HDFC Life Insurance Ltd

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About the Company

HDFC Life (HDFC Life Insurance Company Ltd.) is a long-term life insurance provider with its headquarters in Mumbai, offering individual and group insurance.

It is a joint venture between Housing Development Finance Corporation Ltd (HDFC), one of India’s leading housing finance institutions, and Standard Life Aberdeen PLC, leading a well-known provider of financial savings & investment services in the United Kingdom.

HDFC Life has about 414 branches and a presence in 980+ cities and towns in India.

Q4FY21 Updates

Financial Results & Highlights

*contains tax provision of Rs 9 Cr.

***contains tax provision of Rs 27 Cr.

***contains tax provision of Rs 7 Cr.

Detailed Results

1. There was 14% YoY growth in the value of New Business (VNB) in FY21.
2. Individual WRP (Weighted received premium) grew 40% YoY in Q4 & 17% in FY21 vs industry growth of 8%. Individual APE (Annualized Premium Equivalent) grew 16% YoY while Total APE also grew by 13% YoY in FY21.
3. The new business premium was up 17% YoY while the renewal premium grew 19% YoY in FY21. The new business Margin was at 26.1% while operating return on embedded value was at 18.5% in FY21 vs 18.1% a year ago.
4. There was also a 4% YoY growth in Individual Protection while Group Protection fell by 21% YoY in FY21.
5. Indian Embedded Value grew 29% YoY in FY21.
6. The company maintained a solvency ratio of 201%.
7. Ranked #2 in terms of Individual WRP with market share expanding by 130 bps from 14.2% to 15.5%. The overall market share for the company within the group and the new business segment rose to 27.6% & 21.5% respectively.
8. As of 31^st Mar 2021, the AUM was at Rs 1.74 Lac Cr and had a 64:36 debt to equity mix. 98% of debt investments were in G-Sec and AAA-rated bonds.
9. The product mix was at: UL: 24%, Par: 34%, Non-par savings: 31%, Protection: 7%, Annuity: 5%.
10. The operating expense to total premium ratio was maintained at 12% in FY21 vs 13.1% a year ago.
11. HDFC Pension Fund saw AUM growth of 98% YoY while market share rose to 34.4% from 31.1% last year.
12. 13M and 61M persistency was at 90% and 53% respectively.
13. The board announced a final dividend of Rs 2.02 per share for FY21.

Investor Conference Call Highlights

1. In FY21, HDFC Life settled over 2.9 lakh death claims resulting in pay-outs over Rs 3,000 Cr.
2. The share of the banca channel in individual APE increased to 61%, while that of the agency & direct channel declined 13% & 19% respectively in FY21.
3. The company saw a rise in demand for savings products as customers continued to evaluate investing in bundled solutions to secure both their financial needs as well as protection requirements.
4. Individual protection demand in FY21 remained high but the sales in this business were constrained by lack of physical medical tests, central medical database, and mobility challenges. The management remains confident of the long-term opportunity in the protection space.
5. The management reiterated its positive stance on the pension opportunity. Although there are indeed some supply-side constraints in annuities, the long-term growth opportunity in this space remains intact.
6. Medium-term growth in annuity is expected to be higher than the overall company growth.
7. The company has created an additional COVID-19 reserve of Rs 165 Cr in Q4 to bring the total up to Rs 1360 Cr in FY21.
8. The banca channel grew 29% YoY in FY21. The contribution of business from Tier 2 and 3 locations increased to over 15% of online business.
9. The management has stated that HDFC Life will continue to maintain VNB margin at current levels. The margin expansion in FY21 here was due to a better product mix and higher growth across channels.
10. The industry partnerships made in FY21 with Ujjivan, Equitas, and many others are expected to contribute to growth from FY22 onwards from tier 2 & 3 markets.
11. The management has stated that there might be a possibility of a hike in reinsurance rates in the future.
12. The HDFC bank channel has done well in FY21 with high branch conversion and increasing HDFC Life penetration in rural regions with the expansion of HDFC Bank.
13. The reason behind the growth in the HDFC bank channel is said to be the full training given to its employees and the fact that the bank branches remain open as essential services while other physical channels have to close during the lockdowns.
14. Branch sales for HDFC Life were low due to low footfall in branches as they remained open only to service the critical needs of customers.
15. There is still uncertainty regarding the phenomenon called Long COVID appearing in COVID patients post recovery and how it will affect the insurance industry.
16. The company will continue its growth plans in UL in a calibrated manner.

