HDFC Standard Life Insurance Co Ltd

Transcription

1 IPO Review Rating matrix Rating : Subscribe (Apply) Issue Details* Issue Opens 7-Nov-17 Issue Closes 9-Nov-17 Issue Size ( Crore) Price Band ( ) No of Shares on Offer (crore) 29.9 QIB (%) 5 Non-Institutional (%) 15 Retail (%) 35 Minimum lot size (No. of shares) 5 *Reservation for HDFC Ltd shareholders for up to 1% of offered shares Objects of issue The objects of the offer are to achieve the benefits of listing the equity shares on the stock exchanges and to carry out the sale of offered shares by the promoter selling shareholders. Listing will also enhance brand name and provide liquidity to the existing shareholders Shareholding Pattern Pre-Issue Post-Issue Promoter & promoter group 96.% 81.% Public 4.% 19.% Financial Summary Crore FY14 FY15 FY16 FY17 Premiums earned - Net Total income account PAT Valuation Summary (at 29; upper price band) FY17 (x) FY14 FY15 FY16 Pre Post P/E P/BV P/EV NA Research Analyst Kajal Gandhi kajal.gandhi@icicisecurities.com Vasant Lohiya vasant.lohiya@icicisecurities.com Vishal Narnolia vishal.narnolia@icicisecurities.com November 3, 217 HDFC Life Insurance Company (HDFC Life) was established in 2 as a joint venture between HDFC and Standard Life Aberdeen. In FY15-17, growth in new business premium remained strong at 29% CAGR to crore and grew to 951 crore by September 217. It has a comprehensive product portfolio of 32 individual and 1 group products, including a range of protection and savings products to address the insurance needs of diverse customer segments. In terms of distribution strength, it has 66,372 individual agents (which comprise 6.8% of all private agents in the Indian life insurance industry) and has 125 banking tie-ups including HDFC Bank giving access to the huge branch network. HDFC Life has a healthy balance sheet with total net worth of 44.6 billion and solvency ratio of 2.5% as at September 3, 217, above the minimum 15%. It reported PAT of crore and delivered return on equity of 25.6% in FY17. As on September 3, 217, it had a total AUM of billion and Indian embedded value of 14.1 billion. The company has a track record of consistently delivering shareholder returns across business cycles. Key business aspects Highest VNB margins in industry, registering strong profitability HDFC Life improved its VNB margins from 18.5% in FY15 to 22% in FY17 by improving cost efficiencies, increasing its persistency ratios and selling a balanced product mix. Hence, PAT increased at a CAGR of 6.6% from 786 crore in FY15 to 887 crore in FY17. Insurance profit also increased at a CAGR of 9.7% between FY15 and FY17 depicting core profitability and ensuring EV growth. Among top three private life insurers with strong product mix HDFC Life is among top three private life insurers, in terms of new business premium (NBP). The company increased its market share of NBP among private life insurers in India, from 15.87% in FY15 to 17.2% in FY17. Their share of protection in the individual and group new business premium increased from 12.% in FY15 to 21.8% for FY17. Strong distribution with bancassurance; focus rising on digital & agency Bancassurance remained the most significant distribution channel, with ~54% share. It has access to 112 branches across banking tie-up with HDFC Bank the largest bancassurance partner. Agency channel at contributes 7% to total premium. High group business adds to direct sales. All their distribution channels are independently profitable. Concerns HDFC Standard Life Insurance Co Ltd Price band Termination of or any adverse change in bancassurance agreements Significant part of total NBP generated by unit-linked & par products Major portion of business is generated from relatively few regions Termination of name usage agreement or the trademark agreement Priced at 4.2x P/EV (post issue Q2FY18 IEV) on higher band of 29 At the IPO price band of , the stock is available at P/IEV multiple of 4.2x H1FY18 EV of 141 crore (post issue) at the upper end of the price band. Factoring the parentage brand of HDFC, strong corporate governance and better than industry VNB margins along with high dividend payouts, we believe valuations are reasonable. We recommend that investors Apply to the issue. Post issue market capitalisation is at ~ crore at the upper price band.

