birla sun life insurance company ltd share price Management discussions

BIRLA SUN LIFE INSURANCE COMPANY LIMITED ANNUAL REPORT 2006-2007 MANAGEMENT DISCUSSION AND ANALYSIS Business Review: The overall industry growth rate is expected to remain very robust in the near future. The new business premium income in the industry has increased from 30% for 2005-06 to 117% as on YTD Feb07. Private sector insurance companies have been successful in increasing their distribution reach and making the industry competitive and responsive to customers needs. In FY 2005-06, the private sector grew its premium income by 79% and a further 105% as on YTD Feb07. Among private players, ICICI Prudential has consistently maintained market leadership with considerable margin. New competition is expected to emerge over the next two years with Canara Bank, Andhra Bank, Bank of Baroda, IDBI, etc, entering the life insurance industry. The total sales for all product segments of the Company grew at 36.0% from Rs.7,025 Mn in the previous year to Rs. 9,532 Mn in the current year. The Company recorded growth of 32% in the Individual life sales from Rs. 6,236 Mn in 2005-06 to Rs. 8,198 Mn in 2006-07. The focus on policy sales led to a 68% growth in individual life policy sales. The group segment grew by 69% over 2005-06. The Company continues to follow its strategy of multi-channel distribution. In order to increase the reach of Direct Sales Force (DSF), the channel has embarked on a path of exponential increase in its branch network. The number of branches stands at 137 in March 07, having added 31 branches and 21 unit offices in the past year. The branch network currently covers 95 cities and another 154 odd cities are being covered through the presence of Outstation Agency Managers. The year 2006-07 saw the Alternate Channels breaking into two distinct channels of Bancassurance and Corporate Agents & Brokers (CAB), for intensified focus on both the unique segments. Bancassurance completed the year with a premium of Rs. 2,836 Mn and 48,653 policies. Banca managed to broad base its business mix with increased contribution from other distributors such as HBL Global, Deutsche Bank and IDBI Bank. The Company further strengthened its relationship with Citibank, which continued to be the premier relationship providing more than 50% of the bancassurance channel sales. However, the channel has stopped sourcing business from the NRI segment from Citibank Dubai due to regulatory constraint. The channel is now focused on long-term tie-ins of existing relationships, by developing bank specific products, processes coupled with manpower and technology initiatives, to thwart predatory competition, and further activating all the channels of these relationships. CAB has developed relationships with big distributors like Karvy, Bajaj Capital, ILFS Investsmart, PNB Principal etc. CAB has identified a new avenue for business in the form of Business Associates, which is a low cost acquisition model. This model will enable CAB to spread its reach and enter new locations. Group business also has witnessed a sharp growth over the last year. The focus of Group Business is on launching new products and exploit new segments like healthcare and affinity mortgage for the term business, by exploiting existing bank relationships. As in the previous years, the Company complied with both rural and social obligations as mandated by IRDA. In 2006-07, the Company has continued its focus on launching new and innovative products to extend its products suite to enable it to cater to the needs and requirements of newer market segments. With this in mind, BSLI launched certain products aimed at specific market segments. For HNI segment, Supreme Life was launched, which is an improvement over the existing ULIP linked product. In the Child segment, Children Dream Plan was launched. To meet the basic needs of the middle class segment and specifically an alternative to Term Plan, Dream Plan was launched. Group Interest Credit product in the Group segment was also launched. The Indian economy has shown GDP growth of above 9% in 2006-07. Indian Equity markets have seen an upsurge in volatility mainly on account of rising inflation and interest rates. For FY 2006-07, broad indices delivered near 10% returns and interest rates continued to rise during the year largely on account of higher credit growth and rising Inflation. Your company has followed prudent investment strategy with an aim to deliver above average returns at optimum level of risk on a continuous long-term basis by investing in high quality investments. Our funds under management have crossed Rs.4000 crs. (Previous Year Rs. 2554 crs.). The Company strives to ensure that funds investments are properly aligned with investment strategy and commitment made to policyholders and well controlled by internal and external regulations. The Company continues to leverage technology for achieving the business goals and views technology as a key driver for supporting growth. During the year an outside consultant was hired to formulate an IT roadmap for BSLI so that BSLI IT infrastructure is able to facilitate the plans that the business has drawn up. Elixir CMS was also implemented in Feb07. In the medium to long term, the Company intents to attain/implement/accept practices and conform to industry/quality standards-ISO 27000/BS 7799 (Security), CMM (Software Development), and ITIL (Facilities Management). The Company has a strong financial management and reporting system in place supported by robust IT applications and systems. The Company continues to be first insurer to publish its financial statements year after year, a testimony to its strong financial processes. An effective Management Information System (MIS) is the sound platform on which the Companys control mechanisms have been built. One