 16 28 31

2

-

20

40

60

80

100

FY15

FY16

FY17

FY18

FY19

Individual Agents Corporate Agents - BanksCorporate Agents - Others BrokersDirect business Others

3,07

8

3,21

8

4,81

8 5,91

9

8,30

4

7.7 7.0 9.1 8.8 10.7

-

10.0

20.0

30.0

40.0

50.0

60.0

-1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

FY15

FY16

FY17

FY18

FY19

Staff costs (Rs mn) - LHS Growth (%)- RHSAs % of NWP - RHS


Page | 133

Improving risk management for investment team BAGIC’s FY19 profitability (-15.3% YoY) was hit due to

write offs (Rs 564mn) of investments in DHFL, and IL&FS. We note company has investments in other downgraded papers such as Yes Bank. Mgt is enhancing risk management for investment portfolio.

Maturity profile of debt portfolio Maturity Market Value (Rs mn) Share (%) Upto 1 year 18,426 11.7 1-3 year 30,022 19.1 3-7 year 33,314 21.2 7-10 year 63,824 40.7 10 years + 11,389 7.3 Total 156,975 100.0 Source: Company, HDFC sec Inst Research

Downgrading of Investments Period Securities downgraded

1QFY20 DHFL IDFC YES Bank

FY19

DHFL YES Bank IL&FS IDFC Idea Cell

FY18 IDBI FY17 NIL


Investment book growth has been very robust Share of equity has remained low

Note: Yield includes FV change Source: Company, HDFC sec Inst Research


60

70

87

103

140

168

198

225

257

11.0 10.8

10.9

11.0

9.1

8.3 8.1

7.9 7.7

-

2.0

4.0

6.0

8.0

10.0

12.0

-

50

100

150

200

250

300

FY14

FY15

FY16

FY17

FY18

FY19

FY20

E

FY21

E

FY22

E

Investment book (Rs bn) - LHS Yield (%) - RHS

51.9 42.5 41.8 44.3

-3.1 7.6 8.6

23.3 11.0

15.7 16.0

21.9 37.0

32.1 29.0

2.9 6.5 2.9 2.0

-

20.0

40.0

60.0

80.0

100.0

FY16

FY17

FY18

FY19

Government securities Equity Shares Debentures/Bonds Infrastructure and housingOthers


Page | 134

Management team – BAGIC

CEO – Tapan Singhel Tapan has a master's degree in physics with a

specialization in lasers and spectroscopy from Banaras Hindu University. Tapan started his career with New India Assurance Company Limited as a direct officer in 1991. He was a member of the board of directors for Berkshire India Limited and Berkshire Hathway Services India Private Limited during 2011-12. Before becoming the MD and CEO, Tapan was the chief marketing officer at Bajaj Allianz General Insurance, heading all retail channels and territories. He has been with Bajaj Allianz since its inception in 2001.

CFO – Milind Choudhari Mr. Milind Choudhari has been the Chief Financial

Officer of Bajaj Allianz General Insurance Co. Ltd. since February 9, 2013.

Shareholding: Bajaj Finserv


Top 10 Institutional Shareholders: Bajaj Finserv Institutional Shareholders (%) Blackrock 1.01 Vanguard 0.88 ICICI Pru AMC 0.81 Axis AMC 0.75 SBI AMC 0.51 Kotak AMC 0.33 Reliance AMC 0.26 Birla AMC 0.20 Dimensional Fund Adv. 0.18 Gov. Pension fund - Japan 0.18 Source: Bloomberg, HDFC sec Inst Research

Bajaj Finserv and Allianz hold 74% and 26% stake respectively in BAGIC.

Promoters60.7

MFs and FIs/Banks

6.2

FPIs8.9

Public and others24.1


Page | 135

Valuation Bajaj Finance: While as of now, we don’t have a

formal coverage on the company, hence we value Bajaj Finance at CMP and build in higher holding company discount.

Bajaj General: We value BAGIC at 28x Sep-21E EPS and arrive at a FV of Rs 350bn (P/B: 4.6x)

Bajaj Life: With single digit VNBM and high solvency, company generates low RoEVs. Hence we value BALIC at 1.2x Sep-21EV to arrive at a FV of Rs 148bn.

Bajaj Finserv: Our SOTP derived FV works out to be Rs 7,770/share.

Sum of the parts valuation

ParameterRs mn Multiple

(x) Stake

(%)

Valuation (Rs bn) Discount

(%)

Valuation (Rs bn)

Valuation (Rs/sh)

FY20E FY21E FY22E FY20E FY21E FY20E FY21E FY20E FY21E

Bajaj Finance Stock price: Rs 4048 1.0 54.8 1,280 1,280 30 896 896 5,631 5,631

Bajaj General Insurance PAT 9,216 11,462 13,760 28.0 74.0 237 285 15 202 242 1,269 1,523

Bajaj Life insurance EV 142,706 157,921 175,408 1.2 74.0 140 156 20 112 125 705 783

Bajaj Finserv 1,658 1,721 1,210 1,263 7,605 7,937 Source: HDFC sec Inst Research

72% of Bajaj Finserv’s value comes from Bajaj Finance, while 18% of value comes from BAGIC.


Page | 136

Du-pont

(%) FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Claims 71.9 72.3 70.4 66.7 68.6 69.4 67.9 67.2 Commission 1.3 2.2 0.7 5.2 5.3 6.1 6.2 6.0 Opex 24.8 27.4 28.0 23.7 26.2 26.7 26.7 26.1 Underwriting margin 1.9 (1.9) 0.9 4.3 (0.2) (2.2) (0.8) 0.6 Investment income 18.3 20.2 20.8 18.0 16.6 17.8 18.3 18.3 EBIT 20.3 18.2 21.7 22.3 16.4 15.6 17.5 18.9 Interest/(Other Income) (0.0) (0.0) (0.2) (0.0) - - - - PBT 20.3 18.3 21.8 22.3 16.4 15.6 17.5 18.9 Tax 5.6 4.9 7.1 7.1 5.3 4.1 4.6 4.9 PAT (%) 14.7 13.4 14.7 15.2 11.1 11.6 13.0 14.0 Asset turnover (x) 2.0 1.7 1.6 1.5 1.5 1.4 1.4 1.3 Assets/Shareholders equity (x) 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 ROE (%) 28.9 22.5 23.0 23.0 16.2 16.5 17.6 18.0 Source: Company, HDFC sec Inst Research

ROEs have come under pressure as underwriting margins have deteriorated. Leverages can further enhance ROEs. BAGIC’s solvency is solid at 2.55x (as of Mar-19).


