Insurance - EDEL

Life Insurance
Good Life@Club Banca

November 4, 2019
Competition
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Santanu Chakrabarti Vinayak Agarwal

+91 22 4342 8680 +91 22 6620 3020 Edelweiss Securities Limited
santanu.chakrabarti@edelweissfin.com vinayak.agarwal@edelweissfin.com
Insurance
A word or two
India’s life insurance sector is likely to appear enigmatic to most global and
regional observers of this space. One need only consider the troughs and
crests of the previous decade—starting off with the Go-Go days of unit-
linked products to a virtual meltdown of the agency channel triggered by
the subsequent regulatory tightening. After that came a painful slow
(Click here for motion rebuild of distribution & product capabilities and efforts to
video clip) rationalise cost bases while selling lower-ticket products for the most part.
Redemption came in the form of the successful Big Three IPOs and at long last there is now a
concerted attack on the yawning 'protection gap'.
In some sense, these sharp swings between investor apathy and exuberance have done
immense disservice to any attempt at nuance. The fact remains that India’s life insurance
story is not monochromatic; anything but that. In this report, we attempt to capture the bits
that we believe are most representative—the good, the bad and indeed even the ugly.
Under-penetration yes, but…

The under-penetration argument for sustained growth is not all that it’s cracked up to be. It is
absolutely accurate for pure protection products. It is largely true for retirement products,
but the limits have been imposed by depth and maturity of fixed-income markets in India,
and not demand itself. The argument is almost entirely wrong with respect to unit-linked and
endowment products, which comprise bulk of the industry. We expect ~16% growth for
premiums over the next decade despite 30% annual projected growth for pure protection.
This is healthy, but not as dramatic as the often talked about 20-22%. A fair difference over a
decade.
Few haves, most have nots

Competitive dynamics in India’s life insurance sector, over the past few years, is the story of
the chosen few. The way regulations for commission payments have shaped up, renewal
efforts are often inadequately rewarding for the truly ‘free agent’ distributor. With
rationalised surrender charges, renewals are make or break for ULIP economics. In other
words, unless an insurer has a bank keen to seek renewal through an express interest in the
insurer’s welfare, ULIP is today’s revenue and tomorrow’s loss. In effect, this hobbles a pure
play agency business model to the point of irrelevance.
Exciting dynamics amongst leaders

Much has been happening amongst players blessed with bancassurance over the past few
years. It can be said that Life Insurance Corporation of India (LIC) is the elephant in the room
for every discussion on India’s life insurance sector. With SBI Life ramping up SBI’s branch
activation in the past five years, it can be said that there’s at least another heavyweight in the
making, capable of touching geographies and socio-demographics beyond the reach of other
privates. HDFC Life continues to be the product innovator in the industry, following its
protection lead with the introduction of new retirement products. ICICI Prudential Life
continues to eschew any product exposed to rate sensitivity, at the cost of market share, but
has made a big push into protection. Max Life is the only success story not of banking lineage,
but is a clear beneficiary of an equity-based relationship with Axis Bank. The market narrative
regarding uncertainties in this relationship has muted stock performance, illustrating our
earlier point about criticality of ‘banca that cares’.
1 Edelweiss Securities Limited

BFSI
Our valuation framework is simple, our stock preference clearly etched

Our valuation framework relies on a few basic observations. One is that being a mature
business with high capital productivity product offerings (for the chosen few), trend line
business growth will always lag capital productivity (RoE). Second is that balance sheet risk is
incredibly low vis-à-vis profitability, as the business is primarily savings with a smattering of
insurance on top. We value businesses based on spread over their cost of equity (CoE) that
their steady-state ROEV delivers. ICICI Prudential Life (BUY; TP INR700) is our top pick on 12
months’ basis, followed by SBI Life (BUY; TP INR1,220). In HDFC Life (HOLD; TP INR590), we
recommend to wait on account of slightly stretched valuations as well as near-term peak out
expectation of capital productivity. We suggest caution in case of Max Financials (HOLD; TP
INR450) on account of bancassurance- and holding structure-related uncertainties despite
strong current fundamentals and mouthwatering valuations.
Crystal ball gazing – opportunities and uncertainties

The insurance regulator in India has set the cat amongst the pigeons before. Changes
regarding surrender charges on traditional products can force changes in players’ product
preferences. IFRS introduction may finally render the accounting P&L economically
decipherable as revenues and reserving are more closely matched over product term. This
will reduce new business strain and be a welcome relief for smaller players. New solvency
norms may make capital productivity the centre point of the market narrative versus the
focus we see on new business margin today. Open architecture, in the true sense, though low
in probability, could bring tectonic shifts in competitive dynamics. Finally, technology-led
disruptions may become more feasible as scale increases and industry becomes more data
rich and customers become more connected.

Insurance
Contents
Investment argument ................................................................................................................ 4
Indian life insurance is no spring chicken................................................................................. 13
Distribution, distribution, distribution ..................................................................................... 21
Products replicable but appetite player-specific ..................................................................... 28
An ever-strengthening oligopoly.............................................................................................. 36
Regulations can and have changed the game .......................................................................... 39
Valuation framework needs context ........................................................................................ 41
ICICI Pru Life – our top pick based on 12M upside................................................................... 45
Appendix .................................................................................................................................. 49
Companies
ICICI Prudential Life .................................................................................................................. 61
HDFC Life .................................................................................................................................. 82
SBI Life .................................................................................................................................... 105
Max Financial Services ........................................................................................................... 125

BFSI
Investment argument
Indian life insurance sector is no spring chicken
Penetration best measured in Adjusted penetration: Higher than headline numbers

terms of households Insurance penetration and density comparisons with regional and global peers suggest that
Indian life insurance is set for a huge leap. However, the seasoned investor should take this
appeal to mean reversion with a pinch of salt.
Chart 1: India insurance penetration… …and density vis-a-vis other countries

20.0 10,000
16.0 8,000
12.0 6,000
(USD)
(%)
8.0 4,000
4.0 2,000
0.0 0
South Korea
Australia
Germany
Hong Kong
South Korea
China
Australia
Singapore
Malaysia
India
UK
Germany
Hong Kong
Japan
US
Singapore
China
UK
India
Malaysia
Japan
US
Source: Swiss Re
A McKinsey study in 2012 revealed that 12% of all Indian deaths are insured, a proportion
that would have almost surely gone up since then. Even this dated assumption – of 12% of
possible death events being already insured – implies that close to 50% of all households in
India have at least one member insured (the main breadwinner in most cases). That is
approximately 70% of all households above the poverty line in the country.
India would need to undergo major attitudinal and societal changes in lower social strata,
before we can start talking about Insurance beyond the main breadwinner of the household.
Such changes, likely to happen at a glacial pace, clearly cannot support the rapid medium-
term penetration spike argument.

Insurance
Table 1: Life insurance effective penetration in India could be about 70%

%
Per cent of deaths insured (%) 12.0
Share of LIC customers (Based on LIC market share in individual business) (%) 75.0
Per cent of death insured by LIC (%) 9.0
Average Household Size of LIC customer (assuming the bread-earner of the 5.0
family is insured)
Implied population insured by LIC (%) 45.0
Share of private customers (%) 25.0
Per cent of death insured by private players (%) 3.0
Average Household Size of Non LIC customer (assuming the bread-earner of the 3.0
family is insured)
Implied population insured by private players (%) 9.0
Computed % of population insured 54.0
% of Indian population above poverty line (Target population) 77.0
Target population covered (%) 70.1
Source: Mckinsey-CII study 2013, Edelweiss Research
We expect ~16% premium CAGR in Indian life insurance products have been traditionally high on savings and low on protection.
the next decade We estimate 80–90% of life insurance in the country pertains to savings. Savings-heavy life
insurance products are a relatively mature category, and we expect a CAGR of 13–14%
thereof over the next decade, in tandem with household financial savings and capital market
prospects (particularly ULIPs).
Pure protection and retirement products remain a secular under-penetration-driven growth

story, and we expect a 30%-plus CAGR over the next decade (particularly in pure protection,
as deferred annuity retirement product needs new debt market reforms and altered risk
appetite for sustained growth). This translates into overall annual premium growth of
~16% for the sector (with cyclical variations), and not 20%-plus that much of the market
narrative takes for granted. Over a decade, an annual difference of about 400bps really adds
up, with an end-market size differential of about 40%.
Distribution, distribution, distribution

Banca, banca, banca We wouldn’t be oversimplifying if we said that life Insurance, at its heart, is purely a
distribution business. Bancassurance is the key differentiator, as long as the allied bank has a
reason to be invested in the insurer’s goodwill. Very few agency networks can match the
reach of a large private/PSU bank (barring state-owned LIC of course). The branch
productivity on sales is a further advantage of private bank-based distribution. The biggest
differentiator is, however, the fact that a bank with skin in the insurer’s game would invest
time into renewal efforts, which are unlikely in a truly ‘free-agent’ distribution set-up.

BFSI
Chart 2: Bancassurance on the rise due to private players’ aggression

30.0
24.0
18.0
(%)
12.0
6.0
0.0
Individual NBP Group NBP
FY14 FY15 FY16 FY17 FY18
Source: IRDAI
The agency channel’s slow growth is a direct fallout of the way incentives are aligned given
Agency productivity is key focus
the regulatory structure. The structure of agent remuneration is skewed towards the initial
area
years (which constitute a significant share of total commission) since renewals in later years
fetch low commissions. As a result of such a structure, agents had little incentives linked to
persistency of the policy. This matters a lot for profitability of ULIPs and is singularly
responsible for dampening the potential of this channel. Since the regulatory changes in 2011,
most players have heavily rationalised agent headcount, although they have been building it
up again over the last two–three years.
Chart 3: Premium productivity per agent has improved

250,000 25.0
200,000 20.0
150,000 15.0
(INR)
(%)
100,000 10.0
50,000 5.0
0 0.0
ICICI Pru HDFC SBI Life Max Life Bajaj Life Birla Life PNB
Life Metlife
Agent producitivity CAGR (FY15-19)
Source:Life Insurance Council, IRDAI
Life insurance products: Replicable but appetite player-specific

The industry primarily sells four principal categories of retail products to individual
customers: unit-linked, participating, pure protection and non-participating annuities (now
including deferred annuities). Business margins determine the value contribution of a single
policy ticket. The smart investor needs to keep in mind that the business ticket received as

Insurance
premium also consumes solvency capital. The best way to gauge the commercial
attractiveness of a product (ex-business risk) is to judge how much new business value is
created per unit solvency capital available to the company (same argument as gauging a
manufacturing business through RoE and not net margin). We gauge business value created
per unit solvency through its reciprocal—solvency requirement as a percentage of VNB.
Chart 4: Product margin highest for protection… …but capital productivity highest for ULIP
100.0 250.0
200.0
80.0
150.0
(No)
60.0
100.0
(%)
40.0 50.0
20.0 0.0
Solvency Solvency Solvency
required as a % required/ sum required/
0.0 of VNB assured (bps) Annual premium
Par Non-par ULIP Protection ULIP Protection (%)
Source: Company, Edelweiss research
Table 2: Products vary on margin and risk/cyclicality

Product Indicative new Business risk/exposure to cyclicality
business margin
Par 14-18% No direct exposure to interest rate cyclicality. However, players try to anchor an interest
rate expectation, which could have become a quasi-voluntary pressure point, if not for the
fact that most endowments have large historic surpluses to draw down from.
Non-par (ex -pure 22-26% These products involve an embedded interest rate guarantee which can accrue immediately
protection) or at a deferred point. In a limited interest rate derivate/hedging options scenario in India,
they could potentially be risky. However, players like HDFC Life have some capacity to
address these products, due to specific balance sheet situations and restricted market
opportunities.
ULIP 6-9% Perhaps, the most misunderstood product in terms of risk. In terms of risk, this product is
very nearly a mutual fund i.e. no risk to proprietor in a balance sheet/net worth sense. The
inflow of ULIP is a function of near-term market sentiments, and therefore rather volatile.
However, being almost a asset management business, inflow volatility is high frequency
low amplitude noise. Such dips provide the best opportunity for the intelligent investor.
This should not translate into a understanding that the business’ fortunes are a Teflon
coated certitude. Prolonged (2-3 years) capital market apathy starts to hit persistency in
this business. This drawdown on balance sheet size, can have serious operating economics
implications. In summation, the most extreme form of risk here is profitability
erosion/incremental business linked, and not an existential threat to the balance sheet.
Pure protection 70-90% The only risk is mortality. Present strict underwriting standards, ‘Acts of God’ with mass-
mortality implications are the only risk.
Source: Edelweiss research

BFSI
From this vantage point, we argue that the riskiest product in the portfolio is non-par
deferred annuities, as the ability to interest rate hedge this product in India is limited by both
opportunity and provenance. Even players such as HDFC Life, which have been able to hedge
their currently limited exposures, have real capacity constraints within the bounds of rate
neutrality.
An ever-strengthening oligopoly
Players with a bancassurance tie-up wherein the bank, which has skin in the insurer’s game,
has unique access to a dominant channel and can be expected to show better renewal rates
in bad times. Scale is critical to competitiveness in the life insurance business. A higher ULIP
risk perception has effectively crowded out pure agency plays from the Indian life insurance
market. Consider the following six companies that are either promoted by a bank or have a
bank as equity shareholder/group member: ICICI Pru Life, SBI Life, HDFC Life, Max Life, Kotak
Life and PNB Metlife. Collectively, they command almost two-thirds of the private market.
The first three alone held a market share of about 42.9% in FY19.
Chart 5: Big six command about two-thirds of the market

90.0
72.0
54.0
(%)
36.0
18.0
0.0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Market share select 6 players mentioned above
Source: IRDAI, Edelweiss research
We argue, in absence of significant regulatory change in commission structuring or a long-

term technology-led disruption, the oligopoly will get stronger over time.
Regulator has often set the cat Regulations can and have changed the game
amongst pigeons Life insurance in past decade has gone through a slew of regulation changes. In hindsight,
they have clearly had two clear repercussions:
 They have made the business dynamics move in a direction that provides a better deal
to the customer.
 Despite the turmoil at the points of sharp transitions, it has clearly added to the
robustness of the insurance as a financial savings product.

Insurance
Fig. 1: Regulation timeline
Government of India (GOI) liberalized the insurance sector in March 2000

by lifting all entry restrictions for private players and allowing foreign players
to enter with a limit of 26% on direct foreign ownership.
Clean up of ULIP or linked products.

Excessively high surrender charges were rationalised in the interest of policyholders
Insurance component of such products was increased
Cap on ULIP charges made it a more sustainable product from the policyholder's
perspective
Increased sum assurred on ULIP products
Capped remuneration/commission of the distribution channel (except the direct
marketing channel).
Earlier, the bancassurance model meant that banks could only sell products of
one life, one non-life and one standalone health insurer. With open architecture,
banks have an option of tying up with up to nine insurers, (3 each) for life, non-life
and health
Cap on management expenses proposed and finalised by IRDA in 2016 is a

important regulation, more specifically in the context of participating products
New commission regulations incentivise agents to sell more term/pure risk
products and also allow for higher commission on renewals
A true implementation of open architecture with reasonable limits on the

maximum amount of business that can be done with a single insurer
Like the rationalisation of surrender charges on ULIP Products in 2010,

traditional products may have to go through the same clean up. However we
see this as a low probability event, especially for participating products
As of now, IFRS implementation is required from 2022. Under IFRS, matching

concept of cost of policy and revenue will be better represented unlike the
rules today, where the entire cost is booked upfront while revenue flows
through several years.

BFSI
Outlook and valuation

A cursory look at Indian life insurance players’ valuations vis-à-vis regional/global peers
makes the sector appear richly valued.
Table 3: Valuation matrix

P/BV / P/EV* P/E RoA RoE
Company Region
FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
China Life 1.3 1.2 11.9 10.6 1.1 1.1 11.2 11.9 China
Samsung Life 0.4 0.4 10.5 9.8 0.4 0.4 3.5 3.6 South Korea
AIA Group 2.3 2.1 16.9 15.0 2.7 2.5 14.9 14.7 Hong Kong
Zurich Insurance 1.7 1.6 13.0 12.3 1.3 1.2 12.9 13.1 Switzerland
ICICI Prudential 3.0 2.6 75.6 59.3 0.6 0.7 13.4 16.0 India
HDFC Life 5.7 4.9 97.3 77.0 0.9 1.0 21.2 23.1 India
SBI Life 3.8 3.3 106.9 75.0 0.6 0.7 11.8 15.2 India
Max Financial 1.5 1.3 22.6 24.8 1.0 0.8 23.4 20.0 India
Source: Bloomberg, Edelweiss research
*For Indian players, P/EV is shown
Some context, however, is necessary:
 Indian accounting norms penalise accruals heavily for new business and until businesses
mature further and/or IFRS is implemented, book value will remain a massive under-
estimate and render P/B and P/E comparisons moot.
 Indian life insurance leaders have 80–90% of their business models oriented towards
savings. The balance sheet risk for leading players still remains much lower than interest
rate guarantee-dominated global and regional players.
 As mentioned earlier, the market structure is oligopolistic. Consequently, capital

productivity (RoEV) levels are high, particularly in relation to low balance sheet risks
assumed.
Our valuation framework relies on a few basic assumptions about the life insurance business
A simple valuation framework
in India:
 For most part (savings component), life insurance is a fairly mature business and for the
leaders, would continue to be so, with their RoEVs exceeding our assumption of cost of
equity (CoE). Dilutions are not necessary to sustain growth.
 The CoE for individual businesses (of comparable scale), while lower than regional peers,
is a direct function of product mix.
We accord a P/EV multiple premium to a life insurance business based on the spread
between RoEV and our estimated CoE. That is, a business with steady state RoEV equalling
CoE is valued at 1x one-year forward P/EV. For every 300bps extra spread over CoE, we
accord a 1x premium to that multiple.

Insurance
Chart 6: Spread over cost of capital key to value creation (in absence of dilutions)
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Estimated CoE Steady state RoEV
ICICI Prudential HDFC Life SBI Life Max Financial

Table 4: Target multiple derived from same fair value framework

Spread Fair 1 yr fwd Fair mutliple Target mutliple
over CoE multiple (P/EV 21E) (P/EV 21E) Comments
ICICI Prudential 670 3.2 3.6 3.6
HDFC Life 880 3.9 4.4 4.8 We assign a 10% premium to our 12-month fair target
multiple considering the inherent value creation
opportunity (not captured by its current fundamentals), its
pension presence and prescient capacity build-up in a
white space (retirement planning)
SBI Life 750 3.5 4.0 4.0
Max Financial 750 3.5 4.0 1.4 We assign a 65% discount to our 12M fair target multiple
on account of the critical uncertainties that the company
has been facing in relation to its (equity backed)
bancassurance partner Axis Bank and attempts to
rationalize its ownership structure.
Table 5: Target price and upside potential

Current markey Target Upside/
Rating price (CMP) price (TP) (Downside) (%)
ICICI Prudential Buy 509 700 37.6
HDFC Life Hold 613 590 -3.7
SBI Life Buy 998 1,220 22.3
Max Financial Hold 404 450 11.4
We are initiating coverage on ICICI Pru Life (BUY, TP: INR700), SBI Life (BUY, TP: INR1,220),
HDFC Life (HOLD, TP: INR590) and transferring coverage on Max Financial (HOLD, TP: INR450).

BFSI
Key risks
For the Indian life insurance sector, we believe the key risks pertain to:
 Protracted weakness in capital markets affecting ULIP persistency: Limited renewals

obviously hurt a largely fixed cost-quasi asset management business—through a run-
down in asset size and consequent cost-driven profitability pressures.
 Regulatory changes that can have a profound impact.
Multiple regulations could change
sector dynamics; none immediately o For example, rationalisation of surrender charges on traditional products may
on the anvil significantly alter the profitability of such products and change the competitive
dynamics of that line of business.
o Similarly, rationalisation or greater flexibility on commission payments to agents

might rejuvenate the agency pure-play competitors and challenge the
bancassurance oligopoly.
o Finally, truly open architecture distribution norms, forced through quantitative

quotas – and not just in name – could dilute the value of in-house banca advantage.
 Technology-based disruption attempts, which may break the stranglehold of existing
players, if new licences are granted.
That said, given the current market structure, one would have to concede that medium-term
disruption risks remain low.

Insurance
Indian life insurance is no spring chicken

Growth opportunity large but not as dramatic as suggested
Expect healthy, not spectacular
Our sincerest apologies for opening with such a downer! Our aim is not to smother market’s
growth
enthusiasm about the possibility for HIGH sustainable growth for the insurance segment, a
belief to which the end-CY2016 demonetisation tailwind-driven business momentum had
added much fuel. In recent times, a capital market sentiment-led ULIP slowdown has not
dented these sentiments either as: i) pure protection (term life) business continues to grow at a
fast clip; and ii) retirement products (deferred annuities) too have seen strong early popularity.
We believe that the opportunity size is indeed large and growing continuously. But the 20% plus
decade-long sustainable growth that certain commentaries take for granted appears unlikely to
us, barring large regulatory policy shifts or technology disruptions.
Before we delve into what our view on business growth is, let us take a look at a commonly
displayed chart used to convey the growth opportunity for life insurance in India.
Chart 7: Life insurance penetration in India is low

20.0
16.0
12.0
(%)
8.0
4.0
0.0
South Korea
Australia
Germany
Hong Kong
Singapore
China
UK
India
Malaysia
Japan
US
Chart 8: Life insurance density in India in relation to peers is low too

10,000
8,000
6,000
(USD)
4,000
2,000
0
South Korea
Australia
Germany
Hong Kong
Singapore
China
UK
India
Malaysia
Japan
US
Insurance density refers to total premium upon total population of the nation
Source: Swiss Re

BFSI
The subtext of the above chart and the reason for its inclusion in any honest-to-god ‘India Story’
Headline penetration/ density
pitch is a simple one. A mere glance at this chart instantly appeals to our instinctual belief in
mean reversion arguments to be
mean reversion. What a huge gap! Clearly, something’s got to give here and Indian life
taken with a pinch of salt
insurance must be at the cusp of a huge spike in penetration.
Unfortunately, in the chart above, two parameters skew our perception. The first obvious catch
is that any per capita calculation in India appears low due to the high proportion of population
below the poverty line in the country. The second confounding parameter is the amount of
insurance in the Indian life insurance business!
For rough calculation purposes, the following classification works:
 ULIP – 95% savings and 5% insurance
 Participatory (the key product for Life Insurance Corporation of India, roughly half the
market) – 80% savings and 20% insurance
 Non–participatory business (other than pure term protection) – 70% savings and 30%
insurance
 Pure protection – 100% insurance by definition
Now, a look at the product mix of key players is illustrative.
Chart 9: Pure protection – Small subset of non-par and less than 10% of APE
100.0
80.0
60.0
(%)
40.0
20.0
0.0
ICICI Pru HDFC Life SBI Life Max Life Bajaj Life Birla PNB
Sunlife Metlife
Par Non-par ULIP
Source: IRDAI, Company, Edelweiss research
Our back-of-the-envelope calculations show that Indian life insurance business is 10–20%
Only 10-20% insurance in India’s
insurance; the balance is investment/savings management. Obviously, for the same level of
life insurance
premiums, sum assured (SA) moves higher as the insurance component in the insurance
business increases. As the insurance component is far lower in India than peer nations, the
sum assured at similar levels of premiums is also significantly lower.

