Private life insurance company HDFC Life closed FY22 with higher YoY premium growth as well as a strategic expansion, with the acquisition of Exide Life. Its total premiums have grown 11% YoY across all product types. 

This was driven by 16% growth in renewal premium and an 8% growth each in single/first-year premium. The growth in premiums in FY22 acquires significance as the company now stands amongst the top three private life insurers in India.

Quick Takes:

• VNB (value of the new business) grew 22% to Rs 2,680 crore in FY22, while VNB margins improved 1.3 percentage points to 27.4%
• APE (annualised premium equivalent) grew 18% YoY to Rs Rs 9,660 crore in FY22
• Net profit fell 11% YoY to Rs 1,207 crore in FY22 on higher reinsurance and operating costs
• Persistency ratios improved across time periods with the 13th-month persistency as high as 92%
• Regulators approved the integration of Exide Life with HDFC Life 

New premiums across product categories record a new high for Q4FY22

HDFC Life saw gross premium growth across product segments, with higher YoY premiums for new policies under first year premium, renewal premium for existing policies as well as  premium on new single premium products in Q4FY22. The first year premium saw a growth of 7.7% to Rs 2,574.6, renewal premium grew YoY by 15.6% to Rs 7,341.2 crore and single premium grew YoY by 8% to Rs 4.505 crore in Q4FY22.

HDFC Life scored higher than the previous financial year on key performance indicators like APE, VNB, VNB margins, and persistency ratios. Commenting on the FY22 performance, Vibha Padalkar, Managing Director and CEO said that the insurer clocked a growth of 16% in individual WRP (weighted received premium) in FY22, with a market share of 14.8% and 9.3% in the private and overall sector respectively. Despite very trying times during the two-year pandemic with the Omicron wave in Q4FY22 being the latest setback, HDFC Life’s two-year CAGR of 17% was almost twice the industry growth of 9%.

This year too, Q4FY22 was the highest contributor in FY22. This is because the last quarter of the financial year witnesses more policy sales for income tax benefits. Comparing on an annual basis to FY21, both APEs and VNB rose in FY22.
 

APE rose 18% YoY in FY22 to Rs 9,660 crore and VNB by 22% to Rs 2,680 crore. The rise in both these metrics did not translate directly into net profit growth. Net profit fell 11% YoY in FY22 to Rs 1,207 crore on account of higher reinsurance costs and provisions for Covid-19 related claims. The company has reserves of Rs 55 crore that it’s carrying into FY23 for covid-related claims.

Bancassurance continues to be the highest contribution channel

Distribution is another key factor in driving sales of policies as well as renewal of premiums. HDFC Life has a diversified mix with a lion's share from the bancassurance channel, with 61% contribution in Q4FY21.

The bancassurance channel has traditionally been the strongest channel due to its relationship with group company HDFC Bank, which helped HDFC Life sell policies through its branches in its initial years. Over the years, new partnerships with banks like Saraswat Bank, South Indian Bank, AU Small Finance Bank etc. have strengthened this channel. The distribution mix also covers NBFCs (non-banking finance companies) and MFIs (microfinance institutions) in addition to equity brokers like Motilal Oswal and ICICI Securities.

HDFC Life has added many fintech partners in the brokers’ distribution segment in FY22. These include fintechs like PhonePe, Lending Kart etc. With growing digitization the direct channel  now contributes 19%, with customers directly signing up via the company’s app or website.

Evolving product mix covers a wide spectrum of product offerings

Apart from distribution, the product mix has also evolved over the years to a more balanced one in FY22. In the last four years, the product mix has seen major changes. In FY19, ULIPs/linked policies formed around 55% of the policies sold, it is now down to 26% in FY22.

A par policy allows the policyholder to participate in the profits of the life insurance company. These are paid to the policyholders in the form of bonus or dividends. Non par policies do not pay any dividends but pay out guaranteed returns on maturity.

The share of par and non-par policies is up significantly over the last four years. This is due to the inclusion of new policies in the non-par segment like Sanchay Plus and Sanchay Par Advantage between FY19 and FY21. In FY22, it launched Sanchay FMP as well as HDFC Life Quick Protect, a product which is a combination of protection and critical illness cover. Both these launches received a good response from customers.

The addition of products over the years has led to a more balanced mix. It was seen that each type of product is able to make significant contributions to the APE as well as VNB in FY22. While maximum APE contribution came from the non par segment at 28%, its share in VNB was 13%. Protection constitutes 14% of the APE, and contributes to 24% of VNB.

Along with VNB, VNB margin is a critical metric as it directly defines the profitability of the company. VBN margin is calculated by dividing the value of NBP by the APE.

VNB is consistently rising for the past four years. In addition to that, VNB margin is also rising, implying improving profitability along with increasing sales.

Another metric for HDFC Life that has improved is the persisitency ratio. Persistency ratio is defined as the percentage of customers who continue to pay their premiums for defined time periods.

Persistency improved overall time frames, increasing YoY to 92% from 90% for the 13th month, increasing for the 25th month to 86% from 81% and to 58% from 53%, YoY for the 61st month.

Exide Life acquisition will strengthen its presence in South India

The merger with Exide Life will result in an expansion as a large portion of its business accrues from South India. Branch rationalization and expansion in its geographic footprint will result in an increase in premium growth. It expects the deal to be completed in H2FY23 and continues to work on the integration of both companies, on technology and people front.

The IPO of India’s largest state-owned life insurance company, LIC generated a lot of buzz and is one of the largest IPOs in recent years. HDFC Life’s management views the listing of LIC as a positive for the industry. It is not perturbed with respect to competition as the ticket size of both companies is different. The management feels the low penetration of insurance in India will ensure enough room for everyone to exist and grow.

Investors looking at the life insurance space have many options in FY23. It will be interesting to track whether LIC or other private life insurers can deliver better investment returns in FY23. Going by the trends in HDFC Life over the past few years, with improving metrics and better product mix, it may turn out to be an outperformer in its segment in FY23.