Insurers face margins pressure in Q1 due to change in product mix, but the prognosis is healthy

Avinash Singh, Senior Research Analyst at Emkay Global Financial Services, said that margins for insurers in this quarter were elevated largely due to their focus on more ULIP products and rising operating expenditure.

Some of the top insurers of the country faced pressure on their margins due to a change in their product mix in the first quarter of FY25. An analysis of the top five insurers showed that their VNB (Value of New Business) dipped 225 basis points (bps), or 2.25 percent. These companies include the Life Insurance Corporation of India, HDFC Life, ICICI Prudential, ICICI Lombard, and SBI Life. VNB measures the profit margin of new business written by a life insurance company.

The insurers reported a total growth of 23.6 percent in their net profit. While some exceeded market expectations, others nearly touched what the industry was expecting. The insurers' APE (annualised premium equivalent) grew on average by 26.57 percent and boosted their profit in the quarter. APE is used to measure new business sales in  a given period.

Product mix drags down margins

HDFC Life’s VNB margin shrunk 120 bps and  stood at 25 percent for the quarter. Niraj Shah, Chief Financial Officer (CFO), HDFC Life, in a post-results interaction with Moneycontrol had explained what happened to the margins: “Our product mix is different from what it used to be till about two years ago. The share of non-par has been steady in the mid-thirties, while par has gone down a little, and the rest remains strong," Shah said, and added, “We look forward to maintaining our margins in a range-bound zone rather than having some big changes and expect 17-18 percent growth.”

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ICICI Prudential’s VNB dropped to 24 percent from 30 percent in the corresponding period last year. Dhiren Salian, the bank's CFO, in a post results analyst call said that the movement in margin is primarily on account of a change in the product mix.

The country’s largest insurer, the Life Insurance Corporation of India (LIC), which has been reporting pressure on its VNB margins in the past few quarters, showed some improvement in Q1. LIC's VNB stood at 13.90 percent versus 13.70 percent in the year-ago quarter. In a post results press conference, the company's management said that things will improve going forward, and they will hit a VNB margin of around 20 percent in the next two-three years.

Avinash Singh, Senior Research Analyst, Emkay Global Financial Services, said that insurers' margins were depressed in Q1 largely due to their focus on more ULIP products and rising operating expenditure. “The pressure on margins is not surprising. Insurers were more focused on ULIP-led growth, which has thinner margins,'' he explained. Additionally, some players had higher distribution-related expenses,” Singh said.

APE boost

At Rs 520 crore, SBI Life reported a 36 percent jump in its net profit for the quarter, up from Rs 381 crore in the year-ago period. Its APE for the quarter was up 20 percent on-year to Rs 3,640 crore. This, the insurer said, was driven by growth in the unit linked and non-par segment.

In a report, brokerage house Motilal Oswal has said that SBI Life's new product launches are likely to kick-start the recovery in the insurance sector. Further, the brokerage said that SBI Life is expected to deliver a compound annual growth rate (CAGR) of 18 percent in its APE and VNB over the next two fiscal years.

HDFC Life’s net profit jumped 15 percent on-year to Rs 479 crore, helped by strong growth in both first year and renewal premiums. Its APE grew 23 percent and stood at Rs 2,866 crore for the quarter. The insurer had reported a 13 percent growth in APE last year.