FY18 was a strong performance year for HDFC Life in terms of total premium growth across premium categories, distribution channels, technology and margins. We have tried to analyse the first annual report of HDFC Life, post-listing, and our key findings are: (i) risk retained in the individual business has dropped from 65% in FY13 to 38% in FY18; (ii) increase in total expense was mainly due to an increase in first year and single-premium commissions, investment in technology and expansion in the distribution reach; and (iii) the proportion of surrenders in the benefits paid has declined from 81% in FY13 to 53% in FY18.
Risk retained in the individual business dropped from 65% in FY13 to 38% in FY18: The re-insurance ceded has grown at 42% CAGR over FY15-18 as against the gross premium CAGR of ~17% over the same period with significantly higher proportion of re-insurance done in the non-PAR segment.
Increase in total expense due to incremental commission rates, expanding distribution reach and investment in technology: First year and single premium commission has increased by 70bp y-o-y each to 18.4% and 0.8% in FY18. This has resulted in 30% y-o-y growth (v/s 11% y-o-y in FY17) in first year premiums and a 33% y-o-y growth in single premiums. HDFC Life continued to widen its presence and distribution touch-points, through several new tie-ups and partnerships comprising 163 (as of Q1FY19) bancassurance partners and 26 partnerships (as of Q1FY19) within the non-traditional ecosystem.
Digitisation remained a key theme to migrate customers online, both directly and through deep integration with partners. IT expenses for the year grew by 38% y-o-y to `868 million due to higher business volumes and customer-oriented initiatives.
Valuation and view: We expect HDFCLIFE to deliver a 24.1% CAGR in new business annualised premium equivalent (APE) over FY18-20e, while margins are likely to sustain at current levels of ~24%. Thus, we estimate a 27% CAGR in value of new business (VNB) over FY18-20e, while RoEV sustains at ~18.7% over a similar period. We value HDFCLIFE at `525 per share, which corresponds to 4.9x FY20e EV. While near-term upside appears limited, we believe that huge under-penetration and its strong positioning in the sector will enable HDFCLIFE to deliver healthy returns in the long term. Maintain Buy.
