Macquarie Equity Research

08 June 2023

Insurance
India Insurance - Bracing for a lower India
growth environment
Uncertainty over growth looms Punit
Suresh
Ganapathy, CFA Bahlani
Key Points
• We downgrade HDFC Life, ICICI Prudential Life and SBI Life to Neutral Figure 1 - TP and Reco changes
from Outperform. We cut our FY25E VNB estimates by 2-6% and TP by Earlier New TP
Company
15-17%. TP Reco TP Reco change

• We now forecast a lower VNB CAGR (value of new business) at 9-15%

HDFC Life
IPRU Life
655
580
OP
OP
556
486
N
N
-15%
-16%
for FY23-26E vs 16-22% for FY22-25E. SBI Life 1,306
1,580 OP N -17%
• Near term catalysts are missing. Unless growth picks up meaningfully,
Source: Macquarie research, June 2023
sector performance will lag. Valuation support implies limited downside.
Figure 2 - We cut VNB multiples
across top 3 private players
We remain concerned on longer term growth prospects and VNB Multiple (x)
Earlier Current
Change (%)
looming regulatory risks on FY24E on FY25E
HDFC Life 25.0 15.0 -40%
IPRU Life 16.0 9.0 -44%
• .The VNB CAGR over the past five years (FY18-23) for the private sector SBI Life 19.5 12.0 -38%
has been ~17-30%, largely driven by record level of margins, closer to
Source: Macquarie Research, June 2023
30% for most large players versus sub 20% five years ago. We believe
margins have more or less peaked, and we don't expect it to support Figure 3 - APE and VNB CAGR
VNB growth this cycle. Additionally, with recent tax changes (news (FY23-26E)
article), there should be an impact on growth. Accordingly, we forecast
VNB CAGR this cycle (FY23-26E) to be much lower, at 9-15% for the top 16% 15%
13% 12%
3 private sector players. We also see a regulatory overhang in the form 14% 12%
12%
of reduction or capping of high surrender charges in guaranteed return 10%
9% 9%

policies Figure 11. According to our channel checks, many players are 8%
6%
likely to earn high revenues through lapsation charges on surrenders, 4%
which they are pricing in their product IRRs. In our view, companies earn 2%
0%
40%+margins in guaranteed return products. HDFC Life IPRU Life SBI Life

Cut our VNB multiples sharply and hence cut our target prices for the APE CAGR (FY23-26E) VNB CAGR(FY23-26E)

sector
Source: Company Data, Macquarie Research, June 2023
• While lower growth assumptions largely drive our VNB cuts for FY25E
of 2-6% , we cut our overall VNB multiples from 16x-25x to 9-15x, Figure 4 - VNB growth and P/VNB
as we forecast much lower CAGR for FY23-26E. The lower CAGR is a multiple
function of a high base in FY23, peaking of margins and a lower APE Valuation VNB growth (%) P/VNB (x)
(annualised premium equivalent) growth going forward driven by the new Matrix FY24E FY25E FY24E FY25E
tax rules. Our channel checks reveal that for most large private players HDFC Life 7.8% 17.5% 20.0 15.3
80C deductions could be around 15-20% of overall premiums and high IPRU Life 5.0% 10.2% 11.0 8.1
ticket-size policies (greater than Rs0.5mn) as disclosed form ~2-10% for SBI Life 10.5% 13.6% 12.6 9.5
the top 3 players. Due to lower VNB multiples, we cut our TPs by 15-17% Source: Bloomberg, Macquarie research, June 2023:
and downgrade HDFC Life, ICICI Prudential Life and SBI Life to Neutral Prices as on 7 June 2023
from Outperform.
Figure 5 - P/EV multiple and ROEV
Why the downgrade now after the sharp underperformance?
• Since the last 12 months the insurance sector has underperformed the Valuation P/EV (x) RoEV (%)
benchmark Nifty by ~13% and valuations now are trading at 1-2 standard Matrix FY24E FY25E FY24E FY25E
deviations below historic averages. While valuations look compelling, HDFC Life 2.7 2.3 18.5 18.4
unless the sector delivers ~20%+ VNB growth, we believe, markets won't IPRU Life 1.8 1.6 16.1 15.8
be enthusiastic about a sub-optimal 9-15% VNB growth this cycle. SBI Life 2.3 1.9 20.2 19.7
Consequently, multiples could remain depressed. We think growth is the Source: Bloomberg, Macquarie research, June 2023;
single biggest catalyst for the sector. April 2023 numbers have been Prices as on 7 June 2023
weak, but we won't read too much into one month number.