Analyst’s View

HDFC Life is one of the front runners in the life insurance industry in India. The company has gone from strength to strength and maintained a good balance of new business and existing business while consistently growing over the years. The company has done well to outpace industry growth in Q4 and clock NBM of 26.1%. The results show a sustained rise in Individual WRP, its market share and renewal premium remains strong outpacing the industry growth. The company has also done well to extend partnerships with various banks and SFBs in FY21 which should lead to higher penetration in tier 2 & 3 regions. It also maintains that the opportunity in annuity space which is even bigger than the protection opportunity. It remains to be seen whether the situation ahead unfolds with the rise of the 2^nd wave of COVID-19 & how will the industry change from its long-term impact of COVID-19 (Long COVID). Nonetheless, given the company’s market positioning, its dynamic product portfolio, and its emphasis on the development of non-traditional channels and innovative products, HDFC Life remains a pivotal insurance stock in the country.

Q3FY21 Updates

Financial Results & Highlights

Detailed Results

1. There was flat growth in the value of New Business (VNB) in 9M.
2. Individual WRP (Weighted received premium) fell 19% in Q3 and 8% in 9M vs industry fall of 6% in 9M. Individual APE (Annualized Premium Equivalent) grew 6% YoY while Total APE also grew by 4% YoY in 9M.
3. The new business premium was up 11% YoY while the renewal premium grew 22% YoY in 9M. The new business Margin was at 25.16% while operating return on embedded value was at 18.3% in 9MFY21 vs 19% a year ago.
4. There was also a 18% YoY growth in Individual Protection APE while Group Protection APE fell by 38% YoY.
5. Indian Embedded Value grew 20% YoY in 9M.
6. The company maintained a solvency ratio of 202%.
7. Ranked #2 in terms of Individual WRP with market share expanding by 214 bps from 14.3% to 16.4%. The overall market share for the company within the group and the new business segment rose to 27% & 22% respectively.
8. As of 31^st Dec 2020, the AUM was at Rs 1.65 Lac Cr and had a 64:36 debt to equity mix. 98% of debt investments were in G-Sec and AAA-rated bonds.
9. The product mix was at: UL: 23%, Par: 35%, Non-par savings: 30%, Protection: 7%, Annuity: 5%.
10. The operating expense to total premium ratio was maintained at 12.1% in 9MFY21 vs 13.7% a year ago.
11. HDFC Pension Fund saw AUM growth of 81% YoY while market share rose to 34% from 30% last year.
12. 13M and 61M persistency was at 89% and 53% respectively.

Investor Conference Call Highlights

1. In terms of individual WRP, the company grew by 8% for 9MFY21 vs an 8% decline in the industry. Average ticket size and no. of policies sold continued to rise.
2. As of Dec, HDFC Life has gotten 1,271 individual and 542 group COVID related claims which the management states are well within its projections.
3. HDFC Life has launched a new term plan, “Click 2 Protect life” with innovative features. It is actively engaged with new banca channel partners to get new business and tap new gen customers through the online channel.
4. This new product should help HDFC life expand on margins going forward.
5. ULIP was up 13% in Q3. Credit protect has seen a strong pickup QoQ, generating business worth Rs 10 bn in Q3 vs Rs 7 bn in Q2 and Rs 2.4 bn in Q1.
6. The new product Click2Protect Life provides flexibility to auto balance death and critical illness cover or receive income payouts from age 60. The management believes that this product launch underlines the company’s innovation edge.
7. The management remains positive on the annuity opportunity given that HDFC Life aspires to grow the retiral corpus by 3x by FY25. It also believes that the annuity opportunity is bigger than the protection opportunity for HDFC Life.
8. Renewal growth was strong at 22% YoY with 87% via the digital mode.
9. Growth in the banca channel has been strong, including that for HDFC Bank, where the company has been able to retain its market share.
10. The management remains confident in managing the product mix in times of rate hardening, stating that it follows a dynamic rate pricing governance.
11. Individual and group annuities have seen 42% growth with annuity contributing over 5% to individual APE.
12. The company is seeing signs of demand for individual protection reverting to normal levels after the initial surge due to the pandemic. The long-term opportunity for protection remains strong.
13. The management states that tax savings are no longer the primary reason to buy insurance and thus the core demand for insurance products is expected to remain sustained.
14. The management reiterated its sales approach as being customer-centric rather than being product or distribution channel-centric. It stated that it usually works with its distributors in terms of what their customers want and what the partner strategy is to cater to the customers’ demand.
15. The management expects the quality of the protection book to improve going forward given the price actions taken after the rate hike.
16. Average ticket sizes for plain term plan were between Rs 20,000-30,000 while ROPs were between Rs 35,000-40,000.

