Insurance Sector

Indsec Securities & Finance Ltd.
INSURANCE SECTOR
February 13, 2008.
At 4.1% of penetration level, we believe that Indian Life Insurance sector has a long way
ahead. With higher income levels and increased risk appetite, a spate of investment
linked insurance products are very well received by the market and we believe that this
will further boost the penetration levels to double digits in coming years. The general
(non life) insurance has the least penetration level i.e. 0.6%. Booming economy and
increased awareness coupled with the fully deregulated environment will augur well for
the industry.
There are no standalone insurance companies listed in the stock market and one can
have an indirect exposure by investing in the parent companies holding stakes in these
insurance ventures. We have covered the top private sector players in life insurance and
general insurance space.
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1 Indsec Securities & Finance Ltd.
INDSEC
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TABLE OF CONTENTS
page
1. Introduction 3–4
2. Life Insurance Sector 5–7
3. Product basket 8
4. Distribution channels 9
5. CRAMEL Model 10
6. Emerging space 11
7. Concerns & Regulatory Changes 12
8. Valuation Approach 13
9. Companies covered
ICICI Prudential Life Insurance 14 – 15
Bajaj Allianz Life Insurance 16 – 17
HDFC Standard Life Insurance 18 – 19
Kotak Mahindra Old Mutual Life Insurance 20 – 21
10. General Insurance Sector 22 – 24
11. Detariffication 25
12. Recent Development & Outlook 26
13. Emerging Space 27
14. Companies covered
ICICI Lombard General Insurance 28 – 29
Bajaj Allianz General Insurance 30 – 31
15. Concluding remarks 32
16. Disclaimer 33
Analyst:
Ravi Mehta E-mail: ravim@indsec.co.in Cell no. +91 98920 65956
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Introduction:
Insurance is a risk sharing tool, which involves redistribution of

costs of unexpected losses. Insurers get exposed to similar kind of
risks and come together to share the losses of those who actually
incurred such losses. It is a hedging tool against risks.
Insurance sector
contributes to the
economic development Insurance paves way for unhindered growth of economy as all the
immensely by risk elements are taken care off by procuring appropriate cover
generating huge thereby accelerating the growth momentum of the economy. A
employment and
making long term funds
sound insurance industry will lead to the overall progress of
available for financial & capital markets and benefit the economy as a whole. For
developmental example in this financial year so far, insurance companies have
purposes. invested around Rs 360 bn. in the stock markets against around Rs
600 bn. invested by the FIIs. But the gap is expected to narrow in
the last quarter (January to March 2008), with the insurance
It helps in stabilizing companies estimated to pump in an additional Rs 240 bn.
stock market by
pumping in stable long Insurance can be primarily divided into life and general (non-life)
term funds.
insurance. A major difference between life insurance and general
insurance is that life insurance contract is a long term contract and
general insurance contract is a short term contract. Life insurance
is intended to cover risk of death of an individual. Life insurance
needs of an individual differ according to his financial needs, family,
status, etc. General insurance can be divided into personal and
commercial. In personal insurance we have insurance covers like
accident, health, travel, etc. In commercial insurance we have
insurance covers like fire insurance, marine insurance, aviation
Insurance industry is
insurance, etc.
divided among the life
and general insurance The total premium generated in FY02 stood at Rs. 631.3 bn., which
in the ratio of 83:17 was made up by Rs. 500.9 bn. from life insurance and balance Rs.
respectively.
130.4 bn. was contributed by general insurance, a mix of 79:21.
Over the next 4 years life insurance grew rapidly generating a
premium of Rs. 1058.8 bn. in FY06 while general insurance
premium earned in FY06 stood at Rs. 213.4 bn. thus we see that
life insurance premium accounts for 83% of the total insurance
premium earned.
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The industry was nationalized in1972 and had just two players. These two state insurers
are, Life Insurance Corporation of India and General Insurance Corporation of India
conducting life and non life insurance businesses respectively. With the sector opening
up in 2000 we saw a host of players establishing their operations in the Indian Insurance
Sector, which is one of the least penetrated sector in India thereby providing immense
growth opportunity. With the onset of liberalization the industry witnessed tremendous
growth in premium incomes as more and more private sector companies are showing
interest to participate in the Indian Insurance Sector.
Insurance industry
1400.0 0.3
1200.0 0.25
1000.0 0.2
Rs. bn.
800.0
%
0.15
600.0
400.0 0.1
200.0 0.05
0.0 0
FY02 FY03 FY04 FY05 FY06
premium earned growh rate
Source: IRDA & Indsec Research
Post liberalization, the sector grew at a CAGR of 19%.
PSUs Private players'

