We initiate coverage of Max India with an OUTPERFORM rating and
Reliance Capital with a NEUTRAL rating as the two credible plays on
the Indian life insurance space.
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Over the past eight years, the Indian life insurance industry has shown
a rapid 28% CAGR, aided by the rising popularity of linked products.
The FY09 drop in equity markets has led to a sharp growth slowdown
as well as a 10-20% fall in persistency rates for many insurers. The
recent cap on fees for these products by the regulator should lead to
more volatility in their product portfolio and potentially a compression
in their new business margins.
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With 100 mn people entering insurable population base over next few
years, rising affluence, high savings and increasing life expectancy,
Indian demographics are very supportive of strong growth continuing
in the industry. Even assuming life insurance penetration increases
from 4% of GDP to 5% in the next five years, implies potential growth
of 20% for the industry over this period.
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We expect the top-six private insurers in FY09, who had an aggregate
Rs30 bn loss, to turn profitable by FY11. This swing to accounting
profits is on the back of reducing “new business strain”, benefits of
economies of scale and their recent cost focus.
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We value the insurers on estimated EV-based multiples. Also, with
improved disclosures comparisons on parameters like efficiency,
persistency is possible. Max India (21% potential upside) and Reliance
Capital (4% potential upside) are the most credible plays on the theme,
with life insurance alone accounting for as much as 114% of their
market cap.