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Premium growth tepid; VNB in line aided by margin expansion

Persistency ratio continues to improve

* HDFC Life Insurance (HDFCLIFE) reported 6% YoY growth in total premium in 2QFY23, led by 23% YoY growth in renewal premium while new business premium saw a contraction of 7% YoY.

* VNB rose 10% YoY (in line) with 170bp YoY expansion in VNB margin to 28.3% on a pre-merger basis. Consolidated VNB margin was 26.2% in 1HFY23. 

* APE grew 4% YoY to INR26.5b (5% miss) in 2QFY23, driven by annuity, nonlinked savings and credit life. Demand for ULIP was soft due to volatile capital markets while retail protection trend has improved sequentially with a growth of 26% QoQ.

* In 2QFY23, HDFCLIFE reported financial performance post-merger with Exide Life for the first time. As we incorporate this and adjust for the quarterly performance, we expect HDFCLIFE to deliver ~26% VNB CAGR over FY22-24 and estimate margin to remain ~29% by FY24. We maintain our Neutral rating with a TP of INR600 (premised on 2.8x FY24E EV).

Retail protection trends improving; operating RoEV at 17.7% in 1HFY23???????

* The renewal business grew 23% YoY in 2QFY23 (on pre-merged basis), aided by higher persistency ratio across cohorts. PAT grew 16% YoY to INR3.2b (in line) during the same period.

* APE rose 4% YoY (5% miss) in 2QFY23, on a pre-merger basis. During 1HFY23, APE growth was higher than industry and led to 40bp market share gain to 15.0%. Within APE, annuity grew 39% YoY in 1HFY23 while NonPAR/Par segments grew 37%/24% YoY, respectively. Protection grew 37% YoY led by credit life with 66% YoY growth in new business premium. Retail protection trend has improved sequentially with a growth of 26% QoQ.

* VNB increased 10% YoY to INR7.5b on pre-merger basis (in line). HDFCLIFE is optimistic of improving this momentum as it looks to grow consolidated VNB at 15%+ in FY23E.

* VNB margin improved 170bp YoY to 28.3% on pre-merger basis, primarily driven by a more optimal business mix. Including Exide Life, VNB margin stood at 26.2% in 1HFY23. The management aims to maintain FY22 margin (27.4%) in FY23 as well, as the drag from consolidation reduces.

* On the distribution front, the share of banca and agency increased to 58% and 19%, respectively. This increase was at the cost of direct channel as it continues to face headwind in the form of heightened competition.

* EVOP grew 9% YoY in 1HFY23 to INR25.5b with operating return on EV at 17.7% for the pre-merged entity. However, EV grew 10% QoQ to INR330b, due to fresh capital infusion, offset by adverse economic variances and payment of dividend. Including Exide Life, EV stood at INR360b.

* Total AUM grew 18% YoY to INR2.2t on a post-merger basis while solvency ratio increased to 210% in 2QFY23 from 178% in 1Q due to equity infusion of INR20b from the parent, partially offset by dividend payment.

Highlights from the management commentary

* IRDAI is taking various measures to improve the penetration and sale of life insurance.

* Dependence on FRA is lower for HDFCLIFE v/s other peers and is well diversified across 10 parties. We do not see any challenges in raising this further.

* Within Non-PAR segment, shorter tenure – Sanchay FMP product saw a healthy growth and contributed 20% to the total Non-PAR APE.

Valuation and view

 HDFCLIFE remains focused on maintaining a balanced product mix across businesses, with an emphasis on product innovation and superior customer service. In the near term, Non-PAR/Annuity is likely to witness healthy growth while retail protection should see a gradual recovery over 2HFY23. Credit life will lead growth in protection as momentum in disbursements across lending institutions is strong. Demand for ULIP remains muted due to volatile capital markets. Persistency trend improved across all cohorts for pre-merged entity. Further, HDFCLIFE has the scope to improve post-merger margins by bringing in efficiencies in the operations of Exide Life. We expect HDFCLIFE to deliver ~26% VNB CAGR over FY22-24 and estimate margin to remain ~29% by FY24. We maintain our Neutral rating with a TP of INR600 (premised on 2.8x FY24E EV).

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