1200 100% 250.0 250%
1000 95% 200.0 200%
Rs. Rs.
800
bn. 90% bn. 150.0 150%
600 % %
85% 100.0 100%
400
80% 50.0 50%
200
0 75% 0.0 0%
FY02 FY03 FY04 FY05 FY06 FY02 FY03 FY04 FY05 FY06
total premium market share premium earned grwth
Private players have grown at a CAGR of 129% during FY02 to FY06 thereby capturing a
market share of 16% of the overall insurance (life & general) industry, from the state
owned majors.
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Life Insurance Sector:
The industry size in terms of total

amount of premium earned by the life Life insurance premium earned
insurance companies has doubled from 1200.0 16%
Rs. 500.9 bn. in FY02 to Rs. 1058.8 bn. 1000.0 14%
12%
in FY06. The sector has grown at a 800.0 10%
CAGR of 20.6% during this period, while
Rs. bn.
600.0 8%
private sector players have grown 6%
aggressively at a CAGR of 172.8%. 400.0
4%
These private sector players have taken 200.0 2%
away 14% of market share from the 0.0 0%
state owned life insurer, LIC. LIC’s FY02 FY03 FY04 FY05 FY06
market share in total premium earned,
as on March 2006, has come down to Industry
Pvt. Players' Mkt. Share
Private players
86% and is still falling due to the

aggressive growth strategies adopted by its private sector peers.
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The Life Insurance Sector opened up for private players in the year 2000. With the
opening up of the sector we have seen many players lining up to participate in the
insurance sector in India.
The list of private players operating in this space is as below:
Date of Name of the Company

23.10.2000 HDFC Standard Life Insurance Company Ltd.
15.11.2000 Max New York Life Insurance Co. Ltd.
24.11.2000 ICICI Prudential Life Insurance Company Ltd.
10.01.2001 Kotak Mahindra Old Mutual Life Insurance Ltd.
31.01.2001 Birla Sun Life Insurance Company Ltd.
12.02.2001 Tata AIG Life Insurance Company Ltd.
30.03.2001 SBI Life Insurance Company Ltd.
02.08.2001 ING Vysya Life Insurance Company Private Ltd.
03.08.2001 Bajaj Allianz Life Insurance Company Ltd.
06.08.2001 Metlife India Insurance Company Pvt. Ltd.
14.05.2002 Aviva Life Insurance Co. India Pvt. Ltd.
06.02.2004 Sahara India Insurance Company Ltd.
Nov – 2004 Bharti AXA Life Insurance Company Ltd.
Oct – 2005 Reliance Life Insurance Company Ltd.
17.11.2005 Shriram Life Insurance Company Ltd.
04.09.2007 Future Generali India Life Insurance Company Ltd.
19.12.2007 IDBI Fortis Life Insurance Company Ltd.
Source: IRDA
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Life Insurance in India…
Insurance industry is highly capital intensive and has a long gestation period. Initially all
life insurers incur losses, as the new business premium earned is generally more than
the renewal premium. The regulation in India is too stringent, which makes insurers to
account all the acquisition and related expense upfront in the first year when the
business is been written instead of writing it off over the lifetime of the policy. The
acquisition cost by way of agent commission is generally very high in the initial years
and if these are accounted fully in the first year it will lead to operational losses.
Revenue breakup of life insurers:
PVT
2001- 2002- 2003- 2004- 2005-
06
LIC
PVT
05
LIC
PVT
04
LIC
PVT
03
LIC
PVT
02
LIC
0 100 200 300 400 500 600 700 800 900 1000
Rs. in Billion
First Year Premium Renewal Premium Single Premium
From the above chart we can see that first year premium forms 50% to 66% of the total
premium earned by the private player, while for LIC it forms 15% to 21% of the total
premium earned during the period of FY02 to FY06. Thus it will be normal to see private
players reporting losses due to the stringent accounting norms followed in India and
they will breakeven once the new business premium will be less than renewal premium,
which will be possible in coming years.
In order to quench the thirst of aggressive growth some of the private players resorted
on selling single premium policy in order to capture a greater market share only to
realize that this wont help in sustaining the growth momentum, whereas the regular
premium policy assures steady cash flows in the coming year from the renewal premium
earned in subsequent years.
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Ever emerging product basket…
The life insurance players offers different products the most

common among these are Endowment Assurance. The other
products are Money Back, Whole Life, Term Assurance and the
recent hit, Unit Linked Insurance Scheme (ULIPs). The most
common among these are Endowment Assurance while the ULIPs,
which has been started by the private players, is fast catching up
and is very well received by the market. Even LIC has now rolled
out its unit linked products to gain market share. A brief insight on
some of these different products is given under:
• ULIPs is a typical insurance schemes were a part of the premium paid goes towards
the life cover and the balance is invested in the units like mutual fund and the
insured enjoys the investment performance of that fund. The booming stock market
in India is the prime reason for ULIPs finding favour with most of the insurers.
• The Endowment plans are the savings linked products, wherein, a certain
predetermined amount of payment is made at maturity or on death whichever is
earlier.
• Whole life insurance involves payment of certain sum on the death of the insured to
his family, these policy are generally not in demand.
• Money Back policies provide periodical payments known as survival benefits to the
life assured. The periodical lump sums are paid to the life assured on surviving a
particular term. In case of an unfortunate death of the life assured full sum assured
is paid.
• Term insurance is an exclusive risk cover which does not involve any savings linked
feature. It covers the risk of death for an individual for a fixed term, in case the
insured survives through the term, he is not entitled to any refund of premium by the
insurer on maturity. The premium charged is comparatively low. Term insurance is
yet to catch up in India.
• Riders: these are additional features, which could be attached to any policy bought
by the insured. It involves payment of some additional amount along with the normal
premium and enjoy a special coverage under this rider. The most common riders
offered by the insurers are accidental coverage, permanent disability rider, medical
coverage, etc. It is a new concept in India.
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We believe that further product innovation will be seen in the coming years as
competition intensifies.
Innovative products not enough to lead…
In insurance sector, competitors can easily emulate products and thus innovative
products cannot help in maintaining leadership. It is more important to distribute the
products to the right target segment in the lowest possible cost. Thus there is huge
emphasis to be laid on the distribution channels and network a company builds to
enhance its presence.
Insurance products have been sold traditionally through

