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Single digit growth in premium income: HDFC Life Insurance reported net premium income growth of 9.0% YoY, as the first-year premium and renewal premium reported a good growth of 27.56% YoY and 10.45% YoY, respectively while single premium grew only by 0.62% YoY. Owing to the healthy growth in first year premium Annualized Premium Equivalent (APE) during the quarter grew by 23.1% YoY to Rs 2866 cr while New Business Premium (NBP) grew only by 9.0% YoY to Rs6400 cr. Going forward, the management remains optimistic on the premium growth of the company as it expects to grow in line with the industry.

Decline in VNB margin: During the quarter, VNB margin continued remain under pressure seeing a decline by 105bps QoQ/115bps YoY to 25.1%. The decline in margin has been mainly due to increase in proportion of ULIP and increase in commission expenses. Net commission expenses reported a growth 122.0% YoY to Rs 1,472cr.

ULIP products continue to see traction: In the APE mix, the proportion of ULIP products increased by 100bps QoQ and 1100bps YoY to reach 32%. In the NBP mix, it grew by 100bps QoQ and 700bps YoY to 15%. This rise in ULIP plans is due to positive market returns and tax benefits associated with these products. Additionally, non-participating products also saw growth. In the APE mix, the non-participating proportion increased by 300bps YoY and 200bps QoQ. In the NBP mix, it grew by 300bps YoY and 200bps QoQ. Conversely, protection products, which had been performing well, saw a decline this quarter. In the APE mix, there was a 400bps YoY decline, though it grew by 100bps sequentially. In the NBP mix, protection products saw a 500bps YoY decline and remained flat sequentially. The increase in non-par products is expected to help maintain margins and keep the product mix diversified.

Growing banca network: The insurance company continues to view bancassurance as its primary sales channel. During the quarter, the share of bancassurance in the overall channel mix increased by 400bps YoY, now contributing 65% of the total mix. The company regards its parent bank as its largest bancassurance partner and continues to collaborate with other banks and financial institutions to sell its products. Other channels, such as direct, agency, and brokers, remained almost flat QoQ but declined by 100bps, 300bps, and 100bps YoY, respectively. The agents channel remains a priority, with the number of agents nearly doubling over two years, growing at a 19% CAGR. This agency channel helps penetrate tier 2 and 3 cities, currently driving two-thirds of the company's total business from non-tier-1 cities. The company plans to continue onboarding new agents going forward.

Valuation and outlook: HDFC Life Insurance reported a 9% YoY premium growth, driven by higher individual APE growth. However, VNB margins fell below company guidance, mainly due to an increase in net commission expenses and an unfavorable product mix, with a higher proportion of ULIPs. Looking ahead, the company plans to continue diversifying its portfolio with new product launches, increasing its agent count, and collaborating with banks for product distribution. While we expect higher growth in APE business, we have reduced VNB margins due to latest regulatory changes. Based on this, we maintain a Buy rating on HDFC Life increasing our target price to Rs.742, valuing the company at 2.65x its FY26E embedded value per share.

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