Page | 137

Assumptions Particulars FY18 FY19 FY20E FY21E FY22E Net earned premium (Rs mn) 60,586 70,098 79,602 88,489 98,344 Premium growth (%) 22.7 15.7 13.6 11.2 11.1 Product mix (%) Fire 3.0 2.7 3.3 3.5 3.6

Marine 1.5 1.5 1.5 1.5 1.6

Motor OD 32.7 28.3 25.4 24.0 22.7 Motor TP 27.7 31.8 34.8 36.9 38.5 Health 19.4 23.8 23.0 22.4 22.1 PA 2.6 2.9 2.9 2.9 2.9 Crop 8.4 4.1 4.2 4.0 3.9 Others 4.7 5.0 4.8 4.8 4.7 Total 100.0 100.0 100.0 100.0 100.0 Premium growth (%) Fire 1.8 4.5 41.8 15.0 15.0 Marine 5.2 17.5 17.9 12.0 12.0 Motor OD 1.3 0.1 2.0 5.0 5.0 Motor TP 37.4 32.9 24.0 18.0 16.0 Health 32.0 41.8 10.0 8.0 10.0 PA 25.1 27.9 16.0 10.0 10.0 Crop NA (43.7) 15.0 8.0 8.0 Others 4.6 22.1 10.0 10.0 10.0 Total 22.7 15.7 13.6 11.2 11.1 Combined Ratio (%) 92.8 97.1 99.0 97.6 96.3 Source: Company, HDFC sec Inst Research

We believe with passage of Motor Vehicle Amendment Act, 2019, motor TP business growth should accelerate. With rising competition and industry pricing trending downwards, we project slowing growth for OD.


Page | 138

Income Statement (Rs mn) FY18 FY19 FY20E FY21E FY22ENet earned premiums 60,586 70,098 79,602 88,489 98,344Growth (%) 22.7% 15.7% 13.6% 11.2% 11.1%Claims incurred 40,426 48,104 55,224 60,116 66,109Commission (net) 3,181 3,747 4,838 5,457 5,928Operating expenses 14,381 18,360 21,267 23,601 25,685Underwriting profit/(loss) 2,599 (114) (1,727) (685) 621Investment Income 10,926 12,207 14,431 16,374 18,173Provisions (Other than taxation) 10 578 250 200 200Operating profits 13,514 11,515 12,454 15,489 18,595Operating profit margin (%) 22.3 16.4 15.6 17.5 18.9Interest expense - - - - -Other income 15 - - - -PBT 13,529 11,515 12,454 15,489 18,595Tax 4,317 3,717 3,238 4,027 4,835APAT 9,212 7,799 9,216 11,462 13,760APAT Growth (%) 26.6% -15.3% 18.2% 24.4% 20.0%RPAT 9,212 7,799 9,216 11,462 13,760RPAT Growth (%) 26.6% -15.3% 18.2% 24.4% 20.0%AEPS 83.6 70.8 83.6 104.0 124.8EPS Growth (%) 26.6% -15.3% 18.2% 24.4% 20.0%


Balance Sheet (Rs mn) FY18 FY19 FY20E FY21E FY22E SOURCES OF FUNDS Share Capital 1,102 1,102 1,102 1,102 1,102 Reserves 43,286 49,755 57,638 67,441 79,209 Total Shareholders Funds 44,388 50,858 58,740 68,543 80,312 Fair Value Change Account 276 782 1,229 1,649 2,020 Long-term Debt - - - - - Short-term Debt - - - - - Total Debt (531) (1,543) (1,574) (1,605) (1,637) Net Deferred Tax Liability - - - - - TOTAL SOURCES OF FUNDS 44,132 50,097 58,395 68,586 80,694 APPLICATION OF FUNDS Net Block 3,123 3,444 3,542 3,646 3,752 Investments 139,907 167,864 198,084 225,087 256,819 Total Non-current Assets Cash & Equivalents 8,322 4,558 4,776 5,132 5,409 Advances and Other assets 17,493 19,839 22,291 25,089 27,719 Total Current Assets 25,815 24,396 27,067 30,222 33,128 Current Liabilities 88,175 100,765 116,809 127,143 139,321 Provisions 36,537 44,842 53,490 63,226 73,684 Total Current Liabilities 124,713 145,607 170,299 190,369 213,005 Net Current Assets (98,897) (121,211) (143,232) (160,147) (179,878) TOTAL APPLICATION OF FUNDS 44,132 50,097 58,395 68,586 80,694



