sector thematic 28 dec 2017 life insurance 1 · sector thematic. 28 dec 2017. life insurance 1.0 ....

SECTOR THEMATIC 28 DEC 2017

Life Insurance 1.0

HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters

Miles to go.. India’s Life Insurance sector is poised for strong growth, driven in part by the financialisation of savings post demonetisation. A relatively under-penetrated market and rising awareness offer a multi-year growth opportunity for investors in India’s Insurance sector. Insurance penetration (% of GDP) stands at 2.7% in India, compared to the global median penetration level of 3.5%. New Business Premium (NBP) has grown at a CAGR of 24.4% over FY15-17, with India being largely a savings (as opposed to protection) dominated market. We expect system NBP to grow at a CAGR of 20% over the next five years. Further, the Protection Gap remains, and offers huge growth potential. Companies with multi-channel distribution, and a focus on both bancassurance and digital, are expected to be the biggest beneficiaries. In this report, we have initiated coverage on SBI Life, ICICI Prudential Life and Max Financial Services, and are BUYers in these stocks (in order of preference). We have also attempted to demystify some nuances of the sector.

SBI Life is India’s largest private sector Life Insurance company, and enjoys a robust branch network of 24K branches of its parent SBI, of which only 50% have

been tapped, along with productive agency channels. We expect Annualised Premium Equivalent (APE) and Value of New Business (VNB) to grow at a CAGR of 28.3% and 29.5% respectively. Initiate coverage with BUY and TP of Rs 810/share.

ICICI Prudential is India’s third-largest private sector Life Insurance company. It focusses on ULIPs, and has benefitted largely from a substantial flow of investments to this instrument in recent quarters. An increasing share of Protection will also drive improvement in margins. We expect APE CAGR of 26.7% over FY17-20. VNB Margin is expected to improve 250bps to 12.8% by FY20. Our TP for ICICI PruLife is Rs 465/share.

Max Financial is the holding company of Max Life, which has a well-balanced product mix (PAR/Non-PAR at ~53:47), with a focus on longer duration products. The company benefits from exclusive bancassurance tie-ups with Axis Bank and Yes Bank. Its agency channel is also well developed. We expect APE and VNB to grow at a CAGR of 18.6% and 20.4% respectively. We value Max Financial at Rs 665/share.

Key risk: Normalisation of the income tax rate (from 14.4% currently) is a key risk. An increase in the tax rate to 25% will result in our TPs falling by 10-12%, as we expect gradual and moderate price hikes to partly compensate for the increase in tax rates.

FINANCIAL SUMMARY

(Rs bn) MCap (Rs bn)

CMP (Rs) Reco TP

(Rs) P/VNB

FY18(x) P/VNB

FY19(x) P/VNB

FY20(x) P/EV FY18(x) P/EV FY19(x) P/EV FY20(x)

SBI Life 698 697 BUY 810 35.2 26.0 19.1 3.61 3.07 2.60 ICICI Prudential 568 390 BUY 465 36.7 26.3 20.0 3.13 2.81 2.51 Max Financial 163 600 BUY 665 25.5 19.9 15.4 3.09 2.73 2.40 Source: Company, HDFC sec Inst Research

SBI Life Rs bn FY17 FY18E FY19E FY20E

APE 66.0 89.6 112.5 139.3

Growth (%) 35.3 35.7 25.6 23.7

VNB 10.4 14.3 18.1 22.5

Change (%) 48.3 37.9 26.4 24.5

EV 165.4 193.3 227.1 267.6

ROEV (%) 33.2 18.3 18.7 19.0

ICICI Prudential Life Rs bn FY17 FY18E FY19E FY20E

APE 65.0 88.3 110.2 132.1

Growth (%) 27.2 35.9 24.8 19.9

VNB 6.7 10.4 13.7 16.8

Change (%) 61.5 55.8 32.2 22.8

EV 161.8 179.0 199.2 223.0

ROEV (%) 20.6 15.4 16.6 17.3

Max Life Rs bn FY17 FY18E FY19E FY20E

APE 27.5 32.4 38.5 45.8

Growth (%) 27.1 17.9 19.0 19.0

VNB 5.0 6.1 7.3 8.7

Change (%) 28.6 22.4 19.9 19.0

EV 65.9 74.4 84.1 95.8

ROEV (%) 19.9 18.0 18.5 19.0 Source: Company, HDFC sec Inst Research Vishal Rampuria [email protected] +91-22-6171-7325

LIFE INSURANCE : SECTOR THEMATIC

Page | 2

Contents Huge Opportunities In The Insurance Sector ................................................................................................. 3 Evolution of the Indian Life Insurance industry ............................................................................................. 7

Group business dominates premium collection ............................................................................................... 7 Top seven players dominate the private sector ............................................................................................... 8 Cap on ULIP charges, commission payouts ...................................................................................................... 8 Incentives And Rebates to policyholders .......................................................................................................... 9 Lower corporate tax rate for Life Insurance cos ............................................................................................... 9

Emerging trends in the Indian Insurance industry ....................................................................................... 10 Insurance products .................................................................................................................................... 11 Demystifying Insurance .............................................................................................................................. 12

Does an Insurance company only provide Insurance coverage? ................................................................... 12 How to analyse Life Insurance companies ...................................................................................................... 12 How do you verify the assumptions? ............................................................................................................. 12 Role of Group business in profitability ........................................................................................................... 13

Embedded Value methodology .................................................................................................................. 14 How to analyse the Embedded Value assumption ......................................................................................... 15 Analysing financial statements of Life Insurance Cos. .................................................................................... 15

How to value Insurance companies ............................................................................................................ 18 Key Operational Metrics For Top Insurance Players .................................................................................... 19 New Business Premium Market Share Trend .............................................................................................. 21 Key Operational Metrics Comparison ......................................................................................................... 23 Companies

SBI Life Insurance ............................................................................................................................................ 26 ICICI Prudential Life ......................................................................................................................................... 39 Max Financial Services .................................................................................................................................... 51


Page | 3

Huge Opportunities In The Insurance Sector Life Insurance Industry Penetration (2016) Total Premium Trend

Source: Swiss Re Source : Company, HDFC sec Inst Research New Business Premium Trend New Business Premium: Individual And Group Split

Source : IRDA, HDFC sec Inst Research Source : IRDA, HDFC sec Inst Research

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

0500

1,0001,5002,0002,5003,0003,5004,0004,500

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Total Premium (Rs.Bn)Life Insurance Penetration (%) - RHS

17.0

%16

.0%

11.0

%7.

0% 7.5%

7.3%

6.0%

5.0%

4.5%

4.0%

3.0% 4.

0%3.

0%3.

0%2.

8%2.

7%2.

0%2.

0%1.

0%0.

5%0.

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5.0%

10.0%

15.0%

20.0%

Taiw

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-15%-10%-5%0%5%10%15%20%25%30%

-

500

1,000

1,500

2,000

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

8MFY

18

New Business Premium Private SectorGrowth (%) - RHS

Rs bn

620 610 554 583 777

551

450 592 578 804

973

679

-200 400 600 800

1,000 1,200 1,400 1,600 1,800 2,000

FY13

FY14

FY15

FY16

FY17

8MFY

18

Total Individual NBP Total Group NBP

Rs. bn

The Life Insurance sector has further room for growth, as the penetration level is 2.7% of GDP, as compared to 3.5% across EMs New Business Premium has grown at a CAGR of 24.4% over the last 2 years


Page | 4

Protection Margin (Shortfall) Comparison (2014) India’s Mortality Protection Gap (2004-2014)

Source : Swiss Re Source : Swiss Re Population Growth To Increase Opportunities Age Profile Of The Population

Source : Census of India, HDFC sec Inst Research Source : Census of India, HDFC sec Inst Research

548683

846

1,029

1,211

1,389

0

200

400

600

800

1,000

1,200

1,400

1,600

1971

1981

1991

2001

2011

2020

E

Mn

36.4% 33.2% 29.6% 27.5%

57.3% 59.7% 62.0% 63.0%

6.3% 7.0% 8.4% 9.5%

0%10%20%30%40%50%60%70%80%90%

100%

1991

2001

2011

2020

E

0-14 15-59 60+

92 88 8578 73

56 56

0

20

40

60

80

100

Indi

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Chin

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Thai

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Indo

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%

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3,50

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4,00

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5,00

0

5,50

0

5,60

0

7,00

0

8,00

0

7,80

0

8,00

0

8,60

0

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

$Bn

Despite strong growth in insurance penetration over the last decade, the protection gap remains very high, as India’s Life Insurance is largely a savings market An increasing population and a large working class will offer opportunities as it will need both savings and protection products


Page | 5

Share Of Financial Savings Share Of Life Insurance In Total Household Financial Savings

Source : RBI, HDFC sec Inst Research Source : RBI, HDFC sec Inst Research

Gross Flows Into Equity MFs Have Surged… So Has Individual Life Insurance Premium

Source : AMFI, HDFC sec Inst Research Source : IRDA, HDFC sec Inst Research

0%20%40%60%80%100%120%140%160%180%

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Insurance Flows (Rs Mn) YoY Change - RHS

46.4

%45

.4%

44.9

%47

.6%

42.9

%50

.4%

48.7

%51

.9%

42.9

%47

.5%

43.0

%32

.7%

34.5

%38

.1%

37.9

%43

.2%

53.6

%54

.6%

55.1

%52

.4%

57.1

%49

.6%

51.3

%48

.1%

57.1

%52

.5%

57.0

%67

.3%

65.5

%61

.9%

62.1

%56

.8%

0%10%20%30%40%50%60%70%80%90%

100%

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Household Financial savings Household Physical savings

0%

20%

40%

60%

80%

100%

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Life Insurance fund CurrencyBank deposits Provident and pension fundOthers

Demonetisation has increased the pace of financialisation of savings in recent period Savings in financial assets will increase further Gross Flows to Mutual Funds –Equity (Retail largely buy Equity from MF) has surged

-4%16%36%56%76%96%116%136%156%176%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Jan-

17

Mar

-17

May

-17

Jul-1

7

Sep-

17

Nov

-17

Gross MF Flows(Rs Mn) YoY Change - RHS


Page | 6

Market Share Analysis LIC Dominates The Industry (New Premium: FY17) LIC Dominates Group New Business Premium

Source : IRDA, HDFC sec Inst Research Source : IRDA, HDFC sec Inst Research Private Players Have Steadily Increased Market Share In Individual New Business

Private Players’ Market Share On NBP (FY17)

Source : IRDA, HDFC sec Inst Research Source : IRDA, HDFC sec Inst Research

LIC dominates in New Premium, owing to its huge lead in the Group business On the Individual (Retail) premium front, LIC has lost market share to private players over the last decade SBI Life leads the private sector with 20% market share measured in terms of New Business Premium (NBP)

LIC 72%

ICICI Prudential

5%

HDFC Standard

5%

SBI Life5%

Max Life2%

Others11%

64%

50%

43% 48% 54% 63

%

62%

62%

51%

48%

46%

36%

50%

57% 52% 46% 37

%

38%

38%

49%

52%

54%

0%10%20%30%40%50%60%70%80%90%

100%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

LIC Private Insurers

0%10%20%30%40%50%60%70%80%90%

100%

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

LIC Private Insurers

ICICI Prudential

Life16%

HDFC Standard

17%

SBI Life20%

Max Life7%

Bajaj Allianz

6%

Others34%


Page | 7

Evolution of the Indian Life Insurance industry The Indian Life Insurance industry was opened to

private sector participation in 2000. Prior to this, LIC was the only player, selling largely traditional Life Insurance policies. Currently, there are 24 private sector Life Insurance companies. However, the private sector is dominated by top seven players, who command more than 65% market share of New Business Premium (NBP). These players are backed by a strong bancassurance parent or partners. The industry witnessed de-growth of NBP after a host of changes in commissions and other guidelines by IRDA in 2010. However, it has now recovered after three years of de-growth. Total Premium (Renewal + New Business Premium) has grown at a CAGR of 9.1% over FY12-17.

Total Premium As A % Of GDP

Source: IRDA, HDFC sec Inst Research

Group business dominates premium collection

The Group business dominates the industry’s premium collection. This is largely the Fund Management business for leave encashment, gratuity and superannuation. This is very competitive, with LIC being the dominant player. It also includes Group Credit Life and Group Term Business. Though profitable, their contribution is small in the Group business. For FY17, the total New Business Premium was at Rs 1.75tn, of which Rs 0.8tn was Retail Premium, and the rest was from the Group business.

New Business Premium: Retail And Group

Source: IRDA, HDFC sec Inst Research

The Life Insurance industry has recovered from IRDA changes. Bancassurance has become the biggest channel for private players, owing to lower costs

0.0%0.5%1.0%1.5%2.0%2.5%3.0%3.5%4.0%4.5%

0500

1,0001,5002,0002,5003,0003,5004,0004,500

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Total Premium (Rs.Bn)Life Insurance Penetration (%) - RHS

620 610 554 583 777

551

450 592 578 804

973

679

-

500

1,000

1,500

2,000

FY13

FY14

FY15

FY16

FY17

8MF

Y18

Total Individual NBP Total Group NBP

Rs. bn


Page | 8

Top seven players dominate the private sector

The top seven private players accounted for more than 2/3rd of the total premium of the private sector in FY17. Their dominance has increased in the last

few years, owing to the relative strength of their brands and a wider distribution network. Their business is mainly driven by the bancassurance channel, as they have promoter banks or partners with a pan-India presence.

Private Sector Dominated By Companies Supported By Banks (Market Share On NBP) Players FY13 FY14 FY15 FY16 FY17 Bajaj Allianz 10% 9% 8% 7% 6% Birla Sunlife 6% 6% 6% 5% 5% HDFC Std Life 14% 14% 16% 16% 17% ICICI Pru Life 16% 13% 15% 17% 16% Kotak 4% 4% 4% 5% 6% Max Life 6% 8% 7% 7% 7% SBI Life 17% 17% 16% 17% 20% Others 27% 30% 28% 25% 23% Source: IRDA, HDFC sec Inst Research

Cap on ULIP charges, commission payouts

In 2010, after a series of complaints about the misselling of ULIPs, IRDA capped charges by putting a cap on reduction in yield for policyholders. Owing to this, the profitability of ULIPs is the lowest amongst individual products. This has led to ULIPs being a scale game, with a focus on low channel cost.

