HDFC Life sees valuation under pressure as claims surge in Q1
Premium- HDFC Life anticipates claims to stay elevated in the September and December quarters too with the threat of a third wave
HDFC Life Insurance Company Ltd’s June quarter showed the flipside of the pandemic on an insurance company’s performance. A surge in claims prompted the insurer to set aside more reserves towards them.
The private sector life insurer paid off 70,000 claims in the June quarter, totalling ₹1598 crore on a gross basis, and said that peak mortality claims were three-four times that of the corresponding quarter last year. It anticipates claims to stay elevated in the September and December quarters too with the threat of a third wave. Ergo, HDFC Life set aside ₹7000 crore as an excess mortality reserve towards these anticipated claims.
Analysts at Jefferies India Pvt Ltd point out that the reserve is five times the claims of FY21. “Mgt. guides that the peak of individual claims is behind and the current level of provisioning is sufficient for excess death claims. However, any surge in claims due to a potential 3rd Covid-wave remains a monitorable," they wrote in a note.
Indeed, this reserve and the claims settled in the June quarter impacted the company’s growth as well as operating metrics. Return on embedded value moderated to 14.4%, leading to a slight moderation in embedded value expansion. Net profit at ₹302 crore for the quarter was down 33% from a year ago. To be sure, the 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 that the high excess mortality reserve may prevent a further hit to growth and profits in the coming quarters. That said, the prospect of big claims would weigh on business growth.
For the June quarter, the life insurer reported 44% growth in new business premium, largely due to a low base as the quarter last year was impacted by nationwide lockdown. But the impact of the second wave was stark on growth.
On an annual premium equivalent, HDFC Life saw its retail segment drop 47% from the previous quarter. The overall APE was down 46%. To be sure, the life insurer may not be an outlier in showing contraction as the overall industry too saw a similar trend. What works for the life insurer compared with its peers is its product mix. Unlike peers, the share of market-linked products is just about a third for HDFC Life. That said, the pandemic has impacted the growth in simple and margin-friendly protection plans. This has led analysts to remain wary on valuation despite the company’s shares underperforming peers since April.
“We remain positive on HDFC Life’s ability to switch between products/channels and product innovation aiding industry-best growth and profitability. That said, we see profitability gaps narrowing now vs peers and thus expect valuation premiums to narrow," analysts at Nomura wrote in a note.
HDFC Life’s shares have lost about 3% since April while its peers SBI Life Insurance Company Ltd and ICICI Prudential Life Insurance Ltd have gained 18% and 40% respectively. At about three times estimated embedded value for FY22, HDFC Life still comes as dearer than its peers.
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