Non-Life Insurance in India: Landscape and Opportunity January, 2016 Shrirang V Samant Country Head & Chief Representative India Travelers Insurance Companies DISCLAIMER: The opinions and views expressed in this presentation are those of the author and do not necessarily reflect the position of Travelers Insurance Companies Executive Summary India socio-economic overview Country has geographical, social and economic diversity Registered strong growth during the last 10-15 years due to economic policy reforms A comparatively younger population and a growing consuming class are key economy drivers Projected to grow significantly over the next few years due to inherent socio-economic strengths Non-life Insurance Industry Overview Industry has evolved significantly since liberalisation in Year 2000 to grow approximately 8x Growth to continue due to growing economy and increasing insurance penetration Competitive market consisting of Government owned insurance companies and JVs of global insurance companies Favourable industry outlook with opportunities for generating significant ROEs overtime Can you afford to wait and watch? Assured Growth Attractive returns Attractive future profitability 2 Country Overview 3 India Macro-economic Overview India is a geographical diverse multi-cultural, multi-lingual and multi-religious country General Profile 1 Worlds 7th largest country 2 Macro Economic Indicators Nominal GDP - USD 2,180 Bn by area - 3,166,000 square kilometers Worlds 2nd largest population- 1,252 Mn (2013 est) New Delhi Political Capital
Kolkata Commercial, Old economy businesses Mumbai Commercial Capital Political System Major Cities Bengaluru IT (December 2015) Global Investment destination: Attracted USD 44.9 Bn as FDI in FY15 Sectoral share in GDP (FY15) Agriculture 18%, Industry 24%, Services 58% Chennai IT, Automobiles 3 Largest democracy in the world Stable single party majority Economic reforms and liberalization have become politically neutral and usually irreversible After years of licensing and control, India started its major economic reforms from 1992 FY 15 corresponds to the period from 1st April 2014 to 31st March 2015 Source: Census Database, Industry Reports, EIU, 1 USD = 60 INR; KPMG Analysis 4 India Macro-economic Overview India has demonstrated strong economic growth and has greater potential for future growth vis--vis many other world economies A steady growth over the decade despite the recent relative slowdown India has showcased robust growth over the decades GDP Decadal Growth (%) GDP Growth 7.6% Global 9.6% Recession 9.3% 5.7% 5.4% 7.0%
3.6% 1950-1980 1980-1990 1990-2000 2000-2010 6.8% Slow Down 7.5% 5.0% 4.3% 4.0% FY01 FY03 FY05 FY07 FY09 FY11 FY13 FY15 India is expected to be amongst the top growing economies in the near future GDP at PPP (USD bn) 8.84% 6.69% 13623 2.61% 2.98% 2008 6.64% 8214 3368 China Note : CAGR for Real GDP in Local Currency Unit 5032 India 2013
2018 14292 1.09% 3.56% 3501 2276 2641 Russia -0.10% 1.91% 509 609 2.51% 21101 6.38% 7718 3346 1996 2467 Brazil 1.23% 22641 1.87% 16238 CAGR 08-13 CAGR 13-18 4.20% 792 South Africa 2225 2391 2921 United Kingdom United States of America Source: CSO., Economist Intelligence Unit Data; KPMG Analysis 5 India Macro-economic Overview Indias long-term outlook is bright due to inherent strengths that characterize the economy Growing working age population driven by high domestic demand Working age population as % of total population Domestic Demand as % of GDP (FY 13)
107.20% 72.4% 72.2% 68.8% 67.6%69.4% 67.5% 67.5% 65.2% 64.9% 64.5% 62.8% 62.6% 61.0%61.1% 60.0% 102.70% 99.80% 97.20% 2000 93.20% 2010 2050 Brazil China India Brazil Russia South Africa China India Russia South Africa *Domestic Demand = consumer demand + government spends + investments + imports exports and a burgeoning consumer and urban class.. % of households in different income brackets (real income) 1 34 2 47 6 Elite Deprived CY 2006 51 60 CY 2010 34
GDP Growth (CAGR 2018) 6.7% Consuming Urbanization % 65 .. implies potential for high growth In GDP 2011 2030 (F) 31% 40% CY 2020 F Note: Categories based on annual household income in INR Elite (> USD 16.66K,; Consuming (USD 1.50k-16.66k) and Deprived (< USD 1.50k), 6.4% 3.6% 3.0% 4.2% 1.9% Brazil China India Russia 2.5% South United United Af rica Kingdom States of America Source: IMF, UN Population Statistics, EIU, Census Data, KPMG Analysis 1 USD = INR 60 6 Non-life Insurance Industry Non-Life Insurance Industry Overview Significant evolution since entry of foreign and private insurers in 2000 Future Historical developments in the regulatory environment Insurance Act, 1938. 1938 Insurance
