Non-par drives VNB margin

Non-par drives VNB margin. Life insurers surprised the Street in 2QFY21 with strong VNB margin expansion, offsetting APE weakness. Three drivers: (1) increase in share of non-par savings business, (2) higher individual savings margin, likely due to re-pricing and (3) strong expense management. Trends in persistency are weak for most. SBI Life and HDFC Life remain preferred picks; inexpensive valuations make ICICI Life attractive.

2QFY21: stronger than expected

A solid quarter. Life Insurance companies reported a strong quarter with -1% to 41% change in VNB despite -23% to 31% APE change in 2QFY21.

• APE challenges prompted insurance companies to shift focus on profitability by increasing non-par business or re-pricing up individual protection policies post the rise in reinsurance rates. Availability of FRAs in the debt markets, that support to hedge interest-rate risk, likely supported the move to non-par policies.
• Within protection business, demand for individual business was strong; players that recently raised tariffs, however, saw some weakness.
• Credit protect was down yoy though up qoq reflecting trends in disbursements of banks/NBFCs.
• Strong expense control was a common trend observed among almost all players. However, trends in persistency were distinct across players with reports of a decline in later buckets. 

A strong 2H; VNB margin may moderate. We expect business momentum for most to pick up in 2H, post the encouraging trends observed in the recent months. VNB margin will likely moderate from current highs as ULIPs start to gain some momentum; companies will need to start investing in growth as well. We expect listed life insurance companies to deliver 5 to 31% yoy VNB growth in 2HFY21E; medium-term operating RoEV will remain in the range of ~14% to 19% on the back of ~20 to 25% VNB margins.

Key highlights 

•  HDFC Life – par drives growth. HDFC Life delivered 22% VNB growth on the back of 21% APE growth; VNB margins were strong at 25.6%, up 20 bps yoy. VNB was an interplay of (1) decrease in share of low-margin ULIPs (down 365 bps yoy to 18%), (2) decrease in share of high-margin non-par (down 1,275 bps yoy to 25%), offset by (3) increase in par to 28.7% (up 1,875 bps), further boosted by significant increase in tenor of par policies.
•  ICICI Prudential Life – non-par savings pick up; protection moderates. ICICI Prudential Life reported flat VNB despite 23% yoy decline in APE, reflecting slowdown across segments. VNB margin expanded to 27.4% from 21.1% yoy/24.4% qoq. The reasons: (1) while the share of protection was stable at ~15%, the company effected a rise in tariff of individual term policies; it reduced the share of limited pay policies and increased riders (attached to 30% of ICICI Bank’s term business) – all of this increased the margin of the protection business and (2) share of high-margin non-par policies increased to 12% from 4% yoy.
•  SBI Life – protection cushions margin. SBI Life reported 50 bps yoy/20 bps qoq expansion in VNB margin to 18.9% This supported VNB (down 1% yoy) while APE was a tad lower at 4% yoy decline, sequentially improving momentum from 32% yoy decline in 1QFY21. Focus on the protection business (up 550 bps yoy to 12.6%) was the key yoy margin driver, on qoq basis, increase in high-margin individual business and credit life provided support to margin.
•  Max Life – steep expansion in margins. Max Life reported 41% yoy growth in VNB on the back of sharp 615 bps yoy expansion in post overrun VNB margin to 28.2% and strong APE growth of 10% yoy. Margin expansion was an interplay of (1) strong 71% yoy/35% qoq growth in protection segment to 11% of APE (up 385 bps qoq/down 315 bps qoq), (2) 82% yoy/2.7X qoq jump in non-par savings business to 38% of APE (yup 1,515 bps yoy/2,045 bps qoq) and (3) likely benefits of lower expense overruns.
• Bajaj Life – strong growth in non-par savings supports margin. Strong growth in non-par business (1.5X yoy) led to ~1.1X yoy growth in VNB during 1HFY21. While business momentum will likely moderate a bit from peak levels in these high-margin business segments, its overall share in APE will remain high in FY2021E and drive expansion in pre-overrun margins by ~380 bps to ~23% (post-overrun VNB at 16%).

