Capital infusion – Is the business appealing enough to attract investors? - PowerPoint Presentation

1. Capital infusion – Is the business appealing enough to attract investors?Institute of Actuaries of IndiaServing the Cause of Public InterestIndian Actuarial ProfessionVichitra MalhotraGopal KumarIshwar GopashettiGuide: Mayur Ankolekar

2. Agenda2IntroductionIndustry AnalysisGeneral InsuranceLife InsuranceE-CommerceSummaryQuestions

3. Introduction - Appeal to Investors3From purely economic view point, business which earns highest risk adjusted returncompared to other investment opportunities (opportunity cost) is most appealing to investors.What makes a business appealing for Investors?

4. Introduction – Appeal to investors SURPLUS CAPITAL & OPPORTUNITY COSTINVESTMENT TIME HORIZON & PAST EXPERIENCERISK APPETITE & VALUEBusiness Appealing or Not ?Business Appealing also depends on investors’4

5. FactorPotential/AttractiveChallenge/UnattractiveMarket CharacteristicsMarket SizeLarge potentialSmall disparate marketMarket growth rateGrowing and will continue to growGrowing slowly, flat or decliningPricing trendsHolding steady and moving with inflationPrices falling and becoming more competitiveProfitability trendsChanges in cost passed on to customer, profitability maintainedMargins sinking and pressure to squeeze out costDirect Industry ForcesIntensity of direct competitionFragmented with no competitorMarket dominated by few players with high market shareCustomer purchasing powerPlenty of customers and low dependency on any one customerFew dominant customers with long term supply contractsProduct InnovationPotential for Innovation, Intellectual Property (IP) rights protectionStandardized ProductsIntroduction – Industry attractivenessDetermining if the option at hand is the best depends on various factors:5

6. FactorPotential/AttractiveChallenge/UnattractiveOther ForcesIntensity of direct competition from substitutionNo significant or viable alternativesPlenty of alternative ways to deliver the product or service benefitBarriers to entryHigh barriers to entry deterring new entrantsLow barriers to entrySupplier / distributor dominancePlenty of suppliers with over supply and few of them have significant marker shareFew suppliersRegulatory environmentCollaborative environment between Regulator and Industry membersRestrictive environmentUncertainty of the futureIntroduction – Industry attractiveness6

7. 7Alternative analysisIntroduction – Industry attractiveness

8. Perpetuity ValuationActual cash flow for return capitalisationActual profit for return capitalisaitonNet asset valueNet assetsLiquidation valueDiscounted cash flowsFuture cash flowsFuture ProfitFuture dividend paymentsPerformance MultiplesEBITDA multipleEarnings multipleCash flow multipleRevenue multipleNet asset valueBook value – multipleP/E – growth multiplesIndependent Measure(Basis: return expectation of Buyer Problems: Appropriate return On which to make A valuationComparative Measure(Basis: comparableData of market / industry Problems:Availability of Comparable data ) Current Value MeasureProblemBuying the future and not the pastIntroduction – Industry valuation Future Oriented MeasureProblemForecast accuracy8

9. GI Industry – Growth & Market Size9Significant top line growth – EXPECTED TO CONTINUE IN FUTUREFrom a Rs 12,000 crore top-line industry in 2001–02, today it is worth 70,000 crore, clocking an annual growth rate of 17% over the last decade. The industry today provides a cover of Rs 1,000 lakh crore.GI penetration still on the lower side.GI Industry, with low startup capital, is projected to grow at 16% in medium to long term mainly on account of economic growth, socio economic drivers and greater penetration.Source: KPMG Analysis, IRDA Annual Report 201216%

10. GI Industry – Profitability (low and fluctuating)Profitability low – driven by intense competition and regulated Motor TP prices.De-tariffication has resulted in prices being cut significantly.10

11. GI Industry – Profitability (low and fluctuating)11

12. GI Industry – Regulatory update12Key Regulatory ChangesChange in Industry2007Price DetarifficationCreation of Indian Motor Third Party Insurance PoolMechanism to equitably share CVTP lossesSignificant change in premium rates for commercial lines2011Merger and Acquisition GuidelinesEnabled consolidations, inorganic transactions in the industry2012Introduction of declined risk pool, TP premium rates increaseImprovement in overall profitability of the CV segment2013New health insurance guidelines introducedStreamlining of products

13. GI Industry - Challenges13Existing products mainly standardizedSome innovation seen in terms of add on benefits and customized products to some segmentsLack of proper customer segmentation with products for complete customer life cycleProduct InnovationMany new entrants seen since 2007Focus on growth and competition only on priceNature of CompetitionLimited or no increase in TP premium ratesThird Part liability caps under Motor Vehicles Act Liability generally decided through court orders; high claim ratiosThird Party Premium Rates