agents. However with intensifying competition the insurance
companies can no longer rely on this channel of distribution,
as there would be huge turnover of agents. The company has
to rely on direct distribution by opening up branches or
extension counter at as many locations possible as it will help
in maintaining direct contact with the customer and service
them convincingly. However this will involve lot of investment
and new players or smaller players may not be in a position to
develop such a network effectively.
The companies are also investing in setting up a good IT

infrastructure in order to serve the customers online through
their web sites. The insurance companies also rope in
corporate agents. These corporate agents are companies that
have a huge customer base to which it can target these insurance products.
Since liberalization, the most buzzing form of

distribution is bancassurance. Bancassurance
refers to the selling of insurance policies through
a bank’s established distribution network. With
globalization and intense competition, banks are
witnessing depressed spreads. In a bid to improve its margins banks are focusing on to
shore up its fee based income. Thus banks have responded well by using their reach and
customer base to sell insurance products and earn fee-based income (commission). The
private players who didn’t have enough agent force, heavily relied on bancassurance for
boosting its sales and distribution which is evident from the fact that bancassurance
contributed more than 15% of their businesses whereas it was a negligible source of
business for LIC that heavily rely on its huge agent force.
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Financial analysis using CRAMEL model
We can analyze Insurance companies on the lines of CAMEL

model, which is used to analyze Banks. The key parameters in
CAMEL model are: Capital adequacy, Asset quality, Management
quality, Earnings quality, Liquidity.
To this, we can add one more parameter, Reinsurance, thereby
designing a CRAMEL model.
• Capital adequacy: As we have CAR (capital adequacy ratio) in banking, we have a

similar regulatory parameter for insurance companies called as Solvency ratio.
Solvency ratio implies an insurer’s financial soundness and its ability to pay claims.
IRDA specifies that insurers must maintain a solvency margin of 150%. Solvency
ratio is defined as shareholder’s funds divided by net earned premium. We can also
compute ratios like capital/assets and capital/technical reserves to assess capital
adequacy.
• Reinsurance: We need to check the proportion of business being reinsured. This

gives us a fair indication of the risk cessation undertaken by the company.
• Asset quality: Asset quality indicated the strength of the balance sheet and the
ability to pay claims. We can check ratios like debt investment/total investment
portfolio, equity investment/total investment portfolio.
• Management quality: Management quality is utmost important in any kind of

business. We can evaluate this from surrender ratio, lapse ratios, persistency ratio,
gross premium earned per employee, asset/employee.
• Earnings quality: Loss ratio i.e. net claims incurred/net premium earned and
expense ratio i.e. acquisition and underwriting cost/net premium written gives a fair
indication of the earnings quality. We should also evaluate returns earned on
investments.
• Liquidity: Liquidity position helps us to gauge the company’s ability to meet near
term liabilities and hence the best ratio to be used in this context is liquid
assets/current liabilities.
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Long way to go…
• One of the lowest penetrated sector in India:

Life insurance premium earned by the industry was just 4% of GDP in FY06
indicating enough room for further penetration.
• Investment object:
Life insurance policies carry a tax saving incentive and are

also been viewed from an investment perspective rather than
just a risk cover. The economy growing at around 9% has
lead to a secular bull rally in stock market, which has
generated huge demand for investment linked policies.
• Nuclear families:
With the traditional joint family system taking a back seat, we notice that more
number of nuclear families in modern India will call for more demand of insurance
products.
• Pension plans:
As per the estimates of United
% of population in 60+ yr age group
Nation Organization, in 2005,
7.5% of the Indian population
14
was in the age group of 60+
12
years and this proportion is
going to increase to around 10
12.2% by 2025, thereby calling 8

%
for a huge demand for pension 6

plans and other such annuity 4
plans given the poor state of 2
social security measures taken 0
by Govt. 2000 2005 2010 2015 2020 2025
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Concerns:
• Capital crunch:
Insurance is a capital-intensive business. The FDI limit stipulated is 26%, which is
unlikely to be raised to 49% in near term. This will make fund raising plans difficult
for the players. On top of this IRDA has also fixed high solvency margins.
• Rural reach:
The insurance companied need to tap the rural areas for further growth for which it
needs to have a very efficient distribution network to reach out in remote areas.
• 1 Agent - 1 Insurer:
As per IRDA multiple agency is not allowed, thus one agent or bank can sell only one
life insurer’s product and one general insurer’s product. We believe this is in a way
good for the insurers as once the banks are allowed multiple agency then they might
tend to sell products of only those companies that offers higher commission. Also
there may be lesser understanding of different products of different insurers and this
might lead to miss-selling products to the customers.
• ULIPs sales could slow down:

