Holding on well in a challenging year, more to come

Holding on well in a challenging year, more to come. Life Insurance companies fared well in 4QFY21 and FY2021 as a combination of favorable product mix and operating variance helped offset low APE growth (though significantly better than initial expectations), lower protection business and large COVID provisions. High growth on a low base will likely drive FY2022E VNB, though flat yoy margins and COVID provisions may be a drag.  

Operating RoEV stable in the range of 15-19% in FY2021

VNB was the key EVOP driver. All four life insurance players under coverage reported flat yoy operating RoEV in FY2021 (HDFC Life, ICICI Life and SBI Life at 19%, ICICI Prudential Life lower at 15%). VNB remains the single largest contributor at 46-67% to EVOP.

Volatile trends in unwinding. Trends in unwinding, the second largest contributor were volatile- unwinding rate increased yoy by 90 bps for HDFC Life (reversion to 8.5% post large MTM hit in FY2020, as per management), SBI Life’s unwinding rate declined to 7.8% from 8.5% yoy and Max Life was down to 8.6% from 9.5% due to a change in discounting rates. A lower unwinding rate of 7.2% (down 77 bps in FY2021, followed by 45 bps yoy decline in FY2020) as compared to 8.5-9.5% for peers, coupled with negative mortality variance/COVID provisions, though offset by assumption upgrade on persistency front, led to lower operating RoEV for ICICI Life.

Highest positive variance for SBI Life. SBI Life reported high operating variance at 14% of EVOP, likely indicating its conservative assumptions; the ratio was high at 12% in FY2020 as well- the company has reported consistently positive variance in persistency assumptions. While HDFC Life reported some positives on the savings front (likely due to better growth), negatives on the mortality part was low. Operating variance had a net negative contribution for ICICI Prudential Life due to aforesaid large COVID provisions.

COVID provisions, a drag; more to come. Higher COVID provisions translated to large negative assumption changes for most players, except ICICI Prudential Life who passed though the operating variance line. Max Life (reported results in June), made significant provisions at 18% of EVOP, HDFC Life was 5% and SBI Life was 2%. ICICI Prudential Life reported large assumption upgrade (9% of EVOP) to reflect better persistency of ULIPs and expense assumptions upgrade. We expect further COVID provisions to hit in 1HFY21- discussed later in the report.

Retain positive stance across life players

We retain positive stance across life insurance companies. We believe that multiple product levels and channels (more insurance companies accessing banks), growing agency and online will provide more legs to APE and VNB growth over the medium term. This will offset intermittent segmental headwinds in term policies, ULIPs (due to any likely market slowdown) or guaranteed return policies. A low base and higher APE growth will likely be FY2022E VNB driver. Improving operating variances augur well for 16-18% VNB CAGR over the medium-term. ICICI Life (BUY; FV Rs670) and SBI Life (BUY, FV Rs1200) remain top picks; low base and identifying of with clear growth catalysts favour the former while conservative policies provide comfort for the latter. In the near-term, we however do expect higher COVID provisions to provide some downside to EV for all players.

Ramping up COVID-19 provision buffers, more may be on its way

Life insurers made large provisions for COVID claims in FY2021. In addition to the claims settled in FY2021, we expect delay in reporting to drive further claims in 1QFY22 and further claims from the second COVID wave. While life insurers have already made some provisions, we expect further provisions in 1HFY22E (peak provisions in 1Q and some provisions in 2Q due to delay in reporting); a likely third wave may add to the same. Notably, it is challenging to forecast COVID claims due to number of variables, which we discuss below.

In term of implications- we believe that these provisions may be reckoned as one-offs. However, any change in longevity due to COVID (unknown at this stage) and losses faced by reinsurers prompting them to raise tariffs can have longer impact on the industry.

} All life insurers made provisions for COVID claims for FY2021 and FY2022 (second wave) that may be incurred in the future. Interesting, the quantum of reserves created by all players is not very different even as the scale of risk underwritten is very different (Exhibit 2).