Cap On ULIP Charges

Annualised Premiums Paid

Maximum Reduction In Yield (Difference Between Gross And

Net Yield (% pa)) 5 4.00% 6 3.75% 7 3.50% 8 3.30% 9 3.15%

10 3.00% 11 and 12 2.75% 13 and 14 2.50%

15 and thereafter 2.25% Source: IRDA

Top 7 players contribute more than 2/3rd of the private sectors’ premium collection. Consolidation is imminent ULIPs offer the lowest margins, owing to a cap on charges


Page | 9

Cap on commission payments

To protect policyholders, IRDA has put a cap on commission payouts.

Premium Paying Terms Maximum Commission Or Remuneration In Any Form As A % Of Premium

1st Year Renewal Premiums 5 15 7.5 6 18 7.5 7 21 7.5 8 24 7.5 9 27 7.5

10 30 7.5 11 33 7.5

12 years or more 35 7.5 Source: IRDA

Incentives And Rebates to policyholders

Insurance premium qualifies for deduction under section 80C upto Rs 1.5 lakh, and is used as a tax-saving tool by policyholders. Further, Insurance receipts are exempted from taxation under Section 10 of the Income Tax Act. Both these measures make insurance attractive, and the returns comparable to other saving instruments in the market like fixed deposits, debt funds, PPF etc.

Lower corporate tax rate for Life Insurance cos

The Life Insurance sector is taxed at a lower Corporate Tax rate. Section 115B of the Income Tax Act provides that insurance income computed in accordance with section 44 read with rule 2 in the Act is taxable at the rate of 12.5% (plus the applicable surcharge and cesses).

Cap on commission has protected the policyholder and led to change in the channel strategy Insurance Receipt is tax free for the policyholder Due to tax deduction, 45-50% of individual insurance flows happen in the last 4 months of the financial year


Page | 10

Emerging trends in the Indian Insurance industry Strong improvement in Persistency Ratio: With Life

Insurance companies focussing on improving customer on-boarding with explicit disclaimers and illustrations in Insurance policies (IRDA requirement also), and pre-recorded calls to explain key risks, misselling has substantially reduced. Currently, policyholders are also well informed. This is reflected in the sharp improvement of the Persistency Ratio in all key buckets across players. This has resulted in a significant improvement in margins of Insurance companies.

Persistency Trend For 13th Month

Source: Companies, HDFC sec Inst Research Bancassurance, a big channel: Given the clampdown

on charges and commissions by IRDA in 2011, Insurance companies have leveraged the bancassurance channel, and reduced dependence on the agency channel. Most players like HDFC Life, ICICI Pru Life have substantially reduced the number of branches. This has led to the emergence of bancassurance as the key channel for private players, owing to a lower cost structure as compared to agencies. The agency channel has high fixed costs, and generally has the lowest margins as compared to other channels.

Individual Channel Mix (NBP)- FY17

Source: Companies, HDFC sec Inst Research Protection biz gets a push: The contribution of

Protection was abysmally low in the last decade. Despite strong growth in premium, the Protection Gap has remained very high (Page 3). However, with focus, scale and better life expectancy assumptions owing to improving healthcare, mortality charges are down 30-50%. This is supporting strong growth in the Protection Business. Further, surging retail loans and awareness are leading to strong demand for Credit Life Products.

Product innovation: Private sector Life Insurance companies have evolved, and launched many new products. These include products like cancer care, healthcare, combined insurance products, various riders etc, to help meet the evolving needs of customers.

Technology, the key driver: As in any industry, technology is becoming a key enabler to deliver faster and better customer service. This is also driving better productivity and lower operating costs. Digital is a focal point for most companies.

0%

20%

40%

60%

80%

100%SB

I Life

HDF

C Li

fe

ICIC

I Pru

Life

Max

Life

Birla

Sun

Li

fe

PNB

Met

Li

fe

FY15 FY16 FY17

For private players, the major distribution mode has moved from agencies to bancassurance, given lower costs. Generally, agents are exclusive to one particular Insurance company Protection business has become the key focus segment, given huge underpenetration and higher margins

34.1

%

15.5

%

23.5

%

25.0

%

84.7

%

64.7%

61.1%57.1% 61.8%

3.8%

0.8%14.8% 13.6% 9.7% 9.2%

0%

20%

40%

60%

80%

100%

SBI Life HDFC Life ICICI Pru Life

Max Life Bajaj Allianz

Individual Agents Corporate Agents- BanksCorporate Agents- Others BrokersDirect Business


Page | 11

Insurance products Savings products, except pension and annuity

products, typically offer a life cover 10 times the annual regular premium, and also provide returns on the premium invested. The savings products can be further classified based on their structure into Participating (PAR), Non-Participating (Non-PAR) and ULIP.

PAR: In participating products, the policyholder participates in the surplus of the Life Insurance pool. The investments, expenses and claims of policy holders are pooled, and the return to the policy holder is in the form of bonus declared from the surplus at the end of the year. The surplus is distributed amongst the policyholders and the company in the ratio of 90:10. The investment pattern is decided by the company in line with regulations, and typically a large part of the investment goes into Fixed Income, and the balance in other asset classes like equity and property.

Non-PAR: In this product, the customer is guaranteed a fixed rate of return on the premium paid/to be paid by him. Accordingly, the investment risk is borne by the Life Insurance Company.

ULIP: This product allows investment in an investment fund, post deduction of charges levied by the company towards mortality, policy administration, fund management, etc. In this, the policyholder chooses the asset class he wants to invest in (Fixed Income or Equity), and has the option of switching the asset class. The NAV on the portfolio is declared daily, and the portfolio composition is disclosed on a monthly basis. The investment risks and rewards on these products are borne by the policyholder.

Protection products: These products offer a plain vanilla life cover to the customer. Some products offer critical illness benefits wherein a benefit amount is paid out upon being diagnosed with a critical illness as defined in the product. Credit protection product is also common which covers the outstanding loan amount, in case of death of the borrower.

ULIP allows policyholders to choose asset class Credit Life policies covers the outstanding loan of the borrower


Page | 12

Demystifying Insurance Does an Insurance company only provide Insurance coverage? Globally, Life Insurance companies provide life

coverage, along with saving/investment plans like endowment, annuity, pension and others. In the Indian context, the Insurance industry is heavily skewed towards saving products, and has a huge protection gap. As such, Life Insurance companies do earn significantly from the investment business.

How to analyse Life Insurance companies: Life Insurance is a business with long-term products

and services, and high initial acquisition costs. Therefore, a financial statement that provides the current year’s realised income, with the entire acquisition cost charged upfront, provides an incomplete picture of value creation and profitability. The initial cost is high due to higher commission payouts, marketing spend along with reserve provisioning in the year of policy sold. Further, in periods of high growth, the acquisition cost will be higher, and so will the strain on the business resulting in poor reported profitability in the financial statement.

Profitability can be measured and understood only if the entire life cycle is considered. This is Value In Force (VIF), and is reported by companies. Key assumptions for estimating VIF include persistency, mortality and maintenance costs (post overrun), across products, channels. These are not disclosed by companies.

Similarly, the profitability of a New Business underwritten is measured by the expected value realisable from the newly underwritten policies. This is called Value of New Business (VNB) which, like VIF,

is for the new business during the period. It is based on assumptions of persistency, mortality and cost structure. The profitability parameter is called Value of New Business (VNB) Margin which is Value of New Business divided by APE (Regular Premium +10% of Single Premium). The margin reflects the profitability to be generated over the expected policy period measured in terms of annual premium. The margin is a function of the product mix, tenure, channel mix, persistency, mortality etc. While charges for ULIPs are capped by IRDA, this does not apply for other products, where charges don’t have many restrictions. ULIPs have the lowest margin, while Protection products the highest, as the latter has higher risk and more solvency requirement.

Overview Of The VNB Margin (On APE Basis)

ULIP PAR Non-PAR Protection Group Fund Mgt

2-10% 12-20% 20-30% 50-100% 0.5-2% Source: Industry Experts, HDFC sec Inst Research APE=Regular Premium + 10% of Single Premium

The Persistency Ratio is very important. As highlighted, Life Insurance companies incur huge acquisition costs, owing to marketing and commission payouts, and then earn over the policy period too. The higher the number of years the policy continues, the higher the profitability.

How do you verify the assumptions? Multiple assumptions go in calculating VIF and VNB,

and these assumptions aren’t disclosed by the Life Insurance companies. Owing to lack of disclosure along with multiple assumptions in calculations, it is important to understand from the company the years of actual experience leading to assumptions.

New Business Premium and margins post the overrun are important parameters to track Both accounting and actuarial profits will converge over the life of the policy(s). However, it is difficult to reconcile them Group Fund business has low profitability


Page | 13

Role of Group business in profitability Group business constitutes 56% of the New Business

premium. However, these are largely fund management mandates for leave encashment, gratuity, superannuation, which are very competitive. Group Fund business faces strong competition from LIC. However, it acts as an entry into corporate channels for cross-selling opportunities. The segment also includes Group Credit Insurance and Group Term Plans, which are profitable.

Solvency: The solvency requirement is driven by the

IRDA requirement of 150%. Solvency ratio is Available Solvency Margin divided by Required Solvency Margin.

Available solvency margin includes networth and surplus lying in the PAR pool while Required Solvency is capital requirement based on the policies underwritten. Protection policies have the highest required solvency margin, while ULIPs the least.

Most Life Insurance companies are adequately capitalized for growth and may not need capital for growth.


Page | 14

Embedded Value methodology Embedded Value (EV) is a measure of the value of the

Life Insurance company. This is an important metric, which reflects the expected profitability from the current underwritten policies plus current net worth. It is calculated and certified by the appointed actuary of the Life Insurance Company. Calculation of the Embedded Value has evolved, with players moving towards the Market Consistent Embedded Value (MCEV) approach, as compared to the earlier approach of traditional EV. MCEV has standardised the approach to calculate EV leading to less judgment in the approach. The key difference is that in the traditional EV approach, allowance for risk is made through an increase in the risk discount rate used to value the shareholder’s future cash flows. In the MCEV framework, explicit separate allowances are made for the risk involved. The yearly discount rate used is generally taken from a zero-coupon bond yield. Also, investment return is assumed to be the reference rate.

MCEV = Net worth + VIF,

Where VIF = PVFP – TVFOG – FCRC – CNHR

Shareholders’ adjusted net worth: This refers to the market value of assets attributable to shareholders. The shareholder’s fund is adjusted for any mark-to-market gain or loss after adjusting for tax.

Value In-force represents the discounted value after-tax of shareholders’ attributable cash flows expected from the business underwritten on the valuation date. This is after adjusting for non-hedgeable risk, frictional costs of required capital and the time value of financial options and guarantees. As highlighted

earlier, under MCEV framework, deduction of risk is made separately.

Present value of future profits (PVFP) refers to the discounted projected future after-tax shareholders’ attributable cash-flows, which are expected to arise from the in-force business. The cash flows have been projected on a deterministic basis, using the company’s best estimated view of future persistency, mortality and expenses. Future investment returns and the risk discount rate have been set equal to the returns from the risk-free (government bond) yield curve at the closing balance sheet date. The asset mix and expected rate of return are not considered, unlike the traditional EV approach.

Reference Rates Used As On 31-March-17 Maturity 1 5 10 20 30 Annualised Spot Rate 6.36% 6.78% 7.21% 8.14% 7.26% Source: SBI Life EV report

Time Value of Financial Options and Guarantees (TVFOG): Allowance is made for the asymmetric impact on shareholder value, owing to any financial options and guarantees provided in the underwritten policies above the intrinsic value already allowed for in the calculation of the PVFP.

Frictional costs of required capital (FCRC) represent adjustment for the cost of capital required to be maintained to meet solvency requirements. Cost of capital is typically reflected as a deduction from the PVFP to reflect the fact that assets backing the required capital are held within an insurance company rather than directly and, therefore, cannot be distributed to shareholders immediately. These costs largely arise from investing in assets via an insurance company, such as additional taxation, investment mgt expenses or the fact that investors do not have direct control over their capital.

Under the MCEV approach, PVFP is discounted on reference rates, while risk is adjusted through TVFOG and CNHR


Page | 15

Cost of non-hedgeable risk (CNHR) is designed to capture the allowance for risk (Financial and Non-Financial) that is not explicitly made in the PVFP or TVFOG and ensures that the MCEV is focused on the mean value of the shareholder interest in the distributable earnings. Generally, non-financial risks such as mortality, longevity, morbidity, persistency, expenses, operational and tax risks are regarded as non-hedgeable. By comparison, the majority of financial risks are generally considered to be hedgeable. However, there are still some financial risks that fall under the banner of non-hedgeable. The CNHR has been derived using a cost of capital approach, and is calculated as the discounted value of an annual charge applied to projected risk-bearing capital.

EV As At FY17-end For Major Life Insurance Players

Rs bn SBI Life HDFC Life

ICICI Pru Max

EV (A+B) 165.4 123.9 161.9 65.9 Adjusted Networth (A) 70.1 41.4 67.6 24.0 VIF (B) (i-ii-iii-iv) 95.4 83.3 94.3 41.9 PVFP (i) 104.5 88.6 99.7 48.6 FCoC (ii) 3.4 0.9 1.9 0.9 TVFOG (iii) 0.6 0.3 0.5 0.2 CRNHR (iv) 5.1 4.9 3.1 5.7 Source: Companies

How to analyse the Embedded Value assumption

In view of the lack of disclosures and multiple assumptions to calculate the Value in Force (VIF), it becomes challenging to evaluate the Embedded Value reported by Life Insurance companies. One need to look into the variability of the assumption change and to what level persistency and mortality and expenses experience has been considered in the calculation of the VIF. Sensitivity analysis reported is also important to analyse the EV and VNB.

Analysing financial statements of Life Insurance Cos.

As explained, Life Insurance companies incur acquisition costs, and also need to provide for reserves for the newly under-written policies in the year of acquisition, resulting in business strain. Further, the policyholder liability provisioning is more prudent (read conservative), compared to liability estimated in calculating EV. Accounting profits emerge later than Embedded value, but equate over the lifetime. Therefore, a financial statement is difficult to analyse, and doesn’t help much. However, one should look at the cost trends/ratios, commission ratio, asset mix between equity and debt, etc.