Indian stock markets saw an unprecedented bull run in last few years and have
recently entered into a consolidation phase, this could have some impact on sale of
ULIPs.
Recent regulatory change:
In recent times, single premium ULIPs have been in great

demand as a means to earn short term capital gains and
would ultimately result into high surrender/lapse rates. To
stop this practice IRDA has placed a 3 years lock in period
for ULIPs.
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Valuation:
Valuing an insurance company is difficult as the Indian

insurance industry is at a nascent stage and we cannot follow
globally accepted methods as the insurance industry has
matured in most other countries.
• Globally, the insurance companies are valued on the basis

of Appraisal Value. Appraisal value is a combination of
Embedded Value and New Business Value.
• Embedded Value takes into account the adjusted net worth
and the value of in-force business.
• While the new business value takes into account the present value of all the future
cash flows that a company is expected to generate from new business to be written
every year till perpetuity.
Life insurance companies lose money on new customers due to the acquisition costs, but
makes profit over the years. As the insurance industry is at a nascent stage in India, all
private players are making losses and hence Embedded value hardly contributes much
to the total valuation. Thus looking at the Indian perspective and considering the fact
that all private players are reporting losses we believe that the most appropriate way to
value them is the NBAP i.e. New Business Achieved Profit.
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We have valued the life insurance companies using the NBAP approach:
ICICI Prudential Life Insurance Company:
Leading private sector life insurance company second only to LIC of India.
ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, one of
India's foremost financial services companies and Prudential plc, a leading international
financial services group headquartered in the United Kingdom. Total capital infusion as
on Sept. 2007 stands at Rs. 29.32 billion, with ICICI Bank holding a stake of 74% and
Prudential plc holding 26%.
After receiving approval from IRDA in November 2000, the company began its
operations in December 2000. Its nation-wide team comprises of over 735 offices, over
243,000 advisors and 22 bancassurance partners.
45.0 4.5%
40.0 4.0% ICICI ‘s total premium
35.0 3.5% earned grew at a CAGR of
146% between FY02 to
Rs. in Billion
30.0 3.0%
25.0 2.5% FY06 thereby capturing a
20.0 2.0% market share of 4% in
15.0 1.5% terms of total premium
10.0 1.0% earned in FY06.
5.0 0.5%
0.0 0.0%
FY renewal single mrkt share (RHS)
50 12.0%
40 10.0% ICICI ‘s first year premium

Rs. in Billion
8.0% grew at a CAGR of 139%

30 between FY02 to FY07
6.0%
20 thereby increasing its
4.0% market share to 11% in
10 2.0% terms of first year
premium earned in FY07.
0 0.0%
FY02 FY03 FY04 FY05 FY06 FY07
FY mrkt share (RHS)
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ICICI Prudential Life Insurance has relied on regular premium for growth rather than
banking upon aggressive sales of single premium policies, thus the growth seems to be
sustainable due to the flow of renewal premium. Single premium forms around 10% of
total premium earned in FY07.
ICICI Prudential Life Insurance (Rs. bn.)

FY06 FY07 FY08(E) FY09(E)
FY Premium 22.9 43.7 83.0 149.5
Single Premium 3.1 7.9 11.1 14.9
Renewal Premium 16.6 27.5 45.4 74.9
Total Premium 42.6 79.1 139.5 239.3
New Business Premium 26.0 51.6 94.1 164.4

Annualised Premium Earnings 23.2 44.5 84.1 150.9
NBAP Margins 19%

NBAP 28.7
NBAP Multiple 16.0
NBAP Valuation 458.9
Economic Interest 74%
Valuation of ICICI's stake 339.6

ICICI's Equity 11.12
Value per share of ICICI Bank 305
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Bajaj Allianz Life Insurance Co. Ltd.:
Bajaj Allianz Life Insurance Co. Ltd. is a joint venture between Bajaj Auto, India's largest
exporter of two and three wheeler and Allianz AG, one of the world's largest insurance
companies. Total capital infusion as on March 2007 stands at Rs. 7.01 billion, with Bajaj
Auto holding a stake of 74% and Allianz AG holding 26%, however there is a put and
call option in the JV agreement which on exercise entitles Bajaj Auto an economic
interest of 26% in the JV.
After receiving approval from IRDA in August 2001, the company began its operations,
which is now supported by a nation-wide branch network of 876 offices, over 213,000
advisors and 3 bancassurance partners.
Bajaj Allianz’s total 35.00 3.5%

premium earned grew at a 30.00 3.0%
CAGR of 358% between
Rs. in Billion
25.00 2.5%
FY02 to FY06 thereby
20.00 2.0%
capturing a market share of
3% in terms of total 15.00 1.5%
premium earned in FY06. 10.00 1.0%
5.00 0.5%
0.00 0.0%
FY renewal single mrkt share(RHS)
35.00 9.0%
Bajaj Allianz’s first year 30.00 8.0%
premium grew at a CAGR of 7.0%
242% between FY02 to 25.00
Rs. in Billion
6.0%
FY07 thereby increasing its 20.00 5.0%
market share to 7.8% in 15.00 4.0%
terms of first year premium 3.0%
earned in FY07. 10.00
2.0%
5.00 1.0%
0.00 0.0%
FY mrkt share (RHS)
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Bajaj Allianz Life Insurance has followed a very aggressive strategy to increase its
visibility and market share by selling huge number of single premium policy. Single
premiums contributed around 48% of the total premium earned in FY06, however the
company is doing well to bring down its reliance on single premium income, which is
evident from the fact that these single premiums contributed just 22% of the total
premium earned in FY07.
Bajaj Allianz Life Insurance (Rs. bn.)

