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Summary: HDFC Life Insurance is India’s third largest life insurer with a new business premium market share of 7.2% as on February-23. The company has performed consistently as premium grew at a CAGR growth of 19% for FY17-FY22. It gains from the strong brand name and also HDFC Bank as its Bancassurance partner while having access to the strong distribution network and diverse customer base.

Product mix: The Company has a favorable product mix as participating funds formed 30% of the total products as on FY22. This gives it an edge over other insurance players as the participating products tends to be more sticky which aids the persistency ratio. Unit-linked, Non-Par, Term and Annuity formed 26%, 33%, 6% and 5%, respectively. HDFC Life maintains a balance between protection and savings plan which in turn helps to improve margins and attain consistent growth across business cycles.

Value of new business (VNB) growth: HDFC Life’s VNB saw a growth of 24% CAGR for period FY17-FY22. The VNB growth is among the top insurers in the industry which was driven by balanced product mix and increasing policy sales through direct channels. We expect the VNB growth momentum will continue in the estimates and also VNB margin to improve as direct sales increases.

Annualized premium equivalent (APE) to grow further: HDFC Life APE grew at a CAGR of 15% for the period FY17-FY22. The strong APE is proportional to increase in premium income led by new business premium as well as renewal premium. We Believe APE will continue to grow in estimates due to positive sector tailwinds and HDFC Life diverse channel mix. We expect APE to grow at a CAGR of 17% for period FY22-25E.

HDFC twin merger to drive growth: The merger of HDFC Ltd and HDFC Bank will directly benefit HDFC Life as it gives more access to HDFC’s vast branch network and wide geographical reach. The merger will help in further strengthening the bancassurance and direct channel.

Valuation: We are positive on the life insurer due to favorable product mix, diverse distribution channel and growth in new business premium. The company will benefit from its parent’s company merger which will provide it the boost to grow the premium income. It will also benefit from the positive macro-economic tailwinds as we believe that it is rightly place to benefit to growing trends in the sector. We initiate coverage of the company with a Buy rating and a target price of Rs 614 valuating the company at 3.0x FY25E embedded value.

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