M NEYBEE MONEYBEE SECURITIES PVT.LTD.

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RESEARCH REPORT
INDUSTRY: INSURANCE COMPANY: BAJAJ FINSERVICES LTD (BFL)

• Chairman: BSE Code : NA Recommendation: BUY

Sanjeev Bajaj Face Value : 5/-
M.Cap : NA
• Corporate Office: 52 Week H/L : NA
Bombay-Pune Road, Eq.Cap : 723 CMP : NA
Akurdi, B.V : 290
Pune – 411035, Maharashtra, EPS TTM : NA
P/B : NA Target Price : Rs.1857
Tel, 91-020-27406063 PE : NA Research Analyst
Website: www.bajajallianz.co.in Div Yield % : NA Priyakant Dave

Bajaj Finservices Ltd (BFL) is the demerged company from Bajaj Auto ltd engaged in the business of life & non life
insurance. Bajaj Allianz ltd, an insurance arm of Bajaj Finservices Ltd is undisputed leader in the life insurance
space no.1 company among New Business Policies issued in private sector. On the back of aggressive
distribution scale-up, branding & constant product innovation Bajaj Allianz has retained position of second
largest insurance player in the private sector. It is also a beneficiary of strong brand name of Bajaj Auto Ltd. Bajaj
Allianz is 74:26 joint ventures between Bajaj Auto & Allianz. We value at 18x FY09 NBAP and arrive at a price
target of Rs.1857.

HIGHLIGHTS OF THE COMPANY

Annualised • Bajaj Allianz is second largest insurance company with

market share of 20.1%. The company has managed to
Premium maintain its position on the back of multi-channel
distribution network & aggressive advertising to create
ICICI Pru brand awareness.
• Innovative product range which fulfill need of different
7% Bajaj Finser age group & different income class.
9% 27% • Highest no. of offices in private sector, at present
SBI Life company has opened 876 offices.
• Huge agent network, Personal relationship with client is
Others the key thing in the insurance which is being well
27% handled by the company on the back of huge agent
HDFC network of 2,13,000 no of agent.
21%
9% Reliance Life
• Popularity of ULIP as a potent combination protection
with return has been a major driver.
• Bajaj Allianz has issued over 45 lakh individual policies
Market Share as on Dec 07 since its inception in Oct, 2001 & received a premium
income of over Rs.10,000 cr in total.
Source: Company website

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 1
 • As on Dec 2007, Company has AUM of Rs.12, 579 cr out
of which Rs.10,100 cr is from ULIP & it is growing at an
New Business Policy Avg. CAGR of 86%.
• In some of the ULIP product Bajaj Allianz offers least
charges to compete against other player & mutual
7% ICICI Pru funds.
7% 23% • Company offers wide range of plan such as child plan,
Bajaj Finser pension plan, woman insurance, term plan, and
traditional plan. Company is also launching few plans in
Max Newyork
near future.
26% Others • Bajaj Allianz has been witnessing decline in its
commission ratio due to ULIP which typically carry
HDFC lower commission vis-à-vis traditional plan.
30% Reliance Life
7%

Market Share as on Dec 07

Source: Company website

INDIAN LIFE INSURANCE INDUSTRY

Explosive growth going forward is reinforced by the macro variables of a low social security cover, untapped and
rising household savings as also an encouraging demographic profile. While believe the sector will deliver ~33%
CAGR over FY07-10 (46% for pvt sector), the growth could come at the expense of margins and believe that the
NBAP (New Business achieved profit) margins will moderate by 150-200bps over the next three years. A strong
brand, deep pockets and an aggressive posture on distribution will be the key differentiators.

• The chief trigger driving the growth was the changing

regulations for unit-link insurance plans (ULIPs). The
Linked popularity of ULIP as a potent combination of
45% protection with returns has been a major driver for the
Non-
linked accelerated growth.
55% • Due to long term commitment for the payment of
premium like 10 years & 20 years growth of insurance
industry was moderate.
Data as on FY 06
• With liberalization Pvt player came with the product
which is suitable to investor namely ULIP. In ULIP
investor’s commitment for the payment of premium
has drop down to 3 & 5 years from 20 years. This has
Non- given boost in the penetration of insurance in India.
Linked Linked • In ULIP investor can also withdraw part of his money as
53% 47% per his requirement as against in the case of LIC’s
traditional plan investor need to borrow money from
LIC on which LIC use to charge 15 to 18% as a interest
component.
• ULIP emerge as better product compared to mutual
Data as on fund as IRR from ULIP is greater than that on mutual
FY07 fund in longer term i.e greater than 12 years.

