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Small dip in PAT as claims remain high

HDFC Life Insurance Co. Ltd, a joint venture between HDFC Ltd. and Standard Life Aberdeen, provides insurance services and was listed on BSE on 17th November 2017. The issuer offers protection for life, health, properties and automobile, amongst others.

* Moderate growth in Gross premium income +14.2% YoY pulled up by Renewal premium (+16.8% YoY) and First year premium (+24.0% YoY). Single premium account saw muted growth of 7.7% YoY.

* New business margin stood at 26.6% (vs. 25.6% in Q2FY21). PAT dragged down 15.9% YoY, due to substantial claims (+75.3% YoY).

* Focus on innovative product solutions and new business channels will be the key to keep the upward trend for new business growth. Considering the company’s strong parentage, operational capabilities and upside potential, we reiterate our BUY rating on the stock with a revised TP of Rs. 790 based on 4.1x FY23E EV per share.

Renewal & First year premiums ensue moderate growth

Gross premiums written moderate growth of 14.2% YoY to Rs. 11,630cr this quarter supported by Renewal premium (~43.3% contribution) up 16.8% YoY and First year premium (~17.9% contribution) up by 24.0% YoY. Single premium account (~38.8% contribution) saw a muted growth of 7.7% YoY to Rs. 4,518cr this quarter. The company’s product portfolio remained well balanced at (participating savings/nonparticipating savings/ ULIPs/ protection/ annuity - 30%/ 32%/ 26%/ 7%/ 5% of Individual APE respectively) at the end of this quarter. The claims paid out continued to be substantial at Rs. 8,338cr (+75.3% YoY) this quarter dragging down the PAT by 15.9% YoY to Rs. 274cr.

New business margin continues to improve

Value of New business grew by 23.9% YoY to Rs. 678cr while the New business margin improved 97bps YoY to 26.6% in Q2FY22. Pre-Excess Mortality Reserve (EMR) operating return on embedded value (EV) stood at 18.4% (vs 17.6% in Q2FY21) whereas the post-EMR operating return on EV stood at 16.1%. The solvency ratio was slightly down at 190% (vs. 203% in Q1FY22), whereas 13M/61M pro-rata persistency ratios came-in at 91.0% / 56.0% (vs. 90.0% / 53.0% in Q1FY22) respectively. However, the persistency ratios calculated based on IRDAI’s recent circular, which excludes single premium and fully paid policies, stood at 13M/61M – 86.0%/52.0% at the end of this quarter (vs. 82.0%/47.0% in Q2FY21).

Key highlights in the quarter -

* Around 200,000 claims have been settled in H1FY22; Excess Mortality Reserve (EMR) stands at Rs. 204cr at the end of this quarter.

* The board approved the Share Purchase-Swap Agreement in connection with the acquisition of 100% share capital of Exide Life insurance company.

* The board has also approved the proposed preferential issuance of equity shares to Exide industries, awaiting necessary regulatory approvals.

Outlook and valuation

Focused on developing multiple channels and new product propositions to cope with customer changing behaviour, the company is expected to see uptrend in market share. New business margins have been showing stable trends over the past 2 quarters which is expected to continue for the remaining quarters as well driving profitability growth, depending on the benefits claim scenario going forward. Hence, we reiterate our BUY rating on the stock with a revised TP of Rs. 790 based on 4.1x FY23E EV per share.

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