11-05-2021
Beyond base effect, life insurers may see a modest FY22
Insurance AlertssBeyond base effect, life insurers may see a modest FY22
MUMBAI : Investors of India’s life insurance companies will need to look beyond the optically pleasing growth metrics expected in FY22 to figure out the true performance of insurers. The first step towards this is to ignore the growth rates for the month of April.
Latest business data from the sector regulator shows that private life insurers saw their new business premium surge 90% in April, while the largest Life Insurance Corporation of India (LIC) witnessed 74% increase. But these high percentages are solely due to a low base as the months of April and May last year saw a strict nationwide lockdown due to the pandemic. Ergo, growth metrics for the next few months may reflect a statistical low base effect. According to analysts, a better way to judge the performance of insurers is to look at a two-year compound annual growth rate (CAGR).
On a two-year CAGR basis, private life insurers reported 6.2% growth in new business premium, while LIC saw contraction of 4.7%, point out analysts at Nomura in a note. Among private life insurers, HDFC Standard Life Insurance Company Ltd trumped peers with a stellar 18% growth, while SBI Life Insurance Company Ltd maintained momentum, they added. “FY21 performance for the listed players has been encouraging, with resilience in new business growth and strong margin expansion driven by improving cost efficiencies, persistency improvement and a more diversified product mix which drove 15-35% VNB (value of new business) growth across players (excluding IPRU, MAXF growth for 9MFY21)," the note said.
In short, listed private life insurers continue to see strong business. This has been due to new product launches, and a pandemic that has made Indians aware of mortality. In April, private life insurers saw their market share in new business premium increase to 58%. What’s more is that individuals have preferred non-participatory products and simple protection plans for life cover. The growth in protection plans continue to be robust, while traditional savings products struggled. This augurs well for future profitability of life insurers.
But investors need to be wary of a few trends, too. On a two-year CAGR basis, the growth in retail single premium policies has been 29%, far higher than non-single premium products that grew by just 5.8%. Single premium business has grown faster than non-single premium during the pandemic. Such products may show lower persistency ratios since customers may view them as a means to park excess cash. The commitment to life insurance from individuals is largely seen from products that require regular premium payment and where persistency ratios are high. Single premium products are high cost for insurers and the returns are volatile over a period of time.
Then there is the impact of the second wave on business. While life insurers have managed to recover the business lost due to the pandemic in the first few months of 2020, the second wave comes with disruptions again. While analysts expect growth rates to be healthy, concerns over the second wave’s impact remain. “Growth could have been 10-20% higher if not for lockdowns and weakness is likely to persist in May even as base-effect will be favourable," wrote those at Jefferies India Pvt. Ltd in a note.
Source: Live Mint
