Result preview: High Ulip share may weigh on life insurers' Q2 margins

High share of low-margin unit-linked products (Ulips) and increased investments in distribution channels are likely to weigh on listed life insurance companies’ margins in the September 2024 (Q2FY25) quarter, said analysts.

The guidance by these listed insurers on sales and margin for non-linked savings products will be keenly watched by investors. This comes as the revised surrender value norms were implemented by the insurers starting October 1, analysts said.

Industry players had previously indicated that their margins will take a hit because of the revised norms.

“Aggregate value of new business (VNB) margins is likely to decline 198 basis points (bps) year-on-year (Y-o-Y). This is owing to a change in mix, reduced product-level margins, and increased commission payouts in multi-insurer channels due to increased competition,” said analysts at Nuvama Institutional Equities in their report.

The value of new business (VNB) is the measure of profitability in life insurance.

According to analysts at Emkay, continued investments of insurers in their distribution channel is expected to put pressure on VNB margins. However, robust annualised premium equivalent (APE) growth is likely to aid in modest VNB growth for these companies.

Emkay analysts expect profit after tax (PAT) of listed players to range between 8.7 per cent and 21.6 per cent.

Additionally, the analysts expect SBI Life — the largest private sector life insurer — to report a drop in VNB margin to 25.6 per cent in Q2FY25 from 28.4 per cent in the year-ago period. In Q1FY25, SBI Life’s margin stood at 26.8 per cent.

Similarly, HDFC Life Insurance’s margins are likely to see a drop to 25.1 per cent in Q2FY25 compared to 26.3 per cent in the year-ago period. However, sequentially the margins will remain flat.

ICICI Prudential Life Insurance’s margin is expected to slide to 23.6 per cent from 28 per cent last year. In Q2FY25, its margins stood at 24 per cent.

Max Life’s margin is expected to decline to 22.8 per cent in Q2FY25 from 25.2 per cent. In Q1, it was 17.5 per cent.

On the other hand, the state-owned Life Insurance Corporation of India’s (LIC’s) VNB margin is expected to remain flat at around 15.3 per cent. This is due to gradual increase in the share of non-participating (non-par) products.

“Investors will keenly watch out for guidance on sales and margins for non-linked savings products where surrender values are slated to increase in H2FY25,” said Nuvama in its report.

Meanwhile, the non-life insurers are likely to see muted growth in their profitability during the July-September quarter of FY25, owing to higher claims ratio, which will be partially offset by better operational efficiency, according to analysts.

The claims ratio of the general insurers is expected to have increased in the quarter under review due to natural catastrophes events and seasonal diseases affecting their profitability.

However, their improved operational efficiency is likely to offset the impact of the claims ratio, said analysts at Motilal Oswal.

According to Emkay estimates, in Q2FY25, the combined ratio of ICICI Lombard is likely to be at 103.2 per cent compared to 103.9 per cent last year. Its combined ratio in Q1FY25 stood at 102.3 per cent.

Star Allied & Health Insurance is expected to report a flat combined ratio at 99.2 per cent in Q2FY25. Further, the recently listed GO Digit is expected to see its combined ratio at 108.6 per cent from 108.9 per cent last year. Its combined ratio was 105.4 per cent in Q1FY25.