Analyst’s View

HDFC Life is one of the front runners in the life insurance industry in India. The company has gone from strength to strength and maintained a good balance of new business and existing business while consistently growing over the years. The company has done well to adapt to the new normal and remained conservative in current uncertain times. The results show a sustained rise in Individual WRP, its market share and renewal premium remains strong despite the industry decline. The company has also done well to maintain its focus on operational segments and on introducing the new digital product Click2Protect. It also sees a big opportunity in annuity space which is even bigger than the protection opportunity. It remains to be seen whether the situation ahead unfolds within the company’s expectations or how long will it take for the industry to normalize. Nonetheless, given the company’s market positioning, its dynamic product portfolio, and its emphasis on the development of non-traditional channels and innovative products, HDFC Life remains a pivotal insurance stock in the country.

Q2FY21 Updates

Financial Results & Highlights

Detailed Results

1. 1. There was a 12% YoY fall in the value of New Business (VNB) in H1.
   2. Individual WRP (Weighted received premium) fell 22% in Q2 and 2% in H1 vs industry fall of 11% in H1. Individual APE (Annualized Premium Equivalent) fell 1% YoY while Total APE also fell by 4% YoY in H1.
   3. The new business premium was up 7% YoY while the renewal premium grew 22% YoY in H1. The new business Margin was at 25.1% while operating return on embedded value was at 17.6% in H1FY21 vs 19.6% a year ago.
   4. There was also a 38% YoY growth in Individual Protection APE while Group Protection APE fell by 54% YoY.
   5. Indian Embedded Value grew 16% YoY in H1.
   6. The company maintained a solvency ratio of 203%.
   7. Ranked #1 in terms of Individual WRP with market share expanding by 235 bps from 15.2% to 17.5%. The overall market share for the company within the group and the new business segment rose to 27.4% & 23.3% respectively.
   8. As of 30^thSep 2020, the AUM was at Rs 1.5 Lac Cr and had a 67:33 debt to equity mix. 97% of debt investments were in G-Sec and AAA-rated bonds.
   9. The product mix was at: UL: 23%, Par: 33%, Non-par savings: 30%, Protection: 9%, Annuity: 5%.
   10. The operating expense ratio was maintained at 11.1% in H1FY21 vs 14% a year ago.
   11. HDFC Pension Fund saw AUM growth of 70% YoY while market share rose to 33% from 29% last year.

Investor Conference Call Highlights

1. The company sold 4.4 million policies in Q2 which is a YoY growth of 6%.
2. The management continues to see growth momentum in Individual Protection APE.
3. The share of protection has risen to 9% in H1FY21 from 6% last year.
4. Although the number of COVID-19 claims is rising, they are within the company’s estimates.
5. The Agency channel saw sales growth of 6% in Q2.
6. 95% of the policies are being renewed digitally, accounting for 88% of renewal premiums being done via digital modes.
7. The management prefers to maintain a cautious stance despite delivering a 2% growth in such uncertain times and is still maintaining the target of flat YoY growth for FY21.
8. The main reason to raise sub-debt and increase solvency was to maintain enough of a comfortable position to be able to withstand volatility in markets.
9. The management is confident in its Rs 41 Cr of reserves for COVID-19 claims as it is within their actuarial assumptions.
10. The company sees good potential in the retiral space and this was evident from the 38% growth in the annuities business.
11. Sanchay Par Advantage has done well and one of the main reasons behind this is the faster cashback and the equity upside. The Banca channel has seen a good response to this product and its timing was also good considering it returns which were better than ULIPs for customers.
12. ULIPs are slowly being reduced and replaced by par products.
13. The company will maintain the status quo on pricing and will maintain a risk-based approach to remain competitive in a multi-tier system.
14. In the annuity business, the average age of the customer is close to 60 and 95% of business is from premium annuities.
15. The company’s market share from HDFC Bank in the Banca channel is at 65-70%.
16. The company’s credit protect margins have become much better due to the contraction in the business and fall in disbursement and coverage.
17. The back book surplus has grown by 10% which in view of management is a reasonably robust level of growth.
18. The management maintains that HDFC Life has remained focused on protection before many other industry players and thus it hopes to maintain a sustainable advantage in this emerging product segment.
19. There has indeed been an uptick in searches for HDFC Life products and policy sales in the past 6 months but the online sales have been stalled at the medical test stage where a large chunk of medicals are not done by telemedical and in-person medicals have declined due to COVID-19.
20. The company is also seeing volume and ticket sizes of savings products rising in Q2 vs Q1.
21. Opex growth has certainly been slowed down due to digitization but once field operations resume in full, it can start rising as well.
22. Non-HDFC bank Banca channels have shown growth of around 6%.
23. The company expects growth to resume in the credit protect segment once the disbursals in the industry from NBFCs and other start rising after Diwali.
24. The management has stated that ULIP sales are expected to stay down for at least 9 months since market volatility.
25. The management states that under the current COVID-19 situation, the average customer expects health cover foremost, then life cover, then annuities and savings products come into the picture.
26. Right fit and right sale to each potential customer is of foremost importance according to the management as they do not want to cause any persistency issues and disillusionment for the customer from a wrong product sale and undermined expectations and returns from it.
27. The major reason for EVOP falling YoY is the fall in interest rates YoY.
28. The company has initiated a very large training and capability program called Agency Life which was spread across all agency partners. In the time of COVID, it was migrated from an offline branch training to an online where more than 6,000 financial consultant partners come online and get trained. This is one of the many structural interventions the company has done to maintain and enhance the quality of business and agent performance.
29. The management expects to see more traction coming in the near future in Q3 & Q4 from Group Poorna Suraksha.

