Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AAA/Stable’ rating on the Rs.350 crore and Rs.600 crore subordinated non-convertible debentures of HDFC Life Insurance Company Ltd (HDFC Life).

 

The rating continues to factor in the strategic importance to, and expectation of support, if required, from its parent, HDFC Bank Ltd (HDFC Bank; ‘CRISIL AAA/Stable/CRISIL A1+’) both on an ongoing basis and in the event of distress; the established market position of HDFC Life within the life insurance industry; well-diversified distribution network; healthy persistency and operating profitability; robust risk management in the non-participating segment; and adequate capital position. These strengths are partially offset by high operating cost as compared to peers.

 

HDFC Life has been managed independently and is a self-sustaining entity; strong linkage with HDFC Bank driven by ownership (holding 50.4%) and a shared brand name adds to its strength. Pursuant to the amalgamation of Housing Development Finance Corporation Ltd (HDFC) with HDFC Bank, HDFC Life became a subsidiary of HDFC Bank with effect from July 1, 2023. 

 

HDFC Life has an established market position within the life insurance industry and is among the top three players in the private sector space. Market share in terms of new business premiums (NBP) written in India stood at 8.0% as on December 31, 2023 (7.7% as on March 31, 2023). The company maintained its established position among private players, with a market share of around 19.8% in NBP as on December 31, 2023 (21% as on March 31, 2023). It also continues to benefit from its extensive industry expertise, backed by experience of nearly two decades and presence across all states and Union Territories in India.

 

The Individual WRP grew by 27% in fiscal 2023, adjusted for Exide life in base. This growth was primarily driven by the one-time spike in higher ticket size policy business (>Rs 5 lakh) in the fourth quarter of fiscal 2023. The latter was an outcome of removal of tax exemption on life insurance policies other than unit-linked insurance policies (ULIP), where aggregate premiums exceed Rs 5 lakh, effective April 1, 2023. Accordingly, APE growth moderated to 4.8% for the first nine months of fiscal 2024 due to decline in the higher ticket size policies (>Rs 5 lakh). The company also focused on maintaining a balanced product mix and sustaining margins.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of support from, HDFC Bank

HDFC Life is strategically important to its parent, HDFC Bank, which is reflected in representation on the HDFC Life board and overseeing of the company’s functioning. The company also benefits from common branding with HDFC Bank, which is the largest private bank in India with a strong retail presence, solid brand image, established franchise and large customer base. CRISIL Ratings believes HDFC Bank will continue to support the growth plans of HDFC Life and contribute to any incremental capital requirement. Furthermore, being the life insurance arm of the HDFC group, HDFC Life constitutes a key element of the group’s suite of financial service offerings. CRISIL believes that HDFC Bank will continue to exercise control on HDFC Life and will continue to extend support to HDFC Life, as and when required, in-line with regulatory guidelines.

 

Established market position with balanced portfolio mix

The company maintains its market position as one of the top players in the life insurance industry. Market share in terms of NBP among private players stood at 19.8% as on December 31, 2023 (21% during fiscal 2023). The company has been operating since 2001 and has presence across all states in the country. Diversification of sourcing channels over the years has led to robust business growth. Furthermore, strong brand image and direct access to the large customer base of the HDFC group provide critical support to business growth. Low insurance penetration and other supportive macro factors are expected to drive growth going forward as well.

 

With the intent of maintaining a customer centric, balanced and profitable suite, the company maintains a balanced portfolio mix with focus on sourcing through multiple channels. This is reflected in the individual APE mix, which is diversified across participating – 24%, non-participating savings (non-par) – 24%, protection – 15%, annuities – 7%, ULIPs – 27% and group retirals – 4% for the first nine months of fiscal 2024. The company continues to witness improvement in protection business on account of strong growth in credit protect business. The contribution of the protection business to NBP (including group) has steadily increased to 34% during the first nine months of fiscal 2024 from 29% in fiscal 2023 (24% in fiscal 2022).

 

Well-diversified distribution network

HDFC Life has been the first to successfully embrace open architecture in bancassurance while continuing to diversify its distribution network with over 550 partners, comprising banks, non-banking financial companies (NBFCs), microfinance institutions (MFIs), small finance banks (SFBs), insurance marketing firms, brokers and web aggregators as partners. HDFC Life has always tried to maintain a well-diversified distribution mix; based on Individual APE, distribution from bancassurance accounted for 64%, agency - 18%, direct (including online) - 11% and broker channels -  6% during the first nine months of fiscal 2024. HDFC Life tries to develop and nurture each channel, to ensure business diversification. The company has achieved long-term sustainable and profitable growth by balancing the product mix across various distribution channels.

 

Healthy persistency and profitability metrics

HDFC Life has maintained healthy persistency in its overall product portfolio. The 13th month and 61st month persistency ratio for the merged entity stood at 86% and 54%, respectively, during the first nine months of fiscal 2024; the ratios stood at 87% and 52%, respectively, in fiscal 2023. Stability in persistency across cohorts is led by focus on better quality of business and leveraging technological capabilities to provide a superior customer experience. Healthy persistency also reflects the ability to retain policy holders for a longer duration.

 

The RoE has been consistently above 15% till fiscal 2021. However, in fiscal 2022, it moderated to 10.1% on account of fresh issuance of shares to Exide Industries in lieu of 100% equity shares of Exide Life and equity capital raised in FY23. Since then, the RoE has been on an improving trajectory and stood at 11.5% for the first nine months of fiscal 2024.

 

The new business margin (NBM) remains healthy at 26.5% in the first nine months of fiscal 2024 on post-merger basis (27.6% during fiscal 2023). Embedded value of the company stood at Rs 45,170 crore as on December 31, 2023 (Rs 39,527 crore as on March 31, 2023, and Rs 32,960 crore as on March 31, 2022). Healthy cash accrual has supported capital position.

 

Adequate capital position

HDFC Life maintains adequate capital position, which is reflected in healthy solvency margin of over 1.8 times maintained for the last 12 quarters. As on December 31, 2023, the company reported solvency margin of 1.9 times (2.03 times as on March 31, 2023). Networth stood at Rs 13,782 crore as on December 31, 2023, as compared to Rs 12,967 crore as on March 31, 2023 (Rs 15,401 