SECTOR UPDATE 6 JUL 2018 Life Insurance 3 Insurance - Update - Jul18... · long term prospects of...

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


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

%


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 (%)


Life insurance penetration (% of GDP)


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%


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%.


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


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.


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


Page | 9

APE Growth (%) Ind. NBP Market share (%)



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


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


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



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.


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.


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.


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


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


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


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.


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.


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


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


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.


Page | 23

APE trend ( Rs bn.) Product Mix On APE



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


Page | 24

Persistency Trend Channel Mix On APE


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


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


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



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 - -


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



Max Financial Services BUY


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


Sensex 35,575

KEY STOCK DATA

Bloomberg MAXF IN

No. of Shares (mn) 268

MCap (Rs bn) / ($ mn) 113/1,634




3M 6M 12M

Absolute (%) (8.6) (28.7) (29.7)

Relative (%) (14.5) (32.9) (43.6)


Promoters 30.3

FIs & Local MFs 28.4

FPIs 29.4

Public & Others 11.9 Source : BSE


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%.


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


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.


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.


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


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


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


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.


Page | 36

RoEV stack up


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.


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


Page | 38

Individual APE trend Product Mix On APE



Persistency Trend Individual Channel Mix On APE


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


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


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



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


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



SBI Life Insurance BUY


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


Sensex 35,575

KEY STOCK DATA

Bloomberg SBILIFE IN

No. of Shares (mn) 1,000

MCap (Rs bn) / ($ mn) 663/9,618




3M 6M 12M

Absolute (%) (1.8) (5.5) -

Relative (%) (7.6) (9.7) -


Promoters 84.1

FIs & Local MFs 4.5

FPIs 4.4

Public & Others 7.0

Source : BSE


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

SECTOR UPDATE 6 JUL 2018 Life Insurance 3 Insurance - Update - Jul18... · long term prospects of...

Documents

Transcript of SECTOR UPDATE 6 JUL 2018 Life Insurance 3 Insurance - Update - Jul18... · long term prospects of...