November 3, 2017 HDFC Standard Life Insurance Co...

November 3, 2017

IPO Review

ICICI Securities Ltd | Retail Equity Research

HDFC Life Insurance Company (HDFC Life) was established in 2000 as a

joint venture between HDFC and Standard Life Aberdeen. In FY15-17,

growth in new business premium remained strong at 29% CAGR to |

19445 crore and grew to | 9051 crore by September 2017. It has a

comprehensive product portfolio of 32 individual and 10 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 200.5% as at September 30, 2017, above the

minimum 150%. It reported PAT of | 886.9 crore and delivered return on

equity of 25.6% in FY17. As on September 30, 2017, it had a total AUM of

| 995.3 billion and Indian embedded value of | 140.1 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 12.0% 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 11200 branches across banking tie-up with

HDFC Bank the largest bancassurance partner. Agency channel at 66372

contributes 7% to total premium. High group business adds to direct

sales. All their distribution channels are independently profitable.

Concerns

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 | 290

At the IPO price band of | 275-290, the stock is available at P/IEV multiple

of 4.2x H1FY18 EV of |14010 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

~| 58258 crore at the upper price band.

HDFC Standard Life Insurance Co Ltd

Price band | 275-290

Rating matrix

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Issue Details*

Issue Opens 7-Nov-17

Issue Closes 9-Nov-17

Issue Size (| Crore) 8245-8695

Price Band (|) 275-290

No of Shares on Offer (crore) 29.9

QIB (%) 50

Non-Institutional (%) 15

Retail (%) 35

Minimum lot size (No. of shares) 50

*Reservation for HDFC Ltd shareholders for up to 10% 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

1997-98 2001-04 2006

HUL acquires 23% stake. Mitsubishi Corporation and

Shareholding Pattern Pre-Issue Post-Issue

Promoter & promoter group 96.0% 81.0%

Public 4.0% 19.0%

Financial Summary

| Crore FY14 FY15 FY16 FY17

Premiums earned - Net 11976 14762 16179 19275

Total income 17291 27091 18066 30554Transfer to Shareholders'

account 765 671 718 786

PAT 725 786 818 892

Valuation Summary (at | 290; upper price band)

(x) FY14 FY15 FY16 Pre Post

P/E 79.7 73.8 70.7 65.3 65.3

P/BV 29.9 22.8 18.6 15.1 15.1

P/EV NA 6.6 5.7 4.7 4.7

FY17

Research Analyst

Kajal Gandhi

[email protected]

Vasant Lohiya

[email protected]

Vishal Narnolia

[email protected]


Company Background

HDFC Standard Life Insurance Company (HDFC Life) was established in

2000 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

| 194.45 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 30, 2017. 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 30, 2017, above the minimum

150.0% 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 40.7% and operating return on embedded value of

21.7% during FY17. As on June 30, 2017, they reported total AUM of

| 947.5 billion and Indian embedded value of | 132.2 billion. The company

has a track record of consistently delivering shareholder returns across

business cycles.

Bancassurance remained their most significant distribution channel,

generating 50.4%, 53.5%, 50.7% and 59.1% of their total new business

premiums for FY15, FY16, FY17 and the three months ended June 30,

2017, respectively. Individual agent network generated 10.0%, 7.6%,

7.5% and 6.4% of total new business premium for FY15, FY16, FY17 and

the three months ended June 30, 2017, 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 30, 2017,

key management personnel had an average of over 10 years of

experience in the financial services sector.


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 30, 2017, SBI Life had a bouquet of 10 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 30, 2017, 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.


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 (non-

employer-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 1,254 799

Delhi 327 318 145

Tamil Nadu 260 307 123

Gujarat 269 294 151

Karnataka 231 286 95

Uttar Pradesh 241 230 97

West Bengal 179 206 90

Kerala 123 189 82

Haryana 160 159 67

Punjab 175 153 74

Telangana 136 149 43

Madhya Pradesh 74 98 39

Rajasthan 80 94 40

Orissa 70 82 38

Andhra Pradesh 64 68 22

Chandigarh 48 55 24

Bihar 45 48 25

Assam 36 38 18

Jharkhand 35 38 20

Chattisgarh 26 34 17

Goa 27 24 15

Jammu & Kashmir 33 21 11

Uttrakhand 18 21 9

Other States and Union Territories 4 4 2

Total 3,657 4,201 2,059

Source: RHP, ICICIdirect.com Research


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 FY15-

17. Their 13th month individual persistency ratio was 80.9% and 82.2%

for the period ended March 31, 2017 and September 30, 2017,

respectively. HDFC Life has a healthy balance sheet with total net worth of

| 44.6 billion and solvency ratio of 200.5% as on September 30, 2017,

above the minimum 150.0%. It reported PAT of | 886.9 crore and

delivered a return on equity of 25.6% in FY17. As on September, 2017, it

had a total AUM of | 995.3 billion and embedded value of | 140.1 billion.

