-
SECTOR UPDATE 6 JUL 2018
Life Insurance 3.0
HDFC securities Institutional Research is also available on
Bloomberg HSLB & Thomson Reuters
Stocks price in expected growth moderationFY19 moderating
growth: After two years of Private sector Ind. NBP growth ~26% p.a.
we expect growth for the sector to cool down to 11-14% in FY19E.
This would still imply a FY16-19E CAGR of 20.7% to 21.8%. The
highest 3 yr CAGR since FY12 for private players has been 21.4% for
the three year ended FY18.
First two months are already indicating a sharp moderation with
FYTD Ind. NBP private sector growth coming in at 8%. Moderation
should be expected also because FY18 was helped by demonetization.
Further, FY19 on has been volatile for the markets so far and we
will not be surprised if growth comes in lower than our estimates
if markets remain lacklusture for longer.
Market implied growth rate (MIGR) analysis shows value: We have
run MIGRs on our coverage stocks and the results stunned us- MAX
Financial (MAXF) is now available at a FY21-29E APE CAGR of just
6.9%. Similarly SBILIFE and IPRU MIGRs are at 11% and 9%
respectively.
Companies covered IPRU: We like IPRU’s retail dominated
business, and
strong distribution through parent ICICI Bank. IPRU also has
additional margin levers in the form of increasing share of
protection business (FY18: 5.7% of total APE, +180 bps YoY). We
expect FY18-20E APE CAGR of 16% and believe increasing scale and
higher share of the protection business will drive VNB margins
higher by 75bps by FY20E. RoEV’s are expected to be at the
17.5-18.0% level. We value
IPRU at EV + NBV multiple of 26.3x based on our DCF, deriving a
March 2019 TP of Rs 481 (+31.0%).
MAXF: Equipped with its partnerships with Axis and Yes, Max Life
(MAXL) closed FY18 at 4th position with individual NBP market share
at 9.9% amongst the private sector insurers. Our analysis indicates
that over FY12-21E Axis has gained an average ~Rs 1.4bn (22% of
FY18 VNB) in MAXL share transactions as indirect compensation for
distribution. We have adjusted VNB downward by ~22% in order to
account for the same in our valuation. We have fine tuned our
estimates and value MAXL at EV + 26.4x (FY20E) VNB based on our
DCF. We further adjust valuation for leakage at MAXF and apply
holding company discount @15% deriving a March 2019 TP for MAXF of
Rs 567 (+34.9%). MAXF is our top pick.
SBILIFE: Cost leadership, further scope to expand margins,
strong distribution of the parent SBI, an underpenetrated Insurance
sector, along with financialization of savings augur well for the
company. VNB margins for the company remain understated and adj.
VNB margins are closer to 19%. We remain extremely bullish on the
prospects of SBI led distribution push and are building in sector
leading growth. We expect APE to grow at a 20% CAGR over FY18-20E
and VNB margins to improve from current 16.3% to 16.7% by FY20E.
RoEV’s are expected to be at the 19.4% level. We value SBILIFE at
EV + NBV multiple (FY20E) of 31.6x based on our DCF. This
translates to a March 2019 TP of Rs 870/sh (+30.8%).
IPRU: FINANCIAL SUMMARY (Rs bn) FY17 FY18 FY19E FY20E APE 66.3
77.9 88.8 104.9 Growth (%) 29.7 17.6 14.0 18.0 VNB 6.7 12.9 15.1
18.1 VNBM(%) 10.1 16.5 17.0 17.3 EV 161.8 187.9 212.8 242.9 Growth
(%) 16.1 16.1 13.3 14.1 P/EV (x) 3.3 2.8 2.5 2.2 P/VNB (x) 54.8
26.4 20.8 15.7 Op. RoEV (%) 16.5 22.7 17.6 18.0
MAXF: FINANCIAL SUMMARY (Rs Mn) FY17 FY18 FY19E FY20E APE 27.5
32.5 37.0 43.0 Growth (%) 27.1 18.2 14.0 16.0 VNB 5.0 6.6 7.6 8.9
VNBM (%) 18.2 20.2 20.5 20.7 EV 65.9 74.5 86.4 100.7 Growth (%)
17.3% 13.0% 16.1% 16.5% P/EV (x) 2.4 2.1 1.8 1.6 P/VNB (x) 18.8
13.0 9.8 6.8 Op. RoEV (%) 19.9 19.7 20.1 20.2
SBILIFE: FINANCIAL SUMMARY (Rs bn) FY17 FY18 FY19E FY20E APE
66.0 85.4 102.5 123.0 Growth (%) 35.4 29.3 20.0 20.0 VNB 10.4 13.9
16.9 20.5 VNBM (%) 15.7 16.3 16.5 16.7 EV 165.7 191.4 226.4 267.6
Growth (%) 27.5 15.5 18.3 18.2 P/EV (x) 4.0 3.5 2.9 2.5 P/VNB (x)
48.2 34.1 25.9 19.4 Op. RoEV (%) 23.0 17.8 19.4 19.4 Source:
Company, HDFC sec Inst Research
Madhukar Ladha [email protected] +91-22-6171-7323
-
LIFE INSURANCE : SECTOR UPDATE
Page | 2
Contents Life insurance history
...................................................................................................................................
3
Growth moderation expected in FY19
..............................................................................................................
5
FY19TD Review
..................................................................................................................................................
5
Comments on Individual FY19TD New Business Premium basis and
market share ........................................ 7
Trends in Annual Market Shares and Ticket sizes
............................................................................................
7
Market Implied Growth Rate (MIGR)
.............................................................................................................
12
Recap from our insurance events
...................................................................................................................
12
What are the proposed changes as a result of IND-AS 117 (IFRS
17)? ...........................................................
13
Companies
ICICI Prudential Life Insurance
........................................................................................................................
17
Max Financial Services
....................................................................................................................................
27
SBI Life Insurance
............................................................................................................................................
41
-
LIFE INSURANCE : SECTOR UPDATE
Page | 3
Life insurance history The last 15 years for private life
insurers have been
bumpy to say the least. As new entrants to insurance in India,
the private sector life insurance companies were focused on
expanding distribution and geographical presence to grow business
and capture market share.
During the initial years, life insurance penetration in the
country rose from 2.6% in FY02 to 4% by FY08. This was also as a
result of large scale aggressive mis-selling by the new
entrants.
The tides turned as tough macro-economic conditions caused by
the global financial crisis impacted earnings and savings of the
country.
Additionally, regulatory reform in 2010 (in the form of cap on
discontinuation charges, minimum level of sum assured etc.) forced
insurance companies to re-align their products and business
models.
Second growth phase
Private players bled while recording negative APE growth in FY11
and FY12. After two years of declines FY12 formed a base for life
insurers to re-grow business.
Post the overhaul, Total Individual NBP declined at 5% p.a.
between FY12-15. After 7 years penetration had fallen to 2.6% in
FY15 down from 4% in FY08 and at the same level seen in FY02.
However private sector Individual NBP growth between FY12-15 was
+0.8% p.a. while LIC declined 8.3% p.a.
In this second phase of growth private life insurers made a come
back shrugging off the regulatory
headwinds and raking in an average rolling 3-year CAGR in
Individual APE of 13.2% (NBP terms 12.2% pa) during FY12-18 v/s
LIC’s -4.1% (NBP terms +0.9% pa) as a result total industry grew at
a 3 yr rolling CAGR of 3.4% (NBP terms 5.0% pa).
Last three years Individual new business growth CAGR (FY15-18)
in APE/NBP basis has been 21.3%/21.4% for private sector insurers,
10.2%/16.4% for LIC and 15.9%/18.5% for total industry.
FY12-18 Individual new business growth CAGR in APE/NBP basis has
been 12.6%/10.6% for private sector insurers, -1.5%/3.3% for LIC
and 4.8%/6.1% for total industry.
While market share of LIC in total business NBP has remained
firm at ~70%, it is continuously losing ground to private insurers
in the relatively higher margin individual business segment where
its market share is down 1100 bps just in five years (FY13-18).
Individual NBPs YoY growth (%)
Source: IRDAI, HDFC sec Inst Research
-8 -6
1813 26
26
-2 0
-22
0
39
13
-4 -2 -9
5
33
19
-30
-20
-10
0
10
20
30
40
50
FY13
FY14
FY15
FY16
FY17
FY18
Private players LIC Industry Total
%
-
LIFE INSURANCE : SECTOR UPDATE
Page | 4
Long term remains bright: We continue to like the long term
prospects of life insurance in India given a) scope for further
penetration b) Increasing financialisation of savings- India
continues to be a market where insurance is viewed as a saving
instrument opposed to one that provides protection c) Glaring
protection gap ~92% d) Visibly improving persistency trends- almost
all private insurers are reporting better persistencies over last
few years.
Individual NBPs 3 yr rolling CAGR (%)
Source: IRDAI, HDFC sec Inst Research
Life insurance penetration (% of GDP)
Source: IRDAI, HDFC sec Inst Research
2.62.3 2.5 2.5
4.1 4.0 4.0 4.04.6 4.4
3.4 3.2 3.12.6 2.7 2.7
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Life insurance penetration (% of GDP)
0.8
7.8
18.721.4
-8.3 -7.7
3.0
16.4
-5.0-2.1
8.4
18.5
-10
-5
0
5
10
15
20
25
FY12
-15
FY13
-16
FY14
-17
FY15
-18
Private players LIC Industry Total%
-
LIFE INSURANCE : SECTOR UPDATE
Page | 5
Growth moderation expected in FY19 Despite our long term
positive stance, we do believe the industry is due for a moderation
in growth at least in FY19E. Private Individual NBP growth CAGR has
been ~26% for FY16-18 and last three year CAGR is 21.4% (at highest
levels since product rationalization of 2010 and after new business
growth made a base in FY12).
Owing to a higher base (helped by demonetization last year), an
election year, higher interest rates (making fixed income more
attractive) and uncertainty in domestic and global markets (as
ULIPs still form a significant portion of overall insurance sales)
we take this opportunity to reduce our outlook for Individual new
business growth and now forecast a private players industry growth
to come in between 11-14% vs. our earlier expectation of 15-18%
growth.
An 11-14% growth in private insurers total NBP would still imply
a FY16-19E CAGR of 20.7% to 21.8%. The highest 3 yr CAGR for
private players has been 21.4% for the three year ended FY18.
We expect total private insurers Ind. APE growth for FY19E to
come in the range of 8-10% as share of single premium in NBP
increases.
Given the high degree of correlation between markets and savings
inflows and if markets remain sub-dued for a longer period of time,
we will not be
surprised if growth actually rings in even below our lowered
expectations.
Also remember growth in FY18 was aided by demonetization- IPRU
registered NBP growth of 141%/99% YoY in the months of April and
May 2017.
While we are seeing early signs of a slow-down in growth, first
two months of data is a little too early to conclude, never the
less as detailed above we do expect some moderation in growth and
are lowering our estimates for FY19-20E.
FY19TD Review Individual NBPs and APEs growth for private
players
came in at 8%/1% FY19TD. FY19TD Ind. NBP/APE growth for LIC has
been strong at 16%/13%. Total industry (including LIC) Ind.
NBPs/APEs grew 13%/7% for YTDFY19.
Ex. SBI Life and ICICI Pru, other private insurers recorded a
healthy growth in NBPs of 28% FY19TD.
Within the market leaders it seems that SBI has made a comeback
with a +26% growth in Ind. NBPs in May 2018 after posting a 11% dip
in Ind. NBPs in April 2018 (April 2017 was a 100%+ YoY growth month
for SBILIFE).
IPRU struggles with a YTD Ind. NBP decline of 25%, although it
is still early days and this dip is on a high base set in FY18
where April-May 2017 growth was in excess of 100%.
