SBI Life Insurance Vs HDFC Life Insurance – Comparison And More

SBI Life Insurance Vs HDFC Life Insurance: A Life Insurance is an indemnity contract between an individual and the Company. The Insurer promises to pay a designated amount to the beneficiary, in case of death of the insured person. These policies provide financial security, & protection to families who depend on a single earning member.

Although traditional policies continue to exist, the insurance market is heating up with a variety of policies to lure customers. A number of these policies define insurance policies not merely as insurance products but also as investment products.

SBI Life Insurance Vs HDFC Life Insurance

We will discuss these in greater depth in the article below. Since the industry is different from other Companies, we have tried to list out every metric & explain it for a better understanding. So let us understand which insurer’s stock is a better investment.

SBI Life Insurance Vs HDFC Life Insurance – Company Overview 

SBI Life Insurance

Incorporated in 2000, SBI Life Insurance is a leading insurer that received its insurance license from IRDAI in 2001. The Company was born from a Joint Venture between the parent Company State Bank of India & French Institution BNP Paribas Cardif. 

SBI Life Insurance has over 1028 offices spread across the country and has tied up with 150 brokers and other marketing firms. The Company operates with a massive network of 2.4 Lakh agents, and 74 corporate agents. It also has 41,000 partner branches, 150 brokers, and 14 bancassurance partners.

The insurer offered over 21.97 Lakh individual policies during the year and covered 1.8Cr new lives under its group insurance plans. SBI Life Insurance manages assets worth Rs. 3.07 Lakh Cr, out of which Rs. 2.17 Lakh Cr is Equity and 92,000 Cr is debt. The Assets under Management (AUM) of the insurer increased by 14.92% from Rs. 2.7 Lakh Cr the previous year.

The insurer has an embedded value of Rs. 46,044 Cr, which increased by 16% from Rs. 39,625 Cr last year. The embedded value is a significant measure in the insurance industry. It is an estimate of the current value of the future profits earned from its active policies.

It represents the present value of future cash flows from existing business, including premiums, investment income, and expenses excluding the cost of capital. The value helps investors understand the long-term value of the business.

Insurance Segments

The insurance policies are divided based on participating & non-participating plans. Participation entitles the policyholder to share profits from the insurance business, while a non-participant does not receive such entitlement. Participatory plans generally have higher premiums as compared to non-participatory ones.

The non-participatory policies are further divided into savings & Protection components. Saving are plan under which a certain portion of the premium is set aside which grows at a guaranteed rate of interest as per the policy. This provides an investment cover in addition to the insurance coverage. 

The Non-participatory protection plans are plain life insurance plans that only work towards ensuring the life of their policyholder. They ensure that in the event of death, a predetermined sum will be paid out to the beneficiary. 

In FY23, SBI earned only 3.2% of its new business from participating policies while 59% of the new business came from non-participating policies. Out of the non-participatory, 46.7% of the new business came from individual & group saving policies and 12.3% from pure protection plans.

HDFC Life Insurance

HDFC Life Insurance is yet another leading Life Insurer in India established in the year 2000. The Company was started as a joint venture between HDFC & Abrdn, a Global Investment Company based out of Mauritius. Today it has a diversified distribution system of 300+ partnerships across 498 branches and an army of 1.8 Lakh agents. 

The Company provides a host of long-term life insurance solutions, both individual as well as group plans. Just like its peer SBI, HDFC Life also offers protection & saving plans. Along with this, it also offers pension, investment, annuity, and health plans. With these variations, the Company offers 60 products for both individuals and groups.

HDFC manages Assets worth Rs. 2.4 Lakh Cr as of FY23, which increased by 17% from Rs. 2 Lakh Cr managed a year ago. The embedded value of the HDFC Life Insurance business saw a strong growth of 20% from being worth Rs. 32,958 Cr in FY22 to Rs. 39,527 Cr in FY23.

Insurance Segments

HDFC Life’s business can be divided into three segments: Participating, Non-Participating, and Unit-Linked policy. As we have already learned about participating & Non-Participating, let us just learn about the Unit Linked Policy.

Unit Linked policies are investment cum insurance products where a portion of the premium is invested into other investment funds such as Equity, debt, or a combination of both, based on the risk appetite of the policyholder.

As it is an investment plan, the returns of a ULIP plan are not guaranteed and depend upon the Company’s market performance. These plans also offer additional features such as partial withdrawals and top-ups.

In FY23, the protection policies brought in 29% of the new business, followed by 20%  on annuity plans. Nonparticipatory savings plans brought in 19% of the Company’s revenue and group retirals make for 14% of the entire market. The plain participatory segment contributes to just 10% of the new business followed by the ULIP segment which makes up for just 8% of the total new business.

Industry Overview

India houses the World’s largest population with a median age of 28 years. As per UN population projections, ~95 crore people, or 68% of India’s population currently belong to the working age group of 15-64 years. This cohort will increase by 10 Cr over the next two decades, implying that more than 25% of the incremental global workforce will come from India. 

The life insurance industry helps in the mobilization of long-term savings and provides protection and long-term income and annuity solutions that would cater to the varied needs of customers. The rising middle-income households and growing working population along with improvement in financial literacy, access to information, and awareness will lead to an increase in penetration.

As compared to other developed economies, India remains vastly underinsured, both in terms of penetration and density. The life insurance penetration in India is at 3.2% which is one of the lowest amongst developing countries. The government has taken initiatives to promote financial inclusion & increase insurance awareness including setting up small finance banks, and payments banks and offering low-cost insurance schemes.

