There seems to be no end to the woes of Indian life insurance companies. Even though the insurance regulator won in the spat with Securities and Exchange Board of India (Sebi) over who should be regulating unit-linked insurance plans, both growth prospects and profitability of life insurance companies have altered considerably in the past few months.

Graphic: Paras Jain/Mint

According to a recent report by IIFL Capital, the moderation in the growth rate of renewal premium points to an increase in the surrender rate of policies. In fact, Bajaj Finserv Ltd, a holding company for Bajaj’s life insurance join venture with Allianz AG, has said that some policyholders had surrendered their policies after the mandatory three-year lock-in period. The IIFL report points out: “An increase in surrender rates is reflected in the conservation ratio reported by life-insurance companies. The conservation ratio is computed as renewal premium received during a quarter, divided by renewal and new business premium during the year-ago period." The conservation ratio in the last quarter declined for both Bajaj Allianz and ICICI Prudential compared with the year-ago June quarter.

Things may get worse, especially with the likelihood of a higher tax incidence under the proposed Direct Taxes Code (DTC). The IIFL Capital report says the DTC adversely impacts the valuation of insurance companies for another reason. “The tax rate on profit attributable to shareholders will increase from 12.5% to 30% from FY13. This would adversely affect EV (enterprise value) by 19% and shave off 300 bps (basis points) from new business margin too." One basis point is one-hundredth of a percentage point.

None of these concerns are reflected in the share price of Bajaj Finserv, which derives about 30% of its value from the life insurance joint venture. Its shares have risen by about 45% since April. This is because of a Reserve Bank of India (RBI) circular in March, which may allow Bajaj to sell its stake to Allianz at a higher-than-agreed rate.

It makes more sense to look at the share price performance of companies such as Max India Ltd and Reliance Capital Ltd, which according to IIFL’s estimates get about 80% and 60% of their value, respectively, from the life insurance ventures, Max New York Life Insurance Co. Ltd and Reliance Life Insurance Co. Ltd. While Max India’s shares have declined by around 30%, Reliance Capital shares have been flat since April. Shares of Aditya Birla Nuvo Ltd, which gets about 30% of its value from Birla Sunlife Insurance Co. Ltd, have fallen by 14%. The broad markets have risen by 2% in the same period. While these companies have underperformed the market, there seems to be room for a further correction, considering that news flow is likely to remain negative.