Life Insurance | Sector Report

2 January 2018 India | Life Insurance | Sector Report

Life Insurance Banca vs. Non-banca insurers – Gap continues to widen

We continue to believe that insurers with strong bancassurance channel present a compelling Karan Singh, CFA, FRM [email protected] | Tel: (91 22) 66303082 investment opportunity in the Indian Life Insurance sector. Banca insurers have consistently Nikhil Walecha seen an improvement in all key metrics such as persistency, opex, post-overrun margins, [email protected] | Tel: (91 22) 66303027 operating ROEVs and have gained market share in the past 3 years; we believe such Bunny Babjee outperformance will continue. We expect insurers with strong bancassurance channel to [email protected] | (+91 22) 6630 3263 report superior operating ROEVs of c.19.0% over FY17-20E vs. 10.1% for insurers driven by Sameer Bhise the agency channel. We expect a healthy 19% CAGR in APE over FY17-20E for the life [email protected] | Tel: (+91 22) 66303489 insurance industry, driven by 1) strong long-term growth drivers such as a) robust double- Jayant Kharote [email protected] | Tel: (91 22) 66303099 digit nominal GDP growth, b) favourable demographic profile, c) high financial savings, d) S Parameswaran rising income levels and e) increasing urbanisation; 2) increasing life insurance penetration to [email protected] | +91 22 66303075 2.8% in FY20E from 2.7% in FY16; 3) strong equity markets which augurs well for the sale of unit-linked products. In this report, we initiate coverage on SBI Life (TP: INR 890) with BUY Valuation summary rating and HDFC Life with HOLD rating (TP: INR 410). Key risk for the sector – increase in tax Value Target P/EV rate to 34.6% from current level of 14.2% which could impact EV by 13%-20%. Insurer INR bn USDbn FY19E FY20E HDFC Life 819 12.8 4.7 4.0  Forecast strong 19% APE growth over FY17-20E with private player APE CAGR of 22%: SBI Life 890 14.0 3.6 3.0 We forecast strong 19% APE CAGR for the Indian life insurance industry driven by strong ICICI Pru 667 10.4 3.3 2.9 long term structural growth drivers such as a) robust double digit nominal GDP growth, b) Max Life 255 4.0 3.0 2.6 favourable demographic profile c) high household savings, d) rising income levels, and e) Bajaj Allianz 322 5.0 2.3 2.0 increasing urbanization. This growth would imply increase in life insurance penetration Birla Sun Life 98 1.5 2.2 2.0 Source: Company data, JM Financial from 2.7% in FY16 to 2.8% in FY20E. We forecast private players to report APE CAGR of

22% over FY17-20E implying market share gain of 420 bps to 53% while we expect LIC Target valuation - per share contribution to parent to grow at 16% CAGR over FY17-20E. % of per share Insurer Parent Shareholding parent for parent  Banca insurers to gain market share: Over the past 3 years, insurers with strong Mcap bancassurance channels have significantly outperformed industry growth and gained HDFC Life HDFC Ltd 52% 16% 266 market share. Within our coverage universe, banca players’ market share rose from 58% SBI Life SBI Bank 62% 21% 74 in FY14 to 66% in 1HFY18, while agency-led insurers have lost market share (declined ICICI Pru ICICI Bank 55% 18% 57 from 11.3% in FY14 to 7.6% in 1HFY18). We believe this trend will continue and insurers Max Life Max India 70% 111% 667 with strong bancassurance channels will continue to outperform as we expect 24% APE Bajaj Allianz BJFIN 74% 29% 1,496 Birla Sun Life ABNL 51% 12% 23 CAGR for banca players and 20% APE CAGR for agency-led insurers. Source: Company data, JM Financial

 Increasing focus on pure protection to drive profitable profit growth for banca players: Operating RoEV FY17 FY18E FY19E Life insurers have been the largest beneficiaries of strong capital market growth, as the Strong banca channel contribution of ULIPs in the APE mix increased to 66% in FY17 (FY14: 45%) for large HDFC Life 21.7% 20.6% 20.4% banca players. For agency-led insurers, ULIP contribution increased to 41% in FY17 (vs. SBI Life 18.3% 18.8% 19.8% 20% in FY14), largely led by BALIC. Additionally, banca players have started focusing on ICICI Pru 15.6% 16.4% 17.1% Max Life 19.9% 19.1% 19.3% pure-protection products to improve their profitability. We expect banca players to Wtd. Avg. 18.5% 18.5% 19.1% maintain a dominant share in ULIPs, however rising share of protection products will Agency channel driven support margins. Bajaj Allianz 7.5% 8.6% 9.4% Birla Sun Life 8.0% 8.3% 8.5%  Significant divergence in operating metrics between banca and agency led insurers: Opex Wtd. Avg. 7.7% 8.6% 9.2% ratios (ex-commissions) for banca players has remained lower at 11-12% over FY14-17 Source: Company data, JM Financial driven by low cost banca channel and strong premiums growth while agency led insurers continue to be burdened by high opex (ex-commissions) ratios averaging c.20% over FY14-17. Moreover, banca insurers have superior conservation ratio averaging 84% over FY15-17 vs 65% for agency led insurers over the same period. Similarly 13th-mth persistency is superior for banca insurers at 75-85% vs 60-70% for agency led insurers. JM Financial Research is also available on: Such divergence is expected to continue with banca insurers expected to have opex (ex- Bloomberg - JMFR , commissions) ratios of 10% vs 15% for agency led insurers over FY17-20E. Thomson Publisher & Reuters S&P Capital IQ and FactSet  Post-overrun margins improving for banca, but remained subdued for agency-led insurers: We expect post-cost overrun margins for banca players to improve by upto Please see Appendix I at the end of this 290bps over FY17-20E due to strong growth, operating leverage, better cost controls and report for Important Disclosures and higher persistency ratios. Post-overrun margins for agency-led insurers have remained Disclaimers and Research Analyst Certification. negative (due to the absence of strong banca channels, and lower growth). We expect

JM Financial Institutional Securities Limited

Life Insurance

banca insurers to report post cost overrun margins of 13-22% while we expect agency insurers to report subdued post cost overrun margins in the range of 2-9%. However, increase in corporate tax rate to 34.6% could negatively impact margins by 290-560 bps.

 Insurers with strong bancassurance channel should continue to deliver superior profitability: Insurers with strong bancassurance channel have significantly outperformed others in key operating metrics such as growth, cost, persistency, post-overrun margins and operating ROEVs. We believe such banca insurers should grow faster and contain costs, which will lead to better ROEVs. We expect these companies to generate weighted average operating ROEV of 19.2% by FY20E (vs. 18.5% in FY17) compared with 10.1% (vs. 7.7% in FY17) for agency-led companies. This would be driven by i) persistency improvement ii) a decrease in cost overruns and iii) an increase in NBAP margins as insurers focus more on direct channel and pure-protection products.

 Prefer insurers with strong bancassurance channel; Initiate HDFC Life and SBI Life with TPs of INR 410 and INR 890, respectively: We use the P/EV methodology to value life insurance companies. We give a higher P/EV multiple to HDFC Life (4.0x FY20E EV), SBI Life (3.0x), ICICI Pru (2.9x), and Max Life (2.6x) as we believe they would generate superior ROEVs vs. BALIC (2.0x FY20E EV) and Birla Sun Life (2.0x) due to superior profitability and strong distribution channel. We are initiating coverage on HDFC Life (HOLD rating) and SBI Life (BUY rating). We believe strong growth and improvement in post cost overrun margins would lead to operating ROEV of 20.3% for HDFC Life and 19.7% for SBI Life by FY20E. We value HDFC Life at 4.0x FY20E EV, implying a TP of INR 410 and SBI Life at 3.0x FY20E EV, implying a TP of INR 890.

 Key Risks: a) An increase in the corporate tax rate from 14.2% to 34.6% could reduce margins by 290-560bps and EV by 13-20% b) Any form of open architecture with mandatory clause will be negative for insurers with strong bancassurance channels c) A sustained weakness in capital markets which could have an adverse impact on sale of unit linked policies d) any regulatory changes capping expense on par products could impact the industry adversely.

Exhibit 1. Valuation summary

Embedded Value APE APE growth New business Operating P/EV M.cap (INR bn) (INR bn) YoY (%) margin (%)* ROEV (%) (x) Company INR bn FY17 18E 19E 20E FY17 18E 19E 20E FY17 18E 19E 20E FY17 18E 19E 20E FY17 18E 19E 20E FY17 18E 19E 20E HDFC Life 783 125 147 174 205 41 55 67 81 13% 33% 23% 20% 22% 22% 22% 22% 22% 21% 20% 20% 6.3 5.3 4.5 3.8 SBI Life 700 165 202 245 296 63 86 106 128 40% 36% 24% 21% 15% 16% 16% 16% 18% 19% 20% 20% 4.2 3.5 2.9 2.4 ICICI Pru 549 162 181 204 230 65 86 103 123 27% 32% 21% 19% 10% 11% 12% 13% 16% 16% 17% 17% 3.4 3.0 2.7 2.4 Max Life 255 66 75 86 98 27 31 37 43 26% 18% 17% 17% 19% 19% 18% 18% 20% 19% 19% 19% 3.9 3.4 3.0 2.6 Bajaj Allianz 322 113 126 142 161 12 18 22 27 34% 42% 26% 23% -4% 1% 5% 9% 8% 9% 9% 10% 2.9 2.5 2.3 2.0 Birla SunLife 98 38 41 45 49 11 12 14 17 30% 15% 15% 16% -5% -3% -2% 2% 8% 8% 9% 10% 2.6 2.4 2.2 2.0 Source: Company, JM Financial; *Post cost overrun margins;

JM Financial Institutional Securities Limited Page 2

Life Insurance Key Industry Charts

Exhibit 2. Industry growth – expect 19% CAGR over FY17-20E Exhibit 3. Expect life insurance penetration to be flat over FY17-20E 5.0% 120% High growth GFC Changes in Expect APE 4.5% 95% phase and ULIP and CAGR of 19% reboun traditional 4.0% 70% product d 3.5% 45% regulation 3.0% 20% 2.5% -5% 2.0%

-30%

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

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2015

2016

2017E

2018E 2019E

2020E

FY07

FY08

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FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e FY19e FY20e Source: SwissRe, JM Financial Private LIC Industry Source: IRDA, JM Financial

Exhibit 4. Industry APE growth has started accelerating Exhibit 5. Industry APE market share – Expect Private insurers to 35% continue market share gains 100% 15%

80%

47%

48%

49%

51%

53%

54%

56%

63% 64% -5% 60% 65%

-25% 40%

53%

52% 51%

20% 51%

49%

47%

46%

44%

37% 36% -45% 35%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E FY19E Banca insuers Agency led insurers FY20E Source: Company, JM Financial; Agency includes BALIC and BSL Private LIC Source: IRDA, JM Financial

Exhibit 6. Market Share - expect Banca insurers within our universe to Exhibit 7. Market share – Key players 14% continue market share gains 12% 40% 12% 35% 12% 10% 35% 31% 10% 10% 30% 8% 25% 8% 6% 6% 20% 4% 4% 15% 4% 3% 2% 2% 2% 10% 3.7% 4.1% 2% 5% 0% 0% IPRU SBI Life HDFC MAX BALIC BSL

FY17 FY18E FY19E FY20E

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E FY19E FY20E Source: Company, JM Financial Banca insuers Agency led insurers Source: Company, JM Financial

Exhibit 8. APE mix – Banca insurers Exhibit 9. APE mix – Agency led insurers

100% 100% 24%

80% 80% 28%

33%

38%

43%

45%

46%

48%

59%

61%

63% 67%

60% 60% 23%

73%

30%

89%

23%

92%

93%

96%

26% 24%

40% 20% 40%

19%

25%

11%

10%

29%

10% 19%

20% 20% 54%

44%

42%

36%

35%

34%

29% 29%

29%

23%

22% 21% 0% 0% 18% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

PAR Non PAR Linked PAR Non PAR Linked Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 4 Life Insurance

Exhibit 10. Distribution mix – Banca insurers (Individual) Exhibit 11. Distribution mix – Agency led insurers (Individual) 100% 100%

80% 80% 33%

60% 43% 60%

27%

47%

52%

54%

58%

61% 61%

40% 40%

86%

81%

80%

76%

71%

65%

63% 60% 20% 20% 58%

0% 0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Agency Banca Direct Other Agency Banca Direct Other Source: Company, JM Financial Source: Company, JM Financial

Exhibit 12. Operating expense (ex-commissions) ratio Exhibit 13. Opex (ex-commissions) ratio – Key players 28% 20% 17% 23% 16% 23% 15% 15% 14% 15% 16% 15% 18% 15% 12% 12% 12% 11% 10% 13% 11% 10% 10% 8% 8% 8% 5%

FY09

FY10

FY11

FY12

FY13

FY14

FY15 FY16

FY17 0%

FY18E

FY19E FY20E IPRU SBI Life HDFC Life MAX BALIC BSL Banca Agency led LIC FY17 FY18E FY19E FY20E Source: Company, JM Financial Source: Company, JM Financial

Exhibit 14. NBAP Margins (post cost-overrun) Exhibit 15. NBAP Margins (post overruns) – Key players 12% 13% 15% 16% 16% 16% 16% 30% 20% 22% 22% 19% 20% 15% 16% 18% 13% 0% 10% 6% 9% -1% 2% 10% -20% -5% 2% 0% -40% -25% -21% -24%

-10% -4% -5%

FY14

FY15

FY16

FY17

FY18E FY19E FY20E IPRU SBI Life HDFC MAX BALIC BSL FY17 FY18E FY19E FY20E Banca Agency led Source: Company, JM Financial Source: Company, JM Financial

Exhibit 16. Conservation ratio Exhibit 17. 13-month persistency 100% 100% 84% 85% 86% 83% 81% 81% 81% 81% 83% 81% 81% 80% 76% 80% 80% 71% 80% 72% 71% 66% 68% 71% 58% 64% 62% 60% 60% 60%

40% 40%

20% 20%

0% 0% IPRU SBI Life HDFC MAX BALIC BSL IPRU SBI Life HDFC MAX BALIC BSL FY17 FY18E FY19E FY20E FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

Exhibit 18. Operating ROEV Exhibit 19. RoEV – Key players 25% 20% 17% 18% 18% 21% 14% 15% 14% 15% 20% 20% 19% 19% 15% 19% 20% 17% 17% 17% 9% 10% 15% 8% 8% 9% 10% 6% 6% 15% 5% 6% 10% 10% 10% 8% 5% 5% 0% 0% 0%

IPRU SBI Life HDFC MAX BALIC BSL

FY12 FY13 FY14 FY15 FY16 FY17

FY19E FY20E FY18E FY16 FY17 FY18E FY19E FY20E Banca Agency led Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 Life Insurance Contents

Market Share – Private life insurers continue to gain market share ...... 6 Life APE growth to remain strong ...... 8 AUM growth witnessing improving trends ...... 10 Product Mix – Contribution of ULIPs continues to increase ...... 11 Bancassurance – sought after channel ...... 14 Operating metrics witness improving trends ...... 17 Post-overrun margins to improve with growth ...... 19 Strong solvency margins to support growth ...... 20 Banca and agency-dependent insurers – Gap continues to widen ...... 21 Expect increase in M&A opportunities as PSU Banks monetize their non-core assets ...... 23 Key risks ...... 25 Peer comparison ...... 27 Appendix 1: Industry outlook - Long-term growth story still intact ...... 31 Individual Company notes ...... 36

JM Financial Institutional Securities Limited Page 3 Life Insurance Market Share – Private life insurers continue to gain market share Private insurers have been gaining market share for the past 4 years

 Private insurance companies have gained market share for the last four years, outpacing LIC in terms of APE. Private players’ market share increased to 49% in FY17 from a low of 35% in FY12. The life insurance industry’s APE improved 21% YoY in FY17, with private insurers seeing healthy growth of 26% YoY; LIC’s APE increased 16% YoY in FY17. Strong growth for private insurers was driven by a) strong demand for ULIPs with surge in capital markets; b) Demonetization which led to lower interest rates and also had a favourable impact on capital market flows c) lower inflation, which led to higher financial savings for households; and d) declining interest rates, which reduced competitive intensity from other savings products, especially term deposits. We forecast APE CAGR of 22% over FY17-20E for private players vs. 19% for the industry, implying market share of 53% for private players.

Exhibit 20. APE growth – 18% CAGR over FY14-17 Exhibit 21. Market share between private insurers and LIC 40% 70%

30% 65%

20% 60% 53% 55% 10% 50% 0% 45% 47% -10% 40% -20% 35% -30%

30%

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

FY20E

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E FY20E Industry APE Private LIC Private LIC

Source: IRDA, JM Financial Source: IRDA, JM Financial LIC continues to lose market share

 While LIC’s APE growth improved to 16% YoY in FY17 (vs. flat growth over FY14-17), it was lower than the 21% YoY growth for the industry. Its market share has reduced to 51.5% (vs. 64.4% in FY14). YTD growth remained strong

 YTD, industry growth remained robust (25% YoY) driven by strong APE growth of 32% YoY for private players and 18% for LIC. Among major private insurers, HDFC Life (+39% YoY), Bajaj Allianz Life (+51% YoY) and SBI Life (+38% YoY) outperformed private peers and the overall industry in terms of APE growth.

Exhibit 22. High growth phase following demonetization

APE YTD Nov-16 Mar-17 Apr-17 Jun-17 Sep-17 Oct-17 Nov-17 FY16 FY17 Growth (YoY%) Bajaj Allianz 46% 34% 216% 86% 59% 52% 51% -2% 34%

SBI Life 53% 40% 137% 41% 37% 38% 38% 36% 40%

HDFC Life 7% 13% 8% 23% 37% 35% 39% 14% 13%

ICICI Prudential 21% 27% 141% 73% 38% 36% 32% 10% 27%

Birla Sunlife 20% 30% 21% 21% 16% 14% 16% -3% 30%

Kotak Mahindra 13% 28% 9% 22% 24% 31% 34% 51% 28%

Max Life 24% 26% 40% 19% 18% 20% 18% 8% 26%

Total Private 23% 26% 74% 40% 32% 32% 32% 14% 26%

LIC 21% 16% 0% 9% 17% 18% 18% 10% 16%

Industry 22% 21% 28% 22% 24% 25% 25% 12% 21%

Source: IRDA, JM Financial

JM Financial Institutional Securities Limited Page 6 Life Insurance Insurers with strong bancassurance channels continue to outperform

 Among private insurers, those with strong bancassurance channels outperformed the industry as they grew at an average of 27% vs. overall industry growth of 21% in FY17. Given that bancassurance is the preferred channel to sell ULIPs, robust demand for the same helped banca insurers to outperform industry APE growth. Driven by strong capital markets, insurers with strong bancassurance channels – SBI Life, ICICI Pru, Max Life and HDFC Life – have gained significant market share (increased from 58% in FY14 to 66% in 1HFY18). On the other hand, agency-led insurers (Birla Sun Life and Bajaj Allianz) have lost market share (declined from 11.3% in FY14 to 7.6% in 1HFY18). In FY17, Bajaj Allianz and Birla Sun Life gained market share led by realignment of distribution model and expansion of banking/corporate agent partnerships.

Exhibit 23. Contribution of bancassurance channel Exhibit 24. APE growth 80% 45% FY17-20E: FY17-20E: FY17-20E: FY17-20E: 40% FY17-20E: FY17-20E: 70% 65% CAGR 24% CAGR 27% CAGR 25% CAGR 30% 61% 62% CAGR 17% CAGR 16% 57% 60% 35% 30% 50% 25% 40% 20% 30% 15% 20% 10% 10% 10% 4% 5% 0% 0% IPRU SBI HDFC MAX BALIC BSL IPRU SBI Life HDFC MAX BALIC BSL FY14 FY15 FY16 FY17 FY17 FY18E FY19E FY20E Source: Company, JM Financial, *Individual premium Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 7 Life Insurance Life APE growth to remain strong Promising outlook - we expect 19% APE CAGR over FY17-20E

 We expect growth rates to remain robust (19% APE CAGR over FY17-20E) for the life insurance industry, driven by: a) low regulatory risks as the Insurance Regulatory and Development Authority (IRDAI) has already implemented most of the regulations relating to products; b) increase in contribution of insurance to financial savings mix; c) strong capital markets which could boost ULIP growth; d) increase in life insurance penetration from 2.7% in FY16 to 2.8% in FY20E; and e) long-term growth factors such as strong economic growth, improvement in household savings, favourable demographic profile, rising income and increasing urbanisation will aid industry expansion. We expect 19% CAGR in APE over FY17-20E. Major product-related regulatory risks a thing of the past

 Most regulatory risks with respect to products have passed for the industry. The regulatory flux during FY11-14 led to a growth decline for the private sector in those years. Since most product-related regulatory changes have already been made by IRDAI, there are no significant product-related risks remaining; this ensures that life insurers are well-placed to grow. Any form of open architecture with mandatory clauses will be a negative for insurers with strong bancassurance channels and vice-versa for those relying on the agency channel. Strong capital markets will drive growth

 Demand for ULIPs is strongly related to underlying capital markets. The chart below shows the strong correlation between movement in the SENSEX and ULIP growth. A sustainable rally in capital markets will drive ULIP growth for the industry.

Exhibit 25. Correlation between unit-linked sales and equity 120% 90% 60% 30% 0% -30% -60%

-90%

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

Dec-15 Dec-16 Sensex returns (YoY, %) Linked NBP growth (YoY, %)

Source: Company, JM Financial

Exhibit 26. Share of ULIP (Industry) – new business premiums Exhibit 27. Share of ULIP (Private) – new business premiums 100% 100% 17% 12% 13% 13% 13% 90% 24% 90% 80% 80% 45% 45% 45% 44% 70% 54% 70% 65% 60% 60% 50% 50% 83% 88% 87% 87% 87% 40% 76% 40% 30% 30% 55% 55% 55% 56% 20% 46% 20% 35% 10% 10% 0% 0% FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 Traditional ULIP Traditional ULIP Source: IRDA, JM Financial Source: IRDA, JM Financial

JM Financial Institutional Securities Limited Page 8 Life Insurance Increase in financial savings to aid life insurance industry growth

 With gold losing its sheen and real estate prices cooling off in recent years, we believe Indian households would prefer financial products for their savings. The government’s measures to curb black money as well as the softening of inflation has helped to increase households’ share of financial savings, which would further aid the life insurance industry. In the medium term, new business premium is expected to grow at a healthy pace, propelled by an upswing in economic growth, higher financial savings aided by rising disposable income and benign inflation.

Exhibit 28. Household financial savings as a % GDP Exhibit 29. Contribution of life insurance to financial savings 35% 30%

30% 25% 25% 20% 20%

15% 15%

10% 10% 5% 5% 0%

FY02

FY03

FY04

FY05

FY06

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FY02

FY03

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FY05

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FY09

FY10

FY11

FY12

FY13

FY14

FY15 FY16 Household Savings as a % of GDP Household Savings Growth FY17 Source: RBI, CRISIL, JM Financial Source: RBI, JM Financial

Insurance penetration showing signs of improvement

 Life insurance penetration has improved to 2.75% in FY17 (vs. 2.6% in FY15) is expected to improve to 2.8% in FY20E.

Exhibit 30. Life insurance penetration trends in India Exhibit 31. Life insurance penetration trends globally 5.0% 19% 16.7% 17% 16.2% 4.5% 15% 4.0% 13% 11% 3.5% 9% 7.2% 7.4% 7.6% 7% 3.0% 5% 3.5% 2.3% 2.7% 3.0% 3.0% 2.5% 3% 1%

2.0%

India

Japan

China

Korea

World

Taiwan

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017E

2018E

2019E 2020E Australia Source: SwissRe, JM Financial Source: SwissRe, JM Financial

Long-term growth factors still intact for the industry

 We believe India’s long-term structural life insurance growth story still remains intact. Factors such as strong economic growth, improvement in household savings, favourable demographic profile, rising income and increasing urbanisation will aid industry expansion. The life insurance premium multiplier to nominal GDP growth has been around 1.5x over the past decade. Given nominal GDP growth of c.11-13% for India over the medium term and assuming a multiplier of 1.3-1.5x (in line with historical trends), life insurance premiums could grow c.15-20% over the medium term.

JM Financial Institutional Securities Limited Page 9 Life Insurance AUM growth witnessing improving trends During FY14-17, AUM for life insurance industry witnessed a healthy CAGR of 15% while private life insurers witnessed healthy AUM CAGR of 19% due to improvement in net flows aided by strong capital market.

