Indian life insurance companies have shown that their recovery from the pandemic remains robust, a sign that future profitability would improve.
All listed life insurers reported a sharp year-on-year increase in their new business premium and a significant improvement in their profitability metrics. That said, some were better than others in terms of the quality of growth and therefore have a brighter profitability outlook.
SBI Life Insurance Company Ltd’s June quarter metrics show that it pays to be the largest in the industry segment. Even so, SBI Life has made its investors happy by exceeding their expectations on business growth and trumping competition on profitability metrics.
A key indicator of future profitability is the value of new business. It measures the expected profits from underwriting new policies during a given period. SBI Life’s value of new business margin surged to 30.4 percent for the June quarter, well above HDFC Life Insurance Company Ltd’s 26.4 percent and a shade lower than 31 percent of ICICI Prudential Life Insurance Company Ltd (ICICI Prulife).
SBI Life, HDFC Life, ICICI Prulife
The growth in SBI Life’s value of new business (VNB) has also added to the bullishness among its investors. VNB more than doubled from a year ago for the life insurer unlike its peers that reported more modest 25-30 percent growth.
Both VNB and margin improvement show that SBI Life is underwriting superior policies which is evident from its product mix as well. During the June quarter, the share of margin-friendly non-participatory products in the product mix rose to 65 percent while that of protection policies rose to 12 percent.
To be sure, rival HDFC Life still has a superior product mix with a share of 32 percent for protection in the overall portfolio. But analysts believe that the company may face some challenges.
“We are encouraged by an improving contribution of traditional products in the mix (+252bp YoY). However, the 25.9% YoY drop in individual protection was disappointing, thus paring the contribution in the mix by 263bp to 4.1%,” wrote those at Elara Securities Ltd in a July 20 note.
Bp is short for basis point. One basis point is one-hundredth of a percentage point.
ICICI Prulife has emerged as the dark horse by reporting a quick turnaround in business growth in recent quarters. Recall that the pandemic had hit the life insurer hard, especially when its product rejig had already tempered growth. Analysts expect the life insurer to post a 23 percent compound annual growth rate in its VNB over FY22-24. Those at Motilal Oswal Financial Services believe that this justifies a valuation of over two times the estimated embedded value for FY24.
HDFC Life shares are trading around 2.6 times its estimated embedded value while SBI Life shares traded at around twice estimated embedded value for FY24.
Note that SBI Life’s shares have surged nearly 20 percent in the past one year, outperforming its peers and the broad market. During the period, HDFC Life’s shares have dropped 3 percent but its valuation multiple is still higher than its peers. Shares of ICICI Prulife have gained a modest 11 percent and its valuation has improved.
This is where persistency ratios and product mix become critical. Life insurers need their policyholders to stick with them for as long as the cost of acquiring a customer is recovered.
The 13th month persistency ratio of HDFC Life at 93 percent is superior to that of SBI Life’s 85.6 percent and ICICI Prulife’s 85.5 percent. Further, the product mix too has a heavy share of protection plans that have a lower cost of customer acquisition but higher returns.SBI Life’s faster growth on a bigger balance sheet size has meant that investors believe a valuation relook is warranted. The life insurer would need to show a marked improvement in its persistency ratios to make valuations stick.