Covid 19 Impact:
- The second wave of pandemic was less severe than the first wave but the health impact was higher.
- Given that Covid trends have varied by regions, the company has been more segmental (geographically) in its sales approach.
- Claims have mainly come from most affected states such as Maharashtra and Gujarat.
- The product mix remains balanced with higher focus on long term insurance products such as protection and annuity.
- The current mix stands at Par/Non Par savings/ULIP/ Non Par Protection/Annuity as 29%/31%/27%/8%/5%
- Higher mortgage disbursements have led to higher credit protect business.
- Due to second wave of pandemic death claims peaked up Q1 FY22 at 3-4X compared to Wave 1 in Q3 FY21.
- The company paid out 70,000 death claims in Q1FY22.
- The gross claims were Rs.15.98bn and net claims were Rs.9.56bn.
- During Covid, the death claims received on term insurance were higher and therefore the higher gap between gross and net claims.
- The individual claims have peaked out and they may normalize in the coming months as the vaccination pace will increase
- The claims received are mostly from the retail segment where there has been some acceleration compared to group claims.
- The peak claims had touched 300 per day but now it came down to 200 per day.
- Covid related claims are Rs.1.2bn in protection and Rs.2.1bn in savings.
Excess Mortality Reserves:
- Based on the current claims experience, the company has created excess mortality reserve of Rs.7bn during Q1FY22, which is spread across individual and group businesses.
- The adequacy of this reserve will be reviewed from time to time and mortality claims will also be monitored.
- The excess mortality reserve impact to EV is Rs. 5.5bn. Out of the total reserves carried as of 31st March 2021 (of Rs.1.65bn), the company still has a leftover of Rs.0.69bn. Therefore, total mortality reserves stand at Rs7.7bn, which the company believes is adequate enough to cover the deaths that have happened so far up to 30th June 2021.
- It has been adequately conservative in determining the impact and the actual experience is unlikely to be higher.
- In case of a third Covid wave, the company may have to set aside further reserves, but it’s highly unpredictable.
- Given the strong balance sheet, the company believes it has been able to absorb the higher claims and excess reserving quite comfortably.
- The company remains confident of outperforming the industry growth in FY22.
- The company has mostly stayed away from the group term insurance (GTI) business due to low margin. A small adverse experience may wipe out the profits of the company. The company’s GTI business is negligible.
- The company continues to believe in the long-term retail protection opportunity. Due to pandemic, the awareness has increased significantly, resulting in higher demand. However, the company has been cautious in terms of underwriting this business due to higher risks and challenges with respect to physical medical tests.
- Q1FY21 saw extremely high demand for term plans which has now normalized but it is still higher than pre-covid levels.
- Term conversions have been impacted due to medical testing restrictions. Conversions in banca channel are at 65- 67%.
- Despite the same product mix (yoy basis), the margin improvement (yoy) has come on account of upward re-pricing of protection coupled with increasing share of annuity and higher growth in credit protect business.
- The company has added ICICI Securities and TVS Credit as new corporate partners.
- Overall commentary on new business across channel is positive. The company would continue to prefer increasing the share of proprietary channel.
- Operating leverage will kick in as volume (number of policies sold) increases.
- Reinsurers may come back with stricter reinsurance rates after the second wave .In that case, the management highlighted that it may pass on the costs through price hikes or it may use some of the other tools available to mitigate the impact or a combination of both.
Please find attached for detailed analysis.