APE growth revived in 2QFY21

APE growth revived from trough levels for life insurers in 2QFY21. While HDFC Life and Max Life reported better than industry (flat yoy for private players) growth at 21% yoy and 10% yoy respectively (compared to 30% yoy and 4% yoy decline respectively in 1QFY21) in 2QFY21, pressure on ULIPs and lower presence in non-par savings segment led to 4% yoy decline and 23% yoy decline respectively for SBI Life and ICICI Prudential Life respectively. Notably, SBI Life and ICICI Prudential Life had reported steep 44% yoy and 32% yoy respectively in 1QFY21. Strong traction in non-par savings and protection segment supported >15% yoy growth in APE for Bajaj Life.

 Sequential improvement in growth trajectory over the past few months. Private life insurers witnessed gradual improvement in APE growth to 6% yoy increase in September compared to 3% yoy decline in July and August 2020 and 7% yoy decline in June 2020. Strong momentum in non-par savings (annuity, endowment and other return of premium based policies), elevated demand for term insurance despite marginal moderation post recent price hikes and gradual decrease in risk aversion at the onset of the pandemic and gradual pick in ULIP volume as equity markets improve.

•   We expect listed life insurers (except ICICI Prudential Life) to report 5-14% yoy growth in APE in FY2021E on the back of revival in overall business volumes from 2H. We bake in 19% yoy decline in APE for ICICI Prudential Life during FY2021E as the company has relatively lower presence in the non-par savings segment; this segment will be a key growth driver as it is well positioned to capture incremental from conventional savings instruments like fixed deposits and other financial products which have witnessed drop in IRRs.
•   ULIPs have picked up for most players from trough levels observed over the past few quarter. SBI Life, Bajaj Life and ICICI Prudential Life have witnessed marginal uptick in overall ULIP volumes on the back of improvement in equity markets. It may however take some time for ULIP volumes to normalize due to current volatility in capital markets largely led by uncertainty around intensity and spread of Covid-19 going ahead.
•   Demand for term insurance will likely remain high; albeit moderation from peak levels observed in 1QFY21. Pick-up in sales through digital channels and proposed launch of mass term insurance product may further support growth; stance of insurers to offer low ticket protection policies may however differ. Credit life business is linked to disbursements of financial institutions and will pick-up in line with growth in overall lending business.
•   Barring HDFC Life, participating policies have been weak across most players. LIC continues to be a key player in this segment and has witnessed higher growth than private players in 1H. Additionally, HDFC Life has a significant presence in this segment led by strong sales push of ‘Sanchay Par Advantage’ – a high tenure participating product.

Change in product mix drives VNB margin expansion

20-630 bps yoy expansion in VNB margin in 2QFY21. Life insurers reported ~0-41% yoy growth in VNB in 2QFY21 on the back of steep margin expansion (20-630 bps yoy) led by (1) increase in share of high margin protection and non-par savings business (on yoy basis), (2) re-pricing of protection products on qoq basis; albeit marginal slowdown in retail protection, (3) pick up in credit life business from trough levels in 1QFY21, (4) drop in share of ULIPs for most players.

