Strong yoy with low base on many counts

Strong yoy with low base on many counts. Strong (26-47% in 1QFY22) yoy APE growth with mixed trends in June 2021 will drive 30 to 90% yoy growth in VNB (ex-COVID provisions). While a low APE base augurs well for ICICI Life, low margin base drives high VNB growth for SBI Life and Max Life. HDFC Life’s VNB growth (lower than listed peers) reflects a combination of moderate growth and margin expansion. The focus this quarter will be on incremental growth outlook and impact of Covid-2 claims. We continue to like the life insurance space; ICICI Life and SBI Life are top picks.

1QFY22 highlights: APE strong on a low base; high ULIPs, low term put some VNB pressure

• Strong APE growth on a low base in 1QFY22. Life insurance reported strong (26-47%) growth in individual APE during 1QFY22 (on a low base of 1QFY21). Barring SBI Life (down 12% yoy due to high base), group APE (up 77-240% yoy) was strong for all players on a low base of 1QFY21.
• HDFC Life, ICICI Prudential Life and SBI Life’s individual APE down on two-year CAGR. On a two-year CAGR basis, individual APE was down 1% for HDFC Life, 8% for SBI Life and 15% for ICICI Prudential Life. Max Life’s two-year individual APE CAGR was strong at 14% (industry average of -1%) led by strong traction in business through the Axis Bank channel. Other players with new bancassurance partnerships like Bajaj Life and Tata AIA Life reported strong 22% and 11% two-year individual APE CAGR in 1QFY22. Lockdown-related disruptions and social-distancing norms have led to moderation in business; agent additions remained robust.

ULIPs and credit life likely pick up, term down; sum assured down for all barring SBI Life

•  Individual non-single sum assured down for most, except SBI Life. Individual sum assured for private players declined 14% yoy in 1QFY22; SBI Life was, however, up 50% yoy. The drop in individual sum assured for most players likely reflects pickup in ULIPs during the quarter and lower term business. The capital market witnessed strong revival in equity-oriented mutual fund volumes from March 2021 (Rs201 bn of net inflows in 1QFY22 versus outflows of Rs179 bn in 4QFY21). Increase in term tariffs post rise in reinsurance rates and tightening of screens (like insisting on pre-medicals etc.) have led to lower traction in this segment for the past 2-3 quarters. Notably, tariff hike in SBI Life is less significant over peers.
•  Credit life likely higher yoy. Group sum assured was up 2.3X yoy in 1QFY22 for private players, higher than 42% yoy growth in APE reflecting higher credit protect business to 1QFY21. We expect most banks/NBFCS to deliver high disbursements yoy.

Rise in ULIPs to put qoq pressure on VNB margin; elevated non-par mix to support yoy

1QFY22E VNB margins (before Covid-19 second wave provisions)  will likely be interplay of increasing ULIPs qoq and slowdown in term business putting some pressure versus increase in traction on non-par and pension policies driving expansion; higher volumes and group credit yoy will also augur well. 

We expect ~70-700 bps yoy expansion in VNB margin for HDFC Life, Max Life and SBI Life led by higher share of non-par savings business. ICICI Prudential Life’s VNB margin will likely be flat yoy (high base of 1QFY21 reflects elevated protection mix; higher ULIPs this year offset by increasing non-par and pension business). On a qoq basis, rise in ULIPs will put pressure on VNB margin although strong traction in non-par and annuity businesses will likely provide support.

Even as VNB growth will likely be strong on low base, incremental focus this quarter will be on growth forward and claims from the second Covid wave (link). To clarify, VNB estimates in this report do not reflect impact of Covid-19 second wave provisions.

Highlights of key companies

•  ICICI Prudential Life: strong on a normalized base. On a yoy basis, ICICI Prudential Life’s individual APE growth at 43% yoy in June 2021 translates to 44% yoy growth in 1QFY22, significantly higher than 26% yoy growth for private players. Strong 80% yoy growth in group APE further supported overall APE growth (up 47% yoy). Normalized base and growth from new bancassurance partnerships are the likely drivers. On a two-year CAGR basis, individual APE was down 15%, compared to industry average of 1% decline, reflecting massive decline in 1QFY21. We expect strong growth trends incrementally reflecting channel and product mix diversification.