Exhibit 2: Trend in AUM and EV

670

743

917

995

88 102124 140.1

0

200

400

600

800

1000

1200

FY15 FY16 FY17 Q2FY18

| b

illion


Exhibit 3: Healthy growth in premium

119.8

147.6

161.8 192.7 90.5

4.6%

23.3%

9.6%

19.1%

0%

10%

20%

30%

0

50

100

150

200

250

FY14 FY15 FY16 FY17 Q2FY18

| b

illion

Premiums earned - Net YoY growth (RHS)

Source: RHP, ICICIdirect.com, Research

Exhibit 4: PAT growth trend

786818

892

313

0%

2%

4%

6%

8%

10%

0

400

800

1200


| c

rore

PAT YoY growth (RHS)


Exhibit 5: Healthy return on net worth (RoE)

44.4

35.1

29.0

25.7

13.3

0

10

20

30

40

50


(%

)


Exhibit 6: Solvency ratio remains prudent (%)

193.9 196.1 198.4191.6

211.0

100

200

300


(%)



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 3/2017). In

FY01-17, Indian life insurance assets under management grew at 19%

CAGR to | 30 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 2016.

Protection gap (actual insured for every US$100 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)

11.5

7.4 7.2

3.7

32.7

2.3

1.6

0

2

4

6

8

10

12

14

S.Africa S.Korea Japan Thailand US India China Indonesia

(%)


Exhibit 8: Life insurance density (2016)

2803

2050

1725

616

222 196 19059 47 21

0

500

1000

1500

2000

2500

3000

Japan S.Korea US S.Africa Thailand Brazil China Indonesia India Turkey

(U

SD

)


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.


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 FY12-17. Total premium in the Indian life

insurance market is expected to increase from | 4181 billion in FY17 to

~| 7900 - 8100 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

17.2

15.5

20

7.26.5

0

5

10

15

20

25

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

90% of India’s population will remain below 60 years of age by 2020.

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 10: Indian working population

34.727.5 30.8

6.9

30.9

27.6

33.7

7.8

27.5

26

37

9.5

0

20

40

60

80

100

120

0-14 15-29 30-59 60+

(%

)

2000 2010 2020E



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

23.222.4

23.625.2

23.1 23.622.4

20.2 20.419.2

10.1

11.911.3 11.6

9.9

7.4 7.4 7.4 7.47.9

0

2

4

6

8

10

12

14

0

5

10

15

20

25

30

FY07 FY08 FY09 FY10 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 FY10. 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

10.5 12.7 9.8 12.7 11.4 10.9 8 10.7 13.5

50.4

57.5

40.2

50.8 56.3 56.1 60.546.9 41.3

22

21

26.2

19.521

17.8 16

1918.3

0

20

40

60

80

100

120

FY08 FY09 FY10 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, ~20% 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.


Exhibit 13: Share of out-of-pocket mix (as % of total health expenditure) for other countries

62.4

54.8

46.9

36.1

32

13.911.9

0

10

20

30

40

50

60

70

India Singapore Indonesia S.Korea China Japan Thailand

(U

SD

)% of Total Health Expenditure


India’s total expenditure on health was 4.7% of GDP in 2014. As per the

World Health Organization (WHO), per capita health spending increased

from US$20 in 2000 to US$75 in 2014. 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

2000 with the commencement of operations by four private companies in

the first year. Further, eight companies got added to the list till 2009, 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.


Exhibit 14: Structure of Indian life insurance industry


Private insurer gaining market share: In FY07-11, total premium growth

remained robust at 17% CAGR, owing to an aggressive foray by private

players. Since FY07, private players gained significant market share from

18% in FY07 to 30% 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 FY07-11.

Exhibit 15: Trend in IRP for private players and industry


Post the financial crisis in 2008 and regulatory changes in FY10, private

insurer market share on an individual rates premium (IRP) basis declined

to ~37.9% in FY14 from ~52% in FY10. 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.


