Lower volumes in Q1 FY21 and pressure on ULIPS due to market volatility will affect premium collections
Life insurers reported 30-44% year-on-year (y-o-y) decline in annualised premium equivalent (APE) in Q1FY21 owing to lower volumes due to lockdowns and a sharp decline in ULIPs led by weakness in capital markets. ICICI Prudential Life and SBI Life with a higher share of ULIPs declined at a faster pace compared to HDFC Life which has a diversified product bouquet.
We expect 2-19% fall in APE for life insurers in FY2021 due to lower volumes in Q1FY21 and pressure on ULIPs. A balanced product suite and ability to toggle between product classes will help HDFC Life grow better compared to peers. SBI Life will focus on increasing non-par business and cushion APE decline. ICICI Prudential Life will face dual challenges of lower ULIP volumes and a cautious stance in the non-par segment, driving a steep decline in APE.
Credit life was strong for SBI Life compared to peers. ICICI Prudential Life and HDFC Life saw >70% y-o-y decline in credit life during the quarter owing to lower disbursements by financial institutions. SBI Life focused on cross-selling credit life to existing customers (who had previously not opted for credit life) and this segment saw strong traction. Management guidance suggests that demand remains strong in this segment post the pandemic as customers display increased risk aversion.
The value of new business (VNB) declined 29-43% y-o-y for life insurers on the back of a sharp decline in APE. The VNB margins expanded 340 bps y-o-y for ICICI Prudential Life, led by a sharp increase in protection APE to 26% in Q1FY21 from 15% in Q1FY20 and decreasing share of ULIPs in savings business.
Persistency ratios have declined
On a sequential basis, persistency trends were weak across most companies. Management of most of these players highlighted that customers utilised grace periods for renewals and as such, month-on-month (m-o-m) trends are encouraging with renewals gradually picking up. Persistency trends for most players have improved sequentially from trough levels observed in April 2020 and early trends in July are better than June 2020. ULIP persistency has been weak over the past few quarters and has declined across select buckets for most players. HDFC Life’s management guided that ULIP persistency is weaker for high ticket ULIPs. Broadly speaking, protection persistency has held across these insurers.
We expect persistency to remain weak in FY2021 due to a higher focus on capital preservation by retail customers. Solvency ratios increased for most players by 6-44% q-o-q in Q1FY21 led by improvement in equity markets. Capital position is comfortable for most of these companies.
Source: Edited extract from Kotak Institutional Equities Research report