It’s important to analyse different component of Embedded Value


Page | 16

EV And VNB Sensitivity Of Major Players For FY17

Sensitivity Parameters SBI Life HDFC Life ICICI Pru Life Max Life

% chg in VNB % chg in EV % chg in VNB % chg in EV % chg in VNB % chg in EV % chg in VNB % chg in EV Reference rate up 100 bps 3.6 -6.2 0.4 (1.9) -5.2 -2 6% -2% Reference rate down 100 bps -4.9 6.6 (1.4) 1.9 5.5 2.1 -8% 2% Lapse/Surrender rate up 10 % -7.5 -1.1 (5.8) (1.8) -10.6 -1.1 -6% -2% Lapse/Surrender rate down 10 % 7.2 1.1 6.2 1.9 10.9 1.2 6% 2% Maintenance expenses up 10 % -2.9 -0.7 (2.2) (0.8) -5.5 -1.1 -5% -1% Maintenance expenses down 10 % 2.6 0.7 2.2 0.8 5.4 1.1 5% 1% Mortality up 5 % -3.9 -1.1 (0.9) (0.7) NA NA NA NA Mortality down 5 % 3.7 1.1 0.9 0.7 NA NA NA NA Mortality up 10 % NA NA NA NA -6.1 -0.8 -3% -1% Mortality down 10 % NA NA NA NA 6.1 0.8 4% 1% Tax Rate increased to 25%/28.84%* NA NA (13.0) (6.9) -22% -11% -10% -7% Tax Rate increased to 34.6% -36.5 -19.1 (24.8) (13.2) -5.2 -2 -20% -13%

Source: Companies, * For ICICI Prudential Life Reduction in the interest rate curve leads to an increase in the value of assets (Shareholders’ investment in bonds). However, the impact on new business value depends on the product mix. E.g.: For the Protection business, earnings will not change materially, but high discounting rate will lead to lower discounted value. Similarly, for PAR products, margin will increase as earnings increases on higher rate, though negated by a higher discounting rate.


Page | 17

Movement In MCEV Particulars Explanation Opening EV This reflects the previous year’s closing EV Unwinding/Expected return on existing business

This reflects the rollover or investment return on the opening EV. This is rolled forward at the reference rate, along with the expected return based on the asset mix

Value of New Business This represents the value from the new business underwritten in the reporting period Assumption Change This represents the impact of change in the operating assumption on the EV Operating variance Variance in the performance of mortality-related claims, persistency, expenses and other operating

parameters compared to the estimates at the start of the year Investment variances and change in economic assumptions

This reflects the impact owing to the actual investment return being different from the expected returns, and the impact from the change in the yield curve at the end of the period, as compared to the yield curve at the start of the period.

Movement Of Embedded Value For FY17 (Rs Bn) SBI Life HDFC Life ICICI Pru Max Life Opening EV 125.5 102.3 139.4 56.2 Value of New Business 10.4 9.1 6.7 5.0 Unwinding 10.9 9.4 12.2 5.3 Operating variance 1.7 2.3 4.1 0.9 Assumption change 5.9 0.7 Investment variance/Economic Assumption Change 12.8 2.5 5.8 1.7 Capital infusion / (dividend, other payouts) (1.8) (2.4) (6.3) (3.2) Closing EV 165.4 123.9 161.9 65.9 ROEV (%) 33.2 21 16 17 Source: Companies

Assumptions for EV are annually reviewed with experience, compared to the assumptions. Therefore, change in operating variance is an important indicator to understand whether assumptions were aggressive/conservative


Page | 18

How to value Insurance companies Given the constraints in the financials and long-term nature of Insurance products, Insurance companies are not valued by the typical valuation metrics like P/E, P/B or EV/Sales. Instead, Insurance companies are valued on the Embedded Value multiple.

Embedded Value (EV) is a globally-accepted measure of the value of a Life Insurance company. EV is computed as the sum of the adjusted net worth and the discounted value of profits from in-force policies (VIF). The latter is calculated with a set of economic and operational assumptions. A deduction for the effect of holding the minimum statutory solvency margin, costs of guarantee and unhedgeable risk are usually made. Mostly, companies are assigned a multiple on the Embedded Value to capture growth and profitability. The multiple will vary, based on the contribution from the New Business value and growth rate. Embedded value profits emerge earlier than accounting profits, but equate over the lifetime.

Equity Value = EV (Net worth + VIF)* Multiple

Appraisal value refers to the value of an Insurance company. This is a summation of the present value of the existing business, i.e. the business written in earlier years (called Embedded Value), and future value creation i.e. measured in terms of the present value of profits expected to emerge from any new business (called New Business Profit). Future Business Value can be attributed using a discounted cashflows or a multiple can be assigned depending on the growth, quality of earnings etc. We prefer the Appraisal Value method, as the future business value is captured separately.

Equity Value = EV (Net worth + VIF) + Future Business Value

Appraisal value method is better, as separate valuation is assigned on the growth potential


Page | 19

Key Operational Metrics For Top Insurance PlayersNew Business Premium Trend For Top Players Mix of Premium: Group And Non-Group Mix

Source : Companies, HDFC sec Inst Research Source : Companies, HDFC sec Inst Research Product Mix Comparison (APE) For FY17 VNB Margin Comparison

Source : Companies, HDFC sec Inst Research Source : Companies, HDFC sec Inst Research

6.3%

7.8%

3.9%

4.0%70.9%

46.9%

84.1%

31.0%

0%

20%

40%

60%

80%

100%

SBI Life HDFC Life ICICI Pru Life Max Life

PAR Non-PAR ProtectionNon-PAR Others Fund Based

Group business largely represents the Fund business and Group term plans, which offers low margins. However, for HDFC Life, 39% of it is Group business is protection, mainly Credit Life HDFC Life has the best margins with a superior product mix profile, with highest contribution of the protection amongst all Insurance companies. This is largely driven by Group Credit Life policies

0%10%20%30%40%50%60%70%80%90%

100%

ICICI Pru HDFC Std Life

SBI Life Max Life Bajaj

Individual Premium Group Premium

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

FY15 FY16 FY17 1HFY18

SBI Life HDFC Std Life ICICI Pru Life

Max Life Bajaj

-

20

40

60

80

100

120

SBI L

ife

HDF

C St

d Li

fe

ICIC

I Pru

Li

fe

Max

Life

Baja

j

Kota

k M

ahin

dra

Life

FY13 FY14 FY15 FY16 FY17

Rs bn


Page | 20

Individual Channel Mix Comparison Opex As A % Of Total Premium


Major Bancassurance Channel Partners And Reach Agency Size Comparison

SBI Life HDFC Life ICICI

Prudential Life

Max Life

State Bank of India HDFC Bank ICICI Bank Axis Bank

~24,017 ~4715 ~4850 ~3304

Saraswat Co-operative Bank

Standard Chartered Bank

Yes Bank

~101 ~1000

RBL

Lakshmi Vilas Bank

~239 ~481


34.1%15.5% 23.5% 25.0%

84.7%

64.7%

61.1%57.1% 61.8%

3.8%

0.8%14.8% 13.6% 9.7% 9.2%

0%

20%

40%

60%

80%

100%

SBI Life HDFC Life ICICI Pru Life

Max Life Bajaj Allianz


10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

24.0%

26.0%

FY15 FY16 FY17

ICICI Pru Life HDFC Std Life Max Life SBI Life

SBI lags in the direct channel business SBI scores on the cost and distribution footprint HDFC Life has tie-ups with 125 bancassurance partners

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

FY15 FY16 FY17

SBI Life HDFC Life ICICI Prudential Max Life


Page | 21

New Business Premium Market Share Trend

NBP Growth Among Private Players

Growth Individual NBP Group NBP Total NBP

FY14 FY15 FY16 FY17 8MFY18 FY14 FY15 FY16 FY17 8MFY18 FY14 FY15 FY16 FY17 8MFY18 SBI Life 15% 17% 33% 30% 43.4% -22% -4% 20% 73% -54.2% -2% 9% 29% 43% -0.9% HDFC Life -22% 30% 10% 15% 39.2% 30% 47% 30% 59% 22.2% -9% 36% 18% 34% 29.8% Max Life 20% 14% 11% 27% 18.1% 7% 7% 28% 33% -6.8% 19% 14% 12% 27% 15.1% ICICI Pru Life 0% 40% 11% 30% 33.8% -76% 56% 176% -37% -14.0% -22% 42% 27% 16% 27.5% Bajaj Allianz -23% -10% -16% 20% 52.5% -3% 16% 21% 12% 38.3% -13% 4% 7% 14% 42.4% TATA AIA -19% -13% 161% 71% 44.2% -27% -53% 63% -37% 33.3% -23% -28% 137% 53% 43.2% Birla SunLife -16% -13% -7% 35% 26.9% 4% 44% 28% 4% -13.4% -8% 14% 14% 14% -2.4% Kotak Mahindra Life -7% 17% 42% 35% 45.9% 26% 26% 45% 23% -8.2% 7% 21% 43% 29% 13.4% PNB Met Life -21% 24% 29% 12% 25.7% -15% 17% -27% 49% 38.7% -20% 23% 21% 15% 27.2% India First Life -36% 5% 21% 72% 86.7% 46% -10% -8% 2% -59.6% 28% -8% -4% 13% -35.4% Total Private NBP (Rs bn) 191.8 225.9 254.9 320.9 216.0 103.3 122.5 154.9 185.4 110.5 295.1 348.4 409.8 506.3 326.5 YoY Growth -5.6% 17.8% 12.9% 25.9% 33.5% -1.0% 18.6% 26.4% 19.7% -8.2% -4.1% 18.1% 17.6% 23.5% 15.7% Source: IRDA, HDFC sec Inst Research

NBP Market Share Among Private Players

Growth Individual NBP Group NBP Total NBP

FY13 FY14 FY15 FY16 FY17 8MFY18 FY13 FY14 FY15 FY16 FY17 8MFY18 FY13 FY14 FY15 FY16 FY17 8MFY18 SBI Life 13.8% 16.8% 16.6% 19.5% 20.2% 21.6% 22.8% 17.9% 14.5% 13.7% 19.8% 11.3% 16.9% 17.2% 15.9% 17.3% 20.0% 18.1% HDFC Life 16.2% 13.3% 14.7% 14.3% 13.1% 13.5% 10.9% 14.4% 17.8% 18.3% 24.3% 28.7% 14.4% 13.7% 15.8% 15.8% 17.2% 18.6% Max Life 8.4% 10.8% 10.5% 10.3% 10.3% 9.0% 1.8% 1.9% 1.7% 1.7% 1.9% 1.9% 6.2% 7.7% 7.4% 7.0% 7.2% 6.6% ICICI Pru Life 16.8% 17.9% 21.4% 21.0% 21.7% 24.1% 13.3% 3.2% 4.2% 9.1% 4.8% 4.6% 15.6% 12.7% 15.3% 16.5% 15.5% 17.5% Bajaj Allianz 7.5% 6.1% 4.7% 3.5% 3.3% 3.8% 14.0% 13.7% 13.4% 12.9% 12.0% 16.3% 9.7% 8.8% 7.8% 7.0% 6.5% 8.0% TATA AIA 1.6% 1.4% 1.0% 2.4% 3.3% 3.1% 2.2% 1.6% 0.6% 0.8% 0.4% 0.6% 1.8% 1.5% 0.9% 1.8% 2.2% 2.2% Birla SunLife 5.2% 4.6% 3.4% 2.8% 3.0% 2.4% 7.6% 7.9% 9.6% 9.7% 8.5% 8.6% 6.0% 5.7% 5.6% 5.4% 5.0% 4.5% Kotak Mahindra Life 3.4% 3.4% 3.3% 4.2% 4.5% 3.9% 4.8% 6.1% 6.5% 7.4% 7.6% 7.1% 3.9% 4.3% 4.4% 5.4% 5.6% 5.0% PNB Met Life 3.6% 3.0% 3.2% 3.6% 3.2% 3.1% 1.0% 0.9% 0.9% 0.5% 0.6% 0.8% 2.7% 2.3% 2.4% 2.4% 2.3% 2.3% India First Life 1.4% 1.0% 0.9% 0.9% 1.3% 1.5% 9.8% 14.4% 10.9% 8.0% 6.8% 3.3% 4.3% 5.7% 4.4% 3.6% 3.3% 2.1% Total Private NBP (Rs bn) 203.2 191.8 225.9 254.9 320.9 216.0 104.4 103.3 122.5 154.9 185.4 110.5 307.7 295.1 348.4 409.8 506.3 326.5 Growth -5.6% 17.8% 12.9% 25.9% 33.5% -1.0% 18.6% 26.4% 19.7% 8.9% -4.1% 18.1% 17.6% 23.5% 15.7% Source: IRDA, HDFC Securities

SBI Life’s individual business growth on a fast trajectory

Group Business has declined due to strong competition in the Fund business segment


Page | 22

APE Growth Among Private Players

Growth Individual APE Group APE Total APE

FY13 FY14 FY15 FY16 FY17 8MFY18 FY13 FY14 FY15 FY16 FY17 8MFY18 FY13 FY14 FY15 FY16 FY17 8MFY18 SBI Life 13% 18% 11% 37% 39% 46.1% -5% -19% 9% 40% 10% -42.3% 10% 11% 11% 37% 35% 35.2% HDFC Life 15% -24% 25% 12% 9% 40.9% -69% 30% 47% 30% 59% 22.5% 5% -22% 26% 14% 13% 38.6% Max Life 0% 17% 10% 8% 25% 18.6% -38% 22% -37% 45% 84% -68.7% -2% 17% 9% 9% 27% 14.3% ICICI Pru Life 17% -2% 41% 8% 29% 32.3% -39% -91% -33% 158% -37% -15.3% -3% -21% 39% 10% 27% 31.5% Bajaj Allianz -6% -19% -23% -7% 41% 54.7% 36% -18% 21% -2% 36% -69.8% 7% -18% -5% -5% 38% -13.4% TATA AIA -51% -19% -4% 159% 73% 44.5% -11% -21% -38% 93% -34% 33.1% -43% -20% -14% 145% 55% 43.5% Birla SunLife -12% -19% -12% -8% 35% 24.0% 16% 3% 45% 28% 4% -85.8% -2% -9% 16% 14% 13% -56.7% Kotak Mahindra Life -3% 1% 33% 52% 28% 39.2% 41% 12% 32% 55% 25% -83.0% 12% 6% 32% 54% 27% -23.5% PNB Met Life 12% 3% 23% 29% 11% 23.7% -61% -48% 83% -52% 27% -73.5% -13% -5% 29% 19% 12% 16.6% India First Life 22% -37% 5% 38% 82% 85.5% -75% 6% -10% -8% 2% -59.7% -50% -21% -2% 17% 53% 35.6% Total Private APE (Rs bn) 178.5 172.4 199.9 227.1 286.9 193.0 49.3 44.1 50.4 58.3 61.2 14.6 227.8 216.5 250.4 285.3 348.2 207.6 YoY Growth -3.4% 16.0% 13.6% 26.4% 35.1% -10.5% 14.3% 15.6% 5.0% -61.5% -4.9% 15.6% 14.0% 22.0% 14.9% Source: IRDA, HDFC sec Inst Research

