It is likely to be tough and critical fourth quarter for Indian life insurance companies, courtesy a fair amount of equity volatility and back-end growth in premium.
Companies register a 113% year-on-year growth in December
KOLKATA: It is likely to be tough and critical fourth quarter for Indian life insurance companies, courtesy a fair amount of equity volatility and back-end growth in premium. Analysts have thus raised some concern on valuation.
There has been a marginal growth in first-year premiums (FYP) of around 10% by the life insurers in the first nine months of the current fiscal, being pulled by a negative growth in Life Insurance Corp (LIC), although the private sector logged a 79% growth in FYP.
Despite hopes of a strong rebound by LIC and a robust private sector growth, the tension seems to be quietly building up.
“We are maintaining our valuations for the life insurers, although there have been enhanced concerns on the new business achieved profit multiples assigned owing to high volatility in equity markets. The risk is that they could tend to move to lower end in the event that growth disappoints sharply. The fourth quarter could be critical... as we are seeing more equity volatility,” Merrill Lynch analysts Rajeev Varma & Veekesh Gandhi said in a recent research report.
On a year-on-year growth the insurance sector grew 113% y-o-y in December 2007. While LIC has grown by 99% y-o-y during the month, private players grew 123%.
LIC has shown a rebound during December 2007.
After suffering a dent in premium income in the first six months, it expects to rein in a 40-45% growth in business in the remaining months, with 20% of its total new business premium income through conventional products and 80% from unit-linked products.
The budgeted premium in individual business is at Rs52,500 crore.
Insurers, however, feel that stock market upheavals do not have much of an effect on the purchase of policies by customers-at least the last few market downturns over the last four years haven’t proved so. But what if the markets continue to swing and dip in the quarter?
“The August-December 07 numbers reinforce our view that FY08 growth target is very likely to be achieved and in many cases, players are likely to exceed our targets. The strong showing by the private players (90% growth) suggests possible upside to our year-end FY08 growth estimate of 60%, especially if equity markets remain steady through FY08, as the majority of growth is driven by unit-linked products,” the Merrill report said
The research has valued Indian life insurance companies on the basis of a multiple to their NBAP, which is basically the present value of the profits arising from new business written during the year.
In the absence of adequate disclosures of any actuarial data or embedded value by any life insurer in India, NBAP remains the only valuation tool that can be applied to Indian life insurance companies.
g_nandini@dnaindia.net
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