•   HDFC Life. VNB growth was strong at 22% yoy in 2QFY21 for HDFC Life led by 21% yoy growth in APE and marginal 20 bps yoy expansion in VNB margin to 25.6%. VNB margin expanded by 20 bps yoy/130 bps qoq to 25.6%. VNB margin for 2QFY21 was interplay of (1) decrease in share of low margin ULIPs (down 365 bps yoy to 18%) and consequent increase in share of par (up 1,845 bps yoy to 28.6%), (2) sharp rise in tenor of the new par product ‘Sanchay Par Advantage launched around January 2020, (3) decrease in share of protection and non-par savings (410 bps yoy decline in protection mix to 11.6% in 2QFY21 from 15.7% in 2QFY20 and 1,700 bps yoy decline in non-par savings to 26%), (4) strong 28% yoy growth in high margin individual protection and (5) selective re-pricing of protection products.
•   ICICI Prudential Life VNB was flat yoy despite 23% yoy decline in APE for ICICI Prudential Life. Expansion in VNB margins cushioned overall VNB growth. VNB margin expansion (up 630 bps yoy/30 bps qoq) was interplay of (1) re-pricing of protection products from 2QFY21 providing some support to retail protection margins despite slowdown on overall volumes, (2) marginal 95 bps yoy expansion in protection APE mix, albeit down ~1,000 bps qoq, (3) strong growth in high margin non-par savings businesses, (4) higher share of tele-medical based protection policies sold during the quarter compared to 2QFY20 (margins tend to be ~10-15% higher), (5) decline in share of limited pay protection policies (margins are lower than regular pay policies) and (6) strong focus on operating efficiencies driving lower cost. Overall non-linked savings business increased 1,456 bps yoy/565 bps qoq to ~30% (~10% of overall APE is non-par guaranteed return products which tend to command high margins).
•   Max Life Max Life reported stellar 615 bps yoy/1,105 bps qoq expansion in VNB margin to 29.2% (post overrun) in 2QFY21 led by strong growth in high margin protection and non-par business.
•   SBI Life VNB margins expanded 50 bps yoy to 18.9% for SBI Life led by 550 bps increase in high margin protection business to 12.6% (275 bps yoy expansion in individual protection to 7% of APE). On a qoq basis, margins expanded 20 bps qoq despite decline in high-margin non-par business and stable protection mix. This was owing to change in product mix within the protection business; share of high-margin individual protection to overall protection mix increased to 56% in 2QFY21 from 44% in 1QFY21. Share of high-margin credit protect in group protection increased qoq as well.
•   Bajaj Life Strong growth in high-margin non-par business (1.5X yoy) led to ~1.1X yoy growth in gross VNB during 1HFY21 for Bajaj Life.

RoEV strong at >20% for incumbents; lower for Bajaj Life. RoEV was strong for most companies at 21-27% in 1HFY21; marginally lower at 15% for Bajaj Life. RoEV was interplay of (1) flat to modest growth in VNB led by expansion in margins, (2) <100 bps decline in unwinding rates, (3) muted operating variance due to weakness in persistency for select players like Max Life and (4) reversal of investment variance of 4Q on the back of improvement in capital markets. While most companies don’t report operating RoEV, it was moderate at 17% for HDFC Life and Max Life; this is however lower at ~20-21% levels over the past four years.

Focus on high margin non-par; protection moderates qoq

While individual companies focused on select product cohorts, overall product portfolio and customer selection was intended to expand margins. Most companies reported strong growth in non-par savings business as demand remained high. Retail protection slowed down on qoq; though only ICICI Prudential Life and Bajaj Life witnessed qoq decline. The share of retail protection declined qoq for all players. Price hikes post rise in reinsurance rates, pick-up in volumes in other segments like non-par and ULIPs and moderating risk aversion among probably buyers are key drivers. ULIPs picked up sequentially for all players, though on a yoy basis it decline for all players except HDFC Life (low base). Credit life was down yoy for all players except SBI Life; higher wallet penetration among existing customers of SBI support growth for SBI Life

Individual protection weak for ICICI Prudential Life and Bajaj Life; strong growth for others. ICICI Prudential Life re-priced protection products from 2QFY21 onwards leading to pressure on incremental growth during the quarter. Additionally, competition intensified in individual protection segment; select companies deferred re-pricing of their protection product to capture higher volumes. Growth was weak for Bajaj Life also due to product re-pricing from June 2020 (protection APE down 52% qoq).

