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ULIP guidelines have hit the life insurance industry hard, forcing it to face volume dips and lower
margins. Despite a cap on the cost of intermediation imposed by the regulator, we believe life
insurers will emerge as meaningful intermediaries in mobilising long-term savings, generating
attractive returns.
Persistency/expense risks up, profitability down
Recent regulatory changes have been significant in nature, scope and magnitude, and have sent
the industry into a state of flux. The regulator’s effort has been to ensure that insurance contracts
retain their core value proposition, but the strictures have resulted in higher persistency/expense
risk and lower profitability for manufacturers. This has led to a scale-down of network and shift in
product mix towards non-linked business over FY11.
ULIP – an opportunity albeit for few
Going forward, the ability to write linked business profitably will be the key differentiator. We
believe the unit linked insurance policies (ULIPs) post the new guidelines will: 1) emerge as a
more viable asset class from policyholders’ perspectives; 2) remain the single largest conduit for
long-term retail equity participation; and 3) fit well into the product offering of low-cost operators,
as these players will be able to leverage low-/variable-cost business models to assume relatively
higher persistency risks.
Embedded value converting to book value
Life insurers have started generating high profits as their high-value assets respond to rapid cost
cutting, driving return ratios. While current return ratios look high, as the existing high value inforce
book (written prior to September 2010) runs out (over next three to five years), we expect
return ratios to normalize with ROAs at 1%-plus supported by high leverage 15-73x (likely range:
15-25x). Over FY12-14F, we expect current high return ratios to cushion the difficult transition
and drive rapid growth in book value. We estimate new business achieved profit (NBAP) margins
of 11-12% for ULIPs, a similar range for par and 25-30% for non par policies. In new ULIPs,
sensitivities related to persistency/expenses need more closer monitoring than ever. We expect
new business growth to remain flat over FY12 and track nominal GDP growth in medium term.
We value insurers using an appraisal value methodology at 1.5-2.2xFY12F embedded value and
5.3-11.8xFY12F book value.
Bank-backed insurers at advantage; we prefer ICICI Prudential and SBI Life
We believe bank-backed insurers and those promoted by large financial conglomerates, with
large (profitable) in-force books, will be better off during the difficult transition over the next three
to five years. Among the companies we cover, ICICI Prudential and SBI Life fit well into our
prescription, as mentioned above, followed by HDFC Life (relatively higher expense ratio) and
Birla Sun Life (absence of a strong bancassurance partner).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ULIP guidelines have hit the life insurance industry hard, forcing it to face volume dips and lower
margins. Despite a cap on the cost of intermediation imposed by the regulator, we believe life
insurers will emerge as meaningful intermediaries in mobilising long-term savings, generating
attractive returns.
Persistency/expense risks up, profitability down
Recent regulatory changes have been significant in nature, scope and magnitude, and have sent
the industry into a state of flux. The regulator’s effort has been to ensure that insurance contracts
retain their core value proposition, but the strictures have resulted in higher persistency/expense
risk and lower profitability for manufacturers. This has led to a scale-down of network and shift in
product mix towards non-linked business over FY11.
ULIP – an opportunity albeit for few
Going forward, the ability to write linked business profitably will be the key differentiator. We
believe the unit linked insurance policies (ULIPs) post the new guidelines will: 1) emerge as a
more viable asset class from policyholders’ perspectives; 2) remain the single largest conduit for
long-term retail equity participation; and 3) fit well into the product offering of low-cost operators,
as these players will be able to leverage low-/variable-cost business models to assume relatively
higher persistency risks.
Embedded value converting to book value
Life insurers have started generating high profits as their high-value assets respond to rapid cost
cutting, driving return ratios. While current return ratios look high, as the existing high value inforce
book (written prior to September 2010) runs out (over next three to five years), we expect
return ratios to normalize with ROAs at 1%-plus supported by high leverage 15-73x (likely range:
15-25x). Over FY12-14F, we expect current high return ratios to cushion the difficult transition
and drive rapid growth in book value. We estimate new business achieved profit (NBAP) margins
of 11-12% for ULIPs, a similar range for par and 25-30% for non par policies. In new ULIPs,
sensitivities related to persistency/expenses need more closer monitoring than ever. We expect
new business growth to remain flat over FY12 and track nominal GDP growth in medium term.
We value insurers using an appraisal value methodology at 1.5-2.2xFY12F embedded value and
5.3-11.8xFY12F book value.
Bank-backed insurers at advantage; we prefer ICICI Prudential and SBI Life
We believe bank-backed insurers and those promoted by large financial conglomerates, with
large (profitable) in-force books, will be better off during the difficult transition over the next three
to five years. Among the companies we cover, ICICI Prudential and SBI Life fit well into our
prescription, as mentioned above, followed by HDFC Life (relatively higher expense ratio) and
Birla Sun Life (absence of a strong bancassurance partner).
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