Exhibit 32. AUM growth trend

AUM (INR bn) FY12 FY13 FY14 FY15 FY16 FY17

ICICIPru 704 737 801 995 1,030 1,216

SBI Life 448 500 563 694 778 958

HDFC Life 322 404 505 670 742 917

Max Life 172 205 247 312 358 444

BALIC 394 380 386 433 439 487

BSL 211 229 248 302 308 345

Total Private 3,122 3,419 3,832 4,612 4,929 6,376

LIC 12,691 14,030 15,743 17,863 20,091 23,624

Industry 15,813 17,449 19,575 22,475 25,021 30,000

CAGR (%) AUM growth (YoY, %) FY12 FY13 FY14 FY15 FY16 FY17 FY14-17

ICICIPru 3% 5% 9% 24% 4% 18% 15%

SBI Life 13% 12% 12% 23% 12% 23% 19%

HDFC Life 21% 26% 25% 33% 11% 24% 22%

Max Life 24% 19% 21% 26% 15% 24% 22%

BALIC 0% (4%) 2% 12% 1% 11% 8%

BSL 7% 9% 8% 22% 2% 12% 12%

Total Private 11% 10% 12% 20% 7% 29% 19%

LIC 10% 11% 12% 13% 12% 18% 14%

Industry 11% 10% 12% 15% 11% 20% 15% Source: IRDA, Company, JM Financial

Exhibit 33. Net flows to premiums Exhibit 34. Trend of company wise net flows to premiums 140.0% 120.0% 108% 120.0% 100.0% 89% 85% 90% 100.0% 83% 86% 80.0% 72% 79% 78% 63% 80.0% 65% 60.0% 48% 38% 39% 60.0% 40.0% 24% 40.0% 20.0% 11% 11% 3% 20.0% 0.0% 0.0% FY12 FY13 FY14 FY15 FY16 FY17 ICICI SBI HDFC Max BALIC BSL Pru Life Life Life Banca - Net flows to premiums Agency led FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 10 Life Insurance Product Mix – Contribution of ULIPs continues to increase Contribution of ULIPs has been increasing since the past 3 years

 Since the ULIP regulations of 2010, the industry has seen a steady shift from ULIP to traditional products. From a peak of >75% in 2008, the contribution of ULIP to the overall industry declined to 12% of APE in FY14. Factors such as i) the strong run-up in capital markets since FY15, ii) improved transparency and iii) much better product from customer perspective have made ULIPs attractive for customers. ULIP’s contribution to the industry increased from 12% of APE in FY14 to 23% in FY16, driven by private insurers. Banca continues to be the dominant channel to sell ULIP and insurers such as ICICI Pru, SBI Life and HDFC Life continue to see healthy ULIP trends. In the case of agency led insurers, BALIC has seen traction in ULIPs driven by focus on mass affluent clients. We expect the contribution of ULIPs to dominate the product mix. Insurers with strong bancassurance channels have the highest contribution from ULIPs

 For insurers with strong bancassurance channels, the contribution of ULIPs is significantly higher than it is for agency-dependent insurers. For our coverage universe, banca players’ have higher contribution of ULIPs (c.66% in FY17 vs. 45% in FY14 as % of APE), while compared to agency-dependent insurers (c.48% in FY17 vs. 24% in FY14). We believe this divergence will continue and thus insurers with strong bancassurance channels will continue to have higher share of ULIPs.

Exhibit 35. Contribution of linked products has started improving Exhibit 36. Contribution of linked products 75% 90% 86% 80% 63% 80% 71% 70% 58% 58% 70% 63% 60% 60% 50% 40% 49% 40% 50% 22% 23% 23% 40% 30% 31% 30% 16% 14% 20% 12% 30% 10% 20% 0% 10% FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% IPRU SBI Life HDFC MAX BALIC BSL Linked % of Industry APE

FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 11 Life Insurance ULIPs’ higher investment appeal makes them attractive in the long run (10 years+)

 Over the past few years, the industry significantly scaled up its ULIP offerings to 23% in FY16 vs. 12% in FY14. Rising demand for financial savings products in India offers life insurers significant growth potential. The share of insurance in household savings is already growing and ULIPs have competitive advantages vs. alternative savings products as they i) provide exposure to investment markets at a lower cost than traditional savings products (mutual funds and term deposits) for long-term investments; ii) have a transparent structure that is easy to understand vs. other insurance products (participating, savings, etc.) and iii) provide customised risk allocation choices to suit consumers’ risk appetites. Additionally, life insurers have a higher distribution reach, especially outside the 15 cities supported by c.2 million individual agents vs. c.86,000 IFAs for the mutual fund industry as of FY17.

Exhibit 37. Comparison of various financial products

Participating insurance product ULIP Term deposit Mutual fund Guaranteed returns (3-4%) 5.5-7.0% (Current) Return + 90% of additional return Fund performance 6-9% (in past 10 years) Fund performance Capital guarantee (in case of some Capital guarantee (in case of Guaranteed return 3-4% products) Yes some products) Market linked performance To some extent Yes NA Yes Lock in period 5 years 5 years No No Switching option NA Yes NA NA up to 10x of annual premium subject to some up to 10x of annual premium Life protection conditions subject to some conditions NA NA between 0.9-1.7% (debt fund) between 2.0-2.5% (equity Fund Management charges NA 1.35% NA fund) Source: Company, JM Financial

Increasing share of pure-protection products

 Pure-protection segment premiums posted healthy growth for bancassurance players – ICICI Pru Life (80% YoY), Max Life (65% YoY), HDFC Life (27% YoY) and SBI Life (9% YoY) – over FY15-17 and the proportion of pure-protection has improved for ICICI Pru (from 1.6% in FY15 to 3.9% in FY17), Max Life (from 2% in FY15 to 4% in FY17) and HDFC Life (from 6.3% in FY15 to 7.8% in FY17) of APE.

Exhibit 38. Share of pure-protection Exhibit 39. Channel-wise contribution of the protection mix as a % of individual rated premiums Protection APE / Total APE FY15 FY16 FY17 2.5% 1.9% HDFC 6.3% 7.3% 7.8% 2.0%

- of which group 1.6% 2.5% 4.2% 1.5% 1.2% 1.3% 1.1% IPRU 1.6% 2.7% 3.9% 1.0% 0.8% 0.7% 0.5% SBI 9.0% 10.0% 5.7% 0.5% 0.2% 0.1% 0.2% 0.0% 0.0% - of which group 5.6% 7.8% 4.5% Bancassurance Individual Direct Brokers and agents others MAX 2.0% 3.0% 4.0% HDFC ICICI SBI

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 12 Life Insurance Non-par product proportion continues to increase

 Before norms for traditional products were introduced in March 2013, several insurers packaged index-linked products as non-par to earn better margins. Consequently, the contribution of non-par products increased from 16% in Mar’11 to 20% in Mar’14. The new norms compressed the margins of index-linked non-par products, leading to several insurers discontinuing them. Since then, we have seen mixed trends among insurers for non-par products. The contribution of non-par products declined for insurers such as ICICI Pru and SBI Life, while it increased for HDFC Life. Participating policies to continue dominating the traditional product mix

 Participating products contribute c.55% to industry APEs and are the most widely sold traditional products among insurers.

Exhibit 40. Contribution of non-par products Exhibit 41. Contribution of par products 35% 90% 30% 30% 80% 70% 25% 21% 56% 60% 20% 17% 50% 40% 15% 13% 40% 12% 30% 30% 10% 20% 5% 20% 16% 5% 10% 10% 0% 0% IPRU SBI Life HDFC MAX BALIC BSL IPRU SBI Life HDFC MAX BALIC BSL FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

Single and group premium contributions continue to increase led by LIC

 The contribution of low-margin groups and single premiums continues to remain high for LIC (82% in FY17 vs. 75% in FY15). For private insurers, the contribution of low-margin group premiums increased to 37% in FY17 vs. 35% in FY15. Single premiums, which typically have margins lower than regular-premium-paying products, contributed 7% (vs. 8% in FY15) to unweighted new business premiums for the private insurers in FY17.

Exhibit 42. Contribution of group and single premiums Exhibit 43. Contribution of group and single premiums 80% 80% 69% 71% 65% 70% 63% 63% 70% 60% 2%

58% 2% 11% 60% 52% 16% 60% 50% 49% 7% 46% 14% 45% 14%

50% 50%

16% 16% 29% 6% 40% 40%

27% 68%

28% 62% 30% 31% 30%

31% 52%

31%

58%

56% 51% 20% 49% 20% 20%

44% 8% 36% 42%

10% 34% 10% 25%

20% 11%

18% 10% 16% 0% 14% 0% FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 IPRU SBI HDFC MAX BALIC BSL FY-17: group premium FY-17: single premium Group premium / New business premium Single premium Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 13 Life Insurance Bancassurance – sought after channel The contribution of bancassurance continues to increase for private insurers

 Bancassurance – being a variable cost distribution channel – remains the most preferred channel to sell insurance products. It not only helps generate strong sales but also contributes significantly in keeping expenses low. Its contribution increased to 52% of private insurers’ individual new business premiums in FY17 from 33% in FY11. Moreover, insurers with strong bancassurance channels have significantly outperformed the industry growth and gained market share

Exhibit 44. Bancassurance contribution for private insurers is Exhibit 45. Bancassurance contribution for coverage universe increasing 80% 100% 70% 65% 6% 4% 6% 7% 9% 10% 61% 62% 11% 57% 60% 80% 50% 33% 39% 43% 44% 60% 47% 52% 52% 40% 30% 40% 20% 10% 20% 47% 44% 40% 41% 36% 32% 31% 10% 4% 0% 0% IPRU SBI HDFC MAX BALIC BSL FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Individual agents Corporate agents - Banks Corporate agents - Others Brokers Source: Company, JM Financial, *Based on individual new business premiums Direct business Source: Company, JM Financial

Agents’ productivity has witnessed sharp improvement in FY17

 The FY09-16 years were difficult for private life insurers whose sales were largely driven by the agency channel, as the contribution of the agency channel declined from 55% of private insurers’ individual new business premiums in FY09 to 32% in FY16. We believe the profitability of the agency channel for private life insurers has been weak due to the following factors: i) Low Productivity - Agents’ productivity for private insurer’s stood at c.INR 88,000 in FY16 (and c.INR 130,000 for our coverage universe) which is still lower than LIC agents’ average productivity of c.INR 285,000 in the same year. ii) High-fixed-cost agency model - Traditionally, private players followed the LIC model of providing fixed salaries to agency managers with a multi-layer management hierarchy above agents. Except the agent and a portion of the agency manager’s salary, which were variable, the rest were paid fixed salaries, thus making the agency channel costly to operate. Clearly, this arrangement does not allow private insurers to realise positive margins from the channel. On the other hand, LIC, which works on a similar structure, benefits from economies of scale and its strong brand. iii) Higher overheads - Given the high set-up costs and long breakeven period for the agency network, many private life insurers are still burdened with high overhead costs. iv) Cap on commissions and charges v) Competition from LIC - Private insurers have a strong competitor in LIC, which has maintained its dominance as: (1) it has an efficient and extensive agency force (the average number of policies sold by an LIC agent was c.18 vs. c.3 for private insurers as of FY16); (2) the Government of India has allowed LIC to distribute 95% of its profits on participating products to its policyholders, as opposed to the 90% offered by private insurers; (3) all LIC policies come with a sovereign guarantee from the Government of India; and (4) LIC has the highest claim (maturity + death) settlement ratios at 99.75% (vs. 97% - 99.2%) for leading private insurers. Over the past few years, insurers have focused on various aspects to improve agency productivity, including:

JM Financial Institutional Securities Limited Page 14 Life Insurance i) Rationalisation of the sales force – the number of agents reduced from c.3mn in FY10 and bottomed out to c.2mn in FY16

ii) Rationalisation of infrastructure/costs – the number of branches reduced from the peak of nearly 12,000 in FY10 to 11,000 in FY16 iii) Format changes – costs were managed by de-layering agent manager teams, cutting unproductive agents, etc. iv) Operational efficiency - Insurers are now evaluating agents not just based on sales volume but also on business mix, persistency (critical for agent licence renewals) and the number of lives covered. This has helped them reduce fixed cost bases, and achieve operating efficiencies. Consequently, agents’ productivity for private insurer’s (under coverage) improved to INR c.147,000 in FY17 (vs. INR c.100,000 in FY14) Moreover, increasing digitisation and competition from the bancassurance channel is slated to increase pressure on the agency channel to improve productivity levels.

Exhibit 46. Number of agents growth trend

Number of agents (#) FY12 FY13 FY14 FY15 FY16 FY17 ICICIPru 1,38,883 1,47,547 1,71,734 1,32,463 1,21,016 1,36,114 SBI Life 86,989 95,688 1,10,491 83,656 92,619 95,355 HDFC Life 1,06,244 77,503 55,933 65,214 82,373 54,516 BALIC 1,73,392 1,48,000 1,69,634 1,20,982 89,975 77,097 BSL 1,31,297 1,06,823 1,03,123 90,537 1,10,658 82,045 LIC 12,78,234 11,72,983 11,95,916 11,63,604 10,61,560 11,31,181

Growth (YoY, %) FY12 FY13 FY14 FY15 FY16 FY17 ICICIPru (27%) 6% 16% (23%) (9%) 12% SBI Life 9% 10% 15% (24%) 11% 3% HDFC Life (22%) (27%) (28%) 17% 26% (34%) BALIC (9%) (15%) 15% (29%) (26%) (14%) BSL (9%) (19%) (3%) (12%) 22% (26%) LIC (4%) (8%) 2% (3%) (9%) 7% Source: Company, IRDA, JM Financial

Exhibit 47. Number of branches growth trend

Number of branches (#) FY12 FY13 FY14 FY15 FY16 FY17 ICICIPru 992 559 559 540 521 512 SBI Life 714 729 750 750 724 752 HDFC Life 481 450 429 414 398 414 BALIC 1,043 992 900 900 900 638 BSL 650 600 559 500 489 433 LIC 3,455 3,526 4,839 4,877 4,892 4,892

Growth (YoY, %) FY12 FY13 FY14 FY15 FY16 FY17 ICICIPru (29%) (44%) 0% (3%) (4%) (2%)

SBI Life 14% 2% 3% 0% (3%) 4%

HDFC Life (3%) (6%) (5%) (3%) (4%) 4%

BALIC (4%) (5%) (9%) 0% 0% (29%)

BSL 5% (8%) (7%) (11%) (2%) (11%)

LIC 2% 2% 37% 1% 0% 0%

Source: Company, IRDA, JM Financial

JM Financial Institutional Securities Limited Page 15 Life Insurance Significant increase in the direct channel’s contribution

 The direct channel, which is the most profitable channel, has seen significant improvement over the years and the contribution of direct business has increased to 11% in FY17 from 4% in FY13.

Exhibit 48. Focus on improving agent productivity

Company FY12 FY13 FY14 FY15 FY16 FY17 Bajaj Allianz (BALIC) No. of agents 1,73,392 1,48,000 1,69,634 1,20,982 89,975 77,097 Individual NBP per agent (INR) 68,804 78,378 58,361 80,095 89,247 1,17,125 ICICI Prudential No. of agents 1,38,883 1,47,547 1,71,734 1,32,463 1,21,016 1,36,114 Individual NBP per agent (INR) 98,990 83,228 62,370 92,426 1,09,349 1,20,458 Max Life No. of agents 35,379 35,384 42,620 43,505 45,275 54,283 Individual NBP per agent (INR) 1,80,760 1,67,590 1,52,276 1,54,005 1,60,353 1,52,166 HDFC Life No. of agents 1,06,244 77,503 55,933 65,214 82,373 54,516 Individual NBP per agent (INR) 55,007 71,223 74,500 83,994 59,868 1,19,501 SBI Life No. of agents 86,989 95,688 1,10,491 83,656 92,619 95,355 Individual NBP per agent (INR) 1,98,876 1,54,251 1,44,899 2,05,484 2,03,090 2,31,136 Birla Sun Life No. of agents 1,31,297 1,06,823 1,03,123 90,537 1,10,658 82,045 Individual NBP per agent (INR) 60,570 62,051 55,131 56,747 51,319 86,371 Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 16 Life Insurance

Exhibit 49. Rationalisation of agents Exhibit 50. Number of agents (our coverage universe) 1,800 200 180 1,500 160 136 1,200 140 120 95 900 100 77 82 80 600 55 54 60 40 300 20 0 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 IPRU SBI Life HDFC Life MAX BALIC BSL FY14 FY15 FY16 FY17 LIC - no of agents ('000) Private insurers Source: Company, JM Financial Source: Company, JM Financial

Exhibit 51. Rationalisation of branches Exhibit 52. Number of branches (our coverage universe) 10,000 1,000 900 752 8,000 800 700 638 6,000 600 512 500 414 433 4,000 400 300 210 2,000 200 100 0 0

IPRU SBI Life HDFC MAX BALIC BSL

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15 FY16 LIC - branches Private insurers FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

Exhibit 53. Controlled opex growth Exhibit 54. Decline in opex ratios

40% 40% 30% 35% 30% 20% 25% 10% 20% 0% 15% 10% -10% 5%

-20% 0%

FY11

FY12

FY13

FY14

FY15

FY16

FY09

FY10

FY11

FY12

FY13

FY14

FY15 FY16 LIC Private LIC Private

Source: IRDA, JM Financial Source: IRDA, JM Financial Operating metrics witness improving trends Operating expense ratio has improved in the past 3 years

 As the pace of growth for the overall industry tapered off during FY12-16, most insurers have focused intensively on optimising costs by rationalising their branches and agency force, along with unrelenting focus on improving productivity. In this environment, insurers with strong bancassurance channels have benefitted the most with the lowest operating expense ratio. Improved cost ratios of bancassurance insurers are also reflected in their post cost overrun margins. Versus this, agency-dependent insurers such as BALIC and Birla Sun Life continue to be saddled with high opex. Tie-ups with bancassurance partners could significantly help them improve their cost ratios.

JM Financial Institutional Securities Limited Page 17 Life Insurance

Exhibit 55. Commissions ratio stabilised for major insurers Exhibit 56. Improvement in opex (ex-commission) ratio 10% 20% 9% 9% 9% 18% 17% 16% 15% 8% 16% 15% 14% 15% 7% 14% 12% 12% 6% 12% 11% 10% 5% 4% 4% 5% 4% 4% 10% 4% 8% 3% 3% 8% 4% 8% 2% 2% 3% 6% 2% 4% 1% 2% 0% 0% IPRU SBI Life HDFC MAX BALIC BSL IPRU SBI Life HDFC Life MAX BALIC BSL

FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E Source: Company, JM Financial Source: Company, JM Financial Persistency ratio continues to improve

 All insurers’ 13m persistency ratio has improved in the past 3 years, driven by i) strong capital markets leading to improving insurance policy returns vs. competing products such as bank deposits; ii) an improvement in mis-selling ratios and better back-end processes resulting in higher customer retention; iii) an increase in the contribution of sticky non-par products, contributing to improving persistency ratios; and iv) significant improvement in the 13m and 25m persistency in the past 5 years gradually flowing through to the 61m persistency as well. Additionally, Insurers with strong bancassurance channels have better conservation and persistency ratios.

Exhibit 57. Persistency ratio (13m) Exhibit 58. Persistency ratio (61m) 100% 80% 86% 67% 90% 80% 81% 81% 70% 76% 80% 80% 72% 71% 56% 57% 71% 60% 53% 68% 70% 62% 60% 47% 50% 60% 50% 40% 32% 40% 30% 30% 20% 20% 10% 10% 0% 0% IPRU SBI Life HDFC Life MAX BALIC BSL IPRU SBI Life HDFC MAX BALIC BSL FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

 Private insurers’ conservation ratios have improved over the past 3 years, reflecting improvement in renewal premiums. Renewal premiums for private insurers posted a 12% CAGR over FY14‐16, driven by customer retention and lower surrenders (down 5% over FY14-16). The conservation ratios for bancassurance players are better than those for agency-driven players.

Exhibit 59. Conservation ratio – key players Exhibit 60. Conservation ratio – product-wise 100% 85% Conservation ratio IPRU HDFC Life SBI Life Max Life BALIC BSL 84% 83% 81% 81% 81% 81% 83% PAR - Life 90.8% 88.7% 84.9% 85.3% 85.1% 83.1% 80% 66% 71% 58% 64% NON PAR - Life 94.8% 79.2% 84.1% 89.8% 83.5% 90.1% 60% NON PAR - Health 88.9% 41.7% 18.8% 79.7% 78.1% 58.3% 40% Linked Life 81.1% 77.4% 77.9% 81.3% 73.4% 70.8% Source: Company, JM Financial 20%

0% IPRU SBI Life HDFC MAX BALIC BSL FY17 FY18E FY19E FY20E Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 18 Life Insurance Post-overrun margins to improve with growth Pre-overrun margins driven by product mix

 In the current regulatory environment, non-par pure-protection term insurance products have the highest margins (50%+), followed by savings-based non-par products (20-25%) and par and unit-linked products (10-13%). ULIP’s lower margins have been driven by higher acquisition expenses owing to regulatory changes for ULIP in 2009-10. Within various channels, we believe bancassurance margins may be higher than agency, corporate agents, brokers and even the direct channel due to: i) banks’ ability to cross-sell higher-margin protection products such as credit life; ii) a low-cost variable structure, especially for bank-promoted insurers; and iii) higher persistency for bancassurance compared with the agency channel. Compared with Asian peers (40%+), margins in India are lower due to: i) lower share of protection products in the portfolio; ii) policyholders taking at least a 90% share of profits on participating products vs. 70% in China and 80% in Malaysia; iii) India having stricter regulations with punitive fees and surrender penalty caps, which were brought in after years of mis-selling; iv) lower persistency ratios (Chinese insurers’ 13-month persistency is 92% vs. 74% for Indian insurers); and v) lesser focus on high margin ‘protection riders’. HDFC Life, Reliance Life and Birla Sun Life saw non-par contribution increasing and reported better margins in FY17. BALIC and Max Life – which witnessed increase in their ULIP contribution – consequently recorded margin compression. Post-overrun margins driven by distribution mix

 Post-overrun margins are largely driven by their distribution set-up. The bancassurance channel has lower cost overruns in distributing insurance products. Hence, insurers with strong bancassurance channels such as SBI Life, HDFC Life and ICICI Pru reported positive new business margins post cost overruns ( also banca insurers witnessed higher growth which helped margins) while BALIC and Birla Sun Life continues to report high cost overruns, resulting in negative NBP margins. Improvement in margins has taken place primarily on account of i) improvement in persistency (13m/49m persistency for top insurers improved 2-7%/1-6%, respectively, in FY17; ii) improvement in non-par business (contribution of non-par business for top insurers increased by 2-5% for ICICI Pru, HDFC Life, SBI Life and Birla Sun Life in FY17) and iii) focus on agency restructuring – as in the case of BALIC including a) branch rationalisation; b) replacing low productivity agents with high productivity agents. NBAP margins to improve as protection business picks up

 HDFC Life and Max Life – with a higher protection element in their product offerings – have reported the highest post-overrun margins. Despite a cost-effective distribution set- up, ICICI Pru posted lower NBAP margins due to a relatively lower protection element. We expect NBAP margins to improve 2.9pps for ICICI Pru, 13pps for BALIC and 7.2pps for Birla Sun Life going ahead over FY17-20, driven by: i) An increase in the non-par business, especially protection business – non-par protection term products have the highest new business margins but are tough to sell as life insurance in India has traditionally been sold as a savings rather than a pure risk product ii) Improvement in persistency – ULIPs have higher persistency followed by protection. As insurers’ focus on these two products has increased, we expect persistency to improve further.

iii) Restructuring of agency force and improvement in agent productivity – cost overruns for the agency channel would reduce once agent productivity improves.

JM Financial Institutional Securities Limited Page 19 Life Insurance

Exhibit 61. New business margins before cost overruns Exhibit 62. New business margins after cost overruns 25% 22% 30% 22% 26% 19% 25% 20% 18% 15% 16% 25% 22% 22% 15% 13% 19% 10% 20% 18% 15% 16% 16% 10% 9% 13% 14% 15% 5% 10% 2% 10% 0%

5% -5% -4% -5% 0% -10% IPRU SBI HDFC MAX BALIC BSL IPRU SBI Life HDFC MAX BALIC BSL

FY17 FY18E FY19E FY20E FY17 FY18E FY19E FY20E

Source: Company, JM Financial Source: Company, JM Financial

Strong solvency margins to support growth

 Private insurers’ average solvency ratio declined from 380% in FY14 to 290% in FY17 (well above the regulatory requirement of 150%) primarily due to higher premium growth (19% APE CAGR over FY14-17) and high dividend pay-outs (3-year average dividend pay-out of c.40% over FY14-17 for bancassurance insurers). Private life insurance companies are well-capitalised and with strong solvency margin ratios, can continue to grow without raising capital in the near future.

Exhibit 63. Trend Solvency margin Exhibit 64. Trend in Dividend pay-out 930% 100% 830% 90% 82% 730% 80% 71% 70% 630% 582% 60% 530% 48% 50% 40% 430% 40% 309% 30% 330% 281% 22% 30% 19% 204% 192% 200% 16% 16% 230% 20% 130% 10% 0% 0% 0% 0% 30% IPRU SBI Life HDFC Life MAX BALIC BSL IPRU SBI Life HDFC Life MAX BALIC BSL

FY14 FY15 FY16 FY17 FY14 FY15 FY16 FY17 Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 20 Life Insurance Banca and agency-dependent insurers – Gap continues to widen

 Insurers with strong bancassurance channels (HDFC Life, ICICI Pru, SBI Life and Max Life) have significantly outperformed others in key operating metrics such as growth, cost, persistency, post-overrun margins and operating ROEVs. We believe companies with strong bancassurance channels should be able to grow faster and contain costs, which will consequently lead to better ROEVs. Life insurance companies with strong bancassurance partners (HDFC Life, ICICI Pru, SBI Life and Max Life) should generate weighted average operating ROEVs of 19.2% by FY20E compared with 10.1% for agency-driven companies (BALIC, Birla Sun Life and Reliance Life).