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 2
• Expanding Distribution:
Concentrated sales efforts from both private & p public
ublic sector has increased the penetration of life insurance
products.
s. In the current year almost all private player have aggressively invested in expanding their
distribution reach. Insurance being a push product, and with product innovation easy to replicate, a vast
distribution network will be the key to future growth acceleration, specifically in the under-penetrated
under semi-
urban and rural areas. Again the posture taken towards distribution scale up will shape success. Initial ramp
ups are often less profitable
itable but the single mindedness of the management to commit capital and resources
to increase distribution will determine success.

Distribution 2006 2007

Branches Agents Branches Agents
ICICI Pru 177 72,000 583 2,34,000
Bajaj Allianz 601 1,09,000 876 2,13,000
HDFC Standard 169 33,000 438 74,000
Reliance Life 153 20,231 217 1,06,000

• Falling service charge: Before liberalization LIC was the only player in the industry & use to charge huge
expense ratio around 45% to 60% in almost all the product which has now came down to 20%. Reduction in
the commission has added value to investor’s fund & motivate them to look insurance product not only
from the point of risk cover but also from better investment product
product, this change in
i mind set of people has
boost in the premium volume.
• Returns: Return generated in traditional plan like endowment and money back plan which comprises 80% of
the total product has never be more than 9% which is due to IRDA rules which says that atleast 80%80 of the
corpus has to be in Govt paper & equity exposure should not exceed 10% of the corpus. But in a longer run
equity market has given highest return. With the introduction of ULIP investor has choice to allocate money
as per his risk appetite in different
rent asset class.

ECONOMIC PARAMETER
Global GDP % growth rate:

GDP% as on Y.E 2007

11.4 • From the chart one can
make out that India &
9.2 China is growing
7.7 country & it is
7.3 expected that India
6.3
5.1 will post GDP of
atleast 7.5% to 8% till
2015 on the back of
2.1 2.2 service industry which
is growing at 10% &
constitute 60% of the
total GDP.
China India Singapore Philippines Malaysia South Africa Japan US

Source: International Monetary Fund

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 3
 Life Insurance Penetration as on 2007
2007:

10

4 8.9 8.3
7.3
6
2 4.2 4.1 3.6 4
1.8
0
UK Japan Korea Singapore Australia US Malaysia India China

Source: Swiss Re

• Penetration of insurance products (total premium as a per cent of GDP), though higher
igher at 4% vis-à-vis
vis 1.2% seen
in FY00, still lags penetration levels in developed economies. According to industry estimates, only 35% of India’s
insurable population is currently covered by insurance, which indicates tremendous potential. Only a third of the
target population of 400 mn is insured.

Insurance Density (premium per capita US$) as on 2007

6000
5140
5000
4000
2829
3000 2456
2000 1790 1617 1480
1000 189 38 40
0
UK Japan Hong Kong US Singapore Korea Malaysia China India

Source: Swiss Re

• Though penetration has more than doubled over seven years, we still see scope for a further increase in
insurance business on the back of low insurance density
density.. At present per capita insurance in India is around US$
40 which is very less compared to other matured country.
• Loww household equity ownership: At present only 6% of the savings is come in the equity & equity related
instrument but with the introduction of ULIP participation of Indian household in equity market is likely to
improve.
• Going forward we expect saving of Indian household will increase from current level on the back of increasing
share of working age group in the total population.

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 4
Industry Since liberalization:

FY 2000 FY 2007
Number of Player 1 16

NB Premium (Rs bn) 64 CAGR 42% 754

Total Premium ( % of GDP) 270 1696

CAGR 30%
Penetration ( as % of GDP) 1.2% 4.1%
Insurance Premium p.capita 280 1510

ABOUT BAJAJ FINSERV LTD (BFS)

