It is indeed very very difficult to decipher as well as predict the profitability of insurers. From results of HDFC Life and SBI Life this Q and also previous Qs I have seen almost all analysts go wrong on profitability metrics. As far as I am concerned, i didn’t even dare to do any prediction or calculation because I am sure I am incapable of reaching anywhere close to what it can be.
Point is that I am well aware about all other metrics and what they mean, APE growth, VNB margins etc etc, low penetration, need for protection …that is why HDFC Life is one of my largest holdings and have decent allocation to SBI Life as well. But still I find myself clueless on how to predict this Q and future profitability of my largest holding. (If I add all Life insurers I hold and consider them as single entity, it will be my largest holding).
I understand that current expenses would result in future profitability in a life insurance business but still do not find this aspect of holding Insurance firms somewhat right that I cannot value them based on profitability let alone predict or calculate anything.
I am really curious how other investors holding significant part of their portfolio in life insurance business are managing this aspect and taking it or is it just me who is lagging way behind in understanding Life insurance business and therefore should not allocate large percentage to it. Thanks
Recently read this great article from Dr. Vijay about pitfalls do investing in high PE companies. He took the example of HDFC Life. The article was first published in 2016 when he was offered HDFC Life at Rs. 195 at a PE of 50. He rationally explains how investing in such high PE companies is playing against the odds. He also took other examples. Though from 2016 at the offered price, the stock has gained 350%, almost 30% CAGR but I am worried about this huge PE at which I have started investing. Would the stock be able to show growth for the next decade to justify this high PE. With LIC IPO around the corner, would it lead to a huge correction in the stock price?
Would like to know your views on it. Sharing the article link
No one will sell hdfc life and buy Government owned LIC…
PE is just one of the valuation tools to look at when evaluating valuations. Lets try to deconstruct the PE. P is Price and E is earnings and the ratio is PE.
Now PE can go up or down, when P increases relative to earnings or earnings go up relative to price, and you will end up with high PE or low PE as the case maybe.
When the companies earnings are down in the dumps, PE will look very high, when compared to its past, like in current times. Important thing is to understand is the reason for earnings growth drop and the nature of the industry. In certain cyclical Industries, during the down phase, PE looks high.Say earnings is 2 and price is 100, then PE will be 50, which is very high by conventional thought. Now lets suppose earnings grows to 5, then PE falls to 20, assuming price remains the same. However, you want to sell when the earnings are on an upcycle to capture your gains.
Also the market is will to give a premium to quality companies with long runway and great management, which will again reflect in the PE. Hope this helps
Prof Bakshi has a great article on this, https://www.outlookbusiness.com/specials/the-name-is-buffett-warren-buffett/pay-up-but-dont-overpay-1502
PE is a really poor measure for insurance companies.
The costs of acquiring a customer are expensed at once (hitting the P&L and increasing PE) meanwhile the benefits flow for many years.
It’s similar to a lot of companies that reinvest through the P&L. For instance Amazon.
If you looked at PE, you were sitting out of the greatest moneymaker of our lifetimes, meanwhile, it continued to compound, and still does.
This is the same HDFC Bank and SBI debate.
The article is really good and makes lot of sense. But as with any rule, there are exceptions. Insurance companies are valued on Price to Embedded Value. Still, HDFC life is expensive with this metric too.
Great companies can remain at high valuations and can still deliver decent returns.
The market thinks HDFC Life is a great company. Whether it will remain so or not, only future can tell.
Chinese insurance companies are at Market cap of 45 billion dollars and they have still not reached a saturation point. HDFC Life at current market cap of roughly 4 billion dollars has still a long way to go .
i am holding at current price but buying at current price is a tough decision.
The article says all things that can go wrong in theory…HDFC Life management does all things that can go right in both theory & practicality…at least so far.
I am curious how he got an offer for the unlisted company at such good price? Is there a way to look for such offers from good management such as HDFC etc. for their unlisted companies?
I think all compounder companies need to be looked from only one metrics which is market capitalization to runway ahead. Even growth maybe volatile and therefore the story would be volatile in short-medium term. These are times to add the story. I feel this is the only way we can invest or remain invested in compounder leaders. In today’s world of digital information and click of mouse investing, fortunately or unfortunately there seems no other way.
Question is do we want to invest in compounder leaders or look for valuable gems (if we are capable and correct most of the times and have courage and conviction of decent allocation as well).
Addition: One small addition, sometimes we even fail in assessing the market cap to runway metrics for compounder leaders, like how I personally failed miserably in assessing the true potential of the mammoth RIL thinking it is already a huge market cap and has very limited room to grow until it proved me wrong with swift 3X giving an almost risk free excellent CAGR for someone holding long term with patience like say 5 plus years.
Disc: Invested hence biased, not a buy/sell recommendation only a thought process on Compounder Leaders. I maybe wrong in my assessments.
You are very wrong in your ₹ to $ and Crore to Billion conversion. HDFC Life’s Market Cap is about 19 Billion Dollars.
Thanks for pointing out. I wrote it from back of my mind. The below is from my notes 2 years ago. So, data may be slightly different now. please correct me if i am now.
The total Embedded value of indian insurance companies is around 15 Billion dollars. for China, it’s close to 135 Billion dollars.
The runway is there for Indian companies and 10-15 years down the line, the sector will have some leaders and some losers. The market assumes that HDFC Life will be a clear winner and hence, the skyhigh valuations.
Post listing, the insurance companies have not gone through severe downturn. May be, during that phase, HDFC Life may be available at reasonable valuation.
Disc: Holding, not willing to add at current levels
What can be the impact in Hdfc life after the increase limit of FDI in insurance sector , experts plz put some light in this regard
no impact. Their foreign partner Standard Life has been selling down stake as stocks has become expensive. HDFC has ramped up its business…it does not need the help of any foreign company anymore.
This will benefit Nippon Life (Reliance Life) maybe…not sure…but I thinking it is housed in Reliance Capital.
However, HDFC Life’s Padalkar told Moneycontrol that it FDI inflows would happen primarily in mid-tier and smaller insurance companies.
“There are smaller and mid-sized companies that are perhaps starved of capital since they are still in their growth phase. In cases where Indian partners aren’t willing to put in more capital, foreign partners can step in and increase their stake. Larger companies like us are well capitalised and don’t require additional capital,” she added.
Is the current VNB Margin growth due to decreasing of Interest Rate ? Atleast as per HDFC LIfe Investor presentation . If it is, that’s why EV also growing 20-22% . If we considers cuuren macro is in bottom of interest cycle and from onwards interest rate will increase it will surely affect the VNB Margin and EV. Then will this valuation sustainable ?
Rising Bond yield is also not good for insurance companies
Will be happy if corrected.
Talking Point - HDFC Life’s Growth Outlook For FY22 - BQ …: BQ Live Streaming : Watch Live Business and Market News Online, Latest News Headlines from BloombergQuint
Discl - invested.
The insurer’s net premium income grew by a robust 23 per cent to ₹12,868.01 crore for the fourth quarter of 2020-21 versus ₹10,464 crore a year ago
Mr. Dhawan said last year was a great year for customers migrating their critical workloads such as SAP to AWS and the company had also seen new investments in analytics and machine-learning workloads. For example, he said, HDFC Life had created a data platform called Atom, which used AWS Cloud to analyse customer expectations and engage meaningfully with them across online platforms.
disc - invested in HDFC Life, tracking SBI Life for basket approach.