Analyst’s View

HDFC Life is one of the front runners in the life insurance industry in India. The company has gone from strength to strength and maintained a good balance of new business and existing business while consistently growing over the years. The company has done well to adapt to the new normal and remained conservative in current uncertain times. The results show a big rise in Individual WRP market share and renewal premium remains strong despite the tough environment. The company has also done well to maintain its focus on operational segments like enhanced sales training and digital onboarding which should yield well in the future. It remains to be seen whether the situation ahead unfolds within the company’s expectations or whether we may see more uncertainty arising from COVID-19. Nonetheless, given the company’s market positioning, its dynamic product portfolio, and its emphasis on the development of non-traditional channels and innovative products, HDFC Life remains a pivotal insurance stock in the country.

Q1 FY21 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company saw an income rise of 70% YoY in Q1. PAT grew 6% YoY in the same period.
   2. This rise in income is mainly due to the rise in income from investments.
   3. There was a 43% YoY fall in the value of New Business (VNB).
   4. Individual WRP (Weighted received premium) fell 19% vs industry fall of 23% and individual APE (Annualized Premium Equivalent) fell 22% YoY while Total APE also fell by 30% YoY.
   5. The new business premium fell by 33% YoY while the renewal premium grew 24% YoY. The new business Margin was at 24.3% while operating return on embedded value was at 15.8% vs 19.9% a year ago.
   6. There was also a 48% YoY fall in Protection APE while Individual Protection APE grew by 50% YoY.
   7. Total AUM and Net Worth grew 8% and 22% YoY respectively in the year.
   8. Indian Embedded Value grew 17% YoY.
   9. The company maintained a solvency ratio of 190%.
   10. Ranked #1 in terms of Individual WRP with market share expanding by 100 bps from 17.5% to 18.5%. The overall market share for the company within the group and the new business segment rose to 20.7%.
   11. As of 30^th June 2020, the AUM was at Rs 1.4 Lac Cr and had a 68:32 debt to equity mix. 97% of debt investments were in G-Sec and AAA-rated bonds.
   12. The product mix was at: UL: 27%, Par: 30%, Non-par savings: 28%, Protection: 11%, Annuity: 5%.
   13. The operating expense ratio was maintained at 11.5% vs 13.4% a year ago.
   14. To be included in the NIFTY50 index from 31^st July 2020.
   15. The proposed Sub-debt instrument was rated [ICRA]AAA(Stable) by ICRA/CRISIL as and AAA/Stable by CRISIL.
   16. HDFC Pension Fund saw AUM growth of 69% YoY to Rs 99.7 billion while market share rose to 32% from 28% last year.

