The non participatory product that HDFC Life had launched was the force behind this margin spike. Sale of non-participatory policies surged which nearly halved the share of market linked products to 26% in overall portfolio.
Non participatory products on the other hand carry balance sheet risks unless the life insurer is adequately hedged.
Therefore, it is obvious that the outlook on margins depend on the sustained success of this product. “Key to watch out for, is thus, how does this segment scale and effectiveness of relying on flows from shorter duration products to hedge re-investment risk," said Jefferies in a note.
The management said that ULIPs share will be far lower than it was in previous quarters. However, there is no guarantee that the overall product mix would change.
Ergo, analysts believe that margins have peaked. “HDFCL’s margins have peaked out for now, given a skewed product mix toward non-par savings (largely due to Sanchay plus sale) and should normalize to c. 27% in FY20E from 29.8% in Q1FY20," said analysts at Emkay Global in a note.
Business growth continued to be strong for the insurer with total annualised premium equivalent (APE) growing at a brisk pace of 67%.
Larger rival SBI Life Insurance Co also released its results which showed growth has surprised on the upside. The insurer’s APE grew at a robust 41% and given the size of the company, the double digit growth is impressive.
SBI Life’s portfolio continues to have a large share of ULIPs but its protection business has grown by leaps and bounds. The margin friendly protection business formed 14% of new business premium but is still just 4.4% of the total product mix.
Perhaps this explains why HDFC Life’s valuations are higher than the larger SBI Life.
While SBI Life’s strength lies in its access to the largest branch network of its parent State Bank of India, HDFC Life too has ramped up its distribution. In fact, online sales that typically result in better persistency ratios have been higher for HDFC Life.
Indians not only buy insurance online but also stick with their purchases.
Shares of both the life insurers have gained today but the key question is sustainability of these growth rates and margins.
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