-
LIFE INSURANCE : SECTOR UPDATE
Page | 6
May 2018 and FY19TD NBP for Select Life Insurers
Particulars Individual Group Total YTD - Individual YTD - Group
YTD - Total
May-18 YOY (%) May-18 YOY (%) May-18 YOY (%) FY19TD YOY (%)
FY19TD YOY (%) FY19TD YOY (%) Aditya Birla Sun Life 0.8 48 1.2 32
2.0 38 1.3 47 1.6 3 2.9 19 Bajaj Allianz Life 0.9 15 1.2 1 2.1 7
1.9 -6 2.2 -14 4.1 -11 Bharti Axa Life 0.4 72 0.2 37 0.6 57 0.7 109
0.4 46 1.1 79 DHFL Pramerica Life 0.3 46 0.9 32 1.2 35 0.5 48 1.8
46 2.4 46 HDFC Standard Life 4.5 51 3.4 11 7.9 31 7.6 73 7.9 53
15.5 62 ICICI Prudential Life 4.7 -25 0.8 -20 5.5 -25 8.9 -25 1.3
-2 10.1 -23 IDBI Federal Life 0.4 -16 0.1 17 0.4 -12 0.6 -23 0.1 32
0.7 -17 Kotak Mahindra Old Mutual Life 0.8 -4 1.2 -1 2.1 -2 1.8 21
2.1 2 3.9 10 Max Life 2.1 18 0.3 33 2.4 20 3.5 11 0.5 25 4.0 13 SBI
Life 4.5 26 1.9 -13 6.4 11 7.3 9 3.2 0 10.5 6 Tata AIA Life 0.9 32
0.1 -7 1.0 28 1.3 22 0.2 142 1.5 30 Private players Total* 24 10 13
1 36 7 42 8 24 13 66 10 LIC 31 22 61 4 92 9 52 16 84 0 136 6
Industry total 55 17 74 4 128 9 93 13 108 3 201 7 *Note: Total will
not add up as we have excluded smaller sized private insurers
Source: IRDAI, HDFC sec Inst Research May 2018 and FY19TD NBP
Market share (%) for Select Life Insurers
Particulars Individual Group Total YTD - Individual YTD - Group
YTD - Total
May-18 YOY (bps) May-18 YOY
(bps) May-18 YOY
(bps) FY19TD YOY
(bps) FY19TD YOY
(bps) FY19TD YOY
(bps) Aditya Birla Sun Life 3 81 10 618 5 121 3 81 7 -64 4 -123
Bajaj Allianz Life 4 17 10 66 6 -1 5 -69 9 -300 6 -107 Bharti Axa
Life 2 55 2 1 2 50 2 77 2 38 2 8 DHFL Pramerica Life 1 31 7 -107 3
69 1 35 8 172 4 253 HDFC Standard Life 19 513 27 -1340 22 395 18
683 33 863 24 578 ICICI Prudential Life 20 -954 6 172 15 -631 21
-953 5 -83 15 207 IDBI Federal Life 2 -49 0 -16 1 -26 1 -60 0 7 1
37 Kotak Mahindra Old Mutual Life 3 -52 10 173 6 -53 4 42 9 -92 6
275
Max Life 9 57 2 -9 6 68 8 22 2 21 6 73 SBI Life 19 240 15 347 18
69 18 6 13 -174 16 -256 Tata AIA Life 4 62 1 -66 3 44 3 35 1 44 2
-141 Private players 100 0 100 0 100 0 100 0 100 0 100 0 LIC 57 238
83 40 78 -203 55 166 78 -203 67 -90 Industry 100 0 183 0 100 0 100
0 100 0 100 0 *Note: Total will not add up as we have excluded
smaller sized private insurers Source: IRDAI, HDFC sec Inst
Research
-
LIFE INSURANCE : SECTOR UPDATE
Page | 7
Some player-wise comments on Individual FY19TD New Business
Premium basis and private market share:
FY19TD SBILIFE NBP came at Rs7.3bn (+9% YoY) and market share
expanded ~64bps to ~8%. YTD market share has increased 6bps to
18%.
FY19TD IPRU NBP declined 25% YoY to Rs 8.9bn. This Seems to be
mainly a result of high base made in May 2017 when growth was +96%
YoY. Higher base was a result of demonetization. YTD market share
is down 953bps to 21%.
HDFC Life FY19TD NBP at Rs 7.6bn +73% YoY. This was a resuly of
lower base as in FY17TD the then proposed Max-HDFC Life merger
which since then got cancelled, did not allow HDFC Life to
introduce newer products and grow in the market. FY19TD market
share came in at 18% +683bps.
Max Life FY19TD NBP at Rs 3.5bn was +11% YoY. YTD Market share
is +22bps to 8%.
Kotak continues to steadily gain market share and is now at 4%
+42bps.
YTD with individual NBPs at Rs 51.9bn, +16% YoY, LIC has been
able to increase its market share to ~55%.
Trends in Annual Market Shares and Ticket sizes
For market share analysis, we prefer to use the Individual NBPs
rather than Total NBPs or Total APEs. The use of individual over
total premiums is appropriate since (1) High volume but lower
margins in the group business make the total no less useful (2)
Disproportionately higher share of LIC in the group business. We
prefer usage of NBPs over APEs as it captures wallet share and is
not impacted by weightage.
Amongst the 23 private insurers in India, the top 4 - SBILIFE
(20.8%), IPRU(20.8%), HDFC Life (14.7%), and MAX Life (9.9%)
command 66.2% market share on NBP basis as per FY18 data.
We highlight that SBILIFE has outperformed its peers with 3-year
Individual business-APE CAGR of 36% v/s ~18% for others. The level
of dominance is mostly attributable to strong bancassurance
distribution channel.
Private players enjoy a superior ticket-size in ‘Individual
non-single premium’ business due to being more urban centric and
having access to better market segmental data.
As FY18 records show, private players sit comfortably at Rs
53,000/policy v/s LIC’s size at Rs ~12,500/policy.
Notably IPRU has an above average ticket-size at ~Rs 93,000 as a
result of higher ULIP sales while other big players have average
ticket sizes ranging between Rs 50,000-60,000/policy.
-
LIFE INSURANCE : SECTOR UPDATE
Page | 8
Market Share of Industry - NBP basis Market share- Individual
business for private platers (FY18)
Source: IRDAI, HDFC sec Inst Research Source: IRDAI, HDFC sec
Inst Research
Channel partners of Insurers Particulars HDFC Life IPRU MAXF
SBILIFE
Major Partners HDFC Bank, Saraswat Corporate Park, RBL
Bank
ICICI Bank, Standard Chartered Bank
Axis bank, Yes Bank, Lakshmi Vilas Bank
State Bank of India, Punjab & Sind Bank, South Indian
Bank
Distribution Channel * Total NBP * Ind APE * Ind APE * Total NBP
Bancassurance 51 52 72 62 Agency 8 25 27 25 Direct 40 14 0 0
Brokers and others 2 9 1 13 Total 100 100 100 100 Source:
Respective company presentations, HDFC sec Inst Research
HDFC Standard
Life6
ICICI Prudential
Life5
Kotak Mahindra
Old Mutual Life
2
Max Life2
LIC69
Others16
HDFC Standard
Life15
ICICI Prudential
Life21
Max Life10
SBI Life21
Other private players
26
SBI Life has outperformed all the other big private players
-
LIFE INSURANCE : SECTOR UPDATE
Page | 9
APE Growth (%) Ind. NBP Market share (%)
Source: IRDAI, HDFC sec Inst Research
Source: IRDAI, HDFC sec Inst Research
Protection Margin (Shortfall) Comparison (2014) India’s
Mortality Protection Gap (2004-2014)
Source : Swiss Re Source : Swiss Re
92 88 8578 73
56 56
0
20
40
60
80
100
Indi
a
Chin
a
Sout
h Ko
rea
Thai
land
Indo
nesi
a
Japa
n
Sing
apor
e
%
3,00
0
3,50
0
4,00
0
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
Private players clocked 3-year APE CAGR at 15% v/s/ 10% for LIC
LIC’s dominance has largely remained unchallenged Private players
picking up share in the higher margin individual business
-20-24
2
-3
16 14
26 24
411
-4 -2
-27
3
15 13
-40
-30
-20
-10
0
10
20
30
40
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
APE Growth - Pvt. Players APE Growth - LIC
33 3141 44 41 44
67 6959 56 59 56
0102030405060708090
100
FY13
FY14
FY15
FY16
FY17
FY18
LIC Private players
-
LIFE INSURANCE : SECTOR UPDATE
Page | 10
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
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+
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
-
LIFE INSURANCE : SECTOR UPDATE
Page | 11
Particulars Individual NBP (bn) YOY (%) Market Share (%)
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 TD FY11 FY12
FY13 FY14 FY15 FY16 FY17 FY18 FY19
TD FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
TD Aditya Birla Sun Life 22.9 16.4 12.5 10.5 8.8 7.7 7.1 9.6
11.5 1.3 -28.2 -23.8 -16.1 -16.2 -12.9 -6.9 34.9 19.9 47.4 7.2 5.4
5.7 5.2 4.6 3.4 2.8 3.0 2.9 3.1
Aegon Life 1.5 2.6 2.1 1.3 1.5 2.1 1.4 0.9 1.3 0.1 72.9 -20.3
-37.4 13.3 41.2 -34.3 -33.0 46.6 1.9 0.5 0.9 0.9 0.6 0.8 0.9 0.5
0.3 0.3 0.3
Aviva Life 7.4 6.7 5.3 4.3 3.2 3.1 1.6 1.6 2.0 0.2 -10.2 -21.2
-18.1 -26.6 -2.6 -46.7 -4.7 26.4 20.6 2.3 2.2 2.4 2.1 1.6 1.4 0.6
0.5 0.5 0.4
Bajaj Allianz Life 38.9 25.9 18.0 15.3 11.8 10.6 8.9 10.7 14.6
1.9 -33.4 -30.4 -15.3 -22.8 -10.3 -15.7 19.6 36.6 -5.9 12.3 8.5 8.2
7.5 6.1 4.7 3.5 3.3 3.6 4.5
Bharti Axa Life 4.1 3.4 2.0 2.2 2.9 3.5 3.6 4.0 4.7 0.7 -17.6
-41.9 9.3 37.0 20.0 2.5 11.2 16.0 108.6 1.3 1.1 0.9 1.1 1.5 1.6 1.4
1.3 1.2 1.6
Canara HSBC OBC Life 6.3 7.0 4.7 3.6 2.8 3.3 5.1 6.3 8.3 0.7
10.1 -32.1 -24.2 -21.8 18.0 52.6 23.9 32.5 16.5 2.0 2.3 2.2 1.8 1.5
1.5 2.0 2.0 2.1 1.8
DHFL Pramerica Life 0.4 0.7 1.0 1.4 1.1 1.4 1.8 2.2 3.6 0.5 98.1
38.9 33.9 -20.3 27.5 27.2 22.0 66.9 47.9 0.1 0.2 0.5 0.7 0.6 0.6
0.7 0.7 0.9 1.3
Edelweiss Tokio Life 0.0 0.0 0.1 0.4 0.7 1.0 1.5 1.8 2.7 0.3 NM
NM 298.6 82.8 51.0 47.8 24.9 46.1 63.0 0.0 0.0 0.0 0.2 0.3 0.4 0.6
0.6 0.7 0.6
Exide Life 6.3 6.5 6.4 6.4 5.7 6.3 5.4 8.2 6.5 0.9 3.0 -2.5 0.3
-11.3 12.2 -15.3 52.1 -20.8 29.2 2.0 2.1 2.9 3.1 2.9 2.8 2.1 2.5
1.6 2.1
Future Generali Life 4.5 4.1 3.0 1.8 1.8 1.4 1.3 1.9 2.9 0.3
-9.5 -27.7 -40.3 -0.1 -21.9 -7.5 45.0 53.9 27.0 1.4 1.3 1.3 0.9 0.9
0.6 0.5 0.6 0.7 0.6
HDFC Standard Life 27.6 34.9 29.0 32.9 25.5 33.1 36.6 42.0 59.4
7.6 26.8 -16.9 13.5 -22.5 29.8 10.4 14.8 41.5 73.2 8.7 11.5 13.2
16.2 13.3 14.7 14.3 13.1 14.7 18.3
ICICI Prudential Life 52.1 54.2 30.5 34.2 34.3 48.2 53.6 69.8
84.0 8.9 4.0 -43.8 12.2 0.4 40.4 11.1 30.3 20.4 -25.0 16.5 17.8
13.8 16.8 17.9 21.4 21.0 21.7 20.8 21.3
IDBI Federal Life 4.0 4.3 2.9 3.1 3.0 3.5 4.9 6.3 7.3 0.6 8.2
-34.0 10.1 -3.7 14.6 40.3 30.0 15.5 -22.7 1.3 1.4 1.3 1.5 1.6 1.5
1.9 2.0 1.8 1.5
IndiaFirst Life 2.0 5.1 3.9 2.9 1.9 2.0 2.4 4.1 6.1 0.6 154.8
-25.0 -23.7 -35.9 5.3 20.6 72.4 47.1 4.5 0.6 1.7 1.7 1.4 1.0 0.9
0.9 1.3 1.5 1.5 Kotak Mahindra Old Mutual Life 11.1 9.7 8.1 6.9 6.4
7.5 10.6 14.4 19.7 1.8 -13.2 -16.0 -15.1 -6.6 16.5 42.0 35.1 37.3
20.5 3.5 3.2 3.7 3.4 3.4 3.3 4.2 4.5 4.9 4.2
Max Life 17.6 19.3 17.1 17.2 20.6 23.6 26.1 33.1 39.8 3.5 10.0
-11.4 0.1 20.3 14.5 10.6 26.6 20.4 11.3 5.6 6.4 7.8 8.4 10.8 10.5
10.3 10.3 9.9 8.4
PNB Met Life 9.4 6.3 8.0 7.3 5.8 7.2 9.2 10.3 12.5 1.3 -32.8