Page | 139

Key Ratios FY18 FY19 FY20E FY21E FY22EPROFITABILITY (%) Claims ratio 66.7 68.6 69.4 67.9 67.2Commission ratio 4.7 4.8 5.5 5.6 5.5Expenses ratio 21.4 23.6 24.1 24.1 23.6Combined ratio 92.8 97.1 99.0 97.6 96.3Underwriting profit 4.3 (0.2) (2.2) (0.8) 0.6Investment yield 9.1 8.3 8.1 7.9 7.7Investment Income /NEP 18.0 16.6 17.8 18.3 18.3EBIT 22.3 16.4 15.6 17.5 18.9PAT 23.0 16.2 16.5 17.6 18.0ROE 23.0 16.2 16.5 17.6 18.0Adj. ROE 23.3 17.0 17.2 18.2 18.5Core RoCE 27.8 18.7 18.0 19.1 19.4RoCE 19.1 14.0 14.2 15.0 15.3EFFICIENCY Tax Rate (%) 31.9 32.3 26.0 26.0 26.0Asset Turnover (x) 1.5 1.5 1.4 1.4 1.3Claims os/NEP (x) 0.98 0.98 1.01 0.99 0.97Technical reserves/NEP (x) 1.6 1.6 1.7 1.7 1.7Investment leverage (x) 3.5 3.5 3.5 3.5 3.4NWC (ex-cash) (days) (643) (647) (671) (675) (682)Debt/EBIT (x) - - - - -Net D/E - - - - -Interest Coverage - - - - -PER SHARE DATA AEPS (Rs/sh) 83.6 70.8 83.6 104.0 124.8CEPS (Rs/sh) 86.6 74.7 87.9 108.4 129.3ABV (Rs/sh) 404.4 466.4 541.1 632.9 742.2



Page | 140

Company Profiles Cholamandalam MS General Insurance HDFC Ergo General Insurance Royal Sundaram General Insurance SBI General Insurance

COMPANY PROFILE 01 OCT 2019

Cholamandalam MS General Insurance NOT RATED


Large Auto Insurer Chola MS GI is a JV between Chola Financial Holdings (60%) and Mitsui Sumitomo (40%).

Small, growing and conservative: Chola MS GI is the 8th largest pvt. insurer in India with market share of 2.6% (FY19, +40bps over FY15). Premiums (NEP) have grown at a FY14-19 CAGR of 16.3% to Rs 30.5bn. CORs of near 101% FY16-18, (though up in FY19 to 104.9%) indicate that management is conservative.

Combined ratios rise in FY19: Combined ratios improved 480bps over FY14-18 to 101.3%, however owing to large loss in crop (163% combined ratio), blended combined ratio jumped to 104.9% in FY19. We believe CORs will improve materially as the company has decided exit crop.

Motor heavy product mix: Product mix has been traditionally dominated by Motor insurance (~75-80% share over FY14-19). Traditionally, portfolio was CV heavy, however company has made in-roads into the PVs, and is looking to scale the same. 2Ws have been added to the portfolio since Oct-18.

OD facing pricing pressure: In-line with other players, Chola MS GI has also cut prices on the OD segment. The company’s motor OD premium has declined 19% in FY19. We believe that a price decline led reduction in premiums has led to a 1400bps YoY increase in FY19 COR to 95%. The company has also retained only ~75% of the OD business (lowest in last 6 years). We expect OD growth to remain sluggish in the near future.

Weak investment management: Exposure to stressed groups dented profitability in FY19 (Net inv. income +1.4% YoY only!) as company wrote off 100% i.e. Rs 220mn of investment in IL&FS and additionally provided Rs 172mn i.e. 10% of remaining exposure to IL&FS (secured debt). Chola MS also has exposure to RCAP, YES Bank, DHFL, ECL, Piramal amongst other downgraded papers.

Weak solvency: Solvency at 1.55x (Mar-19) is just slightly above the 1.5x required solvency. Additional capital infusion looks imminent.

Distribution hit: FY19 also witnessed impact of exit of one of its channel partners.

Implied valuations are cheap! At CMP of Chola Fin. Holdings and Chola Inv. and Finance (after adjusting for 30% holding company discount), we observe that Chola MS GI is available at just 5.7x FY19 EPS.

Financial Summary (Rs bn) FY15 FY16 FY17 FY18 FY19Premium (NEP) 14.8 16.9 22.5 28.2 30.5Growth (%) 3.5 14.1 33.0 25.6 8.0Underwriting profits (0.9) (1.1) (1.2) (1.4) (2.3)EBIT 2.0 2.1 3.0 3.5 3.0EBIT margin (%) 13.5 12.6 13.2 12.3 9.9Growth (%) 99.9 6.2 39.4 17.4 (13.1)PAT 1.4 1.5 2.1 2.4 2.2PAT growth (%) 95.6 7.9 40.7 17.6 (9.1)RoE (%) 21.1 18.8 21.4 20.3 16.6Source: Company, HDFC sec Inst Research

Madhukar Ladha [email protected] +91-22r -6171-7323 Keshav Binani [email protected] +91-22-6171-7325

CHOLA MS GENERAL INSURANCE: COMPANY PROFILE

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Du-pont (%) FY15 FY16 FY17 FY18 FY19 Claims 74.6 72.4 72.9 72.5 76.6 Commission 2.2 2.0 0.7 1.5 0.4 Opex 29.5 32.3 31.9 30.9 30.7 Underwriting margin (6.4) (6.7) (5.5) (5.0) (7.7) Investment income (net of provisions) 19.9 19.3 18.7 17.3 17.6 EBIT 13.5 12.6 13.2 12.3 9.9 Interest - - - - - PBT 13.5 12.6 13.2 12.3 9.9 Tax 4.3 3.9 4.0 3.7 2.3 PAT (%) 9.3 8.8 9.3 8.7 7.6 Asset turnover (x) 2.3 2.2 2.3 2.3 2.0 Assets/Shareholders equity (x) 1.0 1.0 1.0 1.0 1.1 ROE (%) 21.1 18.8 21.4 20.3 16.6 Source: Company data, HDFC sec Inst Research


