HDFC Life share price: CLSA highlights company’s focus remains on further diversifying its distribution mix

All four listed life insurance companies participated in the 23rd CITIC CLSA India Forum 2020. The key takeaways were that APE (Annualized premium equivalent )trends have more than normalised relative to pre-Covid-19 levels and most life insurers are willing to take a more flexible approach to product mixes including increasing their share of PAR and non-PAR savings (replicating HDFC Life). Term protection remains a key focus segment for all life insurers given its structural growth outlook, and protection pricing should stabilise by the second half of FY21. CLSA upgraded all life insurance stocks to BUY in Q2 FY21 driven by expectations of a structural growth opportunity with a 15%-20% VNB (Value of New Business) CAGR over FY21-23CL; CLSA maintains their positive view on the Life insurance space.

HDFC Life: balanced product mix and distribution and the ability to innovate

HDFC Life’s superior performance APE performance was driven by its balanced product mix, ability to innovate and its highly diversified distribution. It has no target product mix and it evolves based on customer preferences leading to the success of Sanchay plus and Sanchay PAR. HDFC Life’s focus remains on further diversifying its distribution mix as it continues to increase its reach with existing partners, it is adding new partners (Yes Bank) and web aggregators remain an integral part of this diversification strategy. In terms of VNB, management maintained its guidance of a gradual increase in its VNB margin over the next few years driven by product mix improvement and cost efficiency.

HDFC Life Insurance meeting takeaways:

APE business growth trends:

Product mix evolution:

Within savings, the endeavour is to keep the mix balanced as each product has a different proposition for different investor segments. Non PAR guarantee products offered fixed income for long term and with lower interest rates now the product’s guarantee proposition remains attractive. PAR products provide capital guarantee for investors and HDFC Life’s new offering Sanchay PAR product has done well in the last 2-3 quarters. Company expects protection and annuity growth to be faster than savings products.

Overall market share gains of over 200bps have been the result of strong product innovation, diversified distribution and most importantly readiness in terms of digital offering.

APE trends:

HDFC Life APE for seven months of FY21 is at 108% of last year’s level of Investments in digital over the last few years aided in HDFC Life ramping up APE volumes faster than industry post the full lockdown.

VNB trends:

VNB - Gradual inching up guidance continues:

HDFC Life’s VNB margins have increased from 22% in FY17 to 25% in first half of FY21. Company continued with their gradual VNB margin guidance driven by a balanced product and distribution mix.

Other highlights:

Diversified Distribution:

HDFC Life had a large advantage in terms of banca channel to start off with but the company over the last few years is building its prop/direct channel and expects to double the share of direct business in next 3-4 years. HDFC Life wants to keep expanding distribution thus has recently tied up with Yes bank. HDFC Life has tied-up with digital distributors to continue in a big way. Persistency trends have picked up and are back to levels in FY20. Asset mix for HDFC life evolves as per the preference of customers. For e.g. Ulip which has traditionally been dominated by equity is now seeing a shift towards equity and debt both.