HDFC Life sees valuation under pressure as claims rise in Q1
The June quarter of HDFC Life Insurance Company Ltd showed the pandemic’s reverse on the performance of an insurance company. A sharp increase in claims prompted the insurer to set aside more reserves for them.
The private sector life insurer settled 70,000 claims during the June quarter, totaling ₹1,598 crore on a gross basis, and said maximum mortality claims were three to four times higher than in the corresponding quarter of last year. He expects claims to remain high in the September and December quarters also with the threat of a third wave. Ergo, HDFC Life set aside ₹7000 crore as excess mortality reserve for these anticipated claims.
Analysts at Jefferies India Pvt Ltd point out that the reserve is five times greater than the claims of FY21. “Gest. indicates that the peak in individual claims is behind and that the current level of funding is sufficient for excess death claims. However, any increase in claims due to a potential 3rd wave of Covid remains controllable, ”they wrote in a note.
Indeed, this reserve and the claims settled during the June quarter had an impact on the growth of the company as well as on the operating parameters. The return on intrinsic value moderated to 14.4%, causing the expansion of intrinsic value to moderate slightly. Net profit at ₹302 crore for the quarter was down 33% from a year ago. Certainly, management had indicated that the impact of the pandemic on claims would be felt and had also created a covid reserve in FY21. Analysts believe the high excess mortality reserve could prevent another blow to growth and earnings in the coming quarters. That said, the prospect of major losses would weigh on business growth.
For the June quarter, the life insurer reported 44% growth in new business premiums, largely due to a weak base as last year’s quarter was affected by the foreclosure at nationwide. But the impact of the second wave was brutal on growth.
On an equivalent annual premium, HDFC Life saw its retail segment fall by 47% compared to the previous quarter. The overall EPA is down 46%. Granted, the life insurer may not be an outlier in showing a contraction, as the industry as a whole has also seen a similar trend. What works for the life insurer relative to its peers is its product line. Unlike its peers, the share of related products in the market is around one-third for HDFC Life. That said, the pandemic has had an impact on the growth of simple, margin-friendly protection plans. This has led analysts to remain cautious on the valuation despite the underperformance of the company’s shares since April.
“We remain positive about HDFC Life’s ability to switch between product / channel and product innovation, thereby contributing to the best growth and profitability in the industry. That said, we are now seeing profit spreads narrowing relative to our peers and therefore expect valuation premiums to narrow, “Nomura analysts wrote in a note.
Shares of HDFC Life have lost around 3% since April while its peers SBI Life Insurance Company Ltd and ICICI Prudential Life Insurance Ltd have gained 18% and 40% respectively. At around three times the estimated intrinsic value for FY 22, HDFC Life is still as expensive as its peers.
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