New policy buyout rules and intense competition are likely to impact HDFC Life’s performance in the second half

HDFC Life shares partially recovered on Wednesday, rising 1.9% after falling nearly 4% the day before following the insurer’s second-quarter results announcement. The stock reported weakness despite double-digit premium growth and improving market share.

A major concern was the increasing pressure on the new production margin (VNB margin). The revised policy surrender norms by the regulator, which came into effect on October 1, are expected to increase the surrender value in the hands of customers, further putting pressure on the new operating margin of insurance companies. Moreover, it may be difficult for the insurer to achieve VNB growth guidance for FY25 given the pressure on VNB margin.

The VNB margin represents the profitability of the new sales generated by an insurance company. It is derived by dividing the present value of future profits arising from the new production, known as the value of new production (VNB), by the annual premium equivalent (APE).

Insurance companies’ VNB margins are under pressure due to the rising popularity of unit-linked insurance policies (ULIPs), which have low margins. With the rising stock market, more and more customers are opting for ULIPs. In the case of HDFC Life, ULIPs’ share of APE increased from 24% in the year-ago quarter to 31% in the September 2024 quarter, while their share of new business premiums increased from 11% to 16% in a similar comparison.

HDFC Life’s VNB margin contracted 160 basis points year-on-year to 24.6% in the first half of FY25. Besides growth in ULIP business, other factors such as slowdown in pricing of non-participation products to reflect government bond yield movements and lower growth in annuity and credit life products also impacted the VNB margin.Total APE, which is calculated as the sum of annualized recurring premiums and 10% of single premiums, rose 25% year-on-year to Rs 6,724 crore in the first half of FY25. The insurer expects to achieve APE growth of 18-20% for FY25 with a VNB margin of 15-17%.

Macquarie Capital Securities (India) said in a review note that taking into account the company’s APE growth guidance would imply a VNB margin of 25-26% in the second half of FY25 to achieve a VNB growth of 15-17 % to come. “We think this is a big question. We therefore expect lower VNB growth of 14% in FY25 given the impact of buyout rules, competitive intensity and increasing ULIP mix,” the brokerage said in a report.

Elara Securities (India) expects lower APE growth of 15% and VNB growth of 13% in the second half of FY25 due to product revisions to meet regulatory changes and competitive pressures. It has a target price of Rs 810 on the stock with an “accumulation” call. The stock was trading at Rs 726.5 on the BSE at the end of Wednesday’s trade.