Rationalisation in commission, operating expense: Post IRDAI regulations

in FY10, a significant decline was seen in commission on linked products.

Consequently, commission-expense ratio on total premium basis fell

considerably from 7.9% in FY07 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)

11

9.9

8.5

7.5

5.75.3

5.75.3

4.9 4.7

0

2

4

6

8

10

12

FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17

(%

)

Private Insurer Industry LIC


In FY07-10, private players had a higher operating expense ratio due to

high infrastructure costs incurred on increasing their geographic reach.

However, post regulatory changes in FY10, 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

FY10 to 15.7% in FY17. On a relative basis, LIC, being in a mature phase,

had lower operating expense ratio since FY07. However, since an

increase in salary in October 2010 (effective from August 2007), 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 2010, 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 FY07 to 24% in

FY17, while the share of new business premiums from individual agents

declined from 90.5% in FY07 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.


Exhibit 17: Individual new business premium (for industry) by various distribution channels

90.583.7

79.6 79.6 78.9 78.7 77.5 78.471.4 68.5 68.9

5.6

8.09.7 10.6 13.3 15.0 16.2 15.6

20.8 24.0 23.6

0

20

40

60

80

100


(%

)Individual Agents Corporate Agents – Banks Corporate Agents – Others Brokers Direct Selling



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 2014

(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, 2017. They have strong brand

recall among Indian consumers and were selected as a Superbrand in

India for three consecutive years from 2014 to 2016

Highest VNB margins in industry, registering strong profitability

HDFC Life improved VNB margins from 18.5% in FY15 to 22.0% 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 12.0% in FY15 to

21.8% for FY17.

VNB margin was 22.4% for the six months ended September 30, 2017.

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 12.0% 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.

The insurance profit increased 9.0% from | 624 crore in FY15 to | 680

crore in FY16 and increased 10.4% from | 680 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 80.9% for the six months ended September 30, 2017. 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 18: VNB margin

18.519.9

21.622.4

0

5

10

15

20

25


(%

)

VNB Margin (%)


Exhibit 19: VNB margin comparison

21.6

15.4

10.1

18.8

-4.3-10

-5

0

5

10

15

20

25

HDFC

Standard Life

SBI Life ICICIPru Max Life Bajaj Allianz

(%

)



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 30, 2017, was | 54,921.0

million, | 64,872.2 million, | 86,963.6 million and | 9051 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 |

194.45 billion, during the same period.

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 12.0% 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 20: NBP and growth

5500

6500

8700 4403.0

0

1000

2000

3000

4000

5000

6000

7000

8000

9000

10000


| c

rore

NBP


Exhibit 21: NBP comparison (FY17)

86.96

101.46

78.63

36.7732.9

0

20

40

60

80

100

120

HDFC

Standard Life


(| b

illion)


Exhibit 22: Product break up of various industry players es

50.5

35.24

79.13

24.42

41.72

49.5

64.76

20.87

75.58

58.28

0

20

40

60

80

100

120

SBI Life HDFC Standard Life ICICIPru Max Life Bajaj Allianz

Linked Non-linked



Exhibit 23: Product mix of HDFC Life in terms annual premium equivalent eses

New business APE (individual) FY15 Mix FY16 Mix FY17 Mix Q2FY18 Mix

Participating (par) products 643 21.6 1028 30.0 1297 34.7 537 29.0

Non-par protection 149 5.0 178 5.2 150 4.0 101 5.5

Other non-par. products 336 11.3 292 8.5 325 8.7 146 7.9

ULIP 1849 62.1 1927 56.2 1966 52.6 1068 57.7

Total 2977 100.0 3426 100.0 3739 100.0 1852 100.0

Group business in terms of APE FY15 Mix FY16 Mix FY17 Mix Q2FY18 Mix

Group non-par protection 52 23.7 94 33.1 175 38.8 151 54.2

Other group products 166 76.3 189 66.9 275 61.2 128 45.8

Total 218 100.0 283 100.0 450 100.0 279 100.0


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 30, 2017, their product portfolio comprised

32 individual and 10 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, 2015 to 80.9% for

the period ended March 31, 2017 and 61st month persistency increased

from 39.8% for the period ended March 31, 2015 to 56.8% for the period

ended March 31, 2017. Protection business forms 21% of total premium

now.

