HDFC Life’s bets on protection reaps profits but valuation stays a concern
2 min read.Updated: 23 Jan 2019, 09:19 AM ISTAparna Iyer
Protection plans reward insurer if its mortality assumptions are accurate and hence claims are lower
HDFC Life's early focus on protection business has reaped profits for the life insurer as its value for business continue to grow
HDFC Life Insurance Co. Ltd’s results checked all the right boxes that would underscore the rich premium the stock enjoys.
For the nine months ended December, the private sector insurer reported 41% growth in new business premium and a value of new business (VNB) margin of 24%. Its embedded value has grown 20% from a year ago.
What this means is that not only are the insurer’s policies being grabbed by customers, but it is also able to squeeze more profits out of them.
Protection plans are margin-friendly, as the insurer need not pay regular bonuses. Such products also reward the insurer if its mortality assumptions are accurate and, hence, claims are lower.
The management has indicated that its focus on protection plans continues and that the share will rise, although slowly, as the ticket size is lower than other plans.
Is the insurer spending more to gain market share and profits?
Its expense ratios don’t send up any red flags. In fact, the expense of management ratio has dropped from 19% a year ago to 17%. Given that its tie-ups with banks and the network of HDFC Bank Ltd as well as parent HDFC (Housing Development Finance Corp. Ltd) provide enough bandwidth to push products, the life insurer doesn’t need to put in too much money.
However, the commissions for renewal premiums have gone up sharply, the management said, indicating that agents are being compensated for making sure persistency ratios are high. HDFC Life may have an enviable product mix, but nearly 60% of its portfolio is still made up of market-linked products. This has ramifications as the insurer’s investment income was hit because of market risks. Also, persistency ratios drop in such products and the 61st month ratio was 44%.
Analysts had noted that given near-month persistency ratios seem to have peaked and the protection business share has steadied, HDFC Life has limited scope to improve VNB margins.
Indeed, the VNB margin for the quarter ended December was 23.5%, lower than 24.5% in the previous quarter.
So far, HDFC Life’s performance has justified the stock’s rich valuation. The scrip has gained 33% from its issue price in the initial public offering in November 2017. But the fact that peer stocks are more modestly valued explains why four brokerage firms already have a sell rating on the stock.