Insurance stocks: Analysts see decent upside in HDFC Life, ICICI Lombard

Though Q1 was disappointing, there are triggers that could lead to improvement in the performance of the two insurers

HDFC Life Insurance Company and ICICI Lombard General Insurance Company, two listed insurers in different segments, have come up with their respective April-June quarter (Q1 of FY23) numbers. Both seem to have disappointed the Street, going by share price movements.
 

HDFC Life reported 23 per cent year-on-year (YoY) growth in net premium, with 27 per cent and 19 per cent growth in new business and renewal, respectively. Profit after tax (PAT) grew 21 per cent YoY to Rs 370 crore.
 

The persistency ratio improved in the 37th month cohort, but dipped in the 61st month. Value of new business (VNB) growth was at 25 per cent YoY. This was lower than expectation but VNB margin was up 60 basis points (bps) quarter-on-quarter (QoQ), at 26.8 per cent.
 

The annualised premium equivalent (APE) grew 22 per cent YoY to Rs 1,900 crore. Demand for ULIPs and retail term insurance was soft, perhaps due to the volatile markets.
 

Within APE, annuity grew 42 per cent YoY, while the non-PAR (non-participating) and PAR segments grew 27 per cent and 22 per cent, respectively.
 

The operating return on embedded value (RoEV) grew 210 bps to 16.5 per cent in Q1 but embedded value itself declined.
 

Embedded value dropped 1 per cent QoQ to Rs 29,700 crore (up 9 per cent YoY) after adjusting for the Exide Life acquisition.
 

There was a negative impact of Rs 400 crore and Rs 700 crore due to a fall in the equity markets and owing to rising interest rates.

Total assets under management (AUM) declined by 2 per cent QoQ to Rs 2 trillion. Solvency ratio increased marginally to 178 per cent as HDFC Life raised subordinate debt of Rs 350 crore, (partially offset by dividend).
 

The management believes inflation has impacted demand for individual protection. As and when inflation moderates, demand in Retail is likely to climb. The company tends to front-load expenses in Q1. It is investing in distribution and resulting higher sales will come with a lag.
 

Though competitive intensity is high, it could be assumed that Q1 will only see around 15-20 per cent of annual 2022-23 sales. The RoEV could rise to 17-18 per cent in the long-term if there’s no wild swings in interest rates.
 

General insurer ICICI Lombard’s net underwriting loss stood at Rs 190 crore in Q1 of 2022-23 against Rs 300 crore in Q4 of 2021-22. There was a 14 per cent QoQ decline in total income to Rs 3,980 crore due to lower other income. Expenses grew by 1 per cent to Rs 3,660 crore while PAT grew 12 per cent QoQ and 80 per cent YoY to Rs 350 crore.
 

The claims ratio increased by 10 bps QoQ to 72.1 per cent. The benefits of a lower loss ratio in health and motor third-party were offset by higher claims in fire and motor owner-driven segments. The claims ratio is down 17.36 bps YoY due to base effects caused by the second wave.
 

The combined ratio was at 104.1 per cent against 123.5 per cent (YoY) and 103 per cent (QoQ). This is loss territory but it has improved. Solvency ratio stood at 2.6x compared to 2.5x in Q4 of 2021-22.
 

Positive improvements in the future depend on higher premium growth and lower underwriting losses, especially in the health segment. Synergies with Bharti AXA, post-merger, should help cut expenses and lead to improved earnings.
 

Analysts see upsides for HDFC Life to between Rs 600 and Rs 660, but the valuations have reduced post results. The stock has dropped 2 per cent to Rs 525.
 

ICICI Lombard has also seen selling, with the share dropping to Rs 1,217. Targets for ICICI Lombard vary from Rs 1,300 to Rs 1,500.