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Income Statement (Rs mn) FY15 FY16 FY17 FY18 FY19Net earned premiums 14,821 16,908 22,481 28,238 30,499Growth (%) 3.5% 14.1% 33.0% 25.6% 8.0%Claims incurred 11,061 12,238 16,390 20,484 23,355Commission (net) 332 340 153 423 127Operating expenses 4,377 5,466 7,179 8,738 9,365Underwriting profit/(loss) (950) (1,136) (1,241) (1,406) (2,348)Investment Income 2,956 3,267 4,211 4,893 5,377Provisions (Other than taxation) - - - - -Operating profits 2,007 2,131 2,971 3,487 3,029Operating profit margin (%) 13.5 12.6 13.2 12.3 9.9Interest expense - - - - 88Other income - - - - -PBT 2,007 2,131 2,971 3,487 2,942Tax 636 651 889 1,040 717APAT 1,371 1,479 2,081 2,447 2,225APAT Growth (%) 95.6% 7.9% 40.7% 17.6% -9.1%RPAT 1,371 1,479 2,081 2,447 2,225RPAT Growth (%) 95.6% 7.9% 40.7% 17.6% -9.1%AEPS 4.6 5.0 7.0 8.1 6.0EPS Growth (%) 95.6% 7.9% 40.7% 16.6% -26.2%


Balance Sheet (Rs mn) FY15 FY16 FY17 FY18 FY19 SOURCES OF FUNDS Share Capital 2,988 2,988 2,988 2,988 2,988 Reserves 4,202 5,682 7,763 9,973 11,546 Total Shareholders Funds 7,190 8,670 10,751 12,961 14,535 Fair Value Change Account 5 (141) 203 142 144 Long-term Debt - - - 1,000 1,000 Short-term Debt - - - - - Total Debt - - - 1,000 1,000 Net Deferred Tax Liability (211) (507) (693) (773) (1,623) TOTAL SOURCES OF FUNDS 6,984 8,021 10,261 13,330 14,056 APPLICATION OF FUNDS Net Block 617 615 691 703 687 Investments 31,646 38,607 48,919 63,627 75,961 Total Non-current Assets Cash & Equivalents 442 290 400 627 638 Advances and Other assets 3,173 4,239 7,351 11,985 12,034 Total Current Assets 3,615 4,529 7,752 12,612 12,672 Current Liabilities 19,955 23,100 31,233 43,987 52,593 Provisions 8,939 12,630 15,866 19,625 22,671 Total Current Liabilities 28,894 35,730 47,100 63,612 75,264 Net Current Assets (25,279) (31,201) (39,348) (51,000) (62,592) TOTAL APPLICATION OF FUNDS 6,984 8,021 10,262 13,330 14,056



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Key Ratios FY15 FY16 FY17 FY18 FY19

PROFITABILITY (%) Claims ratio 74.6 72.4 72.9 72.5 76.6Commission ratio 2.1 1.7 0.6 1.3 0.4Expenses ratio 27.9 26.6 27.9 27.4 27.9Combined ratio 104.6 100.6 101.4 101.2 104.9Underwriting profit (6.4) (6.7) (5.5) (5.0) (7.7)Investment yield 10.8 8.9 10.4 8.5 7.1Investment Income /NEP 19.9 19.3 18.7 17.3 17.6EBIT 13.5 12.6 13.2 12.3 9.9PAT 9.3 8.8 9.3 8.7 7.6ROE 21.1 18.8 21.4 20.3 16.6Adj. ROE 21.1 17.5 23.9 19.9 12.9Core RoCE 22.2 19.7 22.2 19.4 12.1RoCE 21.1 18.8 21.4 19.4 12.4EFFICIENCY Tax Rate (%) 31.7 30.6 29.9 30.0 28.6Asset Turnover (x) 2.3 2.2 2.3 2.3 2.0Claims os/NEP (x) 0.9 1.0 1.0 1.2 1.4Technical reserves/NEP (x) 1.5 1.8 1.7 1.9 2.1Investment leverage (x) 4.9 4.9 5.0 5.3 5.5Debt/EBIT (x) - - - 0.3 0.3Net D/E (0.1) (0.0) (0.0) 0.0 0.0Interest Coverage NA NA NA NA 29.6PER SHARE DATA AEPS (Rs/sh) 4.6 5.0 7.0 8.1 6.0ABV (Rs/sh) 24.1 28.7 36.5 43.7 49.0



HDFC ERGO General Insurance NOT RATED


Emerging Pvt. Insurer HDFC ERGO, a JV between HDFC (50.5%) and ERGO International (48.3%), is the 3rd largest pvt. general insurer in India.

HDFC ERGO’s FY19 market share is 5.1% (+130bps over FY15). Market share gain has been organic and inorganic. HDFC Ergo has acquired L&T General Insurance in FY17 and Apollo Munich (SAHI with mkt. sh. 1.3%) in FY19.

Diversified product mix: Motor OD/TP/Health/PA/Crop/Oth. at 31/22/18/10/10/9% for FY19. HDFC Ergo has been able to meaningfully gain market share in the motor business.

Trading risk against commissions: HDFC ERGO has the lowest retention ratio amongst top insurers at 50.1% (5Y avg.). Ceding higher business has allowed the company to earn high commission incomes, allowing it to consistently post negative comm. ratios.

Only player to seed motor TP business: HDFC ERGO also consistently cedes ~25% of motor TP business to reinsurers. This may be because its claims ratio (5Y avg.: 106.3%) has been higher historically.

Improving COR: COR improved 870bps over FY15 to 98.8%, led by a sharp decline in Motor TP COR (-4,800bps over FY15) to 99.3%. HDFC Ergo has posted underwriting profits in FY18 & FY19.

Market leader in PA: With a 10% share in PA, HDFC Ergo is the largest private insurer in this segment. This is also the most profitable line for HDFC Ergo. The company posted 5yr COR of ~55.3% (lowest

amongst top players). With the unbundling of PA from motor TP, pricing for PA has deteriorated significantly, posing a threat to future profitability.

Inv. provisions dent profitability: FY19 PAT declined 11.4% as company provided Rs 1.6bn against its exposure to IL&FS. Investment yield slumped to 6.5% (excl prov: 7.8%). Investment book has grown 2.9x over the last 5 years; despite equity share remaining low at 3.7%.

Weak Solvency: Solvency is just about adequate at 1.7x and the company may need capital infusion to fund growth.

