IGI Logo

As blurry as it gets

4QFY24 business trends were weak for a variety of reasons across different players—margin compression, slowdown in agency/primary banking partner and higher payouts. Takeaways remain similar across players—lack of clarity on FY2025E product strategy, focus on expansion/growth coupled with higher payouts and regulatory developments, all of which provide low near-term visibility. We await clouds to recede and more clarity to emerge; valuations remain undemanding across the board.

Weak readings from 4Q results for a variety of reasons

Weak takeaways from 4QFY24 results of life companies—(1) ICICI Prudential Life reported weak margins of 21.5% in 4QFY24 as compared to 26.7% in 9MFY24, (2) despite acquisition of Exide, HDFC Life lost share in agency business with 27% decline in agency APE (9% decline for the year as compared to 15-28% growth for peers) and (3) SBI Life reported 5% APE growth in SBI (13% in FY2024), raising some concerns of slower near-term trajectory at the parent bank even as it continues to hold on better than most peers. Max Life reported margin compression by 180 bps yoy in 4QFY24 but had strong 31% adjusted (for one-offs) growth in 4QFY24, translating to 19% overall APE growth for the year.

Lack of clarity on multiple issues

FY2024 saw sharp rise in share of ULIPs reflecting capital-market buoyancy over non-par. Individual protection picked up for three private players in FY2024 though base effect seems to be hitting in gradually. We don’t have visibility on FY2025E product strategy—depends on trends in capital markets, shape of yield curve and regulations on surrender penalties.

4 Bancassurance has seen mixed trends in FY2024 likely due to the bank’s focus on deposit mobilization. HDFC Life fared well in HDFC Bank (up 20% yoy) due to gain in counter share, Max Life was up 13% at Axis Bank for the year. SBI, though, moderated (APE up 5% in 4QFY24) for SBI Life; it is not clear if this is due to concerns on bancassurance practices expressed by the government.

4 Competition is intensifying in third-party channels, i.e. banks and brokers. Most players seem to suggest that payouts are increasing with distributors focused only on commissions, providing little moat to insurers in this channel. With anxieties increasing, payouts in this channel are likely to remain elevated. 

4 Agency channel has held on well in FY2024. Even here, HDFC Bank lost share (down 9%) while Max has stepped up (up 28% yoy). Market sources suggest increasing competition for seasoned agents as well.

4 Per unconfirmed media sources, IRDA may revisit surrender guidelines (link). 

We have never found near-term outlook so hazy. We have modeled 15% APE growth for all players for now (except 18% for Max) and almost flat margins. We will revisit the same once we get more clarity on the business.

Soft guidance of various life players

Guidance of most players is soft. HDFC Life has guided for 12-15% APE growth, at higher-end of industry band with flat margins; the company will continue to invest in lower ticket growth and is expanding in interiors. ICICI Prudential Life has guided for faster-than-industry growth but with flat margins (its VNB anyway was down to 24.6% in FY2024 from 32% in FY2023). SBI Life has guided for industry-level (15%) growth with product shift to expand margins. Max Life seems to be guiding for significant share gains with stable margins.

Non-life companies have shown some positive trends

Amid nat cat events tempering FY2024 performance, Bajaj Allianz and ICICI Lombard have reported improvement in motor OD profitability—higher new vehicles sales, stable pricing and premiumization have likely driven the same. Max Life improved profitability in 4Q, getting back on track within in its long-term guidance band; the company has guided for turning the corner in profitability.