§ Bajaj Life has created Covid-19 reserves to the tune of Rs0.4 bn.

§ HDFC Life reported COVID claims of Rs1.45 bn in FY2021. The company has made further provisions of Rs1.65 bn, assuming delayed claims for FY2021. ICICI Prudential Life strengthened its reserves to Rs3.3 bn.  The company had gross COVID claim of Rs4.6 tn, net claims of Rs2.6 tn in FY2021.

§ Max Life carries reserves of ~Rs5 bn, reflecting COVID reserve of Rs3.4 bn created during the year, and catastrophic reserves created in the past. Its total COVID claims was ~Rs1.5 bn in FY2021.

§ SBI Life currently carries provisions of Rs1.83 bn. The company had a gross COVID claim of Rs3.2 bn; net claim in FY2021 was Rs1.25 bn. 

Challenging to estimate COVID claims; multiple variables at play

} Exhibit 3 shows that overall reported COVID-related mortalities in April and May 2021 (two month, peak period of the second wave) are similar to entire FY2021. It may however be inaccurate to conclude that the overall claims will be flat yoy.

} Exhibit 4 shows that there is a delay in reporting of COVID claims. As such some of the claims for FY2021 may not be fully reported as of now. Moreover, the second wave likely had a higher impact on the affluent and mass affluent middle class as compared to FY2021.

} Some of the COVID-related deaths may not be reported accurately. As such, yoy increase in overall deaths may be a more accurate representation; we don’t have sufficient data for the same.

} There are three factors at play to determine the extent of claims- segment of claim (term versus savings), extent of reinsurance and ticket size. In case of claims in savings business (mostly ULIPs), the savings funds helps reduce claim hit to P&L. Reinsurance policy of the insurance company an important role. While some companies reinsurance all claims above Rs3 mn or Rs5 mn, some others follow a more dynamic approach. Exhibit 5 shows overall reinsurance risk coverage of key players.

} We believe that claims in the protection business will have significantly higher impact due to absence of investor AUM to offset the impact. More importantly, the quantum of coverage may be higher (hence, reinsurance policy assumes importance). Wider claims in low-ticket microfinance book have a higher impact as reinsurance in microfinance book tends to be low. Similarly, claims in credit protect business will have a higher impact as the ticket size is lower and may not be reinsured; higher prepayments in this segments may provide some relief.

Strong APE growth in a challenging year for most; significant upgrade in APE estimates despite longer-than-expected COVID impact

All larger players (except ICICI Prudential Life) reported positive overall APE growth in FY2021 led by gradual revival in volumes from July 2020 and strong APE growth in 4QFY21 (on a low base).

ICICI Prudential Life reported >10% yoy decline in APE owing to (1) slowdown in ULIPs (65% of overall APE in FY2020), (2) laggard in non-par segment which was a key volumes driver for almost all players in FY2021 (the company started to push this business from 2HFY21), (3) slowdown in pace of protection business from 2HFY21 due to price hikes and gradual decline in Covid-19 cases and (4) most importantly, strategy of ICICI Bank to go slow in select product classes. The company however managed to tie-ups with new bancassurance partners which supported APE in 2HFY21.

Irrespective, it would be imperative to note that all players fared better on APE growth than our initial expectations. Exhibit 7 compares the initial month-wise APE growth estimates versus final growth for all four players.

Two other trends wrt. distribution

More banks have started to follow an open architecture model (especially PSUs and SFBs) for distribution and players with new bancassurance tie-ups have been able to push growth faster than others. Axis Bank has been a strong growth driver for both Bajaj Allianz as well as Max Life. ICICI Life has tied up with AU SFB, Bandhan Bank, Indus Ind Bank, IDFC First Bank, in addition to ICICI Bank and Standard Chartered Bank.

Players with high dependency on agency business faced pressure on APE growth during the year as agents faced difficulty in originating fresh business due to lockdown related disruptions.

Focus on non-par; term business down in 2H

Product innovation remained a key focus area and almost all players launched a wide array of new products during the year. Players with a diversified bouquet fared better than the rest.

