Premium growth steady; Persistency rates showing recovery

VNB margin improves; Protection and PAR drives business growth

* HDFC Life (HDFCLIFE) reported improvement in new business APE, led by Individual Protection/PAR and Group savings business while the trend in ULIPs remained weak in 2QFY21. VNB margins improved to 25.6% led by rise in retail Protection/Annuity business and cost control. Thus, Absolute VNB grew 22% YoY during 2QFY21. On the persistency front, better trends were witnessed in the PAR/Protection business, and thus, 13th/25th month persistency improved by 200bp/400bp. Overall, shareholders’ PAT grew ~6% YoY to INR3.3b during 2QFY21.

* Overall, we expect HDFCLIFE to reflect 17% VNB growth over FY20-23E. By FY23E, we expect margins to improve to ~26.4% and operating RoEV to remain steady at ~18%. Maintain Neutral.

Individual Protection/PAR trends stay robust; VNB margins improve

* HDFCLIFE posted strong Net premium income growth of 35% YoY, led by single premium growth of 66% YoY. Also, first year/renewal premium growth came in at 15%/21% YoY. Thus, total new business premium grew 47% YoY over 2QFY21. Persistency trends in the 13th/25th month improved by 200bp/400bp, led by improvement in the PAR/Protection segment.

* In 2QFY21, Individual/Group APE grew 18.5%/35.5% YoY, leading to total new business APE growth of 21% YoY. The individual APE growth was mainly led by PAR (250% YoY) while retail Protection grew 28% YoY. On the other hand, the share of ULIPs in total individual APE declined to 21% v/s 27% in 1QFY21. Also, group Protection declined, led by credit life (down 32% YoY). The share of Protection in total APE declined to 11.6% (v/s 15.4% in 2QFY20).

* VNB margins improved to 25.6% in 2QFY21 (v/s 24.3% in 1QFY21 and 25.4% in 2QFY20), on the back of improvement in product mix and cost efficiency. Absolute VNB for 2QFY21 grew 22% YoY.

* Total operating expenses (incl. commissions) grew 4.5% YoY, and thus, total expense ratio declined to 15.0% (430bp YoY improvement).

* The share of banca channel in individual APE increased to 60% (600bp YoY) while the share of agents declined 200bp YoY to 13% over 1HFY21.

Highlights from management commentary

* HDFCLIFE is reflecting better business trends in the retail protection and annuity segment. Also, Banca channel is posting strong trends in the Sanchay Par advantage. However, credit life remains under pressure.

* On the distribution front, HDFCLIFE has entered into a partnership with YES Bank during the quarter.

* On the cost front, as business volumes pick up, there would be an increase in variable cost.

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