26.7 -8.8 -20.8 23.8 28.7 11.6 21.5 15.1 3.0 2.1 3.6 3.6 3.0 3.2
3.6 3.2 3.1 3.1
Reliance Life 33.9 26.6 14.1 11.2 11.8 12.2 9.1 7.1 7.4 1.1
-21.5 -47.1 -20.5 5.6 3.7 -25.3 -22.2 4.6 27.9 10.7 8.7 6.4 5.5 6.1
5.4 3.6 2.2 1.8 2.7
Sahara Life 1.1 0.9 0.7 0.6 0.7 0.4 0.4 0.4 0.0 0.0 -15.1 -21.8
-13.7 6.0 -41.1 12.4 3.8 -90.5 -98.2 0.3 0.3 0.3 0.3 0.3 0.2 0.2
0.1 0.0 0.0
SBI Life 45.0 47.9 33.4 28.0 32.2 37.6 49.8 64.7 84.1 7.3 6.5
-30.3 -16.1 14.8 16.7 32.5 30.0 29.9 8.9 14.2 15.7 15.2 13.8 16.8
16.6 19.5 20.2 20.8 17.6
Shriram Life 3.8 4.8 3.1 2.9 2.7 3.5 4.1 4.4 4.7 0.4 26.1 -35.0
-6.3 -8.8 29.5 17.5 7.0 7.4 -4.6 1.2 1.6 1.4 1.4 1.4 1.5 1.6 1.4
1.2 1.1
Star Union Dai-Ichi Life 4.9 5.9 7.2 5.5 4.1 4.4 4.3 6.6 6.4 0.4
19.9 22.2 -23.1 -26.9 7.9 -1.3 53.8 -3.1 -4.4 1.6 1.9 3.3 2.7 2.1
1.9 1.7 2.1 1.6 0.9
Tata AIA Life 11.3 11.2 7.3 3.3 2.7 2.4 6.1 10.5 14.0 1.3 -1.7
-34.9 -53.9 -19.4 -12.6 160.6 71.3 33.4 21.9 3.6 3.7 3.3 1.6 1.4
1.0 2.4 3.3 3.5 3.2
Private players Total 316 305 220 203 192 226 255 321 404 42 -4
-28 -8 -6 18 13 26 26 8 100 100 100 100 100 100 100 100 100 100
LIC 501 522 425 417 418 328 328 456 517 52 4 -19 -2 0 -22 0 39
13 16 61 63 66 67 69 59 56 59 56 55
Industry total 817 827 645 620 610 554 583 777 921 93 1 -22 -4
-2 -9 5 33 19 13 100 100 100 100 100 100 100 100 100 100
Source: IRDAI, HDFC sec Inst Research
-
LIFE INSURANCE : SECTOR UPDATE
Page | 12
Market Implied Growth Rate (MIGR)
After the recent correction in stock prices we have calculated
the market price implied growth rate for our coverage stocks under
two scenarios- (A) We have used our explicit forecasts for FY19E
and 20E and MIGR has been calculated for FY21E-FY29E, (B) We have
not built in our explicit forecasts for FY19E-20E and hence no
growth and margin improvement has been built in even for our
explicit forecast period
and the MIGR for the entire DCF period of FY20-29E has been
calculated.
MAXF stands out given that the market is building only a
7.2/8.3% YoY growth in the interim periods. These growth rates are
slightly higher than the real GDP growth rate which India can be
expected to grow at. Accordingly we putting the stock in our
conviction list.
MIGR Assumptions & Results
Company CMP (Rs) TP
(Rs) Upside /
(downside) (%) Cost of equity
(%) Terminal
growth rate (%)
MIGR (%) Scenario A
(FY21E-29E) Scenario B
(FY19E-29E) IPRU 367 481 31.0 12.3 5 8.7 10.8 MAXF 420 567 34.9
11.6 5 6.9 8.2 SBILIFE 665 870 30.8 12.0 5 11.3 13.2 Source:
Companies, HDFC sec Inst Research Recap from our insurance
events
Over the last few months we have held two insurance events,
namely (1) Life Insurance Investor Forum held on 9-Mar-18, and (2)
Life Insurance Teach-In held on 14-Jun-18. Both events involved
representatives from our coverage companies and also some industry
experts. We are presenting some of our key learnings from the
events below:-
Why do we use the risk free rate for computation of VNB
margins?
Under the MCEV or IEV framework, the risk free curve is used to
discount cash flows while computing VNB margins. This is because
the cash flows in the numerator are already adjusted for risk.
Insurance companies already use assumptions which are so
conservative that the cash flows in the numerator are
expected to be realized without any uncertainity. Further, under
the MCEV or IEV framework insurance companies only build in the
risk free rate as their investment returns. Given the two reasons
sighted above the use of risk-free rate to discount future profits
is logical.
Do investors need to adjust for the use of risk free rate in EV
calculations as their expected return is higher than the risk free
rate?
Another question that arises here is that do investors then need
to adjust EV to incorporate their cost of capital. We believe that
this is not required as (1) conceptually an asset needs to be
valued at the rate which appropriately incorporates the risk
associated with the cash flows of the asset. In this case as the
cash flows with this business are already risk adjusted (since VNB
is risk adjusted as described in the VNB
MAXF stands out on a MIGR analysis.
-
LIFE INSURANCE : SECTOR UPDATE
Page | 13
margins section) using a risk free rate is appropriate. (2)
Assuming that the insurance company is conservative with its
assumptions- in which case the cash flows will be higher than what
have been built in; thus investors will be compensated for the risk
taken by them and the unwind will be at a rate higher than the risk
free rate.
Why do we use an EV + Multiple of VNB approach to value life
insurers?
Valuing Life insurance companies:
Valuation method 1 : Multiple of EV
Much as the way book value multiples work companies are assigned
a multiple on the embedded value. Multiples vary based on extent of
growth and profitability.
Valuation = EV (Net worth + VIF)* Multiple
This method is more suitable for companies in mature stage where
both growth and RoEVs have stabilized.
Valuation method 2 : Appraisal value
Appraisal Value (AV) refers to the value of an Insurance company
coming from both its in-force
business and its new business. AV is the summation of the
present value of the existing business i.e. the business written in
earlier years (called Embedded Value, or EV) and Structural
Value.
AV = EV + Structural Value,
where
Structural Value = VNB * Multiple (x)
= (APE * VNB margin) * Multiple (x)
The fair VNB multiple should be based on the margin, growth and
longevity of growth. Given the underpenetrated nature of the Indian
insurance market, high multiples are called for. Our valuation of
insurance cos uses VNB multiples in the 25-26x range.
Why should insurance companies be valued at BV + P/E?
It is worth examining why insurance companies should be valued
by assigning a multiple to VNB (representing structural value) and
adding it to EV (representing book value). This seems to suggest
that capital is not used for writing new business. Actually, VNB
margins include a charge for the cost of capital required to do
that particular business, ensuring that the cost of capital
deployed is captured in the structural value.
-
LIFE INSURANCE : SECTOR UPDATE
Page | 14
What are the proposed changes as a result of IND-AS 117 (IFRS
17)? IND-AS-117 (IFRS 17) will certainly reduce investors’ reliance
on company reported EV and shift the same to company reported
audited financial statements.
Under the new accounting rules companies will be required
to:
Classify contracts into investment contract or insurance
contract based on assessment of significant insurance risk.
Separate insurance and investment components and unbundle the
insurance contract- Insurance component, embedded derivative, and
distinct investment components.
Evaluate packaged products and contracts with different rights
and obligations into onerous or profitable. Loss on onerous
contracts have to be separated and recognized on the first day
itself.
Capitalize and allocate Insurance acquisition cash flows during
the period of the contract and amortize the same in the pattern in
which revenue is recognized.
Recognize impact on insurance liabilities due to changes in
discount rate in either in OCI or in P&L. Using OCI will reduce
P&L volatility.
Change revenue line item to “insurance contracts revenue” and
all premium revenue will not be contained in the topline.
Provide more granularity in contract groupings for valuation
purposes- portfolio of insurance contracts
to be split into annual cohorts which would be further split
into at least three groups based on profitability bucket.
Present income/expense from reinsurance contracts held
separately from expense or income from insurance contracts
issued.
Disclose in detail for the new insurance contracts issued-
growth of entity’s insurance business, level of aggregation applied
and expectation with respect to CSM recognition in future
periods.
IND-AS 117 will significantly change the financial statements
and valuation dynamics for life insurance companies. The new
accounting standard will result in separation of insurance and
investment income streams. Additionally, the amortization of
acquisition costs over the premium payment term of the contract
will further help in stream-lining the profitability of companies.
These changes also mean separation of insurance and investment
incomes. These changes probably mean that reliance on VNB margins
and EVs as a measure to track performance of insurance companies
will reduce and investors should be able to directly use statutory
filings to value life insurance companies.
Currently the world is expected to adopt IFRS 17 in CY2021 with
CY2020 as comparable. For IND-AS 117 (Indian equivalent of IFRS
17), India has set an adoption date target of FY21 with FY20 as
comparable. India with its current time line is targeting to be
nine months before the world. We have spoken to companies and given
current state of preparedness we believe that this target will most
likely be deferred to March 2022.
In order to make the financials aligned with US/Europe reporting
standards and geographically comparable, insurance companies will
have to adopt IND-AS-117 w.e.f. FY21 (with FY20 comparable) Radical
changes expected are: 1.Segregating of insurance and investment
components, unbundling of insurance contract 2. Acquisition costs
to be amortized over the life of the policy. 3. Topline to include
only ‘insurance contracts revenue’ 4. Provide more granularity
w.r.t. contract groupings for valuation purposes 5. Income/expense
on reinsurance contracts disclosed separately.
