Will insurance stocks survive death claims & taxes? | Economic Times

The insurance industry is battling on multiple fronts. Life insurers have seen a spike in claims due to surging covid deaths. Introduction of optional tax regime and tax on high-value Ulips are also negatives. Health insurers are facing a barrage of claims while motor insurance premiums have been hit amid lockdowns. Can insurance stocks face the music?Life insurers paid out covid-related claims worth Rs 1,986 crore in 2020-21. In 2019-20—a normal year—aggregate death claims paid by life insurers stood at Rs 18,042 crore. The total death claims paid for in 2020-21 are not known yet, but numbers reported by individual insurers reveal a lot. ICICI Prudential Life saw death claims in 2020-21 jump to 1.89 lakh compared to 1.11 lakh the previous year. SBI Life received 67,000 death claims in 2020-21 relative to around 50,000 the previous year. The devastating second wave are likely to eclipse these numbers. “The claim experience is likely to stay adverse over the next couple of quarters, all the more due to delays in reporting claims. Claims in first half of current financial year may easily surpass the total claims seen in 2020-21,” say analysts at Motilal Oswal Financial Services.The irony of recommending a life insurer in the middle of a pandemic is not lost on analysts. Yet, they feel this doesn’t alter the sector’s growth runway. Analysts at Edelweiss Securities say the mortality spike is not material enough. At an aggregate level, life insurers are more savings than mortality businesses. The pure protection element remains a relatively minor proportion on a balance sheet basis.Besides, a large part of the mortality risk is transferred out to reinsurers. Under reinsurance, the company passes on some part of its own insurance liabilities to the other insurance company. It enables insurers to stay solvent by restricting losses due to excessive claims. ICICI Prudential Life Insurance received covid-related claims of Rs 459 crore in 2020-21 of which Rs 195 crore was reinsured. Of the Rs 231 crore gross claims paid by HDFC Life for covid deaths, claims totalling Rs 86 crore were reinsured. Even though reinsurers have hiked rates in response to the higher mortalities, this is expected to be short-lived. Moreover, life insurers have made higher provisions for covid-led mortality spikes. “Given the sharp rise in fatality rates, insurers would need to shore up provisioning buffers. However, this does not pose any material risk to the balance sheet, solvency ratios, in our view,” insist analysts at MOFSL.SBI Life has seen faster growth among life insurers 83257231The other perceived dampener for life insurers is on the taxation front. First, the introduction of the optional new tax regime—replacing any deductions under Section 80C with lower tax rates—threatened to rob Ulips of their tax advantage. A large part of Ulip sales happens in the fourth quarter. This portion of demand faced uncertainty, but has not been impacted much as individuals have shown preference for sticking to the old tax regime.The last Budget removed LTCG tax exemption for Ulips with annual premium greater than Rs 2.5 lakh. With 80C income tax benefits already restricted, forward demand scenario for Ulips appeared grim. But this has not played out nearly as badly. “Ulip volumes in the five quarters following the tax regime change seem to have vindicated our stance that demand destruction was likely to be limited in a narrow range,” reiterate analysts at Edelweiss.Analysts say recent negatives bear a disproportionate overhang on valuations of life insurance stocks, ignoring multiple levers of growth lying ahead for the sector. Edelweiss analysts say there has not been a period of better risk- reward for life insurance stocks in the last five years. “While the March quarter results of the Big 3 (HDFC Life, ICICI Prudential Life and SBI Life) and blockbuster monthly numbers at large have started attracting attention to the yawning valuation gap vis-à-vis fundamentals, the multiple re-rating has barely started,” they note. ICICI Prudential Life and SBI Life remain their top picks. Non-life insurers are more exposed to the pandemic. Industry wide Covid-related health claims which stood at Rs 14,561 crore by end of 31 March 2021 escalated to Rs 23,715 crore on 20 May. This is a rise of 63% in just 50 days. During 2019-20, non-life insurers received aggregate health claims amounting to Rs 45,783 crore. Industry losses are higher on covid-specific polices, where insurers failed to gauge extent of risk. Meanwhile, motor insurance is facing the brunt of curbs on mobility. Motor premiums moderated in 2020-21 owing to weakness in new vehicle sales and lower freight volumes.HDFC Securities says the road ahead is bumpy for ICICI Lombard, the only listed general insurer. Overall loss ratios are likely to go up given the resurgence in covid claims and increased motor traffic, resulting in higher combined operating ratios (a measure of general insurance underwriting profitability) . “Given the uncertainties, we rate ICICI Lombard a REDUCE,” it notes. Yes Securities has cut its premium growth estimates for ICICI Lombard. It slightly tweaked claim ratios to factor lower growth in the motor OD (own damage) segment and claim ratios in health and motor segment to inch higher.