All players (except HDFC Life, on a high base), increased focus on non-par business (Exhibit 8). Key reasons: a drop in interest rates prompted bank deposit-holders to look elsewhere for better yields. Insurance companies were able to offer guaranteed better IRR on tax adjusted basis (since insurance income is tax free). This, coupled with hedging tools like FRAs, prompted insurance companies to focus on non-par business.

Protection business was weak on two counts. Credit protect business was weak in 1H due to decline in disbursements by banks/NBFCs. Individual term business slowed down for most post raise in tariffs, following similar rise by reinsurers. Most companies reinsure about 60-70% of their mortality risk.

VNB margin expanded for all companies in FY2021; mixed trends in 4Q

VNB margin (post-overrun) expanded 20-360 bps yoy in FY2021 for all companies. Change in product mix towards higher share of high margin non-par savings and protection products led to margin expansion. Change in assumptions (mortality or one-off provisions for Covid-19 like Max Life) did however put some drag.

} Margin expansion was highest for Max Life at 360 bps (~540 bps adjusted for one-off Covid-19 provisions) owing to strong expense management leading to lower overruns.

} Strong persistency trends and expense management also supported margin expansion by 240 bps yoy to 12.3% for Bajaj Life.

} ICICI Prudential Life’s VNB margin expanded ~335 bps yoy to 25.1% while that of SBI Life expanded 170 bps yoy to 20.4% led by drop in share of ULIPs.

} VNB margin expansion was lowest for HDFC Life at 20 bps-the company already had a balanced product mix and par replaced non-par during the year.

We expect limited headroom for margin improvement for HDFC Life and Max Life (bake-in ~40-80 bps VNB margin expansion over FY2021-24E) as these companies have a broadly stable product mix; as such scope to change product mix and drive margin expansion is limited. For ICICI Prudential Life, decline in ULIPs and pick-up in non-par will support margin expansion though pressure on strong increase in protection mix (significantly higher than others at 17% of overall APE) may act as a drag. SBI Life and Bajaj Life have significant upside to margin expansion. While SBI Life has higher scope to increase share of high margin protection and non-par, expenses management and improving persistency trends is likely to drive margin expansion for Bajaj Life. We conservatively build-in ~170 bps expansion in margin over FY2021-24E for SBI Life as the company has preferred to maintain tight persistency and expense assumptions despite improving trends; as such its operating variance contribution to operating ROEV is expected to remain higher than peers.

} HDFC Life-Margin up 20 bps yoy in FY2021. Margin expansion in FY2021 was curtailed at 20 bps yoy by (1) lower volumes in 1HFY21 (particularly in the credit protect business) leading to drag in expenses and (2) change in mortality assumptions due to the ongoing pandemic as well as adverse experience otherwise, apart from a high base. As volumes pick up in FY2022E, margins are likely to expand a bit; this is however likely to be offset by marginal pickup in ULIP share from trough levels (20% in FY2021 versus 23% in FY2020 and 46% in FY2019).

§ HDFC Life reported VNB margin of 26.9% in 4QFY21, translating to 26.1% VNB margin for FY2021 (up 20 bps yoy). This was driven by sharp 265 bps yoy/40 bps qoq margin expansion in 4QFY21; qoq expansion was led by (1) pickup in credit protect business from trough levels, (2) full impact of rate hike in individual protection, (3) strong traction in annuity and (4) improving operating efficiencies as growth picked up.

} ICICI Prudential Life-Sharp margin expansion in FY2021. VNB margin expanded to 25.1% in FY2021 from 21.7% in FY2020. Two key reasons (1) increase in share of non-linked business to 36% of APE from 20% in FY2020 and (2) better expense management- margin for ULIPs expanded by 290 bps as well.

§ For 4QFY21, margin compressed yoy/qoq. Lower protection business was likely reason for 24 bps yoy and 240 bps qoq VNB margin compression to 23.6%.

