Life insurance companies reported 50% year-on-year (y-o-y) (down 40% y-o-y for private players) decline in individual annualised premium equivalent (APE) in March 2020, translating to 5% y-o-y growth for FY20 (14% y-o-y growth in 11MFY20). This was due to the lockdown in the crucial part of March apart from a likely slowdown in unit-linked insurance policy (Ulip) following sharp correction in capital markets. The last two weeks of the year, that typically tend to be heavy, were lost in FY2020E.

All the large players reported a sharp slowdown in individual business: ICICI Life was down 49%y-o-y, SBI Life was down 42% y-o-y and Max Life was down 36% y-o-y.

HDFC Life reported 28% y-o-y decline in individual business with 25% y-o-y decline in overall APE for the month. It remains to be seen if some of the pent up demand will likely spill over to 1QFY21.

Lower APE, VNB estimates for FY20
We are cutting our FV2020E EV estimate by 1-5% following lower volumes for the period, lower unwinding rate and capital market hits. We forecast value of new business (VNB) margins of 17- 21% in 4QFY20 as compared to 18-27% in 9MFY20. We are cutting VNB margins to some extent to reflect lower operating leverage. Some impact on persistency may not be ruled out. However, since most players were running persistency over their assumptions, impact on VNB/EV may be limited.

Negative investment variance in 4QFY20
A sharp decline in equity markets (benchmark down about 30% in 4QFY20) will likely translate into large negative variances. The variance reflects PV of lower AMC fees in ULIPs and mark-to-market (MTM) hit on equity investment book in case of non-par and shareholder funds. This may be offset by rally in bond markets.

FY2021 will be a volatile year
The next two months will be weak (almost nil business in April). We expect slowdown in Ulips to continue for rest of the year. As term policies get expensive, we expect appetite for these policies to increase in FY2021E; this is a typical trend observed post SARS and MERS in other countries. Market sources suggest that term policy rates have started to increase following rise in reinsurance rates. It is not clear if players are passing on the entire hike. Higher appetite of these policies will likely reduce the impact of aforesaid headwinds.

Edited extracts from Kotak Institutional Equities Research report