For important disclosures and analyst certification, refer to page 7 or go to www.macquarie.com/research/disclosures.  1

Macquarie Equity Research India Insurance - Bracing for a lower growth environment

Key FAQs by investors

1) What has changed or what incremental information have we got for us to downgrade
4 months post the budget?
We have not received any incremental information. However, we waited for 4QFY23
numbers as we expected it to be a bumper quarter and then assess growth prospects for
the next three years on FY23 base. Considering FY23 base was higher coupled with some
impact likely to come from tax changes, we now forecast a lower VNB CAGR this cycle. Note
that we haven't significantly changed our VNB estimates. Our change in VNB estimates for
FY24E has been marginal and our FY25E VNB reductions have been moderate (2-6%). This is
because we are scaling up our VNB margin estimates for FY24F/FY25F after a stellar FY23
year. So lower APE estimates get offset by higher VNB margins. The main reason for the
bearish view is that sector is likely to trade at lower multiples till growth picks up. As a result,
a significant part of our TP cut is driven mainly by sharp reduction in P/VNB multiples.
2) Have you factored in any regulatory changes in your estimates?
While we have highlighted the risks, our estimates don't factor any impact coming from
regulatory changes as of now. There have been a lot of other changes like EOM (expenses of
management) guidelines, possible change in composite life insurance guidelines, increase in
bancassurance partners, possible reduction in surrender charges in non-par policies etc., all
of which can affect VNB margins. As of now we have assumed margins to be largely stable
across all product categories.
3) Would HDFC Life not get affected more if there are caps on surrender charges in non-
par guaranteed products?
Close to ~30% of product sales that happened for HDFC Life in FY23 happened through the
guaranteed product route. While it does get affected more, HDFC Life historically has shown
exceptional ability to manage impact of regulatory changes and government policy changes
on tax etc through product innovation and enhancing distribution capabilities. For example
even when open architecture was introduced 5 years ago and share of HDFC Life policies
sold in HDFC Bank counters/branches went down from 100% to 55% currently, HDFC Life
delivered an overall VNB growth of 20%+ over the past five years. Hence, in our model we
continue to forecast an above industry ~15% VNB CAGR for them over the next three years.
For overall private sector life insurance industry overall VNB CAGR could be sub 10% in our
view in this cycle.
4) Are there any additional regulatory risks/policy risks?
We can't rule out the possibility of the Government eventually bringing in complete tax
parity in insurance industry with respect to other industries and eventually removing even
the caps of Rs0.5mn on traditional products and Rs0.25mn on ULIPs. Add to that, it is just
a matter of time before we see even tax on profits of life insurance companies being raised
from current 14.5% to 25% in line with tax rates for other companies and industries in India.
The impact on EV and VNB due to the increase in tax rate could be 5-9% and 6-10%
respectively. Figure 13
5) Why have we cut SBI Life's APE sharper than others?
We had earlier assumed a very strong APE growth of 22%+ for SBI Life. While the company
management still continues to guide for a strong APE growth, we factor in a 13% APE CAGR.
We can't be ruling out any impact coming from 80C tax issues, possible opening up of
bancassurance to LIC (this is NOT a zero probability event in our view). Nevertheless, we
will be closely watching SBI Life and its ability to continue leveraging SBI branches for faster
growth in APE.
6) What about possible upsides for IPRU from ICICI Bank share bottoming out?
Longer term, we aren't convinced that IPRU can sustain high growth with lower contribution
coming from ICICI Bank. There is a finite capacity with which branches of other non-ICICI
banks can continue to sell. So growth will continue to be a pain point for IPRU in our view.
Our 9% APE CAGR for the next three years factors in both ICICI and non ICICI channels
growing at a similar rate. The impact of new tax guidelines, regulatory changes etc will be felt
on non-ICICI Bank channels and will push the growth down.