Insurance
Conservatively, 70% of households

Adjusted penetration much higher than what headline numbers suggest
above poverty line have at least A McKinsey study in 2012 revealed that 12% of all Indian deaths are insured, a proportion that
the bread winner insured would have almost surely gone up since then. Even this dated assumption – of 12% of possible
death events being already insured – implies that close to 50% of all households in India have at
least one member insured (the main breadwinner in most cases). That is 68% of all households
above the poverty line in the country. India would need to undergo major attitudinal and
societal changes in the lower social strata, before we can start talking about Insurance beyond
the chief breadwinner. Such changes, likely to happen at a glacial pace, clearly cannot be the
bulwark of a rapid medium-term penetration spike argument.
Table 6: Effective insurance penetration much higher than what headline numbers hint
%
Per cent of deaths insured (%) 12.0
Share of LIC customers (Based on LIC market share in individual business) (%) 75.0
Per cent of death insured by LIC (%) 9.0
Average Household Size of LIC customer (assuming the bread-earner of the 5.0
family is insured)
Implied population insured by LIC (%) 45.0
Share of private customers (%) 25.0
Per cent of death insured by private players (%) 3.0
Average Household Size of Non LIC customer (assuming the bread-earner of the 3.0
family is insured)
Implied population insured by private players (%) 9.0
Computed % of population insured 54.0
% of Indian population above poverty line (Target population) 77.0
Target population covered (%) 70.1
Source: IRDAI, McKinsey research, Edelweiss research
Industry insurance premium growth: Likely to undershoot most

commentators expectations by 400–500bps
Since the penetration leg to growth in the Indian Insurance opportunity cannot play a
disproportionate role in business growth beyond a gradual change, growth is heavily predicated
on ticket size elevation. Three things can drive ticket size enlargement.
 A movement towards higher financialisation of savings (movement away from traditional
Indian preference for gold and real estate)
 Product mix shift
 Increasing customer prosperity
Now, the product mix shift argument has two sides to it. A move towards higher insurance
component products will inflate sum assured faster, while a move in favour of a savings
orientation would deliver higher premium growth.
In effect, we feel that penetration increase (as larger parts of India move above the poverty line
and awareness increases) and greater ‘financialisation’ can contribute 100–200bps of
annualised growth in premiums. We assume a stable proportion of investment component in
India’s life insurance mix (increase in proportion of term insurance offset by ULIP market share
gain over participatory policies). We feel a rate 100-200bps higher than nominal GDP growth is
a good proxy for premium growth contribution from increase in customer prosperity, both real
and inflationary. This brings us to an annualised growth estimate of 15–16% for insurance

BFSI
premiums over the next decade. This is 400–500bps lower than what most market
commentaries suggest. The 400–500bps difference in growth rate really adds up over a decade.
Do note that capital market volatility will create cyclical spurts and drops in growth rates,
particularly in ULIP premiums. Our estimate pertains to the secular trend. Significant policy and
technology disruptions may create the possibility of a structural deviation from this growth rate
(which we touch upon later).
Chart 10: Total industry premium should grow healthily, but not at 20% plus that market commentaries suggest
6,000 35,000 FY29E
4,800 28,000
3,600
(USD bn)
21,000
2,400
14,000
1,200
7,000
0
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 0
Total life insurance industry premium 16% CAGR 20% CAGR
Chart 11: Growth has picked up over last few years

40.0
32.0
24.0
(%)
16.0
8.0
0.0
Sunlife Metlife
10-yr CAGR 5-yr CAGR
Source: Company, IRDAI

Insurance
Term life (pure protection) remains the secular high-growth component

Insurance as expenditure is The pure protection insurance product has been slow to take off. The idea of insurance in India
anathema to many well-to-do has been culturally anchored around participatory products popularised by state-owned Life
Indians Insurance Corporation of India (LIC). With an 80% savings component, legacy customer
expectation has centred on a stable annual IRR expectation of 3.5–4%. The idea of insurance as
a pure expenditure for a safeguard against mortality still remains under-accepted (even among
the well-to-do). HDFC Life can be credited for the first credible push in this product, both in its
individual form and as an add-on to long-term loans such as mortgages.
Over the last few years, the other major private sector players such as ICICI Pru Life, SBI Life and
Max Life have made up a lot of lost ground on this product. Its popularity has risen amongst
young urban professionals driven by increased ad spends and awareness campaigns. The credit-
linked part of the business (classified regulatorily under group insurance) has seen both price
reductions from increased competition and a slowdown linked to bank/NBFC loan
disbursements.
Protection should be a fast, secular The business, however, continues to grow at a fast clip, and we believe a 30% CAGR in pure
growth story protection premium remains quite achievable over the next decade given the trend towards
more acceptance, marketing spend commitment, and extremely low penetration.
Chart 12: ICICI Pru has made recent rapid strides in protection; others doing well too
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Birla Sunlife
Max Life
HDFC Life
ICICI Pru
SBI Life
PNB Metlife
3-year CAGR in protection (On the basis of NBP)
Source: Company

BFSI
Chart 13: Bancassurance-driven players leading protection push
50.0
40.0
(%)
30.0
20.0
10.0
Protection growth rate (FY19-22 CAGR)
Savings: A much more mature business

Growth of the savings-heavy parts of the insurance sector is dependent financials savings
and domestic GDP growth. Insurance products have the following key features:
• A protection against loss of future income source by deferring our current expenditure for
future requirements of self and those dependent
• Providing a return on the premiums, which in a way acts as an inflation hedge
Savings-heavy insurance products Some products such as ULIPs provide a simultaneous opportunity of risk protection and
directly compete with other benefits of a savings instrument. Hence, these are quite similar to financial savings products and
financial savings products face a direct competition from other savings products such as mutual funds, bank deposits, etc.
In India, the ratio of household savings to GDP was 17% in FY18, with about 40% of these
savings in financial savings products. With the Indian economy projected to grow 6–7% in real
terms and inflation expected to be under control, investments in financial products are likely to
be more preferred over other physical forms of savings. The share of insurance products in
financial savings grew from 15% in FY07 to 17% in FY19.
Chart 14: Households savings ~17% (of which ~40% is in financial savings)
23% 25% 22% 17%
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY07 FY10 FY13 FY18
X HH Savings as a % of GDP Financial savings Physical savings

Insurance
Chart 15: Change in financial savings mix over FY07–18

FY07 FY18
Others Others
11% 10%
Provident/
Pension
fund Provident/
9% Pension
fund
20%
Life Currency &
insurance deposits
15% 53%
Currency &
deposits Life
65% insurance
17%
Source: Company
India’s demographic structure bodes well for growth of its life insurance industry. With more
than 40% of population being below the age of 30, there will be an increased demand for
various insurance products such as protection and pension plans. This is expected to lift
insurance penetration, thereby creating growth opportunities in the sector.
Chart 16: India’s insurance penetration has actually deteriorated…
6.0
5.2
4.4
(%)
3.6
2.8
2.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
India life insurance penetration as a % of GFP
Insurance penetration refers to the insurance premium to GDP.

Source: Swiss Re
Insurance density remains low in India at UD54 in FY18 (USD55 in FY18) compared with the
world average of USD370 at end-FY18. The underinsurance opportunity is clear and visible.

BFSI
Chart 17: …as insurance density has remained nearly static

75.0
60.0
45.0
(USD)
30.0
15.0
0.0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
India life insurance density (premium per capita in USD)
Source: Swiss Re
India’s potential economic growth coupled with the rapid shift towards financial savings is the
key structural driver of insurance penetration growth. That regulatory tightening for the
sector seems to be over and the dominant business models have adjusted thereof, a firm
foundation for the sector is in place. However, savings-heavy products (80–90% of total
premiums) are being preferred in a mature market and, therefore, growth will be robust
rather than spectacular.
.

Insurance
Distribution, distribution, distribution

Trite, but distribution is the key differentiator
Distribution is the magic key We wouldn’t be overly simplifying if we said that life Insurance, at its heart, is purely a
distribution business. Products that meet specific or niche needs can be easily replicated and
are subject to scale, not to mention that overhead costs tend to track closely, adjusted for
product-distribution mix. How much business a company can write, at what
profitability/risks/capital consumption and, therefore, to what extent it can derive operating
leverage benefits over near-fixed establishment costs are, therefore, most directly driven by
distribution.
Four key channels dominate insurance distribution:

 Bancassurance
 Agents (individual)
 Agents (non-bank corporate)
 Direct (walk-ins, web-based)
Out of these, we believe that bancassurance is the differentiator over the medium term while
web-based direct distribution will play a larger role (particularly in profitability) going forward.
Chart 18: Channel comparison: Agency business contributes the most on industry level, private players rely on bancassurance
100.0 100.0
80.0 80.0
60.0 60.0
(%)
(%)
40.0 40.0
20.0 20.0
0.0 0.0
FY17 FY18 FY19 FY17 FY18 FY19
Agency Bancassurance Others Agency Bancassurance Others
Source: Company

BFSI
Chart 19: Distribution mix of each player

100.0
80.0
60.0
(%)
40.0
20.0
0.0
ICICI Pru HDFC Life SBI Life Max Life PNB Metlife
Bancassurance Agency Others (includes direct)
Source: Company
Bancassurance – Greatest medium-term differentiator

Distribution through the bank channel perhaps remains the largest differentiator in the life
insurance sector. The share of bancassurance in new business premiums has been rising for the
market leaders.
Chart 20: Bancassurance share – On the rise due to large private players’ aggression
30.0
24.0
18.0
(%)
12.0
6.0
-
Individual NBP Group NBP
Source: IRDAI

Insurance
Chart 21: Individual premium – Shift towards insurers with robust bancassurance
75.0
60.0
45.0
(%)
30.0
15.0
0.0
Sunlife Metlife
Share of bancassurance in individual business (FY19)
Source: Company
Some insurers in India are indeed more equal than others. We refer to Insurance companies
Bank interested in its good fortune that have commercial banks as parents/sister companies. In this regard, ICICI Prudential Life
- greatest strength of an insurer Insurance seems to have a massive advantage. Open architecture distribution has been
regulatorily watered down and the efficacy of the agency channel has been impaired by
regulatory limits on incentives (especially on ULIPs); such companies with in-group large bank
presence have thrived since the implementation of regulatory restrictions on agency
commissions in 2010–11.
Chart 22: Top 3 bank-based private insurers trump top 3 non-bank based insurers
22.0
18.4
14.8
(%)
11.2
7.6
4.0
FY16 FY17 FY18 FY19
Market share of top 3 bank based Market share of top 3 non-bank based
Source: IRDAI

BFSI
Current regulation limits the number of insurers that a bank can distribute for at three.
No business quantity targets linked
However, our discussions with most industry experts suggest that large commercial banks that
to multi-insurer tie ups for banks
have a significant group presence in the life insurance industry are principally distributing
products of their own sister/subsidiary company. With insurance watchdog IRDA’s call for open
architecture distribution, most of these banks would look at some tie-ups to distribute for other
insurance manufacturers. However, we remain sceptical about third party players garnering
serious shelf space.
Very few agency networks can match the reach of a large private/PSU bank (barring LIC of
course). The branch productivity on sales is a further advantage for private bank-based
distribution. In light of this, we believe banks are likely to negotiate hard on distribution margins
with third-party agency-only insurers, if and when truly open architecture becomes a reality.
Agency channel hobbled by commission time structure regulation

Slow growth of the agency channel is a direct fallout of the way incentives are aligned given the
regulatory structure. IRDA’s 2013 product regulations cap the remuneration or commission of
the distribution channel (except the direct marketing channel).
The structure of agent remuneration remains skewed towards the initial years (which
Little juice in renewals for agents
constitutes the bulk of total commission) while renewals-related payouts are relatively low. As a
result of this structure, the agents had little incentives linked to persistency of the policy.
Rather, the front-ended commission structure left the agent more profitable if they could make
the policyholder churn into a new policy by discontinuing the old one. As a result, the lower
persistency (a key driver of profitability, especially for products like ULIP) of policies sold by
agents made the bank channel’s economics more favourable. This led to a shift in the preferred
distribution structure in the industry, paving the way for leadership of private players with
captive bank infrastructure to grow their business.
In 2016, IRDA came up with revised guidelines for payment of remuneration to insurance
agents (as indicated in the table below). The new regulations too limit the rewards paid to
insurance agents (any incentives, by whatever name called) up to 20% of the first year
remuneration/commission to agents.
Two key benefits the new regulation brings in for agents:

2016 increase in agent
remuneration helps a little  Higher commissions for selling pure protection products to incentivise basic term plan
products.
 Higher commission on renewal premiums (7.5% versus 5% earlier). Though a positive step
for improving persistency sold by agents, we believe the difference between the first-year
commission and renewal premiums is still too large to encourage agents to churn
policyholders.

Insurance
Table 7: Regulations on payment and remuneration to insurance agents

New Regulations Old Regulations (2013)
Product Category Product Type
(2016) (%) (%)
Single Premium (Individual) Pure protection 7.5 2.0
Other than pure protection (Including Pension products) 2.0 2.0
Single Premium (Group) Pure protection 5.0 2.0

Other than pure protection
Group (Variable savings life insurance) 2.0 2.0
Group (Fund Based) 0.5 (Max Rs1mn) 2.0
Regular Premium (Individual) Pure protection
First Year Premium 40.0 Similar to Bundled Plan
Renewal Premium 10.0 Similar to Bundled Plan
Other than pure protection (e.g. ULIPs)
First Year Premium- based on premium payment term
5 years 15.0 15.0
6 years 18.0 18.0
7 years 21.0 21.0
8 years 24.0 24.0
9 years 27.0 27.0
10 years 30.0 30.0
11 years 33.0 33.0 / 30.0*
12 years or more 35.0 35.0 / 30.0*
Renewal Premium
2nd/3rd Year 7.5 7.5 / 5.0*
Later Years 7.5 5.0
Regular Premium (Individual) Individual Deferred Annuity/Pensions
First Year Premium 7.5 7.5
Renewal Premium 2.0 2.0
Regular Premium (Group) Pure protection / Others
First Year Premium 7.5 (only on pure Similar to Bundled Plan
risk premium)
* Cap on brokers remunerations
Chart 23: Number of individual agents is highest for ICICI Prudential

200,000 14.0
160,000 7.0
120,000 0.0
(No.)
(%)
80,000 (7.0)
40,000 (14.0)
0 (21.0)
ICICI Pru HDFC SBI Max Life Bajaj Life Birla Life PNB
Life Life Metlife
No of individual agents CAGR (FY15-19)
Source: IRDAI, Life Insurance Council

BFSI
Chart 24: Premium acquired by individual agents highest for SBI Life
40,000 24.0
32,000 16.0
24,000 8.0
(INR mn)
(%)
16,000 0.0
8,000 (8.0)
0 (16.0)
ICICI Pru HDFC Life SBI Life Max Life Bajaj Life Birla Life PNB
Metlife
Agency premium CAGR (FY15-19)
Chart 25: Productivity of individual agents has improved due to rise in premium
250,000 25.0
200,000 20.0
150,000 15.0
(INR)
(%)
100,000 10.0
50,000 5.0
0 0.0
ICICI Pru HDFC SBI Life Max Life Bajaj Life Birla Life PNB
Life Metlife
Agent producitivity CAGR (FY15-19)
Chart 26: Max seems to have significantly higher agent expense than other three
40.0
32.0
24.0
(%)
16.0
8.0
0.0
ICICI Pru HDFC Life SBI Life Max Life Bajaj Life Birla Life PNB
Metlife
Agency Commission as a % of agency business
Source: IRDAI, Life Insurance Council, Company

Insurance
Direct channel – Tomorrow’s competitive advantage

The direct channel, in the Indian context (not to be confused with third-party aggregators such
as Policybazaar), consists of direct sales on website (especially pure protection) and is a still a
limited proprietary brick-and-mortar sales channel.
While bancassurance has become the dominant channel, critical to competitive success; we
Direct channel could be critical to
believe that the situation may change down the years. Once product sophistications levels
Insurance 2.0
increase in India and IRDA becomes more open to product customisation with respect to
specific customer needs, a specialised high-skill channel could become critical to profitability.
We do not know when this change will happen, but it seems inevitable as standardised product
margins erode (and likely incrementally move to online platforms) and specialised selling-
advisory skills become critical to profitability.

BFSI
Products replicable but appetite player-specific

The industry primarily sells four principal categories of retail products to individual customers –
unit-linked, participating, pure protection and non-participating annuities (now including
deferred annuities). In all products other than pure protection, the industry offers a
combination of savings and protection features.
Unit-linked insurance products offer a combination of investment and protection, wherein the
customer can choose the level of life cover subject to minimum levels mandated by regulations.
Customers have the flexibility to decide the asset classes in which their contributions are
invested. The unit-linked product portfolio caters to customers across income segments and
with different risk appetites. These products are typically used for goal-based savings,
retirement and saving for children.
Participating (par) products are the ones wherein the surplus is shared with policy holders in
the form of bonuses. These policies usually have a minimum guaranteed amount that is payable
upon death or maturity, in addition to bonuses declared from time to time. The bonuses, once
declared, accrue to the policy and are guaranteed. This is the main product polarised by LIC, and
close to 90% of its business.
Non-participating savings and annuity products (non-par annuity) are the ones that offer
Five basic types of products in benefits that are guaranteed in absolute terms at the beginning of the policy and do not provide
India any upside potential from the underlying fund performance. In effect, ex-mortality, these
guarantee a rate of return to the policy holder.
Non-participating deferred annuity products are the ones that delay income, instalment or
lump-sum payments until the investor elects to do so. This type of annuity has two main
phases: the savings phase, when money is invested into the account, and the income phase,
when the plan is converted into an annuity and it begins paying the account owner. So it is a
contract between an individual and a life insurance company in which funds are exchanged for
a promise to provide payouts (monthly/quarterly/annual) at a guaranteed interest rate from
the end of the deferment period. This interest rate is locked at the time of purchase. There is no
tax liability on the earnings during the savings phase. However, earnings are taxed at the time of
pay-out on marginal tax rate.
Pure-protection products typically provide life and health insurance protection for a defined
period. The sum assured under the policy is paid to the beneficiary or beneficiaries on the
occurrence of the insured event during the period of coverage.
In group insurance, the company offers insurance products to employers (to cover their
employees), banks, non-banking finance companies and micro-finance institutions (to cover
their customers), and other professional and informal groups (to cover their members). Even
individual credit-linked protection cover is categorised as group business.

Insurance
Table 8: Basic product structure: Example 1

ULIP Par savings Non-par annuity Non-par deferred annuity Pure-Protection
Policy term (years) 10 10 10 For life 10
Pay in (years) 5 5 5 1 1
Deferment period 0 0 0 10 0
Sum assured 10,00,000 10,00,000 10,00,000 1,10,000 10,00,000
Annual Premium/ First Year Premium (FYP) 1,00,000 1,00,000 1,00,000 1,00,000 6,084
Net IRR assumptions (%) (assumes market return of 8% for ULIP) 4.7 4 5.5 NA NA
INR 833 p.m./
Maturity Benefit (include bonus)- under assured IRR 7,23,000 6,85,000 7,68,000 NA
INR 1,041 p.a.
Sum assured/ FYP (x) 10 10 10 1.1 164.4
Guaranteed Maturity Benefit/ FYP (x) 7.2 6.9 7.7 NA NA
Table 9: Basic product structure: Example 2

ULIP Par savings Non-par savings Non-par deferred annuity Pure-Protection
Policy term (years) 15 15 15 15 15
Pay in (years) 7 7 10 10 15
Deferment period 0 0 0 5 0
Sum assured 10,00,000 10,00,000 10,00,000 1,10,000 10,00,000
Annual Premium/ First Year Premium (FYP) 1,00,000 1,00,000 1,00,000 1,00,000 747
Net IRR assumptions (%) (assumes market return of 8% for ULIP) 5.5 5.1 5.1 NA NA
INR 619 p.m./
Maturity Benefit (include bonus)- under assured IRR 13,35,000 12,72,000 17,10,000 NA
INR 7,744 p.a.
Sum assured/ FYP (x) 10 10 10 1.1 1338.7
Guaranteed Maturity Benefit/ FYP (x) 13.4 12.7 17.1 NA NA
Chart 27: Industry and private players’ product mix demonstrates that ULIP is largely a private phenomenon
100.0 100.0
80.0 80.0
60.0 60.0
(%)
(%)
40.0 40.0
20.0 20.0
0.0 0.0
Industry - Non-linked Industry - Linked Private - Non-linked Private - Linked
Source: Company

BFSI
Chart 28: High ULIP players have strong bancassurance support

100.0
80.0
60.0
(%)
40.0
20.0
0.0
Sunlife Metlife
Par Non-par ULIP
Source: Company

Insurance
Table 10: Product map of the four players that we cover

Products ICICI Pru SBI Life HDFC Life Max Financial
Protection ICICI Pru iProtect Smart SBI Life - eShield HDFC Life Click 2 Protect 3D Plus Max Life Super Term Plan
Plans ICICI Pru iCare II SBI Life – Poorna Suraksha HDFC Life Click 2 Protect Plus Max Life Premium Return Protection Plan
ICICI Pru Life Raksha SBI Life - eIncome Shield HDFC Life Click 2 Protect 3D Plus - Combo Plan
ICICI Pru POS iProtect Smart SBI Life - Smart Shield
ICICI Pru POS Life Raksha SBI Life - Saral Shield
SBI Life – Saral Swadhan+
SBI Life – Smart Swadhan Plus
Health Plans ICICI Pru Heart Cancer Protect SBI Life – Sampoorn Cancer Suraksha HDFC Life Cardiac Care
ICICI Pru Smart Health Cover HDFC Life Easy Health
HDFC Life Cancer Care
Investment ICICI Pru Signature SBI Life – Smart Samriddhi HDFC Life Click 2 Invest - ULIP Max Life Savings Advantage Plan
/Savings ICICI Pru1Wealth SBI Life – Shubh Nivesh HDFC SL Crest Max Life Monthly Income Advantage Plan
ICICI Pru Life Time Classic SBI Life – Smart Bachat HDFC SL ProGrowth Super II Max Life Assured Wealth Plan
ICICI Pru Elite Life Super SBI Life – Flexi Smart Plus HDFC SL ProGrowth Maximiser Max Life Guaranteed Income Plan
ICICI Pru Elite Wealth Super SBI Life – CSC Saral Sanchay HDFC Life ProGrowth Plus Max Life Whole Life Super
ICICI Pru Guaranteed Wealth Protector SBI Life – Smart Women Advantage HDFC Life ProGrowth Flexi Max Life Life Gain Premier
ICICI Pru Smart Life SBI Life – Smart Humsafar HDFC Life Smart Woman Plan Max Life POS Guaranteed Benefit Plan
ICICI Pru Smart Couple Plan SBI Life - Smart InsureWealth Plus HDFC Life Sampoorn Nivesh Max Life Online Savings Plan
ICICI Pru Cash Advantage SBI Life - Saral InsureWealth Plus HDFC Life Classic One Max Life Platinum Wealth Plan
ICICI Pru Savings Suraksha SBI Life – Smart Wealth Builder HDFC Life Capital Shield Max Life Fast Track Super
ICICI Pru Assures Savings Insurance Plan SBI Life - Smart Wealth Assure HDFC Life Click 2 Wealth
ICICI Pru Future Perfect SBI Life - Smart Power Insurance HDFC Life Uday
SBI Life - Smart Elite HDFC Life ClassicAssure Plus
SBI Life - Smart Privilege HDFC Life Super Income Plan
SBI Life - Saral Maha Anand HDFC Life Pragati
SBI Life - eWealth Insurance HDFC Life Sampoorn Samridhi Plus
HDFC Life Super Savings Plan
HDFC Life Sanchay
HDFC Life Sanchay Plus
Retirement ICICI Pru Easy Retirement SBI Life - Saral Pension HDFC Life Guaranteed Pension Plan Max Life Forever Young Pension Plan
Plans ICICI Pru Immediate Annuity SBI Life - Retire Smart HDFC Life Pension Guaranteed Plan Max Life Guaranteed Lifetime Income Plan
SBI Life - Annuity Plus HDFC Life Click 2 Retire Max Life Life Perfect Partner Super
SBI Life - Smart Money Back Gold HDFC Life Personal Pension Plus
HDFC Life New Immediate Annuity Plan -
SBI Life - Smart Money Planner Traditional Annuity Plan
SBI Life - Smart Income Protect HDFC Life Assured Pension Plan
HDFC Life Pension Super Plus
Group Plans ICICI Pru Loan Protect SBI Life - Kalyan ULIP Plus HDFC Life Group UL Pension Plan Group Term Life Platinum Assurance
ICICI Pru Loan Protect Plus SBI Life - Capassure Gold HDFC Life Group Variable Employee Benefit PlanMax Life Group Credit Life Premier Plan
ICICI Pru Group Term Plus SBI Life - Gaurav Jeevan HDFC Life New Group ULIP Max Life Group Gratuity Premier Plan
ICICI Pru Group Gratuity Plan SBI Life - PMJJBY HDFC Life Group Term Insurance Plan Max Life Group Super Life Premier
SBI Life - Sampoorn Suraksha - 1 year Max Life Pradhan Mantri Jeevan Jyoti
ICICI Pru Group Superannuation Plan renewable assurance HDFC Life PMJJBY Plan Bima Yojana
ICICI Pru Group Leave Encashment SBI Life - Swarna Jeevan Max Life Group Credit Life Secure Plan
HDFC Life Group Credit Protect Plus Insurance
ICICI Pru Group Immediate Annuity Plan Plan
ICICI Pru Group Loan Secure HDFC Life Group Credit Protect Insurance Plan
ICICI Pru Group Insurance Scheme for PMJJBY
ICICI Pru Shubh Raksha Credit
ICICI Pru Shubh Raksha One
ICICI Pru Shubh Raksha Life
ICICI Pru Super Protect - Credit
Children's ICICI Pru Smart Kid Plan SBI Life - Smart Champ Insurance HDFC SL YoungStar Super Premium Max Life Future Genius Education Plan
Plan SBI Life - Smart Scholar HDFC Life YoungStar Udaan Plan Max Life Shiksha Plus Super
Rural ICICI Pru Sarv Jana Suraksha - Micro SBI Life - Grameen Bima - Micro HDFC Life Group Jeevan Suraksha Plan - Micro
insurance insurance Insurance
HDFC SL Sarvgrameen Bachat Yojana - Micro
ICICI Pru Anmol Bachat - Micro insurance
Insurance
Protection plans
ULIP
Participating
Non-participating
Source: Edelweiss research, Company

BFSI
Products vary on risk, margins and capital productivity
Table 11: Margin, solvency consumption, risk description and nature/ extent of cyclicality
Product Indicative new Business risk/exposure to cyclicality
business margin
Par 14-18% No direct exposure to interest rate cyclicality. However, players try to anchor an interest
rate expectation, which could have become a quasi-voluntary pressure point, if not for the
fact that most endowments have large historic surpluses to draw down from.
Non-par (ex -pure 22-26% These products involve an embedded interest rate guarantee which can accrue immediately
protection) or at a deferred point. In a limited interest rate derivate/hedging options scenario in India,
they could potentially be risky. However, players like HDFC Life have some capacity to
address these products, due to specific balance sheet situations and restricted market
opportunities.
ULIP 6-9% Perhaps, the most misunderstood product in terms of risk. In terms of risk, this product is
very nearly a mutual fund i.e. no risk to proprietor in a balance sheet/net worth sense. The
inflow of ULIP is a function of near-term market sentiments, and therefore rather volatile.
However, being almost a asset management business, inflow volatility is high frequency
low amplitude noise. Such dips provide the best opportunity for the intelligent investor.
This should not translate into a understanding that the business’ fortunes are a Teflon
coated certitude. Prolonged (2-3 years) capital market apathy starts to hit persistency in
this business. This drawdown on balance sheet size, can have serious operating economics
implications. In summation, the most extreme form of risk here is profitability
erosion/incremental business linked, and not an existential threat to the balance sheet.
Pure protection 70-90% The only risk is mortality. Present strict underwriting standards, ‘Acts of God’ with mass-
mortality implications are the only risk.

