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Insurance: Tough times, limited options
` APE growth disappoints for most players
` Linked or non-linked, business is challenging
` Operating leverage shows limited scope for improvement

Tough times, limited options. We believe insurance companies are finding it tough to 

drive business. Low commission rates do not incentivize distributors to push for unitlinked business and traction in non-linked business is lower than expected, depressing 

growth estimates. Against this backdrop, expense ratios have stabilized and even 

deteriorated in some cases. Insurance players with captive banking partners are 

somewhat better placed in the current environment. Managements’ strategy to 

capitalize on surrender-penalty income is crucial to drive business performance and lead 

to upgrade/downgrade in estimates.  

APE growth disappoints for most players  

Most private players have reported lower-than-expected APE over the past few months. Several 

players (Bajaj Allianz, Birla SL, Max NY Life, Reliance Life and SBI Life) reported yoy decline in 

individual business during November 2011, December 2011 and January 2012 even as the base 

effect of the new IRDA regulations evened out from September 2011. The recent focus on new 

products (largely traditional policies) is likely to have affected these players’ growth. Among larger 

players, ICICI Pru Life and HDFC SL reported positive growth during these months, probably due to 

their banking partnerships. While we await data from IRDA for February and March 2012, we find 

downside risk to our FY2012 APE estimates for most players.  

Linked or non-linked, business is challenging  

We believe it is challenging for insurance companies to drive high business volumes through 

traditional (non-ULIP) products, given difficultly in selling the products and their lower investment 

propositions.  

Distributors prefer traditional policies (on which they earn commissions of over 20%) to unit-linked 

plans, which earn them lower commissions (5-6%). However, it now appears that after initial push 

in the traditional business, traction has slowed, especially at the higher end of the market, which 

tends to be more investment focused. An increase in the share of non-linked policies has reduced 

the average ticket size for most players, except Max NY Life.  

ICICI Pru Life and HDFCSL have resumed focus on linked business. Their captive banking channel 

likely helps to push the low commission, unit-linked products.  

Operating leverage shows limited scope for improvement  

Operating cost-to-premium ratio for most players has stabilized at 15-20%. Bajaj Allianz reported 

an increase to 22% in 3QFY12 from 19% in 2QFY12 and Max NY Life reported a decline to 18% 

in 3QFY12 from 20% in 2QFY12. We believe it is imperative for insurance companies to find 

profitable growth avenues or else go through another phase of cost reduction.