HDFC Life IPO plans: own stock along with your policy

After a spate of deals in the insurance sector, where foreign partners have been upping their stakes in their joint ventures with Indian players both in the life and non-life insurance space, private insurers are now looking to get themselves listed this year.

The initial public offer process initiated by HDFC Standard Life, wherein the parent HDFC will offload its 10 per cent stake in the insurance company, through an offer-for-sale, will be the first. The home financier announced its plans on Tuesday to divest its stake.

As an investor you can gain on two counts. One, if you already have invested in the parent, HDFC, then the stake-sale will help unlock value in the insurance subsidiary. Two, you can own a piece of the action and buy shares during the IPO.

If an earlier deal is any indication, the IPO could be worth about ₹1,900 crore. In August last year, HDFC agreed to sell its 9 per cent stake in HDFC Life to its foreign partner, Standard Life. At ₹95 a share the total deal consideration worked to about ₹1,700 crore, and pegged the value of the life insurance business at about ₹19,000 crore. Post this sale, HDFC’s remaining (61.6 per cent) holding in HDFC Life can be valued at ₹74 a share based on the deal value. This is about 5 per cent of HDFC’s implied fair value of ₹1,364 (after valuing all other subsidiaries, such as non-life and mutual fund). HDFC is currently trading at ₹1,138.40.

With the passing of the Insurance Laws (Amendment) Bill, 2015, which increased the FDI limit in insurance to 49 per cent from 26 per cent, further stake-sale in HDFC Life, can act as a trigger for the HDFC stock.

The 9 per cent stake-sale to its foreign partner at two times the embedded value of the life insurance business — at par with other deals, also indicates good prospects for the business. Similar deals in the life insurance space have happened at one to three times the embedded value of the life insurance business. Embedded value is a measure used to value a life insurance business which, among other parameters, takes into account the future earnings of the company.

Investing directly into the life insurance business can hence, be rewarding too. HDFC Life is a leading player in the life insurance space. The insurer ranked first in group business and third in overall new business premium for the nine months ended December 31, 2015 (private sector). For FY16, the company has reported a net profit of ₹818 crore, an increases of 4 per cent over the previous year. The insurer’s gross premium grew 10 per cent to ₹16,313 crore for the full year.

Regulatory changes, volatile capital markets and decline in financial savings have impacted the performance of private life insurers in the last five years. However, post the regulatory changes in product structures, particularly ULIPs, companies have been focussing on cost rationalisation. Players are now rebalancing their portfolios, with focus on higher-margin non-par policies and ULIPs. This should aid margin improvement.

HDFC Life has a higher proportion of ULIPs (59 per cent as of December 2015).

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