APE Market Share Among Private Players

Growth Individual APE Group APE Total APE

FY13 FY14 FY15 FY16 FY17 8MFY18 FY13 FY14 FY15 FY16 FY17 8MFY18 FY13 FY14 FY15 FY16 FY17 8MFY18 SBI Life 13.4% 16.3% 15.6% 18.8% 20.7% 22.3% 9.9% 8.9% 8.5% 10.3% 10.9% 11.5% 12.6% 14.8% 14.2% 17.1% 19.0% 20.8% HDFC Life 17.5% 13.8% 14.8% 14.7% 12.7% 12.9% 2.3% 3.4% 4.3% 4.9% 7.3% 12.1% 14.2% 11.6% 12.7% 12.7% 11.7% 12.8% Max Life 8.5% 10.3% 9.8% 9.3% 9.2% 7.9% 1.1% 1.5% 0.8% 1.0% 1.8% 1.6% 6.9% 8.5% 8.0% 7.6% 7.9% 7.0% ICICI Pru Life 18.5% 18.9% 23.0% 21.9% 22.3% 24.2% 19.0% 1.9% 1.1% 2.4% 1.4% 13.3% 18.6% 15.4% 18.6% 17.9% 18.7% 22.7% Bajaj Allianz 6.9% 5.8% 3.9% 3.2% 3.5% 4.0% 17.2% 15.8% 16.8% 14.2% 18.3% 12.5% 9.1% 7.8% 6.5% 5.4% 6.1% 5.2% TATA AIA 1.7% 1.4% 1.2% 2.7% 3.7% 3.4% 2.6% 2.3% 1.2% 2.1% 1.3% 2.0% 1.9% 1.6% 1.2% 2.5% 3.2% 3.2% Birla SunLife 5.8% 4.9% 3.7% 3.0% 3.2% 2.5% 15.8% 18.3% 23.1% 25.7% 25.3% 6.5% 8.0% 7.6% 7.6% 7.6% 7.1% 3.1% Kotak Mahindra Life 2.6% 2.7% 3.1% 4.1% 4.2% 3.6% 6.8% 8.4% 9.8% 13.1% 15.6% 13.3% 3.5% 3.9% 4.4% 6.0% 6.2% 4.9% PNB Met Life 3.1% 3.3% 3.6% 4.0% 3.5% 3.4% 2.1% 1.2% 2.0% 0.8% 1.0% 0.9% 2.9% 2.9% 3.2% 3.4% 3.1% 3.0% India First Life 1.4% 0.9% 0.8% 1.0% 1.4% 1.6% 2.9% 3.4% 2.7% 2.1% 2.1% 1.2% 1.7% 1.4% 1.2% 1.2% 1.5% 1.6% Total Private APE (Rs bn) 178.5 172.4 199.9 227.1 286.9 193.0 49.3 44.1 50.4 58.3 61.2 14.6 227.8 216.5 250.4 285.3 348.2 207.6 YoY Growth -3.4% 16.0% 13.6% 26.4% 35.1% -10.5% 14.3% 15.6% 5.0% -61.5% -4.9% 15.6% 14.0% 22.0% 14.9% Source: IRDA, HDFC sec Inst Research

Driven by Group Credit On a fast growth trajectory


Page | 23

Key Operational Metrics Comparison

Units SBI Life HDFC Life ICICI

Prudential Life

Max Life Bajaj Allianz Industry

Business performance (FY17)

New business premium (FY17) Rs bn 101.5 87 78.6 36.8 32.9 1750.2

5-year CAGR (till FY17) % 9.2 17.8 9.1 14 3.9 9

Individual-New business premium (FY17) Rs bn 64.7 42 69.8 33.1 10.7 776.8

5-year CAGR (till FY17) % 14.1 7.7 18 14.1 -10 3.8

Group-New business premium (FY17) Rs bn 36.8 45 8.9 3.6 22.2 973.4

5-year CAGR (till FY17) % 2.9 37 -15.3 13 19.5 14.4

RWRP (FY17) Rs bn 59.4 36.4 64.1 26.4 10.1 532.2

5-year CAGR (till FY17) % 23 6 17.9 11.9 -5.1 2.10% Costs (FY17) Commission ratio % 3.7 4.1 3.4 8.7 2.4 5.3

Expense ratio^ % 7.8 12.3 10.5 14.8 17.1 11.4

Acquisition Cost % of NBP 18.0 24.8 21.5(FY16) NA NA NA EV (FY17) Rs bn 165.4 123.9 161.8 65.9 112.6 VNB (FY17) Rs bn 10.4 9.1 6.7 5.0 1.7 VNB- Margin (FY17) % 15.4 21.60 10.1 18.8 13 Persistency (FY17) 13th month % 81 81 86 80 68 25th month % 74 73 74 70 51 37th month % 67 64 67 60 44 49th month % 62 58 59 55 38 61st month % 67 57 56 53 32 Profitability ROE (Average FY15-17) % 20.1 29.4 31.2 23.6 12.2 ROIC (Average FY15-17) % 87.9 38.4 34.3 25.2 71.4 Source: Companies, HDFC sec Inst Research

HDFC life has grown fastest amongst the top players; however, individual premium growth for SBI is fastest HDFC life has the best VNB Margin


Page | 24

Units SBI Life HDFC Life ICICI

Prudential Life

Max Life Bajaj Allianz Industry

Market share (RWRP) (FY17) Industry level % 11 7 12 5 2 Private sector % 21 13 22 9 3.5 Product mix (FY17) Linked % 48 47 74 25 35 13

Non-linked % 52 53 26 75 65 87

No of products Individual Number 29 30 19 18 23 536

Group Number 10 10 9 5 11 169 Renewal premiums (FY17) Linked + non-linked Rs bn 108.7 107.5 144.9 71.1 28.9 2,429

5-year CAGR (till FY17) % 10.5 11 8.6 9.6 -9.5 7 AUM (FY17) Total Rs bn 977 917 1,229 444 493 29,806 5-year CAGR % 16 23.3 11.9 20.8 4.6 13.5 Geographical Distribution-Individual NBP (FY17) Top 3 States 24.7 44.7 41.9 33.6 36.2 Top 5 States 38.3 58.5 55.8 50.1 50.6 Top 10 States 67.2 80.8 80.3 77.4 73.5 Channel mix Individual NBP (FY17) Individual agents % 34.1 15.5 23.5 25.0 84.7 68.9

Corporate Agents-Banks % 64.7 61.1 57.1 61.8 3.8 23.6

Corporate Agents-Others % 0.4 4.3 3.6 3.2 0.6 1.3

Brokers % 0.0 4.2 2.2 0.3 1.7 1.2 Direct Business % 0.8 14.8 13.6 9.7 9.2 5.0 Claim ratio Claims settlement % 97.98 99.16 97.20 98.27 99.20 96.94 %Claim Repudiation % 1.60 0.70 2.37 1.52 0.80 0.53 Net Premium^^ Rs bn 209 193 222 107 61 Source: Companies, HDFC sec Inst Research

SBI Life leads in the individual retail segment SBI Life geographic distribution is far diversified


Page | 25

How much exposed Life Insurance Companies are to Linked products, especially Equity?

Given the run-up in the Equity market, many investors are concerned on the impact of follows/outflows in

case the equity market falls. Our analysis shows that ULIP continues to attract both Equity and debt investors.

As on 1HFY18 (Rs. bn) SBI Life HDFC Life ICICI Pru Life Max Life Total Policyholder Investments 1,033.3 995.3 1,299.6 477.6 Out of which ULIP 488.2 561.3 923.4 164.0 ULIP as a % of Total 47% 56% 71% 34% Equity Mix in ULIP 37% 59% 57% 18% Source: Public Disclosures

Peer Comparison

Rs Bn M.Cap CMP Reco TP VNB EV P/EV (x) VNB Multiple (x) APE GROWTH (%) VNB Margin (%)

FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E FY18E FY19E FY20E SBI Life 700 698 BUY 810 14.3 18.1 22.5 193.3 227.1 267.6 3.61 3.07 2.60 35.2 26.0 19.1 35.7 25.6 23.7 16.0 16.1 16.2 ICICI Pru Life 567 396 BUY 465 10.4 13.7 16.8 179.0 199.2 223.0 3.13 2.81 2.51 36.7 26.3 20.0 35.9 24.8 19.9 11.8 12.5 12.8 Max Financial 161 606 BUY 665 6.1* 7.3* 8.7* 65.9* 74.4* 84.1* 3.09 2.73 2.40 25.5 19.9 15.4 17.9 19.0 19.0 18.9 19.0 19.0 HDFC Life# 760 375 NR NR 12.7 15.6 18.8 152.7 180.5 213.4 4.95 4.19 3.54 47.5 36.9 28.9 30.5 19.0 16.9 23.2 24.0 24.7

Source: Companies, HDFC Sec Inst Research, * Implies Max Life, #Bloomberg Estimates for HDFC Life

Equity mix within ULIP is under 60% for major players

INITIATING COVERAGE 28 DEC 2017

SBI Life Insurance BUY


Distribution playSBI Life is the largest private sector Life Insurance company in the country, with a market share of 20% amongst private sector players. A strong distribution footprint of the parent SBI, a well-developed agency channel, an underpenetrated Insurance sector, along with the financialisation of savings augur well for the company. Over the last four years, its (Pvt Sector) market share in New Business Premium has improved from 16.9% to 20%. It has the support of strong bancassurance and agency channels, which contribute 65% and 34% respectively. We expect APE to grow at a 28.3% CAGR over FY17-20E. The growth is expected to be largely driven by the individual segment. During 8MFY18, APE is up 35.2%. The increasing business scale and higher share of the protection business would lead to an improvement in NBM to 16.2% by FY20E from 15.7% in FY17. VNB is expected to grow at a CAGR of 29.5%, with ROEV hovering at 18-19%. We value SBI Life at FY20 1x EV + 24x VNB, translating into Rs 810/sh. Initiate with BUY.

Strong distribution footprint: SBI Life’s leadership is supported by a strong parent franchise and SBI‘s very large geographical presence, with a branch footprint of 24K, of which only 50% has been tapped. Further, it has a well-established agency channel, which contributes 35% to its channel mix. However, its direct business contribution is almost non-existent. Its presence is well diversified across geographies.

Improving operating performance: SBI Life has evolved and improved its Persistency Ratio through better on-boarding and customer service. In the last four years, its 13th/61st month Persistency Ratio has improved to 81/67% from 67/14% respectively. Also, its opex to total premium at 13.6% is low compared to other private players.

Diversified Product Mix: SBI Life’s NBP mix is diversified, with a share of ULIP/PAR/Non-PAR/Protection/Fund at 50/11/2/5/32% respectively in premium. However, despite an increase in the share of ULIPs (47% in 1HFY18), the equity mix in ULIP remains low at 37%. This highlights increasing flows towards debt-linked funds, and it not much exposed to Equity market volatility.

FINANCIAL SUMMARY (Rs bn) FY16 FY17 FY18E FY19E FY20E NBP 71.1 101.5 113.7 140.0 170.6 Growth (%) 28.6% 42.8% 12.0% 23.2% 21.8% APE 48.8 66.0 89.6 112.5 139.3 Growth (%) 37.4% 35.3% 35.7% 25.6% 23.7% VNB 7.0 10.4 14.3 18.1 22.5 VNB Margin(%) 14.3 15.7 16.0 16.1 16.2

EV 130.0 165.4 193.3 227.1 267.6 Change (%) NA 27.2% 16.9% 17.5% 17.8% MCap/EV (x) 5.36 4.21 3.61 3.07 2.60 P/Bv (x) 14.9 12.8 10.8 9.2 7.6 ROEV (%) 33.2 18.3 18.7 19.0 Source: Company, HDFC sec Inst Research

INDUSTRY Life Insurance CMP (as on 28 Dec 2017) Rs 700 Target Price Rs 810 Nifty 10,478

Sensex 33,848

KEY STOCK DATA

Bloomberg SBILIFE IN

No. of Shares (mn) 1,000

MCap (Rs bn) / ($ mn) 699/10,903

6m avg traded value (Rs mn) -

STOCK PERFORMANCE (%)

52 Week high / low Rs 740/629

3M 6M 12M

Absolute (%) - - -

Relative (%) - - -

SHAREHOLDING PATTERN (%)

Promoters 84.1

FIs & Local MFs 2.6

FPIs 4.1

Public & Others 9.1 Source : BSE

Vishal Rampuria [email protected] +91-22-6171-7325

SBI LIFE INSURANCE : INITIATING COVERAGE

Page | 27

Largest private sector insurance company SBI is the largest private sector Life Insurance

company, measured in terms of New Business Premium.

The company was set up in 2001 as a joint venture between SBI and BNP Paribas Cardif, following the privatisation of India's Insurance industry. BNP is amongst the top 10 European insurers, and the global leader in Credit Insurance.

Over the last four years, its New Business Premium has grown at a CAGR of 18.3%, with the market share amongst private players improving from 16.9% in FY13 to 20% in FY17.

The Individual segment has a market share of 20.2%, as compared to 13.8% in FY13. This segment has had strong CAGR of 23.3%. Further, during FY15-17 it grew faster at 31.2%.

SBI Life has a diversified product mix. The contribution of ULIP/PAR/Non-PAR/Protection/Fund Business is 50/11/2/5/32% respectively. However, on APE basis, the product mix is skewed towards ULIPs (70%).

It has a strong individual channel network, with bancassurance and agency channels contributing 65% and 34% respectively. However, presence through direct and digital channels is very low and non-contributor.

Over the last few years, the company has substantially improved its Persistency Ratio, driven by

tighter regulations and better on-boarding of customers. Its 13th Persistency has improved from 74.5% in FY12 to 81% in FY17. This improvement, along with the higher scale of business, has helped improve the margin profile.

SBI Life is uniquely positioned to tap the vast potential in India's Life Insurance sector by harnessing the SBI Group's large distribution footprint, with more than 24K branches. Further, it has tied up with 17 regional rural banks, South India Bank and Punjab & Sind Bank. It has benefitted immensely from the group synergy programme to cross sell financial products. The bancassurance channel has grown at a CAGR of 46.7% over FY15-17.

The agency channel is the most productive across private players, with an avg premium per agent at Rs 0.23mn in FY17 (vs Rs 0.21mn in FY16). The agency channel has grown at a CAGR of 13% over FY15-17.

Amongst the private players, SBI Life has one of the lowest cost structures, owing to the strength of its bancassurance channel and a lower cost structure.