Margins vary by product
Chart 29: Indicative margins by product

100.0
50-80%
80.0
60.0
(%)
40.0
20-22%
20.0 14-16%
8-10%
0.0
Par Non-par ULIP Protection

Insurance
New business margins (probability and time value weighted product cash flow possibilities)
are of course the highest for the pure-protection business and lowest for unit-linked products.
Margins, while important, are not the sole indicator of the commercial attractiveness of a
product line.
A few illustrations of new business margin estimation follow.
Table 12: Estimated non-par margin illustration

Premium (Adjusting Distributors Total Actual Net Total PV of
Persistency Policy in for persistency Comission % Distributors Operating expenses investment Claims Surrender Investment Total future
Period (%) force (INR mn) (assumption) Comission expenses incurred corpus Claims (INR mn) charges income Profits profits
0 100% 100 10.0 30.0% 3.0 0.3 3.3 6.7 0.2% 0.2 - 0.5 (3.0) (3.0)
1 96% 96 9.6 7.5% 0.7 0.3 1.0 8.6 0.2% 0.2 0.4 1.2 0.4 0.4
2 88% 88 8.8 7.5% 0.7 0.3 0.9 7.9 0.2% 0.2 1.1 2.0 2.0 1.7
3 82% 82 8.2 7.5% 0.6 0.3 0.9 7.3 0.2% 0.2 1.3 2.8 3.0 2.4
4 84% 84 8.4 7.5% 0.6 0.3 0.9 7.5 0.2% 0.2 (0.4) 3.5 2.1 1.5
5 80% 80 8.0 7.5% 0.6 0.3 0.9 7.1 0.3% 0.2 1.0 4.4 4.3 3.0
6 75% 75 7.5 7.5% 0.6 0.2 0.8 6.7 0.3% 0.2 1.5 5.4 5.8 3.7
7 70% 70 - 7.5% - - - - 0.3% 0.2 1.8 5.9 7.4 4.4
8 65% 65 - 7.5% - - - - 0.3% 0.2 0.4 6.4 6.6 3.6
9 60% 60 - 7.5% - - - - 0.4% 0.2 0.5 6.9 7.1 3.6
10 55% 55 - 7.5% - - - - 0.4% 0.2 0.5 7.4 7.7 3.7
11 50% 50 - 7.5% - - - - 0.4% 0.2 0.6 8.0 8.4 3.7
12 57.0 55.2 (1.8) (0.7)
NPV of the cash flows discounted @ 7.7% 28.0
APE 100
Margins 28.0%
No of policies 100
Sum assurred 1,000,000
Inv. Yield 7.7%
Premium 100,000
First year commission 30.0%
Commission 2nd yr onwards 7.5%
Operating expenses 3.3%
Guaranteed returns 5.5%
Table 13: Estimated ULIP margin illustration
Actual expense scheduling Margin calculation
Premium Fund Death
Fund Surrender
Allocation Available Value at GST on Wealth Benefit Total
Persistency (%) Premium Policy Management Closing Benefit (Net Distributors Other Charges In Expenses in
Policy Charges (6% for for end Mortality Charges Booster & (Higher of Distributors Actual Net Cash
Premium - Based on 9M (Adjusting for Admin Charges Fund Of Comission % Charges respective respective
Year Years 1-5, 4% for Investment before Charges (@18% of Loyalty Fund Value/ Comission expenses Flow
FY19 persistency) Charges (~1.35% of Value Discontinuance (assumption) Assumed Years years
Years 6-7 and 2% (opening) charges charges) Additions Sum incurred
Fund Value) Charges)
thereafter) deduction Assured)
1 100,000 100% 100,000 6,000 94,000 101,520 1,583 1,140 1,371 1,817 - 95,610 89,873 1,000,000 22.0% 22,000 6,000 28,000 10,093 28,000 (17,907)
2 100,000 85% 85,400 5,124 160,756 173,616 1,549 974 2,344 1,798 - 166,951 162,951 1,000,000 5.0% 4,270 4,697 8,967 9,991 8,967 1,024
3 100,000 78% 78,400 4,704 225,792 243,855 1,512 894 3,292 1,872 - 236,285 233,285 1,000,000 5.0% 3,920 3,920 7,840 10,402 7,840 2,562
4 100,000 70% 69,900 4,194 275,202 297,218 1,507 797 4,012 1,892 - 289,010 287,010 1,000,000 5.0% 3,495 3,146 6,641 10,511 6,641 3,870
5 100,000 65% 64,600 3,876 326,649 352,781 1,509 736 4,763 1,959 - 343,814 343,814 1,000,000 5.0% 3,230 2,584 5,814 10,884 5,814 5,070
6 100,000 57% 56,600 2,264 354,401 382,753 1,555 1,358 5,167 1,862 325 373,136 373,136 1,000,000 5.0% 2,830 1,981 4,811 10,344 4,811 5,533
7 100,000 45% 45,280 1,811 340,807 368,071 1,699 1,087 4,969 1,722 250 358,845 358,845 1,000,000 5.0% 2,264 1,358 3,622 9,566 3,622 5,944
8 36% - - 285,905 308,777 1,969 - 4,168 1,105 336 301,871 301,871 1,000,000 5.0% - - - 6,137 - 6,137
9 29% - - 240,326 259,552 2,271 - 3,504 1,039 226 252,963 252,963 1,000,000 5.0% - - - 5,775 - 5,775
10 23% - - 201,199 217,295 2,612 - 2,933 998 151 210,903 210,903 1,000,000 5.0% - - - 5,545 - 5,545
NPV of the cash flows discounted @ 8% 8,355
APE 100,000
Margins 8.4%
Premium payment Term 7 years

Mode of payment Annual
Annual rate of return 8.0%
Policy Term 10 years
Annual Premium 100,000
Sum Assured 1,000,000

BFSI
Solvency drag relevant to product

Solvency drag of individual lines also determines capital productivity
capital productivity Business margins determine the value contribution of a single policy ticket. The smart
investor needs to keep in mind that the business ticket received as premium also consumes
solvency capital. The best way to gauge commercial attractiveness of a product (ex-business
risk) is to judge how much new business value is created per unit solvency capital available
with the company (same argument as gauging a manufacturing business through RoE and not
net margin). We gauge business value created per unit solvency through its reciprocal,
solvency requirement as a percentage of VNB.
Table 14: ULIP solvency requirement

(INR) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Premium 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000 0 0 0 0 0 0
Fund value (@8% gross IRR) 99,000 1,05,106 2,16,936 3,35,923 4,62,536 5,97,276 6,34,223 6,73,521 7,15,324 7,59,800 8,07,133
Sum assured 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Sum at risk estimate* 9,01,000 8,94,894 7,83,064 6,64,077 5,37,464 4,02,724 3,65,777 3,26,479 2,84,676 2,40,200 1,92,867
RSM 1 factor (bps) (of fund value) 80 80 80 80 80 80 80 80 80 80 80
RSM 1 792 841 1,735 2,687 3,700 4,778 5,074 5,388 5,723 6,078 6,457
RSM 2 factor (bps) 20 20 20 20 20 20 20 20 20 20 20
RSM 2 1802 1,790 1,566 1,328 1,075 805 732 653 569 480 386
RSM 1,802 1,790 1,735 2,687 3,700 4,778 5,074 5,388 5,723 6,078 6,457
Solvency requirement (1.5x RSM) 2703 2,685 2,603 4,031 5,550 7,167 7,611 8,082 8,584 9,118 9,686
VNB magin (%) 8.5
VNB 8,500
Solvency required as a % of VNB (A**) 31.8
Solvency required/sum assured (bps) 27
Solvency required/Annual premium (%) 2.7
*Reinsurance is small and ignored
*Sum at risk approximated as sum assured minus fund value
**A is a proxy for capital consumption for generating value of new business. There is gradual release over the policy term
Table 15: Pure protection solvency requirement

(INR) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Premium 1,400 1,400 1,400 1,400 1,400 1,400 1,400 1,400 1,400 1,400 1,400
Sum assured 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
Sum at risk estimate* (SaR) 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000 10,00,000
RSM 2 factor (bps) 10 10 10 10 10 10 10 10 10 10 10
RSM 2 (SaR*factor) 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000
Solvency requirement (1.5x RSM) 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500 1,500
VNB magin (%) 80
VNB 1,120
Solvency required as a % of VNB (A*) 133.9
Solvency required/sum assured (bps) 15
Solvency required/Annual premium (%) 107.1
*Reinsurance is small and ignored
*Sum at risk approximated as sum assured minus fund value
**A is a proxy for capital consumption for generating value of new business; there is a gradual release over the policy term

Insurance
Chart 30: Despite one-tenth margin, ULIP’s capital productivity is double of

pure protection
250.0
200.0
150.0
(No)
100.0
50.0
-
Solvency required as a Solvency required/ Solvency required/
% of VNB sum assured (bps) Annual premium (%)
ULIP Protection
Although it sounds counter-intuitive, ULIP turns out to be a higher capital productivity

product than pure protection, despite being at opposite ends of the new business margin
spectrum.

BFSI
An ever-strengthening oligopoly
The regulations on agency commission term structure (bulk of agent incentives being linked
to first-year premiums) has created a situation in India where renewals are a very pure return
on time invested selling, for free agents. As discontinuance penalties on traditional products
are onerous (to say the least), the impact of this mostly relates to unit-linked product where
surrender charges have been already rationalised. Early surrender is a profitability killer for
the ULIP product.
Table 16: Surrender charges table by product

Surrender charge for savings products
Year of surrender
Unit Linked (For premiums >= 25,000) Non Linked (traditional savings)*
Lower of 6% * Higher of (One premium or Fund Value) with a
Year 1 100% of all premiums paid; no absolute rupee cap
cap of INR 6,000
Year 2 Lower of 4% * (AP or FV) with a cap of INR 5,000 70% of all premiums paid; no absolute rupee cap
Year 5 - 7 Nil 50% of all premiums paid; no absolute rupee cap
Year 8+ Nil 10% of all premiums paid; no absolute rupee cap
Source: IRDAI
*Higher SSVs can be paid at Company's discretion
Chart 31: Half the total commission take for an agent is in year one
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Year Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year
1/FYP 10
Renewal commission out of total commission (%)
First year commission out of total commission (%)
While ULIP persistency is definitely a function of discretion exercised in customer choice, it is

In deep bear markets, persistency
also most definitely a function of prevailing sentiment regarding longer-term attractiveness
depends on intense agent effort
of capital markets. In a deep bear market, persistency maintenance requires intense seller
involvement and effort, an endeavour for which financial emoluments remain low for the
‘free agent’.
This is why players with a bancassurance tie-up – where the bank has skin in the insurer’s
game – have unique access to a dominant channel that can be expected to show better
renewal rates in bad times. Scale is critical to competitiveness in the life insurance business. A
higher ULIP risk perception has effectively crowded out pure agency plays from the Indian life

Insurance
insurance market. The following chart of value creation for the private insurers in India from
McKinsey’s 2015 Indian life insurance report tells a story of its own. Besides, this analysis
shows that the spread in value creation between the leaders and laggards is massive.
Chart 32: Returns in excess of cost of capital negative for industry till FY11
50
10
(USDmn)
(30)
(70)
(110)
(150)
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
Returns in excess of cost of capital, US$mn
Source: McKinsey report
*ROS = Statutory net income (including realised capital gains) divided by average capital surplus.
Cost of capital estimated by using an equity beta of 1.2 for life insurers, which results in a cost of
equity of 13.5–14%
Chart 33: The have-nots destroy almost commensurate value as the haves create
Foreign 4
Domestic 10
Domestic 8
Domestic 7
Domestic 6
Domestic 4
Foreign 1
Domestic 1
(60.0) (40.0) (20.0) 0.0 20.0 40.0

(%)
Annual growth in book value adjusted for capital infusions and dividends (2002-2013, %)
*Excluding LIC; foreign companies classified as up to 49% foreign ownership (there are no pure
foreign players)
Source: McKinsey report

BFSI
Consider the following six companies:
ICICI Pru Life, SBI Life, PNB Metlife and Kotak Life – promoted by banks
HDFC Life – Prime banca distributor HDFC Bank is a group entity (shared promoting entity)
Max Life – Significant stake with Axis Bank, expected to go up
Out of 23 private players, these six companies commanded 65% private market share in 2019
versus 49% in 2009.
Chart 34: Private market share of six players has stabilised around 65% (APE basis)
90.0
72.0
54.0
(%)
36.0
18.0
0.0
FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Market share select 6 players mentioned above
We expect, in absence of significant regulatory change in commission structuring or a long-

term technology-led disruption, the oligopoly will get stronger over time. The inescapable
conclusion seems to be that even if any of the other players were up for acquisition, the case
for paying any business a value over and above liquidation value, is weak.

Insurance
Regulations can and have changed the game

Life insurance in the past decade has gone through a slew of regulation changes; in hindsight,
they have clearly had two specific impacts:
 They have made the business dynamics move in a direction that provides a better deal to
the customer.
 Despite the turmoil at the points of sharp transitions, it has clearly added to the robustness
of the insurance as a financial savings product.
Chart 35: Phases of Indian life insurance sector

750
Phase I Phase II Phase III
600
450
(INR bn)
High growth phase

Private: 26% CAGR Transition phase
Industry: 11% CAGR Private: -12% CAGR
300
Industry: -5% CAGR
Revival phase
150 Financial ULIP Private: 15% CAGR
IRDA Industry: 8% CAGR
Crisis guidlines
guidlines
0
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
Source: IRDAI
As the chart above shows, the insurance industry, after registering strong growth through 2010,
suffered a sharp stagnation in the wake of regulations (specifically pertaining to unit-linked
products), from which it took over four years to recover. The additional regulations introduced
in 2013 further tightened the rules of the game, and the sector has now started showing signs
of a more mature and, most importantly, sustainable growth.

BFSI
Fig. 2: Regulation timeline
Government of India (GOI) liberalized the insurance sector in March 2000

by lifting all entry restrictions for private players and allowing foreign players
to enter with a limit of 26% on direct foreign ownership.
Clean up of ULIP or linked products.

Excessively high surrender charges were rationalised in the interest of policyholders
Insurance component of such products was increased
Cap on ULIP charges made it a more sustainable product from the policyholder's
perspective
Increased sum assurred on ULIP products
Capped remuneration/commission of the distribution channel (except the direct
marketing channel).
Earlier, the bancassurance model meant that banks could only sell products of
one life, one non-life and one standalone health insurer. With open architecture,
banks have an option of tying up with up to nine insurers, (3 each) for life, non-life
and health
Cap on management expenses proposed and finalised by IRDA in 2016 is a

important regulation, more specifically in the context of participating products
New commission regulations incentivise agents to sell more term/pure risk
products and also allow for higher commission on renewals
A true implementation of open architecture with reasonable limits on the

maximum amount of business that can be done with a single insurer
Like the rationalisation of surrender charges on ULIP Products in 2010,

traditional products may have to go through the same clean up. However we
see this as a low probability event, especially for participating products
As of now, IFRS implementation is required from 2022. Under IFRS, matching

concept of cost of policy and revenue will be better represented unlike the
rules today, where the entire cost is booked upfront while revenue flows
through several years.
For details on regulations, kindly refer to Appendix on page 49.

Insurance
Valuation framework needs context

First impression of rich valuations can be deceptive
A cursory look at Indian life insurance valuations vis-à-vis regional/global peers makes the
sector appear richly valued.

P/BV / P/EV* P/E RoA RoE
Company Region
FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
China Life 1.3 1.2 11.9 10.6 1.1 1.1 11.2 11.9 China
Samsung Life 0.4 0.4 10.5 9.8 0.4 0.4 3.5 3.6 South Korea
AIA Group 2.3 2.1 16.9 15.0 2.7 2.5 14.9 14.7 Hong Kong
Zurich Insurance 1.7 1.6 13.0 12.3 1.3 1.2 12.9 13.1 Switzerland
ICICI Prudential 3.0 2.6 75.6 59.3 0.6 0.7 13.4 16.0 India
HDFC Life 5.7 4.9 97.3 77.0 0.9 1.0 21.2 23.1 India
SBI Life 3.8 3.3 106.9 75.0 0.6 0.7 11.8 15.2 India
Max Financial 1.5 1.3 22.6 24.8 1.0 0.8 23.4 20.0 India
*For Indian players, P/EV is shown
Some context, however, is necessary:
Context necessary for valuation  Firstly, the Embedded Value of most of these peers have a larger Adjusted Net Worth
comparison with international component than VIF (Value in Force) of existing business while the situation is reverse for
peers Indian players, including ICICI Prudential Life Insurance. Indian accounting norms penalise
accruals heavily for new business and until businesses mature further and/or IFRS is
implemented, book value will remain a massive under-estimate and render P/B and P/E
comparisons moot.
 Indian life insurance leaders have 80–90% of their business models oriented towards
savings. Of the savings products, ULIP bears zero market risk, participatory products bear
an expectation burden and only non-par annuities have some interest rate risk exposure. In
other words, balance sheet risk for the leading players still remains much lower than
interest rate guarantee-dominated global and regional players.
 As we have mentioned earlier, the market structure is oligopolistic. Consequently, capital

productivity (RoEV) levels are high, especially in relation to low balance sheet risks.

BFSI
Chart 36: All four players have steady-to-rising operating RoEV
30.0
26.0
22.0
(%)
18.0
14.0
10.0
FY17 FY18 FY19 FY20E FY21E FY22E

Source: Company
Chart 37: P/EV FY20E and RoEV FY21E scatter Chart 38: VNB CAGR (FY19–22E) and P/VNB 20E
20.0 72.0
Max Financial
HDFC Life 60.0 ICICI
19.0 HDFC Life
Prudential
48.0 SBI Life
18.0 SBI Life
(P/VNB 20E )
(RoEV 21E)
36.0
17.0
24.0
ICICI Prudential Max Financial
16.0
12.0
15.0 0.0
0.0 1.2 2.4 3.6 4.8 6.0 7.2 17.5 17.8 18.0 18.3 18.5 18.8
P/EV 20E (VNB CAGR 2019-22E )
Valuation framework builds in business risk and capital productivity

Our valuation framework relies on few basic realisations about the life insurance business in
India:
1. For the most part (savings component), life insurance is a fairly mature business in India
A few basic realisations critical to
and the leader’s long term (next decade or so) trendline growth is likely to be lower than
valuation framework
capital productivity (RoEV). This is especially true given RoEV upward trend due to positive
mix shift, better scale and oligopoly driven price stability (for the most part). Given an
efficient dividend policy, this translates into a scenario where dilutions are not necessary
for growth sustenance.
2. The cost of equity of individual businesses (of comparable scale), while lower than regional
peers, is a direct function of product mix. We have discussed the individual risks associated
with each product earlier. Suffice to say that in our view ULIP is the lowest risk product and
non-par deferred annuities are the highest risk. This focus on balance sheet liability

Insurance
composition is not to imply that other risks such as a technology-led disruption or

regulatory shifts have been ignored. For example, in case of Max Financial, we assume a
discount rate on account of company-specific considerations.
We accord P/EV multiple premiums to business based on spread between RoEV and our
estimated CoE. That is a business with steady state RoEV equalling CoE is valued at 1x 1-yr fwd
P/EV. For every 300–350bps extra spread on top of CoE, we accord a 1x premium to that
multiple.
As mentioned earlier, our CoE estimates are based on product mix i.e. risk profile. We believe
that in terms of risk, only AMCs would probably have lower CoE than a savings product-heavy
non-interest rate exposed life insurer. For understanding steady state RoEV of these businesses,
Cost of equity estimates use
we use a rounding off our average RoE expectation over the next three years. While this is our
balance sheet liability mix as risk
general valuation framework, company-specific considerations are taken on board. As an
proxy
example, we have moderated Max Financial’s fair multiple by a discount in setting our target
due to uncertainties surrounding its ownership structure (discussed in the company section).
Table 18: CoE of four major private life insurers estimated by using liability mix as risk proxy
Estimated CoE Comments
ICICI Prudential 10.5 High ULIP, no interest rate guarantee, therefore lowest risk
HDFC Life 11.0 Balanced portfolio, most risks hedged
SBI Life 11.0 Balanced portfolio, most risks hedged
Max Financial 11.5 Low interest rate risk but limitations of higher cost structure
Chart 39: Estimated COE and steady state RoEV for four major private life insurers
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Estimated CoE Steady state RoEV


BFSI
Table 19: Fair and target multiples determined based on same framework
SBI Life 750 3.5 4.0 4.0
Max Financial 750 3.5 4.0 1.4 We assign a 65% discount to our 12M fair target multiple

Insurance
ICICI Pru Life – our top pick based on 12M upside

Chart 40: ICICI Pru has the highest AuM followed by SBI Life
1,900
1,600
1,300
(INR bn)
1,000
700
400
ICICI Pru HDFC Life SBI Life Max Life
Total AuM
Chart 41: Linked and non-linked bifurcation

1,250 750
1,000 600
750 450
(INR bn)
(INR bn)
500 300
250 150
0 0
ICICI Pru HDFC Life SBI Life Max Life ICICI Pru HDFC Life SBI Life Max Life
AuM linked AuM non-linked
Chart 42: HDFC Life has the best 13th month persistency ratio while ICICI Pru is the best at 61st month
90.0 60.0
86.0 56.0
82.0 52.0
(%)
(%)
78.0 48.0
74.0 44.0
70.0 40.0
13th month persistency 61st month persistency
Source: Company

BFSI
Chart 43: SBI Life is by far the best player in terms of operating cost ratios
14.5 50.0
12.2 42.0
9.9 34.0
(%)
(%)
7.6 26.0
5.3 18.0
3.0 10.0
Operating cost to premium Operating cost to new business premium
Initiating on three private life insurers, transferring coverage on Max

Table 20: Fair multiple and explanation thereof
SBI Life 750 3.5 4 4
Max Financial 850 3.2 4 1.4 We assign a 65% discount to our 12M fair target multiple
Table 21: Target multiple, target price and upside

Current markey Target Upside/
Rating price (CMP) price (TP) (Downside) (%)
ICICI Prudential Buy 509 700 37.6
HDFC Life Hold 613 590 -3.7
SBI Life Buy 998 1,220 22.3
Max Financial Hold 404 450 11.4
We initiate coverage on ICICI Pru Life (BUY, TP-INR700), SBI Life (BUY, INR1,220), HDFC Life
(HOLD, TP –INR590) and transfer coverage on Max Financial (HOLD, TP – INR450).

