HDFC Life Insurance Co Ltd’s June quarter (Q1FY25) results reflect the mindset of insurance buyers. While they continue to see insurance as an investment product rather than a risk-coverage tool, their risk appetite is growing, with policy-buyers increasingly choosing unit linked insurance plans (ULIPs).
HDFC Life’s ULIP sales surged 88% year-on-year to ₹918 crore in Q1. In fact, ULIPs were a key driver of the overall annualised premium equivalent (APE) growth of 23%. Their contribution to overall APE jumped to 32% from 21% in Q1FY24. APE is a measure of sales for insurance companies.
While the APE growth is commendable, the tilt towards ULIPs took a toll on the value of new business (VNB) margin – a measure of profitability when a new insurance policy is sold. Though HDFC Life’s absolute VNB grew 18% year-on-year to ₹720 crore in Q1FY25, the margin fell to 25.1% from 26.2% in Q1FY24. The margin peaked at 27.6% in FY23 and tumbled to 26.3% in FY24.
Also read: Crompton Greaves poised for better growth momentum
In the case of ULIPs, nearly the entire premium paid is invested, with only a small sum allocated to actual insurance. Over the past five years, most private life insurance companies have seen ULIP sales rise from 10% to 40% of total sales. There are several reasons for this. For one, with the stock market booming, marketing ULIPs has become easier for life insurance companies. The product also requires a lower capital adequacy ratio, called the solvency margin, and the asset management fees are attractive to boot.
On the flip side, the insurance portion of a ULIP premium is generally more expensive than a standalone insurance product. However, since the break-up is not shown, most ULIP buyers are unaware of this, and the fact that they would be better off buying insurance and mutual funds separately. Importantly, so long as this continues, the mutual fund industry will face stiff competition from life insurance companies.
Margins under pressure
The downside for insurance companies is that their margins could be squeezed further once new surrender value guidelines come into force. Non-participating savings products, which comprise 30% of HDFC Life’s total APE, are relatively more vulnerable to the surrender value guidelines, and could cut the VNB margin by 100 basis points. But HDFC Life’s management feels the margin pressure could be mitigated by measures such as reducing the agency commission. Insurance products with promised guaranteed additions are called non-participatory saving products or non-par. Policies with variable bonus are known as participatory saving products or par.
Also read: DMart is on the road to recovery, but in the slow lane
Despite the growing ULIP sales and consequent VNB margin challenges, HDFC Life’s management reiterated its aspiration of doubling VNB every four years and growing retail APE faster than the industry. But if ULIPs continue to gain in popularity, it may be hard for HDFC Life to meet its VNB goals.
If the APE doubles by FY28 and VNB margin remains at 25%, the absolute VNB or economic profit could also double to ₹7,000 crore. Using the price-to-VNB multiple, HDFC Life’s market capitalisation of about ₹1,37,200 crore discounts the likely economic profit for FY28 VNB by almost 20 times. This is pricey. Also, based on FY24’s embedded value of ₹47,470 crore, HDFC Life’s shares quote at a multiple of 2.9x, which is a premium to most of its listed peers.