Its claim settlement ratio is at 98.6%

Its misselling ratio is the lowest amongst all players

In FY17, Value of New Business contributed 6.3% to its Embedded Value, while Return On Embedded Value (ROEV) was at 33%.

SBI Life’s Individual business grew 30% in FY17 New Business Margin improved from 14.3% to 15.7% in FY17 despite sharp jump in ULIP contribution


Page | 28

New Busines Premium On A Strong Growth Path Mix Between Individual And Group

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

Market Share Has Improved To 20% Total Premium Growth


New Business premium for SBI Life grew 43% in FY17, driven by the Group business; Individual grew by 30% In 1HFY18, Group has de-grown (fund business) resulting in flat growth though APE has sharply increased It has continuously added market share in the last 4 years

-30

-20

-10

0

10

20

30

40

0

50

100

150

200

250

FY13

FY14

FY15

FY16

FY17

1HFY

18

Total Premium (Rs. Bn) % Growth (RHS)

-30

-20

-10

0

10

20

30

40

50

0

20

40

60

80

100

120

FY13

FY14

FY15

FY16

FY17

1HFY

18

New Business Premium (Rs. Bn) % growth (RHS)

17% 17%

16%17%

20%

18%

13.8%

16.8%

16.6%

19.5%

20.2%

21.3%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

22.0%

FY13

FY14

FY15

FY16

FY17

1HFY

18

Market Share based on NBPMarket Share based on Individual NBP

28.0

32.2

37.6 49

.8 64.7

33.3

23.8 18.5 17.721.3

36.8

9.6

0

20

40

60

80

100

120

FY13

FY14

FY15

FY16

FY17

1HFY

18


Rs bn

SBI LIFE INSURANCE: INITIATING COVERAGE

Page | 29

Diversified Product Mix On NBP Diversified Product Mix On APE NBP


Individual Channel Mix:NBP Persistency Across Buckets Has Improved

Source : Company, HDFC sec Inst Research Source : Company, HDFC sec Inst Research 61st bump is also driven by higher single premium in the base cohort.

Share of ULIPs has gone up; however 50% of the flows are for debt funds Though absolute protection pie has grown, its contribution has come down due de-growth in individual protection segment. SBI Life is launching online plan at competitive rate to compete in the growing online protection business Direct business is very low, owing to minimal presence in digital platforms Persistency has sharply improved in the last 4 years across different buckets, leading to an improvement in profitability

30% 22% 11% 19%

8%9%

2%6%

5%2%

2% 2%

24%22% 32%

17%

34%45% 50% 56%

0%

20%

40%

60%

80%

100%

FY15

FY16

FY17

1HFY

18

PAR Non-PAR ProtectionNon-PAR Others Fund BasedULIP

44%31%

17%

9%

10%

6%

3%

4%

5%

41%53%

71%

0%

20%

40%

60%

80%

100%

FY15

FY16

FY17

PAR Non-PAR Protection Non-PAR Others

Fund Based ULIP

50% 46% 38% 34% 30%

47% 52% 61% 64% 69%

1% 1% 1% 0.8% 1%

0%

20%

40%

60%

80%

100%

FY14

FY15

FY16

FY17

1HFY

18


67%

63%

32%

14%

14%

72%

66%

42%

20%

7%

74%

65%

60%

35%

10%

81%

74%

67%

62% 67

%

0%10%20%30%40%50%60%70%80%90%

13th

M

onth

25th

M

onth

37th

m

onth

49th

M

onth

61th

m

onth

FY13 FY14 FY15 FY16 FY17


Page | 30

VNB Margin Comparison Trend In AUM


Opex Trend Agency Channel Productivity


0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%

FY14

FY15

FY16

FY17

Opex/Total Premium Commission/Total Premium

323 360490

618751 809196

225

223180

227242

0100200300400500600700800900

1,000

FY13

FY14

FY15

FY16

FY17

1HFY

18

Debt (Rs. Bn) Equity (Rs. Bn)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


ICICI Pru Life HDFC Std Life Max LifeSBI Life Bajaj

23% of AUM is Equity Operating cost is amongst the lowest Agency productivity is amongst the highest amongst the private sector

-

50,000

100,000

150,000

200,000

250,000

82,000

84,000

86,000

88,000

90,000

92,000

94,000

96,000

98,000

FY15 FY16 FY17

Agents Avg Business (Rs) - RHS


Page | 31

NBP and APE to grow at a CAGR of 20% and 29.2% respectively

SBI Life’s New Business Premium has grown at a CAGR of 26.1% over the last three years. Since demonetisation, the flow of funds into financial assets has increased. During 8MFY18, Individual premium is up 46.1%, while Group business has de-grown 42.3%. Overall, though premium is flat, APE is up 35.2% driven by 46.1% growth in Individual APE. We expect APE to grow at a 28.3% CAGR over FY17-20E. The growth is expected to be largely driven by the Individual segment.

Trend in NBP and APE

Source: Company, HDFC sec Inst Research

VNB margin to improve to 16.2%

We expect margins to improve on a higher operating scale. SBI Life plans to launch competitive online term plans to the improving share of the Protection Business, from the current 6%.Higher scale and improving Persistency will help in the improvement of the VNB margin from 15.7% in FY17 to 16.2% in FY20.

Trend In Margin


SBI Life’s contribution from the top 5 states is at 38.3% APE is up 35.2% in 8MFY18; For FY18, we have modeled 35.7% APE growth

14.3

15.716.0

16.116.2

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

FY16

FY17

FY18

E

FY19

E

FY20

E

New Business Margin

-

20

40

60

80

100

120

140

160

180 FY

15

FY16

FY17

FY18

E

FY19

E

FY20

E

NBP APERs bn


Page | 32

ROEV To Hover Around 18-19% (Rs Mn) FY17 FY18E FY19E FY20E Opening IEV 125,475 165,379 193,613 227,449 Value of New Business 10,368 14,294 18,072 22,499 Expected return on existing business 18,506 15,900 18,102 20,741 IEV operating earnings 41,709 30,193 36,173 43,240 Economic variances From actual return in excess of expected real-world return 15,244 0 0 0 From change in economic assumption -2,409 0 0 0 Other non-operating variances 0 0 0 0 Total IEV earnings 41,709 30,193 36,173 43,240 Capital contributions / (dividend payouts) -1,805 -1,959 -2,337 -2,784 Closing adjustments 0 0 0 0 Closing IEV-Year End 165,379 193,613 227,449 267,905 ROEV return % 33.2% 18.3% 18.7% 19.0% APE 66,009 89,578 112,547 139,253 VNB Margin 15.7% 16.0% 16.1% 16.2% Source: Company, HDFC sec Inst Research

Strong solvency ratio

SBI Life’s solvency ratio stood at 209% as on 1HFY18, as compared to the regulatory requirement of 150%. It is well capitalised for growth. Further, it can shore up the available solvency by reporting surplus in Funds for Future Appropriation. Currently, FFA is nil compared to sizeable amount for other Life Insurance companies.

Strong solvency margin


We have built in gain of Rs 3bn from operating variance and assumptions; the bulk is coming from New Business Value SBI can potentially report Funds for Future Appropriation (FFA) instead of reserves to perk up solvency ratio

216%

212%

204%

209%

198%200%202%204%206%208%210%212%214%216%218%

FY15

FY16

FY17

1HFY

18

Solvency


Page | 33

Management Team Key Positions Occupied By Professionals Name Designation Background

Arijit Basu

Managing Director & CEO

Arijit Basu has been in charge of SBI Life Insurance Co. Ltd. as the MD & CEO since August-2014. With a degree in Economics and Master’s degree in Arts and History, Basu joined the State Bank of India in 1983 as a Probationary Officer. He is also a Certified Associate of the Indian Institute of Bankers, and has held several key profiles in the bank.

Julien Hautiere Rey

Deputy CEO

Rey has been the Deputy CEO of SBI Life since October 2016. Prior to joining SBI Life, he was the Chief Finance & Risk officer at BNP Paribas Cardif Russia. Rey is a graduate from Rouen Business School, majoring in Corporate Finance. Additionally, he is also an Advanced Actuarial Technician graduate from Paris University.

Sangramjit Sarangi

Chief Financial Officer

Sarangi holds a bachelor’s degree in law from Utkal University. He is a qualified Chartered Accountant. He has been associated with SBI Life since December 30, 2009. He has more than 18 years of experience in handling multiple functions in the field of Life Insurance and in the Mutual Fund industry.

Sanjeev Pujari President – Actuarial and Risk Management and Chief Risk Officer

He holds a Bachelors degree in Science from the University of Delhi and a Masters degree in physics from the University of Delhi. He is a Fellow of the Institute of Actuaries of India and a diploma from the Faculty of Actuaries, Institute of Actuaries. He has been associated with the company since June 30, 2008. He has vast experience in the field of Life Insurance.

Source: Company

SBI Life has an experienced mgt team


Page | 34

Valuation and view SBI Life Insurance is a play on the under–penetrated

Life Insurance market, with a strong distribution footprint of its parent SBI. Given the untapped distribution reach, along with tailwinds towards the financialisation of savings, we expect 18.9% and 29.5% CAGR growth in the New Business Premium

and Value of New Business for SBI Life Insurance. We see SBI Life as a compounder. We value the stock at FY20 1x EV +24x VNB to arrive at a target price of Rs 810/sh. Initiate coverage with a BUY rating. Our sensitivity to the tax rate increasing to 25% is 12% cut in our TP.

Post the IPO, the stock has languished


Page | 35

Sensitivity Table Sensitivity EV (% chg) VNB(% chg) Interest Rates and Assets Increase in 100bps in the interest rates and discount rates (6.2) 3.6 Decrease in 100bps in the interest rates and discount rates 6.6 (4.9) Increase in 200bps in the interest rates and discount rates (12.0) 6.4 Decrease in 200bps in the interest rates and discount rates 13.9 (11.2) 10% decrease in equity values (1.7) n/a 20% decrease in equity values (3.4) n/a 25% increase in implied swaption volatilities (0.8) (2.4) 25% increase in implied equity volatilities (0.1) (0.3) Expenses 10% increase in Maintenance expense (0.7) (2.9) 10% decrease in Maintenance expense 0.7 2.6 10% increase in Acquisition expense NA (8.6) 10% decrease in Acquisition expense NA 8.3 Policy/Premium discontinuance rates 10% multiplicative increase in discontinuance rates -1.1 (7.5) 10% multiplicative decrease in discontinuance rates 1.1 7.2 50% multiplicative increase in discontinuance rates -4.8 (31) 50% multiplicative decrease in discontinuance rates 6.2 40.2 25% mass lapsation of policies at the end of surrender penalty period for ULIP -1.4 (8.7) 50% mass lapsation of policies at the end of surrender penalty period for ULIP -3.3 (20.8) 50% multiplicative increase in discontinuance rates after the end of any surrender penalty period -2.6 (11.9) 50% multiplicative decrease in discontinuance rates after the end of any surrender penalty period 3.4 16.3 5% absolute increase in non-zero lapse rates -4.6 (25.8) 5% absolute decrease in non-zero lapse rates 6.4 33.2 Insurance Risk 5% multiplicative increase in mortality and morbidity rates -1.1 (3.9) 5% multiplicative decrease in mortality and morbidity rates 1.1 3.7 Required Capital Required Capital set equal to 150% of the RSM 0.3 0.9 Taxation Corporate Tax rate Increased to 34.61% -19.1 (36.5) Service Tax Increased to 18% 0 Source: Company

Higher interest rate will increase PAR product earnings and lead to higher VNB


Page | 36

Key negatives and risks Share of direct/digital channel is very low.

Lower persistency and mortality remain key risks, which will impact EV and VNB

Individual protection business de-grew in FY17 due to better pricing by competition

Insurance companies pay a lower corporate tax rate of 14.5%. Any move to increase this to the normal rate would significantly reduce EV and VNB. Our sensitivity shows 12% reduction in our TP, if tax rate increases to 25% as we build some price increase over a period of time.

Any adverse changes to the deduction and incentives given to the policyholders under section 80C and Section 10 of the Income Tax Act can have negative effect.

Change in IRDA norms remain a sector level risk Low share of direct channel is a concern


Page | 37

Policyholder AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Total Premium earned 156,655 208,525 256,156 326,309 414,726 Income from investments and other income 33,606 93,624 81,745 98,654 120,491

Transfer from shareholders AC 931 627 500 500 500 Total Income 191,191 302,775 338,401 425,463 535,717 Commission 7,143 7,833 10,608 13,522 17,080 Operating expenses 14,581 16,465 20,194 25,400 31,459 Provisions 1,753 2,223 2,383 2,502 2,627 Total Expenses 23,477 26,522 33,185 41,425 51,166 Benefits Paid 79,669 95,502 110,094 132,128 160,853 Change in valuation of liabilities 79,869 172,410 183,572 239,162 306,762

Total 159,538 267,912 293,667 371,290 467,615 Surplus 8,176 8,342 11,549 12,748 16,936 Tax 1,533 1,798 2,310 2,550 3,387 Net Surplus 6,644 6,544 9,239 10,199 13,549 Transfer to shareholders AC 6,656 6,546 9,239 10,199 13,549 Source: Company, HDFC sec Inst Research

Shareholders AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Transfer from policyholders' A/c 6,656 6,546 9,239 10,199 13,549 Investment income 3,178 4,016 4,296 5,274 6,427 Total income 9,834 10,562 13,535 15,473 19,976 Expenses 240 275 206 227 244 Contribution to policyholders' a/c 931 627 627 627 627 Profit before tax 8,663 9,659 12,702 14,619 19,105 Taxes 127 199 635 731 956 PAT 8,535 9,460 12,066 13,888 18,150 Source: Company, HDFC sec Inst Research


Page | 38

Key Ratios In % FY16 FY17 FY18E FY19E FY20E Premium Growth 22.6 33.1 22.8 27.4 27.1 NBP Growth 28.6% 42.8% 12.0% 23.2% 21.8% APE Growth 37.4% 35.3% 35.7% 25.6% 23.7% Commissions Growth 18.3 9.7 32.4 27.5 26.3 Opex Growth 24.0 12.9 22.6 25.8 23.9 Commissions / premium 4.6 3.8 4.1 4.1 4.1 Opex / premium 9.3 7.9 7.9 7.8 7.6 PAT Growth 5.2 10.8 27.5 15.1 30.7 RoAA 1.1 1.1 1.1 1.1 1.1 RoE 19.7 18.6 20.3 19.8 21.7 EPS (Rs) 8.54 9.46 12.07 13.89 18.15 BV (Rs) 46.9 54.6 64.4 76.0 91.4 EV (Rs mn) 129,990 165,379 193,289 227,076 267,564 VNB (Rs mn) 6,990 10,368 14,294 18,072 22,499 EVOP (Rs mn) NA 28,874 30,193 36,148 43,211 ROEV NA 33.2 18.3 18.7 19.0 P/E (x) 81.7 73.7 57.8 50.2 38.4 P/ABV (x) 14.86 12.75 10.82 9.18 7.63 P/EV (x) 5.36 4.21 3.61 3.07 2.60 P/NBV (x) 81.1 51.3 35.2 26.0 19.1 Source: Company, HDFC sec Inst Research

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E Source Share capital 10,000 10,000 10,000 10,000 10,000 Reserve and surplus 36,907 44,648 54,436 65,967 81,399 Net worth 46,907 54,648 64,436 75,967 91,399 Credit/debit balance in fair value a/c 424 873 873 873 873

Policyholders' a/c 759,912 936,732 1,120,304 1,359,466 1,666,228 Funds for future appropriation 2 - - - - Total Liabilities 807,246 992,252 1,185,613 1,436,306 1,758,500 Application Shareholders' Investments 35,649 42,955 52,743 64,274 79,706 Policyholders' investments 382,559 469,617 538,471 655,660 805,974 Asset to cover linked liabilities 360,219 445,730 560,449 682,422 838,871 Loans 1,236 1,782 1,782 1,782 1,782 Fixed assets + DTA 4,472 5,385 5,385 5,385 5,385 Net current assets 23,111 26,783 26,783 26,783 26,783 Debit balance in P&L - - - - - Total Assets 807,246 992,252 1,185,613 1,436,306 1,758,500 Source: Company, HDFC sec Inst Research


ICICI Prudential Life BUY


Playing on scale ICICI Prudential Life is the third largest private sector Life Insurance company in the country, with a market share of 15.5% amongst the private sector players. It is a big beneficiary of the surge in the flow of funds to the equity market, as it focusses on ULIPs. It derives strength from being a strong brand, the strong distribution reach of the parent ICICI Bank, the under-penetrated Insurance sector, along with the finalisation of savings.

