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9MFY22 new business mix: ULIP and NonPAR outshine while PAR struggles

The three key messages coming out of the life insurance sector’s 9MFY22 new business product mix data are: 1. ULIPs are making a strong comeback (49% YoY growth post 33% decline in 9MFY21 in Individual regular new business); 2. Pension products and non-par (savings and protection together) continue to grow strongly, but Annuity and par savings seem to be struggling; and 3. The materially slow growth in sum assured from individual new business vs. premium growth very clearly reflects the slowing volume of Retail Protection amid multiple rounds of price hikes by leading private life insurers. In sum, these developments are the outcome of a combination of factors, including low interest rates, buoyant equity markets, increasing financial sophistication of customers and product innovation by the leading private life insurers. Thus, large private players, equipped with their superior brands and distribution network and employing their agile and innovative approaches, are well-poised to grow strongly and increase their market share. Based on risk-reward proposition, our order of preference is SBILIFE (Buy), MAXF (Buy), HDFCLIFE (Buy) and IPRULIFE (Hold).

* Product mix changes a reflection of external environment and changing customer preferences: The change in new business product mix in 9MFY22 has been shaped by a combination of external factors, including a sustained low interest rate environment, buoyant equity markets and Covid-19-led dislocations (additional savings to be deployed by upper middle class and affluent class but clipped savings ability of masses). These external factors, along with changing customer preferences, have driven the changes in new business mix toward ULIP, non-par and pension products.

* ULIPs delivered strong bounce-back in FY22, non-par and pension maintained sustained growth: Strong equity markets and increased savings of affluent and white collared youth with higher risk appetite meant that ULIPs have delivered strong growth in Individual regular new business (+49% YoY to Rs130bn) and also in Individual Single Premium new business (+85% YoY to Rs43.3bn). Non-par continued to grow sustainably, with its share in Individual Regular New Business going to 24% in 9MFY22 from 19% in 9MFY20. This is an outcome of two factors: 1. Growing demand of guaranteed products amid depressed low interest rates offered by banks on Time Deposits; and 2. Multiple price hikes in retail protection in the last 2 years. Pension products continue to grow attractively, likely reflecting the robust demand by the customers and increased focus of leading players in this segment.

* Par savings losing sheen, annuities suffer from unattractive interest rate environment: In the post Covid-19 world, mass-saver segment customers have experienced damage to their earnings and savings, while at the same time, affluent and white-collared workers have experienced increased savings. This has resulted in lower contribution of new business from masses and increased contribution from the affluent. This, in turn, has led to increased ticket sizes of policies and a loss of market share for LIC, which caters more to the masses. This lower participation from masses also meant the muted growth in participatory savings products. Given the low interest rates and the expectation of rate hikes, the annuities business saw material slowdown, driving an overall negative growth in Individual Single New Business Premium.

* Muted sum assured growth in individual new business likely a reflection of slowdown in retail protection sales: The sum assured from individual regular new business has grown at a muted ~6.5% YoY in 9MFY22, slower than ~8.5% YoY growth of Individual Regular New Business Premium. This is contrary to the trend seen in recent years when the sum assured has been growing much faster than premium growth, driven by increasing retail protection in the business mix. The trend this year is a likely reflection of the materially reduced policy volume of retail protection sales amid multiple price hikes taken by the leading private players.

* Strong growth in GTI, led by price hikes: Group Term Insurance (GTI) segment has delivered ~69% YoY premium growth in 9MFY22 against the sum assured growth of ~28% YoY in the same period. This is largely a reflection of strong price hikes taken by the life insurers in the GTI segment post adverse claims experience in the damaging second wave of Covid-19. For FY22, growth in the GTI segment should be strong at levels similar to 9MFY22. In FY23, the pricing should likely to stabilize at the current levels; hence, growth should be driven by increase in sum assured.

* Private sector leaders well-poised to grow and gain market share: Amid the rapidly changing external environment, changing customer demographics and their product preferences, our hypothesis of large private life insurers continuing to take market share away from LIC is playing well and will continue to play in the coming years. Powered by their strong brands and distribution network (especially the banacassurance reach), private sector leaders are executing their strategy nicely by being agile and innovative when it comes to offering the insurance products to match customer preferences and needs amid the dynamic external environment. Based on risk-reward proposition, our pecking order of stocks is SBILIFE (Buy), MAXF (Buy), HDFCLIFE (Buy) and IPRULIFE (Hold).

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