14. 14Mainly Agents & Brokers (60% of industry premium)Agents: High churn out, low productivity and low customer connectBrokers: Fragmented, unable to offer full range of services to customersBancassurance potential not utilized fully Distribution ModelsPotential for using risk based pricing, capturing data through new technologies (big data etc.) not exploited enough.Need for having separate pricing approach for each line Pricing ChallengesGI Industry - Challenges

15. GI Industry - Future prospects15Industry has huge potential; but initiatives needed to exploit full potential and grow irrespective of economic environmentCompetition of Product Differentiation versus Price DifferentiationBetter customer segmentation to meet needs across life cycle; Product innovation need of hour.Invest in building best in class claims management Strengthen pricing mechanisms; Talent developmentStrengthen distribution model to maximise reach; Power of E-distribution and shared services should be leveraged

16. Birla Sun LifeBajaj AllianzAvivaSaharaLifeShriramLifeBharti AXAIDBI FederalAegon ReligareIndia FirstEdelweiss TokioHDFC LifeExide LifeFuture GeneraliCanara HSBC OBCICICI PrudentialKotak LifeDHFL PramericaMax LifePNB MetLifeStar Union Dai-chiReliance LifeSBI LifeTata AIAThe Life Insurance Industry - evolutionSource: IRDAWave 1Total PremiumINR 3,13,000 Cr*Total PremiumINR 35,000 CrWave 2CAGR: 25%CAGR: 22%Wave 1Bank-led: ICICI Prudential, HDFC Life, Kotak Life, Exide life, SBI Life, PNB MetLifeNon bank-led: Birla Sunlife, Max Life, Bajaj Allianz, Reliance Life, Tata AIA, Aviva, Sahara Life, Shriram LifeWave 2Bank-led: IDBI Federal, Canara HSBC OBC, Star union Dai-chi Life, India First Non bank-led: Bharti AXA, Future Generali, Aegon Religare, DHFL Pramerica, Edelweiss TokioCAGR: 2.5%16

17. The regulatory changes overviewULIP regulations (FY11)Increased lock-in period for ULIPs from 3 years to 5 years,Age based minimum mortality cover at ~ 10 times premiumCaps on surrender chargesCap on reduction in yield basis policy termPension to offer a minimum 4.5% p.a. guaranteeLinked and Non-linked products regulations (FY13)Minimum death benefit specifications for single and regular premium productsMinimum premium payment term of 5 years for non-single premium policiesCap on commission basis premium payment termGuidelines on pension products (FY12)Scrapped the 4.5% guaranteed annual return clause on ULIP pensionHowever, all pension products to have a guarantee of a non-zero rate of returnCompany that contracts the original deferred pension policy is required to provide the annuity product to the policyholderKey guidelines aIndustry-wide impactReduction in commissionReduction in margin and loadings leading to downsizing of AgencyNo Pension products available for sale for a long time. Hence, decline in new business.Re-pricing of productsReduced commission – reduced new business17

18. What are the drivers?Structural Value –Business MixFuture / Expected Profit MarginFuture Growth RateRisk Discount RateActual ExpensesPersistencyMiscellaneousStructural Value – Acquisition Expense Overrun Embedded ValueAV Appraisal Value18

19. Business Value = VNB * Multiplier + EVValue Creation Framework19

20. MACRO ANALYSISLife Insurance: Industry Analysis20

21. 21- Market Size - $ 1 trillion by 2020, Market Growth rate – 12 % to 15% paPotentialFavorable demographics – Insurable population – 75 Crores lives, Average Age 27, Increased consumer awarenessInsurance premium % of Domestic savings – 35% by 2020 from 26% in 2010Leveraging Digital Platform to tap into the target marketReason- Stable regulatory environment Cost effective distribution channelUntapped potential – Digital spaceProduct innovationChallengesFuture Outlook

22. RATIO ANALYSISRisk ManagementCorporate GovernanceIndustry Analysis22

23. Expense Ratio = OPEX / Premium IncomeOther measures also followed – ex. OPEX to FYPAdjusted Opex Ratio = OPEX / (Premium Income + Investment Income - Increase Reserve) OPEX RatioChina – 8.3%UK – 4.8%Singapore – 6.9%Industry Trend: Private Players vs. LIC23

24. New Business marginsProfit margins ParticipatingproductsULIPsTerm insurance10-12%6-9%15-20%4-8%40-60%40-60%*2-4%1-3%3-5%0.5-2%12-15%12-15%**For non-online term policies Based on analysis & industry discussions New Business Margin = PV of Distributable earnings / Annualised First year premiumProfit Margin = PV of distributable earnings /PV of premiums NBAP Margins24

