HDFC Life Insurance Company | Market Cap: 1,15,280 Cr
CMP 571 | Price to VNB ~47x TTM
Recommendation | Sell Partially
Results: HDFC Life reported growth of ~35% in its net premium income and growth of 47% in its total new business premium.
Click here to check 10 Year X-ray of HDFC Life
Key Highlights:
-
The company reported improvement in APE growth of 25% largely from group premium, while ULIPs remained weak during the quarter due to volatility in equity market.
-
VNB^ margins improved to 25.6% led by rise in retail Protection/Annuity business and cost control. HDFC Life has the highest share of VNB margin due to higher share of group and protection business.
-
The share of banca (banks) channel in individual APE increased to 60% while the share of agents declined 2% year on year to 13% over 1HFY21.
-
PAR business has become 35% of overall premium which is risky as it .
Outlook: As per the management, HDFC Life is reflecting better business trends in the retail protection and annuity segment. The Banca channel is posting strong trends in the Sanchay Par advantage however, credit life remains under pressure. On the cost front, the pick-up in business volumes will be complimented by increase in variable cost.
Moneyworks4me Opinion: HDFC Life is focused on maintaining a balanced product mix across the Savings/Protection businesses, with emphasis customer service and product innovation. In the near term, Individual Protection/PAR segments are likely to see healthy growth and trends in ULIPs could remain sluggish.
VNB margins have been broadly stable over the past few quarters; however, as retail Protection and Annuity mix improves, there is a scope for margin expansion.
Insurance business is complicated just like banking business. One can’t analyse them simply on P&L statement. One has to learn about each product, its profitability and balance sheet ratios which are different than conventional manufacturing business.
Insurance products:
Insurance companies have broadly 4 products
-
group protection business i.e. business from its partners when they underwrite personal/business loans, they ask customers to buy insurance policy
-
individual protection business i.e. term life direct and indirect (small part of ulip/endowment premium is also term insurance)
-
PAR, i.e. participating policies, Policyholders (PH) receive share of profits in pool of premium invested in assets
-
Non-PAR i.e. non participating, PH earn fixed returns, eg annuity, etc.
Risks and advantages of each product:
-
PAR earns lower margin but better persistency due to reasonable returns earned by PH.
-
Term life (incl group protection) has the highest margin but lower persistency. PH skips paying term premium to save his expenses in bad times
-
Non-PAR have good margin but risky in falling interest rate environment fixed return has to be given to PH.
-
ULIP have lower margin and lower consistency due to volatile market return.
Valuation
Insurance companies are valued as [EmV + P/VNB or DCF of Value of New business]. Use of P/EmV is not a right way to value an insurance company but can be used only for reference versus other peers.
EmV : Embedded value is a sum of all future premium to be received from existing policies. This can be take as fixed component of a valuation.
VNB : This is sum of future premium of this year’s policies (using same persistency and profit assumption). This has to be estimated for the future and added to EmV.
Our estimate of VNB growth in HDFC Life is ~20% CAGR, while in SBI and Max Financial is ~12-14% CAGR. We may change the growth rate if we see change in business prospects due to i) better distribution leading to volume growth ii) more traction in high margin term life insurance product due to the event of pandemic.
* APE – Annual premium equivalent (APE) is a measure used for comparison of life insurance revenue by normalising the policy premiums into the equivalent of regular annual payments.
** PAR - Par policies are insurance policies that participate or share in the profits of the insurance company. Apart from the guaranteed benefits, they also provide non-guaranteed benefits.
^VNB- VNB Margin indicates the profit margin of Life Insurance Company. VBN margin is calculated by dividing the Value of New Business by Annualized Premium Equivalent.