Apollo Deal: HDFC ERGO bought a 50.8% stake in Apollo Munich for Rs 13.3bn. This pegs Apollo Munich’s value at Rs 26.3bn (P/B FY19: 6.0x).

Financial Summary (Rs mn) FY15 FY16 FY17 FY18 FY19Premium (NEP) 16.7 17.1 9.9 29.9 38.1 Growth (%) 5.6 2.1 -42.1 202.7 27.2Underwriting profits (1.5) (1.4) (1.0) (0.9) (0.8)EBIT 1.6 2.2 1.2 5.6 4.8 EBIT margin (%) 9.6 13.0 12.5 18.8 12.6 Growth (%) (33.8) 37.3 (44.4) 356.3 (14.3)PAT 1.0 1.5 1.1 4.1 3.7 PAT growth (%) (46.8) 44.8 (23.7) 258.7 (11.4)RoE (%) 11.0 14.6 8.9 24.9 19.6 Source: Company, HDFC sec Inst Research


HDFC ERGO: COMPANY PROFILE

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Du-pont (%) FY15 FY16 FY17 FY18 FY19 Claims 78.7 72.8 77.8 74.4 76.4 Commission (5.8) (8.8) (15.4) (9.0) (4.0) Opex 36.3 44.0 47.9 37.4 29.7 Underwriting margin (9.3) (8.1) (10.3) (2.8) (2.1) Investment income (net of provisions) 18.9 21.0 22.8 21.6 14.7 EBIT 9.6 13.0 12.5 18.8 12.6 Interest 1.2 1.2 1.1 1.3 0.8 PBT 8.4 11.8 11.3 17.4 11.8 Tax 2.2 3.0 (0.3) 3.7 2.2 PAT (%) 6.2 8.8 11.6 13.8 9.6 Asset turnover (x) 1.8 1.7 0.7 1.5 1.7 Assets/Shareholders equity (x) 1.0 1.0 1.1 1.2 1.2 ROE (%) 11.0 14.6 8.9 24.9 19.6 Source: Company, HDFC sec Inst Research


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Income Statement (Rs mn) FY15 FY16 FY17 FY18 FY19Net earned premiums 16,741 17,085 9,891 29,945 38,100Growth (%) 5.6% 2.1% -42.1% 202.7% 27.2%Claims incurred 13,179 12,442 7,698 22,267 29,092Commission (net) (968) (1,499) (1,524) (2,684) (1,526)Operating expenses 6,079 7,520 4,738 11,213 11,328Underwriting profit/(loss) (1,549) (1,378) (1,021) (850) (794)Investment Income 3,163 3,603 2,348 6,385 7,196Provisions (Other than taxation) - 8 94 (87) 1,585Operating profits 1,615 2,217 1,232 5,622 4,817Operating profit margin (%) 9.6 13.0 12.5 18.8 12.6Interest expense 209 203 118 440 380Other income 2 7 5 38 60PBT 1,408 2,020 1,120 5,220 4,497Tax 368 514 (30) 1,096 842APAT 1,040 1,506 1,150 4,124 3,655APAT Growth (%) -46.8% 44.8% -23.7% 258.7% -11.4%RPAT 1,040 1,506 1,150 4,124 3,655RPAT Growth (%) -46.8% 44.8% -23.7% 258.7% -11.4%AEPS 1.9 2.8 1.9 6.8 6.0EPS Growth (%) -47.7% 44.8% -31.5% 256.0% -11.4%


Balance Sheet (Rs mn) FY15 FY16 FY17 FY18 FY19 SOURCES OF FUNDS Share Capital 5,386 5,386 6,005 6,051 6,054 Reserves 4,610 5,313 8,844 11,560 13,770 Total Shareholders Funds 9,996 10,699 14,848 17,611 19,824 Fair Value Change Account 122 (182) 509 194 (275) Long-term Debt 0 - 3,500 3,500 3,500 Short-term Debt - - - - - Total Debt 0 - 3,500 3,500 3,500 Net Deferred Tax Liability 118 96 - 36 (518) TOTAL SOURCES OF FUNDS 10,237 10,614 18,858 21,342 22,531 APPLICATION OF FUNDS Net Block 1,497 1,345 1,488 2,095 2,135 Investments 37,667 41,131 69,323 81,588 91,040 Total Non-current Assets Cash & Equivalents 1,225 1,389 2,020 4,370 3,883 Advances and Other assets 4,908 5,048 15,005 15,492 17,713 Total Current Assets 6,133 6,437 17,025 19,863 21,597 Current Liabilities 22,794 24,132 50,703 59,340 63,752 Provisions 12,266 14,168 18,275 22,864 28,489 Total Current Liabilities 35,061 38,300 68,978 82,204 92,240 Net Current Assets (28,928) (31,863) (51,954) (62,341) (70,644) TOTAL APPLICATION OF FUNDS 10,237 10,614 18,858 21,342 22,531



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PROFITABILITY (%) Claims ratio 78.7 72.8 77.8 74.4 76.4Commission ratio (5.4) (7.9) (15.3) (7.8) (3.5)Expenses ratio 34.2 39.6 47.4 32.4 25.9Combined ratio 107.5 104.5 110.0 99.0 98.8Underwriting profit (9.3) (8.1) (10.3) (2.8) (2.1)Investment yield 9.5 8.4 5.3 8.2 7.8Investment Income /NEP 18.9 21.0 22.8 21.6 14.7EBIT 9.6 13.0 12.5 18.8 12.6PAT 6.2 8.8 11.6 13.8 9.6ROE 11.0 14.6 8.9 24.9 19.6Adj. ROE 11.8 12.5 12.7 23.7 17.8Core RoCE 15.7 18.3 9.7 26.3 21.7RoCE 12.6 16.1 8.6 22.3 17.9EFFICIENCY Tax Rate (%) 26.2 25.5 (2.7) 21.0 18.7Asset Turnover (x) 1.8 1.7 0.7 1.5 1.7Claims os/NEP (x) 0.8 0.8 2.4 1.0 0.9Investment leverage (x) 4.0 4.0 5.4 4.9 4.9NWC (ex-cash) (days) (657) (710) (1,992) (813) (714)Debt/EBIT (x) 0.0 - 2.8 0.6 0.7Net D/E (0.1) (0.1) 0.1 (0.0) (0.0)Interest Coverage 7.7 10.9 10.5 12.8 12.7PER SHARE DATA AEPS (Rs/sh) 1.9 2.8 1.9 6.8 6.0ABV (Rs/sh) 18.7 19.6 25.3 29.3 32.4




