Lockdown woes: life insurance business to take a hit in a usually strong fourth quarter

The last quarter of the financial year is usually strong for life insurance companies, especially the month of March, as taxpayers rush to buy policies to get tax exemption.

But FY20 was different. The lockdown announced by the government to curb the spread of COVID-19 is expected to affect the business and earnings of these companies.

According to HDFC Securities, the high base set after strong growth of 22.8 percent CAGR during FY17-19, slowing sales of NPAR products (compared to Q2 and Q3FY20), a slowing economy and finally the lockdown is expected to severely hit sales of life insurers in Q4FY20.

While having a bullish view on HDFC Life, ICICI Prudential and SBI Life, KR Choksey said, "The higher share of protection mix will lead to growth in value of the new business (VNB) for Jan/Feb-20 period. However, sluggish growth expected in March-20 and H1FY21 will result in lower VNB in the near term. Hence, we have factored in the lockdown impact on new business generation and have revised VNB estimates downward across our coverage by 4-13 percent versus previous expectations."

As per the latest data from IRDAI, new business premium (NBP) of the life insurance industry (Jan/Feb-20) grew 10 percent YoY to Rs 39,156 crore. Private players saw NBP at Rs 15,281 crore during the same period, a growth of 24 percent YoY whereas, for LIC it stood at Rs 23,876 crore, a growth of around 3 percent YoY.

"The abovementioned NBP data clearly indicated private life insurance companies expanding their market share during the quarter. However, the NBP growth for March 2020 will be impacted by the COVID-19 lockdown in March (generally the strongest month for life insurers) due to high dependence on physical modes such as agency & banca channels and small share of online business in overall business," KR Choksey said.

In FY19, the NBP contribution for the month of March has been around 15/12/12/17 percent for HDFC Life, SBI Life, ICICI PruLife and Max Life, respectively to the full year NBP, which is reflective of significant impact of loss in business. Accordingly, KR Choksey revised its FY20 estimates downwards by 5-9 percent against previous estimates on topline.

The brokerage also expects persistency levels to see some negative impact in Q4FY20 and expects significant negative impact in FY21 due to higher surrender claims from ULIPs (Unit-linked insurance policy) arising out of the recent market volatility.

This is likely to impact ICICI PruLife having a high share in ULIPs (around 69 percent of annual premium equivalent-APE) followed by SBI Life (around 52 percent of APE) and delays in premium payment will also lead to lower persistency levels, said the brokerage.

It also expects product mix to change as a result of low attractiveness towards ULIPs and guarantee products (due to low interest rates) and more towards high margin protection products.

HDFC Securities said growth for private individual APE was lower at just 6.1 percent YoY during Jan/Feb-20 and additionally, APE growth will get impacted by the lockdown in March 20.

The brokerage expects ICICI Prudential to report a total APE decline of 14.3 percent YoY in Q4 as the company reported a 9.9 percent decline in Jan/Feb-20 sales. "We expect VNB margins to moderate to 20.6 percent largely due to lower than expected scale."

In the case of HDFC Life, it expects Q4 APE to decline by 5.3 percent, while SBI Life is expected to report Q4 total APE decline of 3.5 percent YoY.

Overall, it believes the lockdown will have a significant impact on Q4FY20E and FY21 on both sales and earnings of life insurers.

Contribution from March month was high in FY19 for HDFC Life/Max Life at 16.7/22.2 percent versus for SBI Life/ICICI Prudential at 13.2/13.2 percent. Additionally, HDFC Securities estimates around 40-60 percent of business in March is generated in the last 10-12 days.

FY20E APE estimates stand revised downwards by 3.7-17.1 percent, with SBI Life least impacted (-3.7 percent) and Max Life most impacted (-17.1 percent), HDFC Securities said, adding lower scale would also result in slightly lower margins for FY20.

The brokerage reduced its FY20 VNB margin expectations by 30-90bps across companies.

In terms of NBP market share (on YTD-20 basis), within the private players, SBI Life market share stood at 21.3 percent, while HDFC Life closely followed with 21.1 percent market share. ICICI PruLife and Max Financial Services has broadly maintained their market share steadily at 15.7 percent and 6.6 percent, respectively. Overall, private life insurance companies commanded a market share of around 31 percent while LIC continued to dominate the sector, KR Choksey said.

Going ahead, in terms of distribution channels, the brokerage expects a big shift towards digitalisation to acquire new business and processing of claims through mediums such as online portals, Whatsapp, Chatbot, mobile apps, email and call-centres.

"This will also reduce the overall acquisitions cost such as commission charges paid to agents and bancassurance channels in the near future; a positive for the overall profitability," it said.

Given the uncertainties surrounding COVID-19, the brokerage feels there is a likelihood of change in consumer behaviour which will understand the importance of insurance as a pure risk cover rather than just an investment product. This, it believes will lead to higher demand for high margin protection products in the future.