MoM trends improving, but 1QFY21E may be muted

MoM trends improving, but 1QFY21E may be muted. Private life insurers reported 7% individual APE decline in June, improving sequentially and translating to 23% yoy decline for 1QFY21; this is better than the initial expectation of 50-60% decline due to a lockdown for most of this period. Traction in individual protection policies, selective push of non-par business and uptick in business through digital channels were likely drivers while ULIP volumes were weak. We consequently expect mixed VNB growth trends (-40% to +12% yoy) for listed players on the back of 220-350 bps VNB margin expansion.

June was better: Protection remains strong; savings likely picked up sequentially

Life insurance companies reported better APE performance in June- similar to improvement in several other high frequency datapoints.

• Overall APE declined 6% yoy in June 2020 as compared to 35% decline in the first two months. Individual APE was down 1% (down 30% in first two months). LIC fared relatively better; private players delivered 7% yoy decline in individual APE, again better than 32-40% in the first two months. This is despite the fact that capital markets sentiment was weak, as reflected by net outflow of Rs20 bn (versus net inflows in the past six months) from equity mutual funds.
• Individual APE declined 7% yoy in June 2020, however, individual sum assured increased 38% yoy for private players (up 28% in 1QFY21). Sum assured/premium (in individual non-single segment) was 45X in June 2020 (30X in June 2019) reflecting higher protection business this year; the ratio was down sequentially (67-81X in the past two months); this likely indicates that savings business picked up to deliver higher APE growth in the last month of the quarter.

1QFY21E preview: Margin expansion to provide cushion

We expect life insurers to report -40% to +12% yoy VNB growth during 1QFY21E on the back of 4-48% yoy decline in APE (Exhibits 1 and 3). Increase in share of protection business, focus on non-par policies and decline in ULIPs will likely be key drivers of VNB margin expansion. However, lower volumes may weigh on VNB to some extent.

Better than expected; annual VNB trends remain crucial

Insurance stocks have fared well in the current environment due to their relative defensive nature as compared to banks/NBFCs. Recent growth trends are encouraging, significantly better than our initial expectations (APE down 23% yoy for private players in 1QFY21 as compared to our initial expectation of -50 to -60%). However, ability of insurance companies to deliver yoy stable/increase in VNB remains a crucial monitorable. Traction in protection business will provide tailwinds to all players. While capital market inflows/ULIPs will likely remain weak, ability of insurance companies to underwrite/scale up traditional business assumes importance.  

We are rolling over our FV to 1QFY23E from FY2022E. SBI Life (BUY, FV Rs1,050, up from Rs1,000) and ICICI Prudential Life (BUY, Rs500 from Rs475) continue to be BUYs. While we expect near-term weakness in business momentum of ICICI Prudential Life, SBI Life will likely fare better. We continue to like the business strategy and superior trajectory of HDFC Life (ADD; FV Rs560) though the same is fully reflected in the current valuations. We wait for clarity on Max-Axis merger before getting more assertive on the stock.

1QFY21E preview: -40% to +12% yoy VNB growth across listed players

• HDFC Life. We expect HDFC Life to deliver 16% yoy decline in VNB, largely on the back of 22% decline in APE. Market sources suggest that the company pushed its flagship non-par product ‘Sanchay Plus’ during the quarter which will likely boost VNB margins by 230 bps yoy to 32%, despite a high base. With a sharp slowdown in retail disbursements, we expect group protection volumes to decline sharply, partially offset by high growth in individual protection (higher pricing and company push).  
• ICICI Prudential Life. We expect ICICI Prudential Life to deliver 300 bps VNB margin expansion; however, its VNB will likely decline 40% yoy due to 48% yoy decline in APE. The company has strong focus on individual protection, a segment that will deliver strong growth on the back of higher pricing. Sharp decline in ULIPs and a somewhat lower participating business (due to lesser traction in agency business) will weigh on overall VNB growth.
• Max Life. We expect Max Life to report 12% yoy VNB growth (post over-run). The company reported 4% yoy APE decline during the quarter. We expect VNB margin expansion of 330 bps yoy to 22.9%, largely reflecting reduction in expense overruns yoy. A marginal increase in the share of individual protection will boost VNB as well though the company has not fully passed on the reinsurance rate hike to its customers.
• SBI Life. We expect SBI Life to deliver 19% yoy decline in VNB on the back of 30% yoy decline in APE. Shift from ULIPs to non-par savings and protection business will boost VNB margins by about 300 bps yoy to 20.8%, up 80 bps qoq. Notably, increasing share of non-par business boosted its VNB margins sequentially throughout FY2020.

Positive investment variance and solvency improvement across the board. A sharp rally in equity markets will likely boost investment variance of all players. Notably, all listed insurance companies reported large negative investment variances in 4QFY20 reflecting correction in capital markets; additionally, lower reserves led to reduction in solvency ratio by 1,000 to 3,500 bps qoq. We now expect some solvency improvement qoq as well.

Key highlights of the month

HDFC Life reported 3% yoy decline in individual APE in June 2020 translating to 19% yoy decline for the quarter. Individual business was likely supported by growth in protection and non-par businesses. Channel checks suggest that demand for non-par saving was high during the quarter led by its competitive pricing. The current IRR of various schemes under Sanchay Plus are in the range of ~4.5-5.5% (it varies with age of entry however); this is comparable to TD rates offered by most frontline banks, the latter being taxable.

ICICI Prudential Life reported 44% yoy decline in individual APE in June 2020 translating to 49% yoy decline in 1QFY21. The company’s decline in individual APE was higher than private peers. Likely slowdown in ULIPs (35% yoy drop in average ticket size in individual non-single business in June 2020) drives weak performance. On considering overall (individual and group) adjusted APE including accrued but not received premium, its APE, was down 41% yoy (down 44% yoy in 1QFY21).

Max Life’ individual APE was up 13% yoy translating to 4% yoy decline in 1QFY21. The company has fared better than peers during the lockdown. Strong growth through digital channels, traction in protection and non-par product and training to proprietary sales force to drive business were likely drivers.

SBI Life’s individual APE declined 5% yoy in June 2020 translating to 35% yoy decline in 1QFY21. Group business was up 31% yoy; better than industry average of 17% yoy decline in May 2020.

Equity-oriented outflows of Rs20 bn in June 2020

Equity-oriented mutual funds witnessed net outflows of Rs20 bn in June 2020 as compared to inflow of Rs35 bn and Rs44 bn in the past two months. Muted gross inflows and sharp increase in redemptions balanced, large cap and multi cap funds led to outflows during the month. SIP inflows declined ~2% mom/yoy to Rs79 bn (lowest in 18 months) Retail inflows (especially from smaller cities) will likely remain muted. Liquid funds reported outflows to the tune of Rs442 bn in June 2020; this tends to be volatile.

Source: Kotak Institutional Equities Research

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