Home / Markets / Mark To Market /  Investors choose HDFC Life over peers but valuations cause worry

Shares of HDFC Life Insurance Ltd have recovered smartly since the lockdown was lifted, and are now only 5% lower compared to the pre-covid highs. This compares with a 15-16% drop in shares of other private life insurers such as SBI Life Insurance Co. Ltd and ICICI Prudential Life Insurance Ltd. What is behind the warmth of investors towards HDFC Life Insurance?

To begin with, the private sector life insurer was on a strong footing even before the covid-19 pandemic hit in late March. The company’s FY20 performance was superior to its peers. Profitability indicators, such as value of new business growth and value of new business margin, trumped competitors consistently. For instance, HDFC Life’s value of new business margin was 25.9% for FY20 as against 18.7% for SBI Life and 21.7% for ICICI Prudential Life.

Performance for the June quarter showed the impact of the lockdown. But HDFC Life managed to keep profitability metrics from eroding too much. Despite a 33% contraction in new business premium, the insurer kept its margins at 24.1%. Peers ICICI Prudential Life and SBI Life saw a sharper contraction in new business. To be sure, data from the sector regulator shows that HDFC Life has fared far better than peers in recovering from the pandemic’s blow.

Strong comeback
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Strong comeback

The bounce back in new business premium in July and August has resulted in narrowing the decline in business for HDFC Life. On an annualized premium equivalent (APE) basis, the contraction in HDFC Life’s business was just 5% for the first five months of FY21. For SBI Life, the contraction was 19% and ICICI Prudential Life Insurance saw a decline of 40%.

While it may seem to justify the valuations, some analysts said the shares may have turned pricey. Edelweiss Securities has kept its rating of reduce on the stock. “Valuations at 4.4 times price to embedded value for FY22 are due to a legacy of higher margin/growth compared to competition, along with brand benefits," wrote Edelweiss analysts in a note.

A big concern for analysts is the potential moderation in the protection business, which has been a large contributor to margins for HDFC Life. Kotak Institutional Equities has said the increase in ratio of sum-assured to premium payout and the rise in average ticket size indicate that growth in simple term plans may be moderating, relative to that of other traditional products.

This is a trend observed for most private sector insurers, but HDFC Life has been at the forefront of pushing protection plans. Besides, even those protection plans bundled with loans may see weak demand, analysts added. Since the protection plans are margin-friendly, this could weigh on them. Nevertheless, HDFC Life’s sustained recovery is its best ally in keeping investors interested. So far, the insurer has given little reason to doubt its revival trajectory.

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