Investor Conference Call Highlights

1. The management remains cautious about the trends going on so far given the possibility of multiple lockdowns going forward and the consequent impact on jobs and small businesses.
2. The management expects the term and annuity products to do well and grow in the near future while ULIPs will continue to go slightly from current levels.
3. The management continues to stress that the company’s focus remains on brand promise and technology rather than pricing. The company will not be willing to compromise on service quality or brand image for pricing.
4. The management stated that Sanchay Par has immediate cashback which is an attractive sell to people who may have stretched budgets and may have sudden cash requirements. This is mainly for younger people with immediate expenses while non-par maybe for people above the age of 50.
5. There hasn’t been much impact of the change in RFR on the Value of New Business.
6. This is because the company constantly reprices almost every month whenever there is a significant shift in the economic parameters.
7. The company has decided to not do any new hiring and to instate bonus cuts and not do increments to limit manpower costs. It has also focused on reducing discretionary expenses by promoting the use of technology to service customers and onboard new customers.
8. The management has stated that there has been a good response from the Bancassurance channel with cross-selling and reaching out to customers. Although bank traffic has gone down due to the pandemic, the digital reach out has expanded significantly.
9. The management has stated that persistency has taken a hit and ULIP has seen the most stress out of all products.
10. The management has maintained that the longer term for Sanchay Par is there to focus more on longer-term par and it has a positive impact on VNB margin as well at the same time.
11. The unwind rate for Q4FY20 was kept at 7.5% as the markets had crashed and the management wanted to stay conservative at the time. So when the markets bounced back since the unwinding rate has risen to 8.4%. Unwind rate for listed insurance players varies between 8% and 9%.
12. In the economic variance of Rs 1154 Cr, around Rs 400 Cr is from equity while interest rate fall is around Rs 180-200 Cr.
13. The management states that it will not be passing on all reinsuring rate hikes and it will continue to do so in a risk-based calibrated manner where they see stress on mortality experience. Thus when the company sees certain profiles generating poor mortality, it will increase rates there.
14. The management has clarified that demand is not an issue with a non-par savings product. The company is just doing conscious demand curbing to keep a balanced product mix in current uncertain times.
15. The management is comfortable with the current solvency ratio of 190% and is looking to raise a sub-debt of Rs 600 Cr to provide an additional cushion of 15%. The management expects that the company will need more capital when the protection mix goes up significantly from hereon.
16. The management is cautious about ULIP as it has poor persistency and most customers in it are there for investment purposes and not the insurance purpose which skews the customer set from the regular insurance customer set. Another reason is that there isn’t much pull left in the market for ULIP.
17. Ticket sizes for ULIP have also gone down 20% in the past 2 quarters.
18. There is a clear consolidation of market share among the top 10 players who control 88% of the pie. The ones below will struggle to break this stranglehold.
19. The management has clarified that despite being a shorter-term product, Sanchay Plus is profitable and along with Sanchay Par it helps offer customers a wide range of options to choose from according to their specific needs.
20. The management remains convinced that the par product should do good and timing for the product launch has been good as longer-term products see ready acceptance in times of market downturn.
21. The Group Poorna Suraksha plan is like an individual term where a customer can buy for a 30-year, 40-year, or 50-year term, and offer it to its employees. It works exactly like an individual term, but with a group wrapper around this providing long term retention scheme for an employer. It is also the first of its kind in the market so there is a lot of vacant market for this product to capture.
22. The company is using technology in many ways from servicing the customer to new business sales using bots in a lot of areas to handle right from customer queries to resolutions to risk management and so on. The company has also launched a platform go-to-market platform called WISE which can be used on a handheld device to product switch, right selling, run some videos, and hone down on a product, do illustration, and also do the KYC of the customer.
23. The agency and broker channels have done well to embrace this tech-driven shift. The management is waiting for the Banc channel to catch up on this as this is where large numbers will come from.

Analyst’s View

HDFC Life is one of the front runners in the life insurance industry in India. The company has gone from strength to strength and maintained a good balance of new business and existing business while consistently growing over the years. The company has done well to adapt to the new normal and remained conservative in current uncertain times. The results show a fall in new premium but renewal premium remains strong despite the tough environment. The company has also done well to take sight of the current situation and launch the Group Poorna Suraksha plan which is the first of its kind group insurance for the workforce. It remains to be seen whether the situation ahead unfolds within the company’s expectations or whether we may see more uncertainty arising from COVID-19. Nonetheless, given the company’s market positioning, its dynamic product portfolio, and its emphasis on the development of non-traditional channels and innovative products, HDFC Life remains a pivotal insurance stock in the country.

