Insurance H1: Why growth is slowing and margins are peaking

By: | Updated: October 30, 2018 5:05 AM

Our assessment of H1 results indicates (i) Moderating new business growth, (ii) Product mix shifting towards protection & away from par-savings, (iii) Margins peaking out, as delta from protection mix increase slowing down, (iv) Negative investment variance from higher bond yields impact EV by 2-5%.

Premium growth for the players moderated on high base and softer capital markets. New business APE growth was muted for IPRU and SBI Life.

Our assessment of H1 results indicates (i) Moderating new business growth, (ii) Product mix shifting towards protection & away from par-savings, (iii) Margins peaking out, as delta from protection mix increase slowing down, (iv) Negative investment variance from higher bond yields impact EV by 2-5%.
Revenue (New Business Premium)

Premium growth for the players moderated on high base and softer capital markets. New business APE growth was muted for IPRU and SBI Life. For HDFC Life, APE growth was stable. Business mix continued to shift towards higher protection, primarily led by credit protect segment. Par-savings mix in H1FY19 APE has reduced by >400 bps y-o-sy for all the three players.

Profitability (VNB margins)
VNB margins have improved by 100 bps (over FY18 margins) for all the three players. H1FY19 margins were 24.3% for HDFC Life, 17.5% for IPRU and 17.3% for SBI Life. Increasing competitive intensity in credit protect segment, coupled with higher bargaining power of distributors have reduced the core profitability of protection mix segment relative to what they were 2-3 years earlier.

Embedded Value & Operating RoEVs
Higher interest rates as of Sep-18 vs Mar-18 (~70-90 bps in 3/10 yr debt) led to MTM losses on the debt book, leading to negative investment variance for all the three players. Part of EV impact was offset by higher value-in-force from increase in investment income rate assumption. On a net basis, EV sensitivity to 100 bps rate increase stands at -2.0% for HDFC Life, -5.0% for SBI Life and -2.1% for IPRU. As per our calculations, annualised operating RoEVs for H1FY19 is 16% for IPRU, 20% for HDFC Life and 15% for SBI Life.
Trading at ~2.4-4.4x EV multiples

On H1FY19 EV, HDFC Life trades at 4.4x P/EV, IPRU at 2.4x & SBI Life at 2.9x. Stripping out EV, current prices imply growth value at 37x FY19 VNB for HDFC Life, 18x for IPRU and 21x for SBI Life.

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