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Life Insurance - Sector Update - Recovery may be swift with protection driving margins - HDFC Securities

Posted On: 2020-07-13 05:19:38

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities.

Life Insurance (Update): Recovery may be swift with protection driving margins

Increased interest in term and health products. Google trends indicate a steep rise in interest for term and health insurance to near all-time high levels. We also observe increased interest in HDFC Life and SBI Life as companies. Search for ULIPs has decreased significantly, most likely due to subdued markets and customers' desire for stability and assured returns. We believe demand will likely be driven by NPAR (savings and protection) in the near term and then move to PAR as risk appetite returns. We believe demand for ULIPs is still some time away.

Past pandemics show increased sales and lower persistency trends. A study of past pandemics such as SARS (CY 2002-04) and MERS (CY 2013-14) demonstrates increased sales of health insurance during the pandemics and life insurance post the pandemics. Singapore also displayed lower persistency following the outbreak (Singapore Life Insurance Industry Persistency on pg. 9). We expect similar trends to play out in India.

Protection to gain vs. savings. We expect the savings business to face headwinds as lower business activity impacts savings levels. Companies with high dependence on ULIPs are likely to be impacted significantly - IPRU/SBILIFE: 64.7/69.6% of individual APE. Additionally, companies that have large credit protect portfolios will also see some declines as loan growth remains challenged - HDFC LIFE/IPRU: 17.1/8.0% of APE is from group business. 1QFY21 data indicates that protection sales have improved - the sum assured/ premium ratio (x) has increased to 56.3 vs. 32.4 for FY20. This ratio was even higher in May-20 at 61.0.

Jun-20 data indicates that recovery may be swift. Jun-20 NBP/APE for private life insurers' individual business recovered impressively to 2.3/-7.0% YoY (1QFY21 NBP/APE declined 17.7/23.1% YoY). It indicates that traction is improving even for the savings business. NBP for HDFCLIFE/MAXL/SBILIFE grew an impressive -0.2/20.0/3.6% YoY. HDFCLIFE has delivered this performance on a base growth of 70%+. Individual NBP declined 28.5% YoY, most likely due to lower appetite for ULIPs.

Agency to drive margins higher. Agency has always had a higher share of PAR/NPAR (savings and protection) in the mix. Additionally, agents work on commissions and will be more motivated in this environment. With 31% of APE from proprietary channels, we expect MAXL to report strong numbers. 1QFY21 NBP declined by only 1.1% vs. other private sector insurers' NBP decline of 25.4%. We believe SBILIFE's business may get impacted as parent SBI will focus more on collections rather than new sales.

Hardening reinsurance rates. Indian life insurers are witnessing a hardening of term reinsurance premiums. Companies are reworking rates for end consumers while trying to ensure the least impact on their margins. Amongst the companies, SBI LIFE is likely to get least impacted as it was charging higher rates vs. competitors. HDFC LIFE/IPRU/MAXL are re-pricing their term products to maintain margins.

Source: Equity Bulls

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