Player-wise 4Q results summary: Growth picked up, margins remain weak for most players

4 Banca supports APE growth for HDFC Life. While APE declined 8% yoy in 4QFY24 on reported basis, adjusted for one-off in base period, APE was up 14% yoy. High growth in low-margin ULIPs was partially offset by sequential pickup in high-margin non-par products leading to 317 bps yoy and 70 bps qoq decline in VNB margins in 4QFY24. Share of ULIPs was up to 36% in 4QFY24 from 34% in 3QFY24 and 14% in 4QFY23. Share of non-par was up to 30% from 24% in 3QFY24. Impact of fixed cost absorption due to IT investments was high at 70 bps in FY2024. Bancassurance was the saving grace for HDFC Life driving APE growth of 20% yoy in 4QFY24 (up 17% yoy in FY2024). Strong pickup in ULIPs has supported growth in the channel. Operating RoEV was down 560 bps yoy to 18.4% in 4QFY24 due to decline in VNB (down 18% yoy).

4 Growth picks up sequentially for ICICI Prudential Life. ICICI Prudential Life’s APE growth picked up to 9.5% yoy in 4QFY24 from 2% in 9MFY24, leading to 4.7% APE growth for full year FY2024. Growth was largely driven by ULIP and annuity products; pickup was spread across channels with agency, banca and direct reporting 19-29% yoy APE growth. VNB margins compressed by 1,050 bps yoy to 21.5% in 4QFY24 and 740 bps to 24.6% for FY2024. The company attributes 410 bps of the compression during FY2024 to increased expenses, 150 bps to change in product mix and 180 bps to change in yield curve.

4 Max Life reported a strong performance in 4QFY24. VNB growth at 7% yoy reflected 14% growth in APE (up 31% excluding one-offs) and contraction in VNB margins by 190 bps yoy. Unlike most peers, margins expanded qoq to 28.5% from 27.2%, reflecting the benefit of higher volumes despite sequential decline in share of protection in favor of ULIPs. Par and ULIPs drove growth, reporting 66-107% yoy APE growth; retail protection growth was also strong at 60% yoy. Non-par was down 42% yoy in 4QFY24. Banca growth picked up in 4QFY24 to 16% yoy from 3% yoy growth reported in 3QFY24. Agency growth moderated to 10% yoy in 4QFY24 (23-57% in the previous three quarters) due to an inflated base. Adjusted for one-off in the base period, agency APE was up 44% yoy in 4QFY24.

4 SBI Life’s APE growth was weak. While SBI Life reported APE growth of 17% yoy in 4QFY24, it was largely driven by pickup in group savings (up 233% yoy). Individual APE growth was muted at 9% yoy in 4QFY24 due to low 5% yoy growth in parent bank channel. Agency fared better, reporting 15% yoy APE growth. Increase in share of low-margin ULIPs (up to 59% from 52% in 4QFY23) led to 321 bps yoy decline in margins. VNB margin was up sequentially to 28% from 27% in 3QFY24 largely due to increase in share of protection.

4 LIC results were weak on both growth and margins. LIC’s APE growth was strong at 11% yoy in 4QFY24, up from 7% yoy growth in 3QFY24 and decline of 7-12% yoy during 1QFY24-2QFY24. This was largely driven by the group business (up 61% yoy in 4QFY24 and 21% in 3QFY24); individual APE declined 2% yoy in 4QFY24 and 1% for full-year FY2024. An increase in product benefits offset the impact of margins accretive product mix shift, leading to a 200 bps yoy decline in VNB margin in 4QFY24 to 17.2%. While share of higher margin non-par savings was up to 11% of APE from 1% in 4QFY23, the margins in par business (53% of APE) were down 303 bps to 8.0%. Management highlighted that the downward revision in the reference rate led to moderation in par margins.

4 Bajaj reported strong growth and lower margin compression than peers. Bajaj Life reported strong APE growth of 19% yoy in 4QFY24, up 34% yoy on adjusting for high base in 4QFY23. VNB margin compression was contained at 50 bps yoy despite high base of non-par in base period. Margins compressed by 94 bps for full year FY2024 to 14.6% driven by sharp rise in share of ULIPs (up 708 bps). Both agency and institutional channels reported moderate 10-12% yoy APE growth. High base in 4QFY23 may have impacted growth in both agency and banca in 4QFY24. Strong off-take in the newly launched par product (ACE) led to 111% yoy growth in par business.