Insurance
A quick comparison of business models can be illustrative
Table 22: Snapshot of operating metrics

Listed
ICICI Pru SBI Life HDFC Life Max Financial
Operating Metrics
FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19
First year premiums (regular) 73,562 69,785 81,394 90,572 47,385 50,581 31,915 38,731
Renewal premiums 178,570 205,654 143,881 191,974 122,148 142,146 81,523 94,148
Single premiums 1,856 33,858 28,268 47,348 66,112 99,133 11,571 12,873
Premium
Total premiums 253,988 309,298 253,542 329,894 235,644 291,860 125,009 145,752
Total New business premium (NBP) 75,417 103,644 109,661 137,920 113,496 149,715 43,486 51,604
Total APE 77,920 77,990 85,400 97,000 55,300 62,600 32,480 39,500
New business premium 4.7% 4.8% 5.7% 6.4% 5.9% 7.0% 2.2% 2.4%
Market share
New business premium (Individual) 9.1% 8.3% 9.1% 9.9% 6.5% 7.8% 4.3% 4.9%
(Overall)
New business premium (Group) 0.7% 1.8% 2.5% 3.6% 5.3% 6.3% 0.4% 0.4%
New business premium 15.4% 14.1% 18.5% 19.0% 19.1% 20.7% 7.3% 7.1%
Market share
New business premium (Individual) 20.8% 17.4% 20.8% 20.6% 14.7% 16.4% 9.9% 10.2%
(Private)
New business premium (Group) 3.8% 8.2% 13.5% 16.1% 28.5% 28.4% 1.9% 1.6%
3 years CAGR (2016-19) 15.3% 24.7% 32.2% 21.4%
NBP growth 5 years CAGR (2014-19) 22.5% 22.2% 30.0% 17.9%
10 years CAGR (2009-19) 4.3% 9.9% 18.7% 10.8%
Savings 94.3% 90.8% 94.6% 93.2% 94.0% 93.0% 92.0% 91.0%
ULIP 81.9% 79.6% 66.5% 70.7% 57.0% 55.0% 41.0% 42.0%
Par 10.9% 8.6% 24.4% 18.7% 28.0% 18.0% 43.0% 40.0%
Annuity 0.4% 0.9% 0.0% 0.0% 5.0% 2.2%
Product mix
Others 1.1% 1.6% 2.8% 3.3%
(On the basis
Non-par 0.8% 0.4% 4.0% 17.8% 8.0% 9.0%
of APE)
Protection 5.7% 9.2% 5.4% 6.8% 5.0% 7.0% 8.0% 10.0%
Retail protection 3.5% 5.6% 4.0% 6.0%
0.7% 3.8%
Credit life 0.8% 2.0% 0.0% 0.0%
Group term 1.5% 1.6% 4.7% 3.0% 4.0% 4.0%
Protection 11.2% 20.6% 5.5% 11.9% 26.0% 27.0% 9.9%
Individual protection 0.5% 2.7%
Group protection 4.9% 9.2%
Product mix Annuity 9.0% 17.0%
(On the basis Individual savings 76.1% 67.2% 41.0% 32.0%
of NBP) Par 18.5% 12.8% 12.0% 6.0%
Non-par 1.9% 1.6% 3.0% 5.0%
ULIP 55.6% 52.8% 26.0% 21.0%
Group savings 18.4% 20.9% 24.0% 24.0%
Bancassurance 52.3% 55.8% 65.5% 66.8% 71.0% 64.0% 72.0% 70.0%
Agency 25.4% 21.7% 30.0% 28.6% 11.0% 13.0%
Distribution 27.0% 30.0%
Direct 13.5% 12.0% 14.0% 19.0%
mix (On the
Corporate agents and brokers 6.0% 5.9% 5.0% 4.0%
basis of APE)
Group 2.7% 4.7%
Others 4.6% 4.6% 1.0% 1.0%
Bancassurance 62.0% 64.0% 33.0% 26.0%
Distribution Agency 25.0% 21.0% 9.0% 9.0%
mix Broker 10.0% 16.0%
(NBP) Direct 48.0% 49.0%
Others 12.0% 15.0% 0.0% 0.0%
Source: Company, IRDAI, Edelweiss research

BFSI
Table 22: Snapshot of operating metrics (contd.)

Listed
ICICI Pru SBI Life HDFC Life Max Financial
Operating Metrics
FY18 FY19 FY18 FY19 FY18 FY19 FY18 FY19
Add. Total individual agents 151,563 170,572 108,261 123,613 77,048 91,172 56,968 50,854
Distribution Agent producitivity 141,855 105,756 253,923 237,515 103,336 117,531 165,523 222,146
info Agency premium (INR mn) 21,500 18,039 27,490 29,360 7,962 10,716 9,430 11,297
Based on Individual NBP
Geographical Top 3 states 40.8% 25.7% 43.1% 33.5%
Distribution Top 5 states 54.3% 39.3% 56.7% 49.6%
Top 10 states 74.3% 65.9% 81.3% 75.4%
13th Month 86.8% 86.2% 81.3% 83.9% 87.1% 87.2% 80.0% 83.0%
Persistency 25th Month 78.3% 77.4% 70.8% 74.3% 77.4% 80.5% 72.0% 71.0%
ratio by 37th Month 68.8% 71.0% 64.5% 66.4% 70.9% 72.0% 62.0% 64.0%
premium 49th Month 64.2% 65.0% 59.1% 60.3% 62.2% 67.7% 57.0% 58.0%
61st Month 54.5% 58.1% 45.3% 47.5% 51.0% 52.3% 53.0% 53.0%
Expense ratio (%, operating exp/gross premium)
7.5 8.4 6.8% 6.5% 13.4% 13.1% 12.9% 13.2%
Operating Commission ratio (%, commission/gross premium)
5.2 5.0 4.5% 4.1% 4.6% 3.8% 7.1% 6.8%
ratios Total cost (%) 12.7 13.4 11.3% 10.5% 18.0% 16.9% 20.0% 20.0%
Cost / Average AuM (%) 2.6 2.8 2.7% 2.7% 4.3% 4.2% 3.6% 3.6%
Claims settlement ratio 97.9 98.6 95.03% 97.82% 99.1% 99.3% 98.3% 98.7%
Fair business Average no of days for settlement 2.99 2.34 3.71 2.8 5.0 4.0
practises Grievance ratio (per 10,000 retail 92.0 72.0 47.0 27.0 70.0 61.0 93.0 59.0
Grievance ratio (%) 0.92% 0.72% 0.47% 0.27% 0.70% 0.61% 0.93% 0.59%
Embedded value (EV) 187.9 216.2 190.7 224.0 152.2 183.0 77.1 92.6
VIF 117.6 142.7 116.0 138.3 103.6 124.3 50.3 65.4
Adjusted NW 70.2 73.5 74.7 85.7 48.5 58.8 26.8 27.2
Movement in EV
Unwind 13.7 15.8 14.1 16.2 10.4 13.0 6.4 7.0
Operating assumption change 7.6 4.2 0.1 (1.0) 1.6 0.0 0.0
VNB 12.9 13.3 13.9 17.2 12.8 15.4 6.6 8.2
Persistency variance 1.5 2.7 0.0 0.6 2.2
Embedded Mortality and morbidity variance 0.7 2.0 0.0 1.0 0.6 1.3
Value Expense variance 0.3 0.0 1.6 0.8 0.4
(INR bn) Other variance 0.0 0.0 0.0 0.0 0.0 3.8
Economic assumption change and investment
1.1 variance
(1.2) (1.8) 2.5 2.6 3.6 (0.5) 0.0
Net capital injection (11.9) (8.4) (2.4) (2.4) (2.0) (3.4) (2.0) (2.8)
Total 26.0 28.4 25.5 33.3 27.4 30.8 11.2 17.5
VIF 62.6% 66.0% 60.8% 61.7% 68.1% 67.9% 65.2% 70.6%

Adjusted NW 37.4% 34.0% 39.2% 38.3% 31.9% 32.1% 34.8% 29.4%
Operating return on Embedded value 22.7% 20.2% 17.9% 17.4% 21.5% 20.1% 20.6% 21.9%
Value of new business (VNB) 12.9 13.3 13.9 17.2 12.8 15.4 6.6 8.6
VNB margin 16.5% 17.0% 16.2% 17.7% 23.2% 24.6% 20.2% 21.7%
VNB breakup
Change in VNB margin
(INR bn)
Business mix 4.0% 2.2% 2.5% 1.4%
Assumption changes 1.3% 0.9% 0.4% 0.9%
Acquisition expenses/exp variance 1.1% -2.6% -1.5% -0.8%
Total 6.4% 0.5% 1.4% 1.5%
AUM (INR bn) 1,395 1,604 1,163 1,410 1,066 1,256 520 630
Other
Solvency ratio 252% 215% 206% 213% 192% 188% 275% 242%
financial data
PAT 16,200 11,389 11,504 13,268 11,090 12,768 5,276 5,564
Source: Company, IRDAI, Edelweiss research

Insurance
Appendix
Privatisation of life insurance – A historical perspective
To understand the context of this evolution, we go back as far as liberalisation of the insurance
in year 2000.
The re-opening of the life insurance sector began in 1990s. In 1993, a committee was set up
under former RBI governor Mr. R. N. Malhotra to propose recommendations to reform the
insurance sector. The committee came up with the recommendation of opening the sector to
private players, including foreign companies via Indian subsidiaries, but preferably through joint
ventures with the Indian companies.
Private entry allowed only in the Following these recommendations, IRDA was incorporated as the sector regulator in 2000 with
new milennium the objective of promoting competition to enhance customer satisfaction, increase consumer
choice and lower premiums while ensuring financial security of the insurance players.
The Government of India liberalised the insurance sector in March 2000 with the passage of the
Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for
private players and allowing foreign players to enter the market with a limit of 26% on direct
foreign ownership.
The opening up of the sector marked the beginning of entry of private players in a market
where government-owned LIC was the only player. Currently, there are 23 private life insurance
players in India registered with IRDA. Besides, market shares of private players in the industry
have picked up at a rapid pace.
Key regulations
Commission to agent
The business impact of bancassurance as a distribution channel (over agency) has shifted the
leadership baton over the past five years to players that have captive banks to sell their
products. Slow growth of the agency channel is a direct fallout of the way incentives are aligned
given the regulatory super structure.
Post-2013 product regulations, IRDA capped the remuneration or commission of the

distribution channel (except the direct marketing channel).
The structure of agent remuneration is such that it remains skewed towards initial years
Comission structure regulations
(constituting a significant share of total commission) while renewals fetch relatively low
have impacted market structure
commissions. Consequently, agents had little incentive linked to policy persistency. Rather,
the front-ended commission structure left the agent more profitable if they could make the
policy holder churn into a new policy by discontinuing the old one. As a result, the lower
persistency (a key driver of profitability, especially for products such as ULIPs) of policies sold
by agents made the bank channel’s economics more favourable. This led to a shift in the
preferred distribution structure in the industry, paving the way for leadership of private
players with ‘captive’ bank infrastructure to grow their business.
In 2016, IRDA had come up with revised guidelines for payment of remuneration to insurance
agents (as indicated in the table below). The new regulations also limit the rewards paid to

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insurance agents (any incentives, regardless of the nomenclature) up to 20% of the first year’s
remuneration/commission to agents.
Two key benefits of the new regulation for the agents are:
New regulations have impacted
selling of pure protection positively  Higher commissions for selling pure protection products to incentivise the basic term plans
products.
 A higher commission on renewal premiums (7.5% versus 5% earlier). Though a positive

step towards improving the persistency of policies sold by agents, we believe the
difference in the commissions on the first year and renewal premiums is still large enough
for agents to churn policyholders into new policies (rather than making efforts in pursuing
renewal premiums).
Table 23: Payment and remuneration to insurance agents

Payment and remuneration to insurance agents
New Regulations Old Regulations (2013)
Product Category Product Type
(2016) (%) (%)
Single Premium (Individual) Pure protection 7.5 2.0
Other than pure protection (Including Pension products) 2.0 2.0
Single Premium (Group) Pure protection 5.0 2.0

Other than pure protection
Group (Variable savings life insurance) 2.0 2.0
Group (Fund Based) 0.5 (Max Rs1mn) 2.0
Regular Premium (Individual) Pure protection
First Year Premium 40.0 Similar to Bundled Plan
Other than pure protection (e.g. ULIPs)
First Year Premium- based on premium payment term
5 years 15.0 15.0
6 years 18.0 18.0
7 years 21.0 21.0
8 years 24.0 24.0
9 years 27.0 27.0
10 years 30.0 30.0
11 years 33.0 33.0 / 30.0*
12 years or more 35.0 35.0 / 30.0*
Renewal Premium
2nd/3rd Year 7.5 7.5 / 5.0*
Later Years 7.5 5.0
Regular Premium (Individual) Individual Deferred Annuity/Pensions
First Year Premium 7.5 7.5
Renewal Premium 2.0 2.0
Regular Premium (Group) Pure protection / Others
First Year Premium 7.5 (only on pure Similar to Bundled Plan
risk premium)
Source: IRDAI
* Cap on brokers remunerations

Insurance
Cap on expenses
Made the participatory product Cap on management expenses proposed by IRDA and finalised in 2016 is an important
more customer friendly regulation, more specifically in the context of participating products.
The current regulations have not only put the limit on the allowable expense but have also…
 Mandated these limits of expenses of management to be complied with on a segmental

basis
 The actual expenses above the mentioned limits would have to be borne by the
shareholders. Also it might mean restrictions on opening of new businesses, incentives to
the directors and KMPs.
A brief on the limits of allowable expenses follows:
Table 24: Limits of allowable expense

Product category % of First Year Renewal Single
Pure Risk Products (>=10 Yrs) - Group/Individual Premium 100 25 10
Pure Risk Products (<10 Yrs) - Group/Individual Premium 7.5*No. Of Years in the 25 10
policy
Annuity Products - Immediate Premium NA NA 5
Annuity Products - Deferred Premium 10 4 5
1-yr renewable group policy Premium NA NA 15
Group Fund Policy (AUM > Rs100bn) AUM NA NA 1
Group Fund Policy (AUM upto Rs100bn) AUM NA NA 0.8
Other Than Above - Business within 10 yrs of operation
Policy period (5-7 yrs) Premium 70 18 NA
Policy period (10 or more yrs) Premium 90 20 NA
Other Than Above - Beyond 10 yrs
Policy period (10 or more yrs) Premium 80 15 NA
On Annuities paid during the year Premium NA NA 0.5
On policies on which no premium is payable at start or end Sum NA NA 0.05
of the year Assured
On lapsed policies under revival period Sum NA NA 0.01
Assured
Source: IRDAI
To understand how this regulation affects participating products the most, let us look at the
product categories and the respective pricing drivers prior to this regulation.
i) In case of ULIP products, the regulator had imposed caps on total charges, expressed as a
reduction in policyholder return on premiums paid which made it difficult for inefficient players
with higher expense structures to grow in this segment.
ii) Pure-protection market in India has been quite price sensitive, but a high-margin business.
The driver of the pure protection growth would be determined by the perception of the
insurance company and the rate competitiveness. Thus, this has ensured the market leadership
would be retained by the lowest-cost player.

BFSI
iii) In the non-participating traditional businesses, the policyholder is guaranteed the maturity
amount at the time of subscription to the policy and, thus, any expenditure by the company in
excess of the originally planned limits would hurt shareholders’ profitability.
At least 90% of the surplus must iv) But for the participating products, wherein the surplus (incomes net of expenses) is shared
now be shared with par with policyholders in the ratio of 90/10, the product segment provided an opportunity for
policyholders versus 70% earlier insurance companies to park their inefficiencies in expense management across other product
verticals.
A look at the product regulation structure before this would indicate that inefficient players
(basically the ones with high operating expenditure) were relying on scaling up the participating
products business to bring down their expense ratios.
But the current regulations, which require meeting expense caps at the individual segment
level, would significantly hurt new business margins generated on participating products, which
hovered around 70% (an amount already lower than similar products in other countries, mainly
due to a 75/25 profit sharing ratio in those countries).
However, better cost efficiencies and lower charges to participating funds will, in the long run,
would hopefully lead to better policyholder returns and a more innovative and efficient
distribution model. But smaller insurers and the ones with a higher cost distribution structure,
wherein the economies of scale needed are simply out of reach over the medium term, may
have to pull back from the participating business.
The adoption of this regulation provides a transitional relief in terms of a gradual phasedown to
the mentioned limits by FY19 onwards.
Table 25: Actual expenses to allowable expenses

Financial Year % of Actual expenses to the allowable expenses
FY16 and FY17 120
FY18 110
FY19 and onwards 100
Source: IRDAI
ULIP regulations
The year 2010 was marked by two major developments in the insurance industry:
The first one being the conflict between regulatory bodies IRDA and SEBI over the power to
exercise control over ULIPs. While SEBI contended that the product is largely in the nature of a
mutual fund savings product with very limited insurance component attached to it, it had issued
notices to insurance companies banning the product sale.
ULIP regulations were one of the This controversy came up at a time when ULIPs were a significant part of private insurance
watershed moments of the player’s new business premiums (80–90% of NBP for private players came from selling ULIPs).
industry Ultimately, a presidential ordinance had settled the issue and a bill passed confirmed IRDA as
the sole regulator for ULIPs.
However, the incident also made IRDA take quick action on modifying the nature of ULIPs,
thereby making them more regulated products that prioritise policyholders’ interest.

Insurance
Reasons that made ULIP a preferred product pre-2010 are:

Pre 2010 ULIP frenzy invited 1. Less capital-intensive product compared with others
tougher regulations 2. Customers attracted to the product as it involved a significant investment linked
component to it.
3. The agency force in India aggressively sold the product based on the capital markets
growth story.
4. In the absence of any regulatory cap on distributor’s commission on ULIP sales, insurance
companies provided high commissions on ULIP sales, making them more attractive for
distributors to sell.
Heavy mis-selling was rampant. Insurance in India has been looked as a tax savings mechanism
and ULIP product (given its low protection cover and a relatively easier to exit product
erstwhile) attracted many. Furthermore, the insurance companies benefitted from high
lapsation as the surrender charges on these ULIP products used to be as high as 70–80%. All
these laid the ground for IRDA to come up with a fresh set of guidelines to regulate the product.
The ULIP guidelines 2010 and 2013 slapped the following major changes:
i) Discontinuance & Surrender charges capped

Upon discontinuance/ surrender of a linked policy, the insurance company can deduct the
discontinuance charges, whose limits were capped as follows.
Table 26: Discontinuance and surrender charges

Maximum discontinuance charges Maximum discontinuance charges
Year of discontinuance (For premiums lesser than Rs25,000) (For premiums more than Rs25,000)
1 Lower of 20% * ( AP or FV/policy account value) Lower of 6% * ( AP or FV/policy account value)
subject to a maximum of Rs. 3000 subject to a maximum of Rs. 6000
5 Nil Nil
*AP-Annualised Premium
*FV-Fund Value
Table 27: : Discontinuance and surrender charges (contd.)

Maximum discontinuance charges Maximum discontinuance charges
Year of discontinuance (For premiums lesser than Rs25,000) (For premiums more than Rs25,000)
1 Lower of 2% * ( SP or FV/policy account value) Lower of 1% * ( SP or FV/policy account value)
2 Lower of 1.5% * ( SP or FV/policy account value) Lower of 0.5% * ( SP or FV/policy account value)
3 Lower of 1% * ( SP or FV/policy account value) Lower of 0.25% * ( SP or FV/policy account value)
4 Lower of 0.5% * ( SP or FV/policy account value) Lower of 0.1% * ( SP or FV/policy account value)
5 Nil Nil
*SP-Single Premium
*FV-Fund Value

BFSI
Upon discontinuance, the fund or account value shall be credited to a separate discontinued
Limited surrender charges for
fund, which shall be invested in the following categories only:
ULIPs
1. money market instruments – 0% to 40% of the funds; and
2. government securities – 60% to 100% of the funds.
The minimum guaranteed return applicable to discontinued funds is 4% p.a. To this, only
discontinuance charges (as highlighted in the table) and fund management charges (not
exceeding 50bps pa on the discontinued fund) can be levied.
The proceeds of a discontinuance policy would be paid only after the expiry of the lock-in of five
years.
(ii) Minimum Sum Assured

The clampdown on the ULIP product by SEBI in 2010 was primarily on account of a very low
insurance component of the product, which made it look quite similar to other pure
financial savings products.
IRDA had subsequently come up with regulations of minimum sum assured for linked products.
Table 28: Minimum sum assured for linked products

Product Type Age of life assured less than 45 years Age of life assured more than 45 years
Single Premium Product Minimum 125% of the single premium Minimum 110% of the single premium
Other than Single Premium Product (Regular Premium including Maximum of : Maximum of :
the limited premium paying products) (i) 10x of the annualised premium (i) 7x of the annualised premium
(ii) 105% of all premiums paid till death (ii) 105% of all premiums paid till death
(iii) 0.5*(70-Entry Age)*Annualised Premium (iii) 0.25*(70-Entry Age)*Annualised
(B) Death Benefits Assured
(i) The sum assured as agreed in the policy plus the balance in the policy account or
(ii) Higher of the sum assured as agreed in the policy or the balance in the policy account
In either case minimum sum assured must be at least 105% of all the premiums paid including top ups.
Source: IRDAI
(iii) Cap on ULIP charges

This regulation is credited with making ULIPs more sustainable while protecting
All management other charges policyholders’ interest. The regulations made the product more transparent. With a cap on
capped by regulators for ULIP overall charges, the customers would benefit from higher returns made on these products.
Moreover, a graded cap structure for charges made longer-term policies more attractive
and fostered persistency.
Description of major charges:
(a) Premium allocation charge (PAC) – It consists of the charge for purchasing units of
fund in the policy. They are expressed as a % of the policy premium received and are
levied at the time of receipt of the premium.
(b) Fund management charge (FMC) – The charge levied as a % of AUM value computed
on value of the assets (usually computed daily). The charge is capped at 1.35% of the
AUM .
(c) Policy administration charge – Charges to cover expenses other than PAC and FMC.
They are either expressed as a fixed amount or as a % of premium or sum assured.

Insurance
(d) Switching Charge – A charge levied on switching from one fund to another available
within the product.
(e) Mortality/morbidity charges – Cost of providing the life/health cover. The charge shall
represent only the pure risk charges for the cover offered and shall not include any
allowance for expenses or other parameters.
(f) Partial withdrawal charges, rider charges, and other miscellaneous charges.
IRDA had capped the maximum allowable reduction from the allowable gross investment
returns based on the elapsed term of the policy.
Table 29: Maximum allowable reduction in yield

The difference between gross and Number of Years elapsed since Maximum Reduction in Yield (Difference
net yield to customer capped, inception between Gross and Net Yield (% p.a.))
basis ownership period 5 4.00
6 3.75
7 3.50
8 3.30
9 3.15
10 3.00
11 & 12 2.75
13 & 14 2.50
15 & thereafter 2.25
Source: IRDAI
The net reduction in the yield at maturity shall be capped at:
(a) 3% for less than a ten-year policy term; and
(b) 2.25% for more than ten-year policy term.
The insurer shall provide illustration benefits to policyholder for gross returns of 4% and 8% and
corresponding net reduction in yield.

BFSI
Non-linked regulations
Minimum sum assured for non-linked products
Table 30: Minimum sum assured for non-linked products

Product Type Age of life assured less than 45 years Age of life assured more than 45 years
Single Premium Product Maximum of : Maximum of :
(i) 125% of the single premium (i) 110% of the single premium
(ii) Minimum guaranteed sum assured on (ii) Minimum guaranteed sum assured on
maturity maturity
(iii) Absolute amount assured on death (iii) Absolute amount assured on death
Other than Single Premium Maximum of : Maximum of :
Product
(i) 10x of the annualised premium (i) 7x of the annualised premium
(ii) 105% of all premiums paid till death (ii) 105% of all premiums paid till death
(iii) Minimum guaranteed sum assured on (iii) Minimum guaranteed sum assured on
maturity maturity
(iv) Absolute amount assured on death (iv) Absolute amount assured on death
(B) Any bonus/additional benefits as specified in the policy and accrued till the date of death
Source: IRDAI
Table 31: Minimum sum assured for non-linked products (contd.)

