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India Equity Research Reports, IPO and Stock News
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Insurance
India
Down but not out. We believe changes in the business environment will erode the
margins of insurance companies though long-term growth prospects remain intact.
RoEs of well-run insurance companies will likely lose ground but remain high at about
20-25% despite near-term odds. We revise our valuation estimates for the insurance
business by 20-40% and retain our cautious view on the sector as the new regime
unfolds.
Lower margins and valuations on the back of several challenges
We revise our valuations downwards by 20-40% for most insurance companies, primarily to factor
lower margins in the new regime. We find significant challenges in the new operating
environment—pressure to drastically cut costs and commissions (25-30% expense reduction as
highlighted by key players) and simultaneously increase business volumes to leverage fixed costs.
Regulatory restrictions have reduced the leeway of insurance companies to offer much variety in
the product portfolios.
Business strategy not yet clear; bancassurance to emerge as the most effective channel
The private sector has reported weak trends in 3QFY11 with APE down 40% yoy as most
companies are still finalizing their business plans (post the IRDA guidelines implementation from
September 2010). The overall business strategy (product mix, distribution strategy, costs and
persistency behavior of the new products) has been significantly altered and is still evolving.
However, we believe that banks having strong bancassurance partners are well placed in terms of
costs and profitability. It may be difficult to run a very large agency force, given the costs attached.
Key challenges faced by insurance companies
(1) Volumes may be imperative to leverage overhead costs but product strategy is still unclear—
popular products like pensions are not attractive anymore; traditional policies (not covered by the
guidelines) seem to be a focus area but most companies do not have the franchisees to scale up
this segment. (2) Reduction in branches and employees saves operating expenses but can affect
long-term franchise. (3) Persistency of new ULIPs (in light of longer minimum tenure) is difficult to
predict. (4) The new commission structure (reduced first-year commissions and higher focus on
renewals) may not enthuse distributors though we haven’t seen a backlash yet. New business
trends for the past two months appear weak.
Long-term growth potential remains strong
We remain positive on the long-term growth potential of the insurance sector on the back of
strong growth in the domestic savings. Nominal GDP growth of about 14%, household saving rate
of 16-18% and the relatively better position of insurance to tap the retail investment market are
key positives. From a stock perspective, we like Max India, which is more of a direct play on the
insurance space.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Insurance
India
Down but not out. We believe changes in the business environment will erode the
margins of insurance companies though long-term growth prospects remain intact.
RoEs of well-run insurance companies will likely lose ground but remain high at about
20-25% despite near-term odds. We revise our valuation estimates for the insurance
business by 20-40% and retain our cautious view on the sector as the new regime
unfolds.
Lower margins and valuations on the back of several challenges
We revise our valuations downwards by 20-40% for most insurance companies, primarily to factor
lower margins in the new regime. We find significant challenges in the new operating
environment—pressure to drastically cut costs and commissions (25-30% expense reduction as
highlighted by key players) and simultaneously increase business volumes to leverage fixed costs.
Regulatory restrictions have reduced the leeway of insurance companies to offer much variety in
the product portfolios.
Business strategy not yet clear; bancassurance to emerge as the most effective channel
The private sector has reported weak trends in 3QFY11 with APE down 40% yoy as most
companies are still finalizing their business plans (post the IRDA guidelines implementation from
September 2010). The overall business strategy (product mix, distribution strategy, costs and
persistency behavior of the new products) has been significantly altered and is still evolving.
However, we believe that banks having strong bancassurance partners are well placed in terms of
costs and profitability. It may be difficult to run a very large agency force, given the costs attached.
Key challenges faced by insurance companies
(1) Volumes may be imperative to leverage overhead costs but product strategy is still unclear—
popular products like pensions are not attractive anymore; traditional policies (not covered by the
guidelines) seem to be a focus area but most companies do not have the franchisees to scale up
this segment. (2) Reduction in branches and employees saves operating expenses but can affect
long-term franchise. (3) Persistency of new ULIPs (in light of longer minimum tenure) is difficult to
predict. (4) The new commission structure (reduced first-year commissions and higher focus on
renewals) may not enthuse distributors though we haven’t seen a backlash yet. New business
trends for the past two months appear weak.
Long-term growth potential remains strong
We remain positive on the long-term growth potential of the insurance sector on the back of
strong growth in the domestic savings. Nominal GDP growth of about 14%, household saving rate
of 16-18% and the relatively better position of insurance to tap the retail investment market are
key positives. From a stock perspective, we like Max India, which is more of a direct play on the
insurance space.
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