Q4 FY20 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company saw an income decline of 97% YoY in Q4 periods. PAT grew 14% YoY in the same period.
   2. This fall in income is mainly due to the impairment in investments.
   3. There was a 25% growth in the value of New Business (VNB).
   4. Individual WRP (Weighted received premium) and APE (Annualized Premium Equivalent) grew 19% & 18% YoY while Total APE also grew by 18% YoY.
   5. The new business premium grew 15% YoY. The new business Margin was at 25.9% while operating return on embedded value was at 18.1%.
   6. There was also a 22% YoY growth in Protection APE.
   7. Total AUM and Net Worth grew 1% and 24% YoY respectively in the year.
   8. Indian Embedded Value grew 13% YoY.
   9. The company maintained a solvency ratio of 184%.
   10. In the individual insurance market, the company increased its market share by 170 bps to 14.2%. It also maintained a leading market share of 29% in the group segment.
   11. The overall market share for the company was at 21.5%.
   12. As of 31st March 2020, the AUM was at Rs 1.3 Lac Cr and had a 71:29 debt to equity mix. 96% of debt investments were in G-Sec and AAA-rated bonds.
   13. The total no of lives insured rose 19% YoY to 6.1 Cr in FY20.
   14. The operating expense to the total premium ratio was maintained at 13.1%.
   15. Claims settlement ratio was at 99.1% in FY20.

Investor Conference Call Highlights

1. The management expects demand for insurance products particularly life insurance emerging stronger from the pandemic.
2. The adoption of the digital channel has seen an increase of 67% during the lockdown period while usage across WhatsApp and other messaging mediums has increased by 70%.
3. The company has settled 3000 maturity claims, 300 death claims, 21000 annuity payouts, and 95000 transactions in the first 15 days of the lockdown.
4. The drop in interest rates in FY20 led to lower EV unwind. This drop along with strengthened persistency and mortality reduced operating return on embedded value by 200 bps to 18.1%.
5. The company has also created a COVID-19 provision in view of increased mortality during the time of the pandemic.
6. New business was offset by robust back-book surplus which grew 17% overall.
7. The company has received board approval to raise tier 2 capital via subordinated debt. This is to provide an additional cushion against further market volatility.
8. The company has not declared any dividend to conserve capital according to the directive by IRDAI.
9. The share of proprietary channels has grown to 36% from 32% a year ago.
10. The broker channel grew 1.5 times to Rs 500 Crs APE.
11. The company has a total of 70 distribution partners with more than 40 in the new ecosystem space.
12. The savings business grew 18% while the protection business grew 22% in FY20.
13. Protection accounted for 27.6% of the new business premiums and 17.2% on a weighted basis.
14. Individual term protection was 7.6% of individual APE and it grew 33% YoY.
15. 13th-month persistency improved from 84% to 88% while 61st-month persistency has improved from 51% to 54% for the individual business.
16. The management is seeing online channels growing for the company since the lockdown started as traditional channels have declined in the same period. The company is also seeing smaller ticket sizes emerging.
17. The company is also getting lots of inquiries on group term insurance from many employers. The management has stated that it shouldn’t be focussed only on COVID-19 and should be more focussed on the overall protection of employees.
18. There hasn’t been any reduction in the annuity business.
19. ULIP business has been declining for a while and this latest disruption has deepened this fall.
20. The management has clarified that the company is willing to take on little additional dollar sensitivity in return for cash flow matching.
21. The company has provisions to provide loans to policyholders if there are at least 2-3 months of premiums paid and some current value has been formed up. This is mainly for people who are in doubt and want to continue their policies but do not have any certainty on immediate cash inflows. The loan does not have any minimum tenure and the customer can pay it back as soon as the cash flow situation gets resolved. This is not applicable to ULIPs any longer.
22. The management has clarified that the rate of interest for the above-mentioned loan is lower than the market rate for personal loans.
23. There is under-penetration in the health insurance sector. It is very less compared to many emerging economies. Thus it is a big opportunity for the company.
24. It is a board directive that the company needs to be thinking of capital raise once the solvency reaches near 170%. The recent fall in equity markets puts further strain on solvency and thus the management made the decision to go for the fundraise. Another reason behind the fundraising is that the management wanted the company to have enough spare capital to ramp up operations once recovery begins post-COVID-19.
25. The company won’t be aggressively pricing its products as it would needlessly increase strain on risk. The company will maintain competitive pricing which should not affect margins too much.
26. The company has set up a COVID-19 reserve of around 4500 lives.
27. The lower ticket size is mostly in the savings schemes and not on the protection schemes.
28. The reinsurance premium has risen mainly due to the company writing off the protection business.
29. The loss from investments is mainly due to the lower mark to market of the company existing portfolio which has fallen due to the 26% fall in Indian equity markets.
30. Due to the fall in the tax rate, the company’s new business operating variance has fallen by 0.2-0.3%.
31. The company hedges its portfolio in various ways and is not solely dependent on credit life.
32. The management has clarified that product mix is not the only source of margin improvement in the near future and there are various ways like channel improvement and others that can be used to achieve this improvement.
33. Operating variance is mainly consisting of persistency variance, mortality, and expense variance. The company is mostly positive in all of these metrics. The total operating variance adds up to Rs 150 Crs.
34. The management has decided to strengthen its core assumptions mainly due to the uncertainties arising from the current COVID-19 problem.
35. The breakup of the costs is as follows:
    1. Employee Costs: 26%
    2. Variable costs from distributors and new business sales: 50%
    3. Volume related costs: 7%
    4. Fixed Costs: 12%
36. 60-65% of costs are variable in nature.
37. In the next 3-5 years, growth is primarily expected to come from the company’s balanced product mix and from differentiated products. Other new areas that can be big in the future are group health insurance and pension products.
38. There are also enough cross-sell opportunities that the company does not need to concentrate too much on expanding the customer base.
39. The loss from COVID-19 to new business and renewal premium is around Rs 1000 Crs.
40. The management has stated that the company will be exiting some of its credit life partnerships and it should be margin accretive because the exits are to be with entities that are loss-making.
41. In the existing customer base, individuals have an average of 1.3 policies, and each family of an average of 4 members has an average of 3.7 policies.
42. On average, the last 2 weeks of March contribute around 8-10% of yearly income. This is the figure that has been directly affected due to the lockdown. On the industry level, around 6-7% of yearly revenues have been affected.

