The dynamics of the life insurance industry changed over the last two quarters as the second wave drove rising claims and increased provisions to take care of future claims. In the life insurance industry, Q3 is the weakest quarter in terms of business. Against this backdrop, Q3FY22 results for HDFC Life reflect rising profitability and substantial YoY growth with higher product pricing against higher reinsurance costs.

Quick Takes

• VNB (value of new business) grew 26% on a YoY basis for the 9MFY22 period to Rs 1,780 crore from Rs 1,410 crore.
• APE (annual premium equivalent) for 9MFY22 grew 34% to Rs 12,255 crore
• The company hiked prices of term insurance products by 15-25% in Q3FY22
• Individual WRP (weighted received premium) two-year CAGR at 14% vs. 5% for industry
• Exide Life became a subsidiary of HDFC Life from January 1, 2022, post approval by IRDAI
• Persistency ratios improved across time periods with 13^th month persistency at 92% for 9MFY22

A buoyant quarter post the second wave

HDFC Life saw a YoY improvement in revenues in the last two quarters after a YoY decline in Q1FY22. Its gross premium income in Q3FY22 remained healthy with a 27% YoY increase with higher renewals and new business premium. Sequentially, premiums increased by 5.9% to Rs 12,255 crore from Rs 11,445 crore in Q2FY22. On an APE (annualised premium equivalent) basis, premiums increased by 20.4% YoY to Rs 2,576 crore. APE is a metric used to map premiums received in the insurance industry. It is the sum of the regular annualized premium from the new business plus 10% of the first single premium in a given period. 

Several life insurance companies recently raised the premiums for their products due to higher reinsurance costs. HDFC Life raised prices of its term plan by 15–25% and ICICI Prudential increased by 10%. Managing Director Vibha Padalkar said that they continue to expect pricing and underwriting norms to evolve over time in line with expanding geographic and demographic coverage.

The APEs for new business premiums (NBP) point to a balanced mix of product offerings, each having a significant share of the total NBP. The premium earned from the new policies issued in a given time period (quarter/financial year) is referred to as the NBP for an insurance company. The share of premiums is not only driven by existing products, but also by the addition of new products. 

Newly launched ‘Sanchay FMP’ in the deferred annuity segment has generated sales of more than Rs 300 crore since its launch. Another product in the deferred annuity segment, ‘Systematic Retirement Plan’ launched in Q3FY22 is receiving a good response. With increasing life expectancy and inflation in India, the need for retirement planning is growing and this product caters to this segment.

Bancassurance is the strongest distribution channel for HDFC Life, backed by its linkage with group company HDFC Bank. The bancassurance channel also gains its strength from relationships with other bancassurance partners like ICICI Securities, IDFC First Bank, Bandhan Bank, and Yes Bank who onboarded during the last year.

Data for the past four years points to the fact that the bancassurance channel has contributed more than 50% of revenues. Apart from the bancassurance channels, proprietary distribution channels viz. direct and online witnessed 25% growth in revenues, and agency channels witnessed a 35% growth based on individual APE.

Each channel has its strength in a particular type of product. While the bancassurance channel’s strength lies in sales of unit-linked policies, its sale of annuities at 2% is negligible. The direct channel gets the highest contribution from annuities and a miniscule share of term policies at 4%. This is in stark contrast to online channels where term plans form a significant 22% of sales. The online channel also includes sales by online insurance aggregators and is gaining traction over the last two years. The direct and online channels contribute higher margins than agency and banca channels which have a higher commission structure.

Technology aids higher persistency ratios

Persistency ratio is an important metric in the life insurance business and a measure of the percentage of customers continuing to pay premiums. One of the challenges across life insurance companies is to ensure customers renew their premiums on time and HDFC Life has addressed this by increasing persistency for all time periods with the aid of technology.

The company has extensively used AI (artificial intelligence) and ML (machine learning) to understand when customers are likely to make their payments. Cloud telephony based systems ensure that renewal reminders via phone calls are not given randomly but based on renewal dates and more importantly based on how many days before the renewal date a particular customer is likely to make the payment. Acknowledging this, Padalkar said that they were able to increase the persistency for the 61st month, which is more challenging than the others, and expect higher renewals in the future across time periods.

Exide Life merger on track with swift approvals from regulators

One of the biggest developments in Q3FY22 was the acquisition of Exide Life Insurance, announced on September 3, 2021. Approvals from regulators IRDAI (Insurance Regulatory and Development Authority of India) and the CCI (Competition Commission of India) were obtained in record time. Exide Life became a 100% subsidiary of HDFC Life with effect from January 1, 2022. 

The management expects the integration to complete by Q2FY23, post which the synergies from the acquisition would play out. The Q3FY22 numbers for Exide Life are not part of the consolidated numbers for HDFC Life, but would be integrated from next quarter onwards. According to the management, Exide Life numbers were in line with their expectations with a YoY growth of 30%.

Covid-19 related claims expected to taper off from Q4FY22

HDFC Life was holding a Covid claims reserve of Rs 204 crore at the end of Q2FY22. Out of this, around Rs 150 crore was utilised to settle Covid-19 claims during Q3FY22. An addition of  Rs 55 crore was made to this reserve, which now stands at around Rs 105 crore. This addition was done in December 2021 at the start of the third wave of the Omicron variant, as a provision towards any claims arising out of the third wave. The management said that they are tracking the situation and do not foresee as many claims in the third wave as compared to the first two.

The management remains optimistic on future business growth. Credit protect and annuity are expected to witness healthy momentum ahead. Demand in individual term insurance is expected to rise due to the under-penetration of this segment. Increasing awareness and expectation of a hike in premium rates is likely to spur demand.

This quarter saw HDFC Life retain its VNB margins, and complete the acquisition of Exide Life. A balanced product and channel mix augur well for the company. The last quarter (Q4) is traditionally the one that generates maximum business for insurance companies. Integration of Exide Life, reduction of covid related claims, and introduction of new products promise to make Q4FY22 a keenly watched quarter one by HDFC Life’s investors. It will be interesting to see if the company ends FY22 on a high note like the last financial year.