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A tale of two halves: Subdued first half, rebound likely in the second
Volumes down in 2H11; likely to be muted in 1H12, recover in 2H12
Indian life insurers witnessed a significant decline in 2HFY11 retail APE growth
(-26% for industry and -41% for private sector), a trend that has continued in
April (-31%/-40%), on new regulations that came into effect from Sept 1, 2010.
Volumes for 1HFY12 will likely remain muted on a high base and continuation
of the adjustment process to the new norms. However, we expect volumes to
improve in 2H12 both due to a low base and distribution adjustment to new
regulations. Long-term, we expect premium income growth to be 1.2X-1.4X
GDP growth given higher consumer disposable income.
Shift towards selling single premium, group/traditional products
The private players have responded to the regulations by focusing more on
single premium products (27% of FY11 new premium from 10% in FY10) to
reduce persistency risk and also sold more group products (up to 34% in
FY11 of new premium from 25% in FY10) to likely boost top line. The share
of traditional products too has increased this year given the higher
commissions on this product (35% commission on FYP vs. 6%-8% on ULIP)
Firms cutting costs; Expenses, commissions set to decline further
Firms have reduced costs in absolute and percentage terms adjusting to new
regulations and offsetting volume growth slowdown. Cost ratios are down to
12%-25% in FY11 from 16%-30% in FY10 on rationalization of agency force
and consolidation of branch network. Commission costs declined as well on
new regulations and increasing share of renewal premiums. There is likely
scope for further costs reduction when compared with Asian peers (at < 8%).
Margins have declined materially in 2H11, we forecast 12% margin
Post the implementation of the new IRDA regulations, margins are down
materially. Firms have started focusing on renewal/policy persistency to
arrest this trend. We are currently assuming FY12E NBAP margins at 12%
for the industry and believe this could be higher if companies succeed in
reducing cost ratios to single-digit and further enhance persistency ratios.
Losses reducing for insurers but we remain Neutral on BJFS, MAXI
Most insurers have started reporting profits leading to reduced accumulated
losses as well as need for further capital infusion. We rate BJFS, MAXI as
Neutral given a lack of near-term catalysts as: (1) premium growth likely to be
subdued near term (2) cost improvements to accrue gradually
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A tale of two halves: Subdued first half, rebound likely in the second
Volumes down in 2H11; likely to be muted in 1H12, recover in 2H12
Indian life insurers witnessed a significant decline in 2HFY11 retail APE growth
(-26% for industry and -41% for private sector), a trend that has continued in
April (-31%/-40%), on new regulations that came into effect from Sept 1, 2010.
Volumes for 1HFY12 will likely remain muted on a high base and continuation
of the adjustment process to the new norms. However, we expect volumes to
improve in 2H12 both due to a low base and distribution adjustment to new
regulations. Long-term, we expect premium income growth to be 1.2X-1.4X
GDP growth given higher consumer disposable income.
Shift towards selling single premium, group/traditional products
The private players have responded to the regulations by focusing more on
single premium products (27% of FY11 new premium from 10% in FY10) to
reduce persistency risk and also sold more group products (up to 34% in
FY11 of new premium from 25% in FY10) to likely boost top line. The share
of traditional products too has increased this year given the higher
commissions on this product (35% commission on FYP vs. 6%-8% on ULIP)
Firms cutting costs; Expenses, commissions set to decline further
Firms have reduced costs in absolute and percentage terms adjusting to new
regulations and offsetting volume growth slowdown. Cost ratios are down to
12%-25% in FY11 from 16%-30% in FY10 on rationalization of agency force
and consolidation of branch network. Commission costs declined as well on
new regulations and increasing share of renewal premiums. There is likely
scope for further costs reduction when compared with Asian peers (at < 8%).
Margins have declined materially in 2H11, we forecast 12% margin
Post the implementation of the new IRDA regulations, margins are down
materially. Firms have started focusing on renewal/policy persistency to
arrest this trend. We are currently assuming FY12E NBAP margins at 12%
for the industry and believe this could be higher if companies succeed in
reducing cost ratios to single-digit and further enhance persistency ratios.
Losses reducing for insurers but we remain Neutral on BJFS, MAXI
Most insurers have started reporting profits leading to reduced accumulated
losses as well as need for further capital infusion. We rate BJFS, MAXI as
Neutral given a lack of near-term catalysts as: (1) premium growth likely to be
subdued near term (2) cost improvements to accrue gradually
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