Exhibit 65. EV Movement – ICICI Pru (FY17) Exhibit 66. EV Movement – SBI Life (FY17) 170 180 165 5.8 -6.3 170 4.6 160 160 3.1 12.8 -1.8 150 155 6.7 3.1 140 10.4 150 0.0 130 10.9 145 12.2 162 120 165 140 1.0 110 135 Operating ROEV of 21.7%; Operating ROEV of 100 125 130 139 15.6%; ROEV of 19.8% 90 ROEV of 35.2% 125 80

120 70

NBV

Op var

Cap Inj

Eco var

Unwind

Invst var

ClosingEV

business

Eco asschg

Opening EV

Assum chgs

Opening EV Assum chgs

Exp return on Source: Company, JM Financial Source: Company, JM Financial

Exhibit 67. EV Movement - HDFC Life (FY17) Exhibit 68. EV Movement – Max Life (FY17) 140 Max Life EV movement 75 130 2.5 2.9 0.3 1.7 120 -2.4 70 9.2 0.9 -3.2 65 0.0 110 -0.3 5.0 9.6 60 5.3 100 125 55 Operating ROEV of 19.9% 66 90 Operating ROEV of 21.0%; 50 102 ROEV of 23.7% 56 v s ROEV of 23.0% 80 45

70 40

NBV

Op var

Op var Op

Cap Inj

Eco var

Cap Inj Cap

Unwind

Invst var Invst

Overruns

ClosingEV

business

Closing EV Closing

Eco asschg

Opening EV

Assum chgs

Opening EV Opening

Assum chgs Assum Eco ass chg ass Eco

Exp return on Source: Company, JM Financial Source: Company, JM Financial

Exhibit 69. EV Movement – BALIC (FY17) 115 6.4 110 1.7 105 1.3 -2.2 6.7 100 113 95 Operating EV of 7.5%; ROEV of 14.1% 90 99

NBV

Op var

Cap Inj

Unwind

Invst var

Overruns

ClosingEV

Eco asschg

Opening EV Assum chgs

Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 21 Life Insurance

 EV growth over the past few years has been impacted due to a change in regulations, which has led to i) slower NBV growth, ii) higher cost overruns and iii) lower persistency. While the industry was marred by various factors, players’ focus rightly shifted to building stronger franchises and improving operating metrics (reflected in lower opex and improving persistency). Going ahead, we believe EV growth should improve aided by improvement in NBV and controlled cost overruns, with EV growth of 13-21% for banca insurers outpacing agency insurer’s growth of 10-13%. This would be driven by i) improvement in persistency, as improvement in 13m/25m persistency will percolate to 61st month over time, ii) a decrease in cost overruns, with insurers with bank tie-ups being able to eliminate cost overruns sooner and iii) an increase in NBAP margins as insurers would focus more on direct channel and pure protection products.

Exhibit 70. EV growth to improve aided by improvement in NBV and controlled cost overruns

FY15 FY16 FY17 FY18E FY19E FY20E IPRU - NBV Margins (post overruns) 5.7% 8.0% 10.1% 11.5% 12.4% 13.0% - EV (INRm) 1,38,223 1,39,388 1,61,840 1,81,035 2,03,806 2,30,065 - EV Growth (YoY%) 17% 1% 16% 12% 13% 13% SBI Life - NBV Margins (post overruns) 17% 14% 15% 16% 16% 16% - EV (INRm) 1,12,871 1,25,475 1,65,379 2,01,561 2,45,225 2,95,934 - EV Growth (YoY%) 15% 11% 32% 22% 22% 21% HDFC Life - NBV Margins (post overruns) 14% 20% 22% 22% 22% 22% - EV (INRm) 88,050 1,02,325 1,24,707 1,47,279 1,73,692 2,04,648 - EV Growth (YoY%) 26% 16% 22% 18% 18% 18% MAX Life - NBV Margins (post overruns) 21% 18% 19% 19% 18% 18% - EV (INRm) 52,320 56,170 65,900 75,122 85,783 97,968 - EV Growth (YoY%) 19% 7% 17% 14% 14% 14% BALIC - NBV Margins (post overruns) (9%) (13%) (4%) 1% 5% 9% - EV (INRm) 93,019 98,763 1,12,651 1,26,394 1,42,289 1,60,825 - EV Growth (YoY%) 22% 6% 14% 12% 13% 13% BSL - NBV Margins (post overruns) (35%) (42%) (5%) (3%) (2%) 2% - EV (INRm) 32,600 32,750 38,100 41,272 44,788 49,215 - EV Growth (YoY%) 1% 0% 16% 8% 9% 10% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 22 Life Insurance Expect increase in M&A opportunities as PSU Banks monetize their non-core assets

We expect PSU Banks to focus on core business and expect them to monetize their non-core assets to shore up their capital base. We expect PSU Banks to divest their stake in insurance subsidiaries or enter into an exclusive partnership with life insurers. As per news reports, IDBI Bank has offered to sell its stake in IDBI Federal life insurance (which is valued at INR 50-70bn with FY17 EV of INR 17bn as per news reports) and IDBI Bank would offer exclusive bancassurance partnership for five years. Apart from Private life insurance companies, we believe Private equity players could also look at buying the controlling stake.

Exhibit 71. Shareholding pattern of life insurance companies in India

Domestic shareholder (%) Foreign shareholder (%) Aegon Religare Bennett Coleman 47% AEGON India Holdings B.V. 49% Aegon Life Employees 4% Aviva Dabur Invest Corp 51% Aviva International Holdings 49% Bharti AXA Life Bharti Enterprises 51% AXA Group 49% Canara HSBC OBC Life Canara Bank 51% HSBC Insurance (Asia Pacific) 26% Oriental Bank of Commerce 23% DHFL Pramerica DHFL 74% Pramerica Financial 26% Edelweiss Tokio Edelweiss Financial Services 51% Tokio Marine Holdings 49% Exide Life Exide Industries 100% Future Generali Life Future Enterprises 6.09% Generali NV 25.5% Sprint Advisory Services 49% Industrial Investment Trust 19.41% IDBI Federal IDBI Bank 48% Ageas International NV 26% Federal Bank 26% IndiaFirst Bank of Baroda 44% Legal & General, UK 26% Andhra Bank 30% Kotak Life Kotak Mahindra Bank 100% PNB MetLife Punjab National Bank 30% MetLife International 26% Jammu & Kashmir Bank 5% Elpro International 21% M. Pallonji & Co. 18.5% Shriram Life Shriram Group 76.39% Sanlam, South Africa 23.56% Others 0.05% Star Union Dai-ichi Bank of India 28.96% Dai-ichi Life 45.94% Union Bank of India 25.10% Reliance Life Reliance Capital 51% Nippon Life Insurance 49% Tata AIA Tata Sons Ltd 51% AIA Group Ltd. 49% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 23 Life Insurance Prefer insurers with strong bancassurance channels

 We use the P/EV methodology to value life insurance companies. We give a higher P/EV multiple to insurers with strong bancassurance channels such as HDFC Life (4.0x FY20E EV), SBI Life (3.0x), ICICI Pru (2.9x), and Max Life (2.6x) as we believe they would generate superior ROEVs vs. BALIC (2.0x FY20E EV) and Birla Sun Life (2.0x) on faster growth and cost controls.

Exhibit 72. Valuation summary

Exhibit 73. Trends in operating RoEV

FY16 FY17 FY18E FY19E FY20E

Insurers with strong bancassurance

HDFC Life 21.0% 21.7% 20.6% 20.4% 20.3%

SBI Life 16.7% 18.3% 18.8% 19.8% 19.7%

ICICI Pru 15.3% 15.6% 16.4% 17.1% 17.4%

Max Life 17.0% 19.9% 19.1% 19.3% 19.2%

Weighted average 17.3% 18.5% 18.5% 19.1% 19.2%

Agency channel driven insurers

Bajaj Allianz 7.6% 7.5% 8.6% 9.4% 10.2%

Birla Sun Life 0.5% 8.0% 8.3% 8.5% 9.9%

Weighted average 5.8% 7.7% 8.6% 9.2% 10.1% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 24 Life Insurance Key risks

Cap on business generated from a single insurer for corporate agents

 In Aug’15, the IRDAI allowed corporate agents (which includes banks and NBFCs) to tie up with up to three life insurance players (as against only one allowed earlier) with no cap on business from single insurers. The policy will be especially beneficial for players that currently have limited tie-ups with corporate agents to sell policies. In its first exposure draft on corporate agents released in Mar’15, IRDAI said that no corporate agent could get more than 90% of the premium from a single insurer in the first year, 75% in second year, 60% in third year and from the fourth year, the limit shouldn’t exceed 50%. While the first exposure draft was disadvantageous for insurers with strong bancassurance channels (ICICI Pru, HDFC Life, Max Life and SBI Life), the final guidelines are unfavourable for insurers that are largely driven by the agency channel (BALIC, Reliance Life and Birla Sun Life). While bancassurance arrangements are non-exclusive, SBI, ICICI Bank and HDFC Bank are exclusive life insurance partners for SBI Life, ICICI Pru and HDFC Life. Any adverse guidelines which limit the proportion of business corporate agents can generate through bancassurance partners may have a material adverse impact on its business. Bank-promoted insurers’ profit margins may get squeezed when banks can opt for multiple tie-ups.

Increase in corporate tax rate

 The FY16 budget proposed to reduce the corporate tax rate and simultaneously removed all exemptions. Life insurance companies are currently taxed at 14.2%, which is significantly lower than the proposed corporate tax rate of 25%. Hence, if exemptions on the sector are removed and are taxed at normal tax rates, new business margins will be impacted by 290-560bps and EV by 13-20% at current corporate tax rate of 34.6%.

Exhibit 74. Impact on EV and NBV margins due to change in corporate tax rate Reported Margins % change NBV margins NBV margins Change in

in EV at 14.2% tax rate at New tax rate NBV margins

Tax rate at 34.6%

HDFC Life -13.2% 21.8% 16.7% -5.1%

ICICI Pru* -14.9% 8.1% 5.3% -2.9%

SBI Life -19.1% 15.4% 9.8% -5.6%

Tax rate at 28.4%

ICICI Prudential -11.0% 10.1% 7.9% -2.2%

Tax rate at 25.0%

HDFC Life -6.9% 22.2% 19.7% -2.5% Source: Company, JM Financial. *Based on FY16 sensitivity disclosure

Increase in surrender values

 Recent report by the Product Review Committee constituted by IRDA debated on increasing surrender values to make life insurance products more competitive vs. other financial saving products especially with respect to early exits. Although the move is still in the recommendation phase, if implemented it could adversely affect both profitability and embedded values. For our peer set, surrenders as a percentage of total premiums averaged 40% in FY17. Moreover, assuming an increase in SVs triggers higher discontinuance rates, the following table summarises the impact on embedded value.

JM Financial Institutional Securities Limited Page 25 Life Insurance

Exhibit 75. Sensitivity to discontinuance rates

% change in % change VNB Margins in EV HDFC Life +10% in discontinuance rates (1.3%) (1.8%) -10% in discontinuance rates 1.4% 1.9% +50% in discontinuance rates (5.7%) (7.9%) -50% in discontinuance rates 8.0% 11.2%

SBI Life +10% in discontinuance rates (1.1%) -10% in discontinuance rates 1.1% +50% in discontinuance rates (4.8%) -50% in discontinuance rates 6.2%

ICICI Prudential Life* +10% in discontinuance rates (1.1%) -10% in discontinuance rates 1.2% +50% in discontinuance rates (4.3%) -50% in discontinuance rates 7.5% Source: Company, JM Financial *As of FY16

Adverse impact on equity market in India

 With a significant portion of investment returns coming from the equity market in India, any significant decline in stock prices or dividends from stocks could negatively affect investment income, especially for the players that have a larger proportion of linked products in their portfolios. Downturns in equity markets could adversely impact fund management charges and result in lower return or capital loss. Change in insurance regulatory norms

 Any change in policies issued by the IRDAI, including foreign investment, interest rates, liquidity, capital adequacy, investments, marketing and selling practices may require the company to increase its coverage to relatively riskier segments.

JM Financial Institutional Securities Limited Page 26 Life Insurance Peer comparison We have shown a peer comparison of key operating metrics of life insurance companies below:

Exhibit 76. APE mix and growth

APE Mix (%) Growth (%) Company FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 Bajaj Allianz - Par 82% 75% 76% 37% 33% 20% 80% -11% -15% -60% -14% -17% - Non Par 7% 12% 15% 24% 22% 17% -76% 62% 4% 33% -10% 4% - Linked 11% 13% 9% 39% 45% 63% -84% 23% -46% 273% 13% 87% ICICI Pru - Par 20% 8% 18% 13% 14% 10% -44% -55% 100% 2% 12% -11% - Non Par 28% 39% 16% 2% 3% 5% 184% 43% -63% -81% 54% 108% - Linked 52% 53% 66% 85% 83% 86% -47% 6% 15% 81% 8% 30% Max - Par 79% 76% 68% 59% 60% 56% 34% -3% 6% -5% 10% 19% - Non Par 9% 15% 11% 15% 13% 13% 71% 63% -13% 46% -1% 20% - Linked 12% 9% 21% 26% 27% 31% -76% -20% 157% 42% 9% 44% HDFC - Par 40% 34% 34% 20% 27% 30% 192% -2% -22% -28% 57% 27% - Non Par 3% 5% 17% 21% 18% 21% 151% 72% 190% 54% 0% 24% - Linked 57% 62% 49% 60% 55% 49% -39% 25% -38% 54% 4% 2% SBI Life - Par 23% 25% 33% 43% 32% 16% 84% 16% 55% 43% 1% -25% - Non Par 30% 37% 32% 13% 8% 12% 122% 34% -1% -55% -12% 110% - Linked 47% 38% 34% 44% 59% 71% -58% -13% 3% 39% 85% 77% Birla Sun Life - Par 0% 2% 25% 35% 35% 40% 83% 10% -48% -22% -11% 33% - Non Par 42% 51% 32% 27% 25% 30% -47% -30% -24% -18% 4% -16% - Linked 58% 46% 42% 38% 40% 30% -24% -11% -17% -7% -2% 11% Source: Company, JM Financial

Exhibit 77. Trend in APE market share

YoY growth% Market Share - Total (%) Market Share - Private (%) APE FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17

Bajaj Allianz -29% -2% -17% -18% -2% 34% 3% 3% 2% 2% 2% 2% 8% 7% 6% 4% 4% 4%

Birla Sunlife -24% -11% -17% -7% -3% 30% 2% 2% 2% 2% 2% 2% 7% 6% 5% 4% 3% 4%

HDFC Life -7% 16% -22% 26% 14% 13% 5% 6% 5% 7% 7% 6% 15% 17% 14% 15% 15% 13%

ICICI Prudential -23% 14% -5% 41% 10% 27% 6% 7% 6% 10% 10% 10% 16% 18% 18% 22% 21% 21%

Max Life -12% 0% 17% 10% 8% 26% 3% 3% 3% 4% 4% 4% 8% 8% 10% 9% 9% 9%

SBI Life -27% 8% 14% 10% 36% 40% 5% 5% 6% 7% 9% 10% 13% 14% 16% 16% 19% 21%

Total Private -22% 2% -3% 16% 14% 26% 35% 37% 36% 46% 47% 49%

LIC 21% 18% 21% 19% 19% 16% 65% 63% 64% 54% 53% 51%

Industry 21% 19% 22% 21% 22% 20% Source: Company, JM Financial, IRDA

JM Financial Institutional Securities Limited Page 27 Life Insurance

Exhibit 78. New business premium - product mix (FY17) Exhibit 79. Customer segment mix (as a % of NBP, FY17) 100% 100% 10% 21% 11% 52% 36% 68% 62% 80% 49% 80% 58% 64% 70% 60% 76% 60% 89% 90% 40% 79% 40% 64% 51% 20% 48% 20% 36% 42% 32% 38% 24% 30% 0% 0% ICICI HDFC SBI Max BALIC BSL ICICI HDFC SBI Max BALIC BSL Pru Life Life Life Pru Life Life Life Linked Non-Linked Individual Group Source: Company, JM Financial Source: Company, JM Financial

Exhibit 80. AUM mix (FY17) Exhibit 81. Individual APE per policy (FY17) 100% 1,00,000 91,294 80% 50% 80,000 65% 73% 69% 72% 60% 78% 60,000 47,622 52,463 35,886 36,920 40% 40,000 30,482 50% 20% 35% 31% 20,000 22% 27% 28% 0% 0 ICICI HDFC SBI Max BALIC BSL ICICI HDFC SBI Max BALIC BSL Pru Life Life Life Pru Life Life Life Equity AUM (%) Debt AUM (%)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 82. Retail NBP – distribution channels Exhibit 83. Number of branches (bancassurance) 100% 30,000 26,367 13% 15% 10% 7% 10% 25,000 80% 10% 65% 20,000 60% 62% 57% 15,000 61% 85% 40% 74% 10,000 4,951 4,954 4,785 20% 34% 23% 25% 5,000 15% na na 0% 0 ICICI HDFC SBI Max BALIC BSL ICICI HDFC SBI Max BALIC BSL Pru Life Life Life Pru Life Life Life Individual Agents Corporate Agents - Banks Corporate Agents- Others Brokers Direct Business Others Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 28 Life Insurance

Exhibit 84. Agent productivity

Exhibit 85. Persistency ratio – 13th month (FY17) Exhibit 86. Persistency ratio – 49th month (FY17) 90% 86% 81% 81% 80% 70% 62% 59% 58% 80% 55% 68% 71% 60% 70% 50% 60% 38% 40% 50% 40% 30% 30% 20% 20% 10% 10% 0% 0% ICICI HDFC SBI Max BALIC ICICI HDFC SBI Max BALIC BSL Pru Life Life Life Pru Life Life Life

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 87. Commission ratio (FY17) Exhibit 88. Operating expense (ex-commission) ratio (FY17) 10% 18% 17% 8.7% 15% 9% 16% 15% 8% 14% 12% 7% 12% 11% 6% 10% 5% 4.5% 8% 4.1% 3.7% 8% 4% 3.4% 6% 3% 2.4% 4% 2% 1% 2% 0% 0% ICICI HDFC SBI Max BALIC BSL ICICI HDFC SBI Max BALIC BSL Pru Life Life Life Pru Life Life Life

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 29 Life Insurance

Exhibit 89. Solvency ratio (FY17) Exhibit 90. Dividend pay-out ratio 3-year average (FY17) 700% 80% 582% 69% 600% 70% 63% 500% 60% 50% 400% 309% 281% 40% 300% 26% 192% 204% 200% 30% 18% 200% 20% 100% 10% 0% 0% 0% 0% ICICI HDFC SBI Max BALIC BSL ICICI HDFC SBI Max BALIC BSL Pru Life Life Life Pru Life Life Life

Source: Company, JM Financial Source: Company, JM Financial *Includes Dividend Distribution Tax

JM Financial Institutional Securities Limited Page 30 Life Insurance Appendix 1: Industry outlook - Long-term growth story still intact

 Highly underpenetrated insurance market India is the 5th largest life insurance market in Asia after Japan, China, South Korea and Taiwan. The total premiums in the Indian life insurance sector posted a CAGR of approximately 13% during FY01–FY16. Despite this, India continues to be an underpenetrated insurance market, with life insurance penetration of 2.7% in FY15 compared with 5.5% in Singapore, 7.3% in South Korea and a global average of 3.5% in 2015. At USD 43 in FY15, the insurance density in India also remains very low compared with other developed and emerging market economies. However, long-term structural factors such as strong economic growth, high household savings, favourable demographic profiles, rising income and increasing urbanisation should lead to healthy growth for the industry going ahead.

Exhibit 91. Life insurance penetration (premium as a % of GDP) Exhibit 92. Life insurance density (premium/population) in USD 6,000 5,651 17% 15.7% 15% 13.3% 5,000 13% 4,000 3,403 3,290 11% 8.3% 2,718 9% 7.3% 7.5% 3,000 1,941 1,827 7% 2,000 1,719 3.5% 3.5% 5% 2.7% 3.1% 3% 1.9% 1,000 346 153 43

1% 0

India

Japan

China

Korea

World

Japan

Korea

China

World

Taiwan

Taiwan Australia Life insurance penetration Australia Source: Company, JM Financial Source: Company, JM Financial

According to Swiss Re, India’s protection margin (ratio between protection gap and protection needs) is highest in Asia and its protection gap (the difference between economic and insured losses) was approximately USD 8.5tn as of 2014, which was much higher than its Asian counterparts.

Exhibit 93. India has the highest protection margin (ratio between Exhibit 94. …with the second-largest mortality protection gap protection gap and protection needs)… CAGR USD bn 2000 2004 2007 2010 2014 2004-14 Protection margin (%) 100% China 3,735 6,540 11,193 18,573 32,074 17% 80% India 2,071 3,067 4,998 7,027 8,555 11% Japan 6,198 6,554 6,305 8,617 6,579 0% 60% South Korea 1,756 2,479 3,697 3,645 5,296 8% 40% Australia 542 784 952 1,078 1,087 3% 20% Indonesia 258 442 526 693 793 6% 0% Thailand 303 326 438 531 767 9%

Vietnam 97 137 230 363 629 17%

India

Japan China

Taiwan Hong Kong 391 421 430 439 538 2%

Vietnam

Thailand

Malaysia

Australia Indonesia

Singapore

Philippines Hong Kong Hong South Korea South Source: Company, JM Financial, Swiss Re Source: Company, JM Financial, Swiss Re

JM Financial Institutional Securities Limited Page 31 Life Insurance

 The life insurance industry is expected to grow at 19% over the medium term The life insurance industry has posted strong growth since it was opened for the private sector. Life premiums posted a CAGR of 20% over FY01-10. This led to an increase in life insurance penetration from 2.3% in FY02 to 4.3% in FY10 and an Increase in insurance density (insurance premium per person) from USD 11 in 2002 to USD 52 in 2010 (CAGR of 22%). However, regulatory changes in the sector and a downturn in capital markets adversely impacted the life insurance industry’s growth during FY10-14, resulting in a decline in insurance penetration from 4.3% in FY10 to 2.7% in FY16. We believe the penetration level has bottomed out and should remain stable, thus contributing to growth. During FY17, insurance inflows have posted a healthy growth rate, driven by an increase in the flood of money in bank deposits, part of which was directed to ULIPs. We expect healthy momentum in insurance inflows to continue, propelled by factors such as strong economic growth, improvement in household savings, favourable demographic profiles, rising income and increasing urbanisation. The life insurance premium multiplier to nominal GDP growth has been around 1.5x over the past decade. Given nominal GDP growth of 10-12% for India over the medium term and assuming a multiplier of 1.3-1.5x (in line with historical trends), life insurance premiums could grow 15-20% over the medium term. Over the long term, the insurance market in India is expected to continue to expand; insurance penetration and insurance density is likely to continue to rise.

Exhibit 95. Life insurance penetration is showing signs of Exhibit 96. Growth in life insurance is 1.5x of nominal GDP in the last improvement decade 5.0% 1,200 4.5% 1,000

4.0% 800 600 3.5% 400 3.0% 200

2.5% 0

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14 FY15 2.0% FY16

Life insurance premiums (indexed) Nominal GDP

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014 2015 2016 Source: Company, JM Financial Source: Company, JM Financial

 Long-term factors such as household savings and favourable demographic profiles still intact for the industry The Indian life insurance sector was the 11th largest life insurance market in the world and the 4th largest in Asia in terms of total premiums in 2016. India currently has one of the youngest populations in the world, with a median age of 28 and an estimated 90% of India's population will be below the age of 60 by 2020. A large working population, coupled with rapid urbanisation and rising affluence, is expected to propel growth for the Indian life insurance sector. In our view, the following main long-term factors should drive the growth of life insurance premiums: 1) underinsured market, 2) a high amount of household savings, 3) rising middle class and income levels, 4) favourable demographics and 5) increasing urbanisation.

JM Financial Institutional Securities Limited Page 32 Life Insurance

Exhibit 97. Population growth rates Exhibit 98. Urbanisation of various countries

0.10%

1.00%

0.30%

0.20%

0.90%

1.00%

0.80%

1.30%

0.40%

74.1%

94.1%

81.8%

86.0%

65.3%

56.2%

54.5%

51.7% - 1,366 2008-18 Population CAGR (%) 1,327 Urban population (% of total) - 2016 324 3.1% 258 2.4% 2.4% 2.5% 206 1.9% 126 146 1.2% 55 68 1.0% 0.6%

0.3%

USA

India

Brazil

Japan

China

Russia

USA

India

S. Africa S.

Brazil

Thailand

Japan

China

Russia

Indonesia

S.Africa Thailand Indonesia Source: Company, EIU, JM Financial Source: Company, EIU, JM Financial

Exhibit 99. GDP per capita CAGR (2016-20E) Exhibit 100. India’s working population

100%

6.9% 7.8% 9.5%

8,650 5,274 8,748 5,908 3,570 8,123

1,709 90%

10,788 38,895 57,467 27,539 6.5% 80% 30.8% 33.7% GDP Per Capita (USD) - 2016 5.6% 70% 37.0% 4.5% 60% 50% 27.5% 2.9% 27.6% 40% 26.0% 2.4% 2.6% 30% 1.3% 1.4% 0.7% 0.9% 20% 34.7% 0.7% 30.9% 27.5% 10% 0%

2000 2010 2020E

USA

India

Brazil

Japan

China

Russia

Turkey

S. Africa S. Korea Thailand 0-14 15-29 30-59 60+ Indonesia Source: Company, EIU, UN Department of Economic and Social Affairs, JM Financial Source: Company, EIU, UN Department of Economic and Social Affairs, JM Financial

 Underinsured market Regulatory changes in the sector during FY10-14 and a downturn in capital markets adversely impacted the growth of life insurance companies during FY10-14, resulting in a decline in life insurance penetration from 4.3% in FY10 to 2.7% in FY16. This is lower than the world average of 3.5% but higher than China (2.3%). At USD 47 in FY16, the insurance density in India also remains very low compared with other developed and emerging market economies. In terms of sum assured/GDP, India is ‘underinsured’ or ‘under protected’. Developed countries such as Japan, Korea and Hong Kong have a sum assured greater than their respective nominal GDPs. In case of India, this metric is around 60% of the value of GDP, which signifies the extent of underinsurance among average Indians.

