Established in 2000, HDFC Life is a leading long-term life insurance solutions provider in India, offering a range of individual and group insurance solutions that meet various customer needs such as Protection, Pension, Savings, Investment, Annuity and Health. As on March 31, 2019, the company had 38 individual and 11 group products in its portfolio, along with 8 optional rider benefits, catering to a diverse range of customer needs. HDFC Life continues to benefit from its increased presence across the country having a wide reach with 412 branches and additional distribution touch-points through several new tie-ups and partnerships of 266 partners comprising NBFCs, MFIs, SFBs, etc. and including 39 new ecosystem partners. The company has a strong base of financial consultants.
Participating products are contracts of insurance where the policyholders have a contractual right to receive a guaranteed sum insured, and a discretionary benefit in the form of bonuses. The bonuses consist of reversionary bonuses (being regular annual bonuses declared every year, based on the actuarial valuation of the assets and liabilities in the participating fund) and terminal bonuses.
Non-participating protection products:
Individual non-participating protection (term) products offer a guaranteed lump sum benefit or an income stream (for a defined period) on the occurrence of a particular event (including the death, disability or illness of an individual) during the period of coverage. Non participating health insurance products provide morbidity or sickness benefits and include health and critical illness. Their health insurance products are in the form of fixed benefit plans (which offer fixed payouts in the event of critical illness and hospitalisation).
Other non-participating products:
It includes savings, pension and annuity products. Savings products offer benefits that are guaranteed in absolute terms at the beginning of the policy and do not provide any upside potential from the underlying fund performance. These products are more suitable for customers who generally prefer lower but guaranteed returns. Annuity products help to fund retirement for individuals. Individuals may purchase annuity products where annuity payments continue during the lifetime of the policyholder or for a fixed period of time, in return for a certain lump sum paid up front. Group customers may purchase annuity products to fully or partially provide for existing and/or emerging annuity liabilities.
These are products where investment decisions and the risks associated with such investments are borne by the policyholders and non-investment risks such as mortality and morbidity are borne by insurance companies.
HDFC Life’s parent, HDFC Ltd. was promoted in October 1977 as a Public Limited Company specialising in providing housing finance primarily to individual households and corporates for the purchase and construction of residential housing. HDFC Ltd. is India’s first retail housing finance company and is currently one of the largest originators of housing loans in the country.About 74% of shareholders in HDFC Ltd. are foreign investors.
Standard Life Aberdeen Plc is a leading global investment and a FTSE 100 company listed on the London Stock Exchange. Headquartered in Scotland, it has offices in 54 locations worldwide and employs around 6,000 people. The Standard Life Aberdeen Group was formed by the merger of Standard Life Plc and Aberdeen Asset Management Plc on August 14, 2017.
HDFC Pension Management Company Limited, a wholly-owned subsidiary of HDFC Life Insurance Company Limited, started its operations in FY 2014. HDFC Pension is the fastest growing Pension Fund Manager (PFM) under the National Pension System (NPS) architecture. Amongst private PFM’s, HDFC Pension is #1 in Corporate Subscriber base and #2 in Retail Subscriber base as on March 31, 2019.
HDFC International Life & Re is a wholly-owned subsidiary in the Dubai International Financial Centre (DIFC). The company has successfully completed three financial years of operations and is steadily building experience in the GCC (Gulf Cooperation Council) Life Reinsurance market. The company currently offers reinsurance capacity in UAE, Oman, Bahrain, Jordan & Egypt and is working towards expanding its footprint across the GCC and MENA (Middle East & North Africa) regions.
Ms. Vibha Padalkar (Managing Director & CEO):
Ms. Padalkar, prior to her appointment with HDFC Life, has worked in varied sectors such as global Business Process Outsourcing, global FMCG and in an international audit firm. She has vast experience in business management, finance, and risk management.
Mr. Suresh Badami (Executive Director):
Mr. Badami is responsible for managing the sales and distribution function across the Company as an Executive Director. He has vast experience in business management, banking, financial services and sales & distribution
Mr. Niraj Shah (Chief Financial Officer):
He has been associated with HDFC Life since February 2019. He heads Finance, Audit, Risk Management and Investor Relations. He has 20 years of experience in financial services, primarily in life insurance and corporate finance advisory. Prior to joining HDFC Life, he was associated with PNB MetLife, ICICI Prudential Life, EY and BNP Paribas.
