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Steady growth in premium; VNB margin stable

Persistency improves across cohorts

* HDFCLIFE reported ~28% YoY growth in premium, led by 40%/19% YoY growth in single/first year premium. Persistency trends improved across cohorts, with 13th/61st month persistency improving 100bp QoQ each to 92%/57%. Shareholders’ PAT grew 3% YoY to INR2.74b (10% miss).

* VNB growth stood at 22% YoY (~11% beat), with VNB margin coming broadly in line at 26.7%. EVOP grew 18.6% YoY in 9MFY22 (16.2% growth post the impact of Excess Mortality Reserve of INR6.5b).

* On the APE front, the Individual Protection business grew 20% YoY v/s a 2% YoY growth in 9MFY22, while strong trends continued in Annuity and NonPAR Savings business. The ULIP business bounced back and reported 33% YoY growth.

* We expect HDFCLIFE to deliver ~22% VNB CAGR over FY22-24E and estimate margin to remain broadly stable ~27%. We maintain our Neutral rating.

Net premium grows 28% YoY; VNB beats estimates

* HDFCLIFE reported a 28% YoY growth in net premium income (5% beat). The renewal business grew 21% YoY (broadly in line), which reflects an improvement in persistency trends across cohorts. Shareholders’ PAT grew 3% YoY to INR2.74b, but was affected by slightly higher expenses on a sequential basis.

* Claims update: Gross/net claims stood at INR46.57b/INR34.06b. HDFCLIFE utilized INR1.5b from outstanding EMR of INR2.04b. It provided a further INR0.55b in 3QFY22. It is holding total additional provisions of INR1.05b.

* Individual/Group APE grew ~18%/~35% YoY, leading to total new business APE growth of ~20%. Within total APE, ULIP grew a strong 32% YoY, while Non-PAR Savings grew 39% YoY. Growth in Protection picked up and the segments share in Individual/Total APE improved slightly to 5.8%/13.6%, while ULIP mix in individual APE stood at 26%.

* VNB growth stood at 22% YoY (~11% beat), with VNB margin coming broadly in line at 26.7%. Total operating expenses (including commissions) grew 14% YoY. The total expense ratio rose 40bp QoQ to 16.4%.

* On the distribution front, the share of the banca channel in Individual APE stood stable at 62.6%, while the share of the agency channel improved by 380bp QoQ to 15.6%. The share of the direct channel stood at 15.8%.

* Embedded Value: EVOP grew 18.6% YoY in 9MFY22 (16.2% growth post the impact of Excess Mortality Reserve of INR6.5b). Overall, Embedded Value grew 18% YoY to INR295.4b.

Highlights from the management commentary

* HDFCLIFE has raised the threshold for risk retained in the Protection business to INR4m from INR2m. Thus, the mix of risk retained has increased to 35% v/s 20% earlier. It has also increased premium in the Protection business by 15-25%.

* It has completed its merger with Exide Life. From 1st Jan’22, Exide Life has become a fully owned subsidiary of HDFCLIFE. The integration and synergies would accrue over the next 18-24 months.

* The agency channel witnessed ~35% growth. It added ~28k agents in 3QFY22.

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/Protection is likely to witness healthy growth. Demand for ULIP has recovered, but growth depends upon the performance of the capital market. Persistency trends remain steady across cohorts and will continue to aid robust renewal trends. We estimate VNB margin to sustain ~27%, enabling 22% VNB CAGR over FY22-24E. We estimate operating RoEV of ~19% in FY24E. We maintain our Neutral rating with a TP of INR730/share, corresponding to 3.7x Sep’23E EV.

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