HDFC Standard Life's margin profile improving, Q4 net profit rises 40%

HDFC Standard Life Insurance Company (HDFC Life) finished FY18 with over 24 per cent growth in net profit. The insurer’s earnings during the March 2018 quarter (Q4), the seasonally strong period for life insurance companies, grew 40.4 per cent year-on-year (y-o-y). Its annual premium equivalent (APE: a sales measure for an insurance firm based on new business won by it) increased around 32 per cent during the year.

HDFC Life’s value of new business (VNB) margin expanded 120 basis points (bps) to 23.2 per cent in FY18. VNB margin is a key profitability indicator of an insurer, and is the present value of profit from new business over a given period of time divided by the annualised premium.

A sharp increase in the share of protection products (up 410 bps to 25.9 per cent) in FY18 boosted its margins, as these are more profitable products. Although the share of these products has come down in Q4 (extrapolated from 27.3 per cent in April-December 2017), analysts said the yearly trends were more accurate to look at. The strong growth in other products helped margins in Q4. The company, among the top players in the protection product segment, aims to increase the share of these products further. The management indicated that such products should see higher traction, given the under-penetrated market.

Among other key parameters, the improvement in persistency ratio boosted the margin. Persistency ratio is the percentage of policies renewed after a specific period (bucket) such as after one year or three years, etc, reflecting the customer stickiness. In FY18, the persistency ratio went up by 200-600 bps across the buckets, barring 61 months, which came down to 51 per cent from 59 per cent in FY17, owing to slippages in the business won in FY13. But, the company would see some progress in this bucket eventually due to the improved trend in the recently written businesses.

HDFC Life’s increased share of ULIP (unit-linked insurance plans that are linked to capital markets) confined the overall margin expansion as ULIP typically fetches lower margin. In FY18, share of ULIP increased to 57 per cent from 53 per cent in FY17. This share has reduced in Q4 (extrapolated from the figure of 59 per cent in April-December 2017), indicating the firm’s efforts to balance the share of ULIP products.

With an overall healthy performance and a potential improvement in the product mix with the main focus on protection products, analysts expect the company’s VNB margin to increase further, boosting its earnings. “We believe margins to improve further as the share of protection increases and the ULIP mix remains in the same range,” analysts at Prabhudas Lilladher said.

While the business outlook appears solid, some analysts also expect the stock to correct citing current high valuations. But, if the firm can sustain the improvement in margins and earnings, valuations should also remain elevated.

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