2 Company Background HDFC Standard Life Insurance Company (HDFC Life) was established in 2 as a joint venture between HDFC (one of India s leading housing finance institutions) and Standard Life Aberdeen plc (one of the world s largest investment companies), initially through its wholly owned subsidiary The Standard Life Assurance Company and now through its wholly owned subsidiary, Standard Life Mauritius. HDFC and Standard Life Mauritius hold 61.41% and 34.86%, respectively. The company s overall total premium grew at a CAGR of 14.5% to billion, driven by a CAGR of 12.6%, 43.6% and 7.3% in individual new business premiums, group new business premiums and renewal premiums, respectively. They have 57.9 million lives insured across their individual and group customers as on June 3, 217. In addition, they improved VNB margins from 18.5% in FY15 to 22% in FY17 improving cost efficiencies, increasing its persistency ratios and selling a balanced product mix. HDFC was the most profitable life insurer, based on value of new business (VNB) margin, among top five private life insurers in India (measured on total new business premium) in FY16 and FY17, according to Crisil. Besides consistently being among the top three private life insurers in terms of profitability based on VNB margin, they have also consistently been among the top three private life insurers in terms of market share based on total new business premium between FY15 and FY17, according to Crisil. They have a healthy balance sheet with total net worth of 41.5 billion and a solvency ratio of 197.5% as at June 3, 217, above the minimum 15.% solvency ratio required under IRDAI regulations. They generated PAT of 887 crore and delivered a return on equity of 25.6%, return on invested capital of 4.7% and operating return on embedded value of 21.7% during FY17. As on June 3, 217, they reported total AUM of billion and Indian embedded value of billion. The company has a track record of consistently delivering shareholder returns across business cycles. Bancassurance remained their most significant distribution channel, generating 5.4%, 53.5%, 5.7% and 59.1% of their total new business premiums for FY15, FY16, FY17 and the three months ended June 3, 217, respectively. Individual agent network generated 1.%, 7.6%, 7.5% and 6.4% of total new business premium for FY15, FY16, FY17 and the three months ended June 3, 217, respectively. They have an independent and experienced leadership team with capabilities and know-how across the banking, financial services and insurance sectors. None of their key management personnel has been seconded by or transferred from promoters, which largely contributes to the stability of key management personnel. As on September 3, 217, key management personnel had an average of over 1 years of experience in the financial services sector. Page 2

3 Product profile HDFC Life Insurance offers a vast product basket to customers, which includes unit linked as well as non linked insurance products. In terms of customer segments, it caters to individual as well as group customers. Individual products Individual or retail life insurance products can broadly be classified into two categories - non-linked life insurance products and linked life insurance products. Non-linked life insurance products can be further classified into participating, non-participating protection and other non participating products. HDFC Life had a comprehensive product portfolio offering 29 individual life insurance products. These products include child plans, retirement/pension plans, protection plans and savings plans, with flexible and variable features addressing specific life insurance needs of the customer. In addition, various riders providing additional benefits for disability, illnesses and death due to accident are also provided bundled with the main product. Linked products Unit linked insurance plans offer a combination of investment and protection where the customer can choose the level of life coverage, subject to minimum levels mandated by regulations. In this product, customers have the flexibility to decide the asset classes in which their contributions are invested, based on their risk appetite, and to transfer money among different funds in a tax-efficient manner, depending on the market outlook and changing risk appetite. Non-linked products Participating products (Par): Participating insurance products are those for which the surplus is shared with policyholders in the form of bonuses and, hence, are also referred as with profit products. These policies usually have a minimum guaranteed amount that is payable on death or maturity in addition to bonuses declared from time to time. The bonuses, once declared, accrue to the policy and are guaranteed. Par products do not have an explicit cap on charges as Ulips have exit loads on policy discontinuance and do not offer customers a choice of asset allocation. As of June 3, 217, SBI Life had a bouquet of 1 products in this category. Pure protection products Pure protection products are those that offer benefits that are guaranteed in absolute terms on occurrence of a particular event at the beginning of the policy. These products do not entail any investment risk for customers. These are protection oriented products, and generally expire without value if the designated event does not occur. The risk covered in most cases covers death of the insured but may also include permanent disability or diagnosis of critical illness. As of June 3, 217, HDFC Life has seven products in this category. Group products Generally, group product customers are employers across a range of industries, including banks and financial services companies as well as professional, consulting and other firms and informal groups. HDFC Life Insurance s group life products are broadly classified into four categories: Group protection products: Group protection products provide protection to banks, financial institutions or other groups or associations in relation to repayment of outstanding loan amount in the event of death or disability of the insured members of the group. Page 3