• The company is currently engaged in life insurance; general insurance and consumer finance businesses and
has plans to expand its business by offering a wide array of financial products and services in India. Apart
from financial services, BFS is also active in wind-energy generation.
• For life insurance business Bajaj auto has done JV with Allianz life insurance company in the ratio of 74:26.
• 2nd highest GWP & new business in the private sector, the company recorded GWP for the Y.E 31.03.2008 of
life insurance business is Rs.97,253 mn as against Rs.53,452 mn for the previous year.
• Company is growing at a 3 year CAGR of 60% & it is estimated that company will continue to grow at an avg.
CAGR of 35% till 2012.
• Highest no. of offices in private sector, office location increased from 569 in 2006 to 876 in 2007.
• Company has capture 21% market share in terms of annualized premium whereas in terms of new business
policy company has capture 30% market share.
• BFS is operating with present capacity of 65 MW of wind energy generation plant. With existing capacity
company is generating around 666 lacs of units, assuming Rs.2/- p.unit company will get Rs.133 mn.
• In the consumer finance division company have a network of over 6,000 Bajaj Auto and consumer durable
dealerships and 60 branch offices throughout the country to handle all the requirements of our customers.

ABOUT ALLIANZ

• Founded in 1896 and based in Minneapolis, Allianz Life Insurance Company of North America (Allianz)
provides fixed and variable annuities, life insurance policies, and long term care insurance products in the
United States.
• Known for innovation, performance, and customer service, the company has become a leader in the North
American life insurance industry.
• Allianz products are offered through a network of independent financial professionals. Company is ranked
number 15 on the Forbes Global 2000 list of the world’s largest corporations, based on sales, profits, assets,
and market value (March 2007). Allianz employs over 177,000 people worldwide.
• Allianz Life offers an extensive portfolio of value-added wealth management products & offers individual
insurance products through over 100,000 independent agents, registered representatives and other
financial professionals nationwide.
• Allianz Life Insurance Company of North America (Allianz Life®) maintains investment portfolios of
Rs. 2006 bn as on Sep 2007 in different asset class.

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 5
KEY DRIVERS

• Increasing advisor base and building

competent distribution channels for rural
Distribution and semi rural India, enhanced focus on
direct marketing and group sales.
Channel • 22 Regional office, 275 Area office and
601 branch office.
Diversified
• Wide range of risk, investment, saving
Product products and pension plans.
Range
• Improve customer service at all
Customer levels, improve turn around time, reduce
error rate, interact with customers
Solutions regularly, improve IT systems.

Product Focus • Increased focus on new verticals

health, women and children, rural and
pension.

VALUATION MODEL

• Valuation of insurance company can not be done using normal valuation parameter like PEx or EV/EBDITA.
EV/EBDITA
• Life insurance companies worldwide require six to eight years to break even due to high set-up set and
customer acquisition costs as well as conservative solvency (reserves for actu
actuarial
arial liabilities) norms.
• Every new policy underwritten entails a loss in the initial years and starts making profitspro subsequently,
resulting in accounting losses in the initial years.
• In the absence of an accounting profit, New Business Ac
Achieved
hieved Profit (NBAP) is the key metric to understand
the profitability of a life insurer.
• In the NBAP model we need to consider new business premium collected for the year under consideration,
as like EBDITA % in other industry here NBAP % is the key parameter which helps to calculate earning of the
company.
• In India NBAP % is in the range of 20% to 22% & it is expected that for coming
ming 5 to 7 years there will not be
major fall in the NBAP %. ULIP constitute 80% of the new business & it yield 22% to the insurance company,
Endowment plan & term plan constitute the balance portion and yield 15% & 45% respectively so the avg.
comes to 20% to 22%.
• Value derive by multiplying New business with NBAP% is the NBAP. Globally company gets NBAPx of 25 to
30 to arrive at EV.

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 6
VALUATION

We value Bajaj Allianz at 18x its NBAP for the Y.E 09P & we arrive a Price Target of Rs.1857.

Detail Y.E 2008E Y.E 2009P

Premium Collection 67,270 100900
NBAP Margin % 20 20
NBAP 13,450 20,180
Multiple @ 18 x 242160 363240
Holding of Bajaj 74.00 74.00
Share of Bajaj 179200 268800
No of Share 144.7 144.7

Value p.share 1,238.40 1,857.61

PEER GROUP VALUATION

Company NBAP Y.E 2009P NBAP x No of Share Value P.Share

ICICI Prudential 26080 18 1112.6 311.76

Bajaj Allianz 20180 18 144.70 1857.61

HDFC Standard Life 7060 18 283.7 324.98

SBI Life 13200 18 631.5 376.32

Kotak Life 3760 18 344.2 196.83

Reliance Life 11020 18 245.60 807

MONEYBEE SECURITIES PVT. LTD. ~ RESEARCH REPORT ~ BAJAJ FINSERVICES LTD Page 7
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