GST impact limited to 200 basis points as protection sales surge 70%; valuation concerns remain
HDFC Life Insurance delivered a stable third quarter with total premium growth of 11%, but margin pressures from GST changes remained a drag on profitability.
The private insurer reported total annualized premium equivalent (APE) of Rs 3,974 crore (Rs 39.7 billion) for Q3FY26, up 11% from the previous year. Individual APE grew faster at 13% year-on-year.
VNB margin declined 203 basis points to 24% as the company absorbed the impact of GST input tax credit removal. Value of new business came in at Rs 955 crore (Rs 9.5 billion), up just 3% despite double-digit premium growth.
Both Nuvama and Centrum maintained buy ratings on the stock. Nuvama kept its target price unchanged at Rs 910 while Centrum raised its target to Rs 972 from Rs 910. The stock currently trades at Rs 755.
GST Drag Better Than Feared
Management said the GST impact was limited to 200 basis points on an annualized basis, better than the earlier estimate of 300 basis points. The company aims to fully neutralize the impact by end-March 2026.
“We expect to start FY27 on a clean slate with GST impact largely neutralized on a run-rate basis,” management told analysts. Distributor negotiations were concluded during Q3, with benefits expected to flow more meaningfully from Q4 onward.
The margin drag from GST removal and revised surrender norms was partially offset by favorable product mix changes. Higher protection sales, rider attachments and longer-tenure products added 110 basis points to margins during the nine-month period.
Protection products grew significantly faster than overall business. Retail protection surged 70% year-on-year in Q3 while overall protection APE rose 30%.
ULIP Share Climbs Sharply
The product mix shifted meaningfully during the nine months ended December. ULIP share in overall APE increased to 38% from 31% in the year-ago period. Par products also gained traction, rising to 23% from 16%.
Non-par savings products declined sharply to 16% from 31% as the company avoided irrational pricing. Management expects a rebound in non-par sales with improving yields and a more favorable yield curve.
Group annuity business grew strongly at 2x year-on-year while group protection grew just 5%. Management attributed the slowdown to slower credit growth mainly in the MFI segment, though trends have started improving.
Bancassurance Growth Muted
The bancassurance channel posted muted growth of 8% year-on-year due to heightened competitive intensity. Agency and non-banking alliances channels delivered stronger growth of 19% and 24% respectively.
The direct channel fell 7% year-on-year. Management mentioned the banca channel slowdown reflects competitive pressures while maintaining margin discipline. The HDFC Bank counter share remained stable.
The company added roughly 80,000 new agents in the nine months on a gross basis. The branch network crossed 700 branches.
Embedded Value Grows 16%
Embedded value expanded 16% year-on-year to Rs 61,570 crore (Rs 615.7 billion) at end-December. Operating return on embedded value for the nine months came in at 13.1%.
Economic variance of Rs 750 crore (Rs 7.5 billion) aided EV growth during the period. However, operating variance was negative at Rs 70 crore (Rs 0.7 billion).
The company posted a one-time labor code impact of Rs 100 crore (Rs 1 billion) related to employee benefit provisioning. Overall, GST and labor code changes had an adverse impact of Rs 360 crore (Rs 3.6 billion) on EV in the nine months.
Profit after tax improved 7% year-on-year to Rs 1,414 crore (Rs 14.1 billion) for the nine-month period. Renewal premium growth was healthy at 15%.
Assets under management stood at Rs 3.8 lakh crore (Rs 3.8 trillion), up 15% from the previous year. The solvency ratio stood at 180% as of December, supported by Rs 750 crore (Rs 7.5 billion) subordinated debt raised in Q3.
Persistency Weakens
Persistency showed mixed trends across cohorts. The 13-month persistency moderated 240 basis points year-on-year, driven by cohort-specific stress and a shift toward lower ticket-size policies.
The 25-month persistency fell 250 basis points. Management attributed the moderation to select customer cohorts, particularly policies sold prior to recent regulatory changes.
However, longer-term persistency improved. The 61-month persistency rose 460 basis points year-on-year to 62%, highlighting strong long-term policyholder retention.
Management implemented targeted corrective actions including collection tightening and cohort-level interventions. They expect persistency to normalize over coming quarters with no need for material assumption changes.
Analysts See Recovery Path
Nuvama expects APE and embedded value to grow at a CAGR of 14% and 15% respectively over FY25-28. VNB margins are projected to remain range-bound between 24.5% and 25%.
The brokerage values the stock at 2.6x FY27 P/EV and 2.3x FY28 P/EV. This compares to the current trading multiple of 2.2x FY27 and 1.9x FY28.
Centrum raised its target price to Rs 972, implying 30% upside. The firm maintained its target multiple of 2.5x, representing a 30% discount to the long-term average.
“Management remains confident of normalizing margins by FY27 with GST impact largely absorbed through repricing, mix optimization and distributor negotiations,” Centrum analysts wrote.
Key risks include regulatory changes, adverse economic events and persistency deterioration. Technology-based disruption and protracted weakness in capital markets could also impact business.
The company maintains its long-term target of doubling VNB every 3-4 years despite recent regulatory challenges. Management expects H2FY26 to be materially stronger given seasonal patterns and year-end target pressures.
The GST transition appears manageable and the shift toward higher-margin protection products provides comfort. But execution on margin recovery will be crucial in coming quarters.