Mr. Parvez Mulla (Chief Operating Officer):
He has been associated with HDFC Life as a Chief Business Officer - Group since January 2018. In November 2018, he was elevated as Chief Operating Officer (COO) of the HDFC Life
Innovation remains the key
HDFC Life Insurance aims to offer need-based and customer-centric products which address the core needs of their customers across each stage of their lives. Their track record has provided them with significant experience and know-how to develop and provide insurance products across various customer segments, economic conditions and market scenarios. Most of the millennial want to take their own decisions, based on their own research and hence innovation is preeminent to cater to them with innovations being surrounded around mortality, morbidity, longevity and interest risk.
Strong brand and well-established market presence HDFC Life Insurance Company Limited was established in 2000 as a joint venture between HDFC Ltd., and Standard Life Aberdeen, a global investment company. The company has grown by leaps and bounds to become one of the trusted brands in the life insurance sector. We believe that company have earned a reputation as an industry leader in quality and service excellence in the Indian life insurance markets by staying relevant to customers and providing them with needs-based product solutions to meet their financial goals, as well as continued customer support and engagement across various channels. During H1 FY20, the company was amongst the top most private players in total new business premium and group business (received premium) with sizeable market share.
Wide range of products:
The company has a wide range of products including Protection, Pension, Savings, Investment and Health products for individuals as well as homogenous groups. Various products launched in the recent past were as follows
HDFC Life Classic One:
This is one of its kind product which offers joint life cover on death basis, thereby reducing the cost of insurance for higher investment return.
Click 2 Wealth:
This is a ULIP that incentivizes every premium paid during the first 5 years and also returns the mortality charges at maturity. This product has multiple options to suit various needs ranging from insurance cum investment for kids or spouse, retirement planning or just saving for key financial milestones.
HDFC Life Sanchay Plus:
This has multiple options to cater to customers across different walks of life. This works excellently for young parents and people nearing retirement to secure a guaranteed income for a defined period.
Multi-channel distribution network:
A balanced distribution offering remains one of their major strengths and is of strategic importance as they have successfully increased their number of partnerships with banks and & NBFC’s, which are now in excess of 230.The company’s focus on proprietary channels comprising agency and direct channels has borne results, with its agency channel growing at a healthy rate of 80% for H1 FY20, with a 57% increase in absolute Value of New Business (VNB) as on H1 FY20. The company added over 28,500 new agents during the year and its flagship programme “Agency Life” has seen a significant scale-up, resulting in a 30% increase in the sales productivity of participating agents. Their direct channel, which includes the online platform, grew by 62% in H1 FY20. The company has been able to successfully expand the online segment beyond protection and is now able to sell investment plans to online customers. Its ability to cross-sell protection products on the back of such investment plans has helped maintain channel profitability while driving growth and offering a full suite of products to the customer.
Bancassurance channel contribution was 54% of Individual APE during H1 FY20 and bancassurance partnerships, other than HDFC Bank, showed a strong growth during the past year. With respect to HDFC Bank, the company had a moderate year on new business growth due to the adoption of open architecture by the bank (open architecture allows banks to sell products of multiple insurers in contrast with the previous model where the distributor would sell products of only one insurer).
Diversified Product mix:
HDFC Life offers a wide range of products in protection, savings and retirement lines. It maintains a diversified product portfolio covering segments across the individual and group categories, namely participating, non-participating, protection term, non-participating protection health, other non participating (such as savings, pension and annuity products) and unit-linked insurance products. The company also offers riders which are supplementary policies tied to individual as well as group life insurance products which offer additional death, disability or critical illness coverage to policyholders for an additional premium. During H1FY20, the share of unit linked policies declined to 10% from 21% in H1FY 2019. Protection portfolio (which includes term and annuity business) currently contributes to 43% of overall new business premium, reflecting company’s focus on growing high margin term and annuity business.
Continued focus on Protection Business:
The Protection business has developed as an important category due to higher customer awareness, product innovation and emergence of the digital mode of distribution. While the proportion of protection products is around 10% of individual APE, we expect this to grow consistently, especially given under-penetration in India. In Indian private players, HDFC Life is the only private player to be focusing on increasing its annuity as percentage of APE. Product margins for the annuity business are much higher than overall margins, and so a higher proportion of annuity products would lead to higher VNB margins.