FY Premium 12.1 30.8 49.3 71.5
Single Premium 15.1 11.9 10.1 9.1
Total Premium 31.3 53.1 76.0 104.7

NBAP Margins 19%

NBAP 13.7
NBAP Multiple 16.0
Value of Bajaj Auto's stake 57.2

Bajaj Auto's Equity 1.01
Value per share of Bajaj Auto Ltd. 566
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HDFC Standard Life Insurance Company Ltd.:
HDFC Standard Life Insurance Company Ltd. is one of India's leading private insurance
companies, which offers a range of individual and group insurance solutions. It is a joint
venture between Housing Development Finance Corporation Limited (HDFC Ltd.), India's
leading housing finance institution and a Group Company of the Standard Life, UK. HDFC
as on March 31, 2007 held 81.9% of equity in the joint venture. After recent 7.15%
stake sale, the equity holding has now realigned to 74:26 between HDFC and Standard
Life, UK, respectively. The company received approval in October 2000 and has over the
years developed a network of over 73,000 agents and 438 branches as on March 2007.
18 1.6% HDFC ‘s total premium

16 1.4% earned grew at a CAGR of
14 1.2% 162% between FY02 to
FY06. It has a market share
Rs. in Billion
12
1.0% of 1.5% in terms of total
10
0.8% premium earned in FY06.
8
0.6%
6
4 0.4%
2 0.2%
0 0.0%
14.00 4.5% HDFC ‘s first year premium

12.00 4.0% grew at a CAGR of 126%
3.5% between FY02 to FY07
10.00
Rs. in Billion
3.0% thereby increasing its market

8.00 2.5% share to 3.9% in terms of
6.00 2.0% first year premium earned in
1.5% FY06, which slipped to 3.3%
4.00
1.0% in FY07.
2.00 0.5%
0.00 0.0%
FY mrkt share (RHS)
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HDFC Standard Life Insurance is the third largest private life insurer however
commanding an overall market share of just 1.5% in terms of total premium earned in
FY06. The company has consistently achieved growth by selling regular policies rather
than selling single premium policies. Single premium contributed just 11.6% of total
premium earned in FY07. Thus it has the cushion to adopt aggressive selling of single
premium policies to ramp up its visibility and market share.
HDFC Standard Life Insurance (Rs. bn.)

FY Premium 8.3 13.2 21.7 30.4
Total Premium 15.7 28.5 44.5 68.2

NBAP Margins 20%

NBAP 6.1
NBAP Multiple 17.0
Value of HDFC's stake 77.0

HDFC's Equity 2.82
Value per share of HDFC Ltd. 273
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Kotak Mahindra Old Mutual Life Insurance Limited:
Kotak Mahindra Old Mutual Life Insurance Ltd. is a joint venture between Kotak
Mahindra Bank Ltd., and Old Mutual plc. Total capital infusion as on March 2007 stands
at Rs. 3.28 billion, with Kotak Mahindra Bank Ltd. holding a stake of 74% and Old
Mutual plc. holding 26%.
After receiving approval from IRDA in January 2001, the company began its operations,
which is now supported by a branch network of 93 offices, over 26,654 advisors and a
good support of parent, Kotak Mahindra Bank as its bancassurance partner.
7.00 0.70%
Kotak’s total premium 6.00 0.60%
earned grew at a CAGR of
5.00 0.50%
Rs. in Billion
201% between FY02 to

FY06 It has a market share 4.00 0.40%
of just 0.6% in terms of 3.00 0.30%
total premium earned in
FY06. 2.00 0.20%
1.00 0.10%
0.00 0.00%
6.00 1.8%
Kotak‘s first year premium 1.6%
5.00
grew at a CAGR of 150% 1.4%
between FY02 to FY07. It
Rs. in Billion
4.00 1.2%
had a market share of just
1.0%
1.7% in terms of first year 3.00
premium earned in FY06, 0.8%
which slipped to 1.4% in 2.00 0.6%
FY07. 0.4%
1.00
0.2%
0.00 0.0%
FY mrkt share (RHS)
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Kotak is a small player in the life insurance space, commanding a negligible market
share, however it commands a good brand image, which makes it attractive as a
possible take over target. We see a drastic change in revenue mix in FY06. Single
premium contributed almost 40% of the total premium earned in FY05 however the
contribution came down to 5.2% in FY06 and 6.3% in FY07. Thus the company has
focused heavily on regular premium policy to ensure stable growth.
Kotak Mahindra Old Mutual Life Insurance (Rs. bn.)

FY Premium 3.6 5.5 9.1 14.4
Total Premium 6.2 9.7 15.0 22.8

NBAP Margins 19%

NBAP 2.8
NBAP Multiple 18.0
NBAP Valuation 49.5
Value of Kotak Bank's stake 36.6

Kotak Bank's Equity 3.4
Value per share of Kotak Mah. Bank 108
Other parameters for valuation:
Apart from looking at NBAP valuation we can also value these insurance companies on
certain qualitative grounds like their branch network, number of agents and
bancassurance tie-ups. One should also look at the quality of agent force as this could
minimize the risk of miss selling complex products. However these qualitative
parameters would increase the subjectivity while valuing these companies.
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General (Non-Life) Insurance Sector:
The industry size in terms of total amount

