Stock Call. Amidst the pandemic, should you bet on life insurers?

While the ongoing pandemic presents life insurance companies with huge opportunities in the long term, thanks to the sharp rise in awareness and demand for protection products, it has also impacted the profitability and financial performance of players in the near term. A fall in premium collections amid the lockdown, uncertainty over pandemic-related claim losses (underwriting losses), low investment returns owing to very low interest rates in the economy and the risk of rise in corporate defaults (credit risk)could weigh on insurers’ profitability in the near term.

The three leading players — HDFC Life, ICICI Prudential Life and SBI Life — reported a sharp decline in premiums (annualised premium equivalent or APE) in the June quarter, which resulted in a fall in value of new business (VNB - a measure that values future profit streams of the new business written during the year). However, a favourable shift in product mix towards protection and non-par business provided a boost to VNB margins for ICICI Life and SBI Life; for HDFC Life, a higher base of non-par mix (thanks to strong response to its Sanchay Plus product last year) impacted margins. Nonetheless, HDFC Life’s diversified product mix is a key positive that can aid growth in the coming quarters.

After taking a hit in April, premium collections picked up in May and June for insurers. The outbreak of the pandemic has led customers to adopt digital modes of transactions more than ever before. Hence, for insurance companies, a strong digital platform to reach out to customers is critical. All three players have strong end-to-end digital platforms that should hold them in good stead.

While near-term pain may persist, a steady focus on protection business, strong technological and digital thrust and increasing cost efficiencies bode well for all three insurers over the long run.

Here’s a deep dive into the latest performance of each of these companies and the outlook going ahead.

ICICI Prudential Life

For ICICI Prudential Life, the company’s relatively high share of ULIPs (which are impacted by market volatility) has been a dampener. But the steady focus on growing protection and non-linked savings business has helped drive its VNB margins. In the latest June quarter, the company managed to report a flat protection APE. The steep fall in ULIP (unit-linked insurance plan) business saw the share of protection business jump to 26 per cent (of total APE) from 15 per cent as of March. Non-linked savings business, too, grew 14 per cent.

While VNB declined 35 per cent y-o-y , VNB margins expanded 340 bps, mainly due to an increase in protection and non-linked savings mix during the June quarter.

Retail renewal premium grew a modest 3 per cent y-o-y (some deferrals owing to grace period offered to customers). Surrenders in the ULIP business will need a watch in the coming quarters.

Going ahead, the launch of its new product under protection (on the back of the increase in reinsurance rates) can aid margins in the coming quarters.

On the distribution front, the company’s diversified distribution mix remains a key positive.

The insurer added IDFC First Bank to its list of partnership distribution.

The company’s assets under management (AUM) that was impacted in the March quarter due to market volatility has seen a sequential growth of 11 per cent in the June quarter at ₹1.7-lakh crore, thanks to the recovery in the equity market.

ICICI Pru Life reported a strong solvency of 2.05 in the June quarter. Market risk is largely passed on to customers in ULIP and par policies (82 per cent of its liabilities). In case of non-par guaranteed products where managing risk is critical in a falling interest-rate environment, the management stated that the book is currently just 0.4 per cent of its total liabilities and it has minimal ALM (asset liability management) mismatch.

At the current price, ICICI Pru Life trades at about 2.8 times its embedded value as of March 2020, at a discount to peers such as SBI Life and HDFC Life. While the insurer’s steady focus on protection and non-linked savings products should drive VNB margins, the relatively high ULIP portfolio needs a watch. However, the attractive valuation offers a good entry point for long-term investors, who can accumulate the stock over the coming months.

HDFC Life

Much like its peers, HDFC Life, too, saw a sharp decline in overall APE amid lockdown, but its well-diversified product portfolio helped cap the fall to some extent. HDFC Life reported a 30 per cent fall in its overall APE in the June quarter. But strong growth of 24 per cent in renewal premium lends comfort.

The insurer reported a robust growth of 50 per cent y-o-y in individual protection APE. However, a tepid lending environment impacted its credit life business, which was down 74 per cent during the quarter.

Weak disbursements by financial institutions can continue to impact HDFC Life’s credit life business in the near term.

While VNB declined for all players on the back of a fall in APE, for HDFC Life, VNB margins contracted by 550 bps y-o-y owing to a drop in share of non-par and protection business in 1QFY21. However, an increase in share of par products offers some support.

Favourable market conditions led to the company’s solvency ratio inching up to 1.9 from 1.84 in March. HDFC Life’s AUM also increased 10 per cent sequentially to ₹1.4-lakh crore in the June quarter on the back of swift recovery in equity markets.

Going ahead, HDFC Life’s well-diversified product mix vis-à-vis peers should aid growth. A lower share of ULIP business (27 per cent of individual APE) and steady focus on protection should aid margins as demand for protection products is likely to rise in a post-Covid scenario.

At the current price, HDFC Life trades at about 6.1 times its embedded value as of March 2020 (5.6 times as on June EV). While the company’s robust financials, strong digital focus and diversified product mix are positives, rate risk around its non-par guarantee product needs to be watched.

Given the steep valuation, the upside may be limited in the near term, but the stock remains an attractive long-term bet. Investors can accumulate the stock on dips.

SBI Life

SBI Life, too, witnessed a sharp fall in APE in the June quarter (32 per cent y-o-y). However, the insurer also saw a steady improvement in new business premiums on a month-on-month basis, with a sharp jump in June led by renewal premiums. Overall, in the June quarter, SBI Life managed to deliver a 30 per cent y-o-y jump in renewal premiums, which is noteworthy.

While SBI Life’s higher share of ULIPs dragged the overall APE, strong growth in non-par products cushioned the blow. On a low base, non-par APE was up 360 per cent y-o-y in the June quarter, taking the share of non-par APE to 18 per cent from 2.7 per cent last year. This, along with the increase in protection mix, aided the 80 bps expansion in VNB margins.

While the individual protection business was down, SBI’s Life credit life protection business remained resilient, thanks to the company’s strategy of pushing the product to existing home loan borrowers. The rising share of protection business and strong traction in non-par should aid margins going ahead. However, the company is yet to re-price its protection plans (on the back of the rise in reinsurance rates).

Improvement in cost metrics and lower surrender ratio was a positive for the insurer. The company’s solvency stood at a robust 2.39 as of June 30, which will aid growth going ahead. SBI Life’s AUM stood at ₹1.7-lakh crore, up 9 per cent from March levels.

SBI Life trades at about 3.4 times its embedded value as on March.

SBI Life’s focus on increasing non-par business will offer cushion to the weakness in overall APE.

Multi-channel distribution with alternative channels delivering strong growth, improvement in VNB margins thanks to increase in share of protection and non-par business, and cost efficiencies will drive valuations. At current levels, the stock presents a good buying opportunity.

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