nationalization 1972 1950 1994 IRDA Bill cleared 1999 Entry by private and foreign players 2000 2001 Abolition of third party motor pool 2003 Tariff Advisory Comm. Number of players Market Growth and Size# 107 USD 29 Mn 2017 Price Detariffication* 1 (with 4 subsidiaries) Growth mainly Inflation led 12% 2014 2007 19 growth at 17% (mainly penetration driven) USD 1.6 Bn Detariff. Impact growth at15% USD 4.2 Bn 30-32 28
Projected growth at 17% USD 12.92 Bn *Insurance companies are free to determine the premium rates of products (except commercial vehicle third party damage) Source : IRDA 8 Non-Life Insurance Industry Overview Gross Direct Premium (USD billion) Non-life Insurance Penetration and Density in India (2013) Non-life Insurance 2,296 4.3% CAGR : 18% 2,500 4.4% 2.8% 1,079 863 1.6% 2.3% 861 0.8% 1,500 1,087 1.5% 557 1,000 11.51 7.89 500 11 - Insurance penetration 12.92 9.69 2,000 Ins uranc e D ens ity (U SD ) 5.0% 4.5% 4.0%
3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% USD Bn Ins uranc e Penetration Economic growth and improving penetration will drive market @16%-18% CAGR to create a USD 45 Bn+ industry in 10 years time FY11 FY12 FY13 FY14 Insurance density Source: Insurance Regulatory Development Authority (IRDA) Current density and penetration of non-life insurance (including Accident &Health (A&H) insurance) in India is amongst the lowest in the wolrd In FY 13 non-life density was USD 11, ranked 85 in the world, while penetration (Premium as a % of GDP) was a mere 0.8% Driven predominantly by the motor and indemnity-based A&H insurance business, the Indian non-life insurance industry has grown steadily over the past few years and was estimated at USD 12.9 billion at the end of FY14, growing at a CAGR of 18% since FY11 Significant premium accretion with market growing to USD 45 Bn from USD 13 Bn would create scope for new entrants 9 Non-Life Insurance Industry Overview Market Size, Profitability and ROE Source: IRDA Annual Reports Source: IRDA Annual Reports Premiums continue to grow and profitability is improving All lines except third-party auto have been de-tariffed In third-party auto, rate increase need recognised by regulator and ~40% increase made during last 2 years Growth to continue in excess of economic growth due to low penetration and expected demographic dividend Many key global players have already entered the market Initial Liberalisation Detarification Partial Recovery N. America AIG, Liberty, Fairfax, CIGNA Europe
Allianz, AXA, Munich, Generali, RSA (now divested), HDI, BUPA Asia-pacific Mitsui, Tokio Marine, Sompo, IAG, QBE Source: FICCI-Mckinsey GI Industry vision report 10 Non-Life Insurance Industry Overview Growth Trends over years by Line of Business INR 2004 bn USD 33.4 bn INR 986 bn USD 16.4 bn INR 583 bn USD 9.7 bn Market size projected by estimating LOB wise growth in line with recent trends duly adjusted for some foreseeable market factors such as growing customer awareness; Increased penetration; Regulatory Initiatives; Pricing corrections in some lines Unforeseen disruptive events such as regulatory actions , additional govt. initiatives for health and agriculture etc. not taken into account Double digit growth in all lines of business resulting in significant GWP accretion over time Source: *IRDA segment-wise figures March 2012 ** Average of Market Estimates Note: Fiscal year runs from 4/1 to 3/31. Exchange rate: 60 INR = 1 USD 11 Non-Life Insurance Industry Overview Motor Insurance is the single largest line of business in the market Product Segments Motor Accident & Health Fire Engineering Marine Miscellaneous Key Products Own Damage (OD) Third Party Damage (TP) Mandatory Comprehensive (Package of OD & TP) Mediclaim (Indemnity based product to cover