General insurance premium earned
of premium earned by the general
insurance companies has grown from Rs.
250.0
130.4 bn. in FY02 to Rs. 213.4 bn. in FY06.
200.0
The sector has grown at a CAGR of 13.1%
Rs. bn.
during this period, while private sector 150.0
players have grown aggressively at a CAGR 100.0
of 83.8%. These private sector payers 50.0

have taken away 25% of market share 0.0
from the state owned insurers. PSU FY02 FY03 FY04 FY05 FY06
insurers’ market share in total premium Industry Private players

earned, as on March 2006, has come down
to 75% and is still falling due to the
aggressive growth strategies adopted by its private sector peers.
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The General Insurance Sector is opened up for private players in the year 2000. With
the opening up of the sector we have seen many players lining up to participate in the
insurance sector in India. It is the least penetrated sector in India, the total general
insurance premium paid is aggregating to 0.6% of GDP (considering FY06 figures).
The list of private players operating in this space is as below:
Date of Reg. Name of the Company
23.10.2000 Royal Sundaram Alliance Insurance Company Limited
23.10.2000 Reliance General Insurance Company Limited.
04.12.2000 IFFCO Tokio General Insurance Co. Ltd
22.01.2001 TATA AIG General Insurance Company Ltd.
02.05.2001 Bajaj Allianz General Insurance Company Limited
03.08.2001 ICICI Lombard General Insurance Company Limited.
15.07.2002 Cholamandalam General Insurance Company Ltd.
27.08.2002 HDFC-Chubb General Insurance Co. Ltd.
03.08.2007 Apollo DKV Insurance Company Limited
04.09.2007 Future Generali India Insurance Company Limited
16.11.2007 Universal Sompo General Insurance Company Ltd.

Source: IRDA
In all we have 15 players in this space including the state owned players like, Oriental
Insurance Co. Ltd., The New India Assurance Co. Ltd., National Insurance Co. Ltd. and
United India Insurance Co. Ltd. with effect from Dec 2000, these subsidiaries have been
de-linked from the parent company and made as independent insurance companies.
Whereas, with effect from Dec 2000, GIC has become a National Reinsurer.
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Business Mix
pvt
05-
20
06
psu
pvt
04-
20
05
psu
pvt
03-
20
04
psu
pvt
02-
20
03
psu
pvt
01-
20
02
psu
0 25 50 75 100 125 150 175

Rs. in Billion
Fire Misc Marine
Source: IRDA
The different types of general insurance are, Fire Insurance, Marine Insurance and
Miscellaneous, which includes many types of risk covers that do not fit into fire or
marine category. Under the head ‘Miscellaneous Insurance’ we have a host of products
like Motor insurance, Burglary insurance, engineering insurance, cattle insurance, crop
insurance, aviation insurance, personal accident cover, liability insurance and risk cover
from calamities.
Auto insurance (included under miscellaneous

head) forms around 40% to 45% of the overall Business Mix - Gen. Insurance
premium earned by general insurers. Of the total Industry
premium earned from auto insurance, around Misc. Fire

two-third of the premium comes from auto own (excl. 19%
damage policies, while the rest comes from the auto)

32%
auto third party policies. Fire insurance accounts
Marine
for around 19% of the total premium income 7%
while marine insurance accounts for 6% to 7%
and the rest accounted under miscellaneous
head, arising from health insurance, aviation Auto
insurance, personal accident, engineering, etc. 42%
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Detariffication… the main theme to focus on
India is adopting the deregulation of the premium in a phased manner.
• Prior to 2007 pricing deregulation was applied to some

selected products and then it has been enforced on three
more class of insurance viz. fire, engineering and auto own
damage whereas the third part liability policies were still
kept under the tariff purview of the regulator. During this
first phase, IRDA had set maximum discount of around 50%
of the old regulated rates and around 20% for auto own
damage rates.
• In the second phase of detariffication, which is applicable from January 2008, IRDA
has allowed complete pricing freedom without prescribing any floor price and also
allows complete freedom in product designing as well.
This approach of adopting a phased manner to deregulate pricing and liberalize product
designing is commendable, as it would minimize the instance of excessive price cuts and
ensure a smooth transition from regulated tariff to free pricing.
The auto third party liability insurance has had a high claim ratio of 150%. With the
second phase of detarrifing, we have seen spurt in prices of these policies while
traditionally profitable policies like fire, engineering, etc. are witnessing major price cuts.
Thus we see the industry moving away from cross subsidizing to risk based pricing which
is a very good development.
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Recent developments and the way ahead…
Property insurance rates fell by 75% to 80% on the

first day of free pricing while fire insurance premium
saw a further drop of 20% to 30% over an above the
51% cut announced in the previous year. While the
price war is expected to continue, there was a
marginal change in auto cover premium rates. In this
segment we may see higher discounts on expensive
cars while higher rates charged for small cars.
We expect the current price war to continue for couple of years and with the industry
moving to the risk based pricing model there could be some sort of price stabilization
seen. The risk of prolonged price war could be seen in case if state owned insurers are
too aggressive to cut prices in order to gain atleast a part of the lost market share.
However we do not expect unjustified price cuts as we believe General Insurance Council
will intervene in such kind of price wars to curb irrational price cuts and also there are
reinsurers who will assess the feasibility of giving a reinsurance cover at a particular
premium level.
In this deregulated environment we see that price volatility would be a temporary

