Key Rating Drivers & Detailed Description
Strengths:
- Strategic importance to, and expectation of support from, HDFC
HDFC Life is strategically important to its parent, HDFC, which is reflected in sizeable representation of its directors on the HDFC Life board, commonality of chairman and overseeing of HDFC Life functioning. The company also benefits from common branding with HDFC, which is the largest housing finance company in India with a strong retail presence, solid brand image, established franchise and large customer base. CRISIL Ratings believes HDFC will continue to support the growth plans of HDFC Life and will contribute to any incremental capital requirement. Furthermore, being the life insurance arm of the HDFC group, HDFC Life constitutes a key element of the group’s suite of financial service offerings. CRISIL believes that HDFC will continue to exercise control on HDFC Life and will continue to extend support to HDFC Life, as and when required, in-line with regulatory guidelines.
- Established market position with balanced portfolio mix
The company maintains its market position as one of the top players in the life insurance industry. Market share in terms of new business premiums among private players stood at 20.3% as on December 31, 2022 (21.0% during fiscal 2022) against 19.1% in fiscal 2018. The company has been in operation since 2001 and has presence across all states in the country. Diversification of sourcing channels over the years has led to robust business growth. Furthermore, strong brand image and direct access to the large customer base of the HDFC group provide critical support to business growth. Low insurance penetration and other supportive macro factors are expected to drive growth.
With the intent of maintaining customer centric, balanced and profitable suite, the company maintains a balanced portfolio mix with focus on sourcing through multiple channels. This is reflected in the product mix for during nine months ended December 31, 2022, with ULIPs (unit-linked insurance policies) and conventional products accounting for 18% and 82%, respectively, of the total annual premium equivalent (APE). The company has witnessed improvement in protection business on account of strong growth in credit protect business The contribution of the protection business to new business premium (including group) increased to 30.4% during nine months ended December 31, 2022 from 24% in fiscal 2022 (19.6% in fiscal 2021).
- Well-diversified distribution network
HDFC Life has been the first to successfully embrace open architecture in bancassurance while continuing to diversify its distribution network with around ~300 partners, comprising traditional partners such as NBFCs, MFIs and SFBs, and including new-ecosystem partners. HDFC Life has always tried to maintain a well-diversified distribution mix, with bancassurance accounting for 59%, 18% contributed by agency, 15% by direct including online and 9% by broker channels in 9M Fiscal 2023. With channels too, each has focused on a profitable product mix with no major concentration. HDFC Life has developed and nurtured each channel, while ensuring business diversification. The company has achieved long-term sustainable and profitable growth by balancing the product mix across various distribution channels.
- Healthy persistency and profitability metrics
HDFC Life has maintained healthy persistency in its overall product portfolio. The 13th month and 61st month persistency ratio for the merged entity stood at 87% and 52% respectively in 9M Fiscal 2023. In fiscal 2022, the 13th month and 61st month persistency ratio stood at 87% and 54% respectively. Improvement in persistency across cohorts is led by focus on better quality of business and leveraging technological capabilities to provide a superior customer experience. The healthy persistency also reflects the ability to retain policyholders for a longer duration.
Healthy accrual has supported capital position. The RoE has consistently been above 18% during the last five fiscals. In fiscal 2022, it stood at 10.1% mainly on account of substantial increase in networth due to fresh issuance of shares to Exide Industries in lieu of 100% equity shares of Exide Life and one-time Covid-related provisions. During 9M Fiscal 2023, the ratio improved to 11.9%. The value of new business (VNB) margin continues to remain healthy at 26.5% in 9M Fiscal 2023 on Post-merger basis (27.4% during fiscal 2022). Embedded value of the company stood at Rs 37,702 crore The company has also shown healthy growth in its embedded value to Rs 37,702 crore as on December 31, 2022 (Post-merger basis) as compared to Rs. 30,048 crore as on March 31, 2022.
- Adequate capital position
HDFC Life maintains adequate capital position which is reflected in healthy solvency margin of over 1.80 times maintained for the last 10 fiscals. As on December 31, 2022, the company reported solvency margin at 2.09 times on account of equity infusion of Rs 2,000 crore during Q2 Fiscal 2023.