Exhibit 24: Comparison of 13th and 61st month persistency (FY17)

81.1 80.985.7

80.4

68.267.2

56.8 56.253.0

31.6

0

20

40

60

80

100

SBI Life HDFC Standard

Life

ICICIPru Max Life Bajaj Allianz

(%

)

13th month 61th month



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 50.4%, 53.5%, 50.7% and 54.1% of total

new business premiums for FY15, FY16, FY17 and the six months ended

September 30, 2017, respectively. HDFC Bank is the largest

Bancassurance partner. Also number of major bancassurance partners

grew from 31 as at March 31, 2015 to 125 as at September 30, 2017. The

company’s top 15 bancassurance partners (in terms of total new business

premium sourced for the six months ended September 30, 2017) had

over 11,200 branches across India as at September 30, 2017. Their

individual agent network with 66372 agents generated 10.0%, 7.6%, 7.5%

and 6.2% of total new business premium for FY15, FY16, FY17 and the six

months ended September 30, 2017, respectively. Also, the direct sales

channel generated 37.0%, 36.8%, 39.8% and 37.5% of total new business

premium for FY15, FY16, FY17 and the six months ended September 30,

2017, 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, | 90.5 crore, | 100.9 crore and | 86.7

crore, in FY15, FY16, FY17 and the six months ended September 30,

2017, 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

5037

54

37

51

40

54

38

0

50

100

150

200

250

Bancassurance Individual Agents Direct Brokers & Others

(%

)




Exhibit 26: Channel-wise individual new business premium for industry

90.583.7

79.6 79.6 78.9 78.7 77.5 78.471.4 68.5 68.9

5.6

8.09.7 10.6 13.3 15.0 16.2 15.6

20.8 24.0 23.6

0

20

40

60

80

100


(%

)

Individual Agents Corporate Agents – Banks Corporate Agents – Others Brokers Direct Selling


Exhibit 27: Individual new business channel mix (FY17)

22.0

6.516.3

8.3 9.0

41.9

25.7

39.8

20.4

0.4

0.0

40.0

80.0

SBI Life HDFC Std

Life


(%

)

Individual Agents Corporate Agent - Banks Others


Exhibit 28: Comparison of agent productivity (FY17)

2.3

1.0

1.3

1.7

1.1

0.0

0.5

1.0

1.5

2.0

2.5

SBI Life HDFC

Standard Life


(| lakhs)

Agent productivity


Exhibit 29: Geographic distribution of individual NBP (FY17)

0

20

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 10.2%

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

30, 2017, appears higher as 2nd half does higher business than 1st half.


Exhibit 30: Expense ratio – HDFC Life

4.2 4.3 4.1 4.4

10.2

11.6

12.6

0

2

4

6

8

10

12

14


(%

)

Commission ratio Operating Expense ratio


Exhibit 31: Comparison of expense ratios – FY17

4.1 3.73 3.4

8.7

2.4

12.6

7.83

10.7

15.7

18

0

2

4

6

8

10

12

14

16

18

20

HDFC

Standard Life


(%

)

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.

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 59.0

million lives insured under various group products (as at September 30,

2017) to cross-sell individual products and riders that provide enhanced

coverage for individuals, over and above the coverage provided by group

insurance policies.

Exhibit 32: Solvency ratio (FY17)

204 192

281309

580

0

100

200

300

400

500

600

700

SBI Life HDFC

Standard Life


(%

)


Exhibit 33: Three year average RoE

20.14

29.4531.23

23.65

12.2

0

10

20

30

40

SBI Life HDFC

Standard Life


(%

)



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, 2016, 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%, 59.0% 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 54.0% 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 25.0%

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 20, 2015, and shall be

renewed for subsequent three-year terms, for a consideration (payable

from April 1, 2015) of 0.3% to 0.5% of premiums earned by the company,

subject to a maximum of | 100 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.