4 Group protection products: Group protection products provide life insurance coverage to a group of individuals, where, upon death of a member, the sum assured is paid to the member s nominee. These products provide benefits to both formal (employer-employee) and informal (nonemployer-employee) groups. Group FM products: These are fund based group insurance (unit-linked and variable insurance products), which cater to the needs of employers looking at financial solutions to fund their employees benefit schemes including gratuity, superannuation and leave encashment. Other group products: These products consist of group immediate annuity plans primarily for corporate clients (employer-employee groups) and other informal groups, who wish to purchase an annuity to provide for their annuity liability (existing or emerging or both) totally or partially. Buyout of pension liabilities is a method by which an insured transfers liability of a defined pension scheme completely to the insurance company. The defined benefits of group members are protected and the insured also gets rid of the risk of the pension scheme running into deficits due to adverse changes in demographic/macroeconomic scenarios, going ahead. Exhibit 1: Geographical distribution of new business premium relating to individual products Location ( Crore) FY16 FY17 Q2FY18 Maharashtra 959 1, Delhi Tamil Nadu Gujarat Karnataka Uttar Pradesh West Bengal Kerala Haryana Punjab Telangana Madhya Pradesh Rajasthan Orissa Andhra Pradesh Chandigarh Bihar Assam Jharkhand Chattisgarh Goa Jammu & Kashmir Uttrakhand Other States and Union Territories Total 3,657 4,21 2,59 Page 4

5 (%) (%) billion crore billion Financial Performance HDFC Life s total new business premium grew at 29% CAGR while annualised premium equivalent (APE) grew at a CAGR of 14.5% in FY Their 13th month individual persistency ratio was 8.9% and 82.2% for the period ended March 31, 217 and September 3, 217, respectively. HDFC Life has a healthy balance sheet with total net worth of 44.6 billion and solvency ratio of 2.5% as on September 3, 217, above the minimum 15.%. It reported PAT of crore and delivered a return on equity of 25.6% in FY17. As on September, 217, it had a total AUM of billion and embedded value of 14.1 billion. Exhibit 2: Trend in AUM and EV FY15 FY16 FY17 Q2FY18 Exhibit 3: Healthy growth in premium Exhibit 4: PAT growth trend % 23.3% % 4.6% FY14 FY15 FY16 FY17 Q2FY18 Premiums earned - Net YoY growth (RHS) 3% 2% 1% % FY15 FY16 FY17 Q2FY18 PAT YoY growth (RHS) 1% 8% 6% 4% 2% % Exhibit 5: Healthy return on net worth (RoE) Exhibit 6: Solvency ratio remains prudent (%) FY14 FY15 FY16 FY17 Q2FY18 1 FY14 FY15 FY16 FY17 Q2FY18 Page 5

6 (USD) Life insurance industry Quick snapshot The Indian life insurance industry size was at 4.2 trillion (total premium basis) in FY17, making it the tenth largest life insurance market in the world and fifth largest in Asia (Source: Swiss Re, sigma No 3/217). In FY1-17, Indian life insurance assets under management grew at 19% CAGR to 3 trillion while total premium grew at a healthy pace of ~17% CAGR. Despite this, India continues to remain an under-penetrated market with life insurance penetration (insurance penetration refers to premiums as a percentage of GDP) at 2.7% in FY16 vs. 3.7% in Thailand, 7.4% in South Korea and 5.5% in Singapore. Similarly, insurance density (per capita premium or premium per person) also remains very low compared to other developed and emerging market economies at US$47 in 216. Protection gap (actual insured for every US$1 of insurance protection requirement) for India remains higher compared to other Asian peers at ~US$8.5 trillion as of FY14 (source: Crisil report) Exhibit 7: Insurance penetration (as percentage of GDP) (%) S.Africa S.Korea Japan Thailand US India China Indonesia Exhibit 8: Life insurance density (216) Japan S.Korea US S.Africa Thailand Brazil China Indonesia India Turkey With economic growth gradually picking up and structural drivers including rising life expectancy, healthcare spending, pension needs in place, this is expected to drive strong growth in the life insurance industry in the next five years. In addition, prevailing low insurance density and penetration will support growth in the life insurance sector on account of the low base. Page 6

