Private life insurance companies trebled their total net profits in 2011-12, with 13 of 22 companies turning in a positive result.

Life Insurance Corporation, the largest insurer, witnessed a modest profit growth of 12 per cent. Total net profits for the industry were at Rs 5,924 crore in 2011-12, up from Rs 2,658 crore a year ago and a combined loss of Rs 989 crore in 2009-10.

In a recent report on the insurance industry, Goldman Sachs pointed out that insurance companies have been reporting high profit growth for the past two years despite a slowdown in new premium income, due to the high proportion of lapse profits.

It said that such profits contributed 10 to 190 per cent of profits before tax for select insurers. Lapse profits or surrender charges are booked by the insurer when the policyholder fails to pay renewal premium.

Annual reports show that ICICI Prudential, which pipped LIC as the most profitable insurer, had surrender charges and policy foreclosure charges worth Rs 877 crore. Bajaj Allianz, the second most profitable private insurer, had Rs 493 crore.

Surrender charges were very high in policies issued prior to September 2010, after which a regulatory cap was introduced on such charges. Hence, this source of profits may not sustain in future.

Maiden profits

HDFC Life’s Executive Director Vibha Padalkar, however, counters the claim that surrender charges were the key contributor to results. She said: “Many companies, including us, have declared maiden profits this year (FY12). This has been possible as the back book (policies issued earlier) has started generating sufficient profits to offset the new business strain incurred on writing of new policies and this has resulted in improving the Indian GAAP results and control on costs. Focused efforts and outsourcing initiatives undertaken to control costs have helped reduce the expenses and thereby contributing to higher profitability.” She also said that “out of the surrender charges collected, a fair proportion of the same goes to reserves and are transferred to Profit & Loss account only after 2-3 years. Therefore, a direct correlation cannot be made between surrender charges and the profit for a particular period.”

HDFC Life profits were Rs 271 crore last fiscal compared with a Rs 99-crore loss a year ago.

Fourteen out of 23 companies which have operations for more than a year, as of March 2012, had turned profitable. The number was 12 in FY11.

On the growth prospects of insurers, Goldman Sachs feels that volume growth may decline but companies with strong support from parent/associate companies’ branch network are expected to do well.

Looking ahead

Prabhudas Lilladhar noted that bank-driven insurers enjoyed higher market share in premiums during the period April- September 2012, thanks to growth in premiums even as the agency-led insurers have witnessed contraction. Both reports pointed out that the bank-driven insurers have been able to adapt better to the new regulations on ULIPs.

When asked about the outlook for the company, Vibha Padalkar said: “HDFC Life is well positioned to align and take advantage of the potential changes expected in the near future. We expect polarisation of market share in favour of large players with access to existing distribution.

“There would be higher alignment to brands that evoke trust. Bancassurance and revised product guidelines are expected in Q3 FY13 and speed to market would be critical in the short term. Process and technology will be the key differentiators to improve productivity and reduce cost across the value chain given the anticipated business environment challenges.

“Also, the ability to attract talent is likely to be restricted to select insurers who deliver profitable and sustainable growth.”

(With inputs from N.S. Vageesh, Mumbai Bureau)

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