} Max Life-high non-par and cost underruns support margin expansion. Overall VNB margin (post-overrun) expansion of 360 bps yoy to 25.2% in FY2021 (up 540 bps yoy to 27% adjusted for the Covid-19 impact of Rs880 mn) was interplay of (1) increase in share of high-margin protection and non-par savings mix to 44% (up 1,240 bps yoy) in FY2021, (2) increase in share of individual protection and credit life within the overall protection mix (individual protection increased ~300 bps yoy in FY2021 to 64% while credit life increased ~200 bps yoy to 16%), (3) robust expense management (expense to premium down 30 bps yoy to 14.2%) and (4) introduction of new products with better margin profile (according to management, its non-par savings product launched in July 2021 had higher margin compared to earlier variants of non-par products).

§ On a yoy basis, for 4QFY21, VNB margin was up 130 bps to 24.1%, reflecting 10% rise in non-par savings mix, even though protection was down 370 bps yoy

} SBI Life-product mix change and cost control are key margin drivers. SBI Life reported 22.2% VNB margin in 4QFY21, ending the year with 20.4% VNB margins, up 165 bps yoy. Increase in share of non-par savings by 400 bps to 10.9% of FY2021 APE and industry-defying growth in individual protection mix to 6.4% (up 163 bps yoy) boosted annual VNB margins; this was, however, partially offset by lower volumes and higher Covid claims.       

§ On effective tax rate basis, the company reported VNB margin of 27.7% in 4QFY21; its FY2021 margin at 23.2% is lower than peers. One of the reasons for difference is lower share of non-par savings though SBI Life benefits from lower expense ratios. One important point to highlight is that SBI Life’s margins despite the expansion remain conservative. During the past two years, SBI Life has seen large net positive operating variances contributing 13-15% to EVOP; this compares with -3% to +6% contribution of operating variances (including assumption changes) to EVOP in case of HDFC Life and ICICI Prudential Life.

Non-par strong in FY2021; ULIPs strong in 2H, protection in 1H

Non-par savings (including annuity and pension based products) was the key growth driver in FY2021 and retained momentum throughout the year. While protection growth was strong in 1HFY21, it slowed down from 2H onwards due to price hikes incurred by various players. Credit protect business was weak in 1HFY21 for almost all players (Relatively better for SBI Life due to focus on increasing attachment rates across old customer of SBI) due to lower disbursements by lending institutions; it however picked up in 2H. ULIPs were weak in 1HFY21 due to weakness in capital markets but started to revive from 3QFY21 and reached to pre-Covid levels (or higher) for most players in 4QFY21. Par was weak for almost all players barring HDFC Life (the company pushed the flagship par product, viz. ‘Sanchay Par Advantage’ in FY2021). 

} Individual protection moderates for all; strong for SBI Life. Yoy change in individual protection was -19% to 3% for players (barring SBI Life). SBI Life however reported 45% yoy increase in individual protection segment (preference for ROP remained).

§ HDFC Life. Similar to trends observed by most other life insurers, HDFC Life witnessed moderation in demand for retail protection post 1HFY21. Lower risk aversion among customer due to drop in Covid-19 cases, decline in interest to go for medical checks and price hikes due to increase in reinsurance rates have led to moderation in demand for protection. While individual protection declined 19% qoq in 3QFY21, it was up 34% in 4QFY21 (down 19% yoy) likely reflecting pickup in sales of the new product launched in 4Q. The share of individual protection to overall APE declined to 5.8% in FY2021 from 6.3% in FY2020.

§ ICICI Prudential Life. Retail protection was strong in 1HFY21, though it slowed down thereafter due to price hikes incurred by the company, moderation in risk aversion due to the gradual decline in Covid-19 cases till mid-March 2021, tightened underwriting and lower interest to conduct medical check-ups.

