Life Insurance: Premium collections up mere 1% in February 2020

Life insurance companies reported 1% growth in annualised premium equivalent (APE) in February 2020, translating to 22% growth for eleven months of FY20. While LIC was weak with 7% decline, private sector was not strong either, up 8% year-on-year (y-o-y).

Individual APE was down 1% y-o-y during the month with 7% decline for LIC and 4% growth for private players. Among major players, HDFC Life (individual APE up 29% y-o-y likely driven by its traditional business push) and Bajaj Life (up 23% y-o-y) were strong while others were weak — ICICI Life was down 15%, SBI Life down 5%, Birla SL down 2% and Max Life up 1%. LIC had reported strong growth (individual APE up 99% y-o-y) in January due to the sunset period of some of its products; on this base, business momentum slowed down in February.

Interestingly, while unit-linked insurance plans (Ulips) seemed weak, inflow to equity mutual funds picked up to Rs 96 billion from Rs 72 billion in January 2020 and `44 billion in February 2019. We expect March 2020E to be stronger as Ulip growth may likely pick up with a lag and large players will likely push protection policies in the sunset month of current pricing regime.

Two headwinds on VNB margins

We find two headwinds on value of new business (VNB) margins of life insurance companies viz: Increase in effective tax rate due to removal of DDT, and secondly, increase in reinsurance rates which may not be fully passed on by insurance companies due to competitive pressures.

We don’t find any significant impact of removal of Section 80C benefits, as the share of Q4 business for most insurance companies has reduced over the past few years. Google trends, however, suggest otherwise, i.e., ratio of searches for insurance sector-related terms remain stable in Q4.

Market sources suggest that reinsurance companies will increase rates from April 2020. The quantum of rise and the ability of insurance companies to pass on the rise, in light of strong competition in the sector, will determine VNB margin movement. At this stage, it is a bit challenging to estimate the same.

Source: Financial Express