Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the Rs 600 crore subordinated non-convertible debentures of HDFC Life Insurance Company Ltd (HDFC Life).

 

The rating continues to factor in the strategic importance to, and expectation of support, if required, from its parent, Housing Development Finance Corporation Ltd (HDFC; rated ‘CRISIL AAA/FAAA/Stable/CRISIL A1+’) both on an ongoing basis and in the event of distress; the established market position of HDFC Life within the life insurance industry; well-diversified distribution network; healthy persistency and operating profitability; robust risk management in the non-participating segment; and adequate capital position. These strengths are partially offset by high operating cost as compared to peers and relative disadvantage as compared to leading peers in the bancassurance channel due to lack of exclusive partnership with group company, HDFC Bank Ltd. CRISIL Ratings also believes in a downward interest rate environment, there may be potential challenges in growth of savings products.

 

HDFC Life has been managed independently and is a self-sustaining entity; strong linkage with HDFC driven by ownership (currently holds 49.97%) and a shared brand name, adds to its strength. The HDFC group presence in the life insurance sector is through HDFC Life which is, therefore, one of the critical entities for the group. Additionally, HDFC and HDFC Life have common members on the Board (three board members of HDFC Life are from HDFC). HDFC has provided HDFC Life access to its network of branches and customers for selling insurance products. In the case of HDFC Bank, while it has embraced an open architecture life insurance distribution, HDFC Life continues to garner a significant share of the business. The foreign promoter, Standard Life (Mauritius Holdings) 2006 Ltd (a unit of Standard Life Aberdeen Plc), holds stake of 8.89% as on date.

 

HDFC Life has an established market position within the life insurance industry and is among the top 3 players in the private sector space. Market share in terms of new business premiums written in India stood at 7.3% during fiscal 2021. The company continued to maintain its established position among private players with market share of around 21.5% in new business premium in fiscal 2021. It also continues to benefit from its extensive industry expertise, backed by experience of nearly two decades and presence across all states and Union Territories in India.

 

Gross written premium (net of reinsurance) grew by 18.3% in fiscal 2021 to Rs 38,122 crore from Rs 32,224 crore in the previous fiscal. Considering the demand prospects for protection covers, in addition to the gradual upward revision in pricing for term products that have been underway, total premiums for the life insurance sector are expected to grow at a higher rate in fiscal 2022. In terms of Individual WRP, HDFC Life reported growth of 16.6% year-on-year in fiscal 2021 (industry growth of 7.5%) driven by increased awareness and requirement for life insurance products following Covid-19. 

 

For the industry, in the first month of fiscal 2022, new business premiums grew at a robust 45% year-on-year. Renewal premiums also exhibited healthy growth over the previous fiscal, indicating higher retention and persistency. The persistency and profitability metrics of the company remained healthy. The 13thmonth persistency stood at around 90% in fiscal 2021 against 88% in fiscal 2020. The return on equity (RoE) has been at an average of around 23% during the five fiscals through 2021. Additionally, the value of new business margin (post-overrun) has steadily increased over the years and stood at 26.1% for fiscal 2021, improving from 25.9% in fiscal 2020. However, with increasing penetration and claim obligations, the impact of actual losses borne by the insurers after the second wave of the pandemic on their underwriting performance and capital and solvency position shall be a key monitorable. The company settled total death claims of Rs 3,053 crore in fiscal 2021 compared to Rs 2,303 crore in the previous fiscal. In light of the second wave and its likely effect, the company created additional Covid reserves of Rs 165 crore in fiscal 2021 compared to Rs 41 crore in fiscal 2020. It has also strengthened mortality assumptions by reserving Rs 120 crore in fiscal 2021.

 

Capitalisation is adequate, as reflected in healthy solvency margin. As on March 31, 2021, the reported networth was Rs 8,638 crore against Rs 6,800 crore in the previous fiscal. The company has maintained a solvency margin of 184-201% during the past five fiscals (201% as on March 31, 2021), which is comfortably above the regulatory requirement. This has been through internal cash accrual, without the need of capital infusion from the shareholders since fiscal 2008. Solvency margin is likely to remain at a similar level over the medium term.

 

HDFC Life has high diversity in its sourcing channels within bancassurance, agency, direct and online channels. In bancassurance, HDFC Life has been the first to successfully embrace open architecture, while continuing to diversify its distribution network with 300+ partners comprising traditional partners such as non-banking financial companies (NBFCs), microfinance institutions (MFIs) and small finance banks (SFBs); along with more than 50+ new ecosystem partners. HDFC Life has always tried to maintain a well-diversified distribution mix, with bancassurance accounting for 61% while agency, direct (including online) and broker channels contribute 13%, 19% and 7%, respectively. The company has developed and nurtured each channel while ensuring business diversification. It has achieved long-term sustainable and profitable growth by balancing the product mix across various channels of distribution. However, CRISIL Ratings notes HDFC Life does not have an exclusive partnership with group company, HDFC Bank. This puts them in a relative disadvantage compared to leading private peers who have exclusive tie-ups with their parent banks.

