A worsening Covid-19 crisis is a key risk for life insurers
An interesting trend came out of the recently gone by September quarter (Q2) results of leading private sector life insurers
– SBI Life, HDFC Life and ICICI Prudential Life (I-Pru Life). While HDFC Life and SBI Life led the segment with net premium income growth of 35 per cent and 27 per cent year-on-year, respectively, suggesting that the sector may have recouped from the pandemic faster than anticipated, I-Pru Life’s 6.3 per cent premium growth was a drag. Yet, I-Pru Life has surprised with 27.4 per cent value of new business (VNB) margin in Q2 – an increase of 630 basis points (bps) year-on-year and 340 bps sequentially, making it the most profitable in the business. HDFC Life saw its VNB margin rise 20 bps YoY and 130 bps sequentially to 25.6 per cent in Q2, while at 18.8 per cent (up 30 bps YoY) SBI Life remained a laggard.
So, how did I-Pru Life shore up its profitability despite weak growth? The answer lies in its product mix, which sharply turned in favour of protection plans. These tend to be margin yielding and sticky in the longer run. Product mix of SBI Life also underwent some alteration, with group savings and protection business almost doubling in Q2, compared to the year-ago period. In comparison to individual plans, which may carry higher operating costs in the initial phase, group plans bring in volume, but aren’t margin-yielding. A sharp surge in contribution from these products, impacted SBI Life’s margins. For HDFC Life, the product mix remained stable also reflecting on its margin profile.
The question is whether the trend is sustainable. For SBI Life, much of the margin improvement going forward would depend on the insurers ability to pass on higher reinsurance costs. Analysts at Emkay Research note the need to re-price its existing protection plans. “(SBI Life's) management has confirmed that the current protection plans are cheaper than HDFC Life’s. However, after a price hike, competition from HDFC Life would surely play an important role,” they add. As for HDFC Life, analysts at Nomura say, with the product mix remaining balanced, margins should stay steady at current levels. For I-Pru Life, analysts at Motilal Oswal Financial Services say, with the protection and annuity segments driving growth, VNB margins may touch 28 per cent in FY23.
That said, Suresh Ganapathy of Macquarie Capital cautions that competitive intensity has lately increased and he would be cautious on pricing. “Many (insurers) may not even be hedging appropriately and taking a risk into the shareholder's account for giving the guaranteed returns,” he spells out.
There are two other critical aspects that would also decide the trajectory – the slowly rising share of unit linked insurance plans or ULIPs as characterised in Q2 and the trend emerging in the persistency ratios (indicates how long customers continue with their policy).
A sharp rebound in equities has put the limelight on ULIPs, after four quarters of lull. Barring HDFC Life, where share of ULIPs continued to decline in Q2 to 21 per cent against 27 per cent in Q1, SBI Life and I-Pru Life witnessed an incremental improvement in ULIPs flows. In absolute proportion, share of ULIPs reduced from 67.2 per cent a year-ago to 47.8 per cent in Q2 for I-Pru Life and from 43 per cent to 32.6 per cent in the same period for SBI Life. However, of Rs 2,100 crore of new business premium, Rs 1,625 crore or 60 per cent came from ULIPs for SBI Life. For I-Pru Life, the number stood at about 50 per cent – Rs 701 crore of ULIPs out of Rs 1,465 crore of new premium. Even as life insurers
guide that they would maintain the product mix prudently, the overall market momentum may be the ultimate guiding force.
Likewise, persistency ratio trends are quite varied for each player (see table). Going ahead, if insurers decide to focus more on maintaining or expanding the 13-months persistency, it may eventually impact profitability.
More importantly, as analysts at Nomura spell out, the key risk for life insurers
is worsening of the current Covid-19 situation and inability to sustain the current improvement in growth and margins, and improve persistency. Despite these concerns, if life insurance stocks appeal to investors, the recent meltdown in valuations needs mention. This has positioned the stocks attractive for long-term investors.