25. Category/CompanyHDFC LifeMax LifeReliance LifeAviva LifeExide LifeBasisMCEVEEVTEVTEVTEVYearMar-13Mar-12Mar-11Dec-13Mar-13EV- Before Overrun6,0203,7862,7301,800844Net Worth1,6901,711439697339VIF4,3302,0752,2911,103505Overruns150102NA NA  NAEV - after overrun5,8703,6842,7301,800844NB-Profits5841683406089NB Margins17.80%17.80%12.80%14.00%14.00%AV13,00010,50411,5005,0001,100Good will7,1306,8208,7703,200256NBM124126533AV/EV2.212.854.212.781.3 Capital Infused2,1602,1273,0942,0051,465The numbers of Max Life, Reliance Life and Exide Life are as per the transactionsHDFC Life numbers (EV) are published as a part of the Investor Presentation. AV is based on bankers publicationThe numbers of Aviva Life are as per the article published in the Economic TimesThe details of capital infused and net worth are obtained from the financials disclosed in the public disclosures for each of the companies.Comparative Statistics: Transactions & public Disclosures25

26. 26GW – Good Will (Market Value less EV)EV – Does not include the expense overrun lPE Multiple Comparison for Life Companies

27. E-commerce Industry on a roller coaster ride over the last five yearsPicked up in 2011 and continued thereafterInternet penetration in India has been increasing exponentially – 21 million in 2006 to 243 million users by June 2014. Number of active mobile internet users grown to 185 million. India’s ecommerce market at $10-16 billion last year, annual increase of 88% and by 2020 it could be 60-80 billion.E-commerce Industry: Introduction27

28. Opportunity: Growing sector in India; Emerging sector, in long term at least 10 per cent of Indian retail will move to online. Bubble: High gestation period, difficult to sustain losses, only top-line driven, bottom line not in sight. Investment Opportunity or Bubble?If you have a long term view and if you are cash surplus, then you can jump in and others who are not cash surplus and don't take a long term view, it probably will look like a bubble.28

29. Sector to reach $32 billion (Rs 1.9 lakh crore) in 2020 Investors pumped in over $1.6 billion (Rs 9,700 crore) across 24 deals so far in 2014 vs $553 million (over Rs 3,300 crore) in 2013 across 36 deals.PE funds typically value companies on profitability and cash flow, while VCs value companies on multiple of salesE-Commerce in India cam a long way when eBay started its operations in India in 2004 by acquiring Baazee.com. Capital Infusion: Investor’s Rationale29

30. Amazon - $2 billion investment in IndiaFlipkart - raised $1 billion from Tiger Global Management and Naspers. Snapdeal - SoftBank Internet and Media, committed $627 million Myntra- $50 million by Premji & othersBigbasket - $33 million from Helion Ventures and othersJabong - secured $27.5 million from British development finance institutionUrbanladder - $21 million from Steadview Capital and othersFirstcry - $15 million funding from Vertex Venture ManagementTop Capital Infusions in the Sector30

31. Valuation is subjectiveValuations depends on many qualitative and quantitative parameters. At this stage less of quantitative and more of qualitative parameters Depends on perception of potential and share of success in past (Softbank – Alibaba) Investors feel not investing in e-commerce may prove to be a lost opportunityValuation Game31

32. Summary32Life InsuranceGeneral InsuranceE commerceMarket CharacteristicsMarket SizeLarge PotentialLarge PotentialLarge PotentialMarket growth rateGrowing slowly, flat or decliningGrowing at steady rateExponential GrowthPricing trendsPrices falling and becoming more competitiveCompetitiveCompetitiveProfitability trendsMargins sinking and pressure to squeeze out costPressure to squeeze costPotential profitsDirect ForcesIntensity of direct competitionMarket dominated by few players with high market shareMarket dominated by few players with high market shareHigh competitionCustomer purchasing powerPlenty of customers with high purchasing powerPlenty of customers with high purchasing powerPlenty of customers with high purchasing powerProduct/Services InnovationPotential for InnovationPotential for innovationPotential for Innovation

33. Summary33Life InsuranceGeneral InsuranceE commerceLimiting forcesIntensity of direct competition from substitutionMedium to HighMediumHighNew competitors and Barriers to entryHigh barriers to entryMediumLowSupplier / distributor dominancePlenty of distributorsPlenty of distributorsPlenty of distributorsRegulatory restrictionHighly regulated Highly regulated No regulationUntested rules and regulations – TaxationIndustry lobby

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