Non-PAR, Protection to drive business growth
Risk retained in the Individual business reduced to 33% vs 37% last year
* HDFC Life’s Annual Report reaffirms our view that it would continue to focus on maintaining a balanced product mix across the Savings and Protection businesses, with an emphasis on product innovation / superior customer service.
* In the near term, there continues to be a higher focus on the Protection and Non-PAR segments as they are relatively simpler products to transact through the Digital channel. The Annuity business is also gaining momentum; thus, its share has improved to ~16% of new business premium (NBP). This would enable steady growth in value of new business (VNB) margins.
* Improvement in persistency, led by a focus on better quality business, the leveraging of technological capabilities, and need-based selling resulted in surrenders declining to ~35% in FY20 from ~76% in FY15.
* Furthermore, the Agency channel delivered 13th month persistency at 91% v/s 85% in Banca, reflecting the distribution strength the company has built.
* The percentage of risk retained in the Individual business reduced to 33% v/s 37% in FY19, and risk retained in the Group business to 79% v/s 86% in FY19.
* Investments in technology have positively impacted, with policy issuance TAT having reduced to <4 hours from 2 days earlier; ~77% of new business policies are auto-underwritten.
* Overall, we believe HDFCLIFE would continue to deliver better business growth than peers, led by product innovation. Overall, we estimate the VNB margin to gradually improve to ~27% by FY22E (25.9% in FY20), while the operating RoEV would remain steady at ~19%. HDFCLIFE currently trades at rich valuations and thus offers limited upside, in our view. We value the stock at INR575, corresponding to 4.1x FY22 EV. Maintain Neutral.
New business premium led by Protection, Non-PAR Savings
HDFC Life has increased focus on the Protection and Non-PAR segments; the Non-PAR Savings business grew at ~220% YoY and the Protection business at 15% YoY. The Annuity business is gaining momentum; thus, its share has improved to ~16% of NBP (4% of the total individual APE). The share of Protection has improved to ~17.2% of the total APE. Furthermore, growth in new business premiums, led by the Group Savings business, increased at 25% YoY. We believe HDFCLIFE continues to focus on product innovation – the key to driving business growth.
Persistency improves across cohorts; higher persistency in Agency v/s Banca
HDFC Life reported improvement in persistency, led by a focus on better quality business, the leveraging of technological capabilities, and need-based selling, resulting in surrenders declining to ~35% in FY20 from ~76% in FY15. As a result, 13th/61st month persistency improved to 90%/55% (v/s 87%/52% last year). In terms of distribution, the Agency channel delivered 13th month persistency at 91% v/s 85% in Banca. Renewal premium in the Non-PAR segment increased 33% YoY, and that in the ULIP segment grew at 10% YoY. Overall, renewal premium growth came in at 9% YoY, impacted by the COVID-19 crisis, as customers are preferring to conserve their cash to maintain high liquidity. In the current environment, we expect persistency to decline in ULIP, while remain strong in Protection.
Surrenders, withdrawals consistently decline, while maturity payouts increased
Surrenders and withdrawals together as a percentage of total benefit payouts declined to ~48% in FY20, from ~64% in FY18, weighed by management focus on need-based selling. On the other hand, maturity payouts have increased primarily owing to a higher Protection business written over the last few years
Strong distribution network; Proprietary channels gaining momentum
HDFC Life has continued to grow its distribution reach via several new tie-ups and partnerships, comprising over 270+ partners, 421 branches, and ~108k agent networks. It is currently focusing on improving its Proprietary channels; the Agency and Direct channels in particular witnessed combined growth of 32% YoY. However, Bancassurance contributes 55% to the total individual APE.
Risk retained in Individual business declines to ~33% in FY20
The increasing proportion of the Protection business across the Individual and Group segments has contributed to an increase in re-insurance ceded over the past few years. Thus, re-insurance premium ceded increased at 85% YoY to INR4.8b. The risk retained in the Individual business reduced to 33% v/s 37% in FY19, while in the Group business, it reduced to 79% v/s 86% in FY19.
Strong focus on digital initiatives
Digitalization remains a key theme, and the company has launched various new innovative products, such as the recent bundled life insurance product with pre-paid mobile recharge, etc. Investments in technology have positively impacted key operating metrics, with TAT having reduced significantly. The policy issuance TAT has dropped to <4 hours from 2 days earlier; ~77% of new business policies are auto-underwritten. Furthermore, nearly ~14% of the Protection business is underwritten through tele-medicals.
Higher MTM loss leads to negative investment income in ULIP; Raising tier-II bonds to improve solvency ratio
A plunge in the equity markets on account of COVID-19 led to MTM loss in the ULIP segment, thus resulting in loss on INR82.2b. On the other hand, income from investments other than in the ULIP segment increased 26% YoY to INR53.5b. Thus, overall, net loss on the investment portfolio stands at INR28.7b. The company has taken the board’s approval to raise tier-II bonds of INR6b, primarily to maintain a high solvency ratio and continue growing strongly in the Protection segment as capital consumption in the business is higher than in the Savings business.
Valuation and view
HDFCLIFE would continue to focus on maintaining a balanced product mix across the Savings and Protection businesses, with emphasis on product innovation / superior customer service. VNB margins have moderated over the past few quarters, and we estimate these to gradually improve to ~27% by FY22E (25.9% in FY20). However, persistency trends are likely to moderate, especially in the ULIP segment, while these would remain strong in the Protection segment. On the other hand, operating RoEV should remain steady at ~19%. HDFCLIFE currently trades at rich valuations and thus offers limited upside, in our view. We value the stock at INR575, corresponding to 4.1x FY22 EV. Maintain Neutral.
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