Age of life assured less than Age of life assured more than
Product Type 45 years 45 years
Single Premium Product Minimum 125% of the single Minimum 110% of the single
premium premium
Other than Single Premium Product (Regular Premium Maximum of : Maximum of :
including the limited premium paying products) (i) 10x of the annualised (i) 7x of the annualised
premium premium
(ii) 105% of all premiums paid (ii) 105% of all premiums paid
till death till death
(iii) 0.5*(70-Entry (iii) 0.25*(70-Entry
Age)*Annualised Premium Age)*Annualised Premium
(B) Death Benefits Assured

(i) The sum assured as agreed in the policy plus the balance in the policy account or
(ii) Higher of the sum assured as agreed in the policy or the balance in the policy account
In either case minimum sum assured must be at least 105% of all the premiums paid including top ups.
Source: IRDAI
Table 32: Minimum surrender value

Product with premium paying term Product with premium paying term
of 10 or more years of less than 10 years
Condition All premiums paid for at least 3 All premiums paid for at least 2
consecutive years consecutive years
Minimum Guaranteed surrender value (GSV)* Guaranteed surrender value (GSV)*
Guaranteed + Surrender value of any subsisting + Surrender value of any subsisting
Value bonus/guaranteed additions bonus/guaranteed additions
Source: IRDAI

Insurance
Table 33: Surrender value

Surrender period Surrender value
Between 2-3 years 30% of all premiums received less any survival benefits paid
Between 4-7 years 50% of all premiums received less any survival benefits paid
After 7 years Filed by insurer under File & Use for clearance
Between last 2 years of term (for less than 7 years 90% of all premiums received less any survival benefits paid
policy)
Table 34: Surrender value (contd.)

Surrender period Surrender value
Within 3 years 70% of all premiums received less any survival benefits paid
between 4-7 years 90% of all premiums received less any survival benefits paid
After 7 years Filed by insurer under File & Use for clearance
between last 2 years of term (for less than 7 years 90% of all premiums received less any survival benefits paid
policy)
Source: IRDAI
Participating products – Profit sharing

According to the distribution of surplus regulation, a life insurance company can reserve not
more than 10% of the surplus arising out of the valuation of assets and liabilities made for the
financial year on participating policies. In other words, the surplus for participating policies shall
be distributed among the policyholders and shareholders in the 90:10ratio.
Evolution of bancassurance as a distribution channel – the way it is today

To start with, we look at the basic difference between an insurance broker and an insurance
agent.
An insurance agent is any person/entity that represents the insurance company. As per the
earlier regulations, individual agent or corporate agents (including banks) could not represent
more than one insurance company. As an agent, the whole responsibility regarding the policy
lies with the insurance company, which can only reprimand the agent by cancelling their
licence.
An insurance broker, on the other hand, is the person/entity that represents the customer.
Brokers have a fiduciary responsibility towards the customer to help them choose between
various insurance policies from different insurers after assessing the best fit for the prospect.
Thus, a broker can simultaneously offer products from multiple agents.
Till 2013, banks could sell insurance policies as insurance agents. According to IRDA regulations
Open architecture regulations
on licensing of bancassurance agents, banks were not allowed to tie up with more than one life,
mooted banks as brokers and not
one non-life and one standalone health insurer.
just agents
However, to increase insurance penetration, insurance companies were demanding an open

architecture in the agency channel to allow banks to become agents for more than one life
insurers. Furthermore, growing importance of bancassurance as the distribution channel post-
2010 made non-bank promoted insurance companies push for an open architecture agency
model. Owing to these demands, the government in power then proposed that banks be
allowed to sell insurance policies as insurance brokers, as this would allow them to offer
insurance products by multiple insurers.

BFSI
Accordingly, IRDA came up with a new regulation to allow licensing of banks as insurance
Three insurers per bank mooted; brokers in August 2013. According to IRDA, banks as insurance brokers cannot do more than
no quantity restrictions 50% of their business with one customer. They also can’t do more than 25% of business with
the insurance company within the promoter group. Therefore, given the added burden of legal
responsibility and need for stricter compliance as a broker, most banks preferred to sell
insurance policies as agents (even though it meant they could sell it only for one insurer).
Presumably, banks having their own insurance company were less inclined to offer products of
multiple insurers as it would have hurt market shares of their respective insurance companies.
IRDA in March 2015 came up with draft guidelines for open architecture (for corporate agents),
which included provisions mandating corporate agents to tie up with at least two and at most
three life insurance companies. Furthermore, the maximum business with one single insurance
company was capped (90/75/60% in the first/second/third years and 50% thereafter).
The revised draft guidelines on the open architecture in May 2015 allowed corporate agents to
choose up to three insurers (no minimum limits) in a particular line of insurance business (i.e.
life, general, health). Furthermore, there were no limits on the maximum business from any
single insurer.

Insurance
COMPANIES

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THIS PAGE IS INTENTIONALY LEFT BLANK

INITIATING COVERAGE
`
ICICI PRUDENTIAL LIFE
Avoiding interest rate exposure
India Equity Research| Banking and Financial Services
EDELWEISS 4D RATINGS
ICICI Prudential Life (I Pru Life) is the third-largest Indian private life insurer
with APE market share of 17.7% (FY19). Given distribution strength, derived Absolute Rating BUY
primarily from bancassurance (~56% of total annual business) and Rating Relative to Sector Outperformer
augmented by a fairly large agency force, we see a clear runway to market Risk Rating Relative to Sector Low
share gain, especially if capital market sentiments remain supportive. VNB Sector Relative to Market Overweight
margin of 21% in H1FY20 has improved 1,160bps in the past three years on
account of operational improvements (persistency) as well as product mix
MARKET DATA (R:ICIR.BO, B: IPRU IN)
shift in favour of pure protection. We expect APE to post 10% CAGR over CMP : INR 509
FY19-22E and 390bps improvement in margin over the same period. Our 12 Target Price : INR 700
months’ target multiple of 3.6x FY21E P/EV yields target price of INR700. 52-week range (INR) : 523 / 277
Initiate coverage with ‘BUY’ and name it our top pick in the space. Key risk is Share in issue (mn) : 1,435.8
persistency drop due to multi-year capital market apathy. M cap (INR bn/USD mn) : 730 / 10,303
Avg. Daily Vol.BSE/NSE(‘000) : 2,338.3
Protection watchword, ULIPs staple
I Pru Life is an industry outlier in terms of focus on unit linked business (ULIP is 80% of SHARE HOLDING PATTERN (%)
FY19 APE) that stayed its course through the regulatory tightening starting 2010-11. Pure Current Q1FY20 Q4FY19
protection business has become a key focus area for the company and having risen from Promoters * 75.0 75.0 75.0
~5% of new business premiums in FY16 to 21% in FY19, a big margin boost. Despite MF's, FI's & BK’s 6.7 6.3 6.5
weak revenue momentum in savings businesses, the company continues to spend FII's 12.1 13.7 12.3
heavily in advertainment & promotion of pure protection products. Others 6.2 5.0 6.2
* Promoters pledged shares : NIL
(% of share in issue)
Attractive valuation due to relative top line weakness
The stock trades at 2.6x FY21E P/EV, by far the cheapest amongst the Big Three private life PRICE PERFORMANCE (%)
insurers, by dint of its recent market share loss. A ULIP-heavy top line is prone to natural Stock over
Sensex Stock
and frequent capital market-linked volatility. However, we believe this is an opportunity Sensex
rather than an irritant. ULIPs are pass-through on risk and top-line gyrations are, in terms 1 month 5.4 8.6 3.2
of potential impact on net profit, high frequency low amplitude noise. 3 months 8.2 26.6 18.4
12 months 14.7 47.2 32.5
Outlook and valuation: Lowest risk balance sheet; initiate with ‘BUY’
Apart from market risk pass through on ULIPs, I Pru Life is also protected by its steadfast
refusal to join the non-par savings bonanza in the current fiscal. While players like HDFC
Life and SBI Life have gone to great lengths to explain their interest rate hedges, I Pru Life
remains cocooned from any failure to mange a rate drop. We initiate coverage with ‘BUY’
and target price of INR700.
Financials Santanu Chakrabarti
Year to March FY19 FY20E FY21E FY22E +91 22 4342 8680
APE 73,171 71,308 82,140 98,068 santanu.chakrabarti@edelweissfin.com
PAT 11,389 9,664 12,313 12,908
Vinayak Agarwal
Diluted EPS (INR) 7.9 6.7 8.6 9.0 +91 22 6620 3020
VNB margin (%) 18.1 20.5 21.5 22.0 vinayak.agarwal@edelweissfin.com
Embedded value (INR bn) 216.2 245.5 279.2 319.3
Operating RoEV (%) 20.2 15.7 16.1 16.6
P/EV (X) 3.4 3.0 2.6 2.3 November 04, 2019
Edelweiss Research is also available on www.edelresearch.com,

61 First Call, Reuters and Factset. EdelweissSecurities
Edelweiss SecuritiesLimited
Limited
Bloomberg EDEL <GO>, Thomson
Insurance
Product choices underscore conservatism
ULIPs have been staple; protection latest push
Up until the regulatory changes in 2011, ULIPs had become the dominant game in town for all
prominent private insurers. As large scale rationalisation happened, on account of new
regulations, most players reduced their exposure to this product (not always voluntarily). I Pru
Life was one of the few companies that continued to bet heavily on this product.
Fig. 1: Composite growth breakdown (NBP) shows ULIP/ protection focus

FY16 FY19 FY22
INR mn CAGR INR mn CAGR INR mn
Mix (%) 2017-19 Mix (%) 2019-22 Mix (%)
6,922 (1.8)% 6,554 15.5% 10,104

Par Product
10.2% 6.3% 6.0%
1,927 60.6% 7,981 59.4% 32,322

Non-Par Product
2.8% 7.7% 19.3%
3,130 89.7% 21,370 30.0% 46,950

Protection 4.6% 20.6% 28.1%
55,678 6.8% 67,739 4.8% 77,896

Linked 82.3% 65.4% 46.6%
As the chart above shows, our growth assumption for the company’s NBP is fairly moderate
and builds in a slow ULIP revenue momentum recovery from the middle of FY21.
One of the key areas of focus for I Pru Life has been pure protection, which has been a key part
of the company’s margin expansion story in the past few years.
Chart 1: Impressive pure protection scale up in mix should continue…

30.0
24.0
18.0
(%)
12.0
6.0
0.0
FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Protection (On the basis of NBP)

ICICI Prudential Life Insurance
Chart 2: …driven by heady growth rates
50.0
40.0
30.0
(INR bn)
20.0
10.0
0.0
FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Protection NBP
Chart 3: Scaled up fast as a percentage of APE as well due to significant retail

10.0
8.0
6.0
(%)
4.0
2.0
0.0
FY16 FY17 FY18 FY19
Protection APE (%)
Chart 4: Pure protection growth driven by retail protection

8.0
6.4
4.8
(INR bn)
3.2
1.6
0.0
FY18 FY19
Group term Credit life Retail protection

Insurance
The company, despite the recent weak revenue momentum in the overall business, is unlikely
to step off the gas on promotional expenditure. This expenditure is mostly related to its pure
protection product and underscores the company’s commitment to doing even more in the
segment.
Chart 5: Ad expenses are aggressive, but yielding results

7,500 30.0
6,000 24.0
4,500 18.0
(INR mn)
(%)
3,000 12.0
1,500 6.0
0 0.0
Advertisement expenses Advertisement exp. as a % of total operating exp.
Source: Company
I Pru Life has practically stayed away from non-par savings products and its commentary does
not suggest any realignment despite recent success of HDFC Life and SBI Life.
Chart 6: APE mix shows reluctance for non-par savings exposure

100.0
80.0
60.0
(%)
40.0
20.0
0.0
ULIP Participating Protection Non Participating Group
Source: Company
Market share loss in recent past

Given: (i) the slowdown in ULIP business overall; (ii) buoyancy in non-par savings products
(annuity and deferred annuity); and (iii) the company’s own move to rationalise exposure to
the high net worth customer exposure within its product portfolio, I Pru Life has lost market
share in the last year. However, the company remains committed to its product strategy and a
non-par savings entry of mix consequence appears unlikely.

Chart 7: RWRP market share has reduced in past two years
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Market share (on the basis of RWRP) - Within private sector
Source: Company

Insurance
Bancassurance still dominant distribution play
Chart 8: Banca is still king
Corporate Group (includes
agents and Group
brokers protection)
6% 5%
Direct
12%
Bancassurance
56%
Agency
21%
Source: Company
Chart 9: Five-year evolution of channel mix shows reliable gains for direct channel
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Bancassurance Agency
Direct Corporate agents and brokers
Group (includes Group protection)
Source: Company
Agency channel has made significant productivity gains post headcount rationalisation, which
began in the earlier parts of the decade.

Chart 10: Agent productivity has improved immensely
1,50,000
1,30,000
1,10,000
(INR)
90,000
70,000
50,000
FY13 FY14 FY15 FY16 FY17 FY18 FY19
Agent producitivity
Source: Life Insurance Council, IRDA
Chart 11: Number of agents has also increased post 2015 (sharp drop from 2010-15)
2,00,000
1,80,000
1,60,000
(Nos.)
1,40,000
1,20,000
1,00,000
Total individual agents
Source: Life Insurance Council

Insurance
Making significant strides in technology adoption
I Pru Life has been investing heavily into technology for over a decade. Over the past few
years, digitisation has given way to AI.
Fig. 2: The technology & systems journey started early
Source: Company
Fig. 3: At current stage, business intelligence, and not just efficiency, is the goal
Source: Company

A story of dramatic margin expansion
Improved persistency, notwithstanding recent blip

I Pru Life’s margin bore the brunt of reduced business volumes in 2010-15; both from lower
levels of new business as well as accelerated lapsation due to agent mortality as well as
product regulation evolution. The effect of this was most pronounced on I Pru Life than
proximate peers who diversified away from ULIP much more emphatically.
However, with regulations having stabilised the business and indeed having made the ULIP
product more competitive on life time customer charges basis against a mirrored synthetic
combination of term insurance and a similar tenure/tenure size mutual fund SIP, an arguably
more patient class of customers has driven persistency improvements for the company on a
consistent basis. Changing the sales culture of its agency channel, monitoring and relentless
focus on renewals has delivered a dramatic improvement in persistencies.
Chart 12: Persistency trends upward for past five years across buckets
100.0
80.0
60.0
(%)
40.0
20.0
-
13th month 25th month 37th month 49th Month 61st month
Chart 13: Persistency improvement more in high buckets

100.0 100.0
90.0 90.0
80.0 80.0
(%)
(%)
70.0 70.0
60.0 60.0
50.0 50.0
ULIP - 13th month ULIP - 49th month Par - 13th month Par - 49th month
Source: Company

Insurance
Chart 14: Protection and non-par near term persistency drop not as damaging as ULIP
100.0 100.0
90.0 90.0
80.0 80.0
(%)
(%)
70.0 70.0
60.0 60.0
50.0
50.0
FY17 FY18 FY19
FY17 FY18 FY19
Non- Par - 13th month Non- Par - 49th month Protection - 13th month Protection - 49th month
Source: Company
The realignment of its customer portfolio has led to a marginal drop in persistency in the
recent quarter, although current performance still remains above actuarial assumptions for EV
calculation.
Chart 15: Recent quarterly drop in persistency is from target segment realignment
90.0
88.0
86.0
(%)
84.0
82.0
80.0
Q3FY17
Q4FY17
Q1FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q4FY19
Q1FY20
Q2FY20
Q2FY18
Q3FY19
13th month persistency

Source: Company
Cost ratios have improved, recent drop from advertisement expense

Pure operating leverage and scale benefits have also played a role in margin expansion.
Bancassurance is fundamentally a more fixed cost intensive model than agency – at both the
level of distribution as well as internal resource allocation to manage/oversee that
distribution. Thus a business model more reliant on bancassurance than agency is always a
larger beneficiary of operating leverage than one reliant on external agency source.

Chart 16: Cost to total premium has dropped…
14.0
12.4
10.8
(%)
9.2
7.6
6.0
Operating cost as a % of premium
Source Company:
Chart 17: …as has cost to NBP, operating leverage at play

40.0
36.0
32.0
(%)
28.0
24.0
20.0
Operating cost as a % of NBP
Source: Company
Mix shift in favour of pure protection has helped margin

I Pru Life has been focussing heavily on the pure protection business in the past five years.
Industry feedback and our earlier rough cut calculations indicate that pure protection business
can have 70-80% margin, depending on the cost structure of the individual player writing the
business and mortality experience.

Insurance
Chart 18: Pure protection as a percentage of APE has risen sharply
10.0
8.0
6.0
(%)
4.0
2.0
0.0
FY16 FY17 FY18 FY19
Protection APE (%)
Source: Company
Margin to trend up further

We expect margin to trend up driven by further shift in product mix towards protection,
muted growth in the ULIP portfolio due to persistently weak market conditions and some
incremental cost rationalisation as ULIP volumes pick up.
Chart 19: VNB margin to improve due to rising share of protection

25.0
20.0
15.0
(%)
10.0
5.0
0.0
VNB margin

Valuation: Appears rather attractive

Steady state ROEV of ~18%
Table 1: EV walkthrough shows stable compounding at 14%

Opening EV 1,39,390 1,61,840 1,87,880 2,16,240 2,45,522 2,79,166
Unwind 12,210 13,720 15,840 18,380 20,869 23,729
NBP 6,660 12,860 13,280 14,618 17,660 21,575
Opex assumption changes 1,000 7,640 4,200 - - -
Persisitensy Variance 990 1,530 2,660 - - -
Mortality & Morbidity variance 980 780 1,970 900 1,000 1,000
Expense variance 350 270 40 - - -
Other Variance 760 - 20 22 24 27
Economic assumption Change & Investor variance 5,820 1,130 -1,220 - - -
Net Capital Injection -6,320 -11,880 -8,430 -4,639 -5,910 -6,196
Closing EV 1,61,840 1,87,880 2,16,240 2,45,522 2,79,166 3,19,301
Chart 20: EV is likely to continue to increase steadily

400
320
240
(INR bn)
160
80
0
Embedded value

Insurance
Table 2: EV sensitivity mostly relates to acquisition expenses
Scenario % change % change
VNB EV
Increase in 100 bps in the reference rates (4.3) (2.0)
Decrease in 100 bps in the reference rates 4.4 2.0
10% increase in the discontinuance rates (8.5) (1.3)
10% decrease in the discontinuance rates 8.9 1.4
10% increase in mortality/morbidity rates (9.4) (1.4)
10% decrease in mortality/morbidity rates 9.4 1.4
10% increase in acquisition expenses (13.0) -
10% decrease in acquisition expenses 13.0 -
10% increase in maintenance expenses (3.6) (0.9)
10% decrease in maintenance expenses 3.6 0.9
Tax rates increased to 25% (7.5) (4.0)
Source: Source: Company
Chart 21: ROEV will slowly trend up; ULIP spurt could accelerate
25.0
20.0
15.0
(%)
10.0
5.0
0.0
Operating RoEV
Source: Source: Company, Edelweiss research

Chart 22: 18% VNB CAGR estimated in next three years
30.0
24.0
18.0
(IRN bn)
12.0
6.0
-
Value of new business (VNB)
Source: Source: Company, Edelweiss research

CMP TP Mkt Cap P/EV P/E Operating RoEV RoE
Company Rating
(INR) (INR) (INR bn) FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E
ICICI Prudential BUY 509 700 730.3 3.0 2.6 75.6 59.3 15.7 16.1 13.4 16.0
HDFC Life HOLD 613 590 1,236.1 5.7 4.9 97.3 77.0 19.1 18.9 21.2 23.1
SBI Life BUY 998 1,220 997.5 3.8 3.3 106.9 75.0 17.2 17.7 11.8 15.2
Max Financial HOLD 404 450 108.8 1.5 1.3 22.6 24.8 19.2 19.2 23.4 20.0
Target price INR700; top BUY in the space

In a sector where the leaders carry low balance sheet risk, as we mentioned before, I Pru Life
stands out as perhaps a player with the lowest risk balance sheet. This is because of high
proportion of unit-linked business, where most risks are pass through and high levels of
capitalisation (solvency >2x of regulatory requirement). Based on this, we believe that 10.5% is
a good estimate for its cost of equity. For reference, our cost of equity assumptions for a pure
mortgage business (financing salaried customer’s first home purchase for self ownership at a
safe LTV and EMI to disposable income ratio, safest credit category) will be 12% and probably
12.5% for a well-diversified pure retail bank.
Based our arguments in the earlier part of the report, a steady state ROEV of about 18% and
CoE of ~11.5%, we assign 3.3x one-year forward P/EV fair multiple. For a 12-months target
multiple, this works out to 3.6x FY21E P/EV. This leads to target price of INR700. We initiate
coverage with ‘BUY’ recommendation and it is our top pick in the space.

Insurance
Company Description
I Pru Life is consistently rated as one of the top players in India’s life insurance sector on the
basis of APE as well as NBP. It was set up in FY01 as a joint venture between ICICI Bank and
Prudential Corporation Holdings. It offers long-term savings (linked, participating and non-
participating) and protection products (individual life, credit cover and group life) to meet
different life stage requirements of customers. The company was also the first insurance
player in India to be listed on NSE and BSE in FY17.
The company reported AUM of INR1,640bn at Q1FY20 end and a solvency ratio of 217%,
well above the regulatory threshold of 150%. It has a market share of 10.0% of the industry
and 17.2% of the private sector on a retail weighted received premium (RWRP) basis for
Q1FY20.
I Pru Life has the highest exposure to ULIPs among leading life insurers with 80% of total APE
for FY19. The residual consists of protection (9.3%), participating (8.6%), annuity (0.9%) and
others. On the distribution front, while bancassurance contributes more than half of total
APE (55.8%), balance comes from agency (21.7%), direct (12.0%) and others (corporate
agents, brokers and group business).
Strategy of the company is to create value for stakeholders, namely, customers, employees
and shareholders. It also aims to grow the absolute Value of New Business (VNB) through 4P
levers—premium growth, protection focus, persistency improvement and productivity
enhancement.
Chart 23: Shareholding pattern (as on Q2FY20) Table 4: Top public shareholding (current)
Domestic Others Top public shareholders (%)
institutions 4%
(MF, SBI Funds Management 3.1
Insurance, FI ICICI Bank Apex Trust 2.5
& AIF) 53% Temasek (through Compassvale Investments) 2.0
7%
Franklin Resources 0.8
Foreign Vanguard Group 0.8
Institutions Baillie Gifford & Co 0.7
(FC, FII & FPI) Aditya Birla Sun Life Asset Management 0.5
& NRI
14% Nomura Holdings 0.5
Morgan Stanley 0.4
Credit Agricole Group 0.4
Prudential
Corp
22%
Source: BSE Filings, Bloomberg

Key Management
Mr. N. S. Kannan, Managing Director & CEO: Mr. Kannan is a post graduate in management
from IIM Bangalore as well as a Chartered Financial Analyst (ICFAI). He has been associated
with the ICICI Group for more than 28 years. During his tenure at the ICICI Group, he has
handled Project Finance, Infrastructure Finance, Structured Finance and Treasury functions.
Mr. Kannan was Executive Director & CFO of ICICI Bank from May 2009 to October 2013.
Prior to this, he was Executive Director of ICICI Prudential Life Insurance from August 2005
to April 2009. Before this, Mr. Kannan was the Chief Financial Officer and Treasurer of ICICI
Bank. In 2015, he was inducted as a member of the CFO Hall of Fame by CFO India
publication for an exemplary career and contribution to the world of finance. In 2013, he
was also voted the Best CFO in India by Finance Asia and adjudged Best CFO in the Indian
banking/financial services sector at the CNBC TV 18 CFO Awards in 2012 and 2013.
Mr. Puneet Nanda, Deputy Managing Director: Mr. Puneet Nanda is a post graduate in
management from IIM Lucknow. He has been with the company since inception and on the
company’s Board as Executive Directors since 2010. He was elevated as Deputy Managing
Director in 2018 and is currently responsible for overseeing various functions including Sales
& Distribution, Product Design & Management, Brand & Marketing, Investment
Management, Digitalisation & Technology, Customer Service & Operations and
Underwriting & Claims. Mr. Nanda is also a Director on the Board of ICICI Prudential Pension
Funds Management Company, one of the pension fund managers in the New Pension
Scheme (NPS) of the Government of India. His experience spans more than two decades in
financial services having worked in ICICI Securities and J.P. Morgan prior to joining ICICI
Prudential.
Mr. Satyan Jambunathan, Chief Financial Officer: Mr. Satyan Jambunathan is a fellow
member (FIAI) of the Institute of Actuaries of India and received his undergraduate degree
from the University of Madras. He joined the company in August 2000 as an actuary and
went on to become the Chief Actuary in June 2013. He was appointed as the CFO in June
2016. Prior to joining ICICI Prudential, Mr. Jambunathan worked with LIC for seven years as
an actuarial assistant.
Table 5: Board of Directors

Name of Director Designation
Mr. M. S. Ramachandran Non-Executive Chairperson
Mr. N. S. Kannan Managing Director & CEO
Mr. Puneet Nanda Deputy Managing Director
Mr. Anup Bagchi Non-Executive - Non Independent Director
Mr. Sandeep Batra Non-Executive - Non Independent Director
Mr. Raghunath Hariharan Non-Executive - Non Independent Director
Mr. V. Sridar Non-Executive - Independent Director
Mr. Dilip Karnik Non-Executive - Independent Director
Mr. Radhakrishna Nair Non-Executive - Independent Director
Mr. Dileep Choksi Non-Executive - Independent Director
Ms. Vibha Paul Rishi Non-Executive - Independent Director
Source: BSE filings, Company