7 (%) (%) According to Crisil Research, the new business premium for Indian life insurance companies is expected to grow at 11-13% CAGR in FY17-22, compared to 9% CAGR in FY Total premium in the Indian life insurance market is expected to increase from 4181 billion in FY17 to ~ billion by FY22. Improving economic growth, low inflation and increase in financial savings, along with rising awareness of insurance are expected be key catalysts for this growth. The government s focus on financial inclusion and initiatives including launch of Pradhan Mantri Jeevan Jyoti Bima Yojana is expected to increase awareness and open avenues for investments in insurance and other savings products. Exhibit 9: Market share - FY17 NBP HDFC Standard Life ICICIPru SBI Life Max Life Bajaj Allianz Market share - private (%) Structural strength to drive life insurance industry Demographics strength: Currently, India has one of the youngest population in the world with a median age of 28 years. It is estimated that 9% of India s population will remain below 6 years of age by 22. Increase in proportion of individuals in the age bracket of 25-49, which is the target population for the industry, is expected to boost industry growth. Rapid urbanisation coupled with high share of working population with rising affluence is expected to provide impetus to growth in the Indian life insurance sector. Exhibit 1: Indian working population E Page 7

8 (%) (%) Increase in share of financial savings and life insurance within: Rising GDP growth (barring last quarter) compared to previous fiscals and control over inflation is a key structural positive, which gives an impetus to overall savings in India. Increase in financial savings, coupled with expected increase in share of insurance as a percentage of financial savings, due to a significant improvement in product proposition and delivery mechanism, is expected to drive growth for the life insurance sector. Exhibit 11: Financial savings as percentage of GDP FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Household Savings as a % of GDP Financial Savings as % of GDP Among financial savings, the share of life insurance had reached its peak at 26% in FY1. However, a downturn in the capital market, increasing inflation and regulatory changes in the sector led to a sharp deceleration in the share of life insurance to 15.3% of financial savings in FY14. Post FY14, there was a considerable revival, due to improving fundamentals and pick-up in the sale of linked products. Further increase in proportion of life insurance in financial savings provides an opportunity for growth in the Indian life insurance industry. Exhibit 12: Financial savings mix FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Currency Bank deposit Life Insurance premium Provident and Pension Fund Others Rise in healthcare spending: As per IRDAI data, only 35.9 crore people (27% of total population) have health insurance coverage as of FY16. Out of this, ~2% coverage is provided by commercial insurance providers (life and non-life included) while the remaining are covered under central or state government-sponsored schemes such as Central Government Health Scheme and Employee State Insurance Scheme. Page 8

9 (USD) Exhibit 13: Share of out-of-pocket mix (as % of total health expenditure) for other countries India Singapore Indonesia S.Korea China Japan Thailand % of Total Health Expenditure India s total expenditure on health was 4.7% of GDP in 214. As per the World Health Organization (WHO), per capita health spending increased from US$2 in 2 to US$75 in 214. Despite this, India has one of the highest shares of out-of-pocket expenses at ~62.4% in FY14 in its overall healthcare spending mix among Asian countries. Therefore, factors including low penetration, rising cost of healthcare, constraints for government spending, increasing demand for quality healthcare with rising income underscore a massive opportunity in health insurance for commercial insurance providers. Historical evolution of Indian life insurance industry The Indian life insurance sector was opened for private companies in 2 with the commencement of operations by four private companies in the first year. Further, eight companies got added to the list till 29, with total number of companies aggregating to 23. Among peers, LIC is the only public sector life insurer. Since inception, the private sector has grown significantly and currently accounts for ~53.9% of the individual rated premium of life insurance industry in FY17. The Indian life insurance industry has undergone various growth phases. The current structure of the industry is depicted in Exhibit 14. Page 9

10 Exhibit 14: Structure of Indian life insurance industry Private insurer gaining market share: In FY7-11, total premium growth remained robust at 17% CAGR, owing to an aggressive foray by private players. Since FY7, private players gained significant market share from 18% in FY7 to 3% in FY11, driven by Ulips. A favourable commission structure (high upfront commission to intermediaries) and capital market performance, supported growth in Ulips. On the distribution side, the share of banking corporate agents in the individual new business premium increased from 6% to 13% in FY7-11. Exhibit 15: Trend in IRP for private players and industry Post the financial crisis in 28 and regulatory changes in FY1, private insurer market share on an individual rates premium (IRP) basis declined to ~37.9% in FY14 from ~52% in FY1. However, driven by an improved product design, primarily for linked products that offer a superior customer value propositions and focus on bancassurance for marketing their products, private insurers regained significant market share to 53.9% in FY17. Page 1