Risks -HDFC Life, ICICI Prudential Life and SBI Life

Upside risks: Meaningful pick up in growth. Downside risks: Substantial decline in VNB margins from peak levels, regulatory risk-
reduction in lapsation charges and slower than expected growth

08 June 2023 2
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

Figure 6 - TP and Reco change summary

Earlier New
Company TP change (%) Reasons for TP and Reco Change
TP Reco TP Reco
HDFC Life 655 OP 556 N -15% VNB mutliple cut from 25x (FY24E) to 15x (FY25E)
IPRU Life 580 OP 486 N -16% VNB mutliple cut from 16x (FY24E) to 9x (FY25E)
SBI Life 1,580 OP 1,306 N -17% VNB mutliple cut from 19.5x (FY24E) to 12x (FY25E)

Source: Macquarie Research, June 2023

Figure 7 - Change in VNB estimates

Earlier Now Change (%)
VNB (INR bn)
FY24E FY25E FY24E FY25E FY24E FY25E
HDFC Life 39.3 47.5 39.6 46.5 0.8% -2.1%
IPRU Life 29.2 34.0 29.0 32.0 -0.6% -5.8%
SBI Life 56.7 67.9 56.0 63.6 -1.2% -6.2%

Source: Macquarie Research, June 2023

Figure 8 - Margins have peaked and will provide limited support to VNB
growth
Earlier Now Change (%)
VNB Margin (%)
FY24E FY25E FY24E FY25E FY24E FY25E
HDFC Life 27.9% 28.2% 28.0% 28.6% 0.1% 0.4%
IPRU Life 29.8% 30.2% 31.5% 32.1% 1.6% 1.9%
SBI Life 27.5% 27.4% 30.0% 29.9% 2.5% 2.4%

Source: Macquarie Research, June 2023

Figure 9 - Change in APE estimates

Earlier Now Change (%)
APE (INR bn)
FY24E FY25E FY24E FY25E FY24E FY25E
HDFC Life 140.5 168.7 141.4 162.6 0.6% -3.6%
IPRU Life 97.8 112.5 92.4 101.7 -5.5% -9.6%
SBI Life 206.1 247.3 186.8 213.0 -9.3% -13.9%

Source: Macquarie Research, June 2023

08 June 2023 3
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

Figure 10 - April 2023 growth numbers have been weak

Growth 3Yr Growth 3Yr
Apr'23 YTD (Apr'22)
Individual APE % CAGR % CAGR
(Rs mn) (Rs mn)
(YoY) (%) (YoY) (%)
HDFC Life 4,704 15% 35% 4,704 15% 35%
IPRU Life 2,335 -31% 15% 2,335 -31% 15%
SBI Life 6,849 -5% 87% 6,849 -5% 87%
Max Life 2,151 -4% 27% 2,151 -4% 27%
Bajaj Allianz 2,724 8% 55% 2,724 8% 55%
Tata Life 3,023 14% 31% 3,023 14% 31%
ABSLI 1,248 27% 36% 1,248 27% 36%
Private Players 28,793 -1% 40% 28,793 -1% 40%
LIC 16,240 -5% 28% 16,240 -5% 28%
Industry 45,033 -3% 35% 45,033 -3% 35%
Growth 3Yr Growth 3Yr
Apr'23 YTD (Apr'22)
Individual Policy Count % CAGR % CAGR
('000s) ('000s)
(YoY) (%) (YoY) (%)
HDFC Life 51 14% 11% 51 14% 11%
IPRU Life 30 -16% 0% 30 -16% 0%
SBI Life 114 -3% 83% 114 -3% 83%
Max Life 28 -3% 4% 28 -3% 4%
Bajaj Allianz 35 6% 33% 35 6% 33%
Tata Life 41 11% 11% 41 11% 11%
ABSLI 16 53% 24% 16 53% 24%
Private Players 408 0% 21% 408 0% 21%
LIC 784 -14% 62% 784 -14% 62%
Industry 1,191 -10% 42% 1,191 -10% 42%

Source: IRDA, Macquarie Research, June 2023

Figure 11 - Comparison of surrender charges for Figure 12 - % of APE from high ticket size policies
non-par guaranteed and ULIP policies. ULIPs are (>INR 0.5mn)
much lower APE as on 9MFY23
Guaranteed Surrender value (GSV) as a % of total
premium 12%
~10-12%
HDFC Life IPRU signature
Policy year ABSLI Milestone 10%
Sanchay plus ULIP
1 0% 0% max 3,000
8%
2 30% 30% max 2,000
3 35% 35% max 1,500 6%
6%
4 50% 50% max 1,000
5 50% 50% 0%
4%
6 50% 50% 0%
<2%
7 50% 50% 0% 2%
8 75% 58% 0%
9 75% 66% 0% 0%
10 75% 74% 0% HDFC Life IPRU Life SBI Life

11 90% 90% 0%
Source: Company disclosure, Macquarie Research, June 2023
12 90% 90% 0%