§ Max Life. During FY2021, protection mix increased 60 bps yoy to 13% led by strong 32% yoy growth in individual protection. Individual protection mix increased 80 bps yoy to 9%. While protection was strong in 1HFY21, it slowed down from 3QFY21 onwards. Overall protection mix was down 330 bps qoq to 9.2% in 4QFY21 on 450 bps decline in 3QFY21. Max launched a new individual protection product in April 2021 (price hike of ~10%). Overall protection mix was ~15% in 2MFY22 versus 14% in FY2021

§ SBI Life. Unlike most other players, SBI Life continued to witness strong demand for retail protection even in 2HFY21; stable term prices (the company’s products were, however, priced higher than peers prior to increase in reinsurance rates for industry peers from April 1, 2020) and strong push through bancassurance channels were likely drivers. Overall individual protection increased 43% yoy (up 81% in 2HFY21 compared to 1HFY21). The share of individual protection increased to 10.5% in FY2021 from 8.9% in FY2020 (5.4% in FY2018). Within retail protection, the company has witnessed an increasing customer preference for ROP policies.

} Credit life recovers to pre-Covid levels for most players. Credit life recovered to pre-Covid levels (or higher) for most life insurers in 3QFY21 led by gradual pick up in disbursements by financial institutions. 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. Credit life has recovered in most segments except MFIs, according to market sources.

§ HDFC Life. HDFC Life’s credit protect new business premium growth bounced back to 26% yoy in 4QFY21 (up 48% qoq).

§ ICICI Prudential Life. Credit life was flat yoy in FY2021 for ICICI Prudential Life despite sharp decline in 1HFY21 indicating pickup in volumes in 2HFY21.

§ Max Life. The share of credit life increased 200 bps yoy in FY2021 to 16% (impact of weakness in group term business). Credit life was up 45% yoy in FY2021.

§ SBI Life. SBI Life reported robust growth trends in credit protect. This segment reported double-digit qoq growth in 3QFY21 and further increased in 4QFY21 on qoq basis.

} Non-par maintains strong traction in FY2021; HDFC swaps par with non-par. Almost all players pushed non-par savings products in FY2021 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. While ICICI Prudential Life was a laggard and pushed the business from 2H (introduced new product), HDFC Life preferred to push it long tenure par products in FY2021 while non-par dropped yoy (high base of FY2020).

§ HDFC Life. Non-par savings were down 14% yoy in FY2021 (on a high base of FY2020; the company had pushed its flagship non-par product ‘HDFC Sanchay Plus’ in 9MFY20). Annuity however reported strong >40% yoy growth in FY2021 (muted at 5% yoy in 4QFY21). The share of non-par and annuity segment moderated a bit to 26% in FY2021 from 28% in FY2021; annuity however increased to 4% from 3% yoy.

§ ICICI Prudential Life. ICICI Prudential Life’s continued to drive strong growth in the non-linked savings business (up 1X yoy in 4QFY21 and 60% yoy in FY2021). Growth in this segment is likely to remain strong due to the substitution of other fixed income instruments which has witnessed a sharp decline in interest rates.

§ Max Life. Non-par savings retained strong momentum, up 129% yoy/10% qoq in 4QFY21 (on a high base). The share of non-par savings however moderated qoq to 25.2% in 4QFY21 (up 1,025 bps yoy) from 36% in 3QFY21 due to strong revival in ULIPs. For FY2021, non-par savings increased 100% yoy; non-par savings mix was up 1,180 bps yoy to 30%.

§ SBI Life. Non-par was up 65% yoy in FY2021 while annuity jumped 1.7X yoy (on a low base). Demand for non-par and annuity product remained high through FY2021 as the IRR rates for these products are similar to other fixed income financial instruments like fixed deposits.

} ULIPs picked up in 2H. While ULIPs were weak in 1HFY21, it picked up for all players in 2HFY21 led by buoyant capital markets.

§ HDFC Life. ULIPs picked up from trough levels in 4QFY21 (up 34% qoq compared to 14% qoq in 3QFY21).

§ ICICI Prudential Life. Overall ULIP volumes further picked up in 4QFY21 (up 40% qoq/21% qoq in 3QFY21). We expect ULIP volumes to pick-up further in FY2022E; it is however likely to remain lower than peak levels witnessed in FY2018.