Insurance
Fig. 4: Evolution of ICICI Prudential Life
Source: Company

Financials
Assumptions Income statement (INR mn)

Year to March FY19 FY20E FY21E FY22E Year to March FY19 FY20E FY21E FY22E
GDP(Y-o-Y%) 6.8 6.8 7.1 7.2 Net Premiums Earned 305,783 323,946 338,811 371,103
G-sec yield (%) 7.0 6.8 6.5 6.4 Income from Investments 102,144 125,931 136,989 149,507
Repo rate (exit rate) 6.3 5.3 5.0 5.0 Others 6,075 884 972 1,069
NBP growth traditional regular (0.2) 55.0 28.4 29.7 Total Income 414,003 450,761 476,772 521,680
NBP growth linked regular (6.0) (16.0) 10.0 15.0 Commission expense 15,513 19,599 22,457 25,296
NBP growth single premium (%) 82.5 50.5 22.8 22.9 Operating Expenses 26,053 29,406 31,038 34,070
Investment yield on AUM (%) 7.3 7.9 7.9 7.9 Other exp. & provisions (inc. tax) 7,482 8,445 8,914 9,785
Benefits paid as a % of Opening 10.8 14.9 14.9 14.9 Benefits Paid 141,885 226,920 249,971 272,167
Operating exp. as a % of Premiums 13.4 15.0 15.5 15.7 Bonus Paid 706 918 1,194 1,552
Tax rate (%) 1.9 14.0 14.0 14.0 Change in Valuation Liability 210,030 153,672 147,975 163,669
Total Expenses 401,670 438,961 461,550 506,538
Surplus from Revenue account 12,333 11,800 15,223 15,141
Funds for Future appropriation 1,562 1,180 1,522 1,514
Transfer to shareholders account 10,770 10,620 13,700 13,627
Other items and contribution 842 617 617 1,382
PBT 11,612 11,237 14,317 15,009
Tax 223 1,573 2,004 2,101
PAT 11,389 9,664 12,313 12,908
Important ratios
Year to March FY19 FY20E FY21E FY22E
APE growth (%) -6.1 -2.5 15.2 19.4
First Year Regular Premium growth (%)-5.1 -5.1 14.6 19.1
Single Premium growth (%) 82.5 50.5 22.8 22.9
Operating exp. as a % of Premiums 13.4 15.0 15.5 15.7
-Commision as a % of Premiums 5.0 6.0 6.5 6.7
-Other op. exp. as a % of Premiums 8.4 9.0 9.0 9.0
VNB growth (%) 3.3 10.1 20.8 22.2
Tax rate (%) 1.9 14.0 14.0 14.0
PAT growth (%) -29.7 -15.2 27.4 4.8

Insurance
Balance Sheet (INR mn) Embedded Value

As on 31st March FY19 FY20E FY21E FY22E Year to March FY19 FY20E FY21E FY22E
Shareholders Funds 70,423 73,936 80,339 87,051 Opening EV 187,880 216,240 245,522 279,166
Share Capital 14,358 14,358 14,358 14,358 Discount unwind 15,840 18,380 20,869 23,729
Reserves & Surplus 54,353 59,379 65,781 72,493 NBV 13,280 14,618 17,660 21,575
Fair Value Change Account 1,712 200 200 200 Operating variance 8,870 900 1,000 1,000
Others 0 0 0 0 Other variance 20 22 24 27
Policyholders Liabilities 1,512,803 1,666,474 1,814,449 1,978,118 EV bef capital changes 225,890 250,161 285,076 325,496
Traditional 403,351 487,517 574,548 676,706 Net capital injection (8,430) (4,639) (5,910) (6,196)
Linked 1,036,999 1,102,882 1,160,022 1,217,540 Economic Assumption Change -1,220 - - -
Funds for discon. policy 72,452 76,075 79,879 83,873 Closing EV 216,240 245,522 279,166 319,301
Funds for Future 10,992 11,524 13,046 14,560 RoEV (%) 19.6 15.7 16.1 16.6
Total Liabities 1,594,218 1,751,935 1,907,835 2,079,730 Operating RoEV 20.2 15.7 16.1 16.6
Investments 1,590,031 1,726,835 1,883,014 2,055,534
Shareholders 79,861 88,724 96,407 104,461 Valuation drivers
Policyholders-Non Linked 400,712 502,143 591,785 697,007 Year to March FY19 FY20E FY21E FY22E
Linked Liabilities 1,109,458 1,135,968 1,194,823 1,254,066 VNB Margins (%) 18.1 20.5 21.5 22.0
Other Assets 4,187 25,100 24,820 24,196 EV growth (%) 15.1 13.5 13.7 14.4
Debit balance of P/L 0 0 0 0 Op RoEV (%) 20.2 15.7 16.1 16.6
Total Assets 1,594,218 1,751,935 1,907,835 2,079,730 Payout Ratio (%) 61.8 40.0 40.0 40.0
Valuation metrics
Diluted PE (x) 64.1 75.6 59.3 56.6
Price/BV (x) 10.4 9.9 9.1 8.4
Price/EV (x) 3.4 3.0 2.6 2.3
Dividend yield (%) 1.0 0.5 0.7 0.7

Additional Data
Directors Data
Name of the director Designation Name of the director Designation
Mr. M. S. Ramachandran Non-Executive Chairman Mr. N. S. Kannan Managing Director & CEO
Mr. Puneet Nanda Deputy Managing Director Mr. Anup Bagchi Non-Independent Director
Mr. Sandeep Batra Non-Independent Director Mr. Raghunath HariharanNon-Independent Director
Mr. V. Sridar Independent Director Mr. Dilip Karnik Independent Director
Mr. Radhakrishna Nair Independent Director Mr. Dileep Choksi Independent Director
Ms. Vibha Paul Rishi Independent Director
Auditors - BSR & Co. LLP

Walker Chandiok & Co LLP
*As per company information
Holding - Top 10
% Holding % Holding
SBI Funds Management 3.11 Apex Trust 2.50
Temasek (through Compassvale Investments) 2.00 Franklin Resources 0.77
Vanguard Group 0.76 Baillie Gifford & Co 0.68
Aditya Birla Sun Life Asset Management 0.54 Nomura Holdings 0.49
Morgan Stanley 0.36 Credit Agricole Group 0.35
*as per latest available data
Bulk Deals
Date Acquired/Seller B/S Qty traded Price
*in last one year
Insider Trades
Date Acquired/Seller B/S Qty traded
8-Aug-18 Mr. Sandeep Batra Sell 25,000
8-Jan-19 Amit Palta Sell 18,000
8-Jan-19 Anita Sudhir Pai Sell 83,900
14-Jan-19 Sujit Ganguli Sell 15,000
28-May-19 Bhawani Singh Pathania Sell 71,875
31-Jul-19 Puneet Nanda Sell 30,000
6-Aug-19 Jitendra Arora Sell 18,250
3-Sep-19 Puneet Nanda Sell 20,000
4-Sep-19 Puneet Nanda Sell 30,000
11-Sep-19 Judhajit Das Sell 20,000
* These are the last ten trades

INITIATING COVERAGE
`
HDFC LIFE INSURANCE
Unrivalled innovation champion
HDFC Life is the third-largest private life insurer in India with an individual EDELWEISS 4D RATINGS
APE market share of 12.5% (FY19). It has been the unrivalled innovation Absolute Rating HOLD
champion in life insurance—particularly adoption of pure protection Rating Relative to Sector Performer
products and, lately, highly successful introduction of retirement planning Risk Rating Relative to Sector Medium
offerings (Sanchay and Sanchay Plus). The stock is trading at 4.9x FY21E Sector Relative to Market Overweight
P/EV, by far the highest among peers. We assign 10% premium to our 12-
months’ fair target multiple of 4.4x FY21E P/EV considering the inherent
MARKET DATA (R:HDFL.BO, B:HDFCLIFE IN)
value creation opportunity (not captured by its current fundamentals), its
CMP : INR 612
pension presence and prescient capacity build-up in a white space
Target Price : INR 590
(retirement planning). Initiate with ‘HOLD’ and TP of INR590. 52-week range (INR) : 646 / 345
Share in issue (mn) : 2,017.7
Fundamentals: Likely to stay strong M cap (INR bn/USD mn) : 1,235 / 17,397
HDFC Life has logged 19% APE CAGR over FY16–19. Its VNB margin, 27.5% in H1FY20, has Avg. Daily Vol.BSE/NSE(‘000) : 3,954.7
improved 550bps over the past three years on account of operational improvements (such
as greater persistency) and a shift in product mix towards non-par policies. Over FY19–22, SHARE HOLDING PATTERN (%)
we estimate the company’s APE to expand 10.8% CAGR and margin to rise 250bps. Current Q1FY20 Q4FY19
Promoters * 71.2 74.5 76. 1
Product, distribution and technology: The holy trinity MF's, FI's & BK’s 4.4 4.2 2.8
While the scale advantage of its tie-up with HDFC Bank is undeniable, none of HDFC Life’s FII's 15.9 11.8 10.5
products seems to be a channel monopoly. The heart of this flexible model is its Others 8.5 9.5 10.6
investment into technology, which is moving beyond being a business enabler onto a
(% of share in issue)
business driver (via analytics). The synergistic combination of product, distribution and
technology is delivering tremendous revenue momentum and market share gains for PRICE PERFORMANCE (%)
HDFC Life in spite of a muted market environment.
Stock over
Sensex Stock
Sensex
Outlook & valuation: ROEV to normalise down; initiate with ‘HOLD’
1 month 5.4 3.3 (2.1)
We project a steady state ROEV of 19–20% as the benefits of margin expansion from the
3 months 8.2 24.0 15.8
shift in mix and significant market share gain gradually ran their course. Three things have
12 months 14.7 64.7 50.0
helped the company manage reinvestment risk in a deferred interest guarantee product:
i) excess asset duration on earlier credit protection portfolio; ii) partially paid-up
debenture borrowing programmes of certain corporate; and iii) opportunities in the
fledgling forward-rate agreement market. These avenues are finite in capacity and
appetite. The growth rate on the reasonably high margin non-par savings will fall off
sooner rather than later and anchor ROEV to a more down to earth 20%. We initiate
coverage with ‘HOLD’ and TP of INR590.
Financials Santanu Chakrabarti
santanu.chakrabarti@edelweissfin.com
APE 62,600 70,807 77,186 85,244
PAT 12,768 12,710 16,046 18,048 Vinayak Agarwal
Diluted EPS (INR) 6.3 6.3 8.0 8.9 +91 22 6620 3020
vinayak.agarwal@edelweissfin.com
VNB margin (%) 24.6 27.5 29.0 30.0
Embedded value (INR bn) 183 215 253 296
Operating RoEV (%) 20.1 19.1 18.9 18.6
November 04, 2019
P/EV (X) 6.8 5.7 4.9 4.2
82 First Call, Reuters and Factset. EdelweissSecurities
Edelweiss SecuritiesLimited
Limited
Bloomberg EDEL <GO>, Thomson
HDFC Life Insurance
Undisputed product innovation leader

Diversification: The cornerstone of its strategy
HDFC Life was the early mover in the pure protection business and deserves the lion’s share of
the credit for developing this business line in India. More recently, the life insurer entered into
the retirement products business.
Fig. 1: A glimpse of product brochure of recently launched non-par product
Source: Company
Fig. 2: Sustained product innovation track record
Source: Company

Insurance
The company’s approach to product innovation is focused on meeting customer needs,
subject to:
 regulatory clarity and approval;
 requisite risk management infrastructure (financial) being in place;
 technological preparedness; and
 natural limits imposed by its overarching strategy of diversification.
Fig. 3: Addressing customer lifecycle product needs across all stages of life
Source: Company
Diversification remains the cornerstone of the company’s business strategy. We expect:
 the relatively small participatory product business to now grow slightly faster;
 the pure protection business to post CAGR of 25% over the next three years, a little lower
than our expectation for ICICI Pru Life and SBI Life as the base (but its weighting in the
overall mix is much higher); and
 non-participatory products business, driven recently by the introduction of retirement
products Sanchay and Sanchay Plus, will not clock very high growth given the high base.

HDFC Life Insurance
Fig. 4: Composite growth breakdown (on NBP basis)
FY16 FY19 FY22
Mix (%) 2016-19 Mix (%) 2019-22 Mix (%)
9,803 (4.0) % 8,683 5.4 % 10,168

Par Product
15.1% 5.8% 4.9%
15,542 60% 63,698 6.5 % 76,854

Non-Par Product
24% 42.5% 37.2%
11,158 53.6 % 40,423 24.8 % 78,521

Protection 17.2% 27% 38%
28,369 9.2% 36,911 3.6 % 41,089

Linked 43.7% 24.7% 19.9%
As the chart above shows, our growth assumption for the company’s NBP is moderate.
Chart 1: Pure protection composition break down between group and individual
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY17 FY18 FY19 1H'FY20
Group credit protection Retail/Individual protection (term)
Source: Company

Insurance
Chart 2: Individual APE mix shows a balanced product structure
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY17 FY18 FY19
Par Non Par savings ULIP Protection
Source: Company
Market share gains: Impressive so far

HDFC Life has gained significant market share in the recent past fuelled by: i) introduction of
extremely successful retirement products with practically no competition; and ii) a diversified
product portfolio & multiple channels, which helped it skirt market sentiment-driven
slowdown in ULIPs.
Chart 3: HDFC Life—APE market share over the years

16.0
15.0
14.0
(%)
13.0
12.0
11.0
Market share on the basis of Individual WRP (private sector)
Source: Company

HDFC Life Insurance
Chart 4: HDFC Life—New business market share over the years
22.0
20.0
18.0
(%)
16.0
14.0
12.0
Market share on the basis of NBP (private sector)
Source: Company

Insurance
Distribution and technology investments paying off
Truly multilateral distribution play

As we have argued earlier, the tie-up with HDFC Bank is of course a game-changer for the
insurer. That said, HDFC Life has invested heavily in developing other channels too, including a
potentially high long-term value proprietary channel.
Chart 5: Bancassurance remains most important channel
Direct
19%
Broker
4%
Agency
13% Bancassurance
64%
Source: Company
Chart 6: Evolution of distribution channel

100.0
80.0
60.0
(%)
40.0
20.0
0.0
Group Savings Group Protection Banca and brokers Proprietary - Agency & direct
Source: Company
While ULIPs, understandably, are mostly a bancassurance-dominated business with least

amount of business coming from the agency channel, none of HDFC Life’s offerings appear to
be ‘channel-exclusive’.

HDFC Life Insurance
Chart 7: No channel has product hegemony
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Banca Agency Direct Online
ULIP Par Non Par savings Protection Annuity
Source: Company
Even the much-maligned agency channel has notched up productivity gains post-headcount
rationalisation, which began in the earlier parts of the decade.
Chart 8: Gradual build up of the agency channel in recent years...

1,00,000
90,000
80,000
(Nos.)
70,000
60,000
50,000
No of agents
Source: Life insurance council

Insurance
Chart 9: ... coupled with stable productivity level
1,25,000
1,05,000
85,000
(INR)
65,000
45,000
25,000
Agent producitivity
Source: IRDA, Edelweiss research
Focus on the proprietary channel and the digital platform will continue. Consulting major BCG
and industry body FICCI’s latest insurance customer survey shows a clear shift towards
customer empowerment on the internet. This will be the future for most non-complex non-
customised products in our view.
Fig. 5: Customer digital maturity increasing
Source: BCG report

HDFC Life Insurance
Technology: Business enabler; Artificial intelligence: Work in progress

The company has invested heavily in upgrading its technological capabilities to build ‘the
insurance model of tomorrow’. However, as the CEO said during the latest earnings call, much
more needs to happen in terms of customer retention and intelligence, beyond the ease of
business operation.
Fig. 6: HDFC Life—Latest 360 degree technology strategy
Source: Company
Fig. 7: HDFC Life—Building blocks of technology-based business approach
Source: Company

Insurance
Investments reflect in operating efficiencies
The company’s persistency ratios and cost efficiency metrics show it is reaping the benefits of
its distribution and technology initiatives. However, while appraising HDFC Life’s persistency,
do keep in mind its high proportion of single premium products, wherein persistency is 100%
by default!
Chart 10: Persistency ratios have improved across all cohorts

100.0
80.0
60.0
(%)
40.0
20.0
0.0
13th month 25th month 37th month 49th month 61st month
Source: Company
Chart 11: Share of single premium products has been on the rise
40.0
35.0
30.0
(%)
25.0
20.0
15.0
10.0
Single premium as a % of total premium

HDFC Life Insurance
Chart 12: Product persistency across different products
Savings traditional Savings unit-linked Protection
100.0 100.0 100.0
88.0 88.0 88.0
76.0 76.0 76.0
(%)
(%)
(%)
64.0 64.0 64.0
52.0 52.0 52.0
40.0 40.0 40.0

13th month 25th month 37th month 13th month 25th month 37th month 13th month 25th month 37th month
49th month 61st month 49th month 61st month 49th month 61st month
Chart 13:Op cost increase due to tech investments & reduced ULIP
15.0
13.8
12.6
(%)
11.4
10.2
9.0

Insurance
Chart 14: Same pattern reflected in new business premium economy
30.0
28.8
27.6
(%)
26.4
25.2
24.0

HDFC Life Insurance
Valuation: Appears to be rich

Margin to trend up; ROEV steady within 19–20%
We expect margin to trend up driven by shift in product mix towards non-par policies, muted
growth in the ULIP portfolio due to persistently weak market conditions and some further cost
rationalisation.
Chart 15: Improving VNB margin due to optimum product mix and gain in market share
32.0
29.6
27.2
(%)
24.8
22.4
20.0
VNB margin
Table 1: Embedded value walkthrough

Opening EV 102,300 124,700 152,160 183,010 215,293 252,511
Unwind 9,440 10,440 13,030 15,556 18,300 21,463
NBP 9,200 12,820 15,370 19,472 22,384 25,573
Opex assumption changes 690 1,580 - - - -
Persisitensy Variance 570 600 2,210 - - -
Mortality & Morbidity variance 1,100 1,000 - - - -
Expense variance 600 390 - - - -
Other Variance 680 - - - - -
Economic assumption Change & Investor variance 2,480 2,590 3,610 - - -
Net Capital Injection (2,360) (1,960) (3,370) (2,745) (3,466) (3,898)
Closing EV 124,700 152,160 183,010 215,293 252,511 295,649

Insurance
Chart 16: Embedded value expected to compound at a steady 17-18%
400
320
240
(INR bn)
160
80
0
Embedded value (EV)
Fig. 8: EV Sensitivity—High sensitivity to acquisition expenses

Analysis based on key metrics Scenario Change in VNB1 Change in VNB margin 1 Change in EV
Change in
Reference rate
Increase by 1.0 (0.3) (0.1) (1.4)
Decrease by 1.0 0.3 0.1 1.2
Equity market movement
Decrease by 10.0 (0.9) (0.3) (1.3)
Persistency (lapse rates)
Increase by 10.0 (0.8) (0.3) (1.0)
Decrease by 10.0 0.6 0.2 1.2
Maintenance expenses
Increase by 10.0 (2.2) (0.7) (0.8)
Decrease by 10.0 2.2 0.7 0.8
Acquisition expenses
Increase by 10.0 (13.1) (4.3) NA
Decrease by 10.0 13.2 4.4 NA
Mortality / Morbidity
Increase by 5.0 (3.8) (1.1) (0.8)
Decrease by 5.0 3.6 1.0 0.9
Tax rate2 increase to 25.0 (17.4) (5.8) (7.3)
Source: Company

HDFC Life Insurance
Chart 17: ROEV expected to trend down to a more sustainable level
23.0
21.8
20.6
(%)
19.4
18.2
17.0
Operating RoEV
Chart 18: Robust growth in VNB

30,000
24,000
(INR mn)
18,000
12,000
6,000
0
Table 2: Valuation summary

Company Rating
HDFC Life HOLD 613 590 1,236.1 5.7 4.9 97.3 77.0 19.1 18.9 21.2 23.1
SBI Life BUY 998 1,220 997.5 3.8 3.3 106.9 75.0 17.2 17.7 11.8 15.2

Insurance
Target multiple of 4.4xFY21E P/EV
Based our arguments in the earlier part of the report, a steady state ROEV of about 20% and
CoE of ~11.5%, we chose 4x one-year forward P/EV fair multiple. For a 12 months’ price
multiple, this works out to 4.4x FY21E P/EV. We assign 10% premium to our 12 months’ fair
target multiple of 4.4x FY21E P/EV on account of the inherent value creation opportunity, not
captured by current fundamentals, of its pension presence and early capacity building in the
retirement planning white space.
This leads to target price of INR590. We initiate coverage with ‘HOLD’ recommendation.

HDFC Life Insurance
Company Description
HDFC Life has been consistently rated as one of the top players in India’s life insurance
sector on APE as well as NBP. It was set up in FY2000 as a joint venture between HDFC and
Standard Life Aberdeen. The company offers a range of individual and group insurance
solutions that meet various customer needs such as protection, pension, savings,
investment and health, catering to a diverse range of customers. It was listed on NSE and
BSE in FY18.
It reported AUM of INR1,310bn at Q2FY20 end and solvency ratio of 192%, above the
regulatory threshold of 150%. HDFC Life has a market share of 15.2% on the basis of
Individual WRP and 22.4% on the basis of NBP for 1HFY20.
HDFC Life has a balanced product mix with share of ULIPs, participating, non-participating
and protection at 10%, 18%, 15% and 46% of NBP, respectively, in Q2FY20. Share of ULIPs is
lower due to traction in non-par portfolio with the introduction of a new product.
On the distribution front, bancassurance contributes more than half of Individual APE (54%),
while the balance comes from agency (15%), direct – including online channel (21%) and
others - corporate agents and brokers (10%). HDFC Life continues to benefit from its
presence across the country with 412 branches and additional distribution touchpoints
through several partnerships. The partnerships comprise 230 plus bancassurance partners
including NBFCs, MFIs, SFBs, etc., and 40 plus partnerships within non-traditional
ecosystems. The company is also strengthened by a strong base of financial consultants.
Strategy of the company is to maintain a diversified distribution mix and profitable product
suite powered by technology and backed by a customer-centric approach.
institutions 9%
JPMorgan Funds 3.6
(MF,
Insurance, Nomura Holdings 1.1
FI & AIF) Capital Group 1.1
4%
BlackRock Inc 1.0
Foreign Motilal Oswal Asset Management 0.9
Institutions HDFC Ltd. Vanguard Group 0.8
(FC, FII & 51%
FPI) & NRI Fidelity International 0.7
16% SBI Funds Management 0.6
Kotak Mahindra Asset Management 0.3
Standard Mirae Asset Global Investments 0.3
Life
20% Promoter Group

Insurance
Key Management
Ms. Vibha Padalkar, Managing Director & CEO: Ms. Padalkar is a Chartered Accountant as
well as a member of the Institute of Chartered Accountants of England and Wales. She has
been associated with HDFC Life since August 2008. She was heading the finance function
before being appointed as the CEO in September, 2018. Prior to this, Ms. Padalkar has
worked with WNS Global Services, Colgate Palmolive and PricewaterhouseCoopers. She was
recently honoured with the ‘Finance Leader of the Year’ award at the ET Prime Women
Leadership Awards 2019. She also received the ‘CA CFO - Insurance Sector’ award from the
Institute of Chartered Accountants of India, along with being recognised as one of the ‘Top
30 most powerful women in business’ by Business Today. She has also been conferred the
‘CFO-woman of the year’ award by the Institute of Chartered Accountants of India and for
“Excellence in Financial Control, Compliance and Corporate Governance” by IMA, India.
Mr. Suresh Badami, Executive Director: Mr. Badami holds a Bachelor’s degree in Science
from Bangalore University and a Post Graduate Diploma in Management from Xavier
Institute of Management, Bhubaneswar. He has been associated with the company since
October 2013. Mr. Badami is responsible for managing the sales and distribution function
across the company as an Executive Director. Prior to joining HDFC Life, he was associated
with Dunlop India, ICI India, Cogensis Networks, Max Ateev and ICICI Bank.
Mr. Niraj Shah, Chief Financial Officer: Mr. Shah holds a Post Graduate Diploma in
Management from Indian Institute of Management, Bangalore, and is also a member of the
Institute of Chartered Accountants of India. He has been associated with HDFC Life since
February 2019 and heads Finance, Audit, Risk Management and Investor Relations. He has
20 years of experience in financial services, primarily in life insurance and corporate finance
advisory. Prior to joining HDFC Life, he was associated with PNB MetLife, ICICI Prudential
Life, EY and BNP Paribas.

