Best Insurance Stock: LIC vs HDFC Life

The Indian life insurance sector holds immense promise for sustained growth in the future.

With regulatory support aiming for universal insurance coverage within a century of independence, the landscape is primed for growth.

Despite its vast potential, India's insurance sector remains significantly underdeveloped in terms of penetration and density.

The life insurance penetration, at a mere 3.2%, ranks among the lowest among developing nations. The low number highlights a glaring 'protection gap,' with 83% of Indians lacking adequate coverage.

Moreover, it indicates a pressing need for enhancing insurance coverage to safeguard against various risks.

However, the sector continues to grow on the back of rising disposable incomes, increasing financial literacy, and a growing awareness of the importance of insurance.

During the financial year 2023, the life insurance industry in India clocked in an impressive 18% increase in new business premiums.

In addition, the market share of private insurers in the individual business segment noted a significant uptick, expanding by 288 basis points during financial year 2023. It shot up from 38% in financial year 2013 to 66% in financial year 2023.

This growth trajectory is attributable to various factors, such as the development of multiple distribution channels and product innovation, particularly with a heightened focus on segments such as non-par savings and deferred annuity.

Looking ahead, the industry is well-poised for growth and is well-positioned to bridge the existing protection gap and ensure financial security for all segments of society.

In this piece, we take a deep dive into the workings of the country's life insurance giants, HDFC Life and LIC.

Let's see how they stack up against each other.

Background

Life Insurance Corporation of India (LIC)

LIC is the largest life insurer in India, commanding a lion's share of the market. It enjoys a market share of 62.6% in terms of first year premium income (FYPI) and 71.8% in terms of Number of Policies (NOP) for financial year 2023.

The company enjoys a pan-India presence and is the only PSU in the sector. LIC boasts a large agent base that is highly productive. Although the Government of India owns 96.5% of LIC, the company has only one government-nominated director on the board.

HDFC Life Insurance Company

HDFC Life Insurance is a joint venture (JV) between HDFC Limited and Standard Life (UK). It is one of the top three private life insurers in India, with a market share of 15% in the private life insurance industry. On an industry-wide basis (APE), the company has >7% market share.

HDFC Life also enjoys a country-wide presence and provides a comprehensive suite of products such as protection, savings, investment and health through its diverse distribution network.

Recently, HDFC Life acquired Exide Life Insurance Company Ltd. which will be reflected in financial year 2023 numbers. Therefore, the numbers for financial year 2023 are not comparable to the previous years.

Since insurance companies operate differently than most regular businesses listed on the stock exchange, we have selected six important parameters to differentiate the two entities.

1. Total Premium

   The income of a life insurance company comes from a combination of premium income, investment income, fee income, underwriting income and other sources.

   The premium income, which accounts for a large part of the total income, can be divided into two heads; the new business premium and the renewal premium.

   The new business premium for the year is the total of the first-year premium and single premium accounted for during the year.

   Single premium covers contracts that require only a single lump sum payment from the policyholder. It also includes top-up premium, which refers to additional amounts of premium over and above the contractual basic premium received during the term of the unit-linked insurance contract.

   Renewal premium is the premium received or receivable on regular premium-paying contracts in the years after the first year of the contract.

   LIC vs HDFC Life Total Premium Growth(2019-2023)

   	2019	2020	2021	2022	2023
   Total Premium (Rs m)
   LIC	33,71,854	37,90,625	40,28,440	42,74,192	47,40,046
   HDFC Life	2,91,860	3,27,070	3,85,830	4,59,630	5,75,330
   Premium growth YOY%
   LIC	6.08%	12.42%	6.27%	6.10%	10.90%
   HDFC Life	23.86%	12.06%	17.97%	19.13%	25.17%

   Data Source: Annual Report
   

   HDFC Life's 5-year compounded annual growth (CAGR) in total premium is nearly two times that of LIC. While HDFC Life reported a CAGR of 19.5%, LIC reported CAGR of 8.3%

   The company has grown faster than the private industry and is ranked amongst the top 3 life insurers across individual and group businesses.

   The private player has outpaced the private insurance industry over multiple timeframes including, in the past 3, 5 and 7 years, thereby consistently demonstrating growth leadership.

2. Annualized Premium Equivalent (APE)

   APE represents the total premium income an insurance company would receive if all premiums were paid annually.

