Lower growth estimates likely to keep HDFC Life stock under pressure

HDFC Life reported Q3FY24 annual premium equivalent (APE) at Rs 3,190 crore which was more than 10 percent below consensus and down 4.5 percent Y-o-Y

HDFC Life Insurance Company (HDFC Life) shocked the Street when it missed consensus growth estimates by a wide margin. As a result, the stock saw selling pressure. However, analysts pointed out that it managed to hold on to margins and the merger of group leaders HDFC and HDFC Bank has gone well. HDFC Life reported third quarter of financial year 2023-24 (Q3FY24) annual premium equivalent (APE) at Rs 3,190 crore, which was more than 10 per cent below consensus and down 4.5 per cent year-on-year (Y-o-Y). The low growth led to a 1.7 per cent Y-o-Y lower value of new business (VNB) at Rs 860 crore (again over 10 per cent lower than estimates). VNB margin was maintained at 26.8 per cent though the market was hoping for better.  

Management attributed this to an approximately 60 per cent Y-o-Y reduction in high-ticket size business. While HDFC Life maintained its margin guidance, it lowered the APE guidance, as it indicated it was targeting double-digit growth in individual APE. The Street is now downgrading Q4FY24 growth estimates as a response to the result. Non-participating policy or non-PAR, annuity, and term products declined 35 per cent, 45 per cent and 16 per cent Y-o-Y respectively, offset by 74 per cent and 96 per cent surge in unit linked insurance plans (ULIPs) and group products respectively. Embedded value grew 20 per cent Y-o-Y to Rs 45,200 crore. Reported net profit at Rs 360 crore was close to estimates and saw a 16 per cent Y-o-Y growth. The company saw strong growth of 14 per cent Y-o-Y in individual APE in Tier II and III cities, where it is well placed, given strong partnerships with financial institutions having a higher rural presence like Utkarsh SFB, AU SFB, and Bandhan Bank.

The recent draft Irdai circular on increasing surrender value for non-linked policies could negatively impact all insurers. They are in the process of submitting representation as a sector as well as individually. This would be a regulatory overhang for the sector.  

 

HDFC Life’s total premium rose 6 per cent Y-o-Y to Rs 15,200 crore within which new business premium declined 3.5 per cent Y-o-Y, while renewal premium grew 16.8 per cent Y-o-Y.  On the distribution front, the share of bancassurance improved to 64 per cent while agency channel constituted 18 per cent share for 9MFY24 (based on individual APE). This change in share was at the cost of direct and broker channel as it continues to face headwinds in the form of heightened competition, and the shares moderated to 11 per cent and 6 per cent respectively for 9MFY24. Total assets under management (AUM) increased 20 per cent Y-o-Y to Rs 2.8 trillion while solvency ratio stood at 190 per cent which was a quarter-on-quarter (Q-o-Q) decline of 400 basis points (bps). 

The manag-ement said growth in the Tier II and Tier III towns has been twice that of the company and has accounted for 65 per cent of the overall topline. The company remains optimistic about its growth prospects. It sees growth being sustained in the less than Rs 5 lakh ticket size, and anticipated stability in the macro environ-ment leading to increased alloca-tion to insurance products, forth-coming full-year impact of counter share at HDFC Bank, the expansion of new relationships and new branches to boost the agency channel.
 

Some analysts maintain a ‘buy’ call but everyone has trimmed their valuations. 

During Q3 persistency ratio (13 month) fell by 100 basis points Y-o-Y to 86 per cent due to minor re-adjustments at Exide Life portfolio, but longer term (25 to 61 months) persistency improved in the range of 100 to 400bps. On the proposal for lower surrender charges, management indicated that it is being discussed with the regulator. While this will be a risk to margins, the industry is working on ways to mitigate impact if Irdai doesn't soften its stance.