 On a yoy basis, we are building in stable yoy VNB margin of 24.4% (up 85 bps qoq). While high protection mix led to high margin in 1QFY21 (protection mix was elevated in 1QFY21 at 26% of APE, 16-17% over next three quarters), traction in non-par savings and pension-based products will support VNB margin in 1QFY22 even as rising share of ULIPs acts as a drag. Additionally, volume growth is higher, helping operating leverage.

The ratio of individual non-single sum assured to individual non-single premium declined to 53X in 1QFY22 from 74X in 1QFY21 (33X in 4QFY21).

 HDFC Life: tepid growth. HDFC Life reported flat APE in the individual segment in June 2021, translating to 22% yoy growth in 1QFY22. Growth was a tad weaker than private peers despite broadly similar base (HDFC Life’s individual APE down 3% yoy in June 2020 compared to 7% yoy decline for the industry). On a two-year individual CAGR, individual APE was down 1% in 1QFY22, similar to industry average. Individual sum assured declined 9% yoy; ratio of non-individual sum assured to individual non-single premium declined to 39% in 1QFY22 from 51% in 1QFY21 (29% in 4QFY21) – this likely reflects pickup in ULIPs and slowdown in term. Growth in group APE was strong at 80% yoy in 1QFY22 (up 73% yoy in June 2021); group sum assured was up 190% yoy – reflecting higher retail disbursements.

We bake in ~70 bps yoy expansion in VNB margin for HDFC Life to 25% due to low base of group credit (3.7% of APE versus 5.6-8.5% of APE in the next three quarters; group sum assured up 189% yoy in 1QFY22), down 190 bps qoq – this reflects the likely rise in share of ULIPs.

SBI Life: strong 50% yoy jump in individual sum assured in 1QFY22. Individual APE growth was strong for SBI Life at 33% yoy in 1QFY22 (up 13% yoy in June 2021). On a two-year CAGR basis, individual APE was down 8% – this reflects sharp decline in ULIP volumes. SBI Life’s growth trends during the quarter were, however, a bit different from other players. Individual sum assured was up 50% yoy (down 14% yoy for private players). The company has likely increased the protection mix further; the company has been slower in raising term tariffs. Additionally, ULIPs have likely further revived during the quarter. Group APE was down 12% yoy in 1QFY22 (down 13% yoy in 1QFY21 compared to 15-47% yoy decline for listed peers); the company has likely slowed down in the group term segment (group sum assured was up 58% yoy likely indicating robust trends in credit life business).

We expect 300 bps yoy expansion in VNB margin for SBI Life to ~21.7% due to rise in protection and low assumptions in the base period; 50 bps qoq compression in margin reflects strong momentum in capital markets, likely driving strong growth in ULIPs.

Max Life: strong growth coupled with margin expansion. Max Life reported strong growth in individual APE at 34% yoy in 1QFY22, up 14% on a two-year CAGR basis. Strong growth trends likely reflects further pickup in volumes through the Axis Bank channel. Individual sum assured was down 13% yoy. The ratio of individual non-single sum assured to individual non-single premium declined to 54X in 1QFY22 from 83X in 1QFY21 (35X in 4QFY21). Growth in group APE was strong at 240% yoy in 1QFY22 (group sum assured up 890% yoy).

 We bake in ~700 bps yoy expansion in VNB margin for Max Life to 24.1% led by rise in share of non-par savings and higher volumes driving lower overruns. Qoq flat margin reflects the impact of a lower base due to one-offs in 4QFY21 (VNB margin was adjusted for impact of Covid-19).

 Bajaj and Tata strong on a low base. On a low base, Bajaj Allianz Life and Tata AIA Life were strong at 22% and 11% growth (two-year CAGR) in individual APE, up 26% and 15% on a yoy basis. Bancassurance tie-ups of these players (Axis Bank for Bajaj Allianz Life and HDFC Bank for Tata AIA Life) are likely driving business for them. Higher-than-industry decline in individual sum assured in 1QFY22 (down 49% yoy for Bajaj Life and 32% for Tata AIA Life), however, reflects lower protection volumes on a yoy basis.

 LIC tepid. LIC reported 4% yoy growth in individual APE, translating to 2% yoy growth in overall APE. Individual sum assured was, however, up 37% yoy. Weakness in volumes for LIC reflects pressure on the individual agency business during the pandemic, resulting from lockdown-related disruptions and social-distancing norms. 

Source: Kotak institutional equities research