•   High margin individual protection was up 28% yoy (up 38% yoy in 1HFY21) for HDFC Life. In the protection segment, limited pay products have witnessed strong growth followed by regular pay products. ROP segment was broadly flat yoy.
•   Growth in the individual protection was strong at 58% yoy for SBI Life. Share of individual protection increased to 7% of overall APE (up 275 bps yoy/150 bps qoq). Growth in individual protection was driven by strong pick-up in overall policy volumes while average ticket size was broadly stable; share of return of premium policies was stable yoy at about 85%. Post increase in reinsurance rates, most life insurers have increased pricing of protection products. SBI Life’s policies were already priced over competition and now the pricing gap has lowered. The company has however filed for a new protection product with marginal tweak in pricing and will roll out the new product post IRDAI approval (likely in 3Q). This can provide some uptick to margins.
•  Max Life reported 71% yoy/35% qoq growth in individual protection in 2QFY21. The share of individual protection increased to 11% of overall APE (up 400 bps yoy/down 300 bps qoq). In its 4Q conference call, management has guided that the company will focus on market share accretion in 1H and launch a re-priced product only from 2H onwards.

Credit life weak for all except SBI Life. Credit life was strong for SBI Life compared to peers. SBI Life focused on cross-selling credit life to existing customers (who had previously not opted for credit life) and this segment witnessed strong traction. Management guided that demand remains strong in this segment post the pandemic as risk aversion among retail customers have increased.

     ICICI Prudential Life and HDFC Life (down 64% yoy) witnessed sharp decline in credit life during the quarter owing to lower disbursements by financial institutions. Bajaj Life’s credit protect business was down 8% yoy.

All players push non-par. Most players push non-par during the quarter as overall demand was quite strong from retail customers. Most customer with age >40 are using the annuity and endowment product for long-term financial or retirement planning. SBI Life however slowed down a bit in this segment (down 25% yoy/up 4% yoy) due to its conscious strategy to maintain a conservative stance on guaranteed products and marginal moderation in volumes due to product re-pricing. HDFC Life reported yoy decline in non-par savings APE on a high base (down 19% yoy/up 88% qoq); as such the flagship product, HDFC Life Sanchay Plus, continues to maintain robust momentum.

    Among major life insurers, Max Life reported sharp growth in non-par savings APE (up 82% yoy/2.7X yoy). The share of non-par savings increased to 39% of overall APE in 2QFY21 (up 1.580 bps yoy/2,100 bps qoq).

   Non-linked savings (par, endowment, annuity and others) increased 50% yoy in 2QFY21 on the back of sharp growth in non-par savings business. While the company does not disclose overall APE mix between products, a rough calculation suggests ~1.3X yoy growth in non-par segment; annuity premiums were up 73% yoy. ICICI Prudential Life has been relatively more conservative in expanding in the guaranteed return segment previously. Lower ULIP volumes coupled with slowdown in protection likely prompted the company to aggressively push non-par products during the quarter

  Non-par savings was up ~1.5X yoy (up 1.3X yoy in 1HFY21) for Bajaj Life. The share of non-par savings increased to 36% of individual APE in 2QFY21 from 17% in 2QFY20 (20% in FY2020). The company witnessed strong demand for guaranteed return products despite revision of IRRs from August 2020. Despite correction in IRRs, the guaranteed returns offered by some non-par products like ‘Savings Goal’ and ‘Goal Suraksha’ are broadly similar to the TD rates offered by frontline banks

ULIPs see green shoots. ULIP volumes have remained weak for most players over the past few quarters due to weakness in capital markets. This has led to pressure on overall APE growth for players with higher dependence on ULIPs (SBI Life, ICICI Prudential Life and Bajaj Life). Most players however witnessed a gradual pick up in volumes from August 2020 onwards as markets improved. On a sequential basis, ULIPs increased 32-166% for life insurers. However, on yoy basis, only HDFC Life was flat yoy due to low base in 2QFY20 while other companies witnessed a decline. The share of ULIPs have dropped to 20-60% for most insurers in 2QFY21 from ~40-90% in FY2018-19.