Financial Summary

Exhibit 34: Policyholders Account

(| Crore) FY13 FY14 FY15 FY16 FY17 H1FY18

Premiums earned - Net 11446.1 11976.4 14762.5 16178.8 19274.9 9051.0

Income from Investments 2542.7 5073.1 12249.3 1790.6 11140.6 5278.3

Other income 25.7 23.9 32.2 59.1 41.9 53.7

Contribution from the Shareholders' account 1.9 217.3 46.69 38 35.39 7.42

Total 14016.3 17290.7 27090.6 18066.5 30554.4 14415.0

Commission 667.3 514.1 623.5 701.9 792.0 403.7

Operating expenses 1216.0 1280.5 1488.8 1871.8 2385.3 1282.6

Benefits paid (Net) 3902.8 4661.9 8162.4 8176.9 9842.2 5485.6

Change in valuation of policy liabilities 7414.9 10058.4 15652.5 5928.1 16054.8 6482.5

Others 0.0 0.0 0.0 0.0 0.0 0.0

Provision for tax 50.9 151.6 119.3 174.6 152.0 22.4

Surplus/(deficit) after tax 637.6 429.8 822.1 959.6 947.6 518.1

Transfer to Shareholders' account 390.0 765.4 670.9 718.3 786.3 455.8


Exhibit 35: Shareholders Account


Amounts transferred from Policyholders' account 390.0 765.4 670.9 718.3 786.3 455.8

Income from investments 71.1 114.0 200.9 179.4 226.9 134.2

Total 461.2 879.4 871.8 897.6 1,013.2 590.0

Expenses other than insurance 7.3 13.7 20.6 21.4 68.0 11.2

Contribution to Policyholders' account 1.9 217.3 46.7 38.0 35.4 7.4

Others 0.0 5.9 -0.1 3.3 -4.4 -0.3

Profit before Tax 452.0 642.5 804.6 835.0 914.1 571.6

Provision for tax 4.2 -82.8 19.1 16.6 22.0 16.8

PAT 447.7 725.3 785.5 818.4 892.1 554.9


Exhibit 36: Balance Sheet


Sources of Funds

Share capital 1994.9 1994.9 1994.9 1995.3 1998.5 2005.6

Reserve and surplus 196.2 165.4 549.0 1154.6 1807.9 2420.5

Credit/[debit] fair value change account -10.3 2.7 -2.0 -41.2 32.3 50.1

Networth 2181 2163 2542 3109 3839 4476

Policyholders' funds 38410 48578 64261 70181 86581 93232

Funds for Future Appropriations 648.6 313.0 464.1 705.5 866.8 929.1

Total Liabilities 41240 51054 67267 73995 91286 98637

Applications of Funds

Shareholders’ investments 856.3 1615.6 2196.2 2640.2 3245.6 3716.9

Policyholders’ investments 11215 14706 19908 25863 34692 39686

Asset held to cover linked liabilities 28333 34207 44920 45727 53800 56131

Loans 78 48 126 93 48 16

Fixed assets - net block 282 289 352 346 353 344

Deferred tax asset 0 0 0 0 0 0

Net current assets -368 -46 -236 -674 -852 -1257

Debit Balance in P & L A/c (Shareholders' account) 843 234 0 0 0 0

Total Assets 41240 51054 67267 73995 91286 98637



Exhibit 37: Key Ratios

(Year-end March) FY13 FY14 FY15 FY16 FY17 H1FY18

Valuation

No. of Equity Shares (Crore) 199.5 199.5 199.5 199.5 199.8 200.6

Diluted EPS (|) 2.2 3.6 3.9 4.1 4.4 2.8

BV (|) 6.7 9.7 12.7 15.6 19.2 22.3

IEV (| crore) NA NA 8800 10200 12400 14010

P/E 129.5 79.7 73.8 70.7 65.3 52.5

P/BV 43.3 29.9 22.8 18.6 15.1 13.0

P/EV NA NA 6.6 5.7 4.7 4.2

Efficiency Ratios (%)

Commission exp. as a % of Gross Premium 5.6 4.3 4.2 4.3 4.1 4.4

Mgt. expenses incl commission as a % of Gross Premium 16.2 14.9 14.2 15.8 16.3 18.4

Return Ratios and capital (%)

Return on Net worth 40.1 44.4 35.1 29.0 25.7 13.3

Return on Embedded value 22.9 20.7 21.7 21.2

Solvency Ratio 217 194 196 198 192 201

Persistency Ratio (%)

13th Month 75.7 69.0 73.3 78.9 80.9 82.2

25th Month 78.3 69.0 64.0 67.5 73.3 74.4

37th Month 60.0 67.1 65.1 60.1 63.9 65.6

49th Month 30.9 54.8 64.2 63.4 58.3 59.3

61th Month 15.4 21.2 39.8 50.0 56.8 55.4



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November 3, 2017 HDFC Standard Life Insurance Co...

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