HDFC Life: Jefferies hosts Niraj Shah - optimistic on premium growth| Know about Yes Bank and SBI Securities linkage

Jefferies hosted Niraj Shah, CFO, HDFC Life, for an investor call where he sounded optimistic about growth in premiums and sustaining margins near FY20 levels. FY22 can see margins expand with better scale and mix. It has also forged links with Yes Bank and SBI Securities. A key negative for HDFC Life is that mortality experience has been slightly worse than the past, but the company has reserves for that; guaranteed return book is well hedged. Medium term focus will be to scale-up agency and maintain a balanced mix of premiums and channel contribution.

Optimism about growth stems from strong trends in recent months & stronger non-ULIP business:

HDFC Life has been outperforming peers on growth (retail premiums APE) with 45% YoY rise in Oct and 8% YTD. Early entry in non-ULIP segments & ramp up of distribution platform has supported this growth; protection is also growing well.

In terms of premium, For FY21, HDFC Life management expects high single-digit growth in premiums with mid-teens growth in FY22. In terms of VNB margins FY21 margin will likely be similar to FY20 while margin expansion in FY22 should drive 20% VNB growth.

Mortality claims worsening; reserving in FY20 will cover for it:

Management stated that claims on the protection side have gone higher than expectations due to a combination of COVID-linked deaths and lagged filing of normal claims. Still, this should not have a material impact on margins as the company had made some buffer provision in FY20 itself.

Focus on non-bancassurance channels needs to backed by variabilisation of costs:

Over the medium term, HDFC Life is looking to increase the contribution from its agency channel from 13-14% of premiums currently to 25%. While this will reduce dependence on bancassurance partnership, it will also need to variabilise agency costs otherwise earnings could become more cyclical. HDFC Life has also forged distribution partnerships with Yes Bank and SBI Securities.
Indian insurers better placed to manage hedges on guarantee risks:

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Management reiterated that its guaranteed return book is hedged for interest rate and cash flow risks. Interestingly management highlighted that 3 key reasons make Indian insurers better placed to hedge such exposures:

(1) India has a larger supply of long-term bonds from the government
(2) Yield curve is steeper than most countries
(3) Access to FRA-type of derivative contracts help to hedge better