of the Companys aspirations is to maintain its position as the most preferred employer in the insurance industry and, hence its human resource practices are aimed at building and maintaining employee goodwill. Being a very people-centric business, the Company endeavors to provide professional and personal growth opportunities, which it feels is one of the primary drivers for employees, as revealed through multiple surveys. Outlook: Indias life insurance industry offers strong potential for growth driven by factors like buoyant economic growth, increasing penetration, regulatory reforms and rising awareness amongst the population about the need for insurance. The overall industry growth rate is expected to remain very robust in the near future. Some of the key indicators of high growth of the industry are: * Changing demographic profile - 60% of population is below 30 years; only 20% of insurable population is insured; * Product innovation increase in demand for new products; * Aggressive marketing and distribution strategy by new private players; and * Buoyant macro outlook and increasing savings rate currently around 28% of GDP The industry is set to witness more competition with new players planning to enter the market. Rural markets and micro insurance hold huge potential and all the companies shall be targeting these segments. Human capital will be a key competitive advantage in the long run and there will be stiff competition among all the insurance companies for talent. BSLI is well positioned to exploit the opportunities thrown by the fast growing market. The Company has proactively taken steps to increase its distribution reach in all the three sales channels and is in advanced stages of implementing its plans for rural and micro insurance markets. MANAGEMENT REPORT: In accordance with the Insurance Regulatory and Development Authority (Preparation of financial Statements and Auditors Report of Insurance Companies) Regulations, 2002, the following Management Report is submitted by the Board of Directors: 1. Certificate of Registration: The Certificate of Registration granted by the Insurance Regulatory and Development Authority (IRDA) to enable the Company to transact life insurance business was valid as on March 31, 2007 and is in force as on the date of this Report. IRDA has renewed the Companys Certificate of Registration to sell life insurance products in India for the year 2007-08 vide its Certificate of Renewal of Registration dated 6th March 2007. 2. Statutory Dues: To the best of our knowledge and belief, all the material dues payable other than those, which are being contested to the statutory authorities, have been duly paid. 3. Shareholding Pattern: The Company confirms that the shareholding pattern and any transfer of shares during the year are in accordance with the statutory and / or regulatory requirements. 4. Investment of Funds: The Company has not, directly or indirectly, invested outside India, the funds of the holders of the policies issued in India. 5. Solvency Margin: The Company has maintained adequate assets to cover both its liabilities and the minimum solvency margin, as stipulated in Section 64VA of the Insurance Act, 1938. 6. Valuation of Assets: We hereby certify that all assets of the Company have been reviewed on the date of the Balance Sheet and to the best of our knowledge and belief the assets set forth in the Balance Sheet are shown in the aggregate at amounts not exceeding their realizable or market value under the several headings - Loans, Investments (other than as Birla Sun Life Insurance Company Limited - Management Report 2 mentioned hereunder), Agents balances, Outstanding Premiums, Interest, Dividends and Rents outstanding, Interest, Dividends and Rents accruing but not due, Amounts due from other persons or Bodies carrying on insurance business, Sundry Debtors, Bills Receivable, Cash and the several items specified under Other Accounts. Market values of fixed income investments made in the controlled funds (shareholder funds and policyholders non linked funds) which are valued at amortised cost as per IRDA regulations, is lower than their carrying amounts by Rs. 76,237 thousands in aggregate as at March 31, 2007. 7. Investment Pattern: We hereby certify that the Life Insurance funds have been invested in line with the provisions of the Insurance Act 1938 (4 of 1938) and various other circulars / notification issued by the IRDA in this context from time to time. 8. Risk Minimisation Strategies: The Company is exposed to several risks in the course of the conduct of its business. The risks on the liabilities side may arise due to an unusually higher number of claims than expected. On the assets side, the risks arise due to the possibility of fluctuations in their values. The Company is also subject to the risk of expense, since until new business volumes grow significantly, the actual expenses of the Company will exceed the expenses loaded into the product pricing. The Company has implemented adequate safeguards to mitigate these risks, as are described below: A strong underwriting team is in place to review all proposals from clients, supported by comprehensive processes and procedures, and guided by international experts. The objective of the underwriting team is to minimise the risks of abnormal mortality and morbidity by acquiring adequate information, on which to determine, whether to accept individual lives, and if so, the extra premium, to compensate for any additional risk. Further, the possible financial effect of adverse mortality and morbidity experience has been reduced by entering into reinsurance agreements with RGA and Swiss Re for individual life business and Munich Re and Generali for group business. This limits the Companys mortality exposure on each life to a maximum limit approved by the IRDA. All