-
LIFE INSURANCE : SECTOR UPDATE
Page | 15
Key financial parameters and Valuations Bloomberg Ticker IPRU
MAXF SBILIFE Rating BUY BUY BUY Current market price Rs 367 420 665
Market Capitalisation Rs bn 527 112 665 Target price Rs 481 567 870
Upside/(Downside) % 31 35 31
Particulars
IPRU FY18
IPRU FY19E
IPRU FY20E
MAXF FY18
MAXF FY19E
MAXF FY20E
SBILIFE FY18
SBILIFE FY19E
SBILIFE FY20E
Profitablity VNB Margin % 16.5 17.0 17.3 20.2 20.4 20.6 16.3
16.5 16.7 Total RoEV % 23.4 17.6 18.0 19.0 20.0 20.0 16.7 19.4 19.4
Operating RoEV % 22.7 17.6 18.0 19.7 20.0 20.0 17.8 19.4 19.4
Non-operating RoEV % 0.7 0.0 0.0 -0.7 0.0 0.0 -1.1 0.0 0.0 RoE %
27.9 23.4 21.0 24.1 26.5 25.0 19.4 19.0 19.8 Valuation at CMP P/EV
x 2.8 2.5 2.2 2.2 1.9 1.6 3.5 2.9 2.5 P/EVOP x 14.3 15.9 13.8 12.4
10.8 9.3 22.5 17.9 15.2 Implied P/VNB x 26.4 20.8 15.7 13.2 10.0
6.9 34.1 25.9 19.4 Implied P/VIF x 4.5 3.9 3.4 3.2 2.8 2.4 5.7 5.0
4.3 P/B x 8.0 7.1 6.4 5.6 4.7 3.9 10.4 8.9 7.6 P/E x 32.4 32.3 32.1
27.2 20.4 18.5 57.8 50.5 41.4 P/AUM x 0.4 0.3 0.3 0.3 0.3 0.2 0.6
0.5 0.4 Valuation at TP P/EV x 3.7 3.2 2.8 2.9 2.5 2.2 4.5 3.8 3.3
P/EVOP x 18.8 20.9 18.0 16.7 14.6 12.6 29.5 23.4 19.8 Implied P/VNB
x 39.1 31.6 24.7
21.8 17.5 13.3
48.8 38.0 29.4
Implied P/VIF x 5.9 5.2 4.5
3.0 2.6 2.3
7.5 6.5 5.6 P/B x 10.5 9.3 8.4
7.5 6.3 5.3
13.6 11.7 9.9
P/E x 42.5 42.3 42.1
36.7 27.5 24.9
75.6 66.1 54.2 P/AUM x 0.5 0.4 0.4
0.2 0.2 0.1
0.7 0.6 0.5
-
LIFE INSURANCE : SECTOR UPDATE
Page | 16
Particulars IPRU FY18
IPRU FY19E
IPRU FY20E
MAXF FY18
MAXF FY19E
MAXF FY20E
SBILIFE FY18
SBILIFE FY19E
SBILIFE FY20E
Per Share data EV Rs 131 148 169
194 225 262
191 226 267
EVOP Rs 26 23 27
34 39 45
30 37 44 VNB Rs 9 11 13
17 20 23
14 17 21
VIF Rs 82 93 107
131 151 173
116 134 155 Book Value Rs 46 51 57
76 90 106
64 75 88
Earnings Rs 11 11 11
15 21 23
12 13 16 AUM Rs 972 1,120 1,303
1,362 1,645 1,909
1,163 1,395 1,704
ANW Rs 49 55 63
90 106 126
75 92 111 Particulars
IPRU FY18
IPRU FY19E
IPRU FY20E
MAXF FY18
MAXF FY19E
MAXF FY20E
SBILIFE FY18
SBILIFE FY19E
SBILIFE FY20E
Key parameters APE Rs bn 78 89 105 32 37 43 85 102 123 VNB Rs bn
13 15 18 7 7 9 14 17 21 Total EVOP Rs bn 37 33 38 13 15 17 30 37 44
Operating EVOP Rs bn 37 33 38 13 15 17 30 37 44 Non- operating EVOP
Rs bn 1 0 0 (0) 0 0 (2) 0 0
EV Rs bn 188 213 243 74 86 100 191.4 226.3 267.3 Net worth Rs bn
66 74 82 29 35 41 64 75 88 Net Profit Rs bn 16 16 16 6 8 9 12 13 16
AUM 1,395 1,607 1,870 522 631 732 1,163 1,395 1,704 Growth YOY APE
% 17.6 14.0 18.0 18.2 13.0 16.0 29.3 20.0 20.0 VNB % 93.1 17.4 20.1
31.5 14.1 16.9 34.1 21.8 21.1 Total EVOP % 60.3 (10.1) 15.6 15.9
15.0 15.9 2.2 26.0 18.1 Operating EVOP % 60.3 (10.1) 15.6 15.9 15.0
15.9 2.2 26.0 18.1 Non- operating EVOP % (80.8) (100.0) NM (127.5)
(100.0) NM (114.0) (100.0) NM
EV % 16.1 13.3 14.1 13.0 15.9 16.3 15.5 18.2 18.2 Net worth %
7.2 12.4 11.1 15.8 19.1 18.1 16.6 17.1 17.8 Net Profit % (5.0) 0.5
0.4 (10.3) 33.4 10.6 20.5 14.4 21.9 AUM % 13.5 15.2 16.4 17.7 20.7
16.1 19.0 19.9 22.1 Source: Companies, HDFC sec Inst Research
-
COMPANY UPDATE 6 JUL 2018
ICICI Prudential Life Insurance BUY
HDFC securities Institutional Research is also available on
Bloomberg HSLB & Thomson Reuters
Growth & Improving marginsICICI Prudential Life (IPRU) is
the 2nd largest private sector life insurance company in the
country with an Ind. NBP private market share of 21.3% in FY18.
Strong distribution of the parent ICICI Bank, rising protection
business, under-penetrated insurance sector along with
financialisation of savings augurs well for the company.
IPRU delivered a strong set of numbers in FY18. Higher share of
protection, operating efficiency and lower tax rate drove its full
year margin to 16.5% (+630bps from FY17: 10.2%), despite a ULIP
heavy sales mix. With this margin, IPRU has narrowed margin gap
with competitors despite higher share of ULIPs (VNB Margins- HDFC
Life: 23.2%; SBI Life: 16.2%, Max Life: 20.2%).
IPRU’s business is retail dominated with almost 90% of business
being individual dominated. IPRU is also investing in the agency
business channel where business growth is improving; FY16 to FY18
agency channel business growth has been 26.8% p.a.
IPRU also has additional margin levers in the form of increasing
share of protection business (FY18: 5.7% of total APE, +180 bps
YoY). The company has not made any material change in its
persistency assumption and continues to build a significant buffer
in the same. During FY18 about 400bps (of 630bps) of margin
improvement has come from better product mix and better product
features.
We lower our growth and margin assumptions in line with our
sector view and now expect APE to grow at a 16% CAGR over FY18-20E.
Increasing scale and higher share of the protection business will
help improvement in VNB margins from current 16.5% in FY18 to 17.3%
in FY20E. EV after payout of dividends is expected to grow at a
CAGR of 13.7% in FY18-20E and RoEV’s are expected to be at the
17.5-18.0% level. We value IPRU at EV + NBV multiple of 26.3x
(FY20E) based on our DCF. This translates to a TP of Rs 481
(+31.0%).
Key risks: Any higher than built-in drop in persistency of
ULIPs, macro slowdown impacting overall flows to insurance,
increase in tax rates for the sector.
FINANCIAL SUMMARY (Rs bn) FY16 FY17 FY18 FY19E FY20E APE 51.1
66.3 77.9 88.8 104.9 Growth (%) 9.9 29.7 17.6 14.0 18.0 VNB 4.1 6.7
12.9 15.1 18.1 Growth (%) 52.7 61.5 93.1 17.4 20.1 VNB margin (%)
8.1 10.1 16.5 17.0 17.3 EV 139 161.8 187.9 212.8 242.9 Growth (%)
1.6 16.1 16.1 13.3 14.1 P/EV (x) 3.8 3.3 2.8 2.5 2.2 P/VNB (x) 94.0
54.8 26.4 20.8 15.7 Op. RoEV (%) 15.3 16.5 22.7 17.6 18.0 Source:
Company, HDFC sec Inst Research
INDUSTRY LIFE INSURANCE CMP (as on 5 Jul 2018) Rs 367 Target
Price Rs 481 Nifty 10,750
Sensex 35,575
KEY STOCK DATA
Bloomberg IPRU IN
No. of Shares (mn) 1,436
MCap (Rs bn) / ($ mn) 527/7,642
6m avg traded value (Rs mn) 739
STOCK PERFORMANCE (%)
52 Week high / low Rs 498/361
3M 6M 12M
Absolute (%) (6.5) (6.6) (25.2)
Relative (%) (12.4) (10.8) (39.0)
SHAREHOLDING PATTERN (%)
Promoters 80.7
FIs & Local MFs 3.8
FPIs 6.5
Public & Others 9.0 Source : BSE
Madhukar Ladha [email protected] +91-22-6171-7323
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 18
(Rs bn.) FY15 FY16 FY17 FY18 New Business Premium 53.3 67.7 78.6
96.2 Total APE 47.4 51.7 66.3 77.9 -Saving APE 46.7 50.3 63.6 73.5
-Protection APE 0.8 1.4 2.6 4.5 Saving APE share (%) 98.5 97.3 96.1
94.3 Protection APE share (%) 1.6 2.7 3.9 5.7
VNB Margin 5.70% 8.0% 10.1% 16.5%
Product Mix-APE Savings 98.5% 97.3% 96.1% 94.3% -ULIP 83.1%
80.8% 84.1% 81.9% -PAR 13.2% 14.1% 9.6% 10.9% -Non-PAR 0.9% 0.6%
1.1% 0.5% -Group 1.3% 1.8% 1.3% 1.0% Protection 1.6% 2.7% 3.9%
5.7%
Channel Mix-APE Bancassurance 58.4% 57.3% 56.9% 52.3% Agency
24.4% 23.8% 23.3% 25.4% Direct 8.8% 9.9% 12.0% 13.5% Corporate
Agents 7.0% 7.0% 6.1% 6.0% Group 1.4% 1.9% 1.6% 2.7%
Persistency Ratio 13th month 79% 82% 86% 88% 25th month 66% 71%
74% 79% 37th month 64% 62% 67% 69% 49th month 54% 62% 59% 64% 61st
month 15% 46% 56% 55%
Solvency Ratio % 337 320 281 252
AUM Rs bn 1,002 1,039 1,229 1,395 Equity 48 46 47 47 Debt 52 54
53 53 Linked 75 72 72 NA Non -Linked 25 28 29 NA Source: Company,
HDFC sec Inst Research
Total business has grown at a handsome pace Protection mix has
grown steadily. IPRU has developed a good mix of channels.
Persistency is improving across buckets.
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 19
EV movement (Rs mn.) FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Opening IEV 58,700 117,750 138,244 139,390 161,840 187,880 212,839
VNB / Value added by new business during the period 4,100 2,700
4,123 6,660 12,860 15,104 18,141 Expected return on existing
business 4,400 11,700 12,582 12,210 13,720 15,993 18,118 Variance
in Operating experience 1,000 2,120 3,395 2,320 2,580 1,000 1,000
Change in operating assumptions 1,600 1,600 0 1,000 7,640 1,000
1,000 Other operating variance 0 0 1,095 760 0 0 0 IEV operating
earnings 11,100 18,120 21,195 22,950 36,800 33,097 38,259 Economic
variances 0 11,110 (5,635) 5,820 1,120 0 0 Total IEV earnings
11,100 29,230 15,560 28,770 37,920 33,097 38,259 Capital
contributions / dividend payouts (1) (9,770) (14,414) (6,320)
(11,880) (8,138) (8,172) Closing IEV-Year End 69,801 137,210
139,390 161,840 187,880 212,839 242,926
RoEV Operating RoEV (%) 18.9 15.4 15.3 16.5 22.7 17.6 18.0
Non-operating RoEV (%) 0.0 9.4 -4.1 4.2 0.7 0.0 0.0 ROEV return (%)
18.9 24.8 11.3 20.6 23.4 17.6 18.0
APE & Margins APE 33,326 46,491 51,085 66,250 77,920 88,844
104,862 Growth (%) (21.5) 39.5 9.9 29.7 17.6 14.0 18.0 New Business
Margin/ VNB Margin 12.3 5.8 8.1 10.1 16.5 17.0 17.3 Source:
Company, HDFC sec Inst Research
Except for FY16, when IPRU reported negative economic variances,
the company has been outperforming its assumptions. IPRU has been a
consistent dividend payer since FY15. Margins and RoEVs will
improve as protection mix in business increases.