Within the Individual business segment, it has the highest market share at 21.7% in FY17, up from 16.8% in FY13. It has the support of strong bancassurance and agency channels, which contribute 57% and 24% respectively.

We expect APE to grow at a 26.7% CAGR over FY17-20E. Growth is expected to be largely driven by the Individual segment. During 8MFY18, Individual APE is up 32.3%. The increasing business scale and higher share of the Protection business would lead to an improvement in NBM to 12.8% by FY20 from 10.3% in FY17. VNB is expected to grow at a CAGR of 36.2%, with ROEV hovering at 15-17%. We value ICICI Pru Life at 1x EV + VNB multiple of 26x FY20E translating into Rs 465/sh. Initiate with BUY.

Strong distribution and franchise footprint: ICICI Pru Life’s leadership is supported by the strong franchise and geographical presence of ICICI Bank, which has a branch count of ~5K. Further, it has the largest agency network of 0.14 mn agents. It has increased

the share of its Direct Business Channel to 13% over the last two years, owing to a focus on digital channels.

Play on ULIPs: ICICI Pru Life’s product mix on APE is skewed towards ULIPs, with the contribution of ULIP/PAR/Non-PAR/Protect/Fund at 84/10/1/4/1% respectively. Though ULIPs have given scale, they have the lowest margins and are exposed to inherent equity market volatility. The focus on ULIPs is also driven by imparting value to customers. 57% of ULIP is equity investment which is exposed to market volatility. It’s targeting higher share of Protection from the current 4%; we model this to increase to 5.5% by FY20.

Improving operating performance: ICICI Pru Life has improved its Persistency ratio. In the last four years, its 13th and 61st Persistency ratios have improved to 86% and 56% from 72% and 14% respectively.

KEY SUMMARY (Rs bn) FY16 FY17 FY18E FY19E FY20E NBP 67.7 78.6 100.6 124.0 147.5 Growth (%) 26.9% 16.2% 27.9% 23.2% 19.0% APE 51.1 65.0 88.3 110.2 132.1 Growth (%) 9.9% 27.2% 35.9% 24.8% 19.9% VNB 4.1 6.7 10.4 13.7 16.8 VNB Margin (%) 8.1 10.3 11.8 12.5 12.8 EV 139.4 161.8 179.0 199.2 223.0 Change (%) 1.6% 16.1% 10.6% 11.3% 11.9% MCap/EV (x) 4.01 3.46 3.13 2.81 2.51 P/Bv (x) 11.0 9.1 8.1 7.1 6.3 ROEV (%) 11.3 20.6 15.4 16.6 17.3 Source: Company, HDFC sec Inst Research


Sensex 33,848

KEY STOCK DATA

Bloomberg IPRU IN

No. of Shares (mn) 1,435

MCap (Rs bn) / ($ mn) 560/8,734

6m avg traded value (Rs mn) 527



3M 6M 12M

Absolute (%) 2.6 (14.3) 32.9

Relative (%) (5.7) (24.1) 3.7


Promoters 80.7

FIs & Local MFs 3.5

FPIs 5.8



ICICI PRUDENTIAL LIFE : INITIATING COVERAGE

Page | 40

Third private sector Insurance Company ICICI Prudential Life Insurance Company Ltd (ICICI Pru

Life) is the third-largest private sector Life Insurance company in terms of New Business premium.

ICICI Pru Life is a joint venture between ICICI Bank Ltd and Prudential Corporation Holdings Limited of UK.

Over the last four years, its New Business Premium has grown at a CAGR of 13%, with the market share remaining largely stable at ~15.5%.

In the Individual segment, it is the market leader with 21.7% share (FY17) amongst the private sector players. This segment has grown at a stupendous CAGR of 19.5% during the last four years, with 30.3% growth in FY17.

ICICI Pru Life’s product mix on APE basis largely comprises ULIP products. In FY17, ULIP/PAR/Non-PAR/Protect/Fund contributed 84/10/1/4/1% respectively.

It has a strong channel mix, with bancassurance and the agency channel contributing 57% and 24% respectively.

Over the last few years, there has been a great improvement its Persistency Ratio, driven by tighter regulations and improved on-boarding of customers. Its 13st Persistency has improved from 72% in FY13 to 82% in FY17. The improvement in Persistency, along with a higher scale of business, has helped in improving the margin profile.

ICICI Pru Life has positioned itself in offering Unit Linked Products as it offers scale and low cost benefit to the customers. It has been a big beneficiary of the surging Equity market. Its 8MFY18 APE is up 37.9%.

As on 1HFY18, 71% of its assets are Unit Linked, out of which 57% is Equity exposure.

Its margin, amongst the top 5 players, is amongst the lowest, owing to high focus on ULIPs. However, the margins are improving on higher scale. In FY17, VNB Margin increased to 10.3% from 8.1% in FY16.

ICICI Pru Life is also focusing on protection business to drive improvement in profitability. During 1HFY18, share of protection on APE basis improved to 4.2% from 3.9% in FY17.

In FY17, Value of New Business contributed 6.3% to its Embedded Value, while Return on Embedded Value (ROEV) was 16.5%.

ICICI Prudential Life is the third-largest Life Insurance company


Page | 41

New Business Premium Displays Strong Growth Individual and Group NBP


Strong Growth In APE Total Premium Growth


Strong growth due to focuss on ULIP Getting strong Insurance flows owing to a focus on ULIPs Strong beneficiary of the equity market surge

-30

-20

-10

0

10

20

30

40

50

0102030405060708090

FY13

FY14

FY15

FY16

FY17

1HFY

18

New Business Premium % growth- RHS

Rs.bn

-10

-5

0

5

10

15

20

25

30

0

50

100

150

200

250

FY13

FY14

FY15

FY16

FY17

1HFY

18

Total Premium % growth- RHS

Rs.bn

0%5%10%15%20%25%30%35%40%45%

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY15

FY16

FY17

1HFY

18

APE- Rs Bn APE-Growth (%) RHS

-10 20 30 40 50 60 70 80 90

FY13

FY14

FY15

FY16

FY17

1HFY

18


Rs bn


Page | 42

Diversified Product Mix On APE VNB Margin on APE


Persistency Across Buckets Has Improved Individual Channel Mix: NBP

Source : Company, HDFC sec Inst Research,* Bump in 61st due to single premium

Source : Company, HDFC sec Inst Research

0%10%20%30%40%50%60%70%80%90%

100%

13th Month

25th Month

37th month

49th Month

61th month

FY13 FY14 FY15 FY16 FY17 1HFY18

ULIPs contribute more than 80% to New Business APE Direct business is also improving, driven by the focus on digital

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


ICICI Pru Life HDFC Std Life Max LifeSBI Life Bajaj

25% 25% 23% 27%

58% 57% 57% 51%

5% 4% 4% 3%

10% 11% 13% 16%

0%

20%

40%

60%

80%

100%

FY15

FY16

FY17

1HFY

18

Individual Agents Corporate Agents- BanksCorporate Agents- Others Direct BusinessOthers

2% 3% 4% 4%

83% 81% 84% 82%

0%

20%

40%

60%

80%

100%

FY15

FY16

FY17

1HFY

18

PAR Non-PAR ProtectionNon-PAR Others Fund BasedULIP


Page | 43

Trend In AUM Agent Productivity


Cost Matrix Market Share Based On NBP


105,000110,000115,000120,000125,000130,000135,000140,000145,000150,000

020,00040,00060,00080,000

100,000120,000140,000160,000

FY15

FY16

FY17

1HFY

18

Individual NBP per Individual agent (Rs)No of Agents-RHS

Share of equity has gone up to 54% in AUM as on 1HFY18 71% of the investment is ULIP; 57% of ULIP is Equity linked Agent productivity has been good Market share has been improving

16%

13%

15%17% 16%

18%16.8% 17.9%

21.4% 21.0% 21.7%24.4%

10%12%14%16%18%20%22%24%26%

FY13

FY14

FY15

FY16

FY17

1HFY

18

Market Share based on NBP

Market Share based on Individual NBP

364 424 521 558 654 601

378 382 481 481

575 705

-

200

400

600

800

1,000

1,200

1,400

FY13

FY14

FY15

FY16

FY17

1HFY

18

Debt Equity Rs bn

0.0%

5.0%

10.0%

15.0%

20.0%

FY13

FY14

FY15

FY16

FY17

Opex to Total Premium Commission to Total Premium


Page | 44

New Business Premium to grow at a CAGR of 23.3% ICICIC Life’s New Business Premium has grown at a

CAGR of 13.1% over the last four years. However, since demonetisation, along with a strong equity market, have propelled inflows to ULIPs. For the 8MFY18, New Business Premium has grown 27.5%, while APE has grown 31.5%. We build in NBP and APE CAGR growth of 23.3% and 26.7% over FY17-20E.

NBP And APE Growth


Increasing share of Protection to drive margins

We expect margins to pick up on an improving share of the Protection business, from the current 4% to 5.5% in FY20. Though the new ULIP is reporting high persistency, the same would be tested in case the market falls.

VNB Trend


For FY18, we are building APE growth of 35.9% due to strong Equity market

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

FY16

FY17

FY18

E

FY19

E

FY20

E

New Business Premium APE

Rs bn

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

FY16

FY17

FY18

E

FY19

E

FY20

E

Value of New Business VNB Margin (%) - RHS

Rs bn


Page | 45

VNB margin to drive growth; ROEV To Hover Around 17%

(Rs Mn) FY16 FY17 FY18E FY19E FY20E Opening IEV 138,244 139,390 161,840 179,003 199,174 Value of New Business 4,123 6,660 10,375 13,720 16,845 Expected return on existing business 17,072 16,290 14,624 15,962 17,536 IEV operating earnings 21,195 22,950 24,999 29,682 34,380 Economic variances From actual return in excess of expected real-world return -6,159 5,820 0 0 0 From change in economic assumption 524 na 0 0 0 Other non-operating variances Total IEV earnings 15,560 28,770 24,999 29,702 34,820 Capital contributions / dividend payouts -14,414 -6,320 (7,836) (9,511) (10,594) Closing adjustments Closing IEV-Year End 139,390 161,840 179,003 199,174 222,961 ROEV return % 11.3% 20.6% 15.4% 16.6% 17.3% APE 51,085 64,965 88,288 110,183 132,097 VNB Margin 8.1% 10.3% 11.8% 12.5% 12.8% Strong solvency ratio

ICICI Prudential Life is strongly capitalised. As it has the highest share of ULIP products, the capital requirement is lower. Its solvency margin stood at 276%, as compared to the regulatory requirement of 180%.

Solvency ratio


We have built in Rs 2bn from operating variance and assumption change Strong solvency margin to fund growth

0%

50%

100%

150%

200%

250%

300%

350%

400%

FY15

FY16

FY17

1HFY

18

Solvency Ratio


Page | 46

Management Team Enhanced Key Positions Occupied By Professionals Name Designation Background

Sandeep Bakhshi MD & CEO

He has obtained his Bachelor’s degree in Mechanical Engineering from Punjab Engineering College, Chandigarh, and a Post graduate degree in Business Management from Xavier Labour Relations Institute, Jamshedpur. He was with ICICI Lombard General Insurance Company Limited from April 1, 2002 to April 30, 2009.

Satyan Jambunathan Chief Financial Officer

He holds a Bachelor of Science degree in Statistics from the University of Madras, and is a Fellow of the Institute of Actuaries of India. He has been associated with the Company since August 17, 2000, and has been appointed as the Chief Financial Officer with effect from June 29, 2016. He has experience in the field of life insurance. Previously, he has worked with Life Insurance Corporation of India.

Asha Murali Appointed Actuary

She holds a Master’s degree in physics from Bangalore University. She is a Fellow of the Institute of Actuaries of India and of the Institute and Faculty of Actuaries, UK. She has been associated with the Company since May 2009, and been appointed as the Appointed Actuary with effect from June 29, 2016. She has experience in the field of Insurance. Previously, she worked with Life Insurance Corporation of India.

Source: Company

ICICI Pru Life is run by a strong mgt team


Page | 47

Valuation and view ICICI Pru Life Insurance is a play on the under –

penetrated Life Insurance market, with a strong distribution footprint of its parent ICICI Bank. Given the untapped distribution reach, along with tailwinds towards the financialisation of savings, we expect

36.2% CAGR growth in VNB for ICICI Prudential Life Insurance supported by margin improvement. We value the stock at FY20 1x EV +26x VNB to arrive at a target price of Rs 465/sh. Initiate coverage with a BUY rating.

