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HDFC Life continues to struggle with margin pain
Source: Live Mint
A key takeaway from the September quarter (Q2FY25) earnings of HDFC Life Insurance Company Ltd is that pressure on value of new business (VNB) margin continues. VNB margin came in at 24.4% in Q2FY25, down sequentially and year-on-year. An analysis of the annualised premium equivalent (APE) for Q2FY25 shows the adverse new business profile, including product mix and higher policy benefits, may be putting pressure on the margin. The overall APE grew 26.6% year-on-year in Q2FY25, but VNB rose 17.5%. The impact of the new business profile was ₹80 crore in Q2FY25 versus ₹40 crore in Q1FY25. This is the key monitorable going forward.
Non-participatory saving products (policyholders are not entitled to a share of the company’s profit) rose 93% year-on-year to ₹1,270 crore and unit-linked insurance plans (ULIPs) by almost 50% year-on-year to ₹1,194 crore. However, APE growth was moderated by other segments that reported a fall.
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The 37% fall in participatory APE is understandable. As participatory policies allow policyholders to share the profits of life insurance companies, it is a conscious strategy to reduce focus on the segment. However, the reduction in protection or term insurance business by 7% is a concern as it has a high profit margin. Annuity APE also fell by 12%, which is a worry as the company has been aiming to increase sales of the longevity product.
The numbers have been derived from the pie chart of the company’s presentation, so there could be slight variation as the percentages have been rounded off. Nevertheless, they do reveal the broad trend.
Further, the operating return on embedded value (OPEV) grew by about 19% year-on-year to ₹1,910 crore. The growth was driven almost equally by the two key elements of unwinding and VNB. Unwinding refers to adding the interest element (time value of money) to an amount discounted to the present value.
Comfortable solvency ratio
The solvency ratio measures the financial soundness of an insurer and its ability to pay claims. It indicates the value of life insurance that can be sold by an insurance company, and is similar to the capital adequacy ratio for banks. It was at 181% at the end of Q2FY25, which is comfortably above the prescribed regulatory limit of 150%. After Q2FY25, the company raised subordinated debt of ₹1,000 crore, which further increased the solvency ratio to 192%. The company raised funds as it has been working with an internal threshold of 180%, higher than the regulatory limit, which is a prudent thing to do.
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Despite the high share of ULIPs and consequent VNB margin challenges, management has a target of doubling VNB every four years and growing retail APE higher than the industry APE. Management has guided for 18-20% APE growth and 15-17% VNB growth for FY25. HDFC Pension Fund Management, HDFC Life’s wholly owned subsidiary, has crossed the milestone of ₹1 trillion in assets under management, maintaining its position as India’s largest private pension fund manager.
Meanwhile, HDFC Life Insurance stock is up 12% so far this calendar year, slightly lagging the Nifty50 index. The stock currently trades at ₹723, below its all-time high of ₹775.65 from almost three years ago, even though earnings have steadily increased over the years. Based on the likely embedded value of around ₹60,000 crore for FY25, HDFC Life’s shares quote at a multiple of 2.6x.
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