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Protection business drives growth of life insurers

The Financial Express
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The top four life insurance companies delivered 4% to 18% annualised premium equivalent (APE) growth in 3QFY20. While October was a weak month on APE, most companies bounced back in November and December 2019. HDFC Life's year-on-year (y-o-y) growth was driven by par (likely its new product) and ongoing traction in the non-par business, though down quarter-on-quarter (q-o-q). Limited pay, return of premium protection policies and non-par policies with regular income were key drivers for Max Life.

Thus, despite the absence of any significant catalyst (like high Ulips or falling interest rates), large players were able to use various strategies to deliver healthy growth. The above trends highlight the ability of life insurance companies to manage growth through a combination of products and channels. These provide some comfort on the ability of the top players to sail through potential near-term challenges like losing the 80C sales pitch in FY2021E.

Is protection losing sheen?

Most life insurers have reported a moderate pace of growth in the protection business led by competition on pricing in individual business, muted growth in the credit life business, either due to high distribution costs or slowdown at NBFCs and transitioning towards increasing share of limited pay policies. Market sources suggest that reinsurers are planning to hike reinsurance rates on term policies.

Two likely reasons adverse mortality experience due to aggressive pricing-this has, however, not yet been reflected in the operating variance reported by large players in FY2019 and secondly, expansion into interiors/newer customer segments, with adverse mortality experience. In case of the latter, the ability of insurance companies to differentiate and underwrite customers will be crucial to drive profitability.

Are insurers assuming higher risks?

Strong value of new business (VNB) growth during the quarter was mostly driven by higher APE growth. In fact, VNB margin expansion was about 60 to 250 bps y-o-y. This compares with significantly higher risk on balance sheet, the share of non-par savings policies increased by 500 to 1,700 bps y-o-y. Following strong growth in HDFC Life's non-par business in Q1FY20, other players seems to be catching on. The share of non-par protection has increased albeit moderately. It appears that incremental margins are lower due to ROP and LP products. Solvency has reduced y-o-y for ICICI Prudential and Max Life.

APE growth shows diverse trends

Life insurers (except ICICI Prudential Life) reported APE growth in the range of 16-18% y-o-y in Q3FY20. We don't see any common trend or growth driver. First, SBI Life and Max Life picked up in ULIPs (18-19%) while HDFC Life and ICICI Prudential Life slowed down (-11% to -35%). Second, growth rate in protection APE was strong for Max Life (1.4X) and ICICI Prudential (34%) but moderated (10-15%) for HDFC Life and SBI Life. Three, non-par business moderated for HDFC Life to 1.9X from 5.7X in 1HFY20, while it was stable/picked up for the rest-ICICI Prudential Life (other segment) was up 1.9X (stable q-o-q), Max (1.9X from 4X) and SBI Life (18X). The focus for most players was on non-core channels, digital and strategic partnerships coupled with higher volumes from the agency business.

Edited extracts from Kotak Institutional Equities Research report