11 (%) Rationalisation in commission, operating expense: Post IRDAI regulations in FY1, a significant decline was seen in commission on linked products. Consequently, commission-expense ratio on total premium basis fell considerably from 7.9% in FY7 to 5.3% in FY17. Among peers, LIC has higher commission expense ratio at 5.5% (FY17) compared to private insurers at 4.7%, owing to sourcing of significant proportion of individual business through individual agents (96% in FY17). Exhibit 16: Commission expense ratio (as percentage of total premium) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Private Insurer Industry LIC In FY7-1, private players had a higher operating expense ratio due to high infrastructure costs incurred on increasing their geographic reach. However, post regulatory changes in FY1, private players went into a consolidation phase and began focusing on cost efficiencies. Therefore, an improvement was witnessed in operating expense ratio from 21% in FY1 to 15.7% in FY17. On a relative basis, LIC, being in a mature phase, had lower operating expense ratio since FY7. However, since an increase in salary in October 21 (effective from August 27), the expense ratio has been higher compared to the previous period. Despite a rise in operating expense ratio, the same remains lower for LIC compared to private peers. Channel mix shift towards bancassurance, direct sales: A significant shift in the channel mix of the Indian life insurance sector has been witnessed from earlier agency-only model to a diversified distribution mix. Further, a cap on Ulip charges, introduced in 21, has led to rationalisation of owned agency network and provided a shift towards third-party channels. Consequently, the share of bancassurance has increased from 6% of individual business, on a new business premium basis, in FY7 to 24% in FY17, while the share of new business premiums from individual agents declined from 9.5% in FY7 to 68.9% in FY17. A higher share of agency channel in the retail new business premium can largely be attributed to LIC. In FY17, bancassurance contributed to ~53.9% of new business premiums for private sector companies, led by a well-developed banking sector in India with a nationwide presence of branches. Direct distribution channel has also gained importance over the years for private sector companies. In FY17, direct sales contributed 5% of new individual business premiums for private sector companies. Page 11

12 (%) Exhibit 17: Individual new business premium (for industry) by various distribution channels FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual Agents Corporate Agents Banks Corporate Agents Others Brokers Direct Selling Page 12

13 (%) (%) Key strengths and strategies: Strong parentage, trusted brand enhancing consumer base Both HDFC and Standard Life Aberdeen are well known for their respective business areas. HDFC is listed on the NSE and BSE. Over the years, the HDFC group has emerged as a recognised financial services conglomerate and was ranked as one of the best Indian brands in 214 (according to Interbrand) with a presence in banking, life and general insurance, asset management and venture capital. Standard Life Aberdeen is headquartered in Scotland and is listed on the London Stock Exchange. It was formed by the merger of Standard Life and Aberdeen Asset Management PLC on August 14, 217. They have strong brand recall among Indian consumers and were selected as a Superbrand in India for three consecutive years from 214 to 216 Highest VNB margins in industry, registering strong profitability HDFC Life improved VNB margins from 18.5% in FY15 to 22.% in FY17 by improving cost efficiencies, increasing their persistency ratios and selling a balanced product mix. VNB increased by 24.8% from 739 crore in FY16 to 923 crore in FY17. due to an increase in the proportion of non-linked protection and non-linked savings business which are more profitable than other products. Their share of protection in the individual and group new business premium increased from 12.% in FY15 to 21.8% for FY17. VNB margin was 22.4% for the six months ended September 3, 217. Group business has seen a higher contribution in recent past. Between FY15 and FY17, the consistent increase in VNB reflects their focus on long-term profitable growth. Their share of protection in the individual and group new business premium increased from 12.% in FY15 to 21.8% for FY17. Accordingly, PAT increased at 6.6% CAGR from 7,86 crore in FY15 to 887 crore in FY17. Insurance profit increased at a CAGR of 9.7% between FY15 and FY17. Exhibit 18: VNB margin The insurance profit increased 9.% from 624 crore in FY15 to 68 crore in FY16 and increased 1.4% from 68 crore in FY16 to 751 crore in FY17 due to increased profits from existing business, on the base of a growing portfolio. Insurance profit as a percentage of profit after tax increased from 79.5% in FY15 to 83.3% in FY16 and 84.7% in FY17. It was 8.9% for the six months ended September 3, 217. They are sufficiently capitalised and have not raised any capital during the last six years (except through issuance of Esops under the relevant ESOS scheme(s)) while paying dividends (including dividend distribution tax) totalling 7.6 billion between first dividend in FY14 to FY17. Profitability and high VNB margins have allowed business to be self-sustaining. Exhibit 19: VNB margin comparison FY15 FY16 FY17 Q2FY HDFC Standard Life SBI Life ICICIPru Max Life Bajaj Allianz -4.3 VNB Margin (%) Page 13