Royal Sundaram General Insurance NOT RATED

Struggling to scale Royal Sundaram GI is the general insurance arm of Sundaram group and is a subsidiary of listed company Sundaram Finance. Recent JV agreement: In Nov-18, Sundaram Finance

entered into JV agreement with Ageas Insurance (international insurance group) and sold 40% stake in the company at Rs 15.2bn. This transaction values the company at Rs 38bn (FY19 P/B: 3.3x, P/E 31.3x).

Mediocre growth, stable mkt. share: With a FY14-19 premium growth of CAGR of ~10.7%, market share has remained stable at around ~1.9%. Growth has accelerated in last 3 years with FY16-19 CAGR at 16.3% lead by traditional motor business. Company hasn’t been able to meaningfully scale other profitable lines such as health and PA.

Marginal improvement in COR but still far from making underwriting profits: COR has improved consistently YoY from FY15 but the improvement has been very marginal at 108.3% in FY19 vs. 112.3% in FY15.

Motor heavy portfolio: Motor contributes about ~80% to the mix, with OD at ~44% while TP at 36%. Premium growth has remained far superior in TP at FY14-19 CAGR of 23.2%, while market share has improved from 1.9% in FY14 to 2.2% in FY19.

Profitability supported by Motor OD: FY18/19 PAT increased 93.5/45.5% YoY led by significant decline in Motor OD COR from 114.5% in FY17 to 96.9% in FY19. This surprises us as improvement is against the trend at the industry level, where OD CORs have moved up for most insurers. Our estimates suggest ~60% of PBT

in FY19 was contributed by Motor OD. With significant deterioration in OD pricing at the industry level we foresee challenge to growth and profitability for the company.

Distribution: Despite RSGI’s banca partnerships, the channel’s contribution is a mere 2%. About 50% of business is through brokers which primarily gets motor business.

Investment book: Book growth has remained lackluster with FY14-19 CAGR of 17.9% (lowest amongst top pvt. insurers). The company also has exposure to DHFL and a few other stressed assets. It provided Rs 50mn against the same. Inv. yield (inc. prov. and FV change) slumped to 7.9% (lowest in six years). Share of equity is low at 5.8%.

Weak return ratios: Company has consistently posted ROEs <12%, largely due to elevated combined ratios.

Financial Summary (Rs bn) FY15 FY16 FY17 FY18 FY19Premium (NEP) 13.0 13.9 17.2 19.4 21.9 Growth (%) -0.9 6.6 23.8 12.8 12.7Underwriting profits (2.0) (2.0) (2.4) (2.0) (1.9)EBIT 0.3 0.4 0.7 1.4 1.9 EBIT margin (%) 2.1 2.6 3.8 7.0 8.8 Growth (%) (73.2) 33.1 83.0 108.2 41.2 PAT 0.2 0.3 0.4 0.8 1.2 PAT growth (%) (67.8) 21.3 61.4 93.5 45.5 RoE (%) 4.1 4.8 7.0 9.9 11.2 Source: Company data, HDFC sec Inst Research


ROYAL SUNDARAM GI: COMPANY PROFILE

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Du-pont(%) FY15 FY16 FY17 FY18 FY19 Claims 78.0 77.7 78.1 80.4 84.8 Commission 4.4 4.1 3.5 2.7 3.9 Opex 32.8 32.8 32.6 27.3 19.9 Underwriting margin (15.2) (14.5) (14.2) (10.4) (8.6) Investment income (net of provs) 17.3 17.1 18.0 17.5 17.4 EBIT 2.1 2.6 3.8 7.0 8.8 Interest (0.1) (0.0) 0.2 0.5 0.5 PBT 2.2 2.6 3.6 6.5 8.3 Tax 0.5 0.7 1.1 2.2 2.8 PAT (%) 1.7 1.9 2.5 4.3 5.5 Asset turnover (x) 2.4 2.5 2.6 2.1 1.9 Assets/Shareholders equity (x) 1.0 1.0 1.1 1.1 1.1 ROE (%) 4.1 4.8 7.0 9.9 11.2 Source: Company data, HDFC sec Inst Research


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Income Statement (Rs mn) FY15 FY16 FY17 FY18 FY19Net earned premiums 13,035 13,900 17,210 19,404 21,862Growth (%) -0.9% 6.6% 23.8% 12.8% 12.7%Claims incurred 10,166 10,802 13,447 15,604 18,549Commission (net) 569 564 599 521 845Operating expenses 4,281 4,556 5,606 5,307 4,340Underwriting profit/(loss) (1,982) (2,022) (2,442) (2,027) (1,872)Investment Income 2,251 2,380 3,097 3,392 3,848Provisions (Other than taxation) - - - - 50Operating profits 269 358 655 1,364 1,926Operating profit margin (%) 2.1 2.6 3.8 7.0 8.8Interest expense - - 28 108 108Other income 13 3 1 4 1PBT 282 361 628 1,260 1,820Tax 62 95 197 427 608APAT 220 267 430 833 1,212APAT Growth (%) -67.8% 21.3% 61.4% 93.5% 45.5%RPAT 220 267 430 833 1,212RPAT Growth (%) -67.8% 21.3% 61.4% 93.5% 45.5%AEPS 0.7 0.8 1.3 1.9 2.7EPS Growth (%) -67.8% 21.3% 53.6% 42.6% 45.5%