Exhibit 101. Life insurance penetration (2016) Exhibit 102. Life insurance density (USD, 2016) 18% 8,000 15.7% 7,066 16% 7,000 13.3% 14% 6,000 12% 5,000 10% 8.3% 3,599 7.5% 7.3% 4,000 8% 3,033 2,803 3,000 6% 2,050 1,725 3.5% 3.5% 3.1% 2,000 1,559 4% 2.7% 2.3% 1,000 353 2% 190 47

0% 0

HK UK

India

Japan

Korea China

Korea

China

World

Taiwan

Taiwan Australia Australia Source: SwissRe, JM Financial Source: SwissRe, JM Financial

JM Financial Institutional Securities Limited Page 33 Life Insurance Exhibit 103. Individual sum assured to GDP 70.0% 59% 61% 63% 63% 60.0% 52% 52% 48% 50% 49% 47% 50.0% 40.0% 30.0% 20.0% 10.0%

0.0%

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16 2016-17P Individual sum asssured to GDP

Source: Company, JM Financial

 Financial savings are picking up Buoyant capital markets, together with Demonetization, have favourably impacted the share of life insurance as a proportion of financial savings, which rose sharply to 24% in FY17 (vs. 18% in FY16). India has a large pool of household savings with a ratio of household savings-to-GDP of 19% (in FY16). The share of financial savings as a proportion of household savings increased to 40% in FY16 and is expected to remain relatively stable in FY17.

Exhibit 104. Household savings as a % of GDP Exhibit 105. Contribution of life insurance to HH savings

30% 30% 26% 25% 24% 23% 23% 24% 24% 23% 25% 22% 25% 22% 20% 21% 19% 24% 23% 24% 23% 17% 20% 22% 22% 20% 16% 20% 15% 15% 21% 19% 15% 15% 17% 18% 14% 14% 10% 10% 13%

5% 5%

0% 0%

FY02 FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY16 FY17

Household saving rate (%) Contribution of life insurance to HH savings (%) Source: Company, RBI, JM Financial Source: Company, RBI, JM Financial

 Low inflation rates would lead to an increase in financial savings

With gold losing its sheen and real estate prices cooling off, we believe Indian households will prefer financial products for savings. Furthermore, softening of inflation will also boost financial savings. Demand for financial savings products bodes well for growth in the life insurance industry (insurance premiums contributed to 24% of household financial savings as of FY17).

 Rising income levels McKinsey projects per capita income to rise to INR 238,000 in 2030 from INR 49,000 in 2008, at a CAGR of 8.3%. In the process, many people are expected to move from the low-income to middle-income bracket. The increasing middle class will have several financial needs such as pensions, annuities and retirement plans, which can be addressed by the life insurance industry; this presents a huge opportunity for growth.

 Favourable demographics: Among emerging Asian economies, India has the most favourable demographics with those under 30 years of age constituting 56% of the overall population. The dependency ratio – which was 52 in 2015 – is expected to decline further to 48 by 2025 and 46 by 2040. Therefore, an increase in the working population augurs well for growth and

JM Financial Institutional Securities Limited Page 34 Life Insurance savings. Increased savings and rising per capita income will boost demand for insurance products.

Exhibit 106. India has favourable demographic trends - 2015 Exhibit 107. Increase in working population - 2050 100+ 100+ 90-94 90-94 80-84 80-84 70-74 70-74 60-64 60-64 50-54 50-54 40-44 40-44 30-34 30-34 20-24 20-24 10-14 10-14 0-4 0-4 -80,000 -60,000 -40,000 -20,000 0 20,000 40,000 60,000 80,000 -80,000 -60,000 -40,000 -20,000 0 20,000 40,000 60,000 80,000 Female Male Female Male

Source: UN, JM Financial Source: Company, JM Financial

 Increasing urbanisation As income levels rose, urbanisation in India increased from 29% of the total population in 2004 to an estimated 33.5% in 2017; this is expected to increase to 40% by 2030. Increasing urbanisation will dismantle informal social support systems provided by joint families and individuals will start providing for themselves. This will present life insurance companies with a vacuum and a significant opportunity to fulfil the financial and protection needs of a person at various stages of their life.

 Major product-related regulatory risks a thing of the past for the industry

Most regulatory risks with respect to products have passed for the industry. The regulatory flux during FY11-14 led to a contraction in premium inflows. Since most product-related regulatory changes have already been enacted by the IRDAI, there are no product-related risks going ahead, ensuring that life insurers are well-placed to grow.

JM Financial Institutional Securities Limited Page 35 2 January 2018 India | Life Insurance | Initiation

HDFC Standard Life Insurance | HOLD Solid franchise: priced to perfection

Karan Singh, CFA, FRM HDFC Life is India’s most profitable private life insurer, with a 6.5% market share in the [email protected] | Tel: (91 22) 66303082 private sector. It has prioritised profitability over growth by maintaining a balanced product Nikhil Walecha [email protected] | Tel: (91 22) 66303027 mix between traditional and linked products, which should help it to grow across business Bunny Babjee cycles. It has successfully leveraged the bancassurance channel to record the highest share of [email protected] | (+91 22) 6630 3263 protection mix (7.8% of APE) among peers, leading to best-in-class post-overrun margins of Sameer Bhise c.22%. It is ahead of the curve in terms of investment in technology/digital space, which has [email protected] | Tel: (+91 22) 66303489 led to slightly higher costs vs. peers. The direct channel’s contribution increased from 10% in Jayant Kharote FY14 to 15% in FY17, led by cross-selling efforts and increasing presence in online channels. [email protected] | Tel: (91 22) 66303099 This has helped in improving 13m persistency (up from 73% in FY15 to 82% in Sep’17), S Parameswaran [email protected] | +91 22 66303075 aiding margin improvement. Going ahead, we expect HDFC Life to maintain stable margins at 22% led by higher share of protection products and better cost controls. Therefore, HDFC Life – with healthy growth and better margins – will generate a superior operating RoEV of Recommendation and Price Target Current Reco. HOLD 20% by FY20E. We value HDFC Life at 4.0x FY20E EV, implying a TP of INR 410. We like the Previous Reco. NA franchise given strong product portfolio and superior return ratios – we would wait for a Current Price Target (12M) 410 correction to enter the stock given it is trading at a significant premium to peers. Initiate with Upside/(Downside) 4.5% HOLD rating. Key Data  Healthy APE growth: HDFC Life is India’s third largest life insurer, with a 6.5% (4.9% in Current Market Price Rs 390 FY14) APE market share of the total industry and 13.4% (vs. 13.8% in FY14) APE share Market cap (bn) Rs 783.1/US$12.3 among private insurers. Its APE has posted a 17% CAGR over FY14-17 and we expect Free Float 48.0% healthy growth momentum to continue driven by i) an ideal bank distribution set-up with Shares in issue (mn) 2,009 52-week range 419/307 11,200 bank branches and the large client base of HDFC Bank and its bancassurance Sensex/Nifty 33,813/10,436 partners, which could be more effectively leveraged for higher growth; ii) a strong capital INR/US$ 63.7 market, which would help drive ULIP growth; and iii) a large part of its group business

comprising profitable pure protection products where it has the highest market share Shareholding pattern (%) (group business market share rose from 14.4% in FY14 to 24.3% in FY17 among private HDFC Ltd 51.86 insurers). We expect 25% APE CAGR over FY17-20E. Standard Life 29.44 Others 18.70  Balanced product mix with focus on margins: HDFC Life has prioritised profitability over growth and focused on maintaining a balanced product mix between traditional and Key performance indicators

linked products. Therefore, despite strong capital markets in the past 2 years, the INR bn FY17 FY18e FY19e FY20e proportion of ULIP reduced from 60% in FY15 to 49% of APE in FY17, while the APE 40.9 54.5 67.0 80.7 proportion of traditional products increased from 40% in FY15 to 51% in FY17. Within Growth (%) 11.1% 33.4% 23.0% 20.4% traditional products, the company has focused on par (increased from 20% in FY15 to Mkt share- industry 6.5% 7.1% 7.4% 7.6% 31% in FY17) and high-margin protection products (increased from 6.3% in FY15 to Mkt share- pvt 13.4% 13.9% 14.2% 14.4% 7.8% in FY17 of total APE; the highest among peers). We expect the company to NBV 9.1 12.0 14.4 17.3 maintain a balanced product mix going forward with higher focus on increasing the NBAP Marg. (%) 22.2% 22.0% 21.5% 21.5% protection mix, which would help it attain profitable growth across business cycles. Opex ratio (%) 16.3% 16.3% 16.4% 16.3% PAT 8.9 11.3 13.5 16.1  Competitive advantages due to strong bancassurance channel: HDFC Life’s distribution Growth (%) 8.6% 27.9% 19.3% 19.3% set-up depends highly on the bancassurance channel, as it contributed 61% to individual RoE (%) 25.6% 26.7% 26.2% 25.8% NBP in FY17 (HDFC Bank contributes 90% to bancassurance premiums). The agency EV 124.7 147.3 173.7 204.6 channel’s contribution has remained low (declined from 17% in FY15 to 15% in FY17) P/EV 6.3x 5.3x 4.5x 3.8x due to the company’s focus on improving the quality of its new business. In the last few Oper.RoEV (%) 21.7% 20.6% 20.4% 20.3% Source: Company, JM Financial years, it has revamped its agency model by focusing on agency productivity, persistency, and margins. This has led to improvement in both agency persistency (13m persistency improved from 66.7% in FY15 to 87% in Sep’17) and agency productivity (improved

from INR 62,000 to INR 95,000). The direct channel’s contribution increased from 10% in

FY14 to 15% in FY17, led by cross-selling efforts and increasing presence in online channels (contributes 2.4% of total APE), especially for sales of term insurance and ULIP products, where HDFC Life is a market leader. Additionally, it has partnered with 14 companies across various non-traditional sectors to leverage its strong brand. We expect JM Financial Research is also available on: Bloomberg - JMFR strong reliance on the low-cost bancassurance channel to continue giving it a strong , Thomson Publisher & Reuters S&P Capital IQ and FactSet

competitive advantage. Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.

JM Financial Institutional Securities Limited HDFC Standard Life Insurance 1 January 2018

 Increased bancassurance tie-ups boost cross-selling opportunities: In the past 2 years, the company has increased its bancassurance partnerships from 31 in FY15 to 125 in FY17. Its top 15 bancassurance partners had over 11,200 branches across India as at end-Sep’ 17, which has helped it to i) expand its group credit protection business’ share (increased from 1.6% of total APE in FY15 to 4.2% in FY17); ii) increase its distribution reach to Tier-2 and 3 cities; iii) capture market share in the highly underpenetrated mass market by focusing on its low-ticket protection business and making its business more granular (average Individual APE of non-par term protection reduced from INR c.9,100 to INR c.2,500); and iv) increase cross-selling opportunities (total number of individual policies sold to its group customer base increased from 1.6% in FY15 to 6.7% in Sep’17). Additionally, the company is focusing on cross-selling its individual products and riders to over 59 million people insured under its group products.

 Cost ratios increasing due to investments in technology; persistency continues to improve: HDFC Life is ahead of the curve in terms of the investments made in the digital space and has invested heavily in technology for its direct/online channel, which has allowed it to improve underwriting and turnaround times for policy issuance. This – along with the initial expenses in building partnerships with new banca partners – has led to a rise in its operating expense ratio (ex-commissions) from 10.0% in FY15 to 12.3% in FY17 which is slightly higher than its bancassurance peers and we expect it to remain stable. Investments in technology – coupled with the focus on customer retention and the creation of a separate vertical for persistency – have led to an improvement in persistency; 13m persistency improved from 73.3% in FY15 to 80.9% in FY17 while 61m persistency improved from 37.4% in FY15 to 56.8% in FY17.

 Highest new business margins in the sector, driven by increasing focus on pure protection products: HDFC Life has one of the highest new business margins (NBMs) in the industry reported, which improved from 18.5% in FY15 to 22.4% as of Sep’17, driven by i) the increasing proportion of traditional products, especially the high-margin pure protection segment, ii) focus on cost controls by selling policies through the direct channel and iii) improvement in persistency ratios. With a balanced product mix and cost controls, we believe margins would remain stable at 22% over FY17-20E.

 Possible capital requirement if HDFC Life pursues inorganic opportunities: HDFC Life has a solvency ratio of 200.5% as of Sep’17, with an average dividend pay-out of 23% over FY14-17. It has broadly remained stable over the past 3 years due to strong internal accruals on account of high profitability. We believe HDFC Life might require capital over the next 12 – 18 months for any acquisitions or if growth is higher than expected.

 Expect strong operating ROEV of 20% by FY20E; Initiate with HOLD Rating and TP of INR 410: Being an insurer with a strong bancassurance channel, we expect 25% APE CAGR over FY17-20E to be better than the industry average, thus leading to market share gains. Strong growth and stable margins would lead to operating ROEV of 20% by FY20E. We value HDFC Life at 4x FY20E EV, implying a TP of INR 410. Initiate with HOLD rating.

 Inorganic opportunities could provide further upside: In the past, the company explored a merger opportunity with Max Life, which did not go through due to regulatory issues. We believe it would continue to explore such inorganic growth opportunities especially given PSU Banks could be looking to sell their stake in life insurance ventures to focus on their core banking operations.

 Key Risk: Increase in corporate tax rate to 34.6% (from current tax rate of 14.2%) could negatively impact margins by 5% and EV by 13%.

JM Financial Institutional Securities Limited Page 2 HDFC Standard Life Insurance 1 January 2018

HDFC Standard Life – Annual trends

Exhibit 1. APE growth trends Exhibit 2. Market share 90,000 26% 33% 40% 20% 80,000 23% 16% 70,000 13% 20% 60,000 20% 12%

50,000 14% 17.2%

0% 15.0%

40,000 14.9%

14.4%

14.2% 13.9% 8% 13.8% 30,000 -22% 13.4% -20%

20,000 4% 7.6%

10,000 7.4%

7.1%

6.9%

6.3%

4.9%

6.8% 6.5% 0 -40% 0% FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e

Reported APE (`mn, LHS) APE growth (%, RHS) APE market share within private(%) APE market share - Industry (%) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 3. Operating cost mix Exhibit 4. Trend in operating expenses 20% 40,000 27% 30% 23.5% 25% 15% 4.1% 30,000 4.3% 4.3% 4.6% 4.7% 20% 4.3% 4.2% 14% 13.6% 14.4% 10% 20,000 10% 15% 10% 11.5% 12.3% 12.0% 11.8% 11.6% 5.8% 10% 5% 10.6% 10.0% 10,000 5% 0% 0 0% FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Opex (ex commisions)/GPW Commisions/GPW Opex (ex commissions) (INR m, LHS) Growth (RHS) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 5. Trend in conservation ratio Exhibit 6. Trend in persistency ratio 100% 100%

90% 80% 90%

80% 82%

81% 60% 81%

79% 78%

82% 73% 80% 80% 81% 81% 71%

70% 76% 40%

57% 50%

60% 20%

37%

20%

20% 18% 50% 0% FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY12 FY13 FY14 FY15 FY16 FY17 Conservation ratio 13th month - 61st month Source: Company, JM Financial Source: Company, JM Financial

Exhibit 7. APE – traditional vs. linked Exhibit 8. APE – product mix 100% 100% 1% 6% 8% 3% 3% 4% 5% 22% 13% 14% 11% 8% 80% 80% 49% 49% 57% 62% 60% 54% 60% 86% 60% 93% 91% 40% 16% 19% 84% 82% 84% 86% 5% 18% 40% 77% 20% 20% 40% 20% 34% 34% 27% 31% 13% 20% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17

Par Non-Par Linked Life Pension Group Health Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 3 HDFC Standard Life Insurance 1 January 2018

Exhibit 9. Agent productivity Exhibit 10. Distribution mix 100% 2% 3% 4% 6% 1,00,000 2,10,000 10% 10% 12% 15% 1,80,000 80,000 80% 1,50,000 51% 61% 60,000 1,20,000 60% 64% 70% 65% 67% 90,000 68% 61% 40,000 40% 60,000 20,000 30,000 20% 45% 31% 0 0 20% 17% 16% 17% 13% 15% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual new business premium per agent (INR) (LHS) No of agents (RHS) Agents Banks Corp agents - others Direct Brokers and others Source: Company, JM Financial Source: Company, JM Financial

Exhibit 11. New business margins (NBMs) Exhibit 12. NBV growth 29% 32% 26% 20,000 35% 26% 25% 23% 20% 20% 28% 24% 21% 23% 22% 22% 23% 22% 22% 15,000 16% 21% 19% 14% 20% 18% 17% 10,000 7% 17% 0% 14% -12% 5,000 -11% -7% -18% 11% -14%

8% 0 -21%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY18e

FY19e FY20e Reported NBP margins Reported NBV (`mn) Growth Source: Company, JM Financial Source: Company, JM Financial

Exhibit 13. RoEV trend Exhibit 14. Trend in EV movement 24% EV Movement (INRmn) FY16 FY17 FY18e FY19e FY20e 22% Opening EV 88,900 1,02,325 1,24,707 1,47,279 1,73,692 22% 21% 21% 20% 20% 20% NBV 7,393 9,225 11,991 14,412 17,347 20% 19% 18% Discount unwind 8,100 9,592 11,242 13,055 15,166 18% 17% Operating variance 3,200 2,880 2,400 2,600 2,800 Non-operating variance/ 16% (3,107) 3,041 - - - assumption change 14% EV before capital changes 1,04,486 1,27,063 1,50,341 1,77,345 2,09,005 12% Shareholder's dividends (2,161) (2,356) (3,062) (3,653) (4,357) 10% Capital injection FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Closing EV 1,02,325 1,24,707 1,47,279 1,73,692 2,04,648 Operating ROEV 21.0% 21.7% 20.6% 20.4% 20.3% Operating RoEV Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 4 HDFC Standard Life Insurance 1 January 2018

Exhibit 15. Net profit Exhibit 16. RoE (%) 18,000 80% 50% 44% 16,000 65% 70% 45% 40% 14,000 62% 60% 40% 35% 12,000 35% 50% 35% 10,000 29% 40% 30% 27% 8,000 28% 26% 26% 26% 19% 30% 25% 6,000 19% 20% 20% 4,000 8% 9% 2,000 4% 10% 15% 0 0% 10% FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Net profits (INR mn) Growth ROE Source: Company, JM Financial Source: Company, JM Financial

Exhibit 17. Solvency margin ratio Exhibit 18. Dividend pay-out 230% 35% 217% 29.8% 30% 26.5% 210% 196% 198% 25% 21.3% 194% 192% 188% 20% 16.1% 190% 180% 172% 15% 170% 10% 5% 0% 0% 150% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 Solvency margin Dividend Payout Ratio (%PAT)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 19. AUM trends Exhibit 20. AUM mix trend (%) 1000 917 50% 100%

800 742 37% 34% 35% 670 80% 45% 44% 39% 41%

600 503 24% 60% 33% 401 25% 24% 27% 400 323 28% 26% 23% 24% 25% 40% 23% 25% 22% 200 16% 22% 33% 11% 20% 19% 26% 28% 31% 0 0% FY12 FY13 FY14 FY15 FY16 FY17 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 AUM (`bn) AUM growth (RHS) Cash and equivalents Gsecs Corporate bonds Equities Source: Company, JM Financial Source: Company, JM Financial

Exhibit 21. Impact on EV and NBV margins due to change in corporate tax rate % change NBV margins NBV margins Change in at at in Sensitivity to tax rate EV 14.2% tax rate New tax rate NBV margins

Tax rate at 34.6%

HDFC Life -13.2% 21.8% 16.7% -5.1%

Tax rate at 25.0%

HDFC Life -6.9% 22.2% 19.7% -2.5% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 HDFC Standard Life Insurance 1 January 2018 Financial Tables

P&L (technical account) (INR mn) Balance sheet (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E

Gross premiums 1,63,130 1,94,455 2,24,670 2,62,184 3,07,759 Shareholders’ Investments 26,402 32,456 29,662 29,991 29,294 Net premiums 1,61,788 1,92,749 2,22,699 2,59,883 3,05,058 Policyholders’ Investments 2,58,629 3,46,915 4,97,170 6,92,430 9,40,882 Investment income 17,906 1,11,406 1,11,319 1,30,326 1,52,679 Unit linked Investments 4,57,270 5,38,005 5,80,333 6,21,943 6,69,644 Other Income 971 1,389 1,035 1,035 1,035 Loans 931 479 503 528 554 Total Income 1,80,665 3,05,544 3,35,053 3,91,245 4,58,773 Fixed assets 3,463 3,529 3,706 3,891 4,085 Commissions -7,018 -7,920 -9,769 -11,964 -14,402 Cash & Bank Balances - CA 6,466 7,965 8,363 8,781 9,220 Operating expenses -22,349 -27,596 -29,184 -33,161 -37,923 Advances and Other Assets - CA 12,326 21,713 22,798 23,938 25,135 Total expenses -29,368 -35,516 -38,952 -45,125 -52,326 Debit Balance in P&L 0 0 0 0 0 Benefits paid -82,420 -1,00,004 -1,00,919 -1,06,114 -1,06,968 Change in valuation of Total Assets 7,65,487 9,51,062 11,42,535 13,81,502 16,78,815 life reserves -59,281 -1,60,548 -1,82,580 -2,23,870 -2,79,612 Current Liabilities 25,119 37,736 39,622 41,604 43,684 Total Benefits -1,41,701 -2,60,551 -2,83,499 -3,29,984 -3,86,580 Provisions 415 466 489 513 539 Surplus/(Deficit) 9,596 9,476 12,601 16,136 19,867 Borrowings 0 0 0 0 0 Source: Company, JM Financial Fair Value Change Account 536 3,981 0 0 0 Policy Liabilities 2,44,006 3,23,819 4,64,071 6,46,331 8,78,242 P&L (Shareholder’s account) (INR mn) Linked Liabilities 4,57,270 5,38,005 5,80,333 6,21,943 6,69,644 Y/E March FY16 FY17 FY18E FY19E FY20E FFA 7,055 8,668 11,323 14,538 18,353 Transfer from the Total Liabilities 7,34,401 9,12,675 10,95,838 13,24,928 16,10,462 Policyholders' Account 7,183 7,863 9,946 12,922 16,051 Share Capital 19,953 19,985 20,090 20,090 20,090 Investment income 1,712 2,303 3,608 3,239 3,216 Reserves and surplus 11,524 18,006 26,284 36,161 47,940 Other income 106 1 1 1 1 Fair Value Change Account -412 323 323 323 323 Total income 9,000 10,167 13,554 16,162 19,269 Shareholder's equity 31,065 38,314 46,697 56,573 68,353 Operating expenses -254 -768 -337 -393 -462 Source: Company, JM Financial Contribution to the policyholders A/C -380 -354 0 0 0

Profit before tax 8,334 9,089 13,217 15,768 18,807

Tax -166 -220 -1,877 -2,239 -2,671 Profit after tax 8,168 8,869 11,341 13,529 16,136 Source: Company, JM Financial Embedded Value (INR mn) Y/E March FY16 FY17 FY18E FY19E FY20E Opening EV 88,900 1,02,325 1,24,707 1,47,279 1,73,692 Operational metrics (INR mn) NBV 7,393 9,225 11,991 14,412 17,347 Y/E March FY16 FY17 FY18E FY19E FY20E Discount unwind 8,100 9,592 11,242 13,055 15,166 NBV 7,393 9,060 11,991 14,412 17,347 Operating variance 3,200 2,880 2,400 2,600 2,800 - Growth 25% 23% 32% 20% 20% Non-operating (3,107) 3,041 - - - Reported NBAP margin 23.6% 22.2% 22.0% 21.5% 21.5% variance/assumption change New business premium 64,508 86,964 1,07,760 1,28,078 1,50,689 EV before capital changes 1,04,486 1,27,063 1,50,341 1,77,345 2,09,005 - Growth 17% 35% 24% 19% 18% Dividend payout (2,161) (2,356) (3,062) (3,653) (4,357) APE 36,160 40,852 54,506 67,033 80,682 Capital injection - Growth 14% 13% 33% 23% 20% Closing EV 1,02,325 1,24,707 1,47,279 1,73,692 2,04,648 Source: Company, JM Financial Operating RoEV 21.0% 21.7% 20.6% 20.4% 20.3% Source: Company, JM Financial