Source: Company Data, Macquarie Research, June 2023

08 June 2023 4
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

Figure 13 - Decline in EV am VNB from increase in tax rate to 25% - as on FY23

12.0%
10.4%
10.0% 8.9%
8.3%
8.0%
6.4%
5.8%
6.0% 5.0%

4.0%

2.0%

0.0%
HDFC Life IPRU Life SBI Life

Decline in EV Decline in VNB

Source: Company disclosure, Macquarie Research, June 2023

Figure 14 - P/EV multiple comparison across top 3 private players

Earlier Now TP Change Target P/EV change (%)
Target P/EV Earlier TP New TP
FY24E FY25E FY24E FY25E (%) FY24E FY25E
HDFC Life 655 1.43 1.21 556 1.19 1.01 -15% -17% -16%
IPRU Life 580 1.39 1.21 486 1.18 1.03 -16% -15% -14%
SBI Life 1,580 2.83 2.38 1,306 2.40 2.04 -17% -15% -14%

Source: Macquarie Research, June 2023

Figure 15 - Valuation comparison- Top 3 Private insurers

Valuation VNB growth (%) P/VNB (x) P/EV (x) RoEV (%) CMP Mcap TP TSR
Reco
Matrix
FY24E FY25E FY24E FY25E FY24E FY25E FY24E FY25E Rs Rs bn Rs (%)
HDFC Life 7.8% 17.5% 20.0 15.3 2.7 2.3 18.5 18.4 594 1,278 N 556 -7%
IPRU Life 5.0% 10.2% 11.0 8.1 1.8 1.6 16.1 15.8 508 730 N 486 -4%
SBI Life 10.5% 13.6% 12.6 9.5 2.3 1.9 20.2 19.7 1,246 1,247 N 1,306 5%

Source: Bloomberg, Macquarie Research, June 2023; Prices as on 7 June 2023

Figure 16 - HDFC Life 1 yr forward P/EV

HDFC life - 1 yr forward P/EV chart

6.5 5.9
6.0
5.5 5.0
5.0
4.5 4.1
4.0
4.1
3.5
3.0 3.2
2.5 2.8
2.0
Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Jun-18

Jun-19

Jun-20

Jun-21

Jun-22

Jun-23
Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

P/EV Average +1 STd. Dev -1 STd. Dev

Source: Company Data, Bloomberg, Macquarie Research, June 2023

08 June 2023 5
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

Figure 17 - IPRU Life 1 yr forward P/EV

IPRU life - 1 yr forward P/EV

4.0
3.6
3.5

3.0 2.8

2.5 2.3

2.0
1.9
1.5
1.2
1.0
Dec-16

Sep-17
Dec-17

Dec-18

Sep-19
Dec-19

Sep-20
Dec-20

Sep-21
Dec-21

Dec-22
Sep-18

Sep-22
Mar-17
Jun-17

Mar-18
Jun-18

Mar-19
Jun-19

Mar-20
Jun-20

Mar-21
Jun-21

Mar-22
Jun-22

Mar-23
Jun-23
P/EV Average +1 STd. Dev -1 STd. Dev

Source: Company Data, Bloomberg, Macquarie Research, June 2023

Figure 18 - SBI Life 1 yr forward P/EV

SBI Life - 1yr forward P/EV chart

4.0

3.5
3.5

3.0
3.0

2.5 2.7

2.3
2.0
1.7
1.5
Jun-18

Sep-18

Jun-19

Sep-19

Jun-20

Sep-20

Jun-21

Sep-21

Jun-22

Sep-22

Jun-23
Dec-17

Dec-18

Dec-19

Dec-20

Dec-21

Dec-22
Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Source: Company Data, Bloomberg, Macquarie Research, June 2023

08 June 2023 6
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

Analysts

Suresh Ganapathy, CFA Punit Bahlani

+91 22 6720 4078 91 80970 31382
suresh.ganapathy@macquarie.com punit.bahlani@macquarie.com
Macquarie Capital Securities (India) Pvt. Ltd. Macquarie Capital Securities (India) Pvt. Ltd.

