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The Life Insurance Industry’s Product mix for Sep-22 confirmed the broader trends displayed earlier: (1) Non-Par products continue to gain share in the retail APE product mix (from 22.2% in Q1FY22 to 27.6 in Q2FY23), while share of Par reduces to 43.5% in Q2FY23 from 49.3% in Q1FY22; (2) The Individual Non-Par sum assured decline of ~10% YoY, despite the ~26% APE growth, points to the continued struggle in Individual Protection and strong momentum in Non-Par guaranteed savings; (3) Volatile Equity markets have led to ULIP share in Retail APE marginally declining to 19.9% (the lowest in 6 quarters) in Q2FY23, from 21.0% in Q1FY22; (4) Group Protection (GTI and Credit Life) continued its strong growth momentum, driven by the combination of the price hike post the Covid-19 impact and volume growth on the back of improving credit. Going forward, Non-Par savings products on the individual front and Group Term Insurance and Group Credit Life insurance products should drive growth for Protection. The return of growth in retail protection remains elusive and it is to be seen if the increasing popularity of Return of Premium (RoP) products and the stabilizing retail protection prices can bring back growth. The robust distribution channels, launch of innovative products, diversified product mix and a customer-centric approach have well-poised private life insurance players to see benign growth in spite of macroeconomic difficulties. The recent underperformance of listed life insurance players is not in sync with their robust fundamentals or operational performance. Based on the risk-reward proposition, our order of preference is SBILIFE (Buy), HDFCLIFE (Buy), MAXF (Buy), IPRULIFE (Buy) and LIC (Hold).

* Non-Par savings continue to gain share in product mix: Continuing the trend of gaining share in retail product mix, the share of Non-Par in Retail APE grew to 27.6% in Q2FY23 from 22.2% in Q1FY22. This impressive growth in Non-Par comes on the backdrop of struggling retail Non-Par protection growth that is reflected in individual Non-Par sum assured declining by ~10% YoY in Q2FY23, despite the 26% YoY APE growth. This suggests ~35% YoY growth for retail Non-Par savings APE in Q2FY23. With increasing tax compliance, such guaranteed Non-Par savings products are becoming an attractive investment option for affluent & HNI customers. The robust demand for such products and attractive profitability mean that growth should continue for some time ahead. (Exhibits 6,14)

* The struggle in Retail Protection continues: With ~26% growth YoY in Individual Non-Par APE in Q2FY23, the Individual Sum Assured for Non Par products saw a ~10% YoY decline, pointing to a likely decline in the number of policies sold for Pure Term Protection plans. This suggests the weak trend of a ~20% YoY decline in retail protection will continue. Due to higher prices of retail pure protection (~50-60% in 2 years), tightening of the underwriting process and likely saturation in easy target customers, the retail protection business has been struggling for the last 4-5 quarters. With Return of Premium (RoP) products becoming popular among masses, stable-to-slightly lower protection prices and favorable base effect should help bring back growth in retail protection in 1-2 quarters. (Exhibits 6,14)

* Pricing and volume drive growth in group protection: Group Protection (GTI and Credit Life) saw strong growth momentum in H1FY23, led by pricing changes in the post Covid-19 Delta-wave world and volume growth led by stronger credit offtake. With Covid-19 Delta waveled step-change in pricing already in the base of all GTI policies, prices seem to have stabilized and premium growth since Q2FY23 is largely driven by sum assured changes. On the credit Life front, Q2/H1FY23 saw ~30% YoY increase in sum assured growth (reflecting the underlying strong retail credit disbursal growth) and 57%/65% YoY premium growth, displaying a material ~20-25% pricing jump, primarily led by reinsurance price hikes amid the Covid-19 delta-wave impact.

* Growth moderation seen in Par products: The Par segment saw a 15% YoY Retail APE growth, driven by LIC’s 15% Retail APE growth having a Par-heavy product mix. With moderation in growth, the share of Par in Retail APE product mix decreased by 1.6pps to 44.7% during H1FY23. With customer preference shifting to Non-Par products, growth of Par products is expected to stay relatively muted.

* ULIP delivers lackluster growth: Owing to the turbulent macroeconomic environment and volatility in equity markets, ULIP retail APE reported a muted 8% YoY growth during H1FY23. Further, customer preference moving towards Non-Par savings products led to a slowdown in ULIP premiums. The slowdown in growth of ULIP Premiums has resulted in the share of ULIP in Retail APE decreasing to 20% in HFY23 from 22.1% in H1FY22.

* Strong growth in Non-Par savings and group protection to more than offset the negative impact on VNB margins from declining retail protection: Negative growth in Retail Protection has been a concern for life insurers’ VNB margins. However, the strong product mix shift towards guaranteed Non-Par savings and strong growth in Group Protection (on the back of pricing hike) should provide the much needed comfort on margins.

* Private sector leaders are well-poised to deliver strong growth and gain market share amid a difficult external environment: With the changing external environment, customer preference, customer demographics and launch of innovative products, we expect large private insurers to deliver robust growth and grab market share from LIC. Private life insurers have been offering innovative and dynamic products in response to customer preference; their strong brand and distribution network should lead to a multi decadal growth opportunity. Based on the risk-reward proposition, our pecking order of stocks is SBILIFE (Buy), HDFCLIFE (Buy), MAXF (Buy), IPRULIFE (Buy) and LIC (Hold)

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