treatment costs) Critical illness (fixed benefit product) Hospital Cash (fixed benefit product) Personal Accident (fixed Benefit based product), Travel insurance Target Segments Private Car owners Commercial Vehicles owners Two-wheeler owners USD 5.65 Bn (44%) Individual / Family (Retail) Group (Corporate) Government USD 3.24 Bn (25%) Fire and Special Perils Consequential Loss Industrial All risks Boiler and Pressure plants insurance Electronic Equipment Machinery Break-down (profit loss) Erection/ Construction all risks USD 1.23 Bn (10%) Small and Medium scale enterprise USD 0.41 Bn (3%) Large corporate Marine Cargo Marine Hull USD 0.53 Bn (4%) Home (Structure and contents) Individuals Cattle, weather, tractor Rural Public liability (industrial & non-industrial), product Professionals SME, corporate Aviation, other customized products SME, Large corporate liability, workmens compensation, professional indemnity Segment Size and
Market Share (FY14) USD 1.87 Bn (14%) Source: IRDA Annual Reports 12 Non-Life Insurance Industry Overview Existence of multiple distribution channels: Auto dealers strong in motor; Brokers strong in commercial; New trend towards DTC for personal Iines Small tied agents operating locally in retail markets (individual agents). Agents (OnlyTied) Companies (mid to large) with a tied agency license (corporate agencies). Auto Dealers Automobile dealerships operating as agents for insurance of vehicles sold though them (primarily new vehicles). Brokers Large and small organisations primarily active in Commercial segment. Have significant say in insurance purchase decisions. Own Sales (Field Force) Active in managing corporate accounts and developing business either directly or through involvement of brokers. Own Sales (Direct-Online) Small but growing segment. Will become important as the young internet user starts acquiring more and more assets. Bancassurance Significant play in Home Insurance through tie up with Home finance. Some involvement in Motor Insurance due to Car finance. % o f G ro s s W r itte n P re m iu m Market Distribution Mix 100% 2% 5% 7% 13% 5% 12% 80% 27% 12% Web / Tele 12%
20% 60% Motor Dealers Bancas s urance 20% 20% Brokers 40% 15% 59% Own Sales 43% 20% 28% Agents 0% 2005 2009 2015E 13 Year Source: Boston Consulting Group - Indian General Insurance Market, May 2011 Political, Social and Demographic Scenario Country Context Investment environment in India has significantly improved with recent political and policy changes. India India overview overview Compelling demographic trends remain with fast progression towards a highly digital future. Specific to insurance, the Foreign Direct Investment limit has been increased from 26% to 49% Indias consumer base is rapidly moving towards a highly digitized experience 15 Country Context Why does India make sense as a target country? Large, fast growing economy Favorable demographics Rapid digital transformation Stable polity with a clear direction India Demographics Global / Macro-economic Context: 6th Largest
economy in the world. $2T GDP growing at 7.5%. Age Distribution Income Distribution Social Change: Worlds largest youth population with majority of 1.2b people under 25 with an increasingly urbanized, growing middle class with higher disposable income and discretionary spending. Political Change: Series of initiatives launched for job creation, digital proliferation, urbanization, public health, and personal finance, to help move India forward. Internet Adoption Digital Trends: While still in a period of emergence, Internet and mobile connectivity is exploding. Major government emphasis on digital enablement. Source: Various Publications: India at a glance 16 Country Context How is technology in India changing consumer behavior? Nine Pillars of Digital India Technological transformation in the country is changing buyer behavior Going Mobile Focus on Infrastructure to Every Citizen, Services on Demand & Digital Empowerment of Citizen Deals in the on-line retail space (Flipkart, Snapdeal) accounted for 75% of venture capital inflows E-commerce grew at a CAGR of nearly 35% form 2009 to 2013. Industry could reach $20B USD in 2020 31% of consumers research insurance on-line while only 11% purchase pointing to concerns with current online experience Smartphone users are expected to grow from 90 million in 2013 to 520 million in 2020 - mobile is the most popular way of accessing Internet in India, increasing Internet penetration. Sources: Country Context, BCG: Insurance @ Digital 17 The Opportunity Beckons Non-Life Insurance Industry Overview Industry Performance and Market Outlook Performance Outlook Market grew 8x while delivering profits for 12 out of last 14 years Growth momentum to continue with performance improvements