Mr. Deepak S Parekh Non-Executive Chairman
Ms. Vibha Padalkar Managing Director & CEO
Mr. Keki M Mistry Non-Executive Director
Mr. Suresh Badami Executive Director
Mr. Prasad Chandran Independent Director
Mr. Sumit Bose Independent Director
Mr. Ranjan Mathai Independent Director
Mr. James Aird Alternate Director
Mr. Ketan Dalal Independent Director
Ms. Stephanie Bruce Non-Executive Director
Mr. VK Viswanathan Independent Director
Ms. Bharti Gupta Ramola Independent Director
Ms. Renu Sud Karnad Non-Executive Director

HDFC Life Insurance
Fig. 9: HDFC Life—Evolution
Source: Company

Insurance
Financial Statements

Repo rate (exit rate) 6.3 6.3 4.5 4.5 Others 4,840 1,926 2,118 2,330
NBP growth traditional regular 0.1 0.5 0.1 0.1 Total Income 384,355 444,090 489,606 539,407
NBP growth linked regular 1.3 (9.5) 10.0 15.0 Commission expense 11,177 12,425 13,518 14,841
Operating exp. as a % of Premiums 16.9 16.8 16.8 16.8 Bonus Paid 5,743 6,891 8,269 9,923
Total Expenses 370,848 431,097 473,710 522,424
Funds for Future appropriation 1,438 - - -
Other items and contribution 7,760 8,211 8,767 9,669
PBT 12,899 14,779 18,658 20,987
Tax 131 2,069 2,612 2,938
PAT 12,768 12,710 16,046 18,048
Important ratios
APE growth (%) 12.0 17.0 9.0 10.4
First Year Regular Premium growth (%)6.7 17.7 9.0 10.6
VNB growth (%) 19.9 26.7 15.0 14.2
Tax rate (%) 1.0 14.0 14.0 14.0
PAT growth (%) 15.1 -0.5 26.2 12.5
Valuation metrics
Diluted PE (x) 96.8 97.3 77.0 68.5
Price/BV (x) 21.9 19.6 16.3 13.8
Price/EV (x) 6.8 5.7 4.9 4.2
Dividend yield (%) 0.3 0.2 0.2 0.3

HDFC Life Insurance

Fair Value Change Account (30) 200 200 200 Operating variance 2,210 - - -
Others - - - - Other variance - - - -
Linked 605,213 665,467 729,303 799,488 Economic Assumption Change 3,610 - - -
Investments 1,255,517 1,432,027 1,656,608 1,895,361
Policyholders-Non Linked 571,245 702,785 852,190 1,008,033 Year to March FY19 FY20E FY21E FY22E
Linked Liabilities 633,774 678,776 743,889 815,478 VNB Margins (%) 24.6 27.5 29.0 30.0
Other Assets (6,688) 26,547 26,356 26,301 EV growth (%) 20.3 17.6 17.3 17.1
Debit balance of P/L - - - - Op RoEV (%) 20.1 19.1 18.9 18.6

Insurance
Additional Data
Directors Data
Mr. Deepak S Parekh Non-Executive Chairman Ms. Vibha Padalkar Managing Director & CEO
Mr. Keki M Mistry Non-Executive Director Mr. Suresh Badami Executive Director
Mr. Prasad Chandran Independent Director Mr. Sumit Bose Independent Director
Mr. Ranjan Mathai Independent Director Mr. James Aird Alternate Director
Mr. Ketan Dalal Independent Director Ms. Stephanie Bruce Non-Executive Director
Mr. VK Viswanathan Independent Director Ms. Bharti Gupta Ramola Independent Director
Ms. Renu Sud Karnad Non-Executive Director
Auditors - Price Waterhouse Chartered Accountants LLP

G.M. Kapadia & Co.
Holding - Top 10
% Holding % Holding
JPMorgan Funds 3.61 Nomura Holdings 1.08
Capital Group 1.05 BlackRock Inc 0.98
Motilal Oswal Asset Management 0.91 Vanguard Group 0.82
Fidelity International 0.67 SBI Funds Management 0.55
Kotak Mahindra Asset Management 0.29 Mirae Asset Global Investments 0.29
Bulk Deals
14-Aug-19 CAPITAL WORLD GROWTH AND INCOME FUND Buy 14,160,294 480
14-Aug-19 STANDARD LIFE (MAURITIUS HOLDINGS) 2006 LTD Sell 67,100,000 481
*in last one year
Insider Trades
21-Jun-19 Rajendra Ghag Sell 53,000
25-Jun-19 Suresh Badami Sell 53,750
28-Jun-19 Suresh Badami Sell 75,000
2-Jul-19 Srinivasan Parthasarathy Sell 39,370
5-Aug-19 Suresh Badami Sell 64,200
7-Aug-19 Suresh Badami Sell 57,450
28-Aug-19 Vibha Padalkar Sell 43,500
24-Sep-19 Vibha Padalkar Sell 75,000
24-Sep-19 Prasun Gajri Sell 50,000
1-Oct-19 Prasun Gajri Sell 50,000

INITIATING COVERAGE
`
SBI LIFE INSURANCE
Overwhelming reach
SBI Life Insurance (SBI Life) is the largest private life insurer in India with an
individual APE market share of 22.3% (FY19). It is the lowest cost player on an Absolute Rating BUY
overall basis and well-poised to notch up market share gains by straddling the Rating Relative to Sector Outperformer
Risk Rating Relative to Sector Low
entire gamut of products fully backed by the deep nation-wide distribution of
Sector Relative to Market Overweight
its parent, banking behemoth SBI. We estimate SBI Life to clock APE CAGR of
16% over FY19–22 and maintain ROEV of 18% via average annual expansion
of 50bps in new business margin. Initiate with ‘BUY’ and 12 months’ TP of MARKET DATA (R:SBILL.BO, B:SBILIFE IN)
INR1,220, at 4x FY21E P/EV (expounded in sector note). Key risks: operational CMP : INR 997
challenges such as managing activations across the massive branch network Target Price : INR 1,220
and management continuity given its PSU parentage. 52-week range (INR) : 1,030 / 510
Share in issue (mn) : 1,000.0
Nonpareil reach M cap (INR bn/USD mn) : 997 / 14,067
Avg. Daily Vol.BSE/NSE(‘000) : 1,562.0
SBI Life distributes insurance policies via 22,000-plus SBI branches and 12,000-plus partner
branches (South Indian Bank, Repco Home Finance, etc.). With average mobilisation per
SHARE HOLDING PATTERN (%)
SBI branch still subdued at INR3mn (up from INR2.3mn last year), translating into a low
~55-60 policies per year per branch, activated branches have significant headroom. The Current Q1FY20 Q4FY19
Promoters * 62.8 67.3 69.8
company also boasts one of the most productive agency channels with premium
MF's, FI's & BK’s 6.9 6.1 4.2
generation per head of about INR220,000. On the basis of these dual strengths and their
FII's 23.7 23.3 23.0
slowly unfolding potential, SBI Life has gained 670bps in individual APE market share over
Others 6.5 3.3 3.0
FY15–19. We expect the market share gain trend to sustain with branch management
remaining a key monitorable. (% of share in issue)
Lowest overall cost structure PRICE PERFORMANCE (%)
By dint of its scale and productivity of third-party distribution, SBI Life is the lowest cost Stock over
Sensex Stock
Sensex
life insurer—its operating cost to premium ratio of 6.5% is 200bps lower than closest
competitor. FY19 VNB margin of 17.6% may not appear high, but adjusted for the product 1 month 5.4 20.0 14.6
mix (high ULIP), it is among the highest like-for-like. 3 months 8.2 25.1 16.9
12 months 14.7 77.1 62.4
Outlook and valuation: Reasonable; initiate with ‘BUY’

We estimate steady state ROEV of 18%, similar to past two years’ run rate. If the ULIPs
business outpaces traditional riding stronger capital market sentiment, we believe higher
premium growth (ticket-size) will compensate for lower blended NBM. Given leadership
strength, FY21E P/EV of 3.3x appears reasonable. We initiate coverage with ‘BUY’.
Financials
Santanu Chakrabarti
PAT 11,333 9,327 13,294 15,457
Vinayak Agarwal
Diluted EPS (INR) 4.5 3.8 3.3 2.8
+91 22 6620 3020
Operating RoEV (%) 17.4 17.2 17.7 17.8
P/EV (X) 4.5 3.8 3.3 2.8 November 04, 2019
Bloomberg EDEL <GO>, Thomson 105First Call, Reuters and Factset. Edelweiss
EdelweissSecurities
SecuritiesLimited
Limited
Insurance
A balanced portfolio
Agile on product choice
SBI Life has not been shying away from seeding products across the life insurance opportunity
spectrum. In the beginning of this fiscal, when rival and private insurer HDFC Life made a
splash with its highly successful retirement products, SBI Life launched Platina.
Fig 1. A glimpse of non-par product Platina
Fig. 2: Growth breakdown (NBP) shows protection non-par & protection push expected
FY17 FY19 FY22
Mix (%) 2016-19 Mix (%) 2019-22 Mix (%)
10,924 26.9% 17,605 (0.0) % 17,587

Par Product 12.8% 6.7%
10.8%
34,885 (6.1)% 30,761 44.5% 92,886

Non-Par Product 22.3%
34.4% 35.4%
4,400 93.1% 16,400 42.1% 47,040

Protection 11.9% 17.9%
4.3%
51,230 19.5% 12.8% 105,035

Linked 73,154
50.5% 40.0%
53.0%

SBI Life Insurance
As the chart above shows, our growth assumption for SBI Life’s NBP is moderate.
Chart 1: Share of protection in APE clocked strong growth in FY19

8.0
6.4
4.8
(%)
3.2
1.6
0.0
FY16 FY17 FY18 FY19
Protection (on the basis of APE)
Source: Company
Chart 2: FY19 was a year of protection; trend expected to sustain
50,000
40,000
30,000
(INR mn)
20,000
10,000
0
Protection (on the basis of NBP)
The company has been able to insure 55,000-plus lives via the YONO app (akin to a digital
wallet) so far. The focus on retail protection is expected to continue.

Insurance
Chart 3: Individual protection share has jumped despite overall growth
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY16 FY17 FY18 FY19
Individual protection Group protection
Source: Company
Chart 4: ULIP contributes the most to business mix

100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY16 FY17 FY18 FY19
Par Non Par ULIP Group Savings Protection
Source: Company
Market share gains: Impressive so far

Nimbleness in launching products across categories and deep distribution are key factors
driving market share improvement for SBI Life.

SBI Life Insurance
Chart 5: IRP market share trending up
30.0
24.0
18.0
(%)
12.0
6.0
0.0
IRP Market Share (private sector)
Chart 6: New business market share too

30.0
24.0
18.0
(%)
12.0
6.0
0.0
NBP Market Share (private sector)
Source: Company

Insurance
Unmatched distribution reach
The tie-up with parent and banking behemoth SBI is worth its weight in gold. In fact, a game-
changer for SBI Life. Besides, it has arguably one of the most productive agency channels in the
country—perhaps a function of higher customer trust in dealing with an SBI affiliate as well as
high agent loyalty (less churn vis-a-vis those of other players during 2011–15).
Fig. 3: Truly pan-India
Source: Company

SBI Life Insurance
Chart 7: Bancassurance continues to dominate distribution mix (based on APE)
Direct
5%
Agency
28%
Bancassurance
67%
Source: Company
Chart 8: Evolution of distribution channel (based on NBP) tells SBI’s contribution story
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Bancassurance Agency Direct
Source: Company

Insurance
Chart 9: Like peers, ULIP highest selling product for bancassurance channel
100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY17 FY18 FY19
Par Non Par ULIP
Chart 10: Interestingly, agency is also ULIP dominated

100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY17 FY18 FY19
Par Non Par ULIP
Chart 11: SBI Life has maintained one of the highest agent productivity levels
3,00,000
2,40,000
1,80,000
(INR)
1,20,000
60,000
0
Agent producitivity
Source: Company, IRDAI, Life Insurance Council

SBI Life Insurance
Chart 12: Number of agents has been rising steadily
1,40,000
1,25,000
1,10,000
(No.)
95,000
80,000
65,000
No of individual agents
Fig. 4: An integrated approach to business development
Source: Company

Insurance
Fig 5: Technology remains key focus area as business enabler
Source: Company
Investments show up in operating efficiencies

SBI Life’s persistency ratios and cost efficiency metrics prove it is reaping the benefits of its
distribution and technology initiatives.
Chart 13: Overall persistency (including single premium and fully paid up policies)
100.0
90.0
80.0
(%)
70.0
60.0
50.0
FY16 FY17 FY18 FY19
Source: Company

SBI Life Insurance
Chart 14: Regular premium persistency has improved across all cohorts
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Chart 15: Leverage benefits reflected in reducing opex ratio
10.0
8.0
6.0
(%)
4.0
2.0
0.0
Chart 16: Same pattern is reflected in new business premium economy
25.0
20.0
15.0
(%)
10.0
5.0
0.0

Insurance
Valuation: Appears to be reasonable
Margin likely to trend up gradually; ROEV to be steady 18%
We expect SBI Life’s margin to trend up driven by a shift in its product mix towards non-par
policies, muted growth in the ULIP portfolio due to persistently weak market conditions and
certain cost rationalisation (already lowest cost player).
Chart 17: VNB margin has improved over past few years
20.0
16.0
12.0
(%)
8.0
4.0
0.0
VNB margin
Table 1: EV walkthrough shows a steady compounding of 17%

Opening EV 125,475 165,378 190,778 224,078 260,494 303,842
Unwind 10,862 14,100 16,200 19,047 22,142 25,827
NBP 10,368 13,900 17,200 20,384 24,078 28,126
Opex assumption changes 4,202 100 800 - - -
Persisitensy Variance 3,362 1,900 (1,000) (1,000) - -
Mortality & Morbidity variance 1,793 (100) - - - -
Expense variance 256 (300) - - - -
Other Variance 527 - - - - -
Economic assumption Change & Investor variance 10,338 (1,800) 2,500 - - -
Closing EV 165,378 190,778 224,078 260,494 303,842 354,456

SBI Life Insurance
Chart 18: Embedded value growing steadily
375.0
300.0
225.0
(INR bn)
150.0
75.0
0.0
Embedded value
Table 2: Embedded value, VoNB (VNB) show ULIP lapsation sensitivity

Scenario Change in EV Change in VoNB
H1FY20 H1FY20
Reference Rate +100 bps (3.5) 0.5
Reference Rate -100 bps 3.3 (0.5)
Decrease in Equity Value 10% (1.2) 0.0
Proportionate change in lapse rate +10% (1.3) (6.0)
Proportionate change in lapse rate -10% 1.3 5.9
Mortality / Morbidity +10% (2.3) (11.8)
Mortality / Morbidity -10% 2.3 11.9
Maintenance Expense +10% (0.7) (2.4)
Maintenance Expense -10% 0.7 2.4
Mass Lapse for ULIPs in the year after the (2.2) (7.3)
surrender penalty period of 25% 2
Mass Lapse for ULIPs in the year after the (5.2) (17.5)
surrender penalty period of 50% 2
Tax Rate Change to 25% (8.1) (16.9)

Insurance
Chart 19: Operating ROEV inching up
30.0
24.0
18.0
(%)
12.0
6.0
-
Operating RoEV
Chart 20: VNB and VNB CAGR

30.0
24.0
18.0
(%)
12.0
6.0
0.0
Table 3: Valuation table

Company Rating
ICICI Prudential BUY 508.7 700.0 730.3 3.0 2.6 75.6 59.3 15.7 16.1 13.4 16.0
HDFC Life HOLD 612.7 590.0 1,236.1 5.7 4.9 97.3 77.0 19.1 18.9 21.2 23.1
SBI Life BUY 997.5 1,220.0 997.5 3.8 3.3 106.9 75.0 17.2 17.7 11.8 15.2
Max Financial HOLD 403.8 450.0 108.8 1.5 1.3 22.6 24.8 19.2 19.2 23.4 20.0
Target multiple of 4x FY21E P/EV

In the accompanying sector piece, we expound the calculation of a steady state ROEV of about
18% and CoE of ~11%. Factoring these in, we reckon 3.6x one-year forward P/EV is fair. For a
12-months’ target multiple, this works out to 4x FY21E P/EV, which yields target price of
INR1,220. We initiate coverage with ‘BUY’ recommendation.

SBI Life Insurance
Company Description
SBI Life has been consistently rated as one of the top players in India’s life insurance sector
on the basis of Annual Premium Equivalent (APE) as well as New Business Premium (NBP). It
was established in FY01 as a joint venture between State Bank of India (SBI) and BNP Paribas
Cardif. The company’s business comprises individual life and group business, including
participating, non-participating, pension, group gratuity, group leave encashment, group
superannuation, group immediate annuity, unit-linked insurance products, variable
insurance products, health and micro insurance. Some of these policies have riders such as
accident & disability benefit, level term and critical illness. SBI Life was the second life
insurance company in India to be listed on NSE and BSE in FY18.
It reported AUM of INR1,548bn at Q2FY20 end and solvency ratio of 220%, well above the
regulatory threshold of 150%. The company has a market share of 13.6% of the industry on
an individual received premium (IRP) basis and 6.2% on NBP basis.
SBI Life has a balanced product mix with ULIPs forming 43% of NBP for Q1FY20. The residual
consists of group savings (29%), protection (12%), participating (7%) and non-participating
(9%). On the distribution front, while bancassurance contributes more than half of total NBP
(57%), the balance comes from agency (18%) and others—corporate agents, brokers, online
and group business (25%).
The company’s strategy is to maximise opportunities available by focusing on geographical

expansion through distribution channels, cost discipline, customer-first approach, digital
transformation and enhanced training.
Chart 21: Shareholding pattern (as on Sep 30, 2019) Table 4: Top public shareholding (current)
institutions 2% Warbug Pincus (through CA Emerald Investments ) 9.0
(MF,
Canada Pension Plan Investment Board 2.9
Insurance,
FI & AIF) ICICI Prudential Asset Management 2.8
State Bank
7% Temasek (through Macritchie Invest PTE) 2.0
of India
KKR (through Value Line PTE LTD 2.0
58%
Foreign Standard Life Aberdeen 1.4
Institutions Vanguard Group 0.8
(FC, FII & Baron Capital Inc 0.5
FPI) & NRI DSP Investment Managers 0.5
28% Kotak Mahindra Asset Management 0.3
BNP
Paribas
Cardif
5%

Insurance
Key management personnel
Mr. Sanjeev Nautiyal, Managing Director & CEO: Mr. Sanjeev Nautiyal started his career as
a Probationary Officer in SBI in 1985 in the bank's Lucknow Circle. After acquiring his
Bachelor of Arts degree, Mr. Nautiyal took a Master's degree in Business Administration
from Lucknow University. He is also a Certified Associate of the Indian Institute of Bankers
(C.A.I.I.B). In his career of 33 years in the banking industry, Mr. Nautiyal has held various
important assignments in fields like Credit, Human Resources and International Banking. He
was appointed MD and CEO of SBI Life for two years in February 2018.
Mr. Sanjeev Pujari, President, Actuarial & Risk Management & Chief Risk Officer: Mr.
Sanjeev Pujari has a Bachelor’s degree in Science, a Master’s degree in Physics, is a Fellow of
the Institute of Actuaries of India and holds a diploma from the Faculty of Actuaries,
Institute of Actuaries, UK. He has more than 33 years’ experience in the life insurance
industry.
Mr. Sangramjit Sarangi, President & Chief Financial Officer: Mr. Sangramjit Sarangi is a
Chartered Accountant and received his undergraduate degree from Utkal University. He
started his career with SBI Mutual Fund in the investment operations team. He has been
with the company for close to 10 years in various roles in the finance division. Mr. Sarangi
was appointed as the CFO in January 2014. Prior to joining SBI Life, Mr. Sarangi spent six
years as Vice President of Finance in ICICI Prudential. He was conferred ‘The India CFO
Award for Excellence in Financial Control and Corporate Governance’ in 2016.

Mr. Rajnish Kumar Non-Executive - Nominee Director-Chairperson
Mr. Sanjeev Nautiyal Managing Director & CEO
Mr. Dinesh Khara Non-Executive - Nominee Director
Mr. P K Gupta Non-Executive - Nominee Director
Mr. Raj Narain Bhardwaj Non-Executive - Independent Director
Mr. Nilesh Vikamsey Non-Executive - Independent Director
Mr. Ravi Rambabu Non-Executive - Independent Director
Ms. Joji Sekhon Gill Non-Executive - Independent Director
Mr. Deepak Amin Non-Executive - Independent Director
Mr. Somasekhar Sundaresan Non-Executive - Independent Director
Mr. Gregory Michael Zeluck Non-Executive - Non-Independent Director

SBI Life Insurance
Fig. 6: SBI Life—Evolution
Source: Company

Insurance

Repo rate (exit rate) 6.3 6.3 4.5 4.5 Others 1,627 702 772 850
NBP growth traditional regular (9.1) 21.4 17.1 15.2 Total Income 442,612 554,029 667,564 788,703
NBP growth linked regular 20.6 15.0 15.0 0.0 Commission expense 13,463 17,095 19,878 22,833
Operating exp. as a % of Premiums 10.5 10.5 10.2 9.9 Bonus Paid 607 729 874 1,049
Total Expenses 431,745 544,826 656,437 775,776
PBT 11,794 10,845 15,458 17,973
Tax 461 1,518 2,164 2,516
PAT 11,333 9,327 13,294 15,457
Important ratios
APE growth (%) 13.2 18.8 14.9 13.7
First Year Regular Premium growth (%)
11.3 16.7 13.4 12.9
VNB growth (%) 23.7 18.5 18.1 16.8
Tax rate (%) 3.4 14.0 14.0 14.0
PAT growth (%) 15.3 -29.7 42.5 16.3
Valuation metrics
Diluted PE (x) 75.2 106.9 75.0 64.5
Price/BV (x) 13.2 12.1 10.8 9.5
Price/EV (x) 4.5 3.8 3.3 2.8
Dividend yield (%) 0.2 0.2 0.2 0.3

SBI Life Insurance

Fair Value Change Account 1,162 200 200 200 Operating variance (200) (1,000) - -
Others 0 0 0 0 Other variance - - - -
Traditional 660,108 792,712 944,515 1,120,381 Net capital injection (2,400) (2,015) (2,872) (3,339)
Linked 657,527 826,850 1,037,645 1,284,635 Economic Assumption Change 2,500 - - -
Investments 1,393,247 1,644,764 2,006,635 2,428,615
Policyholders-Non Linked 644,724 772,894 920,902 1,092,371 Year to March FY19 FY20E FY21E FY22E
Linked Liabilities 691,291 806,179 1,011,704 1,252,520 VNB Margins (%) 17.6 18.0 18.5 19.0
Other Assets 36,731 95,180 108,102 122,958 EV growth (%) 17.5 16.3 16.6 16.7
Debit balance of P/L 0 0 0 0 Op RoEV (%) 17.4 17.2 17.7 17.8

Insurance
Additional Data
Directors Data
Mr. Rajnish Kumar Non-Executive Chairman Mr. Sanjeev Nautiyal Managing Director & CEO
Mr. Dinesh Khara Non-Executive - Nominee Director Mr. P K Gupta Non-Executive - Nominee Director
Mr. Raj Narain Bhardwaj Independent Director Mr. Nilesh Vikamsey Independent Director
Mr. Ravi Rambabu Independent Director Ms. Joji Sekhon Gill Independent Director
Mr. Deepak Amin Independent Director Mr. Somasekhar Sundaresan
Non-Independent Director
Mr. Gregory Michael Zeluck Non-Independent Director
Auditors - GMJ & Co

SC Bapna & Associates
Holding - Top 10
% Holding % Holding
Warbug Pincus (through CA Emerald Investments ) 9.00 Canada Pension Plan Investment Board 2.86
ICICI Prudential Asset Management 2.83 Temasek (through Macritchie Invest PTE) 1.95
KKR (through Value Line PTE LTD 1.95 Standard Life Aberdeen 1.42
Vanguard Group 0.82 Baron Capital Inc 0.54
DSP Investment Managers 0.45 Kotak Mahindra Asset Management 0.32
Bulk Deals
1-Mar-19 CA EMERALD INVESTMENTS BUY 90,000,000 515
1-Mar-19 BNP PARIBAS CARDIF SELL 92,252,908 515
24-Jul-19 VALUE LINE PTE LTD SELL 6,500,000 775
30-Aug-19 VALUE LINE PTE LTD SELL 5,300,000 810
*in last one year
Insider Trades
05-Mar-19 Bnp Paribas Cardif S.A. Sell 9,22,52,908
01-Apr-19 Bnp Paribas Cardif S.A. Sell 5,07,40,000
28-Jun-19 Bnp Paribas Cardif S.A. Sell 2,50,00,000
* These are the last few trades

