A major concern was the rising pressure on the new business margin (VNB margin). The revised policy surrender norms by the regulator that came into effect on October 1 are expected to increase the surrender value in the hands of customers thereby putting more pressure on the new business margin of insurance companies. In addition, the insurer may find it difficult to achieve the VNB growth guidance for FY25 given the pressure on VNB margin.
VNB margin represents profitability of the new business generated by an insurance company. It is derived by dividing the present value of future profits arising from the new business known as value of new business (VNB) by annual premium equivalent (APE).
The VNB margin of insurance companies has been under pressure due to rising popularity of unit linked insurance policies (ULIPs), which are low in margin. With the rising stock market, more customers are opting for ULIPs. In the case of HDFC Life, the share of ULIPs in APE increased to 31% in the September 2024 quarter from 24% in the year-ago quarter while their share in new business premium increased to 16% from 11% by similar comparison.
HDFC Life’s VNB margin shrank by 160 basis points year-on-year to 24.6% in the first half of FY25. Apart from the growth in ULIP business, other factors such as delay in pricing of non-participatory products to reflect yield movement in the government securities and lower growth in annuity and credit life products affected VNB margin.Total APE, which is calculated as the sum of annualised regular premiums and 10% of the single premiums, increased by 25% year-on-year to Rs 6,724 crore in the first half of FY25. The insurer expects to clock 18-20% APE growth 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 VNB margin of 25-26% in the second half of FY25 in order to arrive at 15-17% VNB growth. “This we believe is a tall ask. We accordingly factor in lower VNB growth of 14% in FY25 given the impact of surrender regulations, competitive intensity and increasing ULIP mix,” the brokerage said in a report.
Elara Securities (India) expects a lower APE growth of 15% and VNB growth of 13% in the second half of FY25 due to product revisions to abide by regulatory changes and competitive pressure. It has a target price of Rs 810 on the stock with “accumulate” call. The stock was traded at Rs 726.5 on the BSE at the end of Wednesday’s trading.