Analyst’s View

HDFC Life is one of the front runners in the life insurance industry in India. The company has gone from strength to strength and maintained a good balance of new business and existing business while consistently growing over the years. The company has seen a big fall in investment income due to the fall in the investment portfolio from the fall in Indian equity markets. The company has undergone rigorous stress testing to ensure that even in these tough conditions, the company is able to deliver. It remains to be seen whether the situation ahead unfolds within the company’s expectations or whether we may see more uncertainty arising from COVID-19. Nonetheless, given the company’s market positioning, its dynamic product portfolio, and its emphasis on the development of non-traditional channels, HDFC Life remains a pivotal insurance stock in the country.

Q3 FY20 Updates

Financial Results & Highlights

Detailed Results

1. 1. The company saw good revenue growth of 25% & 20% YoY in Q3 and 9M periods. PAT grew 2.7% & 8% YoY in the same periods.
   2. There was a 45% growth in the value of New Business (VNB).
   3. Individual WRP (Weighted received premium) and APE (Annualized Premium Equivalent) grew 31% YoY while Total APE also grew by the same amount YoY.
   4. The new business premium grew 22% YoY. The new business Margin was at 26.6% while operating return on embedded value was at 19%.
   5. There was also a massive 32% YoY growth in Protection APE.
   6. Total AUM and Net Worth grew 16% and 17% YoY respectively in the 9M period.
   7. Indian Embedded Value grew 20% YoY.
   8. The company maintained a solvency ratio of 195%.
   9. In the individual insurance market, the company increased its market share by 160 bps to 14.3%. It also maintained a leading market share of 28.6% in the group segment.
   10. The overall market share for the company was at 21.4%.
   11. As of 31^st Dec 2019, the AUM was at Rs 1.4 Lac Cr and had a 63:37 debt to equity mix. 96% of debt investments were in G-Sec and AAA-rated bonds.
   12. The total no of lives insured rose 29% YoY to 4.5 Cr in 9MFY20.
   13. The operating expense ratio was maintained at 13.8%.

