Weak business trends owing to the lockdown and a volatile equity market impacted the performance of life insurance companies in the latest March quarter. Premium figures for April suggest the weakness has continued with the lockdown.

The pandemic outbreak has thrown up multiple risks for life insurance companies — fall in premium growth, particularly in the unit-linked business, weak equity market impacting solvency margin, adverse mortality experience, drop in persistency and rise in credit risk.

However, for some of the leading listed private life insurance companies, a balanced product portfolio, diversified distribution mix, thrust on protection business, strong digital capabilities and conservative investment approach should help mitigate these risks. Nonetheless, March quarter results suggest near-term pain, though the long-term prospects remain healthy.

Three-fold impact of Covid

Broadly, the potential impact of Covid on life insurance companies is three-fold. One evident fallout is the hit on premium collections. In March and April, new business premium for all life insurers fell 32 per cent year-on-year (YoY).

The second is the market-related risk pertaining to a sharp fall in equity prices, decline in interest rates and rise in credit risk. An erosion in equity investments immediately impacts unit linked insurance policies (ULIPs), where the market risk is borne by the policyholder. In participating policies (where 90 per cent of the insurer’s profits is shared with the policyholder), too, the risk is largely passed on to the customer.

In the case of non-par policies that offer guaranteed returns, insurance companies have to manage reinvestment risk and ALM (asset liability management) mismatches. There could also be a rise in credit risk owing to an increase in corporate stress. Overall, market risks can impact insurance companies’ solvency ratio and embedded value.

The third risk relates to adverse mortality risk owing to the pandemic.

For the three listed private life insurance companies — HDFC Life, ICICI Pru Life and SBI Life — while many of these factors had a bearing on their performance, inherent risk mitigators in the business have lent comfort.

HDFC Life: Strong focus on protection, lower share of ULIPs

For HDFC Life, individual APE (annualised equivalent premium) fell about 5 per cent YoY in the March quarter, led by a steep fall in its ULIP business, though the protection business continued to deliver strong growth. The company’s profit after tax fell about 14 per cent YoY, owing to sluggishness in overall business and sharp increase in provisions for diminution in value of investments (₹375 crore in policyholder’s account and ₹179 crore in shareholder’s account).

The company has also provided about ₹41 crore as additional death claim provision on account of Covid. Also, its solvency ratio fell to 1.84 as of March 2020, from 1.94 as of February 2020, owing to a 10 per cent negative impact on account of the equity market fall and 2 per cent adverse impact of a write-off of YES Bank AT1 bonds. Solvency ratio is the size of an insurance company’s capital in relation to the risk it takes — assets minus liabilities.

However, HDFC Life’s credit risk is mitigated by the fact that more than 96 per cent of the debt investments are in government and AAA-rated corporate bonds. The company’s assets under management (AUM) grew a meagre 1 per cent in FY20, as market movements had a ₹14,500-crore negative impact.

Its diversified product and distribution mix, and strong value of new business (VNB) margins, lend comfort in volatile times. For life insurance companies, market volatility has a second order impact on business, as investors turn cautious towards ULIPs.

For HDFC Life, the lower share of the ULIP business (28 per cent of individual APE in FY20, against 55 per cent in FY19) and continued focus on protection bode well, as demand for protection products is likely to rise post Covid. The life insurer’s increase in share of business from direct channels is also a key positive. HDFC Life also sports a strong VNB margin — 25.9 per cent in FY20, against 24.6 per cent in FY19.

ICICI Pru Life: Higher share of ULIPs, but increased focus on diversification

ICICI Pru Life’s total APE fell about 19 per cent YoY in the March quarter, mainly led by a decline in ULIPs. While the company’s relatively higher share of ULIPs has been a dampener, it has been focussing on reversing this and instead growing its protection and non-linked savings business to drive its VNB.

The company’s VNB margin stood at 21.7 per cent in FY20, up from 17 per cent in FY19. In FY20, non-linked savings APE grew 62 per cent and protection by about 55 per cent. ULIP APE fell 23 per cent and its share in overall APE fell to 64.7 per cent in FY20 from 79.6 per cent in FY19.

ICICI Pru Life managed to end FY20 with a strong solvency of 1.94. The management believes that even if there are further shocks to both equity prices and bond yields, it would be able to maintain solvency above the mandated 1.5 ratio. Also, market risk is largely passed on to customers in ULIP and par policies (81 per cent of its liabilities). Credit risk is also capped due to 94 per cent of debt being in sovereign and AAA-rated bonds.

The company holds additional reserves for potential Covid claims. This, plus the proposed price hike in protection policies (increase in reinsurance rates) should help mitigate mortality risks. On the distribution front, the company continues to diversify, with a strong focus on agency and partnership distribution. The share of the bancassurance channel has come down notably over the past year. Within the bancassurance channel, the focus on growing protection mix and annuities has continued.

SBI Life: Higher share of ULIPs, but strong growth in protection

The overall sluggishness in premium collections owing to Covid has also impacted SBI Life. The company’s total APE fell about 12 per cent YoY in the March quarter, led by a decline in ULIP sales. The life insurance company has a relatively higher share of ULIP in its portfolio (70 per cent of APE in FY20). However, the management has also been focussing on reducing the share of ULIP and increasing the share of protection and non-par business. However, with the sharp fall in interest rates, non-par growth could decline, and there could be better contribution from par policies.

But the company’s continued focus on the protection business (demand for which is likely to rise amid increased awareness post Covid), should aid margins. Protection NBP (new business premium) increased 27 per cent YoY in FY20. However, the company may need to re-price its existing protection plans owing to rise in reinsurance rates. SBI Life’s VNB grew 16 per cent YoY in FY20, with VNB margins increasing by nearly 100 bps to 20.7 per cent in FY20.

Like ICICI Pru Life, SBI Life also has a higher dependence on bancasssurance, though its share has reduced notably to 60 per cent of NBP in FY20 from 64 per cent in FY19. The company’s solvency ratio dipped to 1.95 as of March 2020, from 2.3 in December 2019, owing to a fall in equity market. Market movement had a negative ₹11,700-crore impact on assets under management in FY20. During FY20, the company classified its investment in DHFL bonds as NPA and made a 100 per cent provision of ₹53 crore under unit linked portfolio.

The bottomline

The Budget proposals of introducing a new personal tax regime (lower tax rate sans most exemptions and deductions) and abolishing the dividend distribution tax (making dividends taxable in the hands of recipients) had already thrown up near-term risks to the earnings of life insurance companies. The Covid-led slowdown in business and equity/debt market volatility have accentuated the pain.

However, over the long run, given the under-penetrated market, particularly in protection, prospects remain strong. The ability of players to offer end-to-end digital offering, product innovation, focus on cost controls, stringent underwriting and balanced product/distribution mix will be critical.