Strong partnerships in emerging ecosystem:
HDFC Life has done partnership with Airtel whereby Rs 4 lakhs life cover is provided on recharge of Rs 249 along with downloading Airtel Thanks app. It has sold over 30 lakh policies since launch and approx. 28 thousand policies are being issued on daily basis. The company has also done partner integration with Paytm where the customer gets insured in just 3 clicks and it has sold approx. 7.7 lakh policies till date. It has been able to build strong partnerships led by in-depth integration in the partner platforms enabling customization as per business needs, minimize underwriting and documentation in turn helping deliver results within no time on the back of independent API engines.
New business premium to grow at a robust pace
HDFC Life has leadership in new business premium with private market share of 22.4% as on H1 FY20. Current low penetration and density of Indian insurance market offers large growth potential. This growth is expected to be propelled by high historical nominal GDP growth, moderate-to-low inflation, improvement in the financial savings rate, initiatives undertaken by the government to ensure adequate social security, favourable demographics, growing awareness of insurance and regulatory changes, such as the increase in the foreign direct investment limit from 26% to 49% in 2015, which will bolster the financial position of existing players and open up the market for new players.
Demonstrating technology competency:
The company uses Artificial intelligence like use of predictive analysis for persistency, underwriting and claims (fraud prevention) and also brings all customer data- like interactions, transactions and relationships in one place on real time basis through usage of customer 360. Technology has been a key enabler and has played a key role in improving customer experience in acquisition and service for the company. The company has continued investment in people and technology platforms, which ensures ease of purchase for consumers, while enabling rapid integration with distributors and products, resulting in higher premium growth. The company has strong technology adoption to withstand disruption, which has accelerated over time, and to enhance experiences across the value chain to deliver appropriate product & services to keep customers in focus. Increasing digital awareness of the population coupled with the government’s push towards digitization is helping the online channel emerge as a key distribution channel.
Strong financial performance defined by consistent and profitable growth:
HDFC Life has focused execution capability which is leading to consistent and profitable growth to their stakeholders. They have a healthy balance sheet and delivered a Return on Equity of 24.3% and Operating Return on Embedded Value of 19.6% during H1 FY20. It had a solvency ratio of 192% as on H1 FY20, above the minimum 150% solvency ratio required under IRDAI regulations. It has consistently increased its persistency ratio whereby 13M/61M ratio stands at 86%/53% as on H1 FY20. Its claim settlement ratio stands at 99% as on FY19 vis-à-vis 97.8% in FY18.
The life insurance industry has evolved considerably catering to the changing macro economic landscape, customer needs and technological developments. Today, there are 23 private companies and 1 state-owned company operating in the life insurance sector in India. The life insurance industry has undergone several changes which includes introduction of new regulations around protection of policyholders’ interests (2002), licensing of corporate agents (2002), linked products circular (2010), linked and non-linked products (2013), registration of corporate agents (2015), management of expenses (2016) among others. This has led to recalibration of the distribution models along with rebalancing of the product mix. Technology has been a key enabler and has played a key role in improving customer experience in on boarding and service.
During FY 2019, the life insurance industry grew by 11% to garner Rs 2147 billion of new business premium against Rs 1939 billion in the previous financial year. The private insurers posted growth of 12% in individual business while group business saw strong growth of 36%. LIC recorded a growth of 5% in individual business and 10% in group business. However, private insurers continued to further consolidate market share in FY 2019 with the fifth consecutive year of greater than 50% share of the market. Market share of the private insurers has increased from a low of 36.5% in FY 2012 to 58.0% in FY 2019 based on Individual WRP. Key drivers of private sector growth within individual segment include development of distribution channels, product innovation, digital transformation and a focused customer centric approach.
Penetration & Density of Life Insurance
In the global insurance industry, around 55% of premium comes from life insurance and the rest from the non-life segment; in emerging markets, around 54% of premium comes from life insurance. By contrast, the share of life insurance is over 78% for India. Despite this, indicators such as insurance penetration (premium as a percentage of GDP), insurance density (premium per capita) and sum assured to GDP indicate that the Indian market is still significantly underinsured.
India’s life insurance penetration is miniscule. Although overall premiums increased from 2010 to 2018, there was a decline in life insurance penetration between years 2010 to 2018, due to GDP growing at a faster pace compared to growth in premiums. The average penetration for the life insurance industry globally is 3.5% which is 75 bps more than the Indian life insurance industry. This indicates the untapped potential of the Indian life insurance market. Also, the penetration for Indian industry is strictly not comparable to the developed markets, such as US and Australia, as mandatory pension contributions in the US and Australia is not included in the insurance pie. Further, due to higher share of savings than protection in the premium, the actual protection provided by insurance in India would be much lower compared with even other developing markets.