 

Operating cost structure of HDFC Life has been relatively higher compared to some of the large peers. As proportion to net premiums, operating costs (excluding commission) have remained at 12.0-13.5% during the last five fiscals. However, CRISIL Ratings notes that the company has been working to ensure a balanced portfolio mix, strengthening its distribution mix and making efficient use of technology to ensure ease of purchase for the customers. Hence, the operating cost ratio is expected to be relatively higher than peers.

 

As per the Reserve Bank of India (RBI) directive dated May 16, 2020, which mandated HDFC to reduce its shareholding to 50% or below, HDFC has complied with the regulations and reduced its holding to 49.97% as on date. HDFC will remain the single largest stakeholder in HDFC Life and will also retain Board control. CRISIL Ratings also understands that there will not be any change in stance of support (both financial and Board oversight) provided by HDFC. In addition, HDFC will also continue to consolidate HDFC Life fully within its financial reporting due to management control. 

Analytical Approach

For arriving at its rating, CRISIL Ratings has first assessed the corporate credit rating of HDFC Life. CRISIL Ratings has factored in its business, financial and management risk profiles and strategic importance to, and expectation of strong support from, HDFC. Additionally, the extent of cushion that HDFC Life intends to maintain in the solvency ratio over and above the regulatory stipulation on a steady state basis is taken into consideration for arriving at the rating on the subordinated debt instrument.

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 HDFC Life board, commonality of chairman and its oversight of HDFC Life’s 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 Ratings notes that as per the Reserve Bank of India (RBI) directive dated May 16, 2020 that mandates HDFC to reduce its shareholding to 50% or below , HDFC has complied with the regulations and has reduced its holding to 49.97% as on date. In the above context, 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 is expected to maintain its market position as one of the top players in the life insurance industry. It has consistently improved its market share in each fiscal. Market share in terms of new business premiums among private players stood at 21.5% during fiscal 2021 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 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 fiscal 2021, with ULIPs (unit-linked insurance policies) and conventional products accounting for 24% and 76%, respectively, of the individual annual premium equivalent (APE). Though the company has witnessed higher demand for the protection business, due to the management’s cautious approach, growth shall continue to be in a calibrated manner. The contribution of the protection business to individual new business APE declined to 6.8% from 7.6% in the previous fiscal. In terms of total new business premium received, the protection segment (only term) contributed 19.6% in fiscal 2021 compared to 27.6% in the previous fiscal.

 

* 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 250+ traditional partners and 50+ partners within the non-traditional ecosystem. HDFC Life has always tried to maintain a well-diversified distribution mix, with bancassurance accounting for 61%, 13% contributed by agency, 19% by direct including online and 7% by broker channels. 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 persistency based on total individual premium improved to 90% in fiscal 2021 from 88% in fiscal 2020.The persistency at 61st month basis stood at 53% in fiscal 2021 compared to 54% during fiscal 2020. 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 company’s ability to retain its policyholders for a longer duration.

 

Healthy accrual has supported capital position. The RoE has consistently been above 18% during the last five fiscals. The value of new business (VNB) margin has also remained healthy at 26.1% during fiscal 2021, improving steadily from 19.9% during fiscal 2016. In absolute terms, the VNB margin has improved to around Rs 2,185 crore during fiscal 2021 from Rs 1,537 crore in fiscal 2019. The company has also shown healthy growth in its embedded value to Rs 26,617 crore as on March 31, 2021, from Rs 20,650 crore as on March 31, 2020.

 

* Adequate capital position

HDFC Life maintains adequate capital position which is reflected in healthy solvency margin of over 180% maintained for the last 10 years. The absolute networth was Rs 8,638crore as on March 31, 2021 (Rs 6,800crore as on March 31, 2020).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. Although there has been no incremental capital infusion during the last nine years, HDFC Life has maintained solvency margin of above 180%.

 

HDFC Life reported embedded value of Rs 26,617 crore as on March 31, 2021. The ratio of embedded value to networth stood at close to 3 times as on March 31, 2021, which was in line with its peers. The embedded value can be seen as a representation of actual capital position since it includes the future profits that the company is expected to receive from the business it has underwritten till valuation date. The steady increase in internal accrual enables the company to maintain capital position while achieving healthy business growth.

 

* 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. Given the company has grown substantially within the non-par segment during the last two fiscals, 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, firstly, 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.

