A major concern was the increasing pressure on the new business margin (VNB margin). The regulator’s revised policy surrender rules that came into force on October 1 are expected to increase the surrender value in the hands of customers, thus putting further pressure on the new business margin of sure companies. Additionally, the insurer may find it difficult to achieve VNB’s FY25 growth guidance given the pressure on VNB’s margin.
The VNB margin represents the profitability of the new business generated by an insurance company. It is obtained by dividing the present value of future profits arising from the new business known as new business value (VNB) by the annual premium equivalent (APE).
The VNB margin of insurance companies has been under pressure due to the growing popularity of unitary insurance policies (ULIPs), which have low margin. With the stock market on the rise, more customers are opting for ULIPs. In the case of HDFC Life, ULIP’s stake in APE rose to 31% in the September 2024 quarter from 24% in the year-ago quarter, while its stake in new company bonus increased from 11% to 16% in a similar comparison.
HDFC Life’s VNB margin declined 160 basis points year-on-year to 24.6% in H1FY25. Apart from growth in ULIP business, other factors such as lag in pricing of non-equity products to reflect the movement of yields in government securities and the lower growth in annuities and credit Life products affected VNB’s margin.Total APE, which is calculated as the sum of annualized regular premiums and 10% one-time premiums, rose 25% year-on-year to Rs 6,724 crore in H1FY25. The insurer expects to register a growth of APE of 18-20% for FY25 with VNB margin of 15-17%.
macquarie Capital Securities (India) mentioned in a review note that factoring The company’s APE growth guidance would imply a VNB margin of 25-26% in the second half of FY25 to reach a VNB growth of 15-17%. “We believe this is a difficult task. Accordingly, we factor in lower VNB growth of 14% in FY25, given the impact of redemption regulations, competitive intensity and growing ULIP mix,” the brokerage said in a report.
Elara Securities (India) expects lower APE growth of 15% and VNB growth of 13% in H2FY25 due to product revisions to meet regulatory changes and competitive pressure. He has a target price of Rs 810 on the stock with a ‘accumulated’ call option. The stock was trading at Rs 726.5 on the BSE at the end of trading on Wednesday.
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