14 crore ( billion) Among top three private life insurers with strong product mix HDFC Life is among top three private life insurer, in terms of new business premium (NBP). Its total new business premium for FY15, FY16, FY17 and the six months ended September 3, 217, was 54,921. million, 64,872.2 million, 86,963.6 million and 951 crore million. Between FY15 and FY17, their annualised premium equivalent grew by a CAGR of 14.5%. Overall total premium grew by a CAGR of 14.5% to billion, during the same period. Exhibit 2: NBP and growth The company increased its market share of NBP among private life insurers in India, from 15.87% in FY15 to 17.2% in FY17. Traditional products form 53% of total premium for HDFC Life and linked premium is 47%. Share of linked has gradually risen in the last three years and is likely to witness further increase as per the management. Over the next few years, the performance of the stock markets is expected to improve on the back of healthy economic growth and an improvement in industrial performance, leading to ULIP surge. Group business, which is largely single premium continues to be a good proportion of total business for HDFC. Group includes three segments, mainly credit protection, fund management and corporate employers. Their share of protection in the individual and group new business premium increased from 12.% in FY15 to 21.8% for FY17. Accordingly, PAT increased at 6.3% CAGR from 786 crore in FY15 to 887 crore in FY17. Insurance profit increased at 9.7% CAGR between FY15 and FY17. Exhibit 21: NBP comparison (FY17) FY15 FY16 FY17 Q2FY18 NBP HDFC Standard Life SBI Life ICICIPru Max Life Bajaj Allianz Exhibit 22: Product break up of various industry players es SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz Linked Non-linked Page 14

15 (%) eses Exhibit 23: Product mix of HDFC Life in terms annual premium equivalent New business APE (individual) FY15 Mix FY16 Mix FY17 Mix Q2FY18 Mix Participating (par) products Non-par protection Other non-par. products ULIP Total Group business in terms of APE FY15 Mix FY16 Mix FY17 Mix Q2FY18 Mix Group non-par protection Other group products Total The company has broad, diversified product portfolio covering five principal segments across the individual and group categories, namely participating, non-participating protection term, non-participating protection health, other non-participating and unit-linked insurance products. As on September 3, 217, their product portfolio comprised 32 individual and 1 group products, as well as eight optional rider benefits. The wide product suite caters to specific needs of customers during each stage of their lives. It also provides us with the flexibility to operate successfully across business cycles, work with diverse sets of distribution partners and serve a range of consumers from mass market to high net worth individuals. It also provides them with the flexibility to adapt to changes in the regulatory landscape and mitigate concentration risk in respect of particular categories or types of products. We have a proven 82 track record in identifying and tapping niche customer segments (such as HDFC Life Cancer Care product) through their innovative product solutions that have continued to draw strong customer demand Sustained high persistency ratios led by focus on traditional, protection Their continued efforts to improve the quality of new business, focus on needs-based selling, strong commitment to customer service and efforts to streamline the renewal premium payment process, has resulted in an overall improvement in persistency ratio. Their 13th month persistency increased from 73.3% for the period ended March 31, 215 to 8.9% for the period ended March 31, 217 and 61st month persistency increased from 39.8% for the period ended March 31, 215 to 56.8% for the period ended March 31, 217. Protection business forms 21% of total premium now. Exhibit 24: Comparison of 13th and 61st month persistency (FY17) SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz 13th month 61th month Page 15

16 (%) Strong distribution with bancassurance; focus rising on digital & agency HDFC Life offers its individual and group customers access to their products through diversified distribution network which comprises four distribution channels, namely bancassurance, individual agents, direct, and brokers and others. All their distribution channels have been independently profitable. Bancassurance remained most significant distribution channel, generating 5.4%, 53.5%, 5.7% and 54.1% of total new business premiums for FY15, FY16, FY17 and the six months ended September 3, 217, respectively. HDFC Bank is the largest Bancassurance partner. Also number of major bancassurance partners grew from 31 as at March 31, 215 to 125 as at September 3, 217. The company s top 15 bancassurance partners (in terms of total new business premium sourced for the six months ended September 3, 217) had over 11,2 branches across India as at September 3, 217. Their individual agent network with agents generated 1.%, 7.6%, 7.5% and 6.2% of total new business premium for FY15, FY16, FY17 and the six months ended September 3, 217, respectively. Also, the direct sales channel generated 37.%, 36.8%, 39.8% and 37.5% of total new business premium for FY15, FY16, FY17 and the six months ended September 3, 217, respectively The company identified the need to focus on the increasing protection requirements of Indian consumers. They launched their first online term product, HDFC Life Click 2 Protect, in Fy12. Their range of Click2Series products sold through online channel collectively generated annualised premium equivalent of 59 crore, 9.5 crore, 1.9 crore and 86.7 crore, in FY15, FY16, FY17 and the six months ended September 3, 217, respectively The company is also focusing on improving agency channel with increase in number of agents as well as improving their productivity as a future strategy Exhibit 25: HDFC Life (FY17) es Bancassurance Individual Agents Direct Brokers & Others FY15 FY16 FY17 Q2FY18 Page 16

