Covid's toll begins to show on HDFC Life books2 min read . Updated: 21 Jul 2021, 08:24 AM IST
- HDFC Life anticipates claims to stay elevated in the September and December quarters too with the threat of a third wave
HDFC Life Insurance Company Ltd’s June quarter (Q1FY22) showed the flip side of the pandemic on an insurance firm’s performance. A surge in claims prompted it to set aside more reserves towards them.
The private sector life insurer paid off 70,000 claims in Q1 totalling ₹1,598 crore on a gross basis, and said that peak mortality claims were 3-4 times that of the corresponding quarter last year. It anticipates claims to stay elevated in Q2 and Q3 too with the threat of a third wave. Therefore, HDFC Life has set aside ₹700 crore as an excess mortality reserve towards these anticipated claims. Its peer ICICI Prudential Life Insurance Company Ltd reported net claims of ₹500 crore, less than the ₹956 crore of HDFC Life.
Analysts at Jefferies India Pvt. Ltd point out that the reserve is five times the claims of FY21. “Management guides that the peak of individual claims is behind and the current level of provisioning is sufficient for excess death claims. However, any surge in claims due to a potential third covid wave remains a monitorable," they wrote in a note.
Indeed, this reserve and the claims settled in Q1 hit the firm’s growth and operating metrics. Return on embedded value moderated to 14.4%, leading to a slight moderation in embedded value expansion. Net profit at ₹302 crore was down 33% from last year. To be sure, the management had already indicated that the pandemic’s impact on claims would be felt. It had also created a covid reserve in FY21. Analysts say that the high excess mortality reserve may prevent a further hit to growth and profits in the coming quarters. That said, the prospect of big claims would weigh on business growth. The 44% year-on-year growth for Q1 in new business premium is largely propped up by a low base, and the impact of the second wave was visible on a sequential basis. On an annual premium equivalent (APE), HDFC Life saw its retail segment drop 47% from last quarter. The overall APE was down 46%. Despite all this, the firm has kept its profitability intact. New business margin remained healthy at 26.2%. The firm has gained from its product mix with the share of market-linked products being lower than peers. The pandemic has impacted the growth in margin-friendly protection plans.
This has turned analysts wary on valuation. “We remain positive on HDFC Life’s ability to switch between products/channels and product innovation aiding industry-best growth and profitability. That said, we see profitability gaps narrowing now versus peers and thus expect valuation premiums to narrow," said analysts at Nomura Financial Advisory Services (India) Pvt. Ltd in a note. Since April, HDFC Life’s shares have lost about 3%. But its peers SBI Life Insurance Company Ltd and ICICI Prudential Life Insurance Ltd gained 18% and 40%, respectively. At about 4 times the estimated embedded value (EV) for FY22, HDFC Life still comes across dearer than its peers, trading at 2.5-3 times EV.
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