§ Max Life. ULIPs reported strong revival in growth in 4QFY21 led by buoyancy in capital markets. ULIP APE increased 88% qoq/45% yoy in 4QFY21; ULIP mix increased 275 bps yoy/740 bps qoq to 43.4% in FY2021.

§ SBI Life. Management guided that demand has picked up in ULIPs over the past few months. Despite initial expectation of slowdown in high-ticket ULIPs due to lower tax benefits incrementally, demand has held up well.

Bancassurance increase in share; investment in agency remains high

Most players witnessed sharp traction in business through the bancassurance channel during FY2021 compared to agency. Branch footfalls recovered faster than business through agency which was disrupted due to lockdown related disruptions. On yoy basis, bancassurance increased for all life insurers (barring ICICI Prudential Life; ICICI Bank’s strategy to slowdown in select product segments and lower ULIPs which are sold primarily through bancassurance channels led to weak banca volumes). Agency was muted in 1HFY21 and gradually started to pickup from 2HFY21 (SBI Life and ICICI Prudential Life witnessed strong growth in business through the agency network in 4QFY21; higher than banca); it has however likely slowed down further in 1QFY22.

Investment in agency business however remained high. While agency additions were tepid in 1HFY21 due to difficulty in on-boarding and training, it picked up at a sharp pace in 2HFY21. HDFC Life, SBI Life and Max Life witnessed increase in overall agency base in FY2021. Life insurers continue to focus on increasing the digital capabilities of the agency network to smoothen the customer acquisition process. Additionally, investment in training remains high.

} HDFC Life-pushing par through bancassurance channel. HDFC Life reported strong 29% yoy growth (based on individual APE) growth in business through the bancassurance channel in FY2021 on the back of strong business growth through HDFC Bank. Par and term insurance reported strong 1.8X yoy and 1.6X yoy growth through the banca channel. Share of bancassurance increased 600 bps yoy to 61% in FY2021. Gradual pickup in business from new bancassurance tie-ups is expected to further support growth in FY2022E. Business generated through the proprietary channel was low in 1HFY21 (down 15% yoy in 1HFY21/up 8% yoy in FY2021) due to various social-distancing norms. The share of individual agents declined 100 bps yoy to 13% in FY2021.

§ Individual APE through direct and online channels was flat yoy in FY2021 due to flat growth in 2HFY21 (compared to 28% yoy growth for the overall business). Slowdown in protection and non-par savings led to tepid growth in this segment. The company is focused on driving annuity business through the direct channel and has slowed down pace of ULIP growth; this has also led to drag in growths

} ICICI Prudential Life-ICICI Bank slows down, new banca tie-ups support. Overall APE through ICICI Bank declined ~40% yoy in FY2020; which was offset to some extent by 80% yoy growth in non-ICICI bank bancassurance channels. The share of ICICI Bank in overall APE mix decrease to 31% in FY2021 from 46% in FY2020 (47% in FY2018). The share of non-ICICI bank bancassurance channels increased to 11% in FY2021 form 5% in FY2020 (5% in FY2018). The company added new bancassurance partners like IndusInd Bank, RBL Bank, AU Small Finance Bank, IDFC First Bank, etc. in 9MFY21. Business scaled-up at a swift pace and overall APE through this channel was up 1.9X yoy in 4QFY21 (overall APE up 27% yoy in 4QFY21).

§ APE through the agency channel increased 40% qoq. On a yoy basis, overall APE through the agency channel was down 1% yoy. This was led by (1) lower addition of new individual agents compounding marginal yoy decline in overall individual agency base and (2) lower business through the agency channel in 1HFY21 due to lockdown related disruptions and social distancing norms. The share of APE garnered through the agency channel however increased 265 bps to 24% in FY2021.