Product mix – APE (INR mn) Key multiples Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY13 FY14 FY15 FY16 FY17 Par 34% 34% 20% 27% 31% P/EV (times) 7.60 6.28 5.32 4.51 3.83 Non-par 5% 16% 19% 18% 17% ROEV 21.0% 21.7% 20.6% 20.4% 20.3% Linked 60% 48% 58% 51% 47% P/B (times) 25.0 20.4 16.8 13.8 11.5 Group 1% 3% 3% 4% 5% P/E (times) 95.2 88.3 69.1 57.9 48.5 Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 6 2 January 2018 India | Life Insurance | Initiation

SBI Life Insurance | BUY Most cost efficient

Karan Singh CFA FRM [email protected] | Tel: (91 22) 66303082 SBI Life is one of India’s leading private insurers with a market share of 20.6% among private Nikhil Walecha players (10.0% in the total industry) on an APE basis. It has achieved APE CAGR of 28% over [email protected] | Tel: (91 22) 66303027 FY14-17, outperforming private insurers growth of 19% over the same period, leveraging a) Bunny Babjee parent SBI’s brand equity and largest bancassurance network (64.0% of APE) with over [email protected] | (+91 22) 6630 3263 24,000 branches and b) most productive agency channel (34.7% of APE) among private Sameer Bhise insurers. It has the lowest expense ratio in the industry (improved from 13.8% in FY15 to [email protected] | Tel: (+91 22) 66303489 11.6% in FY17) driven by productivity improvements and economies of scale. This – coupled Jayant Kharote [email protected] | Tel: (91 22) 66303099 with healthy persistency – has led to strong profitability, with post cost overrun margins of S Parameswaran 15.4% and operating RoEV of 18.3% in FY17. Going ahead, the insurer intends to focus on [email protected] | +91 22 66303075 i) increasing share in under-penetrated markets; ii) expanding credit life protection business and iii) leveraging its large bancassurance channel for cross-selling opportunities. With Recommendation and Price Target significant brand equity, an expansive multi-channel distribution network, most cost- efficient Current Reco. BUY model in the industry and huge client base of its parent that can be leveraged further, SBI Previous Reco. NA Current Price Target (12M) 890 Life is well-placed for strong profitable growth. We value the stock at 3.0x FY20E. Initiate Upside/(Downside) 26.9% with BUY and TP of INR 890. Key Data  India's leading private life insurer in FY17 with market share gains driven by largest Current Market Price Rs 700 bancassurance network and significant brand equity: SBI Life – India's leading private life Market cap (bn) Rs 699.5/US$11.0 insurer – has gained significant market share in the past 2 years. Its APE has posted a Free Float 26% CAGR of 28% over FY14-17, outperforming 19% private industry growth during the Shares in issue (mn) 1000 same period. This led to market share increase from 5.8% in FY14 to 10.0% in FY17. This 3-mon avg daily val (mn) Rs.940.6/US$14.8 was driven by i) expansive multi-channel distribution network with India’s largest 52-week range 740/629 Sensex/Nifty 33,813/10,436 bancassurance network (65.2% contribution to individual APE in FY17) of over 26,300 INR/US$ 63.7 branches and one of the largest agency channels (34.1% contribution to individual APE in FY17), ii) strong brand equity and iii) increasing number of active branches (17,170 in Shareholding pattern (%) FY17 vs. 16,333 in FY15). We expect APE CAGR of 27% over FY17-20E. State Bank of India 62.1 BNP Paribas Cardiff SA 22.0  Product mix to be dominated by ULIPs, with proportion increasing from 34% in FY14 to KKR PE 2.0 75% in FY17: Driven by strong capital markets and increasing focus on linked products, Temasek 2.0 the share of ULIPs increased to 75% of APE in FY17 from 34% in FY14 with par (17% in Others 12.0 FY17 vs. 33% in FY14) and non-par (8% in FY17 vs. 32% in FY14) contributing the rest. Key performance indicators

 Largest bancassurance network and most productive agency channel: SBI Life benefits INR bn FY17 FY18e FY19e FY20e from its exclusive bancassurance relationship with SBI, giving it access to the largest APE 63.0 85.6 105.8 127.7 branch network of over 24,000 branches and 420 million customers. The insurer has the Growth (%) 40.5% 35.8% 23.6% 20.7% Mkt share- 10.0% 11.1% 11.7% 12.0% most productive agency network among private insurers, with over 95,000 individual industry agents. The bancassurance and agency channels contributed 64.7% and 34.1% of NBP, Mkt share- pvt 20.6% 21.8% 22.4% 22.8% respectively, in FY17. NBV 10.4 13.4 16.6 20.2 NBAP Marg.(%) 15.4% 15.6% 15.7% 15.8%  Industry-leading expense ratios and healthy persistency trends: Its cost ratio declined from Opex ratio (%) 11.6% 12.0% 11.8% 11.7% 13.8% in FY15 to 11.6% in FY17, the lowest among private life insurers in India. This PAT 9.5 11.3 13.0 14.8 was driven by effective utilisation of its distribution channels, increased focus on Growth (%) 13.1% 18.5% 14.8% 13.7% bancassurance and improved productivity of its agency channel. Furthermore, its 13m RoE (%) 18.6% 18.7% 18.2% 17.7% persistency ratio increased from 79.3% in FY15 to 81.1% in FY17. We expect SBI Life to EV 165.4 201.6 245.2 295.9 continue to be the most cost-efficient insurer and forecast total opex ratio of 11.7% in P/EV 4.2x 3.0x 2.7x 2.4x FY20E. Oper. RoEV (%) 18.3% 18.8% 19.8% 19.7% Source: Company, JM Financial  Strong profitability with post overrun margins of 15.4% and operating RoEV of 18.3% in

FY17: SBI Life has a strong capital position with a healthy solvency ratio of 204% and has

consistently paid dividends since FY12 with an average pay-out of 18% over the past three years. SBI Life's focus on cost efficiency and persistency has led to strong profitability, with post overrun margins of 15.4% and operating RoEV of 18.3% in FY17. JM Financial Research is also available on: Bloomberg - JMFR  Expect operating RoEV to improve to 20% in FY20E; initiate with BUY with a TP of INR , Thomson Publisher & Reuters S&P Capital IQ and FactSet

890: SBI Life focus on cost efficiency and persistency has enabled it to deliver healthy Please see Appendix I at the end of this report for Important RoEV of 18.3% in FY17. We expect RoEV to improve to 20% by FY20E, driven by: (1) Disclosures and Disclaimers and Research Analyst Certification.

JM Financial Institutional Securities Limited SBI Life Insurance 1 January 2018

improvement in NBAP margins to 16% by FY20E, led by an increase in the proportion of high-margin protection policies. We value SBI Life at 3.0x Mar’20 EV, implying a Mar’19 TP of INR 890. Initiate with BUY.

 Key Risk: a) Termination of exclusivity agreement with banca partners, especially SBI ( the bank together with its associates contributed 64.0% of APE in FY17) ; b) Increase in corporate tax rate to 34.6% (from current tax rate of 14.2%) could negatively impact margins by 5-6% and EV by 19%.

JM Financial Institutional Securities Limited Page 2 SBI Life Insurance 1 January 2018

SBI Life Insurance – Annual trends

Exhibit 1. APE growth trends Exhibit 2. Market share 1,40,000 40% 36% 50% 23% 36% 24% 22% 22% 21% 1,20,000 40% 24% 19% 21% 30% 20% 1,00,000 14% 16% 10% 20% 16% 8% 16% 14% 80,000 10% 12% 12% 60,000 0% 12% 11% 9% 10% -10% 40,000 -22% -27% 7% -20% 8% 5% 6% 20,000 -30% 4% 0 -40%

FY11

FY12

FY13

FY14

FY15 FY16

FY17 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e

FY18e

FY19e FY20e APE (INR mn, LHS) APE growth (%, RHS) APE market share within private(%) APE market share (%)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 3. Operating cost mix Exhibit 4. Trend in operating expense 18% 40,000 45% 50% 16% 35,000 45% 40% 14% 30,000

12% 30% 35%

5.2% 4.9%

4.5% 25,000 4.7% 23% 30%

10% 21%

3.7%

4.2%

3.9% 4.1% 4.1% 20,000 25% 8% 5.2% 18% 16% 15,000 13% 13% 20% 6% 15% 10,000 8%

4% 7% 10%

9.6%

9.4%

10.1%

9.1%

7.8%

7.8% 7.7% 7.6% 5,000 2% 6.8% 5%

0% 0 0%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY18e

FY19e FY20e Commisions/GPW Opex (ex commisions)/GPW Opex (ex-commissions) (LHS, INR m) YoY Growth (RHS)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 5. Trend in conservation ratio Exhibit 6. Trend in persistency ratio 85%

90% 82% 81% 82% 81% 81% 100%

86.2%

80.7%

81.1% 79.6% 75% 79.3% 80% 74% 72%

80% 71.8%

69.2% 67.2% 70%

60% 60% 53.8%

60%

40.7% 37.9%

50% 40%

25.5%

23.4% 19.8% 40% 20% 30% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18eFY19eFY20e 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 Conservation ratio 13th month 61st month

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 7. APE - traditional vs linked mix Exhibit 8. APE - product mix 100% 100% 3% 5% 7% 7% 9% 13% 6% 80% 38% 34% 80% 47% 44% 59% 60% 81% 75% 60% 32% 13% 90% 90% 91% 90% 37% 81% 87% 40% 30% 8% 40% 79% 8% 20% 43% 20% 10% 33% 32% 23% 25% 17% 9% 0% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 PAR Non PAR Linked Life Pension Group Health

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 3 SBI Life Insurance 1 January 2018

Exhibit 9. Agent productivity Exhibit 10. Individual premiums by distribution channels 4,00,000 1,25,000 100% 3,50,000 1,00,000 80% 3,00,000 42% 43% 44% 44% 47% 52% 2,50,000 61% 65% 75,000 60% 2,00,000 50,000 1,50,000 40% 1,00,000 55% 54% 25,000 52% 53% 50% 46% 50,000 20% 38% 34% 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual new business premium per agent (INR) No of agents Agents Banks Corp agents - others Direct Others

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 11. NBAP margins Exhibit 12. NBV growth 25% 25 50% 41% 40% 20% 31% 29% 17% 17% 17% 16% 20 21% 30% 15% 15% 16% 16% 16% 36% 15% 14% 20% 15 24% 10% 10% 10% 14% 0% 10 -10% 5% 5 -34% -20% 0% -30%

0 -40%

FY11

FY12

FY13

FY14

FY15 FY16

FY17 FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e

FY18e

FY19e FY20e Reported NBP margins Reported NBV (INR mn) Growth

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 13. ROEV trend Exhibit 14. Trend in EV movement EV Movement (INR mn) FY16 FY17e FY18e FY19e FY20e 25.0% Opening EV 1,12,871 1,25,475 1,65,379 2,01,561 2,45,225 18.8%19.8%19.7% 18.3% NBV 7,920 10,368 13,355 16,612 20,176 20.0% 16.3% 16.3% 16.7% 15.4% Discount unwind 11,823 10,862 15,155 21,599 26,724 15.0% Operating variance -933 1,681 2,500 1,700 1,500 16.1% Non-operating variance/ 10.0% assumption change -121 18,798 8,000 7,000 6,000 EV before capital changes 1,31,559 1,67,184 2,04,389 2,48,472 2,99,625 5.0% Shareholder's dividends -1,444 -1,805 -2,828 -3,246 -3,691 0.0% Capital injection 0 0 0 0 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Closing EV 1,25,475 1,65,379 2,01,561 2,45,225 2,95,934 Operating ROEV Operating ROEV 16.7% 18.3% 18.8% 19.8% 19.7% Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 4 SBI Life Insurance 1 January 2018

Exhibit 15. Net profit Exhibit 16. RoE (%) 16,000 52% 60% 35% 14,000 29.4% 50% 30% 25.9% 12,000 24.0% 33% 40% 25% 22.0% 10,000 25.3% 19.1% 8,000 30% 20% 18% 15.2% 6,000 15% 15% 13% 12% 13% 14% 20% 15% 16.2% 4,000 15.1% 15.1% 4% 10% 2,000 10% 0 0% 5%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e FY19e Net profit (INR mn) Growth (%,RHS) FY20e Source: Company, JM Financial Source: Company, JM Financial

Exhibit 17. Solvency margin ratio Exhibit 18. Dividend pay-out 225% 223% 25%

220% 217% 19% 20% 18% 17% 215% 212% 212% 16% 210% 15% 10% 209% 9% 205% 10% 204% 204% 200% 5% 195% 190% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 Solvency margin Dividend Payout Ratio (%PAT)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 19. AUM trends Exhibit 20. AUM mix trend (%) 100%

1,200 45% 21%

40% 22%

25% 30%

1,000 80% 30%

35%

37%

39% 40%

39% 35% 44%

800 30% 20% 60% 23%

22% 23% 19%

25% 20% 22%

600 20% 25%

20% 27%

40% 22% 13% 12%

22% 26% 11% 26%

400 15% 46%

46%

37%

29% 33%

20% 22% 16% 10% 19% 200 18%

26%

25%

16%

15%

14%

14% 13%

0 0% 0% 10%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16 FY17

AUM ( INRbn, LHS) AUM growth (%, RHS) Cash and equivalent G Secs Corporate Bonds Equities Others

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 21. Impact on EV and NBV due to change in corporate tax rate to 34.6% % change % change in in FY17 EV NBV

SBI Life -19.1% -36.5% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 SBI Life Insurance 1 January 2018 Financial Tables

P&L (technical account) (INR mn) Balance sheet (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E

Gross premiums 1,58,254 2,10,151 2,49,276 3,16,328 3,92,627 Shareholders’ Investments 35,649 42,955 30,546 40,848 52,573 Net premiums 1,56,655 2,08,525 2,47,650 3,14,265 3,90,067 Policyholders’ Investments 3,82,559 4,69,617 5,96,660 7,04,233 8,36,362 Investment income 33,409 92,950 1,02,750 1,19,420 1,38,265 Unit linked Investments 3,60,219 4,45,730 4,96,216 5,84,330 6,99,044 Other Income 1,134 1,301 674 674 674 Loans 1,236 1,782 1,782 1,782 1,782 Total Income 1,91,197 3,02,775 3,51,074 4,34,359 5,29,006 Fixed assets 4,472 5,385 5,654 5,937 6,234 Commissions -7,143 -7,833 -10,462 -13,111 -16,145 Cash & Bank Balances - CA 26,168 24,298 25,513 26,789 28,128 Operating expenses -18,081 -20,486 -23,803 -29,291 -35,427 Advances and Other Assets - CA 23,988 32,628 34,259 35,972 37,771 Total expenses -25,223 -28,320 -34,265 -42,402 -51,572 Debit Balance in P&L 0 0 0 0 0 Benefits paid -79,659 -95,502 -1,43,511 -1,83,389 -2,16,443 Change in valuation of Total Assets 8,34,291 10,22,396 11,90,630 13,99,891 16,61,894 life reserves -79,869 -1,72,410 -1,63,907 -1,95,688 -2,46,843 Current Liabilities 25,026 27,641 29,023 30,474 31,998 Total Benefits -1,59,528 -2,67,912 -3,07,418 -3,79,077 -4,63,285 Provisions 2,019 2,502 2,628 2,759 2,897 Surplus/(Deficit) 6,446 6,544 9,391 12,880 14,149 Borrowings 0 0 0 0 0 Source: Company, JM Financial Fair Value Change Account 3,354 7,764 0 0 0 Policy Liabilities 3,96,342 4,83,238 5,96,660 7,04,233 8,36,362 P&L (Shareholder’s account) (INR mn) Linked Liabilities 3,60,217 4,45,730 4,96,216 5,84,330 6,99,044 Y/E March FY16 FY17 FY18E FY19E FY20E FFA 2 0 527 1,118 1,790 Transfer from the Total Liabilities 7,86,960 9,66,875 11,25,053 13,22,914 15,72,090 Policyholders' Account 6,517 6,546 8,864 12,289 13,477 Share Capital 10,000 10,000 10,000 10,000 10,000 Investment income 3,178 4,016 4,565 3,179 4,160 Reserves and surplus 36,907 44,648 53,132 62,871 73,943 Other income 79 82 82 82 82 Fair Value Change Account 424 873 2,445 4,106 5,861 Total income 9,774 10,644 13,511 15,549 17,720 Shareholder's equity 47,331 55,521 65,577 76,977 89,804 Operating expenses -283 -275 -327 -414 -514 Source: Company, JM Financial Contribution to the policyholders A/C -937 -627 0 0 0

Profit before tax 8,551 9,746 13,184 15,135 17,205

Tax -110 -199 -1,872 -2,149 -2,443 Profit after tax 8,441 9,547 11,312 12,986 14,762 Source: Company, JM Financial

Operational metrics (INR mn) Embedded Value (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E NBV 7,920 10,368 13,355 16,612 20,176 Opening Indian Embedded Value (EV) 1,12,871 1,25,475 1,65,379 2,01,561 2,45,225 - Growth 41% 31% 29% 24% 21% NBV 7,920 10,368 13,355 16,612 20,176 Reported NBAP margin 16.0% 15.4% 15.6% 15.7% 15.8% Discount unwind 11,823 10,862 15,155 21,599 26,724 New business premium 71,066 1,01,439 1,10,051 1,33,001 1,57,607 Operating variance -933 1,681 2,500 1,700 1,500 - Growth 29% 43% 8% 21% 19% Non-operating APE 44,888 63,037 85,609 1,05,808 1,27,696 variance/assumption change -121 18,798 8,000 7,000 6,000 - Growth 36% 40% 36% 24% 21% EV before capital changes 1,31,559 1,67,184 2,04,389 2,48,472 2,99,625 Source: Company, JM Financial Dividend payout -1,444 -1,805 -2,828 -3,246 -3,691 Capital injection 0 0 0 0 0 Closing IEV 1,25,475 1,65,379 2,01,561 2,45,225 2,95,934 Operating RoEV 16.7% 18.3% 18.8% 19.8% 19.7% Source: Company, JM Financial

Key multiples Product mix – APE (INR mn) Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY13 FY14 FY15 FY16 FY17 P/EV 5.6x 4.2x 3.5x 2.9x 2.4x Par 25% 33% 43% 32% 17% ROEV 16.7% 18.3% 18.8% 19.8% 19.7% Non-par 30% 27% 11% 5% 4% P/B 14.8x 12.6x 10.7x 9.1x 7.8x Linked 38% 34% 43% 59% 75% P/E 82.9x 73.3x 61.8x 53.9x 47.4x Group 7% 5% 2% 3% 4%

Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 6 2 January 2018 India | Life Insurance | Company Update

ICICI Prudential Life Insurance | BUY Improving RoEV driven by margin expansion

Karan Singh, CFA, FRM ICICI Prudential Life (IPRU) is well-placed to outperform industry growth led by a) diversified [email protected] | Tel: (91 22) 66303082 distribution network with a strong bancassurance channel, b) focus on ULIP portfolio, which Nikhil Walecha constituted 86% of APE in FY17 and c) improvement in productivity. Historically, APE growth [email protected] | Tel: (91 22) 66303027 for IPRU has been driven by an improvement in profitability metrics, with RoEV improving to Bunny Babjee [email protected] | (+91 22) 6630 3263 15.6% in FY17 (11.6% in FY14), on rising 13m persistency ratio to 86% in FY17 (72% in Sameer Bhise FY14) and a fall in cost ratios (from 17% in FY12 to 14% in FY17). Going ahead, we forecast [email protected] | Tel: (+91 22) 66303489 24% APE CAGR over FY17-20E, with RoEV expected to improve to 17.4% by FY20E driven Jayant Kharote by an improvement in post-overrun margins to 13% by FY20E (vs.10% in FY17) on strong [email protected] | Tel: (91 22) 66303099 growth, an increase in the proportion of high-margin protection policies and slight S Parameswaran improvement in cost ratios. We value the stock at 2.9x EV FY20E. Maintain BUY with a TP of [email protected] | +91 22 66303075 INR 465. IPRU Recommendation and Price Target  IPRU outperformed industry growth with APE CAGR of 26% over FY14-17; we forecast Current Reco. BUY strong growth of 24% over FY17-20E: IPRU outperformed the industry, with APE CAGR Previous Reco. BUY of 26% over FY14-17 vs. the private industry’s average of 19% over the same period. Current Price Target (12M) 465 Upside/(Downside) 21.6% This was driven by a) diversified distribution with a strong bancassurance network, b) Previous Price Target 460 focus on ULIP portfolio, which constituted 86% of APE in FY17 (vs. 52% in FY12) and c) Change 1.0%

an improvement in productivity. This led to a rise in market share from 18% in FY14 to Key Data 21% in FY17 among private insurers. We forecast 24% APE CAGR over FY17-20E. Current Market Price Rs 382 Market cap (bn) Rs 548.8/US$8.6  Focus on profitability - significant improvement in cost ratios and persistency: IPRU’s Free Float 9.2% expense ratio declined from 17% in FY12 to 14% in FY17 (ex-commissions, it dropped Shares in issue (mn) 1,435.5 from 12.6% in FY12 to 10.5% in FY17), led by rationalisation of branches/agency force 3-mon avg. daily val. (mn) Rs 499.8/US$7.8 and an improvement in channel productivity. Furthermore, 13m persistency ratio 52-week range 507/300 Sensex/Nifty 33,813/10,436 increased from 77% in FY12 to 86% in FY17, among the highest in the industry. We Rs/US$ 63.7 believe improvement in operating performance will continue due to further improvements in persistency and productivity, driven by strong growth. We expect its expense ratio to Price Performance % 1M 6M 12M decline to 13.4% by FY20E. Absolute 3.4 -18.5 27.1 Relative* 0.4 -27.9 0.2  Post-overrun margins to improve to 13% by FY20E. IPRU's post-overrun margins have * To the BSE Sensex been lower than peers at 10% due to the lower proportion of non-par products (only 5% Shareholding pattern (%) in FY17) in the portfolio. Given management's efforts to increase the proportion of ICICI Bank 54.88% protection, coupled with some moderation in cost overruns, we expect the post-overruns Prudential Plc. 25.83% margins to improve to 13% in FY20E. Premji Investments 4.00% Temasek 2.00% Others 13.30%  Expect operating RoEV to improve to 17% in FY20E; value IPRU at 2.9x FY20E EV: IPRU has a healthy solvency ratio of 281% and has consistently paid dividends since FY12, with Key performance indicators

an average pay-out of c.60% over the past three years. IPRU's focus on cost-efficiency INR bn FY17 FY18e FY19e FY20e and persistency has allowed it to deliver a healthy RoEV of 15.6% in FY16-17. We expect APE 65.0 85.5 103.3 122.8 RoEV to improve to 17% by FY20E, driven by (1) an improvement in post-overrun Growth (%) 27.2% 31.7% 20.8% 18.9% margins to 13% by FY20E, led by an increase in sales of high-margin protection policies Mkt share- and (2) further improvement in cost ratios. We value IPRU at 2.9x Mar'20 EV, implying a industry 10.3% 11.1% 11.4% 11.6% Mar'19 TP of INR 465. Maintain BUY. Mkt share- pvt 21.3% 21.8% 21.9% 22.0% NBV 6.7 9.8 12.8 16.0  Key risks: a) Termination of exclusivity agreement with bancassurance partners, especially NBAP Marg.(%) 10.1% 11.4% 12.3% 12.8% ICICI Bank; b) a weak capital market, which could impact growth adversely; c) regulatory Opex ratio (%) 13.9% 13.7% 13.5% 13.4% risks; and d) Increase in corporate tax rate to 34.6% (from current tax rate of 14.2%) PAT 16.8 18.2 20.5 23.0 could negatively impact margins by 3% and EV by 15%. Growth (%) 1.7% 8.2% 12.7% 12.0% RoE (%) 28.6% 26.2% 25.3% 24.4% EV 161.8 181.0 203.8 230.1 P/EV 3.4x 3.0x 2.7x 2.4x Oper. RoEV (%) 15.6% 16.4% 17.1% 17.4% Source: Company, JM Financial

JM Financial Research is also available on: Bloomberg - JMFR , Thomson Publisher & Reuters S&P Capital IQ and FactSet

Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification.