Investor Conference Call Highlights

1. The proprietary and corporate issuance partners grew 60% and 19% respectively based on individual APE in the 9M period.
2. The share of proprietary channels increased to 36% from 29% a year ago.
3. The direct channel grew by 57% in the year so far.
4. The business which was driven by brokers has grown 3 times as compared to last year.
5. The company’s targeted non-par savings exit for Q4 has been achieved in Q3 itself.
6. The Credit-Protect business has grown 21% YoY despite a soft lending environment.
7. There has been an improvement in the persistency ratio across all channels.
8. The company is maintaining a cautious stance in expanding the protection business while expanding into the non-metro regions.
9. The management remains confident that the long term demand for the protection business is still untapped and there is a lot of opportunities here for the company.
10. In the term, the Number of Policy (NOP) growth was 21% and ticket size growth was 23%.
11. Retail term sales through HDFC bank has been on an upward curve.
12. The main reason for the Opex ratio to remain stable is the kicking in of the fixed cost leverage in Q3 & Q4.
13. The Par accounts should go up based on the good reception seen at the launch of the new product Sanchay Par Advantage.
14. The term prices will indeed go up for reinsurers and any increase in prices will be passed on to the customer. Term rates in India may be a lot cheaper than developed country term rates but they accurately reflect the underlying profile and the quality of life here.
15. The management has clarified that the company does not influence the product mix in any way and it all depends on channel sales.
16. The company is focused on its segment of life insurance and is not looking into other insurance categories at the expense of cannibalizing sales of any group companies.
17. The reason for the fall in margin YoY is mainly due to the rise of ULIP in the product mix which was through demand-pull.
18. The exit rate in December was 5%. The longer-term products are seeing higher sales than before.
19. The way forward for the company would be to make its products as easy to buy through its various channels as possible.
20. The management does not believe in playing a price war and chase market share. It would rather build its market share slowly and steadily by providing quality products and experience for customers.
21. The par products that are sold the most through online channels are Sanchay Par and earlier products like Classic Assure and Super Income products.
22. The claims for Q3 were high mainly on account of 2500-3000 Cr of maturities.
23. Credit Life growth has been slow in Q3 mainly due to the ongoing credit slowdown.
24. The management is confident of maintaining the company’s brand recall and advantage despite high competitive intensity.
25. Barring the repricing according to the changes in interest rates, the spread in rates should remain constant in the year so far.
26. The management has stated that a large part of the growth in Embedded Value Operating Profit (EVOP) is likely to come from NBCs.
27. The lower unwind from the interest rate cuts has been responsible for the drop in EVOP growth.
28. The contribution to EVOP from new businesses will grow with high growth given the new business has high profitability or else the contribution of unwinding to EVOP will increase.
29. HDFC bank account for 85% of bank channel.
30. A significant part of the annuity products business has come from long term income options of Sanchay Plus and Sanchay Par.
31. The management believe that the company’s peers are overcapitalized and may have some requirements for excess liquidity. The company will continue to maintain its solvency ratio between 180-200%. The management is confident that the company has enough solvency to grow 50% comfortably.
32. The growth in the bank channel is subdued because of various factors including selling less Unit-linked products via HDFC bank as compared to last year. The company is ramping up term presence through HDFC bank which has much lower ticket size which contributed to this slow growth further. Overall, it may appear to have grown slower than a few other channels because of fast growth on those channels.
33. The management expects to have at least 40-45% sales from the HDFC bank channels going forward.
34. The management has advised against looking at new business growth at an MoM basis as the business is long term and there are a variety of other factors like persistence and attrition rate which are equally important and short term volatility does not adequately reflect the business development in the long term basis.
35. The main disadvantage for a ULIP is the locking period of 5 years where the amount cannot be redeemed even in a medical emergency before the locking period is over. Another disadvantage is that the costs are absorbed upfront and the insurance company will not be able to make money if the premiums stop even after the locking period is over. Thus there are quite a few things that are hindering companies from making most of the opportunity in the ULIP space.
36. This is why the company remains focused on maintaining prudent product mix and not become ULIP heavy like other competitors.
37. In the govt backed schemes, the company has been profitable mainly on the back of the high customer quality which has been mainly due to the good quality of customer base of HDFC bank where most of this business is sold through.
38. The company’s pension subsidiary has done well with more than 5% market share growth to 30% in the year so far. The company has also started to have POP presence from this year onwards which should also help growth going forward. The company is ranked at the top in the corporate subscriber base and it expects to remain at the top here.
39. The HDFC Life International has also done well and is growing steadily and the rating affirmation from S&P of BBB stable is evidence of that.
40. The management remains confident that the upfront cost burden due to the growth in new business will not be able to overwhelm the company’s existing profit generating capacity.

Analyst’s View

HDFC Life is one of the front runners in the life insurance industry in India. The company has gone from strength to strength and maintained a good balance of new business and existing business while consistently growing over the years. The company is also doing well to capitalize on non-traditional channels like industry partners and the internet to continue to grow its insurance business. The association with HDFC bank for its banking channel also provides the company with a very good set of potential customers. The other businesses like the pensions and international businesses have also done well and there remain significant cross-sell opportunities both through the company’s existing insurance customers set and the HDFC bank customer set. It remains to be seen how the insurance industry will be affected by the current turbulent times in the Indian economy with the structural weakness exposed by the Yes Bank debacle and the onset of coronavirus in India. Nonetheless, given its market positioning, its strong underwriting capability and the management’s focus on maintaining a prudent and efficient product mix, HDFC Life remains a pivotal insurance stock to watch out for.

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