During FY23, the life insurance industry clocked 18% growth & collected new business premiums worth Rs. 3.7 Lakh Cr as against Rs. 3.14 Cr in FY22.Private insurers grew by 24% in weighted individual business, while group business saw a growth of 17%. The market share of private insurers in the individual business increased by 288 bps in comparison to FY22.

Strong growth in the proprietary channels and distribution arrangements with large banks and brokers have been key drivers for most of the large insurers. There is scope to increase penetration in terms of the number of policies, especially in Tier 2 and 3 locations as banks and new payments and small finance banks expand into these areas.

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SBI Life Insurance Vs HDFC Life Insurance – Financials

Net Premium Written & Net Profit

As the Companies that we are analyzing as two Life Insurers, we will be comparing them with some of their industry-specific metrics. The first one is the Net Premiums written. Premiums are what bring revenue for an insurer. These are the sum of the total premiums charged for new business as well as renewal of old policies. 

What differentiates Gross premiums from Net Premiums is that Insurance Companies are allowed to reinsure certain risky policies with other insurers. The gross premium received will be deducted from reinsurances to arrive at the Net premiums written.

On the Net premiums front, SBI Life Insurance reported premiums worth Rs. 66,580 Cr in FY23, which increased by 14% from Rs. 58,432 Cr in FY22. HDFC Life on the other hand saw a 25% jump in its Net Premiums from Rs. 45,390 Cr in FY22 to Rs. 56,760 Cr in FY23. Since FY21, SBI Life scaled its premiums by 19.28%, as compared to HDFC’s slightly lower 18.36% CAGR growth.

Although the long-term growth was marginally different for both insurers, Net Profit growth makes quite the distinction between both Companies. SBI was able to grow in Profits at the rate of 6.72% CAGR as compared to just 1.53% by HDFC Life.

This has been because HDFC has rather inconsistent earnings with a degrowth in FY22. SBI in FY23 reported a stellar growth in Net Profits by 14% from Rs. 1506 Cr in FY22 to Rs. 1368 Cr in FY23. 

Profit Margins

We will look at a new industry-specific ratio called Value of New Business Margin (VNBM) in profit margins. The ratio measures the profitability of the new businesses issued during the year. It derives a present value of all the estimated future profits to give us an estimate of the insurer’s margins. 

VNMB of SBI Life insurance remains strongly at 30% in FY23, after jumping 420 Basis points from 25.9% in FY22. HDFC Life also saw a rise in its margins from 27.4% in FY22 to 27.6% in FY23. Although HDFC has lesser margins than SBI, HDFC’s margins have remained rather consistent in the past 5 years.

Moving towards Net profit Margins we see that both SBI & HDFC have razor-thin margins of 2.1% and 1.94% respectively. FY20 seems like the best year for the industry with both Companies having margins in the 3%-4% range. SBI’s performance is stronger as of FY23, while HDFC performs better on a 5-year average.

Return Ratios

SBI Life & HDFC Life have a return on Equity ratio of 14% and 9.6% respectively. Both Companies have seen their ROEs drop consistently over the past 5 years. HDFC Life was impacted the most with ROEs crashing from 24.61% in FY19 to just 9.6% in FY23. 

A probable reason could be that these Companies retain a majority of their profits which form part of equity creating a higher base and causing low return ratios.

In terms of Return on Assets, both Companies are rather evenly matched. Both SBI & HDFC Life reports a ROA of 0.55% in FY23. The 5-year average of returns has been 0.7% for SBI Life & 0.77% for HDFC Life.

Solvency Analysis

To understand the Company’s solvency capabilities we will look at its Operating Leverage. This ratio unlike in other Companies measures the total Net Premium Written in a year as compared to the total Net Worth of the insurer. The ratio helps us understand the potential underwriting capacity of the insurer.

In FY23 SBI Life Insurance with a leverage of 51% outperforms HDFC Life with a leverage of 44%. SBI Life has always maintained its Operating leverage in the high 40% category, while HDFC saw a drop in margins to a low of 29% in FY22.

Another important ratio that will form part of our solvency analysis is the solvency margin. This ratio keeps track of the financial strength possessed by the insurer to meet the claims of its policyholders. The ratio must be at least 1.5 times higher for minimum compliance requirements.

Both Companies have a solvency margin greater than 2x. HDFC Life saw a great improvement from 1.76x in FY22 to 2.03x in FY23. The pandemic saw a severe drop in solvency margins to 1.95x & 1.84x in FY20 for both SBI Life & HDFC Life respectively.

SBI Life Insurance Vs HDFC Life Insurance – Key Metrics

We have now understood both the Companies’ business and take a good comparative look at their financials. Now let us look at a few Key Metrics.

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Conclusion

Both SBI Life Insurance and HDFC Life Insurance are leading players in the Indian life insurance market who began their journey back in 2000. While SBI Life has performed better in terms of net profit growth and the value of new business margins, HDFC Life has seen stronger growth in net premiums written since last year. 

However, both companies have witnessed a decline in key profitability ratios like return on equity over the past few years, potentially due to the retention of profits leading to a higher equity base.

Overall, the life insurance industry in India holds significant growth potential driven by factors such as the rising middle-class population, increasing financial literacy, and government initiatives to enhance insurance penetration.

Written by Nasir Hussain

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