JM Financial Institutional Securities Limited ICICI Prudential Life Insurance 2 January 2018 ICICI Prudential Life – Annual trends

Exhibit 1. APE growth trends Exhibit 2. Market share 1,40,000 45% 24% 22% 21% 21% 22% 22% 22% 1,20,000 36% 27% 20% 18% 18% 18% 1,00,000 16% 16% 18% 16% 80,000 9% 11% 11% 12% 10% 10% 60,000 0% 12% 9% 10% 7% 7% 6% 40,000 -9% 8% 6% -18% 20,000 -27% 4%

0 -36% 0%

FY11 FY12 FY13 FY14 FY15 FY16 FY17

FY18e FY19e FY20e

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

FY18e FY19e FY20e APE (Rs mn, LHS) APE growth (%, RHS) APE market share - industry (%) APE market share within private(%) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 3. Operating cost mix Exhibit 4. Trend in operating expense 25% 50,000 24% 30% 21% 20% 40,000 19% 20% 4% 14% 6% 5% 15% 3% 4% 30,000 4% 3% 3% 3% 3% 3% 10% 10% 20,000 1% 16% 13% 13% 13% -5% 2% 0% 5% 12% 11% 10% 11% 10% 10% 10% 10,000 -8% 2%

0% 0 -10%

FY12

FY13

FY14

FY15

FY16

FY17

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY18e

FY19e FY20e Commisions/GPW Opex (ex commisions)/GPW Opex (ex-commission) (INR m, LHS) Growth (RHS) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 5. Trend in conservation ratio Exhibit 6. Trend in persistency ratio 100% 90% 85% 82% 86% 83% 84% 83% 83% 83% 77% 79% 85% 80% 72% 72% 80% 65% 60% 56% 75% 46% 67% 70% 66% 40% 65% 20% 14% 15% 60% 13% 55% 0% FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY12 FY13 FY14 FY15 FY16 FY17 Conservation ratio 13th month 61st month Source: Company, JM Financial Source: Company, JM Financial

Exhibit 7. APE - traditional vs linked mix Exhibit 8. APE - product mix 100% 100%

80% 80% 11%

52%

53%

53% 66%

60% 68% 60%

83%

85%

86%

98%

92%

98% 97%

40% 40% 96%

86%

28% 39%

20% 16% 20%

43%

25%

20%

10%

18% 14% 0% 13% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 PAR Non PAR Linked Life Pension Group Health

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 2 ICICI Prudential Life Insurance 2 January 2018

Exhibit 9. Agent productivity Exhibit 10. Individual premiums by distribution channels 1,40,000 3,00,000 100% 2% 10% 6% 8% 5% 3% 3.0% 13% 7% 6% 10% 11% 12.8% 1,20,000 2,50,000 4% 3% 7% 80% 1,00,000 2,00,000 80,000 26% 39% 37% 60% 45% 53% 1,50,000 58% 57% 60,000 57.1% 1,00,000 40% 40,000 50,000 51% 45% 20,000 20% 43% 36% 31% 25% 25% 23.5% 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual new business premium per agent (Rs , LHS) No of agents (RHS) Agents Banks Corp agents - others Direct Others Source: Company, JM Financial Source: Company, JM Financial

Exhibit 11. NBAP margins Exhibit 12. NBV growth

14.0% 12.3% 12.8% 18,000 51% 48% 60% 11.4% 30% 12.0% 10.1% 15,000 25% 40% 10.0% 8.0% 12,000 1% 11% 8.0% 6% 20% 5.7% 9,000 6.0% -30% 0% 6,000 -19% 4.0% -7% 3,000 -30% -20% 2.0% 0.0% 0 -40%

FY15 FY16 FY17 FY18e FY19e FY20e

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e FY20e NBAP margins Reported NBV (Rs mn, LHS) Growth (%, RHS) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 13. ROEV trend Exhibit 14. Trend in EV movement EV Movement (INR m) FY16 FY17e FY18e FY19e FY20e 20.0% 17.1% 17.4% 16.4% Opening EV 1,38,223 1,39,388 1,61,838 1,81,035 2,03,806 15.3% 15.6% NBV 4,123 6,660 9,837 12,815 15,970 15.0% Discount unwind 12,582 12,210 14,142 15,908 17,478 10.7% Operating variance 4,484 3,080 2,500 2,250 2,000 10.0% Non-operating variance/ assumption change -5,610 5,820 0 0 0 5.0% EV bef capital changes 1,53,802 1,68,158 1,88,317 2,12,008 2,39,254 Shareholder's dividends 14,414 6,320 7,281 8,202 9,189 0.0% Capital injection 0 0 0 0 0 FY15 FY16 FY17 FY18e FY19e FY20e Closing EV 1,39,388 1,61,838 1,81,035 2,03,806 2,30,065 Operating RoEV 15.3% 15.6% 16.4% 17.1% 17.4% Operating ROEV Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 3 ICICI Prudential Life Insurance 2 January 2018

Exhibit 15. Net profit Exhibit 16. RoE (%) 25,000 12.0% 14% 50% 12.7% 44% 12% 20,000 9.4% 37% 40% 34% 10% 31% 15,000 29% 8% 30% 26% 25% 24% 5.0% 8.2% 10,000 3.1% 6% 20% 4% 5,000 0.8% 1.7% 2% 10% 0 0%

FY13

FY14

FY15 FY16

FY17 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e

FY18e

FY19e FY20e Net Profit (Rs mn) Growth (%,RHS) ROE (%)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 17. Solvency margin ratio Exhibit 18. Dividend pay-out 450% 100% 88% 396% 82% 400% 371% 372% 80% 337% 61% 350% 320% 60%

281% 37% 40% 300% 40% 35%

250% 20%

200% 0% FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 Solvency margin Dividend payout (%)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 19. AUM trends Exhibit 20. AUM mix trend (%) 1,400 3% 80% 100% 1,200 70% 90% 80% 1,000 60% 49% 49% 47% 57% 51% 50% 50% 70% 63% 800 67% 40% 60% 19% 600 24% 50% 18% 30% 17% 13% 15% 400 40% 16% 17% 8% 20% 15% 3% 3% 30% 12% 200 5% 10% 14% 17% 19% 26% 7% 9% 28% 20% 29% 0 0% 6% 10% 18% 19% 16% 13% 15% 12% 10%

FY10

FY11

FY12

FY13

FY14

FY15 FY16 FY17 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 AUM (Rs bn,LHS) AUM growth (%, RHS) Cash and equivalent G Secs Corporate Bonds Equities Others Source: Company, JM Financial Source: Company, JM Financial

Exhibit 21. Impact on EV and NBV margins due to change in corporate tax rate % change NBV margins NBV margins Change in at at in Sensitivity to tax rate EV 14.2% tax rate New tax rate NBV margins

Tax rate at 34.6%*

ICICI Prudential -14.9% 8.1% 5.3% -2.9%

Tax rate at 28.4%

ICICI Prudential -11.0% 10.1% 7.9% -2.2% Source: Company, JM Financial, *Based on FY16 sensitivity disclosure

JM Financial Institutional Securities Limited Page 4 ICICI Prudential Life Insurance 2 January 2018 Financial Tables

P&L (technical account) (INR mn) Balance sheet (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E

Gross premiums 1,91,644 2,23,540 2,75,034 3,35,627 4,05,878 Shareholders’ Investments 62,157 66,349 67,212 72,326 77,806 Net premiums 1,89,987 2,21,552 2,72,588 3,32,643 4,02,269 Policyholders’ Investments 2,15,156 2,70,674 3,54,364 4,45,473 5,51,345 Investment income 12,084 1,49,769 1,64,304 1,95,119 2,32,864 Unit linked Investments 7,52,958 8,78,783 10,32,722 12,31,247 14,74,155 Other Income 209 608 590 590 590 Loans 443 806 847 889 934 Total Income 2,02,279 3,71,930 4,37,483 5,28,352 6,35,723 Fixed assets 2,195 2,138 2,245 2,357 2,475 Commissions -6,200 -7,589 -9,588 -11,580 -13,809 Cash & Bank Balances - CA 2,002 2,137 2,244 2,356 2,474 Operating expenses -22,526 -27,860 -28,191 -33,563 -40,588 Advances and Other Assets - CA 12,751 26,520 27,846 29,238 30,700 Total expenses -28,726 -35,450 -37,779 -45,143 -54,397 Debit Balance in P&L 0 0 0 0 0 Benefits paid -1,24,248 -1,49,979 -1,56,248 -1,81,912 -2,19,223 Change in valuation of Total Assets 10,47,662 12,47,408 14,87,479 17,83,887 21,39,889 life reserves -35,155 -1,74,976 -2,27,356 -2,82,111 -3,40,038 Current Liabilities 18,214 28,160 29,568 31,047 32,599 Total Benefits -1,59,403 -3,24,954 -3,83,604 -4,64,023 -5,59,261 Provisions 3,797 205 215 226 237 Surplus/(Deficit) 14,150 11,527 16,101 19,187 22,065 Borrowings 0 0 0 0 0 Source: Company, JM Financial Fair Value Change Account 9,712 17,867 17,867 17,867 17,867 Policy Liabilities 2,02,548 2,51,695 3,25,104 4,08,691 5,05,821 P&L (Shareholder’s account) (INR mn) Linked Liabilities 7,52,947 8,78,775 10,32,722 12,31,247 14,74,155 Y/E March FY16 FY17 FY18E FY19E FY20E FFA 6,591 6,014 6,417 6,921 7,538 Transfer from the Total Liabilities 9,94,387 11,83,320 14,12,497 16,96,601 20,38,820 Policyholders' Account 12,103 11,315 14,893 17,724 20,344 Share Capital 14,323 14,353 14,353 14,353 14,353 Investment income 5,996 6,670 6,826 6,790 7,173 Reserves and surplus 36,669 46,976 57,898 70,201 83,985 Other income 0 286 0 0 0 Fair Value Change Account 2,509 2,731 2,731 2,731 2,731 Total income 18,098 18,272 21,719 24,514 27,517 Shareholder's equity 53,501 64,060 74,982 87,286 1,01,069 Operating expenses -313 -409 -504 -615 -743 Source: Company, JM Financial Contribution to the policyholders A/C 0 -18 0 0 0

Profit before tax 17,742 17,844 21,215 23,900 26,774

Tax -1,211 -1,028 -3,013 -3,394 -3,802 Profit after tax 16,531 16,817 18,203 20,506 22,972 Source: Company, JM Financial Embedded Value (INR mn) Y/E March FY16 FY17 FY18E FY19E FY20E Opening EV 1,38,223 1,39,388 1,61,838 1,81,035 2,03,806 Operational metrics (INR mn) NBV 4,123 6,660 9,837 12,815 15,970 Y/E March FY16 FY17 FY18E FY19E FY20E Discount unwind 12,582 12,210 14,142 15,908 17,478 NBV 4,123 6,660 9,837 12,815 15,970 Operating variance 4,484 3,080 2,500 2,250 2,000 Non-operating - Growth 53% 62% 48% 30% 25% variance/assumption change -5,610 5,820 0 0 0 Reported new business margin 13.8% 10.1% 11.4% 12.3% 12.8% EV bef capital changes 1,53,802 1,68,158 1,88,317 2,12,008 2,39,254 New business premium 67,658 78,633 1,01,597 1,21,399 1,43,154 Dividend payout 14,414 6,320 7,281 8,202 9,189 - Growth 27% 16% 29% 19% 18% Capital injection 0 0 0 0 0 APE 51,087 64,966 85,535 1,03,344 1,22,848 Closing EV 1,39,388 1,61,838 1,81,035 2,03,806 2,30,065 - Growth 10% 27% 32% 21% 19% Operating RoEV 15.3% 15.6% 16.4% 17.1% 17.4% Source: Company, JM Financial Source: Company, JM Financial

Key multiples

Product mix – APE (INR mn) Y/E March FY16 FY17 FY18E FY19E FY20E

Y/E March FY13 FY14 FY15 FY16 FY17 P/EV 3.9x 3.4x 3.0x 2.7x 2.4x Par 8% 18% 13% 14% 10% ROEV 15.3% 15.6% 16.4% 17.1% 17.4% Non-par 39% 16% 2% 3% 5% P/B 10.2x 8.6x 7.3x 6.3x 5.4x Linked 51% 66% 84% 81% 85% P/E 33.1x 32.6x 30.2x 26.8x 24.0x Group 2% 0% 1% 2% 1% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 ICICI Prudential Life Insurance 2 January 2018

History of earnings estimates and target price Recommendation history

FY18E EPS FY19E EPS Target Date (Rs) % Chg. (Rs) % Chg. Price % Chg.

13-Apr-17 460

JM Financial Institutional Securities Limited Page 6 2 January 2018 India | Life Insurance | Company Update

Max Life Insurance Focus on quality growth and profitability

Karan Singh, CFA, FRM With continued focus on quality – both in terms of product and distribution – Max Life (Max) [email protected] | Tel: (91 22) 66303082 should generate steady growth of 17% CAGR over FY17-20E with strong ROEV of 19% over Nikhil Walecha FY17-20E. Max has a well-balanced product mix with traditional (69% of APE as of FY17) [email protected] | Tel: (91 22) 66303027 and linked products (31%). Further, the rising share of high-margin individual protection Bunny Babjee [email protected] | (+91 22) 6630 3263 products (5% of APE vs. 4% in FY16) is a positive and the company expects to double this to Sameer Bhise 10% by FY20. It has a well-diversified distribution set-up, with strong bancassurance partners [email protected] | Tel: (+91 22) 66303489 (Axis Bank and Yes Bank) and one of the most productive agency channels in the business. Jayant Kharote Focus on bancassurance partners beyond Axis Bank would also help diversify its distribution [email protected] | Tel: (91 22) 66303099 mix. We expect margins to remain stable at 18% driven by focus on individual protection S Parameswaran products. With the merger with HDFC called off, Max can focus on creating an even more [email protected] | +91 22 66303075 efficient distribution infrastructure. Thus, Max appears well-placed to generate operating RoEV of 19% over FY17-20E. We value Max at 2.6x FY20E EV, implying value of INR 255bn. Shareholding pattern Key risk – Max has very high dependence on Axis Bank with 58% of business (as % of APE) % coming from Axis Bank, therefore if Axis decides to start its own insurance company via Max Financial Services 70.0 acquisition; it could adversely impact Max. Axis Bank 5.0 Mitsui Sumitomo Insurance 25.0  Balanced product mix with focus on higher-margin protection products: In the past 5 years (FY12-17), Max’s market share has gradually increased from 2.9% to 4.2%. It has prioritised profitability over growth and focused on maintaining a balanced mix between Valuation summary (INR bn) traditional and linked products. Consequently, the proportion of par products reduced FY20E Embedded value 98.0 from 79% in FY12 to 56% of APE in FY17, while the proportion of ULIP products rose P/EV 2.6x from 12% in FY12 to 31% in FY17. Further, the proportion of high-margin individual Fair value 254.7 protection products now stands at 5% (vs. 4% in FY16) and the company expects to Per share for parent (INR) 667 double its share to 10% by FY20. Management intends to maintain a balanced product % of Max Financial Mkt Cap. 111%

mix by FY20 (with par products at 35-40%, non-par savings at 20-25% and ULIPs at 25%), which would help it achieve profitable growth across business cycles. It also Key performance indicators

expects to achieve 20% margins and ROEV by FY20E. INR bn FY17 FY18e FY19e FY20e APE 26.7 31.5 36.8 42.9  Well-diversified and productive distribution set-up: Max Life has the most balanced and Growth (%) 25.6% 17.7% 16.8% 16.8% diversified distribution set-up in the industry, with Axis Bank and Yes Bank as its main Mkt share- 4.2% 4.1% 4.0% 4.0% bancassurance partners and a highly productive agency force. Following the Axis Bank tie- industry up, the bancassurance channel contribution significantly increased to 67% in FY17 from Mkt share- pvt 8.8% 8.0% 7.8% 7.7% less than 4% in FY10. Focus on bancassurance partners beyond Axis Bank has also helped NBV 5.0 5.8 6.7 7.7 diversify its distribution mix and the contribution of other bancassurance partners has NBAP Marg.(%) 18.8% 18.6% 18.4% 18.1% Opex ratio (%) 23.4% 23.0% 22.6% 22.3% now increased to 14% (vs. 9% in FY16). Max Life has one of the most productive agency PAT 6.6 7.5 8.5 9.5 channels (avg. agent productivity of 165,000) among top private insurers in the industry; Growth (%) 50.3% 13.7% 13.7% 11.1% this channel contributed 32% to new business premiums in FY17. EV 65.9 75.1 85.8 98.0 RoE (%) 29.1% 28.4% 28.4% 27.1%  Improvement in cost ratio continues; persistency remains best: Max’s operating expense P/EV 3.9x 3.4x 3.0x 2.6x ratio (excl. commission) continued to improve (from 18.6% in FY13 to 15.5% in FY17), Oper. RoEV (%) 19.9% 19.1% 19.3% 19.2% led by sustained cost controls. The rise in bancassurance tie-ups has played a large role in Source: Company, JM Financial improving the company’s cost ratios. It has one of the best persistency ratios in the industry, with 13m persistency of 80% and a conservation ratio of 85% in FY17.

 Best-in-class margins: Max has the second highest margins in the industry – at 18.8% in FY17 – largely attributed to the high share of individual protection products. With rising JM Financial Research is also available on: share of individual protection products, we expect stable margins at c.18% over FY18- Bloomberg - JMFR , 20E. Thomson Publisher & Reuters S&P Capital IQ and FactSet  Healthy solvency position: Max Life had a healthy solvency ratio of 395% as of Sep’17 with an average dividend pay-out of 69% over FY14-17. Please see Appendix I at the end of this  To generate operating RoEV of 19% in FY20E; value Max Life at 2.6x FY20E EV: Being an report for Important Disclosures and insurer with a strong bancassurance channel, we expect Max’s APE CAGR of 18% over Disclaimers and Research Analyst FY17-20E. Healthy growth and stable post-cost overrun new business margins should Certification.

JM Financial Institutional Securities Limited Max Life Insurance 2 January 2018

lead to stable operating RoEV of 19% in FY20E. We value Max Life at 2.6x FY20E EV, implying a valuation of INR 255bn.

 Key Risks – Discontinuation of tie up with Axis Bank: In March 2016, Axis Bank had got 5% stake in Max Life at a significant discount (at an approx price of INR 950 mn, the current value of this stake is INR 11.3bn) which it would be able to monetize post minimum performance commitment to Max Life. This discounted stake sale by Max Life was likely a consideration for Axis’ banca partnership. This agreement with Max Life is till Sept 2021. Given, Max has very high dependence on Axis Bank with 58% of business (as % of APE) coming from Axis Bank, therefore if Axis decides to start its own insurance company; it could adversely impact Max Life.

JM Financial Institutional Securities Limited Page 2 Max Life Insurance 2 January 2018

Max Life Insurance – Annual trends

Exhibit 1. APE growth trends Exhibit 2. Market share 12% 50,000 26% 30% 45,000 9.8% 18% 25% 10% 9.3% 40,000 17% 17% 17% 8.8% 8.8% 20% 8.1% 8.0% 7.8% 7.7% 35,000 9% 10% 15% 8% 30,000 8% 10% 25,000 0% 5% 6% 20,000 4.2% 4.1% 4.2% 4.1% 4.0% 4.0% 3.5% 15,000 0% 4% 3.0% 10,000 -12% -5% 5,000 -10% 2% 0 -15%

FY11

FY12

FY13

FY14

FY15 FY16

FY17 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e

FY18e

FY19e FY20e APE market share (%) APE market share within private(%) APE (`mn, LHS) APE growth (%, RHS) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 3. Operating cost mix Exhibit 4. Trend in operating expense 45% 25,000 26% 32% 40% 35% 20,000 24%

9% 13% 30% 16% 25% 9% 15,000 8%

9% 13% 9% 10% 20% 9% 10,000 -1%

9% -4%

9% 9% 15% 9% 3% 0% 31% 3% 2%

10% 25% 5,000 -14% -8%

19%

17%

15% 15%

5% 14%

14%

14% 14%

0% 0 -16%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY18e

FY19e FY20e Commisions/GPW Opex (ex commisions)/GPW Opex (ex-commissions) (INR m) Growth

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 5. Trend in conservation ratio Exhibit 6. Trend in persistency ratio

90% 90% 80%

85% 77%

84% 77%

76% 76% 82% 83% 83% 83% 80% 75% 85% 70% 81% 81% 80% 78% 70% 80%

60% 53%

75% 50%

39% 35%

40% 32%

70% 31% 26%

30% 23% 65% 20% 60% 10% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 13th month - 61st month

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 7. APE – traditional vs linked Exhibit 8. APE – product mix 100% 100% 12% 9% 10% 3% 3% 2% 21% 9% 15% 26% 27% 31% 80% 44% 80% 11% 15% 13% 60% 13% 60% 5% 98% 99% 97% 89% 96% 96% 96% 40% 79% 40% 76% 68% 60% 52% 59% 56% 20% 20%

0% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Linked Non-Par Par Health Group Pension Life Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 3 Max Life Insurance 2 January 2018

Exhibit 9. Agent productivity Exhibit 10. Individual premiums by distribution channels 1,90,000 90,000 100% 3% 2% 7% 7% 8% 10% 11% 10% 3% 21% 20% 13% 10% 9% 6% 4% 1,80,000 72,000 80% 4% 22% 1,70,000 54,000 60% 40% 48% 51% 56% 58% 62%

1,60,000 36,000 40% 70% 1,50,000 18,000 54% 20% 37% 35% 31% 28% 28% 25% 1,40,000 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% Individual new business premium per agent (`) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 No of agents Agents Banks Corp agents - others Direct Others

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 11. NBAP margins Exhibit 12. NBV growth 10,000 92% 100% 80%

25% 23.4% 8,000

60%

19.5%

18.8%

18.6%

18.4%

18.1% 17.9% 20% 17.8% 32% 6,000 27% 40% 17% 15% 14.0% 15% 15% 13.4% 13% 4,000 20% -12% 10% -18% 0% 2,000 -29% -20% 5% 0 -40%

FY11

FY12

FY13

FY14

FY15 FY16

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18eFY19eFY20e FY17

FY18e

FY19e FY20e Reported NBP margins Reported NBV (`mn) Growth

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 13. ROEV trend Exhibit 14. Trend in EV movement 25% 22% EV Movement (INR mn) FY16 FY17e FY18e FY19e FY20e 20% 19% 19% 19% Opening EV 52,320 56,170 65,890 75,122 85,783 20% 17% NBV 3,780 4,990 5,820 6,708 7,730 16% 15% Discount unwind 5,130 5,340 6,288 7,291 8,220 15% 12% 11% Operating variance -140 860 500 500 500 Non-operating variance/ 10% assumption change 0 0 0 0 0 EV before capital changes 60,560 69,070 78,498 89,621 1,02,232 5% Shareholder's dividends -4,390 -3,180 -3,376 -3,838 -4,264 Capital injection 0 0 0 0 0 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18eFY19eFY20e Closing EV 56,170 65,890 75,122 85,783 97,968 Operating ROEV 17.0% 19.9% 19.1% 19.3% 19.2% Operating ROEV (%) Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 4 Max Life Insurance 2 January 2018

Exhibit 15. Net profit Exhibit 16. RoE (%) 10,000 137% 160% 35% 30% 9,000 140% 29% 29% 30% 28% 27% 8,000 120% 25% 23% 22% 7,000 100% 20% 21% 6,000 50% 80% 20% 5,000 60% 15% 4,000 40% 14% 14%11% 3% 6% 10% 3,000 -8% -5% 20% 2,000 0% 5% 1,000 -20% 0 -40% 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18eFY19eFY20e FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Net profit (`mn) Growth RoE

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 17. Solvency margin ratio Exhibit 18. Dividend pay-out 600% 534% 521% 120% 100% 485% 100% 500% 423% 365% 80% 71% 71% 400% 322% 343% 58% 60% 48% 300% 309% 40%

200% 20% 0% 100% 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY12 FY13 FY14 FY15 FY16 FY17 Solvency margin Dividend Payout Ratio (%PAT)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 19. AUM trends Exhibit 20. AUM mix trend (%) 500 36% 40% 100% 450 35% 28% 27% 400 38% 35% 32% 30% 32% 26% 30% 80% 350 25% 24% 21% 300 19% 25% 18% 21% 60% 22% 19% 250 20% 15% 24% 27% 28% 200 15% 40% 150 10% 51% 49% 100 24% 27% 33% 43% 46% 50 5% 20% 0 0% 14% 11%

0% 7% 5% 3% 4% 3%

FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY11 FY12 FY13 FY14 FY15 FY16 FY17 AUM (`bn, LHS) AUM growth (%,RHS) Cash and equivalent G Secs Corporate Bonds Equities Others Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 Max Life Insurance 2 January 2018 Financial Tables

P&L (technical account) (INR mn) Balance sheet (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E