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 20
ICICI Prudential Life Insurance Total RoEV breakdown (%)
Source: Company, HDFC sec Inst Research IPRU: VNB and EV
sensitivities (%)
ICICI Pru Life FY17 FY18
% chg in VNB % chg in EV % chg in VNB % chg in EV Reference rate
up 100 bps -5.2 -2 -4.9 -2.1 Reference rate down 100 bps 5.5 2.1
5.2 2.2 Lapse/Surrender rate up 10 % -10.6 -1.1 -8.6 -1.3
Lapse/Surrender rate down 10 % 10.9 1.2 9.1 1.4 Maintenance
expenses up 10 % -5.5 -1.1 -3.5 -1.0 Maintenance expenses down 10 %
5.4 1.1 3.5 +1.0 Mortality up 10 % -6.1 -0.8 -5.4 -1.0 Mortality
down 10 % 6.1 0.8 5.5 1.0 Tax Rate increased to 25%/28.84%* -22%
-11% -7.9 -4.6 Tax Rate increased to 34.6% -5.2 -2 NA NA Source:
Company, HDFC sec Inst Research
Insurers derive significant RoEV from the value of new business
and un-winding. Except for FY16, when IPR reported negative
economic variances, the company has been outperforming its
assumptions. VNBs and EVs for IPRU remain to be materially
sensitive to lapses/surrenders given higher proportion of ULIPs
this continues to be a key risk.
7.02.3 3.0 4.8
7.9 8.4 9.2
7.59.9 9.1
8.88.5 8.5 8.5
1.71.8 2.5 1.7
1.6 0.5 0.52.71.4 0.7
4.70.5 0.50.8 0.5
9.4
-4.1
4.20.7
-10
-5
0
5
10
15
20
25
30
FY14 FY15 FY16 FY17 FY18 FY19E FY20E
Economic variances Other operating variance Change in operating
assumptionsVariance in operating experience Expected return on
existing business VNB as % of opening EV
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 21
IPRU: DCF valuation (Rs mn.)
FY18 FY19E FY20E FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29
APE 77,920 88,844 104,862 121,640 141,102 163,678 189,867 212,651
238,169 266,749 298,759 334,610 Growth % 17.6 14.0 18.0 16.0 16.0
16.0 16.0 12.0 12.0 12.0 12.0 12.0 VNB Margin 16.5 17.0 17.3 17.5
17.7 17.9 18.1 18.3 18.5 18.7 18.9 19.1 Change bps 645 50 30 20 20
20 20 20 20 20 20 20 VNB 12,860 15,104 18,141 21,287 24,975 29,298
34,366 38,915 44,061 49,882 56,465 63,911 Growth % 93.1 17.4 20.1
17.3 17.3 17.3 17.3 13.2 13.2 13.2 13.2 13.2 Discounted VNB 15,104
16,158 16,888 17,649 18,441 19,267 19,433 19,598 19,762 19,925
20,088 Discounted Terminal Value 290,128
Present value of cash flows 187,210 Discounted terminal value
290,128 Structural value 477,338 Embedded value 212,839 Appraisal
value 690,177 Value/share 481 Upside/(downside) % 31.0 Implied VNB
multiple (x) 37.1 31.6 26.3 Implied EV multiple (x) 3.7 3.2 2.8
Government 10 yr risk free rate 7.8 Equity risk premium 5.0 Beta
0.854 Cost of equity 12.1 Terminal growth rate 5.0 Source: Company,
HDFC sec Inst Research
Terminal growth rate (%)
4.0 4.5 5.0 5.5 6.0 6.5
Cost
of e
quity
(%)
10.8 533 554 578 607 641 684 11.3 503 520 540 563 591 624 11.8
476 491 507 526 549 575
12.3 453 465 479 495 513 535
12.8 433 443 455 468 483 501 13.3 415 424 434 445 458 472 13.8
399 406 415 424 435 447
Source: Company, HDFC sec Inst Research
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 22
Five Quarters At A Glance (Rs Bn) 4QFY17 1QFY18 2QFY18 3QFY18
4QFY18 YoY(%) Growth
QoQ(%) Growth
Premium Earned 75.79 48.85 65.99 68.56 87.29 15.2 27.3 Premium
on re-insurance 0.53 0.65 0.59 0.61 0.73 37.7 19.7 Net premium
earned 75.26 48.2 65.4 67.95 86.56 15.0 27.4 Investment income
67.48 36.19 29.83 67.6 -13.66 -120.2 -120.2 Other income 0.42 0.16
0.17 0.18 0.24 -42.9 33.3 Total Income 143.16 84.55 95.4 135.73
73.14 -48.9 -46.1 Commission Paid 2.51 2.17 3.63 3.77 4.46 77.7
18.3 Expenses 8.35 5.3 6.46 6.83 7.78 -6.8 13.9 Tax on policyholder
funds 0.19 0.26 0.23 0.24 0.47 147.4 95.8 claim/benefits paid 49.02
39.69 40.71 46.85 45.56 -7.1 -2.8 change in actuarial liability
78.79 32.85 39.88 73.23 11.25 -85.7 -84.6 Total outgo 138.86 80.27
90.91 130.92 69.52 -49.9 -46.9 PBT 4.3 4.28 4.49 4.81 3.62 -15.8
-24.7 Tax on 0.22 0.22 0.28 0.29 0.21 -4.5 -27.6 PAT 4.08 4.06 4.21
4.52 3.41 -16.4 -24.6 New Business Premium 25.60 20.34 22.80 23.17
29.92 16.9 29.1 Total APE 21.67 17.04 18.70 20.05 22.13 2.1 10.4
-Savings APE 20.80 16.27 17.96 19.26 19.96 -4.0 3.6 -Protection APE
0.86 0.77 0.73 0.80 2.16 151.2 170.0 Savings APE Share (%) 96.0
95.5 96.1 96.0 90.2 -579bps -582bps Protection APE Share (%) 4.0
4.5 3.9 4.0 9.8 579bps 582bps Cost to Total Premium (%) 14.3 13.1
13.1 13.2 14.5 13bps 121bps VNB Margin (%)# 10.1 16.5 16.5 16.5
16.5 640bps NA AUM Rs (bn) 1229.19 1265.91 1305.91 1383.04 1395.32
13.5 0.9 Equity Mix (%) 46.8 46.5 46.0 48.0 47.0 +20bps -100bps
Debt Mix (%) 53.2 53.5 54.0 52.0 53.0 -20bps +100bps Linked (%)
71.5 71.3 70.7 71.0 NA NA NA Non-Linked (%) 28.5 28.7 29.3 29.0 NA
NA NA
Source: Company, HDFC sec Inst Research #Refers to FY17 and FY18
margin; for 4Q is refers to FY17 margin
Strong growth in protection business as seen in the changing
mix. Partly also as a result of re-classification.
Sharp increase in margins driven by product mix, persistency and
lower tax rate assumption.
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 23
APE trend ( Rs bn.) Product Mix On APE
Source: Company, HDFC sec Inst Research
Source: Company, HDFC sec Inst Research
VNB Trend( Rs bn.) AUM Mix
Source: Company, HDFC sec Inst Research Source: Company, HDFC
sec Inst Research
APE growth was muted at 2.1% YoY. Protection business share
improving is hugely beneficial for the company’s margins. Margin
has seen a strong improvement on change in tax assumption, higher
share of protection business and lower cost assumptions.
52
66
1719 20 22
78
0.1 28.1
112.2
3.3 8.7 2.1
17.6
0.0
20.0
40.0
60.0
80.0
100.0
120.0
0102030405060708090
FY16
FY17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
FY18
Total APE Growth - RHSRs bn %
81% 84% 82%
14% 10% 11%
3% 4% 6%
0%10%20%30%40%50%60%70%80%90%
100%
FY16
FY17
FY18
-ULIP -PAR -Non-PAR -Group Protection
4.1 6.7 12.9
8.0%
10.1%
16.5%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
0
2
4
6
8
10
12
14
FY16
FY17
FY18
VNB VNB Margin - RHSRs bn
46 47 47 46 48 47
54 53 54 54 52 53
0%10%20%30%40%50%60%70%80%90%
100%
FY16
FY17
1QFY
18
2QFY
18
3QFY
18
FY18
Equity Debt
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 24
Persistency Trend Channel Mix On APE
Source: Company, HDFC sec Inst Research Source: Company, HDFC
sec Inst Research
Persistency has been improving across most buckets Banca
continues to be the most dominant contributor to business
0%10%20%30%40%50%60%70%80%90%
100%
13th month
25th month
37th month
49th month
61st month
FY15 FY16 FY17 FY18
57% 57% 49% 54% 54% 53% 52%
24% 23%31% 24% 25% 23% 25%
10% 12% 14% 15% 15% 11% 14%7% 6% 5% 6% 6% 7% 6%2% 2% 2% 2% 1% 6%
3%
0%
20%
40%
60%
80%
100%
FY16
FY17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
FY18
Bancassurance Agency Direct Corporate Agents Group
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 25
Policyholder Account (Rs mn) FY17 FY18 FY19E FY20E Total premium
earned 221,552 268,107 330,698 386,194 Income from investments and
other income 150,360 113,315 142,159 165,639 Transfer from
shareholders account 18 753 - - Total income 371,930 382,174
472,857 551,833 Commission 7,589 14,033 16,640 19,480 Operating
expenses 23,572 20,299 33,904 39,211 Provisions 61 31 32 32 Total
expenses 31,222 34,363 50,575 58,723 Benefits paid 149,979 172,808
189,647 220,787 Change in valuation of liabilities 174,976 154,475
214,761 254,403 Total 324,954 327,283 404,407 475,190 Surplus
15,754 20,529 17,874 17,920 Tax 788 1,201 714 757 Net surplus
14,966 19,328 17,161 17,163 Transfer to shareholders account 11,315
10,892 10,062 9,468
Source: Company, HDFC sec Inst Research Shareholders account (Rs
mn) FY17 FY18 FY19E FY20E Transfer from policyholders' a/c 11,315
10,892 10,062 9,468 Investment income 6,955 7,469 7,797 8,497 Other
income 285 50 50 50 Total income 18,555 18,412 17,909 18,016
Expenses 409 420 451 485 Contribution to policyholders' a/c 18 753
- - Profit before tax 18,128 17,239 17,458 17,530 Taxes 1,028 997
1,131 1,136 PAT 17,101 16,242 16,326 16,394
Source: Company, HDFC sec Inst Research
Balance Sheet (Rs mn) FY17 FY18 FY19E FY20E Source Share capital
14,353 14,355 14,355 14,355 Reserves and surplus 46,976 51,382
59,520 67,692 Net worth 61,329 65,737 73,875 82,047 Credit/debit
balance in fair value a/c 2,731 3,081 3,081 3,081 Policyholders'
a/c 1,148,941 1,306,111 1,520,871 1,775,275 Funds for future
appropriation 6,042 8,782 9,001 9,226 Total Liabilities 1,219,043
1,383,710 1,606,828 1,869,628 Application Shareholders' investments
66,349 77,466 84,466 93,162 Policyholders' investments 270,674
332,889 - - Asset to cover linked liabilities 878,783 975,020
1,522,669 1,777,072 Loans 806 1,451 1,451 1,451 Fixed assets &
DTA 2,138 4,221 4,221 4,221 Net current assets 291 (7,336) (5,979)
(6,278) Debit balance in P&L - - - - Total Assets 1,219,042
1,383,710 1,606,828 1,869,628
Source: Company, HDFC sec Inst Research
-
ICICI PRUDENTIAL LIFE: COMPANY UPDATE
Page | 26
Growth and ratios (%) (Rs mn) FY17 FY18 FY19E FY20E Performance
metrics NBP 78,633 92,118 107,214 125,987 APE 66,250 77,920 88,844
104,862 VNB 6,660 12,860 15,104 18,141 EV 161,840 187,880 212,839
242,926 EVOP 22,950 36,800 33,097 38,259 Rs/share EPS 11.9 11.3
11.4 11.4 BV 42.7 45.8 51.5 57.2 DPS 3.2 2.8 4.7 4.7 Growth (%)
Premium growth 16.6 41.1 23.3 16.8 Total income growth 83.9 2.8
23.7 16.7 Commissions growth 22.4 126.3 18.6 17.1 Opex growth 24.8
7.5 67.0 15.7 PAT growth 3.4 (1.8) 0.5 0.4 Performance metrics
growth (%) NBP 16.2 17.1 16.4 17.5 APE 29.7 17.6 14.0 18.0 VNB 61.5
93.1 17.4 20.1 EV 16.1 16.1 13.3 14.1 EVOP 8.3 60.3 (10.1) 15.6 EPS
3.1 (5.0) 0.5 0.4 BV 20.7 7.2 12.4 11.1 DPS (49.1) (11.6) 66.7 0.4
Expense ratios (%) Commissions/premium 3.4 5.2 5.0 5.0 Opex/premium
10.6 7.6 10.3 10.2 Total expenses/premium 14.1 12.8 15.3 15.2
Effeciency ratios (%) RoAA 1.5 1.3 1.1 0.9 RoE 30.5 27.9 23.4 21.0
ROEV return 20.6 23.4 17.6 18.0 Operating RoEV 16.5 22.7 17.6 18.0
Non-operating RoEV 4.2 0.7 - -
Source: Company, HDFC sec Inst Research
Valuations Valuations FY17 FY18 FY19E FY20E Ratios on CMP P/E
(x) 30.8 32.4 32.3 32.1 P/ABV (x) 8.6 8.0 7.1 6.4 P/EV (x) 3.3 2.8
2.5 2.2 P/VNB Multiple (x) 54.8 26.4 20.8 15.7 P/EVOP (x) 23.0 14.3
15.9 13.8 P/VIF (x) 5.6 4.5 3.9 3.4 P/AUM(x) 0.4 0.4 0.3 0.3 Ratios
on TP P/E (x) 40.4 42.5 42.3 42.1 P/ABV (x) 11.3 10.5 9.3 8.4 P/EV
(x) 4.3 3.7 3.2 2.8 P/VNB Multiple (x) 79.4 39.1 31.6 24.7 P/EVOP
(x) 30.1 18.8 20.9 18.0 P/VIF (x) 7.3 5.9 5.2 4.5 P/AUM(x) 0.6 0.5
0.4 0.4
Source: Company, HDFC sec Inst Research
-
COMPANY UPDATE 6 JUL 2018
Max Financial Services BUY
HDFC securities Institutional Research is also available on
Bloomberg HSLB & Thomson Reuters
Sharp correction covers risks & offers valueEquipped with
its partnerships with Axis and Yes, Max Life (MAXL) closed FY18 at
4th position with a FY18 Ind. NBP market share of 9.9% amongst
private sector insurers. With strong partnerships in place, we
believe MAXL will continue to grow at above average sector growth
rates.