INITIATING COVERAGE
`
MAX FINANCIAL SERVICES
Under a cloud
Max Financial Services (Max) is the holding company of Max Life Insurance
(71.9% stake), one of the largest private life insurers in India (without in- Absolute Rating HOLD
group bancassurance relationship) with 9% share of private APE in FY19. Rating Relative to Sector Performer
Risk Rating Relative to Sector Medium
The stock trades at an attractive 1.3x FY21E P/EV, by far the lowest amongst
Sector Relative to Market Overweight
peers. We assign 65% discount to our 12 months’ fair target multiple of 4.0x
FY21E P/EV on account of the critical uncertainties that Max has been facing
with regards its (equity-backed) bancassurance partner Axis Bank and MARKET DATA (R:MAXI.BO, B:MAXF IN)
attempts to rationalise its ownership structure. While this may appear an CMP : INR 404
unfairly steep discount, one needs to appreciate that an unfavourable Target Price : INR 450
outcome could have a seismic impact on the business model. We remain 52-week range (INR) : 473 / 354
open to reviewing this discount as and when there’s incremental clarity on Share in issue (mn) : 269.4
these uncertainties. We transfer coverage with ’HOLD’ (BUY earlier) and 12 M cap (INR bn/USD mn) : 109 / 1,535
months’ target price of INR450 (INR593 earlier). Avg. Daily Vol.BSE/NSE(‘000) : 721.0
SHARE HOLDING PATTERN (%)

Strong fundamentals remain tempting
Max has registered APE CAGR of 22% over the past three years. VNB margin of 19.6% in Current Q1FY20 Q4FY19
Promoters * 28.3 28.3 28.3
Q1FY20 has improved 170bps over the past three years on account of operational
improvements (persistency) and product mix shift in favour of pure protection. Over FY19- MF's, FI's & BK’s 30.7 32.2 31.2
22, we estimate 16% APE CAGR and margin to increase 150bps. While Q1FY20 margin FII's 29.6 30.0 29.8
suffered due to cost overruns on account of distribution rationalisation, there are no Others 11.4 9.5 10.7
* Promoters pledged shares : 25.9
imminent signs of this becoming a trend (seasonality also supports this conclusion). (% of share in issue)
Some steps towards ownership structure rationalisation PRICE PERFORMANCE (%)

Mitsui Sumitomo (MSI) will be issued 21.45% stake in Max at INR421.67/share through a Sensex Stock
Stock over
preferential allotment. In exchange, Max will acquire 19.98% stake in Max Life from MSI at Sensex
INR80.89/share. Max also has a call option, and MSI the corresponding put, to acquire 1 month 5.4 (3.5) (8.9)
residual 5.24% in Max at the same price (valid for 12 months). 3 months 8.2 (3.2) (11.4)
12 months 14.7 0.8 (13.9)
Outlook and valuation: Concerns persist

To understand the criticality of ownership and banca partnership uncertainties, one needs
to only go back to the main theme of our sector piece–large bank ‘backed’ players are a
one-way North trade in the current scheme of regulations. With progress being slow and
management admitting that most solutions will need “regulatory proof”, we advise
caution. We transfer coverage with ’HOLD’ and target price of INR450.
Financials
Santanu Chakrabarti
PAT 5,564 6,708 6,113 5,159
Vinayak Agarwal
Diluted EPS (INR) 14.8 17.9 16.3 13.7
+91 22 6620 3020
Operating RoEV (%) 21.9 19.2 19.2 19.7
P/EV (X) 1.7 1.5 1.3 1.1 November 04, 2019

Bloomberg EDEL <GO>, Thomson 125First Call, Reuters and Factset. Edelweiss Securities Limited
Insurance
Fundamentals strong, but ownership concern a drag
Fig. 1: Composite growth breakdown (NBP basis)
FY16 FY19 FY22
Mix (%) 2017-19 Mix (%) 2019-22 Mix (%)
17,345 12.5% 24,680 11.8% 34,497

Par Product 47.8%
60.2% 42.8%
4,514 0.6% 4,591 40.0% 12,595

Non-Par Product
15.7% 8.9% 15.6%
805 81.4% 5,160 19.3% 8,766

Protection 3.0% 10.0% 10.9%
6,093 41.3% 17,174 12.9% 24,714

Linked 21.1% 33.3% 30.7%
Chart 1: Protection post 81.4% CAGR FY16-19

6,000
4,800
3,600
(INRmn)
2,400
1,200
0
FY16 FY17 FY18 FY19
Protection
Source: Company

Max Financial Services
Chart 2: Share of protection also increased to 10% in product mix
100.0
80.0
Akin to peers, focus is on increasing 60.0
(%)
the share of protection
40.0
20.0
0.0
FY16 FY17 FY18 FY19
Par Protection Non-par savings ULIP
Chart 3: Like peers, bancassurance continues to dominate distribution mix

100.0
80.0
Partnership with Axis Bank is highly 60.0

critical as it contributes 57% to total
(%)
APE
40.0
20.0
0.0
FY16 FY17 FY18 FY19
Proprietary Banca Others
Chart 4: Within bancassurance, Axis Bank contributes 82% to APE

100.0
80.0
60.0
(%)
40.0
20.0
0.0
FY16 FY17 FY18 FY19
Contibution of Axis Bank Contibution of other Banks

Source: Company

Insurance
Chart 5: Steady build up of agency channel…
60,000
52,000
Max’s agency network is one of the 44,000
(No.)
best in the industry
36,000
28,000
20,000
Total individual agents

Chart 6: … coupled with stable productivity

150,000
120,000
90,000
(INR)
60,000
30,000
0
Agent producitivity
Source: IRDAI, Life Insurance Council

Chart 7: Persistency ratios have improved across all cohorts
100.0
80.0
60.0
(%)
40.0
20.0
0.0
Source: Company
Chart 8: With rising scale, leverage benefits have started to kick in

16.0
14.8
Stable market share of ~9% over the
years 13.6
(%)
12.4
11.2
10.0


Insurance
Chart 9: VNB margin expected to be stable
25.0
20.0
15.0
(%)
10.0
5.0
0.0
VNB margin
Source: Company
Table 1: EV walkthrough indicates stable compounding of EV

INRmn FY17 FY18 FY19 FY20E FY21E FY22E
Opening EV 56,170 65,900 75,090 89,380 101,692 116,826
Unwind 5,340 6,410 6,970 8,223 9,152 10,748
NBP 4,990 6,560 8,230 9,519 11,283 13,418
Opex assumption changes 0 0 0 0 0 0
Variation in Operating experience 860 620 1,260 (600) (900) (1,100)
Other Variance 0 0 3,840 0 0 0
Economic assumption Change & Investor variance 1,710 (470) 0 0 0 0
Closing EV 65,900 75,090 89,380 101,692 116,826 136,177
Chart 10: EV to compound at a steady 15%

150.0
130.0
110.0
(INRbn)
90.0
70.0
50.0
Embedded value (EV)


Chart 11: Operating ROEV to trend down to more sustainable levels
23.0
22.0
21.0
(%)
20.0
19.0
18.0
Operating RoEV
Chart 12: VNB should continue to clock strong growth

15,000
12,000
INRmn
9,000
6,000
3,000
0
Table 2: Valuation
Company Rating
HDFC Life HOLD 613 590 1,236.1 5.7 4.9 97.3 77.0 19.1 18.9 21.2 23.1
SBI Life BUY 998 1,220 997.5 3.8 3.3 106.9 75.0 17.2 17.7 11.8 15.2

Insurance
Target multiple of 1.4x FY21E P/EV after 65% discount

Based our arguments in the earlier part of the report, a steady state ROEV of ~19% and CoE
of ~11.5%, we assign 3.5x one-year forward P/EV fair multiple. For a 12-months’ target
multiple, this works out to 4.0x FY21E P/EV. However, we assign 65% discount to our 12-
months’ fair target multiple on account of the critical uncertainties that Max has been facing
in relation to its (equity backed) bancassurance partner Axis Bank and attempts to
rationalise its ownership structure. This leads to target price of INR450. We initiate coverage
with ‘HOLD’ recommendation.
Table 3: Change in estimate (INR mn)

FY20E FY21E
New Old Change New Old Change
Embedded value (EV) (INRbn) 102 108 (5.4) 117 129.45814 (9.8)
Value of new business (VNB) 9,519 9,751 (2.4) 11,283 11,745 (3.9)
Annual premium equivalent (APE) 46,435 48,358 (4.0) 53,726 58,552 (8.2)
Profit after tax (PAT) 6,708 6,795 (1.3) 6,113 7,954 (23.1)
Table 4: Change in target price

New Old Change
Target price (INR) 450 593 (24.1)

Company description
Max, part of the USD3bn Max Group, is the holding company of Max Life Insurance (Max
Life), India’s largest non-bank, private life insurance company. Max owns and actively
manages a majority stake in Max Life, making it India’s first listed company exclusively
focused on life insurance.
The company owns 71.8% stake in the life insurance arm; while 25.2% is held by MSI, a
Japan-headquartered global major in life insurance. However, with a share swap
arrangement between the two, Max’s ownership will increase to 91.8%, while MSI will get
21.5% stake in Max in exchange.
Max was established in 2000 as a joint venture with MSI. The company offers long-term
savings (linked, participating and non-participating) and protection products (individual life,
credit cover and group life) catering to different life-stage insurance needs of customers.
It reported AUM of INR630bn at end-Q1FY20 and solvency ratio of 242% at end-FY19, well
above the regulatory threshold of 150%. As much as 78% of its AUM is invested in debt and
the balance 22% in equity instruments.
Max has a balanced product mix with 42% of revenue coming from ULIPs, 40% from
participating products, 10% from protection and the balance from non-par products. On the
distribution front, bancassurance accounts for ~70% of NBP, while the balance 30% comes
from agency channel. Max has among the most agency networks in the industry. In
bancassurance, about 80% of its premium comes from Axis Bank.
Max’s strategy is to continue to create value for stakeholders, namely customers,

employees and shareholders through its 25/25/25 strategy by FY22.
Others Promoter Top public shareholders (%)
11% (through KKR (through Moneyline Portfolio Investments) 6.7
Max
Jacksom National Asset 6.1
Ventures &
Reliance Capital Trustee 5.7
others)
Domestic 28% Aditya Birla Sun Life 5.3
institutions HDFC Asset Management 4.9
(MF, Mirae Asset Global Investments 3.7
Insurance, ICICI Prudential Asset Management 3.6
FI & AIF) Motilal Oswal Asset Management 3.4
31% Baron Capital 3.0
Foreign Baron Emerging Markets Fund 2.6
Institutions
(FC, FII &
FPI) & NRI
30%

Insurance
Key management personnel and Board of Directors
Mr. Mohit Talwar – Managing Director & CEO, MFSL: Mr. Mohit Talwar is Vice Chairman,
Max Group. He is also Managing Director, Max Financial Services Limited and Max India
Limited, and Vice Chairman, Max Ventures & Industries Limited (MaxVIL). In addition, he
serves on the boards of Max Life Insurance, Max Healthcare, Max Bupa Health Insurance
and Antara Senior Living. In his earlier role as Deputy Managing Director of erstwhile
consolidated Max India Limited, he successfully leveraged his strong relationships with
institutional investors, hedge funds, banks and private equity firms, and led several complex
corporate finance and financial structuring deals to ensure adequate investment and
liquidity for the group’s operations.
Mr. Prashant Tripathy – Managing Director & CEO, Max Life: Mr. Prashant Tripathy is a
seasoned professional with over two decades of experience across finance, organisational
strategy, operations, risk management and investor relations. Prashant leads Max Life
Insurance as Managing Director & Chief Executive Officer. Having spent 12 years with the
company, Prashant was earlier Chief Financial Officer of the company, spearheading
Financial Management and the Corporate Strategy, and also played a critical role in
managing Investor Relations and Communications for Max Financial Services Ltd., the parent
company of Max Life Insurance.
Mr. V. Viswanand – Deputy MD, Max Life: Mr. V. Viswanand is an financial services
industry veteran with an experience of nearly three decades. He look after Distribution,
including proprietary channels, bancassurance and third-party business, institutional sales,
business development and distribution operations. He also steers the company’s strategic
direction and growth through his deep involvement in strategy formulation processes.
Additionally, he leads the Max Skill First training partnership as well as the Procurement and
Facilities functions.

Mr. Analjit Singh Non-Executive Chairman
Ms. Naina Lal Kidwai Non-Executive - Independent Director
Mr. Mohit Talwar Managing Director
Mr. Aman Mehta Non-Executive - Independent Director
Mr. Ashwani Windlass Non-Executive - Non-Independent Director
Mr. Charles Richard Vernon Stagg Non-Executive - Independent Director
Mr. Dinesh Kumar Mittal Independent Director
Mr. Jai Arya Non-Executive - Independent Director
Mr. Sahil Vachani Non-Executive - Non-Independent Director
Mr. Sanjay Nayar Non-Executive - Non-Independent Director
Mr. Charles Richard Vernon Stagg Independent Director

Fig. 2: Max—Evolution
Source: Company

Insurance

Repo rate (exit rate) 6.3 6.3 4.5 4.5 Others 440 352 387 426
NBP growth traditional regular 19.6 19.7 16.9 17.7 Total Income 193,267 213,546 249,035 289,571
NBP growth linked regular 23.8 11.4 14.0 14.0 Commission expense 9,888 12,468 14,383 16,634
Operating exp. as a % of Premiums 20.2 20.6 20.5 20.5 Bonus Paid 14 16 20 23
Total Expenses 185,022 208,124 244,468 286,203
PBT 6,226 7,800 7,109 5,999
Tax 662 1,092 995 840
PAT 5,564 6,708 6,113 5,159
Important ratios
APE growth (%) 21.6 17.6 15.7 16.2
First Year Regular Premium growth (%)
21.4 16.0 15.7 16.2
VNB growth (%) 25.5 15.7 18.5 18.9
Tax rate (%) 10.6 14.0 14.0 14.0
PAT growth (%) 5.5 20.6 (8.9) (15.6)

Fair Value Change Account (57) 200 200 200 Operating variance 1,260 (600) (900) (1,100)
Others 0 0 0 0 Other variance 3,840 - - -
Policyholders Liabilities 585,743 681,603 795,562 929,726 EV bef capital changes 95,390 106,522 121,227 139,891
Linked 186,738 211,732 244,298 284,175 Economic Assumption Change - - - -
Total Liabities 635,872 733,844 849,515 985,124 Operating RoEV 21.9 19.2 19.2 19.7
Investments 627,979 741,251 862,478 1,004,541
Shareholders 35,187 38,667 40,892 42,770
Policyholders-Non Linked 394,173 480,266 565,073 663,387
Linked Liabilities 198,619 222,319 256,513 298,384
Other Assets 7,893 (7,407) (12,963) (19,417)
Debit balance of P/L 0 0 0 0
Total Assets 635,872 733,844 849,515 985,124
Valuation metrics
Diluted PE (x) 27.2 22.6 24.8 29.4
Price/BV (x) 5.5 5.1 4.8 4.6
Price/EV (x) 1.7 1.5 1.3 1.1
Dividend yield (%) 2.6 2.7 0.0 0.0

Insurance
Additional Data
Directors Data
Mr. Analjit Singh Non-Executive Chairman Mr. Mohit Talwar Managing Director
Ms. Naina Lal Kidwai Independent Director Mr. Aman Mehta Independent Director
Mr. Ashwani Windlass Non-Independent Director Mr. Charles Richard Vernon Stagg Independent Director
Mr. Dinesh Kumar Mittal Independent Director Mr. Jai Arya Independent Director
Mr. Sahil Vachani Non-Independent Director Mr. Sanjay Nayar Non-Independent Director
Auditors - Deloitte Haskins & Sells LLP
Holding - Top 10
% Holding % Holding
KKR (through Moneyline Portfolio Investments) 6.71 Jacksom National Asset 6.09
Reliance Capital Trustee 5.73 Aditya Birla Sun Life 5.34
HDFC Asset Management 4.89 Mirae Asset Global Investments 3.74
ICICI Prudential Asset Management 3.62 Motilal Oswal Asset Management 3.37
Baron Capital 2.99 Baron Emerging Markets Fund 2.61
Bulk Deals
*in last one year
Insider Trades
14-Dec-18 Max Ventures Investment Holdings Private Ltd. Sell 4,999,130
11-Jan-19 Rahul Khosla Sell 310,755
15-Jan-19 Rahul Khosla Sell 140,229
6-Jun-19 Rahul Khosla Sell 408,308

RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative

reco reco risk reco reco Risk
Aavas Financiers HOLD SP M Aditya Birla Capital BUY SO H

Axis Bank BUY SO M Bajaj Finserv REDUCE SU L
Bank of Baroda REDUCE SU M DCB Bank HOLD SP M
Equitas Holdings Ltd. BUY SO M Federal Bank BUY SO L
HDFC BUY SO L HDFC Bank BUY SO L
ICICI Bank BUY SO L IDFC Bank BUY SP L
Indiabulls Housing Finance HOLD SU M IndusInd Bank BUY SO L
Kotak Mahindra Bank BUY SP M L&T FINANCE HOLDINGS LTD HOLD SP M
LIC Housing Finance BUY SO M Magma Fincorp BUY SP M
Mahindra & Mahindra Financial Services BUY SP M Manappuram General Finance BUY SP H
Max Financial Services BUY SO L Multi Commodity Exchange of India HOLD SU M
Muthoot Finance BUY SO M Power Finance Corp BUY SP M
Punjab National Bank REDUCE SU M Repco Home Finance BUY SP M
Rural Electrification Corporation HOLD SU M Shriram City Union Finance BUY SP M
Shriram Transport Finance BUY SO M South Indian Bank BUY SP M
State Bank of India BUY SO L Union Bank Of India HOLD SU M
Yes Bank HOLD SU M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING

Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe
within the sector
RELATIVE RISK RATING

Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return

Insurance
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098.
Board: (91-22) 4009 4400, Email: research@edelweissfin.com
ADITYA
Digitally signed by ADITYA NARAIN
DN: c=IN, o=EDELWEISS SECURITIES LIMITED,
Aditya Narain ou=SERVICE,
2.5.4.20=3dc92af943d52d778c99d69c48a8e0
c89e548e5001b4f8141cf423fd58c07b02,
NARAIN
Head of Research postalCode=400011, st=MAHARASHTRA,
serialNumber=e0576796072ad1a3266c2799
0f20bf0213f69235fc3f1bcd0fa1c30092792c2
aditya.narain@edelweissfin.com 0, cn=ADITYA NARAIN
Date: 2019.11.04 15:11:51 +05'30'
Coverage group(s) of stocks by primary analyst(s): Banking and Financial Services

Aavas Financiers, Aditya Birla Capital, AU Small Finance Bank Ltd, Axis Bank, Bajaj Finserv, Bank of Baroda, DCB Bank, Equitas Holdings Ltd., Federal Bank,
HDFC, HDFC Bank, ICICI Bank, ICICI Lombard General Insurance Company Ltd, IDFC Bank, Indiabulls Housing Finance, IndusInd Bank, Kotak Mahindra Bank,
LIC Housing Finance, L&T FINANCE HOLDINGS LTD, Max Financial Services, Multi Commodity Exchange of India, Manappuram General Finance, Magma
Fincorp, Mahindra & Mahindra Financial Services, Muthoot Finance, Punjab National Bank, Power Finance Corp, Rural Electrification Corporation, Repco
Home Finance, State Bank of India, Shriram City Union Finance, Shriram Transport Finance, South Indian Bank, Union Bank Of India, Yes Bank
Recent Research
Date Company Title Price (INR) Recos
01-Nov-19 Yes Long road ahead; 67 Hold

Bank Result Update
30-Oct-19 State Bank Analyst day: Big on specifics, 290 Buy
of India but execution vital ;
Company Update
29-Oct-19 Aavas Story compelling but pricey; 1604 Hold
Financiers Result Update
Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 161 67 11 240 Buy appreciate more than 15% over a 12-month period
* 1stocks under review
Hold appreciate up to 15% over a 12-month period
> 50bn Between 10bn and 50 bn < 10bn
743
Reduce depreciate more than 5% over a 12-month period
Market Cap (INR) 156 62 11
594
446
(INR)
297
149
-
Apr-14
Sep-14
Feb-14
Mar-14
Jun-14
Dec-14
Jul-14
Aug-14
Oct-14
Nov-14
May-14
Jan-14

(INR) (INR)
200
400
600
250
300
350
800
400
450
500
1,000
1,200
Nov 18 Nov 18
Dec 18 Dec 18
Jan 19 Jan 19
One year price chart
Feb 19 Feb 19
Mar 19 Mar 19
Apr 19 Apr 19
May 19 May 19
Jun 19 Jun 19
141
SBI Life Insurance
Jul 19 ICICI Prudential Life Insurance Jul 19
Aug 19 Aug 19
Sep 19 Sep 19
Oct 19 Oct 19
Nov 19 Nov 19
(INR) (INR)
600
300
400
500
700
800
500
250
300
350
400
450
Nov-18 Nov 18
Dec-18 Dec 18
Jan-19 Jan 19
Feb-19 Feb 19
Mar-19 Mar 19
Apr-19 Apr 19
May-19 May 19
Jun-19 Jun 19
HDFC Life Insurance
Jul-19 Jul 19
Aug-19 Aug 19
Edelweiss Securities Limited

Sep-19 Sep 19
Oct-19 Oct 19
Insurance
Nov-19 Nov 19
Insurance
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Life Insurance

Good Life@Club Banca

Santanu Chakrabarti Vinayak Agarwal

Under-penetration yes, but…

Few haves, most have nots

Exciting dynamics amongst leaders

1 Edelweiss Securities Limited

Our valuation framework is simple, our stock preference clearly etched

Crystal ball gazing – opportunities and uncertainties

2 Edelweiss Securities Limited

Investment argument ................................................................................................................ 4

Indian life insurance is no spring chicken................................................................................. 13

Distribution, distribution, distribution ..................................................................................... 21

Products replicable but appetite player-specific ..................................................................... 28

Regulations can and have changed the game .......................................................................... 39

Valuation framework needs context ........................................................................................ 41

ICICI Pru Life – our top pick based on 12M upside................................................................... 45

ICICI Prudential Life .................................................................................................................. 61

HDFC Life .................................................................................................................................. 82

SBI Life .................................................................................................................................... 105

Max Financial Services ........................................................................................................... 125

3 Edelweiss Securities Limited

Indian life insurance sector is no spring chicken

Penetration best measured in Adjusted penetration: Higher than headline numbers

Chart 1: India insurance penetration… …and density vis-a-vis other countries

4 Edelweiss Securities Limited

Table 1: Life insurance effective penetration in India could be about 70%

Pure protection and retirement products remain a secular under-penetration-driven growth

Distribution, distribution, distribution

5 Edelweiss Securities Limited

Chart 2: Bancassurance on the rise due to private players’ aggression

Chart 3: Premium productivity per agent has improved

Life insurance products: Replicable but appetite player-specific

6 Edelweiss Securities Limited

Source: Company, Edelweiss research

Table 2: Products vary on margin and risk/cyclicality

Source: Edelweiss research

7 Edelweiss Securities Limited

Chart 5: Big six command about two-thirds of the market

We argue, in absence of significant regulatory change in commission structuring or a long-

8 Edelweiss Securities Limited

Fig. 1: Regulation timeline

Government of India (GOI) liberalized the insurance sector in March 2000

Clean up of ULIP or linked products.

Cap on management expenses proposed and finalised by IRDA in 2016 is a

A true implementation of open architecture with reasonable limits on the

Like the rationalisation of surrender charges on ULIP Products in 2010,

As of now, IFRS implementation is required from 2022. Under IFRS, matching

Source: Edelweiss research

9 Edelweiss Securities Limited

Outlook and valuation

Table 3: Valuation matrix

Some context, however, is necessary:

 As mentioned earlier, the market structure is oligopolistic. Consequently, capital

10 Edelweiss Securities Limited

ICICI Prudential HDFC Life SBI Life Max Financial

Table 4: Target multiple derived from same fair value framework

Source: Edelweiss research

Table 5: Target price and upside potential

11 Edelweiss Securities Limited

 Protracted weakness in capital markets affecting ULIP persistency: Limited renewals

o Similarly, rationalisation or greater flexibility on commission payments to agents

o Finally, truly open architecture distribution norms, forced through quantitative