Gross premiums 92,162 1,07,804 1,23,208 1,41,914 1,63,960 Shareholders’ Investments 23,918 32,303 27,224 31,715 36,719 Net premiums 91,389 1,06,802 1,21,864 1,40,366 1,62,172 Policyholders’ Investments 2,02,784 2,55,483 3,31,937 4,17,100 5,15,040 Investment income 12,899 42,107 49,284 56,348 63,938 Unit linked Investments 1,31,538 1,55,910 1,57,394 1,58,834 1,52,024 Other Income 165 192 189 189 189 Loans 764 1,333 1,400 1,470 1,543 Total Income 1,04,454 1,49,101 1,71,337 1,96,903 2,26,299 Fixed assets 1,679 1,623 1,704 1,789 1,879 Commissions -8,210 -9,364 -10,746 -12,207 -14,055 Cash & Bank Balances - CA 3,326 3,464 3,638 3,820 4,011 Operating expenses -13,259 -16,715 -18,360 -20,671 -23,348 Advances and Other Assets - CA 12,302 14,318 15,034 15,786 16,575 Total expenses -21,469 -26,080 -29,106 -32,878 -37,402 Debit Balance in P&L 0 0 0 0 0 Benefits paid -31,464 -37,775 -62,371 -69,035 -88,500 Change in valuation of Total Assets 3,76,311 4,64,434 5,38,330 6,30,512 7,27,791 life reserves -46,888 -78,693 -69,877 -82,547 -86,467 Current Liabilities 13,650 16,773 17,612 18,493 19,417 Total Benefits -78,352 -1,16,468 -1,32,248 -1,51,583 -1,74,967 Provisions 2,806 310 326 342 359 Surplus/(Deficit) 4,632 6,553 9,983 12,442 13,929 Borrowings 0 0 0 0 0 Source: Company, JM Financial Fair Value Change Account 101 3,045 0 0 0 Policy Liabilities 1,90,418 2,45,296 3,16,130 3,97,238 4,90,514 P&L (Shareholder’s account) (INR mn) Linked Liabilities 1,34,536 1,58,351 1,57,394 1,58,834 1,52,024 Y/E March FY16 FY17 FY18E FY19E FY20E FFA 14,563 15,565 19,124 23,185 27,842 Transfer from the Total Liabilities 3,56,072 4,39,340 5,10,585 5,98,091 6,90,157 Policyholders' Account 3,351 5,551 6,424 8,381 9,272 Share Capital 19,188 19,188 19,188 19,188 19,188 Investment income 2,187 3,089 3,435 2,846 3,258 Reserves and surplus 954 5,867 8,518 13,195 18,407 Other income 6 5 5 5 5 Fair Value Change Account 97 38 38 38 38 Total income 5,544 8,645 9,864 11,231 12,534 Shareholder's equity 20,239 25,093 27,744 32,422 37,633 Operating expenses -415 -961 -1,098 -1,265 -1,461 Source: Company, JM Financial Contribution to the policyholders A/C -19 -2 0 0 0

Profit before tax 5,109 7,682 8,767 9,967 11,073

Tax -718 -1,083 -1,264 -1,437 -1,597 Profit after tax 4,391 6,599 7,502 8,529 9,476 Source: Company, JM Financial Embedded Value (INR mn) Y/E March FY16 FY17 FY18E FY19E FY20E Opening Indian Embedded Value (EV) 52,320 56,170 65,890 75,122 85,783

Operational metrics (INR mn) NBV 3,780 4,990 5,820 6,708 7,730 Discount unwind 5,130 5,340 6,288 7,291 8,220 Y/E March FY16 FY17 FY18E FY19E FY20E Operating variance -140 860 500 500 500 NBV 3,780 4,990 5,820 6,708 7,730 Non-operating - Growth -18% 32% 17% 15% 15% variance/assumption change 0 0 0 0 0 Reported new business EV before capital changes 60,560 69,070 78,498 89,621 1,02,232 margin 17.9% 18.8% 18.6% 18.4% 18.1% Dividend payout -4,390 -3,180 -3,376 -3,838 -4,264 New business premium 28,817 36,664 42,215 48,855 56,574 Capital injection 0 0 0 0 0 - Growth 12% 27% 15% 16% 16% Closing Indian embedded APE 21,297 26,740 31,460 36,754 42,943 value (IEV) 56,170 65,890 75,122 85,783 97,968 - Growth 8% 26% 18% 17% 17% Operating RoEV 17.0% 19.9% 19.1% 19.3% 19.2% Source: Company, JM Financial Source: Company, JM Financial

Product mix – APE (INR mn)

Y/E March FY13 FY14 FY15 FY16 FY17 Par 76% 68% 59% 60% 56% Non-par 14% 10% 14% 12% 12% Linked 9% 20% 26% 27% 30% Group 1% 1% 1% 1% 1% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 6 2 January 2018 India | Life Insurance | Company Update

Bajaj Allianz Life Insurance Turnaround plan bearing fruit

Karan Singh, CFA, FRM Bajaj Allianz Life Insurance (BALIC) has been focusing on product and agency channel [email protected] | Tel: (91 22) 66303082 transformation over the last 3-4 years and its operating metrics are showing signs of Nikhil Walecha improvement. During this period, it has focused on re-balancing its portfolio mix by [email protected] | Tel: (91 22) 66303027 increasing the share of linked products (63% in FY17 vs. 9% in FY14) and undergoing Bunny Babjee [email protected] | (+91 22) 6630 3263 channel restructuring by i) targeting mass affluent customer segments which have a greater Sameer Bhise acceptability for linked products ii) clustering its area of operations for agency channel and iii) [email protected] | Tel: (+91 22) 66303489 revamping agency channel by focusing on productive agents. We believe BALIC, with strong Jayant Kharote solvency and better cost structure, is well positioned to focus on growth which could lead to [email protected] | Tel: (91 22) 66303099 ROEV improvement going forward. We expect operating RoEV to improve to 10% in FY20E S Parameswaran and value BALIC at 2.0x FY20E EV implying value of INR 321bn. [email protected] | +91 22 66303075

 Growth momentum to continue led by portfolio/channel restructuring: Over the past

decade, BALIC has struggled to grow its APE given i) product-related regulatory changes; Shareholding pattern ii) distribution constraints—absence of prominent bancassurance partner and end of % bancassurance tie-up with Standard Chartered Bank (2014), and iii) portfolio/channel Bajaj FinServ 74.0 restructuring (doing away with lesser productive distributors/channels and corresponding Allianz SE 26.0

volumes). Consequently, BALIC’s market share declined from a peak of 10.5% in FY08 to 2.0% in FY17, while APE contracted 16% over FY08–17. Over the past 2 years, BALIC Valuation summary (INR bn) FY20E underwent significant portfolio/channel restructuring with a) focus on ULIP – proportion Embedded value 160.8 increased to 63% in FY17 vs. 9% in FY14 b) targeting mass affluent customer segments - P/EV 2.0x proportion increased from 23% in FY16 to 36% in FY17 c) hiring good quality sales Fair value 321.7 agents to service this segment and d) doing away with high surrender products and retail Per share for Bajaj Finserv (INR) 1,496 % of Bajaj FinServ Mkt Cap. 29% single premium products (proportion reduced to 6% in FY17 vs. 22% in FY16 of NBP). Consequently, growth bounced back (34% YoY) during FY17 driven by increase in both Key performance indicators ticket size and number of policies benefiting from the restructuring exercise. We expect strong growth momentum to continue and expect 30% APE CAGR over FY17–20E. INR bn FY17 FY18e FY19e FY20e APE 12.3 17.5 22.2 27.3  Distribution network dominated by agency channel; any possible Banca tie up with large Growth (%) 34.5% 42.3% 26.4% 23.0% bank could further boost growth prospects: BALIC, being a non‐bank promoted entity, Mkt share- 2.0% 2.3% 2.4% 2.6% lacks a prominent bancassurance partner and agency continues to be the key distribution industry channel (86% of the retail NBP). In the past few years, it has revamped its distribution Mkt share- pvt 4.0% 4.5% 4.7% 4.9% NBV 1.7 2.6 3.3 4.2 strategy by segmenting its agency area of operations into various clusters such as i) Core NBAP Marg.(%) 13.0% 14.4% 14.4% 14.8% market comprising of locations with high potential where BALIC has delivered decent Opex ratio (%) 19.5% 19.2% 18.4% 18.0% business volumes. ii) Focus market comprising of six metro cities having high potential PAT 8.4 8.4 9.2 10.5 with relatively lower penetration and iii) Emerging market comprising of 135 cities where Growth (%) -4.9% 0.0% 10.4% 13.6% the insurance industry has done well in the past and where BALIC has lower share. RoE (%) 10.4% 9.4% 9.5% 9.8% Further, it has taken various steps to improve productivity such as: a) replacing c.50% of EV 112.7 126.4 142.3 160.8 the employees at the top level (Branch managers and above) with top quality workforce P/EV 2.9x 2.5x 2.3x 2.0x who could cater to mass affluent customers. b) Realigning employee’s remuneration Oper. RoEV (%) 7.5% 8.6% 9.4% 10.2% Source: Company, JM Financial structure to agency’s performance and c) developing robust training architecture. This has led to sustained improvement in agency productivity (individual new business premium per agent has improved to 108,000 in FY17 vs. 62,000 in FY14). On the Banca side, if BALIC is able to tie up with any large bank, it could further provide a boost to its

growth prospects.On the Direct channel, company intends to leverage 80mn group customer database for cross-selling. Further it is seeing healthy traction in online ULIP sales. JM Financial Research is also available on:  Improvement in key operating metrics continue: Key operating metrics have improved for Bloomberg - JMFR , BALIC, as operating expense ratio (excl. commissions) improved to 19% in FY17 vs. 28% Thomson Publisher & Reuters in FY14 led by sustained measures to contain cost such as rationalizing size of branches. S&P Capital IQ and FactSet The 13-month persistency ratio also improved to 68% in FY17 from 61.6% in FY14 driven by i) company’s focus on customers with higher affordability ii) regular follow-ups Please see Appendix I at the end of this and efforts to ensure higher automatic renewals and iii) incorporating persistency as an report for Important Disclosures and Disclaimers and Research Analyst important KRA for its employees/agents. Significant improvement can be seen in the Certification.

JM Financial Institutional Securities Limited Bajaj Allianz Life Insurance 1 January 2018

persistency levels of 37th, 49th and 61st while the conservation ratio has also improved to 66% in FY17 from 55% in FY14 but remains weaker than peers.

 Post-cost overrun margins impacted by high cost overruns: Pre-cost overrun margins has broadly remained stable at 13.6% in FY17 (vs. 13% in FY14) but is lower compared to peers due to higher proportion of ULIP products (63% in FY17) in the portfolio. However, due to very high cost overruns, post-overrun margins were negative. Sustained growth and improvement in the product mix towards high-margin retail protection products should lead to better margins, going ahead. We expect pre-over run margins to improve to 14.8% in FY20.

 Strong solvency with additional capital buffer; business self-sufficient since FY08: BALIC has a strong capital position with healthy solvency ratio of 582% which is sufficient to meet growth requirement for the next five years. Additionally, from capital perspective they are well placed to grow through inorganic route as well.

 Expect operating RoEV to improve to 10% in FY20E; value BALIC at 2.0x FY20E EV: Due to lack of a strong bancassurance partner, BALIC has lost significant market share since FY08. We believe turnaround plan has started bearing fruit and BALIC is well placed to report improvement in performance metrics going ahead.. We expect BALIC’s operating RoEV to improve be around 10% by FY20E. We value BALIC at 2.0x FY20E P/EV, implying a value of Rs.321bn.

 Key risks: a) Increase in tax rate from current levels will adversely impact EV and margins; b) weak capital markets could adversely impact demand for linked products; and c) regulatory risks.

JM Financial Institutional Securities Limited Page 2 Bajaj Allianz Life Insurance 1 January 2018

Bajaj Allianz Life Insurance – Annual trends

Exhibit 1. BALIC’s APE growth trends Exhibit 2. Market share trends 42% 10% 30,000 34% 50% 26% 25,000 23% 8% 7.3% 25% 6.3% 20,000 -2% -2% 6% 4.9% 15,000 -17% 0% 4.4% 4.5% 4.7% -18% 3.8% 4.0% 10,000 -29% 4% 2.7% 2.4% 2.6% -39% -25% 2.2% 2.0% 2.0% 2.3% 5,000 1.8% 2% 0 -50%

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e FY19e FY20e FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e APE (INR mn) (LHS) APE growth (%, RHS) APE market share (%) APE market share within private(%) Source: Company, JM Financial Source: Company, JM Financial

Exhibit 3. Operating cost mix Exhibit 4. Trend in operating expense 30% 20,000 11% 11% 13% 15%

8% 4% 25% 3% 10%

16,000

3% 5% 3% -1% 5%

20% 2% 2%

6% -2%

2% 8% 2% 12,000 -5% 0% 15% -12% -5%

8,000 -10% 23%

10% 23% -17%-17%

19%

17% 17%

17% -15%

16% 16% 5% 16% 4,000 -20%

0% 0 -25%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY18e

FY19e FY20e Opex(ex commisions)/GPW Commisions/GPW Opex (ex-commissions) (INR mn) Growth Source: Company, JM Financial Source: Company, JM Financial

Exhibit 5. Trend in conservation ratio Exhibit 6. Trend in persistency ratio

75% 80%

73% 66%

70% 68%

63% 62%

70% 62% 60%

71% 71% 60% 56% 65% 68% 66% 66% 50% 60% 63% 40%

55% 59% 32% 58% 30% 56% 55% 50%

20% 16% 6%

45% 6% 4% 10% 4% 40% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18eFY19eFY20e FY11 FY12 FY13 FY14 FY15 FY16 FY17 Conservation ratio 13th month - 61st month Source: Company, JM Financial Source: Company, JM Financial

Exhibit 7. APE - traditional vs linked Exhibit 8. APE – product mix 100% 100% 9% 4% 6% 11% 13% 8% 0% 11% 12% 18% 18% 7% 0% 0% 22% 12% 15% 39% 3% 80% 46% 45% 80% 4% 5% 63% 60% 60% 24% 21% 22% 87% 92% 88% 87% 40% 82% 75% 76% 40% 80% 74% 77% 17% 20% 32% 37% 33% 20% 20% 0% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Linked Non-Par Par Health Group Pension Life

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 3 Bajaj Allianz Life Insurance 1 January 2018

Exhibit 9. Agent productivity Exhibit 10. Individual premiums by distribution channels 100% 4% 4% 3% 5% 5% 1,40,000 2,10,000 5% 10%1% 1% 7% 12% 1% 13% 10% 19% 1,20,000 1,80,000 80% 7% 24% 10% 1,00,000 1,50,000 21% 80,000 1,20,000 60% 92% 90% 60,000 90,000 84% 85% 40% 76% 40,000 60,000 66% 56% 55% 20,000 30,000 20% 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual new business premium per agent (INR ) No of agents Agents Banks Corp agents - others Direct Others

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 11. NBAP margins pre overruns Exhibit 12. NBAP margins post overruns

20%

10% 8.5% 16.6% 18% 18.1%

5.0%

14.8% 14.4% 16% 14.4% 5%

14% 13.0% 1.0% 12% 11.2% 0% 10% -5% -2.4% 8% -4.5% 6% -10% -8.8% 4% -12.6% 2% -15% FY14 FY15 FY16 FY17 FY18e FY19e FY20e 0% FY14 FY15 FY16 FY17 FY18e FY19e FY20e

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 13. ROEV trend Exhibit 14. Trend in EV movement 16% EV Movement (Rs.mn) FY16 FY17e FY18e FY19e FY20e 14% Opening EV 93,019 98,763 1,12,651 1,26,394 1,42,289 NBV 1,603 1,671 2,630 3,324 4,224 12% 14% Discount unwind 6,296 6,700 7,567 8,687 10,020 10% Operating variance -826 -917 -455 -116 292 10% 8% 10% 9% Non-operating variance/ 9% 8% 9% 6% 8% 8% assumption change -1,324 6,434 4,000 4,000 4,000 4% EV before capital changes 98,763 1,12,651 1,26,394 1,42,289 1,60,825 2% Shareholder's dividends 0 0 0 0 0 Capital injection 0 0 0 0 0 0% FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e Closing EV 98,763 1,12,651 1,26,394 1,42,289 1,60,825 Operating ROEV 7.6% 7.5% 8.6% 9.4% 10.2% Operating ROEV Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 4 Bajaj Allianz Life Insurance 1 January 2018

Exhibit 15. Net profit trend Exhibit 16. RoE (%) 16,000 20% 35% 31% 15% 30% 12,000 14% 10% 10% 5% 25% -2% 0% 19% 0% 0% 20% 8,000 14% -5% 15% 12% 10% -5% -10% 9% 9% 10% 10% 4,000 -20% -15% -14% -20% 5% 0 -25% 0% FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e ROE Net profit (INR mn) Growth Source: Company, JM Financial Source: Company, JM Financial

Exhibit 17. AUM trends Exhibit 18. AUM mix trend (%) 600 20% 100% 18% 12% 500 11% 15% 29% 31% 80% 41% 33% 52% 47% 400 10% 56% 60% 26% 300 2% 1% 5% 25% 23% 19% -1% -2% 19% 200 0% 40% 22% 23% 38% 100 -5% 22% 28% 34% 38% 20% 9% 13% 0 -10% 13% 11% 13% 11%

0% 7% 6% 8%

FY11 FY12 FY13 FY14 FY15 FY16 FY17

FY11 FY12 FY13 FY14 FY15 FY16 FY17 AUM (INR bn) (LHS) AUM growth (%, RHS) Cash and equivalent G Secs Corporate Bonds Equities Others Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 Bajaj Allianz Life Insurance 1 January 2018 Financial Tables

P&L (technical account) (INR mn) Balance sheet (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E

Gross premiums 58,973 61,833 69,545 78,603 91,510 Shareholders’ Investments 75,647 73,961 94,844 1,03,430 1,13,254 Net premiums 58,317 61,221 68,856 77,825 90,604 Policyholders’ Investments 1,70,902 2,04,802 2,29,948 2,72,936 3,27,126 Investment income 7,479 53,728 51,263 49,328 47,956 Unit linked Investments 1,94,526 2,08,382 1,83,092 1,50,395 1,28,287 Other Income 857 1,769 350 350 350 Loans 1,449 1,796 1,886 1,981 2,080 Total Income 66,654 1,16,718 1,20,470 1,27,503 1,38,911 Fixed assets 2,198 2,265 2,378 2,497 2,622 Commissions -1,574 -1,464 -1,690 -1,915 -2,255 Cash & Bank Balances - CA 3,397 6,145 6,453 6,775 7,114 Operating expenses -12,057 -11,508 -12,748 -13,779 -15,584 Advances and Other Assets - CA 12,101 19,340 20,307 21,322 22,388 Total expenses -13,631 -12,973 -14,438 -15,695 -17,839 Debit Balance in P&L 0 0 0 0 0 Benefits paid -50,125 -61,998 -88,947 -97,978 -84,316 Change in valuation of Total Assets 4,60,221 5,16,692 5,38,908 5,59,336 6,02,871 life reserves 1,508 -36,310 -13,145 -10,287 -32,076 Current Liabilities 12,269 18,018 18,919 19,865 20,858 Total Benefits -48,617 -98,309 -1,02,091 -1,08,265 -1,16,392 Provisions 4,360 4,676 4,910 5,155 5,413 Surplus/(Deficit) 4,406 5,437 3,940 3,543 4,680 Borrowings 0 0 0 0 0 Source: Company, JM Financial Fair Value Change Account 1,362 6,155 6,155 6,155 6,155 Policy Liabilities 1,69,314 1,91,489 2,29,924 2,72,908 3,27,091 P&L (Shareholder’s account) (INR mn) Linked Liabilities 1,94,526 2,08,382 1,83,092 1,50,395 1,28,287 Y/E March FY16 FY17 FY18E FY19E FY20E FFA 2,074 3,216 2,926 2,650 2,374 Trfr from Policyholders' A/c 3,576 4,295 4,230 3,820 4,955 Total Liabilities 3,83,905 4,31,936 4,45,926 4,57,128 4,90,179 Investment income 7,549 7,728 6,121 7,622 8,064 Share Capital 1,507 1,507 1,507 1,507 1,507 Other income 9 0 0 0 0 Reserves and surplus 74,808 83,248 91,474 1,00,701 1,11,184 Total income 11,134 12,023 10,351 11,442 13,019 Fair Value Change Account 0 1 1 1 1 Operating expenses -409 -545 -613 -693 -807 Shareholder's equity 76,315 84,756 92,982 1,02,209 1,12,691 Contri policyholders A/C -436 -1,419 0 0 0 Source: Company, JM Financial Profit before tax 10,290 10,060 9,738 10,749 12,212

Tax -1,500 -1,697 -1,379 -1,522 -1,730

Profit after tax 8,790 8,363 8,359 9,226 10,483 Source: Company, JM Financial

Operational metrics (INR mn) Embedded Value (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E NBV 1,603 1,671 2,630 3,324 4,224 Opening EV 93,019 98,763 1,12,651 1,26,394 1,42,289 - Growth -10% 4% 57% 26% 27% NBV 1,603 1,671 2,630 3,324 4,224 Reported VNB margin 16.6% 13.0% 14.4% 14.4% 14.8% Discount unwind 6,296 6,700 7,567 8,687 10,020 New business premium 28,845 32,903 37,125 44,676 53,131 Operating variance -826 -917 -455 -116 292 - Growth 7% 14% 13% 20% 19% Non-operating variance/assumption change -1,324 6,434 4,000 4,000 4,000 APE 9,166 12,326 17,536 22,161 27,253 EV before capital changes 98,763 1,12,651 1,26,394 1,42,289 1,60,825 - Growth -2% 34% 42% 26% 23% Dividend payout 0 0 0 0 0 Source: Company, JM Financial Capital injection 0 0 0 0 0 Closing IEV 98,763 1,12,651 1,26,394 1,42,289 1,60,825 Operating RoEV 7.6% 7.5% 8.6% 9.4% 10.2% Source: Company, JM Financial

Product mix – APE (INR mn)

Y/E March FY13 FY14 FY15 FY16 FY17 Par 75% 76% 37% 33% 20% Non-par 2% 5% 11% 6% 4% Linked 12% 7% 35% 40% 58% Group 11% 12% 18% 22% 18% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 6 2 January 2018 India | Life Insurance | Company Update

Birla Sun Life Insurance New Banca tie ups brings some respite

Karan Singh CFA FRM [email protected] | Tel: (91 22) 66303082 Birla Sun Life (BSL)’s APE growth remained subdued (APE declined 10% over FY10-17) due to Nikhil Walecha regulatory challenges and the lack of large banca tie-ups, leading to pressure on its ROEVs. [email protected] | Tel: (91 22) 66303027 However, growth bounced back in FY17 (30% YoY), led by improvement in agency Bunny Babjee productivity and an increase in ticket size. Going forward, we expect APE growth to improve [email protected] | (+91 22) 6630 3263 to 16%, driven by new banca tie-ups. With focus on non-par products, BSL has one of the Sameer Bhise highest pre-overrun margins (29%), but significant cost overruns has kept post-overrun [email protected] | Tel: (+91 22) 66303489 margins negative; we expect margins to turn positive by FY20E, driven by improvement in Jayant Kharote [email protected] | Tel: (91 22) 66303099 operational efficiency. Focus on costs is the key for BSL to improve it return ratios. We S Parameswaran forecast operating ROEV of 10% over FY17-20E. We value BSL at 2.0x FY20EV, implying [email protected] | +91 22 66303075 value of INR98bn.

 APE growth turns positive after declining for 7 consecutive years: BSL's market share declined from 6% in FY13 to 3% in Sep'17. After a 7-year decline (15% CARC over Shareholding pattern FY09-16), APE growth picked up (30% YoY), led by improved agency productivity and an % increase in ticket size. We expect 16% APE CAGR over FY17-20E, driven by BSL's recent Aditya Birla Capital 51.0 bancassurance tie-ups. Sun Life Financial 49.0

 Focus on high margin non-par products: Historically, BSL has focused on traditional Valuation summary (INR bn) products, which contributed 75% to APE in FY17. Within traditional products, it is FY20E focusing on high-margin non-par, which contributed 43% (vs. 32% of the total APE in Embedded value 49,215 FY14). Additionally, the company has started focusing on pure protection products, with P/EV 2.0x its share in the overall mix increasing to 5% in FY17 (vs. 2% in FY16). The proportion of Fair value 98,430 Per share for parent (INR) 23 its ULIP portfolio increased from 32% in FY14 to 43% in FY17, led by strong capital % of Aditya Birla Capital Mkt Cap. 12% markets and new banca tie-ups, while par contribution remained stable at 25% in FY17. Going ahead, management intends to have a balanced product mix with equal Key performance indicators contribution from ULIP, par and non-par products. INR bn FY17 FY18e FY19e FY20e  New bancassurance tie-ups to strengthen non-agency contribution: The contribution of APE 10.8 12.4 14.4 16.7 the bancassurance channel (as a % of individual NBPs) declined from 20% in FY14 to Growth (%) 29.7% 15.4% 15.5% 15.8% Mkt share- 10% in FY17 after Citibank (BSL's largest bancassurance partner) ended the tie-up in 1.7% 1.6% 1.6% 1.6% Dec'14. The absence of a strong bancassurance partnership led to a significant market industry Mkt share- pvt 3.5% 3.2% 3.0% 3.0% share loss for BSL for 3 years. With open architecture, BSL has recently tied up with large NBV 2.8 3.2 3.6 4.2 banks such HDFC Bank, DBS, Deutsche Bank, DCB, KVB and LVB. Hence, we expect NBAP Marg.(%) 28.9% 28.8% 27.7% 27.7% bancassurance contribution to improve and have a positive impact on new business Opex ratio (%) 19.6% 19.4% 19.2% 18.9% growth in the near term. Agency channel contribution remained high at 74% in FY17 (vs. PAT 1.2 1.5 1.7 1.9 65% in FY14) and management has taken steps to improve the agency channel's Growth (%) (12.3%) 22.9% 10.6% 11.8% productivity; individual NBP/agent improved to 74,000 in FY17 vs. 54,000 in FY14 owing RoE (%) 5.6% 6.9% 7.4% 8.1% to the implementation of the new agency distribution model. Its direct channel EV 38.1 41.3 44.8 49.2 contribution increased from 2% in FY14 to 10% in FY17 as the proprietary channels' P/EV 2.6x 2.4x 2.2x 2.0x productivity posted a 50% CAGR over FY14-17. With more banking partners and a Oper. RoEV (%) 8.0% 8.3% 8.5% 9.9% Source: Company, JM Financial higher focus on the direct channel, the non-agency channels contribution increased to 31% of individual new business premiums in 1HFY18, vs. 25% in 1HFY17. We expect 16% APE CAGR over FY17-20E.

