Life Insurance: One sector, diverse fortunes

In 2000, the government opened up the industry to private players. And the rules of the game have been changing frequently in the constantly evolving regulatory landscape since then. The largest players in the Indian life insurance sector today include LIC, SBI Life, HDFC Life, ICICI Prudential Life, and Max Financial Services.

Despite belonging to the same industry, catering to largely the same customer base, and being governed by more or less the same set of rules and regulations, these stocks have delivered diverse investment outcomes. On one extreme, LIC has eroded about 30% of investor wealth over the last one year. On the other extreme, we have ICICI Prudential Life, which has appreciated by about 12% during the period. In this article, we shall delve into the factors driving this divergence.

Regulations have hit different players differently

Be it disincentivizing insurance policies via tax changes which has reduced the scope for insurers’ revenue growth, reducing the surrender penalties, which has affected their margins, nudging private insurers to get listed, or the latest move to allow 100% FDI in insurance that is likely to bring in additional $12 billion of foreign capital, changing regulations have forced India’s insurers to frequently recalibrate their business models.

In this constantly evolving regulatory landscape, nimbler private insurers have adapted faster and gained market share, while players including the market-leader LIC have ceded ground. But of course, the regulator’s crackdown on the bancassurance distribution channel is expected to work in favor of LIC which still controls a bulk of India’s agency channel.

That said, LIC’s share of the agency channel has reduced over the years – from 53% in FY20 to 48% as of September 2024. It is also at risk from the regulator’s proposal to open up the agency arrangement. Currently, an agent can be empanelled with only one insurer in each of the life, health, and general insurance categories. The Insurance Regulatory and Development Authority (Irdai) has proposed to remove this cap, and allow an agent to associate with multiple insurers in each category. If this goes through, while it would be beneficial for the customers as conflicts of interest in insurance-sales would be contained, it would put LIC’s bread and butter (its massive agency distribution channel) up for grabs by other players.

This would help private insurers penetrate deeper into the most underinsured segments, but will also raise their distribution costs. Against this context, for private players, Average Premium Equivalent (APE) contribution from tier 2-3 cities, as well as margins would be key monitorables.

Same business, different margin profiles

Despite operating in the same industry, India’s largest insurers have starkly different business models. While some players depend on the agency channel for distribution, others rely on bancassurance. The product mix is also starkly different across insurers – some rely heavily on individual policies while others have group policies contributing a significant chunk, some have higher contributions from participating policies compared to peers, and the contributions of protection, linked, savings, and annuity products are also markedly different. These differences lead to different growths, cost ratios, persistency, and margins.

Take for instance, distribution. While LIC derives 95% of its business from the high-cost agency channel, other players rely on agents for less than 30% of their business. Similarly, higher contribution of online channels for private players also helps contain costs. Meanwhile, LIC’s higher offline presence and employee costs weigh on its margins. Even when it comes to product mix, LIC has seen an erosion of market share in individual policies, even as it commands almost 90% market share in group policies. Given the typically lower margins of group policies, this, too, has affected LIC’s margin profile.

Elaborating on product mix, participating (Par) policies offer a share in the profits made by the insurer, thereby diluting their margin even as their balance-sheet risk is lower. LIC has the highest share of such Par policies, further affecting its margin profile. But of course, LIC’s larger Par contribution leaves room for moving towards non-Par policies as has been seen in recent quarters, which in turn, leaves room for margin improvement.

Among private insurers, ICICI Prudential Life has the highest share of Par policies, while SBI Life has the lowest contribution from Par. Another aspect of the product mix that contributes to SBI Life’s business profile is the higher share of ULIP products, which reap benefits during market upswing.

Also Read: Swan Energy’s rollercoaster ride: A turning point or a temporary rebound?

Persistency is key

The contributions of single premium, renewal premium, and first-year premium also affect margins. Notwithstanding recent regulations capping surrender penalties, renewal premiums tend to be sticky and have lower associated costs compared to new business premiums. A key metric towards tracking this this, is persistency, which measures the percentage of premiums renewed after a certain period. Higher the persistency, typically, better is the revenue-visibility as well as margin-profile of the insurer.

Chasing new business premium via mis-selling and/or to unwilling customers tends to reflect as high topline growth, but low persistency. This seems to be the case for Max Life which has the lowest 61st month persistency at 55%. LIC has the lowest 13th-month persistency at a little above 75% compared to more than 85% for its peers. This is at least partially attributable to LIC’s lower ticket-size of insurance policies, which have a higher probability of being surrendered after the first year. Having said that, LIC has been working towards improving its persistency, especially after the imposed cap on surrender penalties. It has tweaked its commission structure to reward renewals while also increasing the commissions for larger ticket sizes.

Also read | For Vedanta, dividends and demerger delays play spoilsport

Rounding it up

Courtesy the widely different business models with the different distribution channel mixes, product mixes, as well as business focus, the growth and margin profiles of the insurers in India have been diverging in an evolving regulatory environment. While ICICI Prudential Life has seen the fastest topline growth, SBI Life has had the strongest margin profile. The market leader LIC has been lagging on both counts, thanks to the doubled-edged sword of government backing, erosion of market share, and a lag in the outcomes from modifying its commission structure.

Recent divergence in stock returns is reflective of the divergence in business fundamentals. After LIC’s steep correction over the last year, it is trading at the lowest price-to-book of 5x. Max Life, with its issues in persistence, is available at 7 times its book value. On the other end of the spectrum, SBI Life, given its strong margin profile, is trading at the steepest valuation of 9 times its book-value. Upgrades in embedded value hereon are contingent on a show of strength even as regulations keep insurers on edge.

For more such analyses, read Profit Pulse.

Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. X: @ananyaroycfa

Disclosure: The author does not hold any shares of the companies discussed, except SBI Life. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.