Decoding the Axis Bank transaction: For FY18, the Axis Bank
channel generated 59% of Ind. APE for MAXL. While this partnership
arrangement with Axis Bank terminates in FY21, given the mutually
beneficial nature of this arrangement, we expect that an
arrangement on similar lines will be re-engineered. Our analysis
indicates that over FY12-21E Axis gains an average Rs 1.4bn (22% of
FY18 VNB) by way of capital gains on MAXL shares as indirect
compensation for distribution of MAXL’s products. We have adjusted
VNB downward by 22% in order to account for the same in our
valuation.
Strong strategic vision: MAXL outlined its strategic priorities-
(1) Continue to integrate with existing partners (2) Accelerate
investment in technology for proprietary channel with target to
grow proprietary channel at 35% CAGR. (3) Retain and grow existing
partners. MAXL’s target product mix is 40/40/8/12% for
Par/ULIP/Protection/Non-PAR respectively and the company continues
to develop new partnerships with potential to scale, eg. Yes Bank.
Further, any material development of a scalable alternate channel
will reduce dependence on Axis and be a big positive.
We believe Max Life to be a strong franchise run by a credible
and strong management team and believe Max-Axis partnership to be
mutually beneficial which neither of the parties would want to
abandon. We lower our growth assumptions in the medium term,
in-line with our sector view and are building in APE growth of
14.5% p.a. over FY18-20E. We also build in VNB margins improvement
from current 20.2% in FY18 to 20.6% in FY20E. EV after payout of
dividends is expected to grow at a CAGR of 16.1% in FY18-20E and
RoEV’s are expected to be at 20%. We value MAXF at EV + Adj. VNB
multiple (FY20E) of 26.4x based on our DCF. We have adjusted VNB by
22% to build in the leakage for the Axis transactions. We further
adjust valuations for group company expenses at MAXF level and
apply holding company discount of 15% to arrive at a TP of Rs 567
(+34.9%).
Key risks: Any additional dependence on Axis Bank,
Inability/Ability to develop alternate distribution channels, Any
large scale acquisition at expensive valuations, macro slowdown,
increase in tax rates.
FINANCIAL SUMMARY (Rs Mn) FY16 FY17 FY18 FY19E FY20E APE 21.6
27.5 32.5 36.7 42.6 Growth (%) 8.7 27.1 18.2 13.0 16.0 VNB 3.9 5.0
6.6 7.5 8.8 Growth (%) NA 28.6 31.5 14.1 16.9 VNB margin (%) 17.9
18.2 20.2 20.4 20.6 EV 56.2 65.9 74.5 86.3 100.4 Growth (%) NA 17.3
13.0 15.9 16.3 P/EV (x) 2.8 2.4 2.2 1.9 1.6 P/VNB (x) 26.6 18.8
13.2 10.0 6.9 Op. RoEV (%) 17.0 19.9 19.7 20.0 20.0 Source:
Company, HDFC sec Inst research
INDUSTRY LIFE INSURANCE CMP (as on 5 Jul 2018) Rs 420 Target
Price Rs 567 Nifty 10,750
Sensex 35,575
KEY STOCK DATA
Bloomberg MAXF IN
No. of Shares (mn) 268
MCap (Rs bn) / ($ mn) 113/1,634
6m avg traded value (Rs mn) 354
STOCK PERFORMANCE (%)
52 Week high / low Rs 653/403
3M 6M 12M
Absolute (%) (8.6) (28.7) (29.7)
Relative (%) (14.5) (32.9) (43.6)
SHAREHOLDING PATTERN (%)
Promoters 30.3
FIs & Local MFs 28.4
FPIs 29.4
Public & Others 11.9 Source : BSE
Madhukar Ladha [email protected] +91-22-6171-7323
-
MAX FINANCIAL : COMPANY UPDATE
Page | 28
Decoding the Axis Bank Distribution deal Axis bank distributes
MAXL’s products and is singularly responsible for bringing 59% of
FY18 of MAXL’s Individual APE. Other banks mainly Yes Bank
contributed 13% of FY18 Individual business APE.
Channel Mix- Individual APE
FY16 FY17 FY18 Proprietory 32% 29% 27% Axis Bank 58% 58% 59%
Other Banks 9% 12% 13% Others 1% 1% 1% Total 100% 100% 100% Source:
Company, HDFC sec Inst research
For this relationship MAXL compensates Axis Bank in two
ways:
(1) Commission payments to Axis Bank on new and renewal business
premiums collected through it. We estimate that in FY18 Axis Bank
has received Rs 5.1bn in commission from MAXL.
MAXL commission payment estimate Particulars (Rs mn.) FY17 FY18
Total premium earned 106,802 119,031 Total commission paid 9,364
8,299 Paid to banks 6,656 6,220 Premium share of Axis Bank as % of
total bank share 82.9% 81.9%
Assumed commission pay out to Axis Bank 5,515 5,097
Source: Company, HDFC sec Inst research
(2) Share sale and buyback arrangement with Axis bank where by
Max financial/Max India/Sumitomo at various instances sold shares
to Axis Bank at face value and then repurchased the same on later
dates at market value. These transactions have resulted in huge
gains for Axis Bank.
In total we estimate Axis Bank to have earned Rs.6.3bn in
realized profits (pre-tax) and we estimate it to additionally earn
Rs 9.8bn in profits until FY21E.
Thus on an average we estimate that post tax the payout to Axis
bank as a result of these transactions will be Rs 1.4bn (22% of
FY18 VNB).
Transaction history Year Type for Axis Bank Seller / Issuer
Buyer Value (Rs mn) Stake trfd. (%) Closing stake (%)
FY12 Purchase Max Life Insurance Company Axis Bank 770 4.0 4.0
FY13 Sell Axis Bank Max Financial Services 1,034 (1.0) 3.0 FY15
Sell Axis Bank Max Life Insurance 1,034 (1.0) 2.0
FY16 Purchase Max Financial Services Axis Bank 766 4.0 6.0
Purchase Mitsui Sumitomo Insurance Company Axis Bank 192 1.0
7.0
FY17 Sell Axis Bank (through IDFC) Max Financial Services 1,463
(1.0) 6.0 Sell Axis Bank Max Financial Services 2,126 (1.0) 5.0
FY18 Sell Axis Bank Max Financial Services 1,533 (0.7) 4.3
Source: Max Life Ltd., Max Financial Services Ltd. Annual
reports
Axis Bank contributed 59% of Individual APE for FY18. We
estimate that MAXL has paid ~Rs 5.1bn as commissions to Axis Bank
in FY18. We estimate an average leakage of ~22% as a result of
share sale and buy-back deals with Axis Bank and are accordingly
adusting VNB by 22%.
-
MAX FINANCIAL : COMPANY UPDATE
Page | 29
Axis Bank estimated earnings from Max transactions
FY12-21E
Shares (mn) Amount (Rs mn.) Realized gain 91.2 6,278 Unrealized
gain* 81.6 9,781 Total pre-tax profits 172.8 16,059 Tax assumed
@10% (1,606) Total post tax profits 14,453 Period (FY12-21E) 10
Average p.a. 1,445 FY18 VNB 6,560 Percentage of FY18 VNB 22% * We
have valued the shares at 20% premium to last transaction price of
Rs 108/sh as the re-purchase transaction will take place in the
coming years. Source: Company, HDFC sec Inst Research
-
MAX FINANCIAL : COMPANY UPDATE
Page | 30
Strong strategic vision
MAXL outlined its strategic priorities- (1) Continue to
integrate with existing partners. (2)Accelerate investment in
technology for proprietary channel. Target to grow proprietary
channel at 35% CAGR. (3) Retain and grow existing partners. MAXL’s
target product mix is 40/40/8/12% for Par/ULIP/Protection/Non-PAR
respectively and the
company continues to develop new partnerships with potential to
scale, eg. Yes Bank. Any development of a scalable alternate
channel will be a big plus as it will reduce its dependence on Axis
Bank and reduce Axis Bank’s leverage on MAXL thereby reducing the
extent of any possible dilution.
Annual Data Rs. Mn FY16 FY17 FY18 Total APE 21,130 26,570 32,475
Growth % 7% 26% 22% Individual APE 21,030 26,390 32,150 Growth % 8%
25% 22% VNB 3,880 4,990 6,560 Growth % -16% 29% 31% VNB margin
18.3% 18.8% 20.2% Change (bps) -510 50 140 GWP Income 92,160
107,800 125,010 First year Premium 20,830 26,460 31,920 Renewal
Premium 63,340 71,140 81,520 Single Premium 7990 10,200 11,570 New
Business Premium 28,820 36,660 43,490 Growth % 12.0% 27.2% 18.6%
Shareholder profit (Pre tax) 5,110 7,680 6,150 Growth % 7.1% 50.3%
-19.9% Product Mix-Individual APE PAR 58% 55% NA Non-par 3% 4% NA
Non-PAR savings 11% 9% NA ULIP 28% 32% NA Total 100% 100% 100%
Product Mix-Total APE PAR 58% 54% 43% Individual protection 3% 4%
4% Group protection 4% 3% 4% Non-PAR Savings 9% 9% 8% ULIP 26% 30%
41% Total 100% 100% 100%
Any development of a scalable alternate channel will be a big
plus as it will reduce MAXL’s dependence on Axis Bank.
