Improvement in profitability to continue for life insurers, say analysts

Low penetration and increasing awareness to propel sale of more profitable protection products

The stocks of most life insurers have been under pressure in the last couple of months amid factors such as high valuations, some company-specific concerns, among others (see chart).

Though minor issues may still weigh on their financial and share price performance, with an expected pick-up in profitability, their earnings prospects look better, say analysts.

Although the higher base of the last two years means growth in the annual premium equivalent may not be very high, financialisation of savings offer long-term opportunity. Moreover, companies’ initiatives will also play a crucial role in driving growth and profitability.

“Growth concerns are behind us and for the sector, with formalisation of the economy and household savings tilting towards financial products,” says Prashant Tripathy, managing director and chief executive officer of Max Life Insurance – subsidiary of Max Financial Services.

According to the Reserve Bank of India’s 2017-18 (FY18) annual report, gross household financial savings in India improved to 11.1 per cent of gross national disposable income in 2017-18, from 9.1 per cent a year ago. The trend is likely to continue, with increasing awareness about financial investment channels, which also bodes well for the life insurance sector.

Yet, the underlying fact is that in India, insurance is mainly used for investments rather than for protection, which is its main purpose. As a result, penetration level of pure-protection products or even the sum assured (insurance cover) in India is at very low levels.

For example, the sum assured to India’s gross domestic product stood at just 76 per cent in FY18, versus 96 per cent - 260 per cent in countries such as Thailand, Malaysia, Japan, and Singapore. This indicates potential for domestic insurers to increase the share of more-profitable protection products (such as term policies), with rising awareness about insurance as protection.

The pure-protection products attract highest profitability among other products such as unit-linked insurance products (ULIPs) or non-par savings. While pure-protection products have value of new business (VNB) margin ranging 50-100 per cent, other products have up to 40 per cent VNB margin, according to the UBS report. This, in fact, is encouraging private players to focus more on protection products.

During April-December 2018, the share of protection products in the overall annual premium equivalent of the three life insurers – Max Financial Services, HDFC Life, and ICICI Life – improved sharply by 300-500 basis points (bps) year-on-year (YoY). SBI Life’s protection share, in terms of VNB, increased by 600 bps YoY (refer table).

Going ahead, expect more gains. “As financial markets remain volatile, ULIP sales growth could continue to be slow, but taking cues from December 2018 quarter results, companies continue to improve their protection share and non-par savings as well, which are margin accretive,” said analysts at Prabhudas Lilladher.

Not only retail insurance products, but life insurance companies are also focusing on credit protection segment, aiding overall protection business. Credit protection provides debt-repayment cover (such as home loans) in the case of death of a retail borrower. In the case of HDFC Life, credit-protect insurance products accounted for 11 per cent of its new premium.

According to analysts at UBS, faster growth is expected in protection products with higher customer demand as the awareness is improving. And this, should further improve life insurers’ profitability by 100-150 bps in the next two-three years. Profitability would further get support, with an expected improvement in persistency ratio (shows stickiness of customers).

However, in the case of Max Financial Services, higher investments for expansion of proprietary distribution channel could confine margin gains, say analysts.

Though the sector is dominated by the state-owned Life Insurance Corporation (LIC), factors such as low presence in popular unit-linked products and less use of effective distribution channels (bank partners, commercial agents) are leading to losses in market share to private players, say analysts. LIC’s market share, in terms of premium, stood at 66 per cent in January 2019, from 71 per cent two years back.

For now, among stocks, SBI Life and ICICI Life (mainly due to attractive valuation) are top picks of analysts, while premium valuations could limit the near-term upside for HDFC Life.