 Improvement in cost ratios and persistency: Given its significantly high cost overruns, BSL has been making efforts to improve its cost ratios; its operating expense ratio (ex- commissions) improved from 21.5% in FY14 to 15.2% in FY17. Despite this, cost over- JM Financial Research is also available on: runs were significant at 31% of FY17 APE. Thus further improvement in cost ratio will the Bloomberg - JMFR , key to improve profitability for BSL. BSL’s persistency ratio improved to 72.5% (vs. 60% in Thomson Publisher & Reuters FY14), while conservation ratio remained stable at 58% (vs. 60% in FY14) in FY17. S&P Capital IQ and FactSet

 Significant cost over-run so far, forecast positive post-cost overrun margins by FY20E: Please see Appendix I at the end of this BSL's pre-cost overrun margin - at 29% in FY17 - was one of the highest in the industry, report for Important Disclosures and largely due to the significant contribution of non-par products. However, its post-cost Disclaimers and Research Analyst overrun margin was negative at 5% in FY17. We expect positive post-cost overrun Certification.

JM Financial Institutional Securities Limited Birla Sun Life Insurance 1 January 2018

margins of 2% by FY20E, driven by healthy APE growth, cost controls and improvement in productivity.

 Operating ROEV to improve to 10% by FY20E; value Birla Sun Life at 2.0x FY20E EV: Being an agency-driven life insurer, BSL's ROEVs have remained significantly lower than those of bank-promoted insurers. We expect it’s operating ROEV to improve to 10% by FY20E driven by improvement in post-overrun margins and healthy APE growth. We value BSL at 2.0x Mar'20 EV, implying a value of INR 98bn.

 Key risks: a) Increase in tax rate from current levels will adversely impact EV and margins; b) Any change in regulations with respect to the high margin non par business will impact Birla Sun Life adversely

JM Financial Institutional Securities Limited Page 2 Birla Sun Life Insurance 1 January 2018

Birla Sun Life Insurance – Annual trends

Exhibit 1. APE growth trends Exhibit 2. Market share 18,000 36% 8% 30% 16,000 15% 16% 24% 5.9% 14,000 6% 5.0% 12,000 12% 10,000 -3% 15% 4.0% -7% 0% 4% 3.4% 3.5% 8,000 -11% 3.2% 3.0% 3.0% -17% 6,000 -12% 2.2% -24% 1.8% 1.8% 1.7% 4,000 -29% 2% 1.6% 1.6% 1.6% 1.6% -24% 2,000 0 -36%

FY11

FY12

FY13

FY14

FY15 FY16

FY17 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e

FY18e

FY19e FY20e APE (`mn) (LHS) APE growth (%, RHS) APE market share (%) APE market share within private(%)

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 3. Operating cost mix Exhibit 4. Trend in operating expense 35% 16,000 15% 10% 8% 10% 30% 10% 25% 6% 12,000 3% 5% 5% 20% 4% 4% 4% 4% 4% 4% 8,000 0% 15% 1% 22% 21% -5% 10% 19% 18% -9% -5% 15% 15% 15% 15% 4,000 -10% 5% -6% -13% -10%

0% 0 -15%

FY13

FY14

FY15

FY16

FY17

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18e

FY19e

FY20e

FY18e

FY19e FY20e Commisions/GPW Opex (ex commisions)/GPW Operating expense (`mn) Growth

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 5. Trend in conservation ratio Exhibit 6. Trend in persistency ratio 75% 70% 90% 83% 82% 81% 69% 70% 80% 71% 66% 65% 64% 70% 65% 62% 60% 62% 65% 60% 60% 60% 55% 58% 58% 53% 51% 60% 50% 47% 44% 39% 55% 40% 35% 30% 50% 20% 45% 10% 40% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY11 FY12 FY13 FY14 FY15 FY16 FY17 Conservation ratio 13th month - 61st month

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 7. APE – traditional vs linked Exhibit 8. APE – product mix 100% 100% 5% 7% 9% 10% 1% 14% 18% 15% 32% 6% 80% 46% 42% 38% 40% 80% 58% 60% 83% 60% 27% 25% 43% 93% 90% 40% 32% 40% 87% 85% 82% 79% 82% 51% 20% 42% 35% 35% 20% 17% 25% 25% 0% 0% FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Par Non Par Linked Life Pension Group Health

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 3 Birla Sun Life Insurance 1 January 2018

Exhibit 9. Agent productivity Exhibit 10. Individual premiums by distribution channels 1,00,000 2,00,000 100%

8% 80,000 1,60,000 80% 10% 17% 20% 19% 17% 18% 18% 60,000 1,20,000 60%

40,000 80,000 40% 80% 74% 61% 67% 64% 63% 65% 67% 20,000 40,000 20% 0 0 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual new business premium per agent (`) Agents Banks Corp agents - others Direct Others No of agents Source: Company, JM Financial Source: Company, JM Financial

Exhibit 11. NBAP margins pre cost overruns Exhibit 12. NBAP margins post cost overruns 35% 10% 2% 29% 29% 30% 28% 28% 0% -2% 25% -10% -5% -3%

20% 16% -20% 14% 15% 15% -30%

10% -40% -35% -42% 5% -50% -50% 0% -60% FY14 FY15 FY16 FY17 FY18e FY19e FY20e FY14 FY15 FY16 FY17 FY18e FY19e FY20e

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 13. ROEV trend Exhibit 14. Solvency ratio 12% 350% 9.9% 299% 289% 10% 8.5% 8.0% 8.3% 300% 267% 8% 250% 211% 211% 6% 205% 200% 186% 200% 4% 1.1% 150% 2% 0.5% 0% 100% FY15 FY16 FY17 FY18e FY19e FY20e FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Operating ROEV Solvency margin

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 4 Birla Sun Life Insurance 1 January 2018

Exhibit 15. Net profit Exhibit 16. RoE (%) 6,000 60% 18.0% 16% 5,000 40% 16.0% 14.0% 13% 4,000 20% 12.0% 3,000 0% 10.0% 8% 2,000 -20% 8.0% 6% 7% 7% 6.0% 6% 1,000 -40% 4.0%

0 -60% 2.0%

FY12

FY13

FY14

FY15 FY16

FY17 0.0%

FY18e FY19e FY20e FY14 FY15 FY16 FY17 FY18e FY19e FY20e Net profit (`mn) Growth

Source: Company, JM Financial Source: Company, JM Financial

Exhibit 17. AUM trends Exhibit 18. AUM mix trend (%) 400 90% 100% 72% 350 31% 24% 28% 75% 80% 36% 34% 35% 300 60% 250 60% 32% 33% 200 45% 28% 29% 27% 31% 150 40% 22% 21% 30% 100 8% 12% 25% 27% 33% 7% 8% 15% 20% 26% 29% 31% 50 2% 0 0% 9% 12% 10% 9% 10% 7% FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 0% FY12 FY13 FY14 FY15 FY16 FY17 AUM (`bn, LHS) AUM growth (%, RHS) Cash and equivalent G Secs Corporate Bonds Equities Others

Source: Company, JM Financial Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 5 Birla Sun Life Insurance 1 January 2018 Financial Tables

P&L (technical account) (INR mn) Balance sheet (INR mn)

Y/E March FY16 FY17 FY18E FY19E FY20E Y/E March FY16 FY17 FY18E FY19E FY20E

Gross premiums 55,797 57,240 63,672 69,996 77,900 Shareholders’ Investments 17,066 16,039 12,808 14,670 16,717 Net premiums 54,117 55,335 61,554 67,667 75,309 Policyholders’ Investments 56,820 80,312 1,20,584 1,64,809 2,17,067 Investment income 6,434 43,376 38,409 41,340 45,078 Unit linked Investments 2,34,228 2,48,877 2,46,977 2,50,233 2,54,733 Other Income 3,612 1,962 332 332 332 Loans 478 537 564 592 622 Total Income 64,163 1,00,673 1,00,295 1,09,339 1,20,719 Fixed assets 646 810 850 892 937 Commissions -2,181 -2,551 -2,820 -3,141 -3,452 Cash & Bank Balances - CA 4,811 4,991 5,240 5,502 5,777 Operating expenses -10,045 -8,691 -9,551 -10,289 -11,296 Advances and Other Assets - CA 5,011 8,302 8,717 9,153 9,611 Total expenses -12,225 -11,241 -12,371 -13,431 -14,748 Debit Balance in P&L 5,282 3,648 2,545 876 -991 Benefits paid -42,480 -46,537 -53,010 -47,084 -47,705 Change in valuation of Total Assets 3,24,342 3,63,516 3,98,285 4,46,728 5,04,472 -6,002 -39,609 -34,081 -47,481 -56,757 life reserves Current Liabilities 8,265 7,770 8,159 8,566 8,995 Total Benefits -48,482 -86,145 -87,091 -94,565 -1,04,462 Provisions 231 253 265 278 292 Surplus/(Deficit) 3,456 3,287 834 1,343 1,509 Borrowings 0 0 0 0 0 Source: Company, JM Financial Fair Value Change Account -255 250 0 0 0 Policy Liabilities 59,644 84,603 1,20,584 1,64,809 2,17,067 P&L (Shareholder’s account) (INR mn) Linked Liabilities 2,34,228 2,48,877 2,46,977 2,50,233 2,54,733 Y/E March FY16 FY17 FY18E FY19E FY20E FFA 132 69 69 69 69 Transfer from the 3,509 3,350 834 1,343 1,509 Total Liabilities 3,02,244 3,41,821 3,76,053 4,23,956 4,81,155 Policyholders' Account Share Capital 19,012 19,012 19,012 19,012 19,012 Investment income 1,486 1,491 1,276 987 1,095 Reserves and surplus 3,089 2,683 2,683 2,683 2,683 Other income 0 0 0 0 0 Fair Value Change Account -3 -0 536 1,077 1,622 Total income 4,995 4,841 2,109 2,330 2,604 Shareholder's equity 22,098 21,695 22,231 22,772 23,317 Operating expenses -330 -1,982 -350 -385 -428 Source: Company, JM Financial Contribution to the -3,265 -1,630 0 0 0 policyholders A/C

Profit before tax 1,400 1,228 1,759 1,945 2,176 Tax 0 0 -250 -276 -309

Profit after tax 1,400 1,228 1,509 1,669 1,867 Source: Company, JM Financial

Operational metrics (INR mn) Y/E March FY16 FY17 FY18E FY19E FY20E NBV 1,110 2,810 3,237 3,595 4,163 - Growth -8% 153% 15% 11% 16% Reported new business 15% 29% 29% 28% 28% margin New business premium 22,212 25,346 29,248 33,779 39,124 - Growth 14% 14% 15% 15% 16% APE 8,316 10,789 12,450 14,379 16,654 - Growth -2% 30% 15% 15% 16% Source: Company, JM Financial

Product mix – APE (INR mn)

Y/E March FY13 FY14 FY15 FY16 FY17 Par 2% 25% 35% 35% 25% Non-par 47% 28% 18% 17% 34% Linked 44% 38% 33% 30% 26% Group 7% 9% 14% 18% 15% Source: Company, JM Financial

JM Financial Institutional Securities Limited Page 6 Birla Sun Life Insurance 1 January 2018

APPENDIX I Financial Tables JM Financial Institutional Securities Limited P&L (technical account) (Rs mn) Balance sheet (Rs mn) Corporate Identity Number: U65192MH1995PLC092522 Y/E March FY16 FY17E FY18E FY19E FY20E Y/E March FY16 FY17E FY18E FY19E FY20E Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. Gross premiums 191,644 230,617 276,165 329,660 392,617 Shareholders’ Investments 62,157 60,500 65,907 71,293 76,529 SEBI Registration Nos.: BSE - INZ010012532, NSE - INZ230012536 and MSEI - INZ260012539, Research Analyst – INH000000610 Net premiums 189,987 228,623 273,778 326,810 389,223 Policyholders’ Investments 215,156 290,210 368,059 456,934 559,868 Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India. Investment income 12,084 134,916 157,418 183,648 214,779 Unit linked Investments 752,958 863,218 1,000,383 1,167,981 1,370,346 Board: +9122 6630 3030 | Fax: +91 22 6630 3488 | Email: [email protected] | www.jmfl.com Other Income 209 209 209 209 209 Loans 443 465 488 513 538 Compliance Officer: Mr. Sunny Shah | Tel: +91 22 6630 3383 | Email: [email protected] Total Income 202,279 363,748 431,405 510,667 604,211 Fixed assets 2,195 2,305 2,420 2,541 2,668

CommissionsDefinition of ratings (6,200) (7,974) (9,533) (11,379) (13,565) Cash & Bank Balances - CA 2,002 2,102 2,207 2,318 2,434 OperatingRating expenses Meaning(22,526) (24,215) (28,307) (32,966) (39,262) Advances and Other Assets - CA 12,751 13,388 14,058 14,761 15,499 TotalBuy expenses Total(28,726) expected (32,188) returns of(37,840) more than (44,345)15%. Total expected(52,827) return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15%Debit upside Balance fromin P&L the current market0 price. 0 0 0 0 Benefits paid (124,248) (141,367) (167,262) (198,065) (233,784) ChangeSell in valuation of Price expected to move downwards by more than 10% Total Assets 1,047,662 1,232,190 1,453,523 1,716,342 2,027,883 Researchlife reserves Analyst(s) Certification(35,155) (173,971) (208,586) (249,135) (296,799) Current Liabilities 18,214 19,124 20,081 21,085 22,139 TotalThe BenefitsResearch Analyst(s),(159,403) with respect(315,338) to each issuer(375,847) and its(447,201) securities covered(530,583) by themProvisions in this research report, certify3,797 that: 3,987 4,187 4,396 4,616 AllSurplus/(Deficit) of the views for the expressed in this research report accurately reflect his or her or theirBorrowings personal views about all of the 0iss uers and0 their securities;0 and 0 0 Noyear part of his or her or 14,150their compensation16,222 was,17,717 is, or will 19,121be directly or20,801 indirectly related to the specific recommendations or views expressed in this research Fair Value Change Account 9,712 9,712 9,712 9,712 9,712 report.FFA 1,344 320 395 481 581 Policy Liabilities 202,548 266,248 337,669 419,206 513,640 Source: Company, JM Financial Important Disclosures Linked Liabilities 752,947 863,218 1,000,383 1,167,981 1,370,346 ThisP&L (Shareholder’s research report account) has (Rs mn) been prepared by JM Financial Institutional Securities LimitedFFA (JM Financial Institutional6,591 Securities) 6,912 to provide7,307 information 7,788 about the8,369 company(ies) and sector(s), if any, covered in the report and may be distributed byTotal it Liabilities and/or its associates solely995,456 for the1,169,779 purpose 1,379,915 of information 1,630,745 of the 1,929,399select Y/E March FY16 FY17E FY18E FY19E FY20E recipient of this report. This report and/or any part thereof, may not be duplicatedShare in Capital any form and/or reproduced14,323 or redistr14,323 ibuted14,323 without the14,323 prior written14,323 Transfer from the Policyholders'consent of AccountJM Financial Institutional12,103 Securities.15,090 This16,436 report has17,684 been prepared19,180 independent Reserves and of surplus the companies covered36,669 herein.45,578 56,775 68,764 81,651 JMInvestment Financial income Institutional Securities5,996 is registered6,054 with5,765 the Securities6,141 and 6,493Exchange Fair Board Value Changeof India Account (SEBI) as a Research2,509 Anal2,509yst, Merchant2,509 Banker2,509 and a Stock2,509 BrokerOther income having trading memberships0 of the B0SE Ltd. (BSE),0 National0 Stock Exchange0 Shareholder's of India Ltd. equity (NSE) and Metropolitan53,501 Stock62,411 Exchange 73,608 of India 85,597Ltd. (MSEI). 98,483No Totalmaterial income disciplinary action has18,098 been taken21,144 by SEBI22,201 against JM23,825 Financial 25,673Institutional Source: Securities Company, in JM the Financial past two financial years which may impact the investment Operatingdecision expenses making of the investor.(313) (376) (450) (538) (640) Contribution to the policyholdersJM Financial A/C Institutional Securities0 provides0 a wide 0 range of investment0 0 banking services to a diversified client base of corporates in the domestic and international markets. It also renders stock broking services primarily to institutional investors and provides the research services to its institutional Profit before tax 17,742 20,768 21,751 23,288 25,032 clients/investors. JM Financial Institutional Securities and its associates are part of a multi-service, integrated investment banking, investment management, Tax (1,211) (2,949) (3,089) (3,307) (3,555) brokerage and financing group. JM Financial Institutional Securities and/or its associates might have provided or may provide services in respect of managing offeringsProfit after tax of securities, corporate16,531 finance,17,819 investment 18,662 banking, 19,981 mergers 21,478 & acquisitions , broking, financing or any other advisory services to the company(ies) Source:covered Company, herein. JM JMFinancial Financial Institutional Securities and/or its associates might have received during the past twelve months or may receive compensation from the company(ies) mentioned in this report for rendering any of the above services. Operational metrics (Rs mn) JM Financial Institutional Securities and/or its associates, their directors and employeesEmbedded may; Value (a) ( Rsfrom mn) time to time, have a long or short position in, and buy or Y/Esell March the securities of the companFY16 y(ies) FY17E mentioned FY18E herein or FY19E (b) be engagedFY20E in anyY/E March other transaction involvingFY16 such securitiesFY17E andFY18E earn brokerageFY19E or otherFY20 E compensationNBV or act as a market4,123 maker 6,371in the financial8,382 instruments11,109 of the13,709 company(ies) Opening covered Indian Embedded under this report or (c) act as an advisor or lender/borrower to, Value (EV) 138,223 139,388 152,488 169,417 189,154 -or Growth may have any financial interest53% in, such55% company(ies) 32% or (d) considering33% 23%the nature of business/activities that JM Financial Institutional Securities is engaged in, itReported may have new potential business conflict of interest at the time of publication of this report on NBVthe subject company(ies). 4,123 6,371 8,382 11,109 13,709 margin 13.8% 9.8% 10.9% 12.2% 12.7% Discount unwind 12,582 12,638 13,512 14,371 15,534 Neither JM Financial Institutional Securities nor its associates or the Research Analyst(s) named in this report or his/her relatives individually own one per cent or New business premium 67,658 82,935 96,867 113,337 132,825 Operating variance 4,484 3,000 2,500 2,250 2,000 more securities of the company(ies) covered under this report, at the relevant date as specified in the SEBI (Research Analysts) Regulations, 2014. - Growth 27% 23% 17% 17% 17% Non-operating variance/assumption change (5,610) 0 0 0 0 TheAPE Research Analyst(s) principally51,087 responsible64,060 for 75,804the preparation 89,789 of this106,452 research report and members of their household are prohibited from buying or selling EV before capital changes 153,802 161,397 176,881 197,147 220,397 debt- Growth or equity securities, including10% but not25% limited to18% any option,18% right, warrant,19% future, long or short position issued by company(ies) covered under this report. Dividend payout 14,414 8,910 7,465 7,992 8,591 Source:The Research Company, Analyst(s)JM Financial principally responsible for the preparation of this research report or their relatives (as defined under SEBI (Research Analysts) Regulations, 2014); (a) do not have any financial interest in the company(ies) covered under Capital this reportinjection or (b) did not receive0 any compen0 sation0 from the company(ies)0 0 covered under this report, or from any third party, in connection with this reportClosing or (c)Indian do not embedded have any other material conflict of interest at the time of publication of this report. Research Analyst(s) are not serving as an officer, director valueor employee (IEV) of the company(ies)139,388 covered152,488 under 169,417 this report. 189,154 211,806 Operating RoEV 15.3% 15.8% 16.0% 16.4% 16.5% While reasonable care has been taken in the preparation of this report, it doesSource: not Company, purport JM Financial to be a complete description of the securities, markets or developments referred to herein, and JM Financial Institutional Securities does not warrant its accuracy or completeness. JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This Key multiples (Rs mn) reportProduct mixis provided– APE (Rs mn) for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. The investment Y/E March FY16 FY17E FY18E FY19E FY20E Y/Ediscussed March or views expressed orFY16 recommendations/opinions FY17E FY18E givenFY19E herein FYmay20E not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed withoutP/EV notice and JM Financial Institutional4.1x Securities3.7x reserves3.3x the 3.0x right to make2.7x Par 14% 14% 14% 15% 15% modifications and alterations to this statement as they may deem fit from time to ROEVtime. 15.3% 15.8% 16.0% 16.4% 16.5% Non-par 3% 2% 2% 3% 3% P/EV Earnings 36.4x 25.7x 23.2x 20.4x 18.1x LinkedThis report is neither an offer nor81% solicitation82% of an offer81% to buy 81%and/or sell 81%any securities mentioned herein and/or not an official confirmation of any transaction. P/B 10.6x 9.1x 7.7x 6.6x 5.7x Group 2% 2% 2% 2% 2% This report is not directed or intended for distribution to, or use by any person or entityP/AUM who is a citizen or resident0.5x of or located0.5x in any0.4x locality, state,0.3x country0.3x or Source: Company, JM Financial other jurisdiction, where such distribution, publication, availability or use would beP/E contrary to law, regulation 34.2xor which w31.8xould subject30.3x JM Financial28.3x Institutional26.4x Securities and/or its affiliated company(ies) to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to a certain category of investors. Persons in whose possession this report may come, are required to inform themselves of and to observe such restrictions. Persons who receive this report from JM Financial Singapore Pte Ltd may contact Mr. Ruchir Jhunjhunwala ([email protected]) on +65 6422 1888 in respect of any matters arising from, or in connection with, this report.

JM Financial Institutional Securities Limited Page 8 Birla Sun Life Insurance 1 January 2018

Additional disclosure only for U.S. persons: JM Financial Institutional Securities has entered into an agreement with JM Financial Securities, Inc. ("JM Financial Securities"), a U.S. registered broker-dealer and member of the Financial Industry Regulatory Authority ("FINRA") in order to conduct certain business in the United States in reliance on the exemption from U.S. broker-dealer registration provided by Rule 15a-6, promulgated under the U.S. Securities Exchange Act of 1934 (the "Exchange Act"), as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission ("SEC") (together "Rule 15a-6"). This research report is distributed in the United States by JM Financial Securities in compliance with Rule 15a-6, and as a "third party research report" for purposes of FINRA Rule 2241. In compliance with Rule 15a-6(a)(3) this research report is distributed only to "major U.S. institutional investors" as defined in Rule 15a-6 and is not intended for use by any person or entity that is not a major U.S. institutional investor. If you have received a copy of this research report and are not a major U.S. institutional investor, you are instructed not to read, rely on, or reproduce the contents hereof, and to destroy this research or return it to JM Financial Institutional Securities or to JM Financial Securities. This research report is a product of JM Financial Institutional Securities, which is the employer of the research analyst(s) solely responsible for its content. The research analyst(s) preparing this research report is/are resident outside the United States and are not associated persons or employees of any U.S. registered broker-dealer. Therefore, the analyst(s) are not subject to supervision by a U.S. broker-dealer, or otherwise required to satisfy the regulatory licensing requirements of FINRA and may not be subject to the Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. JM Financial Institutional Securities only accepts orders from major U.S. institutional investors. Pursuant to its agreement with JM Financial Institutional Securities, JM Financial Securities effects the transactions for major U.S. institutional investors. Major U.S. institutional investors may place orders with JM Financial Institutional Securities directly, or through JM Financial Securities, in the securities discussed in this research report.

Additional disclosure only for U.K. persons: Neither JM Financial Institutional Securities nor any of its affiliates is authorised in the United Kingdom (U.K.) by the Financial Conduct Authority. As a result, this report is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the "Financial Promotion Order"), (ii) are persons falling within Article 49(2)(a) to (d) ("high net worth companies, unincorporated associations etc.") of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the matters to which this report relates may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as "relevant persons"). This report is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this report relates is available only to relevant persons and will be engaged in only with relevant persons.

Additional disclosure only for Canadian persons: This report is not, and under no circumstances is to be construed as, an advertisement or a public offering of the securities described herein in Canada or any province or territory thereof. Under no circumstances is this report to be construed as an offer to sell securities or as a solicitation of an offer to buy securities in any jurisdiction of Canada. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the registration requirement in the relevant province or territory of Canada in which such offer or sale is made. This report is not, and under no circumstances is it to be construed as, a prospectus or an offering memorandum. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. If you are located in Canada, this report has been made available to you based on your representation that you are an “accredited investor” as such term is defined in National Instrument 45-106 Prospectus Exemptions and a “permitted client” as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada nor should it be construed as being tailored to the needs of the recipient. Canadian recipients are advised that JM Financial Securities, Inc., JM Financial Institutional Securities Limited, their affiliates and authorized agents are not responsible for, nor do they accept, any liability whatsoever for any direct or consequential loss arising from any use of this research report or the information contained herein.

JM Financial Institutional Securities Limited Page 9