-
MAX FINANCIAL : COMPANY UPDATE
Page | 31
Rs. Mn FY16 FY17 FY18 Channel Mix-Individual APE Proprietory 32%
29% 27% Axis Bank 58% 58% 59% Other Banks 9% 12% 13% Others 1% 1%
1% Total 100% 100% 100% Policy holder expense to gross premium
13.60% 14.80% 12.90% Solvency (%) 343% 309% 275% AUM (Rs mn)
358,240 443,700 522,370 Debt NA 76% 78% Equity NA 24% 22% Linked NA
65% 67% Non-Linked NA 35% 33% Opex at Max Financial-standalone (Rs
mn) 860 1,023 1,064 Source: Company, HDFC sec Inst Research
Valuing MAXF Step 1: Value MAXL excluding value transferred to
Axis Bank
We have used a DCF framework to arrive at a multiple to value
the company accordingly our FY20E VNB multiple works out to be
26.4x.
Step 2: Adjusting the VNB for value transfer.
As discussed earlier we have adjusted the FY20E VNB by 22% to Rs
6.8bn and then apply the multiple of 26.4x as derived in step
1.
Step 3: Adjusting for discount of expenses and holding company
discount
MAXFancial also bears certain group level expenses at the
holding co level which need to be adjusted for. During FY15, FY16,
and FY17 the company has incurred net expenses of Rs 630mn, Rs
534mn, and Rs 651mn respectively. We are applying a multiple of 10x
to reduce from the valuation of the company.
We are also applying a holding company discount of 15% to this
to arrive at a value for MAXF shares.
We adjust VNB by 22% to derive an Adj. VNB for the purposes of
valuation.
-
MAX FINANCIAL : COMPANY UPDATE
Page | 32
Based on Appraisal value Adjustments FY18 FY19E FY20E EV 74,460
86,335 100,426 New Business Value 6,560 7,486 8,751 Growth YoY 31%
14% 17% Adj. to VNB 22% 1,443 1,647 1,925 Adjusted VNB 5,117 5,839
6,825 Multiple of New Business Value 35 31 26 Structural value
179,961 179,961 179,961 Valuation 254,421 266,296 280,388
MFSL Valuation Stake in Max Life 70% 70% 70% Valuation of Max
life 178,095 186,407 196,271 Leakages: Group level expenses 7,500
7,500 7,500 Max Life valuation post leakages 170,595 178,907
188,771 Holding company discount 15% 25,589 26,836 28,316 Max
Financial valuation 145,006 152,071 160,456 MFSL (Value/share Rs)
540 567 598 Source: Company, HDFC sec Inst Research
-
MAX FINANCIAL : COMPANY UPDATE
Page | 33
Valuation
FY18 FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY26E FY27E FY28E
FY29E APE 32,475 36,697 42,582 48,544 55,340 63,087 71,919 79,831
88,612 98,359 109,179 121,188 Growth % 18.2 13.0 16.0 14 14 14 14
11 11 11 11 11 VNB Margin 20.2 20.4 20.6 20.8 21.0 21.2 21.4 21.6
21.8 22.0 22.2 22.4 Change bps 204 20 15 20 20 20 20 20 20 20 20 20
VNB 6,560 7,486 8,751 10,073 11,594 13,343 15,355 17,203 19,273
21,590 24,183 27,086 Growth % 31.5 14.1 16.9 15.1 15.1 15.1 15.1
12.0 12.0 12.0 12.0 12.0 Discounted VNB 7,841 8,088 8,341 8,602
8,870 8,905 8,939 8,973 9,006 9,039 Discounted Terminal Value
144,116
Present value of cash flows 86,604 Discounted terminal value
144,116 Structural value 230,720 Embedded value 86,335 Appraisal
value 317,054 MFSL stake 70% MFSL stake value 221,938 Value per
share 827 Implied multiple of VNB 35.2 30.8 26.4 Government 10 yr
risk free rate 8.0 Equity risk premium 5.0 Adj. beta 0.72 Cost of
equity 11.6 Terminal growth rate 5.0 Source: Company, HDFC sec Inst
Research
-
MAX FINANCIAL : COMPANY UPDATE
Page | 34
VNB adj. factor
567 16% 19% 22% 25% 28%
Cost
of e
quity
(%) 10.6 683 665 647 628 610
11.1 637 620 603 586 570 11.6 597 582 567 551 536 12.1 563 549
535 521 507 12.6 534 521 508 495 482 13.1 509 497 484 472 460
Terminal growth rate (%)
567 4.0 4.5 5.0 5.5 6.0 Co
st o
f equ
ity (%
) 10.6 595 619 647 680 720 11.1 561 581 603 630 662 11.6 532 548
567 588 614 12.1 506 520 535 553 574 12.6 483 495 508 523 540 13.1
463 473 484 497 511
-
MAX FINANCIAL : COMPANY UPDATE
Page | 35
EV Projection (Rs. Mn) FY16 FY17 FY18 FY19E FY20E Opening MCEV
52,320 56,170 65,890 74,460 86,335 Value added by new business
during the period/ VNB 3,880 4,990 6,560 7,486 8,751 Unwind/
Expected Return 5,130 5,340 6,410 6,925 8,029 Variance in Operating
experience -140 860 0 500 500 MCEV operating earnings 8,870 11,190
12,970 14,911 17,280 Economic variances 0 0 0 0 0 Other
non-operating variances -630 1,710 -470 0 0 Total MCEV earnings
8,240 12,900 12,500 14,911 17,280 Capital contributions / dividend
payouts -4,390 -3,180 -3,930 -3,036 -3,188 Closing MCEV-Year End
56,170 65,890 74,460 86,335 100,426
Operating RoEV % 17.0% 19.9% 19.7% 20.0% 20.0% Non-operating
RoEV % -1.2% 3.0% -0.7% 0.0% 0.0% Total EVOP return % 15.7% 23.0%
19.0% 20.0% 20.0%
APE 21,627 27,485 32,475 36,697 42,582 Growth (%) 8.7 27.1 18.2
13.0 16.0 New Business Margin 17.9% 18.2% 20.2% 20.4% 20.6%
Unwind rate-reference 9.5% 9.5% 9.7% 9.3% 9.3% Source: Company,
HDFC sec Inst Research EV movement
1HFY16 2HFY16 1HFY17 2HFY17 1HFY18 2HFY18 Opening IEV 52,320
54,120 56,170 60,340 65,890 69,440 Value added by new business
during the period 1,600 2,280 1,830 3,160 2,040 4,520 Unwind 2,500
2,630 2,540 2,800 3,060 3,350 Variance in Operating experience -300
160 150 710 200 420 IEV operating earnings 3,800 5,070 4,520 6,670
5,300 8,290 Other non-operating variances -630 1,340 370 210 -680
Total IEV earnings 3,800 4,440 5,860 7,040 5,510 7,610 Capital
contributions / dividend payouts -2,000 -2,390 -1,690 -1,490 -1,960
-1,970 Closing IEV-Year End 54,120 56,170 60,340 65,890 69,440
75,080 EVOP return % 14.5% 18.7% 16.1% 22.1% 16.1% 23.9% Source:
Company, HDFC sec Inst Research
Margins improved 140 bps YoY to 20.2% in FY18 helping VNB for
the year Operating RoEV came in at 19.7% (FY17: 19.9%) Other
non-operating experience hit EV by Rs 470mn in FY18.
-
MAX FINANCIAL : COMPANY UPDATE
Page | 36
RoEV stack up
Source: Company, HDFC sec Inst Research
Sensitivity Table
FY18 FY18 EV/VNB (Rs.mn) 77,060 6,560 Sensitivity Analysis
Lapse/Surrender - 10% increase -2% -5% Lapse/Surrender - 10%
decrease 2% 6% Mortality- 10% increase -1% -4% Mortality- 10%
decrease 1% 4% Expenses- 10% increase -1% -5% Expenses- 10%
decrease 1% 5% Risk free rates- 1% increase -2% 5% Risk free rates-
1% reduction 2% -7% Equity values- 10% immediate rise 1% negli
Equity values- 10% immediate fall -1% negli Corporate tax Rate – 2%
increase -2% -3% Corporate tax Rate – 2% decrease 2% 3% Corporate
tax Rate – increased to 25% -9% -15% Source: Company, HDFC sec Inst
Research
7.4 8.9 10.0 10.6 11.0
9.8 9.5 9.7 9.3 9.3
(0.3)
1.5 0.7 0.6
(1.2)
3.0
(0.7)
(5.0)
-
5.0
10.0
15.0
20.0
25.0
30.0
FY16 FY17 FY18 FY19E FY20E
Other non-operating variances Variance in operating
experienceExpected return on existing business VNB as % of opening
EV
MAXL has not reported substantial negative operating
variance.
-
MAX FINANCIAL : COMPANY UPDATE
Page | 37
Five Quarters At A Glance (Rs mn) 4QFY17 1QFY18 2QFY18 3QFY18
4QFY18 YoY(%) Growth
QoQ(%) Growth
Individual adjusted premium 10,490 4,580 6,540 7,640 13,390 27.6
75.3 GWP Income 37,870 20,070 28,010 30,440 46,490 22.8 52.7 First
year Premium 10,550 4,530 6,460 7,540 13,390 26.9 77.6 Renewal
Premium 24,050 13,420 18,940 19,780 29,380 22.2 48.5 Single Premium
3,270 2,120 2,610 3,120 3,720 13.8 19.2 New Business Premium 13,820
6,650 9,070 10,660 17,110 23.8 60.5 Shareholder profit (Pre tax)
2,190 1,060 1,300 1,540 2,250 2.7 46.1 Total APE 10,895 4,703 6,607
7,828 13,337 22.4 70.4 Individual. APE 10,490 4,580 6,540 7,640
13,390 27.6 75.3 Product Mix-Individual APE PAR 56.5% 54.0% 45.5%
42.9% NA NM NM Non-PAR Protection 4.0% 7.0% 3.6% 5.0% NA NM NM
Non-PAR Savings 7.5% 8.0% 9.7% 9.0% NA NM NM ULIP 32.0% 31.0% 41.2%
43.1% NA NM NM Channel Mix-Individual APE Proprietary 23.7% 35.0%
29.9% 28.3% 22.1% -160bps -622bps Axis Bank 60.3% 48.0% 56.5% 59.1%
63.9% 363bps 476bps Other Banks 15.0% 16.0% 12.6% 11.5% 13.0%
-203bps 146bps Others 1.0% 1.0% 1.0% 1.0% 1.0% 0bps 0bps
Policyholder expense to Gross premium 13.5% NA 13.0% 13.5% 9.8%
-370bps -370bps
Opex at Max Financial-Standalone 276 252 253 311 249 (9.9)
(19.9) VNB Margin (%)# 18.8% 18.1% 18.1% 20.2% 20.2% 140bps NM AUM
443,700 458,700 477,560 503,330 522,370 17.7 3.8 Equity Mix (%) 76%
NA 77% 75% 78% 200bps 300bps Debt Mix (%) 24% NA 23% 25% 22%
-200bps -300bps Linked (%) 65% NA 66% 66% 67% 200bps 100bps
Non-Linked (%) 35% NA 34% 34% 33% -200bps -100bps
Source: Company, HDFC sec Inst Research,# For FY17 and FY18
AUM growth remains good; Link products continue to dominate
AUM
Good improvement in margins
Solid APE growth
-
MAX FINANCIAL : COMPANY UPDATE
Page | 38
Individual APE trend Product Mix On APE
Source: Company, HDFC sec Inst Research
Source: Company, HDFC sec Inst Research
Persistency Trend Individual Channel Mix On APE
Source: Company, HDFC sec Inst Research Source: Company, HDFC
sec Inst Research
Share of ULIP increased, though it remains balanced Persistency
has been improving across all buckets Dependence on Axis Bank
remain very high
26.4 4.6 6.5 7.6 13.4 32.2
25.5
19.3 18.5
16.8
27.6
21.8
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
FY17
1QFY
18
2QFY
18
3QFY
18
4QFY
18
FY18
APE -Rs mn Growth (%) - RHS
58 5441
3 5
6
9 710
3 43
27 3040
0102030405060708090
100
FY16
FY17
FY18
ULIP Fund BasedNon-PAR Others Non-PAR ProtectionPAR
%
0
10
20
30
40
50
60
70
80
90
13th month
25th month
37th month
49th month
61th month
FY16 FY17 FY18
67 70 72
32 29 27
1 1 1
0102030405060708090
100
FY16
FY17
FY18
Others Agency Bancassurance
-
MAX FINANCIAL : COMPANY UPDATE
Page | 39
Policyholder AC (Rs mn) FY16 FY17 FY18E FY19E FY20E Total
Premium earned 91,389 106,802 119,031 134,265 151,850 Income from
