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HDFC Life/SBI Life/IPRU Life have reported strong performance in 9MFY23 with VNB growth of 22%/40%/23% YoY. Outlook remains optimistic on the back of growth prospects of retail protection, credit protect, non-par products (all have fared good) and sustained increase in persistency. Possible tailwinds from composite license is an optionality that can enhance positive sentiment. While there could be product-specific volatility in demand (as we have seen in ULIPs, retail protection, credit protect over last three years), we remain upbeat on the prospects of overall growth in the sum assured and annuity markets in India. Nearterm challenges include possible rise in costs as open architecture intensifies. We highlight below the key trends inferred from the 9MFY23 performance of life insurers

* Sequential growth in retail protection for all players; management commentaries have improved regarding growth outlook of retail protection in this segment. SBI Life / HDFC Life / IPRU Life reported retail protection growth of 18% / 13% / 20% QoQ in Q3FY23. In addition, Google search trends for term protection normalised to pre-covid levels and reinsurers’ arrangements have again started to work in the spirit of partnership resulting in supply-side stability. We expect life insurers to use the extra solvency available to retain some more business on the balance sheet.

* Credit protect will remain a VNB growth driver with overall credit growth. HDFC Life’s credit protect business grew 52% YoY in 9MFY23 while SBI Life’s group protection business grew 30% YoY. New Banca tie ups should help in the growth of this segment

* Strong growth in non-par segment for all players in 9MFY23 seems to indicate no impact of rising interest rates; it will be tested in H2FY23. The most common question posed to managements was about the possible impact of rising deposit rates on growth in the non-par business. Till now there seems to have been very little impact of the same considering the growth rates achieved. Basis 9MFY23, HDFC Life’s individual non-par APE rose 46% YoY while that for SBI Life (total APE basis) grew 151% YoY. IPRU’s non-linked APE grew 24% YoY. HDFC Life also mentioned that Banks continue to maintain high focus on selling non-par products and the category itself has grown by >60% at an industry level. HDFC Life has in certain cases reduced the guaranteed rates to increase margins and expects similar moves from peers.

* Rising persistency for all is a good industry feature; could lead to positive operating variance. IPRU Life’s 8MFY23 13M/49M persistency improved by 150/260bps over FY22 to 86.1%/66%. 61M persistency also expanded from 54.7% to 64.2% during the same period. HDFC Life’s 37M persistency (on standalone basis) increased from 67.5% in FY22 to 71% in 9MFY23. 13M/49M persistency remained largely stable at 87%/63.6% while 25M/61M persistency declined from 79%/54% to 78%/52% during the same period. SBI Life’s 37M/61M persistency improved from 72.1%/49.5% in FY22 to 73.2%/53.6% in 9MFY23 while 13M/25M persistency declined by 60/180bps to 84.6/76.3%

* Open architecture has led to higher costs reflected in cost ratios for all companies. SBI Life’s overall cost ratio (% of GWP) increased from 8.7% in 9MFY22 to 9.7% in 9MFY23. This was largely on account of higher commission expense, which increased by 100bps to 4.5% in the same period. IPRU’s overall cost (% of TWRP) grew from 17.7% in 9MFY22 to 20.8% in 9MFY23 largely on the back of excommission expenses, which rose 320bps YoY to 15.2%. HDFC Life’s cost ratio (% of total premium) expanded from 16.3% in 9MFY22 (pre-merger) to 19.4% in 9MFY23 (post-merger). This was largely due to higher operating expenses, which increased by 250bps YoY to 14.7%.

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