§ Overall growth through the direct channel declined 13% yoy in FY2021. In the wake of the pandemic, ICICI Prudential Life has ramped up investment in technological innovation to capture higher share of wallet through the digital channels. The share of overall APE through this channel remains low at 13% (FY2021), though it is expected to pick-up going ahead.

} Max Life-Axis Bank the key growth driver. Axis Bank continued to drive volumes for Max Life. Overall APE through Axis Bank was up 32% yoy in FY2021 while it was down 14% yoy through other bancassurance channels; management however guided that volumes through Yes Bank revived in 2HFY21. Axis Bank’s contribution to overall APE increased 600 bps yoy to 63% in FY2021. The share of bancassurance further increased during the quarter to 74.2% in 4QFY21 (up ~285 bps yoy).

§ APE through proprietary channels increased 22% yoy (banca up 41% yoy) in 4QFY21. Overall APE growth for FY2021 was muted at 9% yoy (24% yoy growth in APE for banca) through the agency channel due to lockdown-related disruptions. While business momentum started to revive in 2HFY21, sharp rise in Covid-19 cases during the second wave has further halted business growth through this channel in 1QFY22.

} SBI Life-non-core channel up in FY2021.  SBI Life reported strong growth in APE through non-core channels (all channels excluding SBI and agency channels) in FY2021 at 51% yoy. The share of non-core channels in overall APE mix increased 300 bps yoy to 10% (5% in FY2019). Strong growth in non-core channels is led by pickup in volumes through non-SBI bancassurance partners. Activation rates are significantly lower in the new bancassurance partners compared to SBI (overall branch footprint of these players are 50% that of SBI) and the company will focus on increasing business through these channel going ahead. While a wide bouquet of products are offered through these channels, non-par and annuity drive high share of incremental volumes. Overall non-par (including protection) was up 1.4X yoy through these channels and contributed 47% of overall APE in FY2021 (up from 36% in FY2020 and 25% in FY2018).

§ APE growth through the bancassurance channel (only SBI) was muted at 4% yoy in FY2021. Lower ULIP sales (the predominant product in the banca channel; ~75-80% of overall APE over FY2017-20) led to weakness in APE growth.

§ The agency business was muted at 2% yoy. Social-distancing norms and lower addition of new agents in 1HFY21 led to muted APE growth through the agency channel.

} Bajaj Life-non-core and Axis Bank strong. Individual APE through the non-agency channel reported strong 64% yoy growth in FY2021 (up 90% yoy in 4QFY21). Institutional business (including partnerships and banca) was up 78% yoy in FY2021 (up 1.1X yoy in FY2021); this was likely driven by partnership from Axis Bank. Management continues to focus on increasing the share of non-agency channels. Share of agency originated individual APE declined to 44% in FY2021 from 56% in FY2020.

Persistency trends hold up well in FY2021 despite challenges in 1HFY21

Persistency ratios held up well in FY2021 despite challenges in 1HFY21 due to lower collections led by focus on cash conservation by customers. Additionally, ULIP persistency ratios were weak for select cohorts due to weakness in capital markets. While HDFC Life and SBI Life witnessed robust persistency trends in 1HFY21, it deteriorated on yoy basis for Max Life and ICICI Prudential Life. Max Life and ICICI Prudential Life and Max Life were however able to improve persistency trends in 2HFY21 leading to flat/stable trends in persistency across most buckets for FY2021. On the other hand, persistency trends continued to improve for HDFC Life and Max Life leading to sharp 100-400 bps increase in persistency across most buckets (barring 61st month for HDFC Life which was down 60 bps).

Further, change in product mix during the year led by drop in share of ULIPs led to improvement in persistency trends. Persistency trends of non-par business and protection segment are mostly higher than ULIPs. We compare 11M data across players as companies were provided additional grace period for March 2020 collections. 4QFY21 reported persistency ratios are not strictly comparable as most companies had additional grace period for collections in the base quarter due to Covid-19.