Retail protection growth was strong for listed players

Retail protection growth was strong at 30-59% for HDFC Life, ICICI Prudential and Max Life in FY2024. The benefit was largely front-ended for HDFC Life and with base effect playing out, retail protection was down 23% for the company. ICICI Prudential Life and Max Life continued to benefit from the push with 29-59% yoy growth. SBI Life has launched new protection products to support growth in the segment over FY2025E (down 4% in FY2024).

Sharp shift to ULIPs from non-par for private players

ULIP supported growth for most players. ULIP growth was strong at 32-132% yoy during the quarter for private players driven by favorable market environment. ULIP now contributes 35-59% of APE for these players. LIC has low share of ULIPs (3% in 4QFY24 and 2% in FY2024).

Non-par under stress. Weak demand for non-par products due to change in taxation norms, and lower IRRs driven by moderation in market yields, led to sharp decline in non-par business. Private players reported 21-46% yoy decline in non-par APE in 4QFY24, dragging down margins in 4QFY24. The base period had high share of non-par at 26-57% exacerbating the impact; share of non-par at 18-36% in 4QFY24 and 13-31% in 4QFY22.LIC fared better reporting 914% yoy growth in non-par savings APE driven by new launches. LIC launched six new non-par products during the year.

Par fared well for Max and Bajaj. Exhibit 13 shows that growth in par was high for Bajaj Allianz and Max Life, replacing non-par. Fastest growth in par at 93% yoy was reported by Bajaj Allianz Life; up 66% for Max Life. ICICI Prudential reported muted 10% growth in the segment, and others reported 20-44% yoy decline on par APE.

Mixed trends in channels

While HDFC Life and Max Life reported strong growth in bancassurance, ICICI Prudential Life reported strong growth in agency channel in 4QFY24.

4 Bancassurance growth was muted at 3% for the industry due to weak volumes at most banks. ICICI Bank was an exception delivering 31% growth driven by strong traction for ULIPs and annuities. While HDFC bank reported muted growth, increase in counter share of HDFC life led to 20% bancassurance APE growth for the insurer.

4 ICICI Prudential Life delivered strong 29% yoy growth in agency APE leading to increase in share to 32% in 4QFY24 from 27% in 4QFY23. While HDFC Life reported 27% decline in agency APE, Bajaj Allianz and Max Life reported muted 10-12% yoy growth in 4QFY24 due to inflated base. Agency channel has better access to HNI and had highest impact of sunset period sales of high-ticket non-par policies in 4QFY23.

4 HDFC Life’s agency was down 9% (FY2024, per management, growth for policy below Rs0.5 mn was 9% in agency channel); agency ticket size was down 24%. Max Life stepped up on agency to deliver 28% growth during the year (even as 4Q was tempered by higher base). This is followed by Bajaj Allianz Life, up 20% for the year. ICICI Prudential Life was up 16%, mostly driven by higher tickets (up 11% yoy); all other players reported decline in agency ticket size.

Persistency on an upward trend

Most players reported improvement in persistency across most buckets in 4QFY24. This increase likely reflects (1) change in product mix of back book (protection and non-par savings tend to have higher persistency) and (2) strong focus on renewals and collections (further amplified by push through digital engagement and renewal channels).

Cost ratios declined for private players

Lower new business strain led to lower expenses for private players in 4QFY24. Private players reported 111 to 361 bps yoy decline in cost-to-APE ratio in 4QFY24. The base period had high volumes of high payout products like non-par. Moderation in non-par has likely led to decline in cost ratios for private players in 4QFY24. For FY2024, cost ratio increased for ICICI Prudential Life by 191 bps, the company cited increase in payouts as key reason for compression in margin.