Balance Sheet (Rs mn) FY15 FY16 FY17 FY18 FY19 SOURCES OF FUNDS Share Capital 3,150 3,150 3,310 4,490 4,490 Reserves 2,315 2,582 3,152 5,755 6,967 Total Shareholders Funds 5,465 5,732 6,462 10,245 11,457 Fair Value Change Account 32 (22) 105 (8) (117) Long-term Debt - - 1,000 1,000 1,000 Short-term Debt - - - - - Total Debt - - 1,000 1,000 1,000 Net Deferred Tax Liability (193) (344) (240) (346) (290) TOTAL SOURCES OF FUNDS 5,304 5,365 7,327 10,891 12,050 APPLICATION OF FUNDS Net Block 362 327 286 281 309 Investments 24,914 27,156 33,646 42,922 50,755 Total Non-current Assets Cash & Equivalents 497 582 774 655 735 Advances and Other assets 2,114 2,031 2,311 3,509 5,713 Total Current Assets 2,611 2,613 3,085 4,165 6,448 Current Liabilities 15,005 16,286 19,421 25,300 34,050 Provisions 7,579 8,444 10,270 11,176 11,412 Total Current Liabilities 22,584 24,730 29,690 36,476 45,462 Net Current Assets (19,973) (22,117) (26,605) (32,311) (39,014) TOTAL APPLICATION OF FUNDS 5,304 5,365 7,327 10,891 12,050



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PROFITABILITY (%) Claims ratio 78.0 77.7 78.1 80.4 84.8Commission ratio 4.1 3.8 3.1 2.6 3.8Expenses ratio 30.8 30.9 29.4 26.1 19.6Combined ratio 112.9 112.5 110.7 109.1 108.3Underwriting profit (15.2) (14.5) (14.2) (10.4) (8.6)Investment yield 9.7 8.9 10.6 8.6 7.9Investment Income /NEP 17.3 17.1 18.0 17.5 17.4EBIT 2.1 2.6 3.8 7.0 8.8PAT 1.7 1.9 2.5 4.3 5.5ROE 4.1 4.8 7.0 9.9 11.2Adjusted ROE 4.6 4.1 8.5 9.0 10.5Core RoCE 3.6 4.3 7.1 11.1 12.2RoCE 4.1 4.8 6.8 9.6 10.9EFFICIENCY Tax Rate (%) 21.9 26.2 31.4 33.9 33.4Asset Turnover (x) 2.4 2.5 2.6 2.1 1.9Claims os/NEP (x) 1.0 1.0 1.0 1.1 1.3Investment leverage (x) 4.6 4.8 5.5 5.1 4.7NWC (ex-cash) (days) (573) (596) (581) (620) (664)Debt/EBIT (x) - - 1.5 0.7 0.5Net D/E (0.1) (0.1) 0.0 0.0 0.0Interest Coverage NA NA 23.0 12.7 17.9PER SHARE DATA AEPS (Rs/sh) 0.7 0.8 1.3 1.9 2.7BV (Rs/sh) 17.4 18.1 19.7 22.8 25.3



SBI General Insurance NOT RATED


Riding on SBI’s distribution prowessSBI GI is a JV between SBI (70%) and Insurance Australia Group (26%). The company is the 7th largest private insurer in India with FY19 market share of 2.8% (+90bps vs. FY15). Business growth: Premiums have grown at a robust

pace of 30.5% (5 yr CAGR) to Rs 23.8bn. Growth was supported by crop insurance. Ex-crop FY14-19 growth is 27.8%.

Distribution strength of parent, SBI: The banca channel contributed ~55-60% of GDPI in FY15, however over years its share has declined to 40% in FY19. Strong banca relationship through parent has meant lower commissions.

Evenly spread product mix: Owing to a high banca contribution in mix, SBI GI has been able to acquire non-motor business. Motor/Health/PA/Crop/Others were 39/21/20/10/10% share in the mix.

Improving profitability: COR has consistently improved YoY from 121.0% in FY15 to 95.0% in FY19; however CORs in Motor OD/TP continue to remain elevated at 118/131% in FY19. We see limited benefits through regulatory changes as TP mix in total premium is low at 13.2% vs 22% for industry. SBI GI turned profitable in FY17, and FY19 PAT is 120% higher at Rs 3.3bn.

Pain in Motor OD visible: In-line with industry, Motor OD premium (NEP) declined 10.2% in FY19 and combined ratios inched up to 118%, +800bps YoY. Profitability for OD line continues to deteriorate.

Weak investment management: Investment book has grown at a FY14-19 CAGR of 31% to Rs 63.5bn. The book has a very low equity exposure of 2.8%. SBI GI has exposure to stressed names such as IL&FS, DHFL, and YES Bank, amongst other downgraded papers. Owing to defaults and downgrades investment yield (inc. provision and FV change) has dropped to 6.8%- lowest in the last 6 years.

Stake sale: During FY19, SBI has sold 4% stake in SBI GI to PI Opportunities (2.35%) and Axis AIF (1.65%). The deal has valued the company at Rs 120bn (FY19 P/B: 6.6x, P/E: 36x). SBI GI’s FY19 ROE is 20% despite a high solvency ratio of 2.34x. Recently, SBI’s chairman has also announced that it will not be listing SBI GI in FY20E.