Industry grew significantly even in phases of lower economic growth New government may boost economy further, driving even higher growth for industry Companies with 26% FDI delivered comparatively superior financial performance FDI increase, although beneficial, may cause disruptive events in the medium to short term Market saw phases of intense price competition A phase of price competition may re-emerge Creation of Motor TP pool adversely impacted financials for a few years Minimal impact due to TP pool rationalisation and ongoing annual TP rate revision Private companies > 7 years in business achieved ROEs in high teens to over 20% Established JVs of Allianz, AIG, RSA, Ergo likely to turn underwriting positive soon Companies with critical mass achieved midteens ROE despite underwriting losses due to high investment returns on account of: Investment income would continue to be an important contributor to overall financial results Higher interest rate - Treasury bill @ 6 - 9% Higher investible float due to cash and carry Private Companies at 13% ROE in 2013 Rapid growth of DTC market with significant digital sales / influence 19 Non-Life Insurance Industry Overview Existence of multiple distribution channels: Auto dealers strong in motor; Brokers strong in commercial; New trend towards DTC for personal Iines Non-Life industry Competitive Structure (FY13) A few new entrants managing profitable growth 75% 65% Mostly Wave-2 players with high growth low profitability Apollo Munich (103) Bharti Axa (211)
CAGR (FY 10 FY 13) 55% Cholamandalam (275) Shriram (261) 45% 35% 25% 15% Future Generali HDFC ERGO Mostly Wave-1 players, pursuing profitable growth (192) (418) Tata AIG (369) National (1592) ICICI Lombard (1068) Bajaj Allianz 4,000 (667) United (1610) RSA (265) IFFCO Tokio (442) 5% -5% 95% Mostly Public sector players, lagging on growth as well as profitability New India (2160) Oriental (1190) Star Health (143) 100% 105% 110% 115%
120% Combined Ratio (FY 13) 125% 130% Notes: Size of the bubble indicates Gross Direct Premium in USD Mn L&T, Magma HDI, Liberty Videocon, Religare have started the business only recently and not shown; Raheja QBE, SBI General, Max BUPA not shown due to their limited scale Source: IRDA, KPMG Analysis 20 Insurance Company Valuations in India Stake acquirer Target Date % stake Deal size US Valuation $ MN US $ MN Price / Price / Book Earnings GWP $ MN US Remarks General Mitsui Sumitomo Chola MS Dec-15 14% 136 970 8.8 46 291 Ergo HDFC Ergo Dec-15 23% 173
754 4.8 47 490 Est. 15x Forward earnigs Faifax Holdings ICICI Lombard Oct-15 9% 239 2,650 5.4 25 AXA Bharti AXA General May-15 23% 66 289 1.3 NA QBE Raheja QBE Aug-15 23% 16 69 2.1 42 3 Sunadaram Finance Royal Sundaram Aug-14 26% 72
277 3.4 26 221 Ergo HDFC General Nov-07 26% 31 118 6.1 385 BUPA Max Bupa Nov-15 23% 29 128 1.1 NA Munich Re Apollo Munich Jan-16 23% 24 104 1.1 1126 Sun Life Birla Sun Life Dec-15 23% 256 1,113 3.3
88 AIA Tata AIA Life Dec-15 Premji (4%) / Temasek (2%) ICICI Pru Life Nov-15 6% 300 5,000 6.2 21 Reported to be 2.4x EV Nippon Life Reliance Life Nov-15 23% 348 1,515 2.9 73 Reported to be 3x EV Aviva International Aviva India Life Aug-15 23% 85 368 1.2 48 Standard Life HDFC Life Aug-15 9%
262 2,906 7.3 24 Reported to be 2.1x EV AXA Bharti AXA Life May-15 23% 132 574 1.6 NA FY 15: USD 19 MN loss Premji HDFC Life Dec-14 1% 31 3,062 9.0 27 Reported to be 2.5x EV Exide Industries ING Vysa Life Jan-13 50% 85 169 0.8 NA FY 12: USD 5 MN loss Mitsui Sumitomo MAX Life
Apr-12 26% 420 1,616 4.8 23 Reported to be 3x EV Nippon Life Reliance Life Mar-11 26% 471 1,812 3.8 NA FY 11: USD 20 MN loss 1,027 224 FY 15: USD 18 MN loss 30 *If constant Dollar @65 Health only FY 15: USD 9 MN loss Life Deal details not disclosed Company figures from Public disclosures of preceding FY. Valuation figures from Media articles indicating deal sizes. Constant USD @ INR 65. Several other potential stake increase discussions have been reported, but valuation indications have not yet been provided. Updated 27/01/2016 21 Thank you!!
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