 

Weakness:

* High operating cost as compared with peers

The operating costs (excluding commission), though improving, have been modestly higher compared to some of its large competing peers. For new business premium, operating expense ratio of the company has remained within 23-26%, whereas for net premiums the ratio has been at 12-13% in the last three fiscals. However, CRISIL Ratings notes the company has been working to ensure balanced portfolio mix, strengthening its distribution mix and make efficient use of technology to ensure ease of purchase for the customers. Hence, the operating cost ratio is expected to be relatively higher than peers.

 

* Relative disadvantage as compared to 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 them at a relative disadvantage as compared to 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 80-85% of the bancassurance channel, the bank embraced open architecture model over the last 2-3 years. Consequently, as a percentage of overall life insurance business sold by HDFC Bank, HDFC Life’s share has reduced.

 

Nevertheless, HDFC Life has significantly ramped up its corporate distribution tie-ups including new ecosystem partners with over 300+ partners as on March 31, 2021.The reduction has helped the company to de-risk its sources of generating business. This has helped the company to generate sufficient business volumes from bancassurance channel. However, at this juncture, the share of individual new business sourced from non-HDFC Bank partners is still limited. HDFC Life’s ability to ramp up business from other partners will be a key monitorable.

 

* Potential challenges in growth of savings business

During fiscals 2019 and 2020, the company had launched two customer-centric products – Sanchay Plus and Sanchay Par Advantage that continues to remain the top selling products of the company. HDFC Life’s majority of the business, within traditional segment, are contributed by these two key products. These products have helped HDFC Life to increase its proportion significantly within the traditional business (particularly with Sanchay Plus in the non-par segment) during the last three fiscals. The non-par products come with guaranteed returns over a longer policy tenure. CRISIL Ratings believes demand for these products will compete with traditional fixed deposits and debt mutual funds; although, on post-tax basis, these products remain attractive. However, in a downward interest rate environment and with uncertainty on account of Covid-19, the overall future demand and consequently growth in the short term may remain a challenge.

Liquidity: Superior

As on March 31, 2021, total non-linked policyholder investments stood at Rs 90,538 crore. The company had debt investment (non-ULIP) book value of Rs 87,417 crore; of which 98.5% was in sovereign instruments and 'AAA' rated instruments. The major outflow for the company is benefits to claimants (net of reinsurance), which was at Rs 21,781 crore for fiscal 2021.Since life insurance inherently is a highly granular and stable business, liquidity is likely to remain comfortable on an ongoing basis.

Outlook Stable

CRISIL Ratings believes that HDFC Life will continue to derive strong financial support and oversight from HDFC over the medium term, both on an ongoing basis and in the event of a financial distress, and that it will maintain comfortable level of cushion in its solvency ratio over and above regulatory minimum on a steady-state basis.

Rating Sensitivity factors

Downward factors

* Revision in rating or outlook of the parent HDFC, resulting in similar action on HDFC Life

* Significant reduction in cushion in the solvency ratio taking it below 170%

About the Company

Established in 2000, HDFC Life is a leading long-term life insurance solutions provider in India, offering a range of individual and group insurance solutions that meet various customer needs such as protection, pension, savings, investment, annuity and health. As on March 31, 2021, the company had 36 individual and 12 group products in its portfolio, along with 7 optional rider benefits catering to a diverse range of customer needs. HDFC Life continues to benefit from its presence across the country with 390 branches and additional distribution touch-points through several new tie-ups and partnerships. The company has more than 300 partnerships comprising traditional partners such as NBFCs, MFIs and SFBs, and includes more than 50 new-ecosystem partners. The company also has a strong base of financial consultants.

Key Financial Indicators

As on / for the period ended March 31		2021	2020
Gross direct premium/Gross written premium	Rs crore	38,583	32,707
Profit after tax	Rs crore	1,360	1,295
Persistency ratio (13th month)	%	90%	88%
Persistency ratio (61st month)	%	53%	54%
Solvency ratio	%	201%	184%

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Cr)	Complexity Level	Rating Assigned with Outlook
INE795G08019	Subordinated Non-Convertible Debentures #	July 29, 2020	6.67% per annum	July 29, 2030 (subject to call option as per IM)	600	Complex	CRISIL AAA/Stable

# Unsecured, subordinated, fully paid-up,listed, redeemable non-convertible debentures. The proposed subordinated non-convertible debenture issue of Rs600 crore is subject to the receipt of approval from the Insurance Regulatory and Development Authority of India (“IRDAI”) pursuant to the provisions of IRDAI (Other Forms of Capital) Regulations, 2015. HDFC Life has applied to IRDAI for the same and is awaiting approval