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Growth continues; product mix to aid earnings…

HDFC Life Insurance reported a good set of numbers led by strong renewal premium, steady persistency and investment income.

Gross premium growth remained healthy at 20.3% YoY to | 9628.21 crore, led by higher traction in renewal (up 21.5% YoY) and single premium (up 21.8% YoY). Growth in renewal premium continued to remain healthy at ~22% YoY to |4576.98 crore. New Business Premium (NBP) witnessed slight moderation at 19% YoY to | 5051.23 crore, due to sluggish group business. On APE basis, growth in premiums stood at 15.9% YoY to | 2100.14 crore, Individual APE for 9MFY21 stood at | 4660 crore, which was up by 6% YoY. Growth in retail protection stood at 17% YoY and 42% growth in annuity. The company is seeing improving customer confidence that is visible through trends in new business in individual and group segment. HDFC life is actively engaging new bancassurance partners for new business. Improving traction in housing credit protect business should witness growth, and has already reached 95% of previous years’ volume

Commission ratio increased by 50 bps QoQ to 4.7% while opex ratio (management expense) ratio jumped from 10.8% in previous quarter to 13.6%. Net profit for the stood at | 265 crore, which was up by 6% YoY but down 18.7% QoQ. AUM growth for the quarter stood at 21% YoY to | 165623 crore. Persistency ratio largely remained steady on sequential basis, 13th Month persistency stood at 92.9% versus 90.80% QoQ and 61st month stood at 51.8% versus 52.4% QoQ.

Conservation ratio increased from 85.9% to 86.2% QoQ indicating healthy customer retention. New business margins continued its general upward trajectory lead by balanced product mix and it improved by ~80 bps QoQ to 26.4%, on YTD basis NBM was steady at 25.6% versus 25.9% YoY. Market share for the company on Individual WRP basis slightly declined on sequential basis from 17.5% to 16.4%, though on yearly basis it saw an increment.

Valuation & Outlook

Product innovation and launches coupled with diversified distribution is seen to keep business momentum healthy. Steady traction in individual term insurance and pick up in credit protect (reached 95% of pre Covid level) to keep VNB margin at 24-25%. We expect gross written premium (GWP) to grow at a CAGR of ~10% in FY21-23E to | 43136 crore. PAT is expected to grow at 9% CAGR over the same period to | 1676 crore. VNB margins are expected to be in the region of ~25% by FY23E. HDFC Life currently trades at ~4.3x FY23E Embedded Value (EV), which is at a premium compared to its peers. Given the superior business franchise and continued focus on profitability, valuations are expected to remain at a premium. Considering the current business franchise and building anticipated improvement in business momentum and profitability metric, we maintain our target at | 820/share, valuing the company at 5.0x FY23E EV. Maintain Buy.

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