   It is calculated as the sum of annualised first year premiums on regular premium policies, and 10% of single premiums of both individual and group business written by insurers, adjusted for new business cancellations, effected during the relevant financial year or period.

   This calculation allows for the consistent measurement and comparison of premium income across different policies and payment frequencies. It provides a uniform basis for evaluating the company's performance.

   LIC vs HDFC Life APE (2019-2023)

   	2019	2020	2021	2022	2023
   APE
   LIC	NA	NA	4,21,700	5,03,900	5,66,820
   HDFC Life	62,600	74,070	83,720	97,580	1,33,360
   APE growth YOY%
   LIC				19.49%	12.49%
   HDFC Life	13.16%	18.32%	13.03%	16.56%	36.67%

   Data Source: Annual Report
   

   HDFC Life has reported a 5-year CAGR growth of 19.2% in APE. While LIC's data is not available for the past few years, the public insurer has ramped up its APE well, growing by 13% in financial year 2023 alone.

3. New Business Margin

   Often referred to as the value of new business margin (VNB) as well, it is a measure of the expected profitability of new business, expressed in percentage terms.

   VNB Margin is calculated by dividing the value of new business (expected profitability of new business written during the financial year) during the period by APE (APE: 100% of first-year regular premium + 10% of single premium).

   LIC vs HDFC Life New Business Margin (2019-2023)

   	2019	2020	2021	2022	2023
   New Business Margin
   LIC	N.A.	N.A.	9.90%	15.10%	16.20%
   HDFC Life	24.60%	25.90%	26.10%	27.40%	27.60%

   Data Source: Annual Report
   

   Along with an improving trend, HDFC Life has consistently reported higher margins than its giant peer, LIC. This comes despite a strong growth in business.

   According to the company, a large part of the margin expansion comes on the back of favorable product mix and lower cost ratios and is likely to continue.

4. Net Profit

   Net Profit is the profit a company earns after subtracting its' expenses from its total revenue. It is a key indicator of a company's financial performance and profitability.

   LIC vs HDFC Life Net Profit (2019-2023)

   	2019	2020	2021	2022	2023
   Net Profit
   LIC	26,884	27,127	29,005	41,247	3,59,966
   HDFC Life	12,779	12,974	13,608	13,269	13,682
   Net Profit growth YOY%
   LIC	9.89%	0.90%	6.92%	42.21%	772.71%

   Data Source: Annual Report
   

   HDFC Life's net profit has been stable over the years. This sub-par performance is a direct result of elevated claims during the pandemic.

   However, post that the business has been performing well. In financial year 2023, the net profit, without factoring in the Exide Life Insurance business, grew by 13% year-on-year.

   LIC's new profit has also recovered well, post the claims from the pandemic. The elevated numbers in 2023 come from a one-time transfer of Rs 272 billion (bn) net of tax, pertaining to the accretions on the available solvency margin from non-par fund to the shareholders' account.

   Barring the one-time effect for both companies in financial 2023, HDFC Life and LIC reported a 5-year CAGR of 4% and 30%, respectively.

5. Persistency Ratio

   Persistency ratio is a crucial metric that reflects the ability of an insurance company to retain its policyholders over time. It's essentially a measure of customer loyalty.

   Expressed in the form of percent, it is calculated by dividing the number of policies that are renewed by the total number of policies eligible for renewal.

   LIC vs HDFC Life Persistency Ratio (2019-2023)

   	2019	2020	2021	2022	2023
   Persistency Ratio
   LIC	77%	72%	79%	76%	77%
   HDFC Life	88%	90%	85%	87%	87%

   Data Source: Annual Report
   

   Generally, a higher persistency ratio indicates better customer retention, which is typically a positive sign for an insurance company. It implies that policyholders are satisfied with the insurance products and services offered, leading them to renew their policies.

   HDFC Life has consistently maintained a higher persistency ratio than LIC over the years. HDFC Life higher persistency ratio comes from improvement in persistency across cohorts, led by a focus on the quality of business and leveraging technological capabilities to provide superior customer experience.

6. Solvency Ratio

   Solvency ratio assesses the excess funds an insurance company possesses in comparison to the minimum threshold mandated by regulatory standards. It serves as an important measure of the insurer's financial strength and capacity to meet its obligations to policyholders.

   The solvency ratio is measured using Available Solvency Margin (ASM) and the Required Solvency Margin (RSM).