17 ( lakhs) %) (%) (%) Exhibit 26: Channel-wise individual new business premium for industry Exhibit 27: Individual new business channel mix (FY17) FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Individual Agents Corporate Agents Banks Corporate Agents Others Brokers Direct Selling SBI Life HDFC Std Life ICICIPru Max Life Bajaj Allianz Individual Agents Corporate Agent - Banks Others Exhibit 28: Comparison of agent productivity (FY17) Exhibit 29: Geographic distribution of individual NBP (FY17) SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz Agent productivity FY15 FY16 FY17 Commission ratio Operating Expense ratio Continue to build economies of scale to ensure profitability & cost leadership HDFC Life has increased efficiency and reduced sales costs though implementing newer strategies, including productivity and cost savings initiatives. They aim to continue adding economic value to shareholders by increasing total premium and VNB, while reducing total operating cost ratio across business cycles. They intend to undertake appropriate investments to strengthen sources of competitive advantage and make their business resilient. These can reduce unit costs per policyholder, which they expect will improve total operating cost ratio and allow them to continue to build scale across business. They will continue exploring organic and inorganic opportunities to improve their operating margins through scale and synergies, expand distribution reach and improve financial performance. Total operating cost ratio (excluding commission) increased from 1.2% in FY15 to 12.7% in FY17, primarily due to: (a) investments in various initiatives (such as brand visibility, technology and digital initiatives) to develop new distribution partnerships, strengthen their existing distribution relationships and increase the productivity levels; (b) an increase in business promotion expenses which contributed to growth in business; and (c) an increase in the number of frontline sales staff. Total operating cost ratio was 14.2% for the six months ended September 3, 217, appears higher as 2nd half does higher business than 1st half. Page 17

18 (%) (%) (%) (%) Exhibit 3: Expense ratio HDFC Life Exhibit 31: Comparison of expense ratios FY FY15 FY16 FY17 Q2FY HDFC Standard Life SBI Life ICICIPru Max Life Bajaj Allianz 18 Commission ratio Operating Expense ratio Commission ratio Operating Expense ratio Focussed on value creation and execute planned strategies for future HDFC Life s overall business strategy is to deliver profitable growth to shareholders consistently across business cycles and to build a high quality, customer-centric franchise that provides superior value to policyholders. Increasing distribution reach and strengthening position as a leader in certain product niches is the key to capturing customer segments and improving future profitability. Given their track record of strong financial performance and investments made over the years, they are well-positioned to be a multi-channel distribution specialist and a preferred partner for distributors. They plan to capitalise on the increasing numbers of consumers who have a preference for purchasing insurance through non-traditional channels, such as their website, mobile applications and other e-commerce channels. They aim to drive innovation in product development and improve their distribution value proposition, enabling further increase of market share across product categories, as well as improve their profitability. The company plans to leverage technology and automation and build economies of scale to further drive cost efficiencies. Exhibit 32: Solvency ratio (FY17) They plan to leverage the large network of potential customers from various distribution partners to distribute and cross-sell products. In addition, their large and varied base of individual and group customers provides significant growth opportunities from increased cross-selling and up-selling. They intend to leverage their access to more than 59. million lives insured under various group products (as at September 3, 217) to cross-sell individual products and riders that provide enhanced coverage for individuals, over and above the coverage provided by group insurance policies. Exhibit 33: Three year average RoE SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz Page 18

