HDFC Life delivered an 18% yoy increase in annual premium equivalent (APE) and a 180bp rise in the new business value (NBV) margin leading to a 27% rise in NBV. APE and NBV were 3% and 4% above our expectation, respectively in Q3 FY21. The share of protection APE fell 345bp to 13.3% 3QFY21. APE grew due to 19% yoy growth in individual APE and a 36% yoy rise in group savings.

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HDFC Life’s market share among private insurers rose 214 bps to 16.4% (9M FY20: 14.3%) on an individual APE basis. Par APE (+117% yoy) and annuities showed strong growth, up 52% yoy, whereas unit linked insurance plan (ULIP) APE sales fell 15% yoy. Non-par savings APE (ex-annuities) fell 4% yoy. Overall protection APE declined 6% y-o-y in 3QFY21 (down 12% in Q2). Individual protection APE fell 13% yoy while group protection was down 2% yoy.

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The bank channel continued to deliver strong growth (up 35% yoy, on an individual APE basis), while the agency channel remained weak. Overall 13th month persistence of 89% in 9M FY21 rose from 88% in the first half of FY21. 13th month persistency in traditional savings products and protection products remained strong at 92% and 89%, respectively, whereas ULIP persistency dropped to 80% vs. 82% in 2QFY21. While the cost ratios improved on a 9M basis, they rose 60bp in Q3 FY21. Embedded value (EV) came in at Rs 250.5 bn (up 7% qoq) while the operating ROEV was 18.3% (1H20: 19.0%). Net profit rose 3% yoy in Q3 FY21 while the solvency ratio was largely unchanged at 202%.

HDFC Life’s Other highlights:

HDFC Life management stated that Google searches for protection products have risen since December. HDFC Life believes that annuities will present the company with more opportunities than protection-related products, over the medium term.

HSBC makes no changes to HDFC Life rating, target price or estimates in this note. HSBC maintains HDFC Life target price at Rs 630 and Hold rating on the stock. HSBC continues to use a P/EV-ROEV based valuation approach, applying a target multiple of 5.1x (unchanged) to their EV per share estimate of INR126.70 (unchanged).

HSBC arrived at this multiple based on a Gordon growth model assuming a normalised ROEV of 19.0% and a 9% COE (both unchanged). After discounting to the present, HSBC arrives at a target price of Rs 630 on HDFC Life.

HDFC Life’s Key upside risks:

(1) Rise in sales of protection policies
(2) better-than-expected NBV growth.

HDFC Life’s Key downside risks:

(1) Weaker-than-expected NBV growth
(2) irrational pricing in protection leading to weaker growth and margins for the group. The stock is trading at a FY22e P/EV of 4.7x vs. a sector average of 3.1x.