Important Disclosures
Recommendation definitions
Macquarie – Asia and USA
Outperform – expected return >10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie – Australia/New Zealand
Outperform – expected return >10%
Neutral – expected return from 0% to 10%
Underperform – expected return <0%
During periods of share price volatility,
recommendations and target prices may
occasionally and temporarily be inconsistent
with the above definitions.
Recommendations – 12 months
Note: Quant recommendations may differ
from Fundamental Analyst recommendations
Volatility index definition
This is calculated from the volatility of historical price
movements.
Very high – highest risk – Stock should be expected to
move up or down 60–100% in a year – investors should be
aware this stock is highly speculative.
High – stock should be expected to move up or down at
least 40–60% in a year – investors should be aware this
stock could be speculative.
Medium – stock should be expected to move up or down
at least 25–40% in a year.
Low – stock should be expected to move up or down at
least 15–25% in a year.
* Applicable to select stocks in Asia/Australia/NZ
Note: expected return is reflective of a Medium Volatility
stock and should be assumed to adjust proportionately
with volatility risk
Financial definitions
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging, IFRS
impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property revals,
appraisal value uplift, preference dividends & minority
interests
EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average number of
shares
All Reported numbers for Australian/NZ listed stocks are
modelled under IFRS (International Financial Reporting
Standards).

Recommendation proportions for quarter ending 31 March 2023

AU/NZ Asia USA
Outperform 56.13% 64.77% 64.49% (for global coverage by Macquarie, 2.51% of stocks followed are investment banking clients)

Neutral 37.74% 23.98% 32.71% (for global coverage by Macquarie, 1.83% of stocks followed are investment banking clients)

Underperform 6.13% 11.26% 2.80% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients)

Company-Specific Disclosures

Company Name Disclosure

HDFC Life (HDFCLIFE IN) During the past 12 months, Macquarie Group Limited or one of its affiliates provided securities services to HDFC Standard Life
Neutral Insurance Company Ltd for which it received compensation for Broking services.
12-month target: INR556.00 - VNB
multiple
Valuation: INR 556.00 - VNB multiple
Price: INR594.60

ICICI Prudential (IPRU IN) During the past 12 months, Macquarie Group Limited or one of its affiliates provided securities services to ICICI Prudential Life
Neutral Insurance for which it received compensation for Broking services.
12-month target: INR486.00 - VNB
multiple
Valuation: INR 486.00 - VNB multiple
Price: INR507.55

SBI Life Insurance (SBILIFE IN) During the past 12 months, Macquarie Group Limited or one of its affiliates provided securities services to SBI Life Insurance
Neutral Company Limited for which it received compensation for Broking services.
12-month target: INR1,306 - VNB
multiple
Valuation: INR 1,306.00 - VNB multiple
Price: INR1,246
A reference to “Macquarie” is a reference to the entity within the Macquarie Group of companies (comprising Macquarie Group Limited and its worldwide affiliates
and subsidiaries) that is relevant to this disclosure. Important disclosure information regarding the subject companies covered in this report is available publicly at
www.macquarie.com/research/disclosures. Clients receiving this report can additionally access previous recommendations (from the year prior to publication of this report)
issued by this report’s author at https://www.macquarieinsights.com.

Recommendation history
Company name Date Recommendation Target price

8-Jun-2023 Neutral INR 556.00

HDFC Life  (HDFCLIFE IN)
24-Oct-2022 Outperform INR 655.00
28-Jun-2021 Outperform INR 850.00

08 June 2023 7
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

20-Oct-2020 Outperform INR 849.00

22-Jul-2020 Outperform INR 680.00
16-Jul-2020 Neutral INR 419.00

8-Jun-2023 Neutral INR 486.00

ICICI Prudential  (IPRU IN)
17-Oct-2022 Outperform INR 580.00
22-Jul-2021 Outperform INR 740.00
10-Jun-2021 Outperform INR 585.00
28-Oct-2020 Outperform INR 560.00
22-Jul-2020 Outperform INR 487.00

8-Jun-2023 Neutral INR 1306.00

SBI Life Insurance  (SBILIFE IN)
24-Oct-2022 Outperform INR 1580.00
24-Jan-2022 Neutral INR 1285.00
24-Jun-2021 Neutral INR 885.00
27-Oct-2020 Neutral INR 845.00
22-Jul-2020 Underperform INR 715.00
16-Jul-2020 Underperform INR 613.00

Sensitivity analysis:
Clients receiving this report can request access to a model which allows for further in-depth analysis of the assumptions used, and recommendations made, by the author
relating to the subject companies covered. Contact https://www.macquarieinsights.com/contacts for access requests.

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08 June 2023 8
Macquarie Equity Research India Insurance - Bracing for a lower growth environment

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