Protection pays

Given the challenges in the savings business, life insurance players have been focussing on the protection side

Sharp focus on the protection business to drive growth and improve profitability, better customer engagement, attention to cost efficiencies and improving persistency were the key highlights of life insurance players’ March quarter earnings, as it was for the full fiscal of 2019.

Given the challenges in the savings business, life insurance players have been focussing on the protection business. Savings products comprise linked, participating and non-participating policies. Protection products provide cover for life, disability, critical illness and accidental death. These pure risk protection products are low-cost.

By focusing on protection business, life insurance players have been driving value of new business (VNB). Since premium payments for life insurance policies are spread over time, the cost of new customer acquisition is high, leading to new business strain. VNB is a key measure to assess the financial performance of insurers. It values future profit streams of the new business written during the year.

Pick-up in growth

After a muted performance in the nine months ended December 2018, ICICI Prudential Life Insurance saw some pick-up in growth. Annualised premium equivalent or APE grew by 11 per cent Y-o-Y in the March quarter, after declining by 4.2 per cent in the nine months ended December 2018. Overall for FY19, APE was flat (0.1 per cent growth). The growth in APE in FY19 has been led by strong focus on the protection business. Protection APE grew by 61.9 per cent in FY19, constituting 9.3 per cent of APE, up from 5.7 per cent in FY18.

However, despite the increase in share of protection business, savings business (90.7 per cent) remains a significant part of ICICI Pru Life’s APE. Within savings, unit linked products (ULIPs) account for a tidy 79.6 per cent of APE in FY19 (slightly down from 81.9 per cent in FY18).

ICICI Pru Life, through its focus on protection business, believes that it can sustain profitability. Currently, VNB from protection business is about 60 per cent of the overall VNB. In FY19, ICICI Pru Life witnessed a marginal 3.3 per cent growth in VNB.

VNB margin — the ratio of VNB to APE — went up by 50 bps to 17 per cent in FY19. While favourable business mix mainly on account of protection-led growth helped, higher acquisition cost weighed on the margins. The management expects to double VNB over the next three to four years.

Improved persistency

Aside from ramping up premium growth, the company was also focused on improving persistency, which measures the number of policies (or in terms of premium) retained with an insurer across different time periods.

After some decline as of December 2018, ICICI Pru Life’s 13th month persistency (second year) improved to 86.1 per cent (from 84 per cent for eight months of FY19). However, it more or less remained flat from levels of FY18 (85.8 per cent).

The profit-after-tax for FY19 was ₹1,141 crore as compared to ₹1,620 crore in FY18. The drop in profit is led by increase in new business strain due to strong growth in protection and annuity segment.

Leveraging on its brand and distribution network, SBI Life posted a robust set of numbers, with new business premium growing by 26 per cent in FY19, above-industry (private players) growth of 22 per cent. Ranking number one in terms of individual rated premium, SBI Life has a market share of 22.3 per cent among private players.

Increased focus on protection business led to the share of protection APE inching up to 6.8 per cent in FY19 from 5.4 per cent in FY18.

This helped VNB increase by 24 per cent Y-o-Y in FY19 to ₹1,720 crore; VNB margin expanded by 150 basis points. SBI Life’s profit-after-tax grew by 15 per cent Y-o-Y in FY19 to ₹1,330 crore. SBI Life has a well-diversified product portfolio with savings forming 88 per cent of new business premium; ULIPs form about 53 per cent.

Apart from strong financial metrics, other operating metrics such as persistency and expense ratio also continued to improve in FY19. SBI Life’s 13th month persistency improved to 85 per cent in FY19 from 83 per cent in FY18. Operating expense ratio declined to 6.4 per cent from 6.8 per cent in the previous year.

For HDFC Life, its resilient earnings, strong leadership position, and well-balanced product mix have always been a key positive. In FY19, HDFC Life’s overall APE grew by 13 per cent while new business premium reported a robust growth of 32 per cent Y-o-Y.

Share of protection business moved up to 16.7 per cent of overall APE from 11.3 per cent in FY18. While VNB grew by 20 per cent Y-o-Y to ₹1,540 crore in FY19, VNB margins moved up by 140 bps to 24.6 per cent.

HDFC Life’s share of ULIP came down as the company focussed on ramping up its protection business. The insurer’s 13th month persistency remained healthy at 87 per cent in FY19.

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