HDFC Life ahead of the pack to push par. HDFC Life’s new par product ‘Sanchay Par Advantage’ ramped up in 2QFY21 (similar to 1QFY21) and reported 2.4X yoy growth. The share of par policies increased to 28.6% of overall APE in 2QFY21, up from 10.1% in 2QFY20 and 27% in 1QFY21. HDFC’s VNB margins, in the par segment, are likely higher than typical low double digit product due to (1) higher equity allocation and (2) longer tenure of par policies. Management expects strong growth in this segment going ahead driven by penetration into smaller markets and targeting the mass segment (higher volumes but lower ticket size).

Bancassurance remains key; investment in agency high

Most players witnessed sharp traction in business through the banca channel led by increase in volumes on the back of lower lockdown related disruptions. Agency business remained a bit weak due to various social distancing norms. Most companies however continued to ramp up investments in growing the agency base and increasing training and productivity of agents. Private life insurers added 67,742 agents during the quarter compared to 3,76,007 in FY2020; this is likely to further increase in 2H.

  HDFC Life. HDFC Life reported strong 38% yoy growth (based on individual APE) growth in business through the bancassurance channel in 2QFY21 on the back of strong uptick in business through HDFC Bank. The bancassurance channel has pushed the par product which led to strong growth in business. Agency channel was up 8% yoy (for individual business) and direct business was up 4% yoy. HDFC Life continues to focus on diversification of channel mix and has further added new partners during the quarter. Additionally, it has tied up with Yes Bank as a bancassurance partners.

  ICICI Prudential Life. Overall APE from the banca channel picked up in 2QFY21 from trough levels in 1QFY21; 2QFY21 APE was 94% higher than 1QFY21. Gradual easing of lockdown related restrictions, pick-up in sales through new banca partners (IDFC First Bank) and increasing sales through ICICI Bank (APE up ~100% yoy in 2QFY21) led to revival in APE from banca channel. The overall share of bancassurance to APE marginally inched up to 44% in 2QFY21 from 40% in 1QFY21; it however declined 970 bps yoy. APE through the agency channel declined 12% yoy. Overall growth through direct channels was strong at 76% qoq (down 28% yoy).

  Max Life. Individual APE through bancassurance channel increased ~17% yoy led by strong traction in overall volumes through the Axis bank channel. While the company has not disclosed business through Axis Bank, individual APE through Axis Bank was up ~25-35% yoy. Agency business was marginally down yoy.

 SBI Life. APE growth through the bancassurance channel (only SBI) declined 9% yoy in 2QFY21 (up 71% yoy in 1HFY21). Within the bancassurance channel, the share of non-par products has increased to 22% of overall APE in 1HFY21 (19% in 2QFY21) from 14% in FY2020 ULIPs, the dominant product in the banca channel (>70% share) declined 11% yoy. Non-core channels (including other banca tie-ups) increased at a sharp pace of 95% yoy. The agency business was down 18% yoy due to lockdown-related disruptions.

Bajaj Life. Individual APE from non-agency channels increased 63% yoy in 2QFY21 (up 43% in 1HFY21). Institutional business (including partnerships and banca) was up 76% yoy (up 54% yoy in 1HFY21); this was likely driven by partnership from Axis Bank. Management continues focus on increasing the share of non-agency channels. Share of agency originated individual APE declined to 44% in 2QFY21 from 59% in 2QFY20 (56% in FY2020). Agency business was down 12% yoy in 2QFY21 (down 13% yoy in 1HFY21) led by strict social distancing norms.

Persistency weak for Max Life, ICICI Prudential Life and Bajaj Life

Persistency ratios was weak for Max Life, ICICI Prudential Life and Bajaj Life while it was strong for SBI Life and mixed for HDFC Life; HDFC Life however operates at best in class persistency ratios. While persistency trends have been robust in the protection and non-lined savings business, weakness in ULIP persistency ratios have led to drop in persistency ratios across select buckets for life insurers. For 1H, persistency ratios saw significant weakness for Max Life, ICICI Prudential Life and Baja Life with decline in persistency ratios in 3 or more buckets. SBI Life’s performance remains impressive as the company has high share of ULIPs. HDFC Life’s focus on increasing renewals an marinating a relatively diversified product bouquet support strong persistency trends.

