Add HDFC Life Insurance Ltd For Target Rs.731 - Yes Securities
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HDFL adjusts protection retention and adds annuity product to manage margin
Result Highlights
* VNB margin: Calculated VNB margin grew by 22bps QoQ and 30bps YoY to 26.7%
* VNB growth: VNB growth was 2.7%/21.8% QoQ/YoY slightly outpacing the growth in APE
* APE growth: New business APE growth was 1.8%/20.4% QoQ/YoY driven, sequentially, by Non-par savings, ULIP and group business
* Expense control: Expense ratio rose 33 bps QoQ but declined 192 bps YoY to 16.6% as opex ratio rose 60 bps QoQ but declined 139 bps YoY
* Persistency: 37th month ratio rose 230 bps/500 bps QoQ/YoY to 65.8% whereas 61st month ratio declined/rose 180 bps/370 bps QoQ/YoY to 51.1%
Our view – HDFL adjusts protection retention and adds annuity product to manage margin
Like IPRU, HDFL also raised the retention limit for retail protection but diverged in keeping the limit lower at Rs 4mn, compared with Rs 10mn for IPRU: As a result, HDFL now retains ~30-35% of protection premium as opposed to ~20% earlier. In contrast, IPRU was retaining ~30-40% earlier and now retains more than 50%. Consequently, HDLF effected retail protection price hikes of 15-25% compared with 0-10% for IPRU. Actions at both life insurers, served to protect VNB margin for retail protection at prior levels.
HDFL introduced a primarily single premium deferred annuity product at the shorter end of the term spectrum of 5-10 years, with low interest rate risk: Normally, HDFL would like to keep Non-Par business capped at 30-35% of total APE but, as far as the new annuity product was concerned, they are comfortable selling it to an extent that the said limit would breach. We think that, ceteris paribus, this new product is likely to be lower margin than longer-tenure annuity products but has a healthy enough margin profile to be overall margin-accretive, somewhat, for HDFL.
We maintain ‘ADD’ rating on HDFL with a revised price target of Rs 731: We value HDFL at 4.0x FY23 P/EV for an FY22E/23E/24E RoEV profile of 16.2/18.2/17.9%.
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