Sensitivity 1HFY18 Sensitivity EV (% chg) VNB (% chg) Increase in 100bps in the reference rates (2.0) (5.2) Decrease in 100bps in the reference rates 2.1 5.5 10% increase in discontinuance rates (1.1) (10.6) 10% decrease in discontinuance rates 1.2 10.9 10% increase in Mortality rates (0.8) (6.1) 10% decrease in Mortality rates 0.8 6.1 10% increase in Acquisition expense Nil (20.5) 10% decrease in Acquisition expense Nil 20.5 10% increase in Maintenance expense (1.1) (5.5) 10% decrease in Maintenance expense 1.1 5.4 Tax rates increased to 28.84% (11.0) (22.0) Source: Company

Higher Interest rate will lead to lower NBV due to higher exposure of ULIP


Page | 48

Key negatives And risks Inherent risk of market volatility owing to high

exposure to ULIPs.

Lower Persistency and Mortality remain key risks, which could impact EV and VNB.

Insurance companies pay a lower corporate tax rate of 14.5%. Any move to increase this rate to the normal rate would significantly reduce EV and VNB. Our sensitivity shows 10% reduction in our TP, if tax rate goes up to 25%.

Any adverse changes to the deduction and incentives given to the policyholders under section 80C and Section 10 of the Income Tax Act can have negative effect.

Change in IRDA norms remain a sector level risk High exposure to Equity remain a key risk

ICCI PRUDENTIAL LIFE : INITIATING COVERAGE

Page | 49

Policyholder AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Total Premium earned 189,987 221,552 277,688 337,003 414,514 Income from investments and other income 12,292 150,360 114,700 143,112 168,248

Transfer from shareholders AC - 18 - - - Total Income 202,279 371,930 392,388 480,116 582,762 Commission 6,200 7,589 9,814 12,014 14,531 Operating expenses 18,883 23,572 28,763 34,572 42,113 Provisions 3,643 4,288 4,501 4,725 4,960 Total Expenses 28,726 35,450 43,077 51,312 61,604 Benefits Paid 124,274 149,979 172,770 190,857 223,101 Change in valuation of liabilities 35,155 174,976 164,257 222,245 280,027

Total 159,429 324,954 337,027 413,102 503,129 Surplus 14,124 11,527 12,283 15,702 18,029 Tax 704 788 840 942 1,172 Net Surplus 13,421 10,738 11,443 14,760 16,857 Transfer to shareholders AC 12,076 11,315 10,528 13,284 14,665 Source: Company, HDFC sec Inst Research

Shareholders AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Transfer from policyholders' a/c 12,076 11,315 10,528 13,284 14,665 Investment income 6,019 6,647 6,640 7,498 8,466 Total income 18,095 17,962 17,168 20,782 23,131 Expenses 338 380 408 439 472 Contribution to policyholders' a/c - 18 - - - Profit before tax 17,757 17,565 16,760 20,343 22,660 Taxes 1,212 1,028 1,089 1,322 1,473 PAT 16,545 16,537 15,671 19,021 21,187 Source: Company, HDFC sec Inst Research

ICCI PRUDENTIAL LIFE : INITIATING COVERAGE

Page | 50

Key Ratios In % FY16 FY17 FY18E FY19E FY20E Premium Growth 25.3 16.6 46.2 21.4 23.0 NBP Growth 26.9% 16.2% 27.9% 23.2% 19.0% APE Growth 9.9% 27.2% 35.9% 24.8% 19.9% Commissions Growth 12.1 22.4 58.3 22.4 21.0 Opex Growth 14.3 24.8 52.3 20.2 21.8 Commissions / premium 3.3 3.4 3.5 3.6 3.5 Opex / premium 9.9 10.6 10.4 10.3 10.2 PAT Growth 1.3 (0.0) (5.3) 21.4 11.4 RoAA 1.6 1.5 1.3 1.3 1.2 RoE 33.3 29.5 26.1 25.7 25.2 EPS (Rs) 11.55 11.52 10.92 13.25 14.76 BV (Rs) 35.4 42.7 48.2 54.8 62.2 DPS (Rs) 6.3 3.8 4.5 5.5 6.2 EV (Rs mn) 139,390 161,840 179,003 199,174 222,961 VNB (Rs mn) 4,123 6,660 10,375 13,720 16,845 EVOP (Rs mn) 21,195 22,950 24,999 29,682 34,380 ROEV 11.3 20.6 15.4 16.6 17.3 P/E (x) 33.8 33.9 35.7 29.4 26.4 P/ABV (x) 11.01 9.12 8.09 7.11 6.27 P/EV (x) 4.01 3.46 3.13 2.81 2.51 P/NBV (x) 101.7 59.8 36.7 26.3 20.0 Source: Company, HDFC sec Inst Research

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E Source Share capital 14,323 14,353 14,353 14,353 14,353 Reserve and surplus 36,401 46,996 54,832 64,342 74,936 Net worth 50,725 61,350 69,185 78,696 89,290 Credit/debit balance in fair value a/c 2,509 2,731 2,731 2,731 2,731

Policyholders' a/c 965,784 1,148,941 1,313,197 1,535,442 1,815,470 Funds for future appropriation 6,619 6,042 6,785 6,954 7,128 Total Liabilities 1,025,637 1,219,063 1,391,898 1,623,823 1,914,618 Application Shareholders' Investments 62,124 66,403 74,981 84,661 95,429 Policyholders' investments 215,156 270,674 309,353 361,687 427,628 Asset to cover linked liabilities 752,958 878,783 1,004,361 1,174,272 1,388,358 Loans 443 806 806 806 806 Fixed assets + DTA 2,197 2,138 2,138 2,138 2,138 Net current assets (7,241) 259 259 259 259 Debit balance in P&L - - - - - Total Assets 1,025,637 1,219,063 1,391,898 1,623,823 1,914,618 Source: Company, HDFC sec Inst Research


Max Financial Services BUY


Diversified playMax Financial Services is the holding company of Max Life. Max Life is the fourth-largest private sector Life Insurance company in the country, with a market share of 7.2% in the private sector. It has a diversified product mix, with a focus on long-term saving products.

Over the last four years, its market share in the New Business Premium has increased marginally. It has strong bancassurance partners like Axis Bank, Yes Bank and agency channels, which contribute 62% and 25% respectively to the channel mix.

We expect New Business Premium to grow at 18% CAGR over FY17-20E. During 8MFY18, NBP is up 15.1%, though APE is up 14.3% driven by individual APE growth of 18.6%. The increasing scale and higher share of the Protection business would help improve NBM to 19% by FY20 from 18.2% in FY17. VNB is expected to grow at a CAGR of 20.4%, with EVOP return hovering at 18-19%.

We value Max Financials 70% stake in Max Life at FY20 1x EV + 28x VNB, and apply a discount, translating into Rs 665/sh. Initiate with BUY.

Balanced product mix: Max Life has a balanced product mix, with a focus on profitability. PAR products contribute 53%, with focuss on longer duration products. The contribution of PAR/Non-PAR/Protection/ULIP/Fund is 53/8/4/31/4%. The company has lost some market share in recent months owing to less focus on ULIPs. We expect growth to bounce back as flows to ULIPs stabilise.

Strong channel mix: Max Life’s bancassurance channel has increased at a CAGR of 40% over FY15-17, driven by new tie-ups with Yes Bank and LVB. Contribution from Axis Bank continues to be strong. It also has a strong agency channel which supports growth.

Protection business to drive margin improvement: Max Life is targeting an increase in its Protection share to 10% by FY20, from the current 6% in FY17. We expect the Protection share to improve to 8.5%, leading to NBM improving to 19% from the current 18.2%.

Improving operating performance: Max Life, like other players, has improved its Persistency Ratio through better on-boarding and customer service. In the last four years, its 13th and 61st Persistency Ratios have improved to 80% and 56% from 74% and 32% respectively. 19% of the premiums were sourced digitally, as compared to 5% in FY16. This would aid in further improvement in Persistency and cost.

KEY SUMMARY of MAX LIFE (Rs bn) FY16 FY17 FY18E FY19E FY20E NBP 28.8 36.7 42.9 50.9 60.4 Growth (%) 12.0% 27.2% 16.9% 18.7% 18.7% APE 21.6 27.5 32.4 38.5 45.8 Growth (%) 8.7% 27.1% 17.9% 19.0% 19.0% VNB 3.9 5.0 6.1 7.3 8.7 VNB Margin (%) 17.9 18.2 18.9 19.0 19.0 EV 56.2 65.9 74.4 84.1 95.8 Change (%) NA 17.3% 12.9% 13.1% 13.9% MCap/EV* (x) 4.10 3.49 3.09 2.73 2.40 P/Bv* (x) 8.00 9.18 7.82 6.71 5.72 ROEV (%) 17.0 19.9 18.0 18.5 19.0 Source: Company, HDFC sec Inst Research, * For Max Financial


Sensex 33,848

KEY STOCK DATA

Bloomberg MAXF IN

No. of Shares (mn) 268

MCap (Rs bn) / ($ mn) 161/2,512

6m avg traded value (Rs mn) 564



3M 6M 12M

Absolute (%) 2.7 (3.0) 12.7

Relative (%) (5.5) (12.8) (16.4)


Promoters 30.3

FIs & Local MFs 30.0

FPIs 26.1



MAX FINANCIAL : INITIATING COVERAGE

Page | 52

Balanced product mix Max Financial is the holding company, and owns 70%

stake in Max Life.

Max Life is the fourth-largest Life Insurance company. It was originally formed as a 74:26 JV between the Max Group and New York Life. The stake owned by New York Life was bought by Japan’s Mitsui Sumitomo in FY13.

Over the last four years, its New Business Premium has grown at a CAGR of 17.5%, with the market share remaining largely stable at 7.2%. However, it has lost market share in 8MFY18 to 6.6% due to higher flows towards ULIP which is less focuss for the company.

In the Individual segment, it has a market share of 10.3% amongst private players. This segment has grown at a CAGR of 17.8% during the last four years.

Max Life’s product mix is balanced, with a focus on long-term saving instruments. Contribution of PAR/Non-PAR/ULIP/Protection/Fund-based is 53/8/4/31/4% respectively.

Max Life has a strong bancassurance relationship with Axis Bank since 2008 (Axis Bank owns 5% stake as a part of current partnership, expiring in FY21). It also a tie-up with Yes Bank (exclusive) and LVB. Collectively, bancassurance contributes 62% to its Individual channel mix. The channel has grown at a CAGR of 24.7% over the last 4 years.

Max Life has a productive agency channel, which contributes 25%.

Over the last few years, it has sharply improved its Persistency Ratio, driven by tighter regulations, better on-boarding of customers and improvement in customer service. Its 13st month Persistency has improved from 76% in FY13 to 80% in FY17. Further, even the 61st Persistency bucket has improved from 32% to 53%. The improvement in Persistency, along with a higher business scale, has helped improve the margin profile.

It focusses on long-term saving products and protection. As on FY17, the average policy term stood at 25 years, while the average age of the policyholder is 35 years.

Its claim settlement ratio is strong at 97.1% as on FY17

Its VNB margin was healthy at 18.2% in FY17, as compared to 17.9% in FY16. And it is targeting margin of 20% by FY20 as it working on improving protection mix to 10%

It focus on the digital channel has started showing results. In 1HFY18, 19% of the customers were sourced through the digital channel, as compared to 11% in FY17.

In FY17, New Business Value contributed 7.6% to its Embedded Value, while Return on Embedded Value (ROEV) was 19.9%.

Max Life has exclusive bancassurance tie-ups with Axis bank and Yes Bank Merger with HDFC Life was called off in July 2017, owing to IRDA diktat on merger of Life and Non-life (holding company)

http://www.business-standard.com/search?type=news&q=new+york+life

http://www.business-standard.com/search?type=news&q=mitsui+sumitomo

http://www.business-standard.com/search?type=news&q=mitsui+sumitomo


Page | 53

New Busines Premium Trend Group Business Contribution is ~10%


Market Share Based On New Business Premium VNB Margin Comparison


New Business has grown at a CAGR of 17.5% over FY14-17 80% of the group business is protection business The trend in the new business has moderated due to higher flows to ULIP; market share too has declined

19.0 22.6 25.7 28.8 36.7 15.7

1914 12

27

15

0

5

10

15

20

25

30

0

5

10

15

20

25

30

35

40

FY13

FY14

FY15

FY16

FY17

1HFY

18

New Business Premium % growth - RHSRs.Bn

6.2%

7.7%

7.4%7.0%

7.2%

6.6%

5%

6%

6%

7%

7%

8%

8%

FY13

FY14

FY15

FY16

FY17

1HFY

18 0.0%

5.0%

10.0%

15.0%

20.0%

25.0%


SBI Life HDFC Std Life ICICI Pru Life

Max Life Bajaj

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

FY13

FY14

FY15

FY16

FY17

1HFY

18


Rs.bn


Page | 54

Diversified Product Mix On APE Persistency Across Buckets Has Improved


Channel Mix: Individual NBP Channel Mix: Individual APE


0%10%20%30%40%50%60%70%80%90%

13th Month

25th Month

37th month

49th Month

61th month

FY13 FY14 FY15 FY16 FY17 1HFY18

53% on the product mix is PAR while rest is Non-PAR; During 1HFY18, share of Protection increased to 6% 10% of the retail premium is sourced through direct channel including digital Bancassurance channel growth is led by the tie-up with Axis Bank and Yes Bank

32% 32% 29% 32%

59% 58% 58% 53%

6% 9% 12% 14%4% 1% 1% 1%

0%10%20%30%40%50%60%70%80%90%

100%

FY15

FY16

FY17

1HFY

18

Proprietory Axis Bank Other Banks Others

27.6% 27.4% 31.1% 36.2%

56.1% 56.8% 53.4% 48.0%

12.8% 10.8% 8.7% 8.8%2.4% 3.8% 5.2% 6.0%

0%

20%

40%

60%

80%

100%

FY15

FY16

FY17

1HFY

18

ULIP PAR Non-Par Non-Par Protection Fund based

28% 28% 25% 27%

56% 58% 62% 58%

6% 4% 3% 2%10% 11% 10% 12%

0%

20%

40%

60%

80%

100%

FY15

FY16

FY17

1HFY

18

Individual Agents Corp Agents - Banks Corp Agents - Other Brokers Direct Business


Page | 55

Trend in AUMs Agency Channel Productivity


Opex Cost Trend Digital Showing Good Traction


0%

5%

10%

15%

20%

25%

30%

FY13

FY14

FY15

FY16

FY17

Opex/total premium Comm/Total premium

Equity Mix is 23% of AUM Agency channel is highly productive for the company Commission and operating cost for Max Life is high due to higher payout for PAR products

0%

20%

40%

60%

80%

100%

120%

140%

0%

5%

10%

15%

20%

FY16

FY17

1HFY

18

Growth in Direct to E-commerce Sales - RHSDigitally Sourced Customers

0

50,000

100,000

150,000

200,000

250,000

0

50,000

100,000

150,000

200,000

250,000

FY15

FY16

FY17

1HFY

18

No of AgentsIndividual NBP per Individual agent (Rs)- RHS

254 337 368

104

106 110

-

100

200

300

400

500

600

FY16 FY17 1HFY18

Debt Equity Rs bn


Page | 56

New Business Premium to grow at a CAGR of 18.1% Max Life’s New Business Premium has grown at a

CAGR of 17.5% over the last three years. During 8MFY18, premium growth at 15.1% is lower than 15.7% for the private sector, owing to a lower share of ULIPs, which displayed strong growth. APE growth is 14.3%. Max Life continues to focus on balanced and profitable growth. It is not aggressively focussing on ULIPs like other players, owing to low margins and persistency risk in case of volatile markets. We expect the growth rate to improve, as the equity market stabilises after a sharp run in the last one year. We expect New Business Premium and APE to grow at a CAGR of 18.1% and 18.6%.