India is amongst the top countries (3rd) when ranked on basis of GDP (PPP) and has been one of the fast growing countries in the world, aided by strong fundamentals like falling inflation, rising disposable income, largest working age population. Innovations in operating architecture based on the e-KYC are expected to improve reach of insurance products and efficiency. With rising income and inflation under control, the household savings rate (household savings as a percentage of GDP) is likely to increase gradually. Though the share of household savings has remained subdued since fiscal 2012, the proportion of financial savings has increased significantly during the period. In the past too, strong real income growth and low inflation had a positive spin-off effect on financial savings.
During fiscals 2017 to 2018, the share of financial savings in household savings decreased from 49% to 40%. Furthermore, benign inflationary pressures would diminish the attractiveness of gold and real estate – which represent physical savings of households – as investment alternatives. The government’s measures to curb black money will also help increase the share of financial savings, which would further aid the life insurance industry. Risks to inflation could emanate from 1) high protein inflation, which has recorded double-digit growth for 12 consecutive months; 2) service inflation, especially in rural areas, which is keeping core inflation high and sticky; 3) unfavourable temporal and spatial distribution of rainfall; and, 4) oil prices.
|Particulars (in crores)||Mar-16||Mar-17||Mar-18||Mar-19||Mar-20E||Mar-21E||Mar-29E|
|First year Premium||3296.49||3657.03||4738.46||5058.11||5867.41||6806.19||22313.52|
|New Business premium||6487.22||8621.02||11349.61||14971.45||18259.09||22295.79||114638.72|
|Investment and other Income||1887.69||11279.56||8863.10||9511.50||12333.17||15663.13||83687.68|
|Operating Profit From Insurance Business||1134.13||1099.62||1270.16||1577.50||2002.45||2437.61||9688.77|
|Provisions For taxation||174.55||151.98||175.55||226.79||400.49||487.52||2131.53|
|Profit After Tax||959.58||947.65||1094.62||1350.72||1601.96||1950.08||7557.24|
|Policy Holders Technical Account||718.25||786.34||1002.20||1206.90||1441.77||1755.08||6801.51|
|Funds for Future appropriations||241.33||161.31||92.41||143.81||160.20||195.01||755.72|
|Transfer from policyholders a/c||718.25||786.34||1002.20||1206.90||1441.77||1755.08||6801.51|
|Investment and other Income||179.38||226.86||293.28||429.47||500.94||621.16||2003.01|
|Profit Before Taxation||835.00||914.14||1126.74||1289.89||1554.16||1900.99||7219.71|
|Provisions For taxation||16.59||22.01||17.74||13.09||15.54||19.01||72.20|
|Profit After Taxation||818.40||892.13||1109.00||1276.79||1538.62||1881.98||7147.52|
|Balance B/F from Balance Sheet||383.53||985.83||1613.49||2393.65||3274.06||4428.02||26028.31|
|Balance C/F To Balance Sheet||985.83||1613.49||2393.68||3274.06||4428.02||5839.51||31388.95|
|Sources of Fund|
|Reserve and Surplus||1204.59||1807.90||2706.40||3640.88||4794.87||6206.36||31755.80|
|Provisions for Linked Liabilities||45727.02||53800.48||57185.39||63377.41||69081.38||75298.71||124564.10|
|Funds For future Appropriations||705.48||866.78||959.20||1103.01||1263.20||1458.21||5010.03|
|Total Sources of Funds||74045.38||91286.02||105835.07||124882.91||147232.79||174677.88||715159.02|
|Application of Funds|
|Investments - Policies Holders||25862.87||34691.54||45347.14||57124.46||72548.06||92136.04||557917.86|
|Assets Held to cover Linked Liabilities||45727.02||53800.48||57185.39||63377.41||69081.38||75298.71||124564.10|
|Net Other Assets||-184.66||-451.58||-767.79||-668.76||-658.39||-521.42||-706.48|
|Total Application of funds||74045.38||91286.02||105835.07||124882.91||147232.79||174677.88||715159.02|
|New business premium||18.10%||32.90%||31.70%||31.90%||22.00%||22.10%||23.10%|
We expect HDFC Life to continue its growth momentum on the back of ongoing product innovation, advancement in its distribution network with multiple channels, and reorganizing processes to provide a flawless experience to the end-customer. The company is in right position for long term growth due to increasing digital adoption by the customers and stable regulatory environment. Further, we also expect its technology platform should help in improvement of product offerings. The company’s wide range of products in its portfolio along with strong financial performance will help in preserving its position in the market. At CMP, the stock is trading at 5.3x times FY20E Embedded value. We initiate BUY on HDFC Life Insurance Company Ltd with a target market cap of Rs 13.45 lakhs crore in 10 years.
