On the positive side, most key operating parameters showed improvement. First, value of new business (VNB) at all three grew a strong 23-42 per cent year-on-year during the first half. VNB indicates present value of future profits associated with new business written during the period. Importantly, all three saw expansion in the VNB margin during the first half. Those of SBI Life and HDFC Life rose 170-190 basis points (bps) to 17.3 per cent and 24.3 per cent, respectively. ICICI Life’s shot up by 580 bps to 17.5 per cent. This was led by a rise in share of the more-profitable protection products and improvement in key operating assumptions.
Protection products include term policies, wherein the entire premium earned becomes revenue (after subtracting expenses such as commissions and customer claims) and percolates to profits; it is seen as the most profitable of all offerings. Insurance players continue to focus on the protection business by improving the contribution in annual premium equivalent or APE (SBI Life’s protection share is in terms of new business premium) by 360-484 bps as compared to the year-ago period. Protection-based policies (on the basis of APE) of HDFC Life now comprise 16.2 per cent of the business share in H1FY2019 as against 11.8 per cent in H1 FY2018.
However, amid the liquidity crunch being faced by non-banking finance companies (NBFCs), including housing finance ones, many analysts and even the management of some (HDFC Life) sound cautious about growth of credit protection.
ICICI Life’s management, however says their diversified base in terms of tie-ups with lenders for the credit protection business would help mitigate the overall impact.
All three also reported improvement in the persistency ratio (indicating customer loyalty) almost across all the cohorts (barring 61st month), further supporting the margin.
The improving operating momentum is likely to remain strong, with the increase in financial savings of households and insurance being one of the safest investment vehicles currently, when debt and equity markets are volatile. “Overall, the performance trajectory would continue, with focus on protection products. But, the growth would come down a bit, amid the high base,” says Avinash Singh, analyst at SBICAP Securities.
On the downside, if bond yields continue to move up during the coming days, insurers will again have to bear the heat on their embedded value (EV). This could lead to downward revision in valuation (price to EV) and target price. An analyst at Emkay Securities, for instance, revised SBI Life’s valuation down to three times the FY20 estimated EV, from 3.3 times earlier, due to elevated bond yields. SBI Life’s results came last weekend.