 HDFC Life. HDFC Life’s persistency trend was strong in early buckets. On an overall basis, persistency ratios increased 150 bps yoy and 570 bps yoy in 13th and 25th month buckets; it however dropped marginally by 270 bps yoy in the 37th month buckets. This was led by weak persistency in ULIPs and persistency declined 200 bps, 200 bps and 300 bps yoy respectively in 13th month, 25th month and 37th month buckets. Persistency trends were mixed in non-par segment.

 ICICI Prudential Life. ICICI Prudential Life reported weak trends in persistency on yoy basis with decline in persistency across early buckets (13th month, 25th month and 37th month). 13th month persistency (excluding single premium) declined 110 bps yoy to 84.4%. The current experience is lower than the company’s assumptions (82.5% 13 month persistency). While persistency ratios have improved for protection segment on yoy basis and has witnessed stable trends in non-linked savings businesses, weakness in ULIP persistency ratios continue to drag overall persistency. On qoq basis, persistency trends were with marginal improvement in 13th and 61st month buckets but decline across other buckets

 Max Life. Max Life reported decline in persistency ratios across all buckets in 5MFY21 (barring 61st month where it was flat yoy) by 200-400 bps; this remain a key concern for the company.

 SBI Life. SBI Life reported improvement in persistency trends across most buckets on yoy basis (except 49th month). Persistency ratios increased 170 bps yoy, 100 bps and 210 bps yoy respectively in 13th, 25th and 37th month buckets. Persistency trends (on regular premium basis) saw marginal weakness in 13th and 49th month buckets in 1HFY21.

 Bajaj Life. Bajaj Life witnessed marginal decline in persistency ratios in early buckets. 13th month and 25th month persistency ratios declined 300 bps yoy and 100 bps yoy in 1HFY21 to 77% and 70%, respectively. Management guided that weakness in high-ticket business generated through the agency channel has witnessed weakness in persistency trends. Persistency trends have, however, improved a bit in higher buckets.

Focus on driving cost efficiencies; aggressive cost cutting by ICICI Prudential Life

 Stringent cost control by ICICI Prudential Life. Overall expenses declined 13% yoy for ICICI Prudential Life (down 18% yoy in 1HFY21) and 1% yoy decline for SBI Life (up 1% yoy in 1HFY21). In contrast , HDFC Life’s operating expenses increased 1% yoy (down 10% yoy in 1HFY21).

  HDFC Life, which operates at higher cost ratios compared to ICICI Prudential Life and SBI Life, reported sharp decline in calculate cost/APE to 23.8% (down 388 bps yoy); on a qoq basis, cost/APE however increased 220 bps qoq owing to sharp bounce back in overall volumes. Cost/APE declined 230 bps yoy/50 bps qoq for ICICI Prudential Life and 185 bps yoy/280 bps qoq for SBI Life.

 Focus on cost efficiencies. FY2021E will witness sharp decline in APE for life insures owing to lower volumes in 1QFY21 and weakness in capital markets driving lower ULIPs. Amidst lower volumes, companies have increased focus on improving cost-efficiencies by (1) reducing/deferring discretionary expenses, (2) increasing share of variable cost in overall cost structure, (3) pause in business expansion and (4) renegotiation of various fixed expenses like rent. The extent of cost control will however likely differ across players.

Despite focus on cost control, investment in technology/digital initiatives and sourcing platforms remain high.

Solvency comfortable

Solvency ratios improved sequentially. Solvency ratios remained comfortable for most life insurers with >200% solvency ratio compared to regulatory requirement of 150%. While most players witnessed robust improvement in solvency ratios, it was down 5% for Max Life. ICICI Prudential Life’s solvency ratio will further be bolstered by proposed infusion of Rs12 bn of tier-II capital.

Source: Kotak Institutional Equities Research