As on March 31, 2022, the company reported solvency margin of 1.76 times. Networth stood at Rs 12,604 crore as on December 31, 2022 (Post-merger basis) as compared to Rs 15,401 crore as on March 31, 2022 (Rs 8,430 crore as on March 31, 2021). Networth as of December 31, 2022 is adjusted in line with the merger scheme. While CRISIL Ratings expects capital support from HDFC to be forthcoming if required; HDFC Life has been maintaining its capital position through internal accrual, not necessitating any such support.
- Robust risk management in non-participating segment (non-par)
HDFC Life has a robust risk management framework across all its product segments. The products offered under non-par segment are typically those wherein the minimum returns are guaranteed to the policyholders. The company has grown substantially within the non-par segment during the last two fiscals. Given its philosophy of adhering to a balanced product mix, it has been able to maintain it to close to a third of its product mix. HDFC Life follows a fairly comprehensive approach to financial risk management, targeting duration matching on the annuity business and cash flow matching on the non-par savings business. The company also follows a strategy of prudent pricing and dynamic repricing of new business. A judicious mix of multiple instruments is used to hedge interest rate and renewal premium reinvestment risk.
These include aggregation of non-par savings and credit life cash flows. The relative scale at which these businesses have been written allows them to achieve close ALM at an aggregate level. Secondly, investing in partly paid bonds of high-rated issuers that complement the cash flow profile of these products and also offer attractive yields. Thirdly, using G-Sec STRIPS to improve the efficiency of the cash investments, improve asset-liability management and reduce interest rate risk. Finally, it also uses external hedging instruments such as forward rate agreements to lock in interest rates for future premiums of the non-par savings portfolio.
A combination of the above allows HDFC Life to be in a positive net assets (policyholder assets minus policyholder liabilities) position under base case and stress scenarios (very low interest rates and 100% persistency). The result of all the above is visible in low interest rate sensitivity for embedded value and VNB margin. CRISIL Ratings understands that the risk management approach of the company has also been validated by a leading external actuarial consultant.
Weaknesses:
- High operating cost compared with peers
The operating costs (excluding commission), though improving, remain modestly higher compared with some large competing peers. For new business premium, operating expense ratio of the company has remained within 23-28%, whereas for net premiums the ratio has been at 12-14% in the last three fiscals. However, CRISIL Ratings notes the company has been working to ensure a balanced portfolio mix, strengthening its distribution mix and make efficient use of technology to ensure ease of purchase for the customers. Company operates in open architecture model across all corporate distributors. Hence, the operating cost ratio is expected to be relatively higher than peers.
- Relative disadvantage compared with leading peers in the bancassurance channel
HDFC Life does not have an exclusive partnership with HDFC Bank, the second-largest bank in India with an impeccable track record of profitable growth. This puts it at a relative disadvantage as compared with leading private peers who have exclusive tie-ups with their parent banks (among the top five in India). While the business generated from HDFC Bank stood at 75-80% of the bancassurance channel, the bank has embraced an open architecture model over the last 3-4 fiscals. Consequently, as a percentage of overall life insurance business sold by HDFC Bank, HDFC Life’s share has reduced. However, subsequent to the merger, CRISIL Ratings believes that HDFC Life will benefit from the direct linkage with HDFC Bank, and it may enhance the business growth of the company. Furthermore, the share of HDFC Bank under bancassurance channel may also witness an upward trend.
- Potential challenges in growth of savings business
During fiscal 2022, the company launched non par savings product i.e., Sanchay Fixed Maturity Plan that contributes more than 15% of the non-par savings mix. Every year, the company launches an innovative product that becomes the top selling product for the company and significant revenue contributor. During fiscals 2019 and 2020, the company had launched two customer-centric products – Sanchay Plus and Sanchay Par Advantage. These products have helped HDFC Life to increase its proportion significantly within the traditional business during the last three fiscals. The non-par products come with guaranteed returns over a longer policy tenure. CRISIL Ratings believes that while these products do well, sustainability of healthy future growth given significant concentration from single product type remains a monitorable.