RoEV of 16-20%

Exhibit 26 shows that private Life insurance companies reported operating RoEV of 14% to 22% in FY2024. VNB contributed 38-61% to EVOP while unwinding contributed 44-60%. We expect operating variance to be moderately positive over the medium term driven largely by improvement in persistency. Unwinding rate will largely be stable in the range of 7.5-8.8% for all players. APE growth will likely remain moderate at 15-17% for private players. VNB margin expansion will also remain moderate all private players as the product mix, the main driver of margins, is already optimized. LIC has a sub optimal product mix should continue to expands margins over the medium term.

NON-LIFE: Health supports growth, motor OD profitability improves 

Growth in the non-life industry was moderate at 13% yoy in 4QFY24. While retail health premium growth was strong at 20%, motor premium growth was muted at 10% yoy. Competitive intensity in motor OD segment shows signs of moderation.  Star Health reported significant improvement in profitability despite moderate growth. Motor profitability has improved for both ICICI Lombard and Bajaj Allianz General.

Motor profitability improves for Bajaj Allianz

Adjusting for crop and government health, GWP growth was moderate at 13% yoy for Bajaj Allianz General. While group health growth was strong at 46% yoy, motor business (down 2% yoy) dragged overall growth. Claims ratio moderated 580 bps yoy in OD segment and competitive intensity may be moderating in this segment, as per management. Health loss ratios were elevated at 88.7% in 4QFY24 (up 840 bps yoy) and 87.9% in FY2024 (up 1,000 bps) due to higher share of government and group health (up 46% yoy). Expense ratios moderated by 380 bps in FY2024 leading to 290 bps decline in combined ratio to 97.6%. This improvement is largely driven by increase in share of government health business.

One-offs drive earnings growth for ICICI Lombard

ICICI Lombard reported 19% yoy growth in PAT supported by (1) a high investment yield of 8.3% in 4QFY24 (this may not be sustained) and (2) the release from loss triangles increased yoy (FY2024 versus FY2023). On the core business, (1) ex-crop GWP growth was strong in 4QFY24 at 22% yoy, driven by the health (up 28% yoy) and motor (up 27% yoy) businesses, and (2) combined ratio was down 191 bps yoy and 137 bps qoq to 102.2%, driven by an improvement in the claims ratio. Claims ratio was down 559 bps yoy and 137 bps qoq, largely driven by an improvement in the motor loss ratios. Higher growth in new cars and a decline in the CV portfolio (down 2% yoy) supported improvement in loss ratios of the motor business. Opex + commission rate was flat qoq.

Profitability improves for Star Health, growth remains moderate

Star Health reported 40% yoy growth in PAT to Rs1.4 bn driven by improvement in combined ratio and investment income. Combined ratio was down 56 bps qoq to 92.8% driven by 356 bps qoq decline in claims ratio and 155 bps lower expenses (including commission). While GWP growth was at 18% yoy in 4QFY24, retail growth was lower at 16% yoy. Group health growth was strong at 61% yoy on a low base (2-year CAGR of 28%). Investment yield was 7.6% in 4QFY24 compared with 7.8% reported in 3QFY24 and 6.7% in 4QFY23.

Cat losses shoot up claims in commercial lines, motor claims improve

Cyclone Michaung and floods in Tamil Nadu led to higher claims in the commercial lines for both Bajaj Allianz (up Rs745 mn) and ICICI Lombard (up Rs1,350 mn). This led to elevated overall claims ratio of 73.8% for Bajaj Allianz and 70.8% for ICICI Lombard in FY2024. Adjusting for the CAT losses, claims ratio was 72.5% for Bajaj Allianz and 70.0% for ICICI Lombard.

The motor OD claims ratio has also improved by 690-910 bps for both ICICI Lombard and Bajaj Allianz in FY2024, this likely signals moderation in competitive intensity for the industry. Motor TP claims ratios has also moderated significantly to 67% in FY2024 versus 72% in FY2023 for ICIC Lombard.

Above views are of the author and not of the website kindly read disclaimer