19 Key risks and concerns Termination of or any adverse change in bancassurance agreements Bancassurance remains the most significant distribution channel of HDFC Life. This distribution channel contributed 69.6%, 71.5%, 68.2% & 66.6% of company s APE for FY15, FY16, FY17 and as on Q2FY18, respectively. Prior to April 1, 216, a bank was only permitted to act as a corporate agent to solicit and service insurance business for one life insurance company, and HDFC Life had an exclusive bancassurance arrangement with HDFC Bank. Historically HDFC Bank has contributed the highest to HDFC Life s APE at 64.8%, 65.6%, 59.% and 54.3% of total APE for FY15, FY16, FY17 and as on Q2FY18. The bancassurance distribution channel benefits from inherent cost efficiencies resulting in lower cost of sales and greater profitability. Thus, termination of or any adverse regulatory changes could restrict company s ability to further grow the business. Significant part of total NBP generated by unit-linked & par products. Unit-linked products contributed 57.5%, 53.8%, 51.7% and 54.% to HDFC Life s total individual NBP for FY15, FY16, FY17 and as on Q2FY18. If its unit-linked funds underperform their respective benchmarks or if there is a significant decline in equity markets, the company may be unable to market these products in the future and may be in a disadvantageous position as compared to its competitors. In addition, participating (Par) products contributed 18.9%, 26.7%, 29.7% and 25.% to total individual NBP for FY15, FY16, FY17 and Q2FY18, respectively. If its par products generated lower than expected returns to policyholders, this may result in increased surrenders which would have an adverse impact on NBP. Thus, any regulatory changes or market developments that adversely impacts sales of such products could have a material adverse effect on company s earnings and prospects Major portion of business generated from relatively few regions Maharashtra, Gujarat, Karnataka, Tamil Nadu and Delhi accounted for 58.5% and 63.8% of the total received premium from new business retail policies in FY17 and as on Q2FY18, respectively. Thus it is susceptible to economic and other trends and developments, in these areas. Given the company s geographic concentrations regional occurrences, such as local strikes, terrorist attacks, natural or man-made disasters or more stringent state and local laws and regulations could adversely effect on HDFC Life s business and operations. Termination of name usage agreement or trademark agreement HDFC Life and other product names and intellectual property rights are important assets to HDFC Life. Pursuant to the shareholders agreement, HDFC and Standard Life Mauritius had permitted HDFC Life to use the word HDFC and Standard Life trademarks solely as part of its corporate or trading name. Further, the Name Usage Agreement is valid for an initial term of three years from October 2, 215, and shall be renewed for subsequent three-year terms, for a consideration (payable from April 1, 215) of.3% to.5% of premiums earned by the company, subject to a maximum of 1 crore. In the event that the Trademark or Name Usage Agreement expires or is terminated, HDFC Life may not be permitted to use the Standard Life name as part of its corporate or trading name or for any its existing products. This could require the company to expend significant resources to establish new branding and name recognition in the market as well as undertake efforts to rebrand the branches and digital presence. This could have a material adverse effect on HDFC Life s financial performance. Page 19

20 Financial Summary Exhibit 34: Policyholders Account ( Crore) FY13 FY14 FY15 FY16 FY17 H1FY18 Premiums earned - Net Income from Investments Other income Contribution from the Shareholders' account Total Commission Operating expenses Benefits paid (Net) Change in valuation of policy liabilities Others Provision for tax Surplus/(deficit) after tax Transfer to Shareholders' account Exhibit 35: Shareholders Account ( Crore) FY13 FY14 FY15 FY16 FY17 H1FY18 Amounts transferred from Policyholders' account Income from investments Total , Expenses other than insurance Contribution to Policyholders' account Others Profit before Tax Provision for tax PAT Exhibit 36: Balance Sheet ( Crore) FY13 FY14 FY15 FY16 FY17 H1FY18 Sources of Funds Share capital Reserve and surplus Credit/[debit] fair value change account Networth Policyholders' funds Funds for Future Appropriations Total Liabilities Applications of Funds Shareholders investments Policyholders investments Asset held to cover linked liabilities Loans Fixed assets - net block Deferred tax asset Net current assets Debit Balance in P & L A/c (Shareholders' account) Total Assets Page 2

21 Exhibit 37: Key Ratios (Year-end March) FY13 FY14 FY15 FY16 FY17 H1FY18 Valuation No. of Equity Shares (Crore) Diluted EPS ( ) BV ( ) IEV ( crore) NA NA P/E P/BV P/EV NA NA Efficiency Ratios (%) Commission exp. as a % of Gross Premium Mgt. expenses incl commission as a % of Gross Premium Return Ratios and capital (%) Return on Net worth Return on Embedded value Solvency Ratio Persistency Ratio (%) 13th Month th Month th Month th Month th Month Page 21

22 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Subscribe: Apply for the IPO Avoid: Do not apply for the IPO Subscribe only for long term: Apply for the IPO only from a long term investment perspective Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com Page 22

23 ANALYST CERTIFICATION We /I, Kajal Gandhi, CA, Vasant Lohiya, CA and Vishal Narnolia, MBA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities Limited is a Sebi registered Research Analyst with Sebi Registration Number INH99. 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