Life Insurance - Sector Thematic - Comparative annual report analysis - HDFC Securities

Mr. Madhukar Ladha, Institutional Research Analyst, HDFC Securities

We conducted a deep dive comparative analysis of the annual reports of the top three private life insurers. Our analysis revealed that VIF unwind conversion to PAT has deteriorated across companies with the worst hit being IPRU (61.9% -7,586bps since FY17). HDFCLIFE/SBILIFE continued to report stable conversion trends at 94.7/74.9% for FY20. With life insurers focusing on growing NPAR businesses, RoAEs continue to slide as the new business strain has increased. HDFCLIFE/SBILIFE reported non-linked RoAE of 9.1/10.6% (-851/-1,251bps since FY17) vs. IPRU’s 21.3% i.e. -5,581bps since FY17. Linked business RoAE deteriorated across companies despite lower growth mainly due to weak equity markets in FY20. Expenses as a percentage of net new money raised (premiums less benefit paid) reduced for IPRU/SBILIFE to 25.3/16.5 (-1,320/-464bps since FY17), while increased for HDFCLIFE to 41.0% (+730bps since FY17). Additionally, the first-year commission percentage is the highest for HDFCLIFE at 17.9% in FY20. On an overall basis, expense ratios and commission ratios are the lowest for SBILIFE across business lines. Lastly, in this report we have also covered surrender percentages, reinsurance efficiency, provisioning, related party transactions, reserving, and asset composition.

VIF unwind conversion to PAT. PAT to VIF unwind (%) has reduced across the three life insurers over the past four years. IPRU reported a significantly lower conversion in FY20 at 61.9% (vs 118.0% in FY18) despite the APE decline of 5.4% in FY20 and thus lower new business strain. VIF conversion for HDFCLIFE reported higher conversion during FY17-20 in the range of 94.3-106.5%, while SBIIFE reported conversions between 74.9-87.9%.

Segment-wise RoAE. Calculated RoAEs for non-linked business are on a downward trajectory across the three life insurers as the focus remains on growing this segment, resulting in higher upfront costs and lower reported profits. Non-linked RoAE for HDFCLIFE/SBILIFE declined 851/1250bps over FY17-20 to 9.1/10.6%, while IPRU reported a negative RoAE of 21.3% (-5,581bps vs. FY17). Linked business chalked higher RoAEs on the back of a slowdown in linked business in FY20.

Lower expenses are driving gains. On an overall basis, commission + opex expenses as a percentage of net new money raised (premiums less benefit paid) improved for IPRU/SBILIFE from 38.5/21.2% to 25.3/16.5% over FY17-20, whereas deteriorated for HDFCLIFE from 33.7% to 41.0%. Expense ratios continue to remain high across segments for HDFCLIFE. SBILIFE has the lowest expense ratios across segments. First-year commission payouts by HDFCLIFE/IPRU are high at 17.9/16.5 (FY20) vs. SBILIFE’s 8.4%. FY commissions continue to increase for NPAR business as the duration for this business continues to increase.

In this report, we also cover increasing surrender percentages, low reinsurance margins for reinsurers, investment provisioning, and related party transactions, reserving and asset composition.

Source : Equity Bulls

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