Trend In NBP And APE


VNB Margin to improve to 19% by FY20

We expect margins to improve on higher share of the Protection Business, from the current 6% to 8.5% in FY20. Also, higher scale and improving Persistency will help post improvement in the New Business margin from 18.2% in FY17 to 19% in FY20.

Trend In VNB And VNB Margins


Mgt focuss on business after merger getting called off should led to better growth Mgt targets 10% Protection share by FY20 Protection share is gradually improving, driven by both Individual as well as Group business 15.0

15.516.016.517.017.518.018.519.019.5

01,0002,0003,0004,0005,0006,0007,0008,0009,000

10,000

FY16

FY17

FY18

E

FY19

E

FY20

E

Value of New Business VNB Margin - RHS

Rs mn %

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

FY16

FY17

FY18

E

FY19

E

FY20

E

New Business Premium APE

Rs mn


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VNB To Grow at a CAGR of 20.4%; ROEV at 18-19%

(Rs Mn) FY16 FY17 FY18E FY19E FY20E Opening IEV 52,320 56,170 65,890 74,397 84,126 Value added by new business during the period 3,880 4,990 6,108 7,324 8,712 Expected return on existing business 4,990 6,200 5,771 6,452 7,230 IEV operating earnings 8,870 11,190 11,879 13,775 15,943 Economic variances -630 1,710 Other non-operating variances 0 0 0 0 Total IEV earnings 8,240 12,900 11,879 13,775 15,943 Capital contributions / dividend payouts -4,390 -3,180 -3,372 -4,046 -4,248 Closing adjustments 0 0 0 0 Closing IEV-Year End 56,170 65,890 74,397 84,126 95,820 ROEV return % 17.0% 19.9% 18.0% 18.5% 19.0% APE 21,627 27,485 32,391 38,534 45,842 VNB Margin 17.9% 18.2% 18.9% 19.0% 19.0% Source: Company, HDFC sec Inst Research

Strong solvency ratio

Max Life’s solvency margin stood at 300%, as compared to the regulatory requirement of 180%. It is strongly capitalised for growth.

Solvency ratio


We build in Rs 500mn income from operating variances and assumption change Capital positions remain strong

0%50%

100%150%200%250%300%350%400%450%

FY15

FY16

FY17

1HFY

18

Solvency Ratio


Page | 58

Strong Management Team Key Positions Occupied By Professionals Name Designation Background

Rajesh Sud Managing Director

Rajesh Sud has 24 years of experience in the banking and financial services sector. He has rich experience of transforming businesses in a challenging environment. Since November 2008, when Sud took over as CEO & Managing Director, he has led the company through one of the most dynamic period for the industry, and established the company as one of the leading Life Insurance players in the country.

V. Viswanand Sr. Director and COO Vishwanand is part of the company for last 16 years.

Prashant Tripathy Sr. Director and CFO Prashant has 22 years of experience and has worked with organization like Tata Steel, GE etc. He is with the company for last 10 years

Mihir Vohra Chief Investment Officer Mihir is leading the investment team. He has been with the company for the last 3 years and has worked with companies like HSBC Global Asset, ICICI Prudential, Birla Sun Life AMC

Jose John Director and Appointed Actuary Jose has 17 years experience and has worked with organization like Prudential UK, Metlife UK etc. He is with the company for last 8 years

Source: Company

Max Life has a strong management team supported by group strategic team


Page | 59

Valuation and view Max Financial, which owns 70% in Max Life, is one of

the investment plays in the Insurance sector. Max Life has a balanced and diversified product and channel mix, with a focus on profitability. Growth has lagged, owing to a low share of ULIPs as compared to other private players. However, we expect growth to stabilise as the equity market pauses after strong returns, leading to growth in the non-ULIP segment. Given the strong brand, leadership, and tailwinds

towards the financialisation of savings, we expect 20.4% CAGR growth in the NBV for Max Life Insurance. At 2.4x EV multiple, the stock is attractive. We value Max Financial at FY20 1x EV +28x VNB, and apply a 15% holding company discount and 10% haircut for the Axis Bank and group structure to arrive at a target price of Rs 665/sh. Initiate coverage with a BUY rating.

Sensitivity Table As On 1HFY18 Sensitivity EV (% chg) VNB (% chg) Risk free rates- 1% increase -2% 6% Risk free rates- 1% decrease 2% -8% Lapse/Surrender- 10% increase -2% -6% Lapse/Surrender- 10% decrease 2% 6% Mortality- 10% increase -1% -3% Mortality- 10% decrease 1% 4% Expenses- 10% increase -1% -5% Expenses- 10% decrease 1% 5% Equity values- 10% immediate rise 1% Negligible Equity values- 10% immediate fall -1% Negligible Source: Company

Post the HDFC Life merger being called off, the stock has languished Due to high exposure to PAR products, higher interest rate has a positive impact on VNB


Page | 60

Stake Dilution for Axis Bank Tie-Up Axis Bank is a major channel for Max Life as it

contributes more than 58% to its NBP-APE. In order to maintain its exclusive tie-up, both the promoter entities of Max Life- Max Financial and Suminto- have been giving equity stake in Max Life to Axis Bank at Rs 10 (face value), and then buying it back at fair market value. This transaction allows Axis Bank equity upside on Max Life’s performance. For eg. In FY17, Max Financial and Mitsui Sumitomo gave 4% and 1% holding in Max Life to Axis Bank at face value. In FY17, Max Financial acquired 1% stake (19.2mn shares) in Max Life from Axis Bank at Rs 2.1bn.

We treat this as a cost for Max Life business and knock off 7% from our fair value.

Holding company’s structure Max Financial is a holding company and has no

operation business. At the holding company level, it incurs a net cost of Rs 700-800mn due to group level employee cost and other consultancy charges after recovering some cost from the group companies. We treat this as a cost for Max Life business and knock off 4% from our fair value

Particulars (Rs Mn) FY16 FY17 Total Cost 860.2 1,022.8 Recovery of Cost from Group companies 162.4 212.2

Net Cost 697.8 810.6 Source: Company

Stake given to Axis Bank along with cost associated with Group level people are additional cost for shareholders


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Key negatives And risks Sustained improvement in ULIPs can lead to further

loss in market share and business to the competition.

Lower Persistency and Mortality remain key risks which would impact EV and VNB.

Insurance companies pay a lower corporate tax rate of 14.5%. Any move to increase this rate to the normal rate would significantly reduce EV and VNB. Our TP would get reduced by 10%, if tax increases to 25%.

Income from investment products attracts no tax under Section 10. As such, this increases the appeal of saving products of Insurance companies. Any move to tax income from Insurance can lead to an adverse effect on growth.

Change in IRDA norms remain a sector level risk Holding company structure reduces M&A opportunity


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MAX LIFE Policyholder AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Total Premium earned 91,389 106,802 119,697 136,654 156,871 Income from investments and other income 13,046 42,296 36,002 42,179 49,229

Transfer from shareholders AC 19 2 - - - Total Income 104,454 149,101 155,699 178,833 206,100 Commission 8,210 9,364 10,790 12,718 15,029 Operating expenses 12,496 15,912 17,574 19,788 22,320 Provisions 763 803 843 886 930 Total Expenses 21,469 26,080 29,207 33,392 38,278 Benefits Paid 31,464 37,775 47,318 55,629 65,079 Change in valuation of liabilities 46,888 78,693 72,265 82,167 94,069

Total 78,352 116,468 119,583 137,796 159,147 Surplus 4,632 6,553 6,909 7,646 8,674 Tax Net Surplus 4,632 6,553 6,909 7,646 8,674 Transfer to shareholders AC 3,351 5,551 5,873 6,499 7,373 Source: Company, HDFC sec Inst Research

Shareholders AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Transfer from policyholders' a/c 3,351 5,551 5,873 6,499 7,373 Investment income 2,190 3,089 3,230 3,773 4,374 Total income 5,541 8,640 9,103 10,272 11,748 Expenses 415 961 769 692 692 Contribution to policyholders' a/c 19 2 - - - Profit before tax 5,108 7,677 8,334 9,580 11,056 Taxes 718 1,083 1,175 1,351 1,559 PAT 4,389 6,594 7,159 8,230 9,497 Source: Company, HDFC sec Inst Research


Page | 63

Key Ratios In % FY16 FY17 FY18E FY19E FY20E Premium Growth 12.8 16.9 12.1 14.2 14.8 NBP Growth 12.0 27.2 16.9 18.7 18.7 APE Growth 8.7 27.1 17.9 19.0 19.0 Commissions Growth 9.7 14.1 15.2 17.9 18.2 Opex Growth 0.6 27.3 10.4 12.6 12.8 Commissions / premium 21.7 5.3 5.0 5.0 5.0 Opex / premium 4.6 21.5 12.0 14.3 14.6 PAT Growth (10.2) 20.1 25.3 17.6 17.0 RoAA 1.3 1.6 1.6 1.6 1.5 RoE 21.8 29.2 28.9 27.7 27.3 EPS (Rs)* 11.45 17.20 18.67 21.46 24.77 BV (Rs)* 52.5 65.3 76.7 89.4 105.0 EV (Rs mn) 56,170 65,890 74,397 84,126 95,820 VNB (Rs mn) 3,880 4,990 6,108 7,324 8,712 EVOP (Rs mn) 8,870 11,190 11,879 13,775 15,943 ROEV 17.0 19.9 18.0 18.5 19.0 P/E (x)* 52.4 34.9 32.1 28.0 24.2 P/ABV (x)* 11.42 9.18 7.82 6.71 5.72 P/EV (x) * 4.10 3.49 3.09 2.73 2.40 P/NBV (x)* 44.8 32.9 25.5 19.9 15.4 Source: Company, HDFC sec Inst Research * For Max Financial

Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E Source Share capital 19,188 19,188 19,188 19,188 19,188 Reserve and surplus 954 5,867 10,225 15,093 21,061 Net worth 20,142 25,055 29,413 34,281 40,249 Credit/debit balance in fair value a/c 97 38 38 38 38

Policyholders' a/c 325,054 406,692 478,957 561,124 655,192 Funds for future appropriation 14,563 15,565 16,636 17,780 19,004 Total Liabilities 359,856 447,350 525,044 613,224 714,483 Application Shareholders' Investments 23,918 32,303 37,732 43,745 50,936 Policyholders' investments 202,784 255,483 300,360 351,388 409,806 Asset to cover linked liabilities 131,538 155,910 183,296 214,436 250,086 Loans 764 1,333 1,333 1,333 1,333 Fixed assets + DTA 1,679 1,623 1,623 1,623 1,623 Net current assets (827) 699 699 699 699 Debit balance in P&L - - - - - Total Assets 359,856 447,350 525,044 613,224 714,483 Source: Company, HDFC sec Inst Research * For Max Financial

• •


Page | 64

Key Industry Terms APE (Annualised Premium Equivalent) –APE

(Annualised Premium Equivalent) is the sum of annualised first year premiums on regular premium policies, and ten percent of single premiums, on the new business written during any period from both the individual and group customers. For the purposes of the APE calculation, consider all premiums received in the group business and any top-up premiums as single premiums. The APE is adjusted for any new business cancellations effected during the period

Embedded Value (EV) -The measure of the consolidated value of shareholders’ interest in the existing life insurance business. It represents the present value of shareholders’ interests in the earnings distributable from the assets allocated to the business after sufficient allowance for the aggregate risks in the business and is generally expressed as a sum of Adjusted Net worth and Value of In-force of business. Embedded value determined as per the requirements and principles prescribed in the Actuarial Practice Standard 10 issued by the Institute of Actuaries of India is referred to as Indian Embedded Value.

Insurance penetration- It is the Total Premium (Renewal Premium+ New Business Premium as a percentage of the GDP.

Return on Embedded Value -Return on Embedded Value is the ratio of EV increase before dividend for any given period to the EV at the beginning of that period.

Persistency Ratio -Persistency ratios for period ending March and June have been calculated based on the relevant cohort of new business written from

April to March and from June to May respectively measured with a one month lag to allow for grace period as per IRDAI regulations. The ratios may vary from similar information presented publicly either due to the cohort of business belonging to a different period or due to the methodology used in these information being based on regulations applicable at those points in time.

Protection Margin- It is measured as the ratio between protection gap and protection needs as per Swiss Re Institute

Total premium (Gross Premium) -Measure of premiums received on both retail and group products and is the sum of first year and renewal premiums on regular premium policies and single premiums received by the Company during any given period

Total New business premium -First year premiums on regular premium policies and single premiums, on the new business written during any period from both the individual and group customers. For the purposes of the Total New business premium calculation, consider all premiums received in the group business and any top-up premiums as single premiums.

Value of new business (VNB) and VNB margin -VNB is the present value of expected future earnings from new policies written during any given period and it reflects the additional value to shareholders expected to be generated through the activity of writing new policies during any given period. VNB for any period reflects actual acquisition costs incurred during that period. VNB margin is the ratio of VNB to APE for any given period and is a measure of the expected profitability of new business


Page | 65

1yr Price Movement

600

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SBI LIFE

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ar-1

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Max Financial

200250300350400450500550600

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ICICI Pru Life

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


Page | 66

Disclosure: I, Vishal Rampuria, CA, author and the name 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. Any holding in stock –No HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475. Disclaimer: This report has been prepared by HDFC Securities Ltd and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. 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mailto:[email protected]


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