Probably it is that point in time when the stock market is not theme-oriented or concentrating on a particular sector. It is also that point in time when markets are not showing any kind of trend, up or down.
A casual glance at a report allows her to look at the premium growth rates achieved by the private sector insurance companies operating in the Indian market. She also notices that these companies have a strong parentage who are some of the biggest companies in the Indian markets.
Maybe she has found the next big thing in the Indian stock markets. She reads on.
Bajaj Auto Ltd (BAL), one of the biggest auto companies in the world, is betting big on insurance. The company has a consolidated sales turnover of Rs 8,188 crore, a growth of 32% over the previous year. The company has also formed a joint venture with Allianz to form Bajaj Allianz, where BAL holds around 74%. Over the last one year, Bajaj Allianz has seen its individual non-singular premium (repeated premium income) move up by 195% to Rs 1184 crore. The market capitalisation for BAL over the last one year is up by 75% at Rs 25,265 crore.
Apart from the good financial performance, many attribute the rise in market capitalisation for the company to the investment in the insurance business. Companies that have invested in insurance through joint ventures are being re-rated by the investor communities.
It is because the stock market has a view that there is a chance that some of these companies will see insurance acting as major source of revenues ten years down the line, while the present line of activity will become only a miscellaneous activity. The market is noticing the business of insurance and its potential to add value to a company.
Says Sam Ghosh, CEO, Bajaj Allianz, "Companies that have a lot of cash are looking for different avenues for investment. The insurance sector has a long-term story to tell and is in a position to generate higher net present values."
There are 13 private players in the insurance industry, bringing in around 100 products each year. In the last five years, private sector insurance players have posted a CAGR of 90% and the whole industry (private and LIC together) has grown at CAGR of 41%. This growth is sustainable for the next ten years, based on latent demand and low share as a percentage of GDP.
Says Rahul Sinha, senior vice president-marketing, Kotak Mahindra Old Mutual Life Insurance, "Telecom was the story of the previous decade and insurance is the big story of this decade. The maturity cycle of this industry is faster than a lot of other industries. When the new players entered this industry, there were hardly any term plans, there were no ULIPs. Now, newer products have evolved, there are whole life plans, term plans, short-term plans, capital guarantee, riders etc. Five years ago, in terms of product offerings, we were 20 years behind, now we are just 10 years behind. In the next five years we will be at par with the world."
Capturing the value of the insurance business in the market capitalisation of their parents which have invested in insurance subsidiaries is difficult. There are too many methods and too many variables. The best used method, commonly known as embedded value, is used by companies that are profitable and there is actuarial data to collect the findings.
Investors are looking at companies which have invested into the business of insurance very seriously. Says a fund manager with a leading mutual fund, "Putting the value of insurance on the market capitalisation is not easy. The best way is to look at the pedigree and the non-single individual premium and discount the profits over the next ten years. But major weights need to be given to distribution network and technology."
SBI Life, the subsidiary of State Bank of India, probably has the best distribution network in the country. The company has invested in technology and is taking its insurance business very seriously.
For SBI, insurance accounts for a substantial part of the total fee-based income of Rs 100 crore and when compared to other products, insurance is the highest. SBI is seeing big potential in cross selling and is aiming to double its income this year.
Says S Krishnamurthy, MD & CEO, SBI Life, "Today, insurance has high growth prospects in the country on account of lower density. There is demand for affordable and customer savvy products and we believe that we can deliver those products. Again, the 14,000 branches of SBI have been a great asset for our insurance business."
SBI has a market capitalisation of Rs 39,675.13 crore. The life insurance business through SBI life shows that the individual non-single premium has moved up by 214% over the last year at Rs 309.37 crore.
The management of the company is positive that they will be in a position to maintain a three-digit premium growth rate for more than five years on the conservative side. Again, since the insurance arm has concentrated more on traditional part of the insurance business more than the individual single premium, the company is in a better position to maintain higher premium growth rates as compared to companies that concentrate on the growth of individual single premiums. Indian companies operate on 20% profit margin to their premiums.
If we look at the future value of the profits at a growth rate of 25%, we are able to value SBI Life at Rs 425.81 crore, which is also known as the value of new business. But when we see this value as a percentage of the total market capitalisation of the parent i.e. SBI, the ratio works out to a mere 1.07%. This also happens to be the lowest ratio for all the listed companies that have an insurance arm.
The highest ratio in this regard goes to Max India which has partnered with Max New York Life for its insurance business. The value of new business to market capitalisation for the company works out to 38% for the company.
For both SBI and Max India, the business of insurance means different things. For SBI, the business of insurance is another way of increasing its fee-based income while for Max India, insurance forms one of the major activity of the company. SBI will continue to benefit from its insurance arms but companies that are more dependent on insurance will also attract a lot of investor fancy.
Another example is ICICI Prudential. The parent company, ICICI Bank, has a market capitalisation of Rs 39,804.54 crore, higher than that of SBI. The value of new business works out to Rs 2,892 crore which is 7.27% of the market capitalisation of the parent company.
Non-single premium guarantees repeat business and is considered the best way to de-risk the insurance business. The private sector is concentrating on non-single premium as it guarantees annuities and growth at the same time. Thus, the private sector has seen a higher growth rate for the individual single premium as compared to individual non-single premium.
Bajaj Allianz and Prudential ICICI have a higher growth rate in terms of individual single premiums at 233% and 95% as compared to 195% and 56% respectively for non single premium. In general, the insurance industry saw individual single premium of Rs 10,998.98 crore, of which private sector accounted for 20% of the premiums garnered. In terms of individual non-single premium the private sector accounted for 32% of the premium.
The India story
The insurance sector in India has a long way to go. In India, the investment that insurance receives as a percentage to GDP is just 2.5% as compared to 10% of GDP in the US. In 2000, the figure was at 1.6% that of the GDP. But now, there is an overall growth experienced by the insurance sector in the country.
Mostly it is the banks that have promoted the insurance business as they are associated with 'trust' and are in a better position to play with capital more efficiently. Though insurance functions as a separate business and banks only act as distributors for their insurance products, there is no database sharing between the banks and the insurance arm. The insurance arm provides the bank with a product line, trains its personnel, provides sales support and shares technology with the bank. In the case of Kotak Mahindra Old Mutual Life Insurance, 36% of the insurance business comes from the bancassurance channel, 14% from distributors and 50% direct. During 2001-02, their business was at Rs 7 crore. During 2005-06, it was at Rs 397 crore.
The industry is faced with several problems like high attrition, high capital infusion and is also highly under-penetrated. Till date, none of the private players have achieved break even. Most players should achieve break even by 2008-09, latest by 2009-10. The factors that will contribute to profits will be based on the basket of products and the pace of customer base acquisition. It is important that companies concentrate more on regular premium business than single premium business. High content of regular premium reflects a more stable business. Also, companies must not completely rely on bancassurance for business and tap other channels. Innovative product development and technology with the other distinguishing factors will take this business to higher levels.
Different businesses have different reasons for entering into the business of insurance. Banks have invested into insurance joint ventures for increasing their fee-based incomes.
The banking industry has realised that in times of volatilities due to interest rate risk and high inflation, a steady fee-based income becomes a necessity. Insurance accounts for a major part of fee-based income for most banks and it will not be long before these banks start listing their subsidiaries separately in the market. It will be at that time when the real value of the insurance arms will be unlocked.