Markets
For life insurers, taming of second wave is key to growth
Summary
- On a two-year CAGR basis, private life insurers reported 6.2% growth in new business premium, while LIC saw contraction of 4.7%, point out analysts at Nomura
MUMBAI : Investors of India’s life insurance companies will need to look beyond the optically-pleasing growth metrics expected in FY22 to figure out the true performance of insurers. The first step towards this is to ignore the growth rates for April.
Latest business data from the sector regulator shows that private life insurers saw their new business premium surge 90% year-on-year (y-o-y) in April while the largest, Life Insurance Corporation of India (LIC), witnessed a 74% increase. But these high percentages are solely due to a low base as April and May last year saw a strict nationwide lockdown due to the pandemic. Growth metrics for the next few months also may reflect such a statistical low base effect.
According to analysts, a better way to judge the performance of insurers is to look at a two-year compounded annual growth rate (CAGR). On a two-year CAGR basis, private life insurers reported 6.2% growth in new business premium, while LIC saw a contraction of 4.7%, point out analysts at Nomura Financial Advisory and Securities (India) Pvt. Ltd in a note. Among private life insurers, HDFC Life Insurance Company Ltd trumped peers with a stellar 18% growth, while SBI Life Insurance Company Ltd maintained momentum, they added.
“FY21 performance for the listed players has been encouraging with resilience in new business growth and strong margin expansion driven by improving cost efficiencies, persistency improvement and a more diversified product mix which drove 15-35% VNB (value of new business) growth across players," the note said.
In short, listed private life insurers continue to see strong business growth. This has been due to new product launches, and a pandemic that has made Indians more conscious of mortality. Indeed, in April, private life insurers saw their market share in new business premium increase to 58%. What this shows is that private insurance companies have managed to recover business lost during the strict lockdowns last year.
However, the pandemic’s second wave has brought uncertainty yet again. Granted, lockdowns are not as restrictive as last year, but a short-term impact on growth cannot be ignored. “Growth could have been 10-20% higher if not for lockdowns and weakness is likely to persist in May even as base effect will be favourable," Jefferies India Pvt. Ltd said in a note.
Investors also need to be wary of a few trends. On a two-year CAGR basis, the growth in retail single premium policies has been 29%, far higher than non-single premium products that grew by just 5.8%. Single premium business has grown faster than non-single premium during the pandemic. Such products may show lower persistency ratios, since customers may view them as a means to park excess cash.
The commitment to life insurance from individuals is largely seen from products that require regular premium payment and where persistency ratios are high. Single premium products are high cost for insurers and the returns are volatile over a period of time.
Beyond the base effect, life insurers may see pressure on growth in FY22, at least for the first quarter. To be sure, some companies such as HDFC Life Insurance may stand out on growth metrics. But for the industry, the trajectory of growth for the rest of the year hinges on how fast the second wave of the pandemic is controlled.
