Mortality spike due to Covid-19 not impacting life insurers: Edelweiss

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Covid-19 has claimed over 3 lakh lives so far, making India third worst-hit nation by the pandemic after US and Brazil. The US has so far reported 6,07,726  deaths and Brazil 4,56,753 deaths. With the increasing deaths, claims of insurers are also rising.

However, according to a report titled ‘Despite death and taxes’ by Edelweiss Financial Services, insurers are not impacted by the rising claims.

While pure mortality products or pure life cover products incrementally make up a larger component of insurance company’s annual value creation, on a balance sheet basis, they remain a relatively minor proportion, the report said.

On aggregate, these are more savings than mortality businesses. The reinsurance proportion of mortality (sum assured) in India remains high, transferring out most of the risk to reinsurers. While the evolution of strains poses some risks around exact estimates of population mortality while the pandemic is raging, in some sense the actuarial models have the luxury of building in a year’s experience of a real-world simulation of an identical scenario, it added.

“If Covid impact on mortality cost is 2.5x in FY22 vs. FY21 actuals (i.e. 2x of that already provisioned for), it amounts to a grand total of about 100bps lower compounding in EV (Embedded value) for the year. This, we believe, does not represent a material risk worth worrying about,” the report explained.

Management commentary

Management commentary of listed life insurers that have declared Q4FY21 results so far narrated that they are not much impacted by mortality.

For instance, ICICI Prudential Life Insurance in FY21 received 2,500 Covid-related claims of Rs 456 core. Net of reinsurance the amount came down to Rs 264 crore. In view of the ongoing second wave and rising death, the insurer has increased the provision for future Covid-19 claims to Rs 332 crore.

Similarly, In FY21 HDFC Life paid total claims worth Rs 2,412 crore (net of reinsurance) against expectations of Rs 2,350 crore. The gap of Rs 50 crore was met with Covid reserves of Rs 41 crore. Covid specific claims stood at Rs 145 crore (net of reinsurance) for 2,324 claims. For FY22 the company has provided Rs 165 crore for a Covid impact.

Likewise, SBI Life Insurance in FY21 received over 5,000 Covid claims netting Rs 320 crore. The insurer has also made a provision of Rs 183 crore for Covid. That apart the insurer has strengthened the mortality assumptions (projections of expected death rates used by actuaries to estimate insurance premiums and pension obligations) to the extent of Rs 80 crore.

“In other words, if the Covid impact on mortality cost is 2.5x in FY22 vs. FY21 actuals (i.e. 2x of that already provisioned for), it amounts to a grand total of about 100 basis points lower compounding in enterprise value for the year. This does not represent a material risk worth worrying about,” noted the report.

Top picks

The brokerage firm is of the opinion that the sector these are unaltered and is unable to find a period of better risk-reward for the sector in the last five years as short-term mortality spikes cannot erode business value materially.

ICICI Prudential Life and SBI Life are the top picks of the brokerage house with a potential upside of over 50% on a 12-month basis. Both the stocks are trading a little above 2x FY22E price to enterprise value. Even after assuming a CAGR (compounded annual growth rate) of 25%+/26–30% FY21–23E APE (annual premium equivalent)/VNB (value of new business), resulting in 16–25% RoEVs (return on enterprise value).

(Disclaimer: The recommendations in this story are by the respective research and brokerage firm. Money9 & its management do not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)