Higher share of Ulips likely to weigh on life insurers' profit margin

Non-life firms to post strong premium growth, benefit from low claims ratio

Increased sale of Unit Linked Insurance Plans (ULIPs) is set to weigh on the margins of listed life insurance companies in June quarter of FY25 (Q1FY25) despite higher premium accumulation on a favourable base.

A buoyant equity market has led to an increase in sales of ULIPs, driving the growth in Annualized Premium Equivalent (APE) of life insurers. APE is the sum of regular premiums plus 10 per cent of new single premiums in a particular period.

According to analysts at Emkay Global Financial Services, Value of New Business (VNB) margins for private sector life insurers will contract in Q1FY25, given higher share of united linked products in the product mix and some pressure on group term policy pricing. VNB margin is the measure of profitability of life insurers.

“…life insurers would post strong APE growth of 20.3% year-on-year (Y-o-Y) in Q1FY25 on a soft base. Given the strong equity markets, linked products are particularly likely to post robust growth. Margins, though, shall dip given the mix change and lower product-level margins. Strong APE growth shall drive up aggregate VNB 10.8 per cent Y-o-Y,” analysts at Nuvama Institutional Equities said.

Life insurers’ guidance on sales and margins for non-linked savings products, whose surrender values are expected to increase in the second half of FY25, will be a key focus point during the earnings update, Nuvama analysts said. The insurance regulator revised the surrender value norms, which will be effective from October 2024.

As per Emkay Global, Life Insurance Corporation (LIC) is anticipated to defy the trend of VNB margin contraction. LIC’s VNB margin is expected to inch up to 14.7 per cent in Q1FY25, while SBI Life’s VNB margin is set to drop to 27.2 per cent; HDFC Life’s margin is likely to dip to 25.6 per cent and ICICI Prudential Life’s margin to 23.1 per cent from 30 per cent last year. Similarly, Max Life’s VNB margin is projected to be at 20 per cent.

On the other hand, non-life insurers are expected to see an improvement in combined ratio in Q1FY25, due to lower claims ratio. A combined ratio of less than 100 is considered to be better as it indicates that the insurer is earning more through premiums as compared to claims paid and the operating expense incurred. Premium growth is expected to be strong, driven by motor, health and commercial lines.