When the Finance Minister proposed an amendment to the Income Tax Act disallowing payments to individuals under unit-linked insurance plans (above a limit) sold by life insurance companies, many were left wondering what would happen to businesses that sold these products. Many companies over the past decade had reworked their ULIP  offerings to make them more attractive, but this amendment was a body blow.

One company that investors knew wouldn’t be impacted significantly was HDFC Life Insurance. Part of the HDFC Group, this firm had built a broad-based franchise which didn’t earn more than 30% revenue from any single product category. The management reiterated this focus in their post Q4 earnings conference call with analysts. The company is the second largest private sector life insurer in India

As a result, HDFC Life managed to post decent growth in premiums at the end of the March 2021 quarter, even though it was against a low base in the same period  last year. At the end of FY21, the total annual premium equivalent (APE) rose 13% YoY and the individual APE rose 16% YoY.

As of March 31, 2021, the company’s APE was made up of participating savings plans (34%), non-participating savings plans (31%), ULIPs (24%), protection plans (7%) and annuity plans (5%), of the individual APE respectively.

Robust operating metrics

HDFC Life’s stable Q4 performance was aided by growth in participating and non-participating savings plans. These two businesses grew at 30% and 95% in YoY terms during the March 2021 quarter. This is despite a 45% YoY fall in protection plans APE, which was mostly due growth normalising in the quarter.

Retail term insurances growth was hamstrung by underwriting constraints due to medical testing and challenges on movement. Last year in the March 2020 quarter, this business had grown at 35% YoY.

The value of new business (VNB) grew 14% in FY21 to Rs 2,190 crore, indicating that the company’s strategy of not focussing on just one product set is paying off. The company’s new business margin has been rising steadily over the past few years.

 Some concerns remain, with slow net profit growth

HDFC Life’s good operating performance apart, investors must take note of its underlying profitability. Net profit for Q4FY21 rose by just 2% YoY to Rs 318 crore. The company had to change its assumptions on Covid related claims, and has increased the reserve at the end of FY21. This reserve now stands at Rs 165 crore.

The company’s underwriting profit did take a hit during FY21. This is despite the company changing operating assumptions for Covid only in the latter part of the year. There are some supply side constraints for sourcing business, but the company is making use of all channels to increase the customers it can reach. It already has a large bancassurance network, including HDFC Bank. It is also leaning on its extensive digital network to source customers.

Although concerns remain on the uncertainty under the pandemic, HDFC Life doesn’t expect this to be pervasive in FY22. Even though the company paid out more Covid related claims than it had anticipated, the overall claims were lower than last year. It only had to pay out Rs 50 crore more than at Rs 2,350 crore it had anticipated during FY21

As a result of its efficient operating model, and its balance sheet strength, HDFC Life’s solvency ratio increased by 17 percentage points to 201% at the end of FY21. All its other operating metrics were also doing well during FY21.

An uncertain economic outlook ahead

Now that lockdowns are in effect in many states in India, there will be some fallout impact on individuals and companies. How this plays out will be interesting to watch. The life insurance product becomes more relevant in this situation. There has been an increasing preference for such products, but unlike last year, HDFC Life’s management doesn’t anticipate a severe impact on its savings products.

For investors, the HDFC Life stock seemed fully priced once the results were announced. The stock did give up some gains over the past few months from its 52-week high of Rs 746. After the results were announced, the stock fell nearly 5% as investors and traders booked profits. Whether it tests new highs will depend on the monthly insurance operating numbers that come out next month.