HDFC Securities: Life Insurance - ULIP Versus Mutual Fund

HDFC Securities Report

Life insurers procure business by incurring high acquisition costs, which are expensed upfront.

This depresses reported profitability, especially when the new business premium is growing.

Given this accounting methodology, reported profitability of life insurers cannot be directly compared with that of asset managers.

We have carried out a few adjustments to determine the true profitability of life insurers.

Our analysis reveals that the profitability of life insurers (pre-tax approximately 45-90 basis points operating profit to average asset under management) is higher than that of asset management companies (23-40 basis points).

Additionally, the profitability of life insurers has improved over FY17-20 as costs of acquisition of new AUM have reduced.

Further, we estimate that the linked savings business has delivered return on invested capitals (RoICs) between 7.715.7% for FY20.

This is significantly lower than the computed RoICs of asset managers HDFC Asset Management Company Ltd./Nippon Life India Asset Management Company Ltd. at 443.8/99.4%.

We estimate linked savings business of life insurers would be d between 9-12.7% of AUMs, contributing between 4.4-19.6% to target prices.

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