Insurance: Widening the base - Kotak

Widening the base. Recent trends indicate that insurance companies are sustaining growth by adding new policies than mere ticket size increase; mutual funds are spreading themselves wider as well, driving stronger inflows. In 1QFY18, LIC and HDFC Life were among key drivers for industry-wide APE. While strong monthly insurance growth rates appear encouraging, trends in net flows (surplus post payouts and expenses) are crucial to track as well-Max Life, LIC and HDFC Life fare well among large players.

Higher volumes drive growth

Life insurance companies and mutual funds are spreading themselves wide and deep, driving higher volumes and higher APE/inflows.

- Number of policies driving APE growth for private players. In July 2017, private players reported 33% growth in individual APE translating into 42% YTD growth as compared to 13% and 26% yoy growth in FY2016 and FY2017 respectively. Growth in average ticket size in the individual non-single segment has likely moderated. The number of policies in the individual non-single segment has seen strong growth between November 2016 (since demonetization) and March 2017. While number of policies declined yoy in April and May 2017, we have once again seen an uptrend in past two months.

- LIC into high growth mode as well. LIC reported 45% growth in individual APE in July 2017 after about six months of sluggishness, i.e. 5-17% growth (after the corporation reduced interest rates on Jeevan Akshay). Average ticket size in the individual non-single segments was up 36% yoy and 45% qoq; yet LIC's average segment remains different - its average non-single individual policy size was Rs18,042 as compared to Rs50,000-90,000 for large players. This may be another sign of growth spreading into lower-ticket segments; the sustenance of this trend is crucial.

- MF AUMs: Higher growth in smaller cities. We compare the above with mutual funds that are spreading themselves wide; growth in (equity and debt) AUMs for smaller towns (those beyond top-15 cities) was 41% yoy in July 2017 as compared to 30% growth for the overall industry. Inflows to equity mutual funds remained strong at Rs182 bn (Rs72-161 bn in previous six months).

Private sector trends reverse between large players in past two months

- Over the last two months, the trends in ICICI Life and HDFC Life have reversed due to their respective base effects. HDFC Life, after about 10 months of weakness (decline/moderate growth), reported 37% growth in June 2017 and 56% in July 2017. ICICI Life, on the back of 6% yoy decline and 3% mom growth in individual non-single ticket size, reported 19% growth in July 2017 versus over 100% in April and May 2017 and 27% in June 2017. We expect these trends to continue and the difference in growth rates of the two players will reduce.

- Max Life has moderated to 9-12% growth over the past two months-the reasons for this weakness is not clear and will need to be monitored. Post the withdrawal of Max-HDFC merger deal, the company will likely get more aggressive in the market place, in our view.

Gross inflows strong; trend in net flows (surplus) is crucial

The net flows (surplus post payouts and expenses) for large private players and LIC. While ICICI Life reported strong APE growth in FY2017, surplus post policyholder's payouts (surrenders, withdrawals and claims) and expenses was low at 16% of gross premiums; this has improved from negative flows in FY2014. The ratio was high at 35% for HDFC Life, over 40% for Max Life and about 30% for LIC in FY2017. While we continue to track the monthly APE trends, we would periodically compare these with net flows.

Source : Equity Bulls

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