} HDFC Life-strong trends in persistency. HDFC Life reported increase in persistency ratios across all buckets (except 61st month) in FY2021 (up 0-450 bps yoy across all buckets in 4QFY21). Persistency ratios increased 90-400 bps across various buckets led by strong trends in persistency in the protection and non-par savings segments. Persistency ratio in non-par segment (barring protection) has increased ~200-700 bps across buckets (13th month persistency is high at 93%). While ULIP persistency ratios held up well in higher buckets, it declined ~100-300 bps in the 13th, 25th and 37th month buckets (lower collections in 1HFY21) in FY2021. Weakness in ULIP persistency ratio reflects in volatile persistency trends through the bancassurance channel.

} ICICI Prudential Life-persistency ratios improved in 2HFY21.  ICICI Prudential Life reported an increase in persistency ratios in 13th and 61st month buckets in FY2021; other buckets were weak due to weakness in collection trends in 1HFY21. Weakness in persistency for other buckets reflects higher ULIP surrenders. Increasing share of protection and non-linked savings business is expected to support improvement in persistency ratios

} Max Life-strong pull back in 2HFY21. Persistency ratios increased 100 bps yoy and 200 bps yoy respectively to 84% and 54% in 13th and 61st month buckets in 11MFY21. The ratio marginally declined by 100 bps yoy in the 49th month bucket. While persistency ratios declined significantly in 1HFY21 due to lower collections, it picked up in 2H.

} SBI Life-strong increase in persistency across buckets in FY2021. SBI Life reported 75-250 bps yoy increase in persistency ratio across all buckets. Change in the product mix towards lower share of ULIPs (lower persistency compared to protection or non-par savings business) and strong collection efforts during the pandemic have supported improvement in persistency ratios. Persistency for FY2021 (based on regular premium) declined marginally by 110 bps and 130 bps for 25th month and 61st month buckets but increased sharply by 17-340 bps yoy in other buckets, 330 bps and 160 bps for the 37th and 49th month buckets.

§ Strong persistency trends have led to high positive operating variance of Rs3.2 bn in FY2021 and Rs2.4 bn in FY2020. The company has preferred to not change its persistency assumptions and as such further improvement in persistency ratios can continue to support operating variances; we bake-in ~5% of EVOP over FY2022-24E

} Bajaj Life-persistency up across most buckets in FY2021. Bajaj Life witnessed steady 0-500 bps yoy increase in persistency ratio across buckets. Strong focus on collections and change in product mix towards lower share of ULIPs has led to gradual increase in persistency ratios over the past few years.

§ Persistency ratio in 13th month increased 100 bps yoy to 80% and 25th month was flat yoy at 71%. Persistency ratios were down 200 bps and 100 bps yoy respectively across these buckets in 9MFY21 indicating sharp pick up in collections in 4QFY21. Despite gradual increase in persistency ratios over the past few quarters, persistency ratios remain lower than leading industry peers indicating significant headroom for improvement.

Aggressive cost control in FY2021

} Aggressive cost control in FY2021. Life insurers resorted to aggressive cost control amidst lower volumes and uncertainty over Covid-19 claims. In 1HFY21, cost control was further aided by lower discretionary spends and one-off volumes linked payouts. HDFC Life, ICICI Prudential Life and SBI reported 110-180 bps yoy decline in cost/APE ratio. Investment in channel diversification and technology initiatives however remained high during the years.

} Mixed trends in operating expense in 2H. Expense trends in 2H were mixed across players. Barring SBI Life, almost all players witnessed gradual pick up in cost ratios in 2H over 1H led by gradual revival in business activities and rise in overheads. On the contrary SBI Life witnessed sharp decline in operating expense ratios despite operating at lower cost ratios across life insurers.

Solvency comfortable

Solvency ratios remained comfortable for most life insurers at 196-217%; significantly higher than the regulatory requirement of 150%. >200% solvency ratio compared to regulatory requirement of 150%. QoQ decline in solvency ratio by 10-20% for ICICI Prudential Life, Max Life and SBI Life reflects impact of higher Covid-19 provisions.

Source: Kotak institutional equities research