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.

Q4 FY20 Updates

Financial Results & Highlights

Standalone Financials (In Crs)
  Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 418.64 14375 -97.09% 11649 -96.41% 29261 38437 -23.87%
PBT 284.47 345.28 -17.61% 263.61 7.91% 1312 1290 1.71%
PAT 311.71 364 -14.37% 250.24 24.56% 1295 1277 1.41%

 

Consolidated Financials (In Crs)
  Q4FY20 Q4FY19 YoY % Q3FY20 QoQ % FY20 FY19 YoY%
Sales 430 14379 -97.01% 11649 -96.31% 29282 38443 -23.83%
PBT 284.41 346 -17.80% 264.5 7.53% 1314 1291 1.78%
PAT 312 365 -14.52% 251 24.30% 1297 1278 1.49%

 

Detailed Results

    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

Standalone Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 11649 9303.5 25.21% 8658 34.55% 28843 24061 19.87%
PBT 263.61 256.48 2.78% 326.77 -19.33% 1027.27 944.61 8.75%
PAT 250.24 245.63 1.88% 308.7 -18.94% 983.55 912.78 7.75%

 

Consolidated Financials (In Crs)
Q3FY20 Q3FY19 YoY % Q2FY20 QoQ % 9MFY20 9MFY19 YoY%
Sales 11649 9304.7 25.19% 8661 34.50% 28853 24084 19.80%
PBT 264.46 255.43 3.54% 327 -19.13% 1029.5 945.1 8.93%
PAT 251.1 244.6 2.66% 309 -18.74% 985.8 913.25 7.94%

Detailed Results

    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 31st 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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