reinsurers are specialist international reinsurance companies with excellent reputation and significant financial strength. The Company has also set up systems to continuously monitor its experience in regard to other parameters that affect the value of benefits offered in the products. Such parameters include policy lapses, maintenance expenses and investment returns. The operating expenses are monitored very closely. Most of the savings related products offered by the Company also have an investment guarantee. The Company has set aside additional reserves to cover this risk, based on a scenario model. The assets of the Company are invested in such a manner as to closely match its liabilities, so that the Company is effectively immunised against the impact of changes in the value of policyholder assets, and the impact of any change in the value of shareholder assets is minimised. The Companys investment team operates under the close supervision of the Investment Committee appointed by the Board of Directors. The investments are made in line with the investment policy adopted by the Company. The Company has a Business Continuity Plan in place to manage any business interruption risk. To control operational risk, operating and reporting processes are reviewed and updated regularly. Ongoing training through internal and external programs is designed to prepare staff at all levels for meeting the demands of their positions. 9. Country Risk: The Company is operating in India only and hence has no exposure to country risk. 10. Ageing of Claims: Average claim settlement time-to-date has been 7 days from the day all the necessary documents are submitted to the Company. The company does not have any outstanding claim, which are settled and unpaid for more than six months as at March 31, 2007. 11. Valuation of Investments: We hereby certify that the fixed income investments made in the controlled fund (shareholders funds and policyholders non linked funds) have been valued on the basis of the amortised value of these assets and mutual fund investments have been valued at the Previous Days net asset value of the respective mutual funds. The investments of linked funds of policyholders is valued as under: * Fixed Income Securities: These are valued on the basis of the CRISIL bond valuer matrix. * Equity: These will be valued on the lower of last quoted closing price of the security on Bombay Stock Exchange Limited and/or the National Stock Exchange of India Limited. * Money Market Instruments: Money market instruments having maturity less than 6 months are valued on Amortized value. * Mutual Funds: The previous days net asset value published by the respective mutual funds. 12. Review of Asset Quality: Shareholders Fund: The company has invested almost 53.79% of the Shareholder funds in Government securities and Treasury Bills, which have a sovereign rating. Around 22.45% of the funds have been invested in AAA and AA+ rated Infrastructure bonds. The balance funds have been invested into highly rated corporate debt (AA+, P1+ and above). Approximately 3.72% of the funds are invested in liquid & short-term schemes of leading mutual funds to meet short-term cash flow requirements. Policyholders Fund: The policyholders funds are invested based on the commitments made to the policyholders. In fixed income segment the investment is made into government securities having sovereign rating & debt paper of reputed corporate having rating AA+ & above. The equity selection is made after completing appropriate research and analysis of the company as well as the industry to which it belongs. To meet the liquidity requirement a part is invested into liquid & short-term schemes of leading mutual funds and other money market instruments. The investments are made keeping in mind the asset - liability requirement of the respective funds. 13. Directors Responsibility Statement: The Board of Directors of the Company also state that: * The financial statements have been prepared in accordance with applicable accounting standards, the regulations stipulated by the IRDA and the provisions of the Insurance Act, 1938 and the Companies Act, 1956 and disclosures have Birla Sun Life Insurance Company Limited - Management Report 5 been made, wherever the same is required. There is no material departure from the said standards, principles and policies. * The Company has adopted accounting polices and applied them consistently and has made judgements and estimates that are reasonable and prudent, so as to give a true and fair view of the state of affairs of the Company as on March 31, 2007, and, of the operating loss and of the loss of the Company for the year ended on March 31, 2007. * Proper and sufficient care has been taken to maintain adequate accounting records in accordance with the applicable provisions of the Insurance Act, 1938, Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities. * The financial statements of the Company are prepared on a going concern basis. * The Company has appointed an audit firm to conduct the internal audit of the Company. The scope of work of the firm is commensurate with the size and nature of the Companys business. The management certifies that adequate internal control systems and procedures were in existence for this financial period. 14. Related Party Disclosure: A schedule of payments made to the related parties as defined in the Accounting Standard 18 of the Institute of Chartered Accountants of India is provided in Annexure 2 to the financial statements. For Birla Sun Life Insurance Company Limited Sd/- Sd/- Sd/- Sd/- Donald A. Stewart S.K. Mitra Gary Comerford Vikram J. Mehmi Chairman Director Director President & CEO Sd/- Sd/- Sd/- Satish Rajgarhia Fabien Jeudy Sudhakar Shetty Chief Financial Officer Appointed Actuary Company Secretary Date : April 23, 2007 Place: Mumbai