The Indian life insurance market has witnessed unprecedented volatility in its growthrates, margins and valuations over the past 24 months, quite an antithesis to theannuity nature of the business. While the industry is witnessing weak growth, webelieve in its long-term potential. We expect favorable demographics, low socialsecurity cover and high level of household savings to drive 18% CAGR for theindustry over FY10-15, and growth to stabilize at least at nominal GDP growth ratesin the longer term. We expect our coverage universe to break even over FY12-13, anddeliver reasonably attractive long-term RoEs of 20-25%; though evolving regulationremains a key risk. While the industry's high beta can be justified given the unitlinkedproduct mix, a pendulous swing in valuations for an annuity-based business isdefinitely out of sync. In this context, we propose an alternate approach based onDCF of long-term accounting profits/ cash flows to be used in conjunction with thewidely used appraisal method. The sector is poised for public listings over next 12months, which means value unlocking for the sponsors.
Growth potential intact: Given its unit-linked nature, the downturn in capital marketssince mid-Jan '08 has steered the industry away from scorching and seemingly invinciblegrowth rates of FY05-07 to a phase of decline. However, we believe in the industry'slong-term potential as growth drivers are intact. We expect the industry to outperformnominal GDP growth rates over the next 10 years and penetration levels to rise to ~6.5%of nominal GDP from 4.8% as of March'09.
Industry transitioning to the next life-stage; need to change approach: Most privateinsurers would achieve P&L break-even by FY12-13E, driven by reviving businessvolumes, declining expense ratios and improving conservation ratios. In this light, weadvocate an alternative methodology based on DCF of their long-term accounting profitswhich would be rid of the near-term volatility in premiums, margins and consequentlyprofits. In the eventual analysis, we are valuing insurers based on both the appraisal and DCF methodologies.
The Indian Life Insurance Industry, is most certainly at an inflexion point with various competing forces at play from volatile capital markets challenging the growth trajectory to an evolving regulatory landscape. The verdict is unequivocal - that theindustry would transition from a phase of 'scorching growth' to 'efficiency focus'over the next few years. However, we remain convinced of the long-term growthpotential of the industry on the back of India's strong demographic profile, lowsocial security cover and high savings ratio. We believe industry penetration wouldincrease to 6.4% of nominal GDP by FY20 from 4.8% as of FY09, with steady-stategrowth expected to run at least at nominal GDP growth. Our coverage universe offive insurers is expected to gain a ~7.5% market share (aggregate) to 23% over FY09-20.
This MBA Project Report, will be extremely useful in understanding the Data Analysis, portion of writing a quality report.The government proposes to raise the foreign ownership ceiling for private sector insurance companies from 26% currently to 49%. The Insurance Laws (Amendment) Bill 2008, introduced in December 2008 to give effect to the rise, is pending in the Rajya Sabha. We believe that a rise in foreign ownership limit is directionally positive for the insurance industry. Such a step will facilitate access to international capital, in turn enabling players to enhance their capital base for business expansion and aid value unlocking in the sector. All major players would be key beneficiaries, except Reliance Capital due to its current 100% ownership in the life insurance business and given the fact that the company is awaiting clearance for an IPO.
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