investments and other income 13,046 42,296 51,608 45,134 50,896
Transfer from shareholders AC 19 2 - - - Total Income 104,454
149,101 170,638 179,398 202,746 Commission 8,210 9,364 10,727
12,289 14,218 Operating expenses 12,496 15,912 17,476 19,442 21,605
Provisions 763 803 843 886 930 Total Expenses 21,469 26,080 29,047
32,616 36,753 Benefits Paid 31,464 37,775 45,261 55,286 64,555
Change in valuation of liabilities 46,888 78,693 91,129 84,261
93,834 Total 78,352 116,468 136,390 139,546 158,389 Surplus 4,632
6,553 5,202 7,236 7,605 Transfer to shareholders AC 3,351 5,551
4,421 6,150 6,464 Shareholders AC (Rsmn) FY16 FY17 FY18E FY19E
FY20E Transfer from policyholders' a/c 3,351 5,551 4,421 6,150
6,464 Investment income 2,190 3,089 3,230 3,726 4,386 Total income
5,541 8,640 7,652 9,876 10,850 Expenses 415 961 769 692 692
Contribution to policyholders' a/c 19 2 - - - Profit before tax
5,108 7,677 6,883 9,184 10,158 Taxes 718 1,083 970 1,295 1,432 PAT
4,389 6,594 5,913 7,889 8,726
Source: Company, HDFC sec Inst Research
Balance Sheet (Rs mn) FY16 FY17 FY18E FY19E FY20E Source Share
capital Rs 2 FV 19,188 19,188 19,188 19,188 19,188 Reserve and
surplus 954 5,867 9,820 15,357 21,614 Net worth 20,142 25,055
29,008 34,545 40,802 Credit/debit balance in fair value a/c 97 38
42 46 51
Policyholders' a/c 325,054 406,692 497,821 582,081 675,916 Funds
for future appropriation 14,563 15,565 16,636 17,780 19,004 Total
Liabilities 359,856 447,350 543,507 634,453 735,772 Application
Shareholders' Investments 23,918 32,303 37,255 43,863 51,267
Policyholders' investments 202,784 255,483 - - - Asset to cover
linked liabilities 131,538 155,910 502,521 586,782 680,616 Loans
764 1,333 1,333 1,333 1,333 Fixed assets + DTA 1,679 1,623 1,663
1,705 1,748 Net current assets (827) 699 734 771 809 Debit balance
in P&L - - - - - Total Assets 359,856 447,350 543,507 634,453
735,772
Source: Company, HDFC sec Inst Research
-
MAX FINANCIAL : COMPANY UPDATE
Page | 40
Performance metrics (Rs mn) FY16 FY17 FY18E FY19E FY20E NBP
28,817 36,664 42,182 48,611 56,522 APE 21,627 27,485 32,475 36,697
42,582 VNB 3,880 4,990 6,560 7,486 8,751 EV 56,170 65,890 74,460
86,335 100,426 EVOP 8,870 11,190 12,970 14,911 17,280 Rs/share EPS
11.4 17.2 15.4 20.6 22.8 BV 52.5 65.3 75.7 90.1 106.4 Growth (%)
Premium growth 12.8 16.9 11.4 12.8 13.1 Total income growth (14.9)
42.7 14.4 5.1 13.0 Commissions growth 9.7 14.1 14.6 14.6 15.7 Opex
growth 0.6 27.3 9.8 11.2 11.1 PAT growth (10.2) 20.1 19.8 22.1 16.8
Performance metrics growth (%) NBP 12.0 27.2 15.1 15.2 16.3 APE 8.7
27.1 18.2 13.0 16.0 VNB NA 28.6 31.5 14.1 16.9 EV NA 17.3 13.0 15.9
16.3 EVOP NA 26.2 15.9 15.0 15.9 EPS 431.8 50.2 (10.3) 33.4 10.6 BV
400.5 24.4 15.8 19.1 18.1 Expense ratios (%) Commissions/premium
21.7 5.3 5.0 5.0 5.0 Opex/premium 4.6 21.5 11.4 12.3 12.7 Total
expenses/premium 23.5 24.4 24.4 24.3 24.2 Effeciency ratios (%)
RoAA 1.3 1.6 1.3 1.5 1.4 RoE 21.8 29.2 24.1 26.5 25.0 ROEV return
15.7 23.0 19.0 20.0 20.0 Operating RoEV 17.0 19.9 19.7 20.0 20.0
Non-operating RoEV -1.2 3.0 -0.7 0.0 0.0
Source: Company, HDFC sec Inst Research
Valuation
FY16 FY17 FY18E FY19E FY20E Ratios on CMP P/E (x) 36.7 24.4 27.2
20.4 18.5 P/BV (x) 8.0 6.4 5.6 4.7 3.9 P/EV (x) 2.9 2.4 2.2 1.9 1.6
P/VNB (x) 27.0 19.1 13.2 10.0 6.9 P/EVOP (x) 18.2 14.4 12.4 10.8
9.3 P/AUM(x) 0.4 0.4 0.3 0.3 0.2 P/VIF (x) 4.5 3.8 3.2 2.8 2.4
Ratios on TP P/E (x) 49.5 32.9 36.7 27.5 24.9 P/BV (x) 10.8 8.7 7.5
6.3 5.3 P/EV (x) 3.9 3.3 2.9 2.5 2.2 P/VNB (x) 41.5 30.3 21.8 17.5
13.3 P/EVOP (x) 24.5 19.4 16.7 14.6 12.6 P/AUM(x) 0.3 0.2 0.2 0.2
0.1 P/VIF (x) 4.3 3.6 3.0 2.6 2.3
Source: Company, HDFC sec Inst Research
-
COMPANY UPDATE 6 JUL 2018
SBI Life Insurance BUY
HDFC securities Institutional Research is also available on
Bloomberg HSLB & Thomson Reuters
Increasing Dominance with Margin BuffersSBI Life (SBILIFE) is
the largest private sector Life Insurance company in the country,
with FY18 Individual NBP market share of 20.8% amongst the private
sector players. Cost leadership, further scope to expand margins,
strong distribution of the parent SBI, an underpenetrated Insurance
sector, along with the financialization of savings augurs well for
the company.
VNB Margins understated: For FY18, SBILIFE has reported a VNB
margin of 16.3% vs. peers i.e. ICICI Pru Life (16.5%), HDFC Life
(23.2%) and Max Life (20.2%). SBI Life’s margins are not comparable
with peers due to its use of statutory tax rate of 14.6% vs. peers
using their respective ETRs. Further SBI Life also builds in a
higher solvency capital of 180% vs. statutory requirement of 150%.
According to the management, margins for the ULIP product in FY18
would be higher by 400bps had the company not provided for tax on
dividend income within that product. Accordingly Adj. VNB margin
for the company would work out to ~19%.
SBI to drive growth: SBILIFE, through its parent has access to
over 22k branches across India, cross selling from which is still
at its early stages- only 69% branches doing over Rs 600k business
pa. SBILIFE has a detailed plan to hire personnel at branches with
high business potential and to increase concentration
of BDMs. As a result, we believe SBILIFE can grow above industry
growth rates over next several years.
We lower our growth assumptions in the medium term in-line with
our sector view but still believe SBILIFE will grow at above sector
growth rates and now expect APE to grow at a 20% CAGR over
FY18-20E. Increasing scale and higher share of the protection
business will help improvement in VNB margins from current 16.3% in
FY18 to 16.7% in FY20E. EV after payout of dividends is expected to
grow at a CAGR of 18.2% in FY18-20E and RoEV’s are expected to be
at the 19.4% level. We value SBILIFE at EV + NBV multiple (FY20E)
of 31.4x based on our DCF. This translates to a target price of Rs
870/sh (+30.8%).
Key risks: Any higher than built-in drop in persistency, macro
slowdown impacting overall flows to insurance, increase in tax
rates for the sector.
FINANCIAL SUMMARY (Rs bn) FY17 FY18 FY19E FY20E APE 66.0 85.4
102.5 123.0 Growth (%) 35.4 29.3 20.0 20.0 VNB 10.4 13.9 16.9 20.5
Growth (%) 48.3 34.1 21.8 21.1 VNB margin (%) 15.7 16.3 16.5 16.7
EV 165.7 191.4 226.3 267.3 Growth (%) 27.5 15.5 18.3 18.2 P/EV (x)
4.0 3.5 2.9 2.5 P/VNB (x) 48.2 34.1 25.9 19.4 Op. RoEV (%) 23.0
17.8 19.4 19.4 Source: Company, HDFC sec Inst Research
INDUSTRY LIFE INSURANCE CMP (as on 5 Jul 2018) Rs 665 Target
Price Rs 870 Nifty 10,750
Sensex 35,575
KEY STOCK DATA
Bloomberg SBILIFE IN
No. of Shares (mn) 1,000
MCap (Rs bn) / ($ mn) 663/9,618
6m avg traded value (Rs mn) 334
STOCK PERFORMANCE (%)
52 Week high / low Rs 775/629
3M 6M 12M
Absolute (%) (1.8) (5.5) -
Relative (%) (7.6) (9.7) -
SHAREHOLDING PATTERN (%)
Promoters 84.1
FIs & Local MFs 4.5
FPIs 4.4
Public & Others 7.0
Source : BSE
Madhukar Ladha [email protected] +91-22-6171-7323
-
SBI LIFE: COMPANY UPDATE
Page | 42
VNB Margins understated
For FY18, SBILIFE has declared a VNB margin of 16.3% vs. peers
i.e. ICICI Pru Life (16.5%), HDFC Life (23.2%) and Max Life
(20.2%). SBI Life’s margins are not comparable with peers due to it
using the statutory tax rate at 14.6% vs. peers using their
respective effective tax rates. According to the management,
margins for the ULIP product in FY18 would be higher by 400bps had
the company not
provided for tax on dividend income within the product. Further
SBI Life also builds in a higher solvency capital of 180% vs.
statutory requirement of 150%. Accordingly Adj. VNB margins are at
~19%. Using adjusted margins P/adj. VNB of SBILIFE for FY19E and
FY20E works out to a compelling 22.1x and 16.4x respectively.
Adjusted P/VNB (x) for SBILIFE
FY18 FY19E FY20E Adj. EV (Rs mn) 191,384 229,045 273,731 APE (Rs
mn) 85,400 102,470 122,998 Growth (%) 29.3 20.0 20.0 Adj. VNB (Rs
mn) 16,226 19,725 23,862 Adj. VNB margin (%) 19.0 19.3 19.4 P/Adj.
VNB (x) 29.2 22.1 16.4 Source: Company, HDFC sec Inst Research
Adj. for tax rate and excess solvency margin- VNB margins for
FY18 are ~19%. SBILIFE is selectively targeting branches with high
business potential and increasing sales personnel.
-
SBI LIFE: COMPANY UPDATE
Page | 43
SBI to drive growth
SBI’s retail business franchise is one of the most well
diversified amongst all banks. SBILIFE, through its parent has
access to over 22k branches across India, cross selling from which
is still at its early stages- only 69% branches doing over Rs 600k
business pa. SBILIFE has a detailed plan to hire personnel at
branches with high business potential and to increase concentration
of BDMs. SBILIFE is selectively targeting branches with high
business potential and increasing sales personnel.
In the 4QFY18 earnings call, the management alluded to the
banking channel being distracted by NPAs and had assured investors
that growth from banca will be stronger.
For YTDFY19 SBILIFE has reported growth of 8.9%/9.1% in NBP/APE
respectively. This is after a growth of 74%/89% in the base period
of FY18.
Recently SBILIFE has tied-up and has already started business
through South Indian Bank and Punjab & Sind Bank.
SBILIFE is also aggressively targeting the group credit business
along with partners. Current home loan attachment rate is 52%.
Company is also pursuing other partnerships to expand reach.
Management is also focused on increasing tie-ups and
collaborating more with partners in order to attain higher
individual business and also group credit business.
Particulars FY16 FY17