Financial Summary (Rs bn) FY15 FY16 FY17 FY18 FY19Premium (NEP) 9.1 12.1 14.8 18.4 23.9 Growth (%) 44.5 32.4 22.3 24.8 29.7Underwriting profits (3.1) (3.8) (1.9) 0.3 0.8 EBIT (1.1) (1.2) 1.5 4.2 4.7 EBIT margin (%) (11.6) (10.0) 10.2 22.9 19.6 Growth (%) NA NA NA 180.7 11.1 PAT (1.1) (1.2) 1.5 4.0 3.3 PAT growth (%) NA NA NA 159.2 (15.6)RoE (%) (9.5) (9.1) 10.6 25.6 19.9 Source: Company,HDFC sec Inst Research


SBI GENERAL INSURANCE: COMPANY PROFILE

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Du-pont Particulars FY15 FY16 FY17 FY18 FY19 Claims 85.8 83.0 75.0 71.5 72.0 Commission 5.7 6.0 1.3 (8.2) (0.3) Opex 29.5 30.9 33.1 36.7 23.4 Underwriting margin (21.0) (19.8) (9.4) (0.1) 4.9 Investment income (net of provisions) 22.7 21.8 23.2 21.2 16.3 EBIT 1.7 2.0 13.8 21.1 21.3 Interest/(other income) (0.1) (0.0) (0.2) (0.0) (0.0) PBT 1.8 2.0 13.9 21.2 21.3 Tax - - - 1.4 5.7 PAT (%) 1.8 2.0 13.9 19.7 15.6 Asset turnover (x) 0.8 0.9 1.0 1.2 1.4 Assets/Shareholders equity (x) 1.0 1.0 1.0 1.0 1.0 ROE (%) 1.4 1.8 14.3 23.5 22.2 Source: Company,HDFC sec Inst Research


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Income Statement (Rs mn) FY15 FY16 FY17 FY18 FY19Net earned premiums 9,113 12,069 14,764 18,419 23,884Growth (%) 44.5% 32.4% 22.3% 24.8% 29.7%Claims incurred 7,817 10,013 11,075 13,164 17,206Commission (net) 718 956 211 (1,408) (87)Operating expenses 3,703 4,937 5,399 6,343 5,976Underwriting profit/(loss) (3,125) (3,837) (1,921) 319 788Investment Income 2,067 2,635 3,428 3,927 4,030Provisions (Other than taxation) - - 4 29 131Operating profits (1,058) (1,202) 1,502 4,217 4,687Operating profit margin (%) (11.6) (10.0) 10.2 22.9 19.6Interest expense - - - - -Other income 5 1 24 7 11PBT (1,053) (1,201) 1,527 4,224 4,698Tax - - - 267 1,358APAT (1,053) (1,201) 1,527 3,957 3,340APAT Growth (%) 7.1% 14.0% -227.1% 159.2% -15.6%RPAT (1,053) (1,201) 1,527 3,957 3,340RPAT Growth (%) 7.1% 14.0% -227.1% 159.2% -15.6%AEPS 4.6 5.0 7.0 8.1 6.0EPS Growth (%) 95.6% 7.9% 40.7% 16.6% -26.2%


Balance Sheet (Rs mn) FY15 FY16 FY17 FY18 FY19 SOURCES OF FUNDS Share Capital 2,030 2,030 2,155 2,155 2,155 Reserves 6,381 5,180 8,831 12,788 16,084 Total Shareholders Funds 8,411 7,210 10,986 14,943 18,239 Fair Value Change Account 2 (40) (8) (75) (34) Long-term Debt - - - - - Short-term Debt - - - - - Total Debt - - - - - Net Deferred Tax Liability - - - (366) (422) TOTAL SOURCES OF FUNDS 8,412 7,170 10,978 14,502 17,783 APPLICATION OF FUNDS Net Block 838 531 373 562 910 Investments 26,677 33,006 43,621 52,922 63,566 Total Non-current Assets Cash & Equivalents 585 574 340 390 1,831 Advances and Other assets 1,425 2,123 3,133 5,015 7,043 Total Current Assets 2,010 2,697 3,474 5,405 8,874 Current Liabilities 9,871 13,889 19,757 28,797 38,259 Provisions 11,242 15,175 16,733 15,589 17,308 Total Current Liabilities 21,114 29,064 36,490 44,387 55,567 Net Current Assets (19,103) (26,367) (33,017) (38,982) (46,693) TOTAL APPLICATION OF FUNDS 8,412 7,170 10,978 14,502 17,783



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PROFITABILITY (%) Claims ratio 85.8 83.0 75.0 71.5 72.0Commission ratio 5.7 6.0 1.3 (8.2) (0.3)Expenses ratio 29.5 30.9 33.1 36.7 23.4Combined ratio 121.0 119.8 109.4 100.1 95.1Underwriting profit (21.0) (19.8) (9.4) (0.1) 4.9Investment yield 9.5 8.7 9.0 7.9 6.8Investment Income /NEP 22.7 21.8 23.2 21.2 16.3EBIT 1.7 2.0 13.8 21.1 21.3PAT 1.8 2.0 13.9 19.7 15.6ROE (9.5) (9.1) 10.6 25.6 19.9Adj. ROE (9.5) (9.4) 10.9 25.2 20.1Core RoCE (9.9) (9.5) 10.8 26.2 21.2RoCE (9.5) (9.1) 10.6 25.6 19.9EFFICIENCY Tax Rate (%) 0.0 0.0 0.0 6.3 28.9Asset Turnover (x) 0.8 0.9 1.0 1.2 1.4Claims os/NEP (x) 0.9 1.0 1.0 1.1 1.0Investment leverage (x) 2.4 2.5 3.0 3.4 3.8NWC (ex-cash) (days) (720) (789) (815) (825) (780)Debt/EBIT (x) NA NA NA NA NANet D/E NA NA NA NA NAInterest Coverage NA NA NA NA NAPER SHARE DATA AEPS (Rs/sh) (5.2) (5.9) 7.1 18.4 15.5ABV (Rs/sh) 65.2 65.0 71.8 71.6 84.5



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Rating Definitions BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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New India Assurance


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Disclosure: We, Madhukar Ladha, CFA & Keshav Binani, CA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. HSL has no material adverse disciplinary history as on the date of publication of this report. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest. 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initiating coverage 01oct 2019 general … insurance...initiating coverage 01oct 2019 general...

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