   The ASM is the surplus assets beyond liabilities within the shareholders' and policyholders' funds, while the RSM represents the mandated solvency margin stipulated by the IRDAI guidelines.

   LIC vs HDFC Life Solvency Ratio (2019-2023)

   	2019	2020	2021	2022	2023
   Solvency Ratio
   LIC	160%	155%	176%	185%	187%
   HDFC Life	188%	184%	201%	176%	203%

   Data Source: Annual Report
   

   A high solvency ratio indicates that the insurer has a strong financial position and is well-capitalised. It suggests that the insurer has sufficient funds to honor its obligations to policyholders, even in adverse economic conditions or during periods of high claims.

   The Insurance Regulatory and Development Authority of India (IRDAI) requires life insurers to maintain a minimum solvency ratio of 150%.

   While both companies have consistently reported a solvency ratio higher than the regulatory requirement, HDFC Life's ratio has been higher than LIC's, barring financial year 2022.

Dividend

Dividend is the income an investor can make from stocks, other than the appreciation in the value of the share.

The five-year median dividend yield for HDFC Life has been at 0.3% . LIC has reported a dividend yield of 0.4% in financial year 2023.

Valuation

The most common and effective ratios for comparative analysis and valuation are the price to earnings (PE) and price to book (PB) value ratio.

While the PE ratio uses the company's earnings to determine the value a shareholder assigns against one rupee of earnings; the PB ratio uses a company's book value to determine the same.

LIC vs HDFC Life Valuation Ratios (2021-2022)

	P/BV Ratio	5-year average P/BV	P/E Ratio	5-year average PE
LIC	9.2	NA	14.2	NA
HDFC Life	9.6	14.8	89	90

Data Source: Equitymaster


The PE and PB ratios for LIC is at 14.2x and 9.2x, respectively.

For HDFC Life, the PE and PB is at 89x and 9.6x, respectively. The 5-year median is 90 and 14.8, respectively.

Bright Prospects

Insurance as a sector continues to be a beneficiary of a relatively robust economy, stable savings trends and favourable regulatory regime.

The rising middle-income households and the growing working population, in tandem with improving financial literacy, access to information and awareness, promise an uptick in insurance adoption.

Moreover, the surge in credit facilities also indicates the opportunity for attaching group protection products at the time of borrowing, tapping into a wider market segment.

The government initiatives have also helped. Setting up small finance banks and payment banks and offering low-cost insurance schemes have bolstered insurance awareness and accessibility.

Retirement is an equally large opportunity, given India's changing demographic profile. With the elderly population projected to nearly triple by 2060 and an absence of a formal social security system, there is a burgeoning demand for retirement-focused insurance products.

As per a study by the UN, the share of the population over the age of 60 is to increase from 7% to nearly 17% in 2060.

Looking ahead, digital assets emerge as the key to driving new business, customer service, claim pay-outs as well as risk management. Digitisation is no longer merely a channel but a way of life permeating the business.

Evolving technology is disrupting businesses rapidly, with customers and distributors wanting seamless end-to-end digital solutions.

Harnessing technology and data analytics hold the key to not only streamlining customer interactions but also bolstering underwriting processes, especially as insurance ventures into new market segments and geographical territories.

LIC or HDFC Life: Which is Better?

HDFC Life has been growing steadily in the last five years while improving its margins.

Registering robust growth in total premiums and APE, the company has been charging ahead of the industry growth. It has been growing organically and inorganically, acquiring Exide Life Insurance, a first of its kind in the life insurance industry in India.

The new business margins have also been strong in comparison to LIC, giving it a leg up.

Besides, the private insurer enjoys a strong legacy with the HDFC brand name. HDFC Life has also reported a higher solvency ratio and persistency ratios in comparison to LIC.

However, the lower margins offer LIC room for improvement. Moreover, LIC is the undisputed leader in the industry and is synonymous with life insurance in the country.

Still Wondering Which is Better?

Use our feature-rich comparison tool, which draws a detailed comparison between any two companies.

This tool also includes a graphical analysis making it easy for you to see trends!

You can also compare companies with their peers.

HDFC Life vs LIC

LIC vs SBI Life

For a more detailed analysis, check out the LIC factsheet and HDFC Life factsheet.

You can also check out the latest quarterly result for LIC and HDFC Life.

As stocks from thelife insurance sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top insurance companies in India

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