phenomenon and eventually the industry would be headed for a stable and risk based
pricing practice, which would benefit the industry and consumers at large.
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Emerging space…
• Agriculture insurance:
More than two-third of Indian population is directly or indirectly linked to agriculture,
we see, agricultural insurance as an emerging space. Different products thought of in
this space are:
o Crop insurance – Agriculture Insurance Company of India Limited (AIC) have

passed through the leaning curve in all areas of crop insurance and are looking to
make crop insurance reachable and affordable to a majority of cultivators in the
country.
o Weather insurance – This is a new concept were in the cultivators need not wait
till harvesting the crop but could claim a relief in case the weather is not as per
the requirement to grow a particular crop for which the cultivator has taken a
weather risk cover.
• Health insurance:
Rising life expectancy levels due to modern medical science and also stressful life
style calls for huge medical expenses. We are also witnessing higher expenses for
medical treatment owing to rapid advancement in the medical field. Currently in
India, total health insurance undertaken covers just 2% of the total medical expenses
incurred, which represents immense penetration opportunity in this segment.
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We have valued the general insurance companies using the forward PE

approach:
ICICI Lombard General Insurance Co. Ltd.
Leading private sector general insurance company in India.
ICICI Lombard General Insurance Company is a joint venture between ICICI Bank, one
of India's foremost financial services companies and Canada based $ 26 billion Fairfax
Financial Holdings which is a diversified financial corporate engaged in general
insurance, reinsurance, insurance claims management and investment management.
ICICI Bank holds 74% equity stake while its foreign partner holds 26% in this joint
venture. Lombard Canada Ltd, a group company of Fairfax Financial Holdings Limited, is
one of Canada's oldest property and casualty insurers. ICICI Lombard General Insurance
Company received regulatory approvals to commence general insurance business in
August 2001.
ICICI Lombard General Insurance was recently awarded as the General Insurance
Company of the Year Award at the 11th Asian Insurance Industry Awards held in
Singapore. It is the first Indian company to be given this prestigious Award.
Revenue Mix
(Net premium): FY07
FY06
FY05
FY04
FY03
FY02
0 5000 10000 15000
Rs. in Million
Fire Marine Motor Misc.
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The net premium earned from writing new business has grown at a CAGR of 266%
during FY02 to FY07. The company has huge exposure to motor insurance, which
contributed more than 50% of premium in FY07.
ICICI Lombard General Insurance (Rs. mn.)

Gross written premium 15829 29891 47826 66956
Net premium income 7339 14508 23913 32808
PAT 503 684 1076 1440
PE Multiple 18
Value of the business 25912
ICICI's stake 74%

Value of ICICI's stake 19175
ICICI's Equity 11125
Value per share of ICICI Bank 17
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Bajaj Allianz General Insurance Company Limited:
Second largest private sector general insurer in India.
Bajaj Allianz General Insurance Company Limited is a joint venture between Bajaj Auto
Limited and Allianz SE. The Company has an authorized and paid up capital of Rs 1,100
mn. Bajaj Auto holds 74% and the remaining 26% is held by Allianz, SE. However there
is a put and call option in the JV agreement which on exercise, entitles Bajaj Auto, an
economic interest of 51% in the JV.
Bajaj Allianz General Insurance received regulatory approvals to commence general

insurance business on May 2nd, 2001 to conduct General Insurance business (including
Health Insurance business) in India. Bajaj Allianz today has a network presence in over
200 towns spread across the length and breadth of the country.
As on 31st March 2007 Bajaj Allianz General Insurance maintained its premier position
in the industry by garnering a premium income of over Rs.18,000 mn. Bajaj Allianz has
made a profit before taxes of Rs.1,170 mn. and emerged as the first private insurance
company to make profit before taxes of more than Rs.1,000 mn. The company also was
the one of the highest profitable insurer among private insurance companies and made a
profit after tax of Rs.750 mn. Bajaj Allianz is the only company to make underwriting
profits for the last three years consecutively.
Revenue Mix
(Net premium):
FY07
FY06
FY05
FY04
FY03
FY02
0 2000 4000 6000 8000 10000 12000

Rs. in Million
Fire Marine Motor Misc.
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The net premium earned by writing new business has grown at a CAGR of 165% during
FY02 to FY07. The company is doing well to realign its business mix, which was highly
inclined towards motor insurance. In FY07, motor insurance contributed 61.5% of the
net premium earned. We observed that Bajaj Alliance has a lower reinsurance rate,
which means more risk exposure and better margins.
Bajaj Allianz General Insurance (Rs. mn.)

Gross written premium 12846 18033 23443 30476
Net premium income 6987 10398 13128 16762
PAT 516 754 961 1265
PE Multiple 18
Value of the business 22765
Bajaj Auto's stake 51%

