Though the Insurance Regulatory and Development Authority (Irda) has just released the norms for initial public offerings (IPOs), insurance companies are hardly queuing for listing.
The industry is seeing a decline in new business premiums, reflecting the waning risk appetite for market-linked investment policies like unit-linked investment products (Ulips) and poorly-incentivised distribution. Also, the strife between regulatory flux and recalcitrant markets. In a poor market environment, this translates to prospects of unexciting valuations.
Valuations for life insurers include the embedded value of assets and in-force business, as well as goodwill or structural value. Structural value is the ability to generate a future stream of profitable new businesses and is a function of new business premium growth projections and a company’s expected profitability.
| FIRST-YEAR PREMIUM OF LIFE INSURERS (In Rs crore) | |||
| Sept, 10 | Sept, 11 | % chg | |
| SBI Life | 3,172 | 2,453 | -22.7 |
| ICICI Prudential | 3,016 | 1,916 | -36.5 |
| HDFC Standard | 1,636 | 1,462 | -10.6 |
| Bajaj Allianz | 1,511 | 937 | -38 |
| Max New York | 969 | 841 | -13.3 |
| Birla Sunlife | 1,052 | 802 | -23.8 |
| Reliance Life | 1,410 | 674 | -52.2 |
| Tata AIG | 626 | 470 | -24.8 |
| Kotak Mah. Old Mutual | 538 | 414 | -22.9 |
| Canara HSBC OBC Life | 364 | 309 | -15.2 |
| Aviva | 328 | 301 | -8.4 |
| Met Life | 307 | 271 | -11.9 |
| ING Vysya | 274 | 266 | -2.8 |
| Star Union Dai-ichi | 227 | 256 | 12.8 |
| IndiaFirst | 236 | 252 | 6.9 |
| Others | 1,004 | 700 | -30.28 |
| Private Total | 16,670 | 12,325 | -26.1 |
| LIC | 45,691 | 36,721 | -19.6 |
| Grand Total | 62,361 | 49,046 | -21.4 |
| Source: Irda | |||
Amitabh Chaudhry, chief executive of HDFC Life, says new business margins are the biggest drivers of life insurance valuations. This, he clarifies, can be loosely explained as the ability to deliver a certain absolute volume at a certain cost of acquisition. Therefore, it keeps the spotlight on new business premium growth, with emphasis on the efficiency of distribution and operations.
New business premium volumes declined 21 per cent year-on-year as on September 30, according to data from the regulator. Volatile equity markets have hurt risk appetite and the demand for savings offerings from life insurers, especially Ulips. Historically, Ulip sales accounted for 90 per cent of new business premiums, and private insurers saw phenomenal growth in a dizzying market share chase that attracted several new entrants, resulting in 23 players in the pool.
However, since then, the industry has completed a full circle, with Life Insurance Corporation of India dominating again. While private players saw a 26 per cent year-on-year decline in new business (first-year premiums) for the 12 months ended September, LIC’s new business growth has contracted 19.6 per cent, taking its market share to 75 per cent, primarily owing to the controversy over Ulips and the subsequent higher protection mandate on these products.
So, the shift to traditional products started. On Friday, Ulips account for about 65 per cent of HDFC Life’s business mix, compared with 75 per cent of the portfolio in 2009-10 and 87 per cent in 2010-11. ICICI Prudential also has a similar mix of 65:35 between Ulips and traditional policies, said Executive Director Puneet Nanda.
There is limited scope for innovation or differentiation in product design, says Ashvin Parekh, partner and national leader, Ernst & Young, with the demand for investments and savings products accounting for about 80 per cent of the market. The unavailability of underlying financial assets to provide required yields and market volatility across asset classes have made insurers reluctant to focus on return-based products, he adds. Also, the tighter regulations reduce the scope for differentiation, and most changes in product design are driven by regulatory changes, says Anil Sahgal, founder of online financial advisory website, i-save.com.
Irda’s recent decision to allow insurers to offer an option of guaranteed returns of 4.5 per cent for pension products through capital protection could drive some new product offerings. So, would new Ulip policies compatible with regulations, after current Ulips die a natural death, says Anant Gupta, senior manager, PWC. Given the cap on distribution charges for Ulips, the higher investible proportion of the first-year premium makes it a very attractive proposition for policyholders, he says, cautioning that lower distributor incentives would limit sales.
While most insurers blame the demand implosion for market volatility, it is clearly complicated by the regulatory shift in incentives from commissions to fee-based. While Ernst & Young’s Parekh and ICICI Prudential’s Nanda believe the capping of charges is good for the industry from a long-term perspective, both agree this would be painful in the near to medium term. The incentive structure has also rewarded volume chase without discouraging mis-selling or encouraging policy servicing, affecting policy persistency. Parekh feels the regulator should allow dynamism in compensation.
Given the growth pressure, cost management is becoming significant and the focus on profitability is evident, says Parekh. Agent productivity and efficiency is a thrust area, and could be a major differentiator. Companies are actively reducing their agency force to focus on productive agents.
Max New York Life has seen its net profit rise to Rs 373 crore in the first half of 2011-12, with operating costs (including commissions) down from 42.9 per cent of total premiums to 31.7 per cent, boosted by a stellar agency efficiency performance, with average agent new business productivity at Rs 17, 808 per month and the average case rate at 0.52 policies a month. HDFC Life and ICICI Prudential have tracked a significantly lower distribution efficiency performance, with productivity of Rs 3,301 and Rs 6,268 and case rates of 0.1 and 0.15, respectively, based on disclosures and internal analysis by Max NY Life. HDFC Life’s numbers were partly hit by the expansion of 1,500 people since April. Chief executive, Chaudhry says the company is focusing on cutting costs by linking incentives to sales and reducing commissions. Excluding commissions, operating costs were down 32 per cent year-on-year in the first half of 2011-12. He says the company reported a profit of Rs 21 crore in the first half of 2011-12, compared with a Rs 65-crore loss in the same period last year. In the same period, ICICI Prudential reported a net profit of Rs 689 crore, compared to a Rs 101-crore loss in the year-ago period.
The need for capital would reassert once premiums start flowing again and the industry sees growth, says PWC’s Gupta. Unless smaller players find themselves in a desperate situation (need of funds), IPOs from life insurance players are unlikely in the near term.
While Indian partners would want to realise some value, tapping the primary markets through an IPO is unlikely to happen voluntarily, till the foreign direct investment limit is raised to 49 per cent, which would attract foreign partners and allow potential mergers, says Gupta. This could bring valuations into the spotlight again.
Companies would wait till new business margin parameters improve and profitability allows better valuations, says HDFC Life’s Chaudhry.