First Year Premium (FYP) : FYP is the premium collected by the insurance company during the first year of the policy (for regular policies or limited premium paying policies). It doesn’t apply to single premium policies.
Renewal Premium (RP) : RP is the premium collected by the insurance company from the second policy year onwards (for regular policies or limited premium paying policies). It is the amount paid for renewal of the contract as per the terms.
New Business Premium (NBP) : NBP is the premium collected by the insurance company from all the new policies sold in that year (or given period). All the policies are considered (regular, limited premium and single premium). Hence,
NBP = FYP + SP
Annual premium equivalent (APE) : This is one of the most commonly used terms. In insurance, new business is not entirely comparable across all types of policies. New Business Premium (NBP) comprises of single as well as regular premium policies. In case of single premium policies, the entire premium is collected upfront while in regular premium policies, the premium amount is smaller since it’s collected over a longer term. Thus business garnered through these two policies is not directly comparable. It has to be brought on a common ground before comparison.
Traditionally, a 10-20 year term is very common in insurance and hence, single premium is multiplied by 10% to arrive at the equivalent regular premium. In other words, 10% of the single premium collected is taken as comparison with regular premium. Hence, a weight of 10% brings single and regular premium policies on common ground.
APE = FYP + 10%*SP
Total Premium (TP): As the name suggests, it is the premium collected from all policies during the given period.
TP = NBP + RP = FYP + SP+ RP
Embedded value (EV): It represents the sum of present value of all future profits from the existing business and shareholders’ net worth. Embedded value simply represents the value generated from the business sold by the company, if it were to stop writing anymore business. The more business a company generates, the larger will be the embedded value assuming all other metrics like persistency ratio and costs remain the same.
Value of new business (VNB): It represents value of an insurer on the basis of the new business it wrote in the last year. VNB is also termed as embedded value of new business measured at point of sale.
VNB margin: It is calculated by dividing the value of new business by 1 year’s annualised premium and it indicates the profit margins of a company. It also indicates the product mix of a company. Traditional investment products have similar margins, so a company that wants to improve its margins will start focusing on the protection business more.
Operating expense ratio: This ratio is computed by dividing expenses incurred for business operations by the gross premiums. Expense ratios depend on the type of business sold by a company. For a company that largely has single-premium business, the expense ratio will be much lower since single premiums collected are usually large amounts.
Persistency Ratio: The proportion of business retained from the business underwritten. In other words, the policies that remain live with policyholders paying premiums regularly (and not cancelling their policy).This is an important metric to track as persistency is a key driver of profitability for an insurer. A persistent book—where customers pay renewal premiums every year—also helps insurers reduce costs through economies of scale.
Assets under management (AUM): Premiums collected by an insurance company are invested over the term of the policy. This entire accumulated premium amount from all policies sold by the insurance company is called as AUM. It is one of the most important measures of the company’s health and growth. Total AUM can be broadly classified as follows:
Shareholder AUM: This is the fund value lying in the insurance company’s shareholders account. Shareholders have to maintain a certain solvency margin. Shareholders infuse money into the business from time to time. A part of the money gets used in funding the expense overrun and new business strain. The balance remaining after meeting these expenses is called shareholder AUM.
Policyholder AUM: As the name suggests, this is the fund set aside to meet the benefits promised to policyholders (liabilities). Actuarial department calculates the amount to be set aside by the insurance company to meet the benefits promised, based on the future expected cash flows. This amount is calculated on a conservative basis and is called as reserves. The accumulated reserve is effectively the policyholder AUM. (There could be differences as reserve is prospective calculation whereas AUM is retrospective aggregation but conceptually it is similar). Policyholder AUM can further be classified as:
Assets held to cover linked liabilities: It is the AUM from unit linked policies. This amount is the aggregate fund value in all the ULIP funds.
Policyholder investments: This amount refers to the fund garnered under non-linked policies.