Value of Bajaj Auto's stake 11610
Bajaj Auto's Equity 1012
Value per share of Bajaj Auto Ltd. 115
Other parameters for valuation:
Apart from looking at forward PE, we can also value these

insurance companies on certain qualitative grounds like
their branch network and number of agents. Employee
strength is also of great importance and one needs to
check the company’s ability to design innovative products,
as these would be in vogue with complete derugaltion
being enforced by IRDA. However these qualitative
parameters would increase the subjectivity while valuing
these companies.
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Concluding remarks:
With the opening up of the insurance space since the year 2000, we have seen number
of players plunging in to have a pie of this emerging space. The growth in insurance
sector looks very robust on the back of low penetration levels coupled with increasing
awareness.
The business of life insurance and the recommended accounting practice in India calls
for a longer time frame for achieving break-even. As such all the private players, owing
to the above expected business growth, are posting losses till date. We believe that the
life insurance companies will take couple of years to break even. In this space the top
two private sector companies are ICICI Prudential and Bajaj Allianz Life Insurance that
command a market share (on the basis of first year premium during the period April to
December, 2007) of 9% and 7% respectively. Due to its aggressive growth strategies
and huge distribution network, we find these two companies to continue to perform
better and command higher value compared to its peers.
The general insurance business breaks even soon after commencement of businesses
and most of the private players are posting profits. Here again the top two private sector
players are ICICI Lombard and Bajaj Allianz General Insurance that command a market
share (on the basis of gross premium underwritten during the period April to December,
2007) of 12.6% and 8.2% respectively. Bajaj Allianz General Insurance is the only
private sector company to have generated underwriting profits in a competitive and
difficult market. We believe that these two companies would continue to command
better value.
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Disclaimer: This document has been prepared and issued on the basis of publicly available information, internally developed
data and other sources believed to be reliable. Whilst meticulous care has been taken to ensure that the facts stated are
accurate and opinions given are fair and reasonable, neither the analyst nor any employee of our company is in any way
responsible for its contents. The company may trade in securities, which are the subject of this document or in related
instruments and may have acted upon or used the information contained in this document or the research or the analysis on
which it is based, before its publication. The company or its owners may have a position or be otherwise interested in the
investment referred to in this document. This is just a suggestion and the company will not be responsible for any profit or
loss arising out of the decision taken by the reader of this document. No matter contained in this document may be
reproduced or copied without the consent of the company.
For additional information please contact:
Research Team
Name Sectors Covered Contact Information
Viral Malia Logistics, Power, Engineering & viralm@indsec.co.in 9821244313
Construction.
Ravi Mehta Auto & Ancillaries, Banking ravim@indsec.co.in 9892065956
Hemang Tanna I.T & Metals hemangt@indsec.co.in 9819803389
Prachi Bane Cement & Real Estate prachib@indsec.co.in 9819793654
Smita Jayaraj Telecom, Media & Retail smitaj@indsec.co.in 9820190850
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Deepesh Panchawala Technicals deepeshp@indsec.co.in 9920911845
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Location Contact Person
Mumbai (H.O) Maya Gandhi mayag@indsec.co.in 9820633316
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For additional information please contact: research@indsec.co.in, or Visit us at www.indsec.co.in

Indsec Securities & Finance Ltd., 116, Free Press house, 215, Free Press Journal Marg, Nariman Point, Mumbai 400 021.
(Phone No: 2204 6753, 2282 2362)
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Indsec Securities & Finance Ltd.

Insurance is a risk sharing tool, which involves redistribution of

premium earned growh rate

Source: IRDA & Indsec Research

Post liberalization, the sector grew at a CAGR of 19%.

PSUs Private players'

total premium market share premium earned grwth

Source: IRDA & Indsec Research

The industry size in terms of total

86% and is still falling due to the

The list of private players operating in this space is as below:

Date of Name of the Company

Revenue breakup of life insurers:

Source: IRDA & Indsec Research

Ever emerging product basket…

The life insurance players offers different products the most

Innovative products not enough to lead…

Insurance products have been sold traditionally through

The companies are also investing in setting up a good IT

Since liberalization, the most buzzing form of

Financial analysis using CRAMEL model

We can analyze Insurance companies on the lines of CAMEL

• Capital adequacy: As we have CAR (capital adequacy ratio) in banking, we have a

• Reinsurance: We need to check the proportion of business being reinsured. This

• Management quality: Management quality is utmost important in any kind of

Long way to go…

• One of the lowest penetrated sector in India:

Life insurance policies carry a tax saving incentive and are

12.2% by 2025, thereby calling 8

for a huge demand for pension 6

• ULIPs sales could slow down:

Recent regulatory change:

In recent times, single premium ULIPs have been in great

Valuing an insurance company is difficult as the Indian

• Globally, the insurance companies are valued on the basis

ICICI Prudential Life Insurance Company:

40 10.0% ICICI ‘s first year premium

8.0% grew at a CAGR of 139%

ICICI Prudential Life Insurance (Rs. bn.)

Total Premium 42.6 79.1 139.5 239.3

New Business Premium 26.0 51.6 94.1 164.4

NBAP Margins 19%

Valuation of ICICI's stake 339.6

Value per share of ICICI Bank 305

Bajaj Allianz Life Insurance Co. Ltd.:

Bajaj Allianz’s total 35.00 3.5%

Bajaj Allianz Life Insurance (Rs. bn.)

Total Premium 31.3 53.1 76.0 104.7

New Business Premium 27.2 42.7 59.4 80.6

NBAP Margins 19%

Value of Bajaj Auto's stake 57.2

Value per share of Bajaj Auto Ltd. 566

HDFC Standard Life Insurance Company Ltd.:

18 1.6% HDFC ‘s total premium

14.00 4.5% HDFC ‘s first year premium

3.0% thereby increasing its market

HDFC Standard Life Insurance (Rs. bn.)

Total Premium 15.7 28.5 44.5 68.2

New Business Premium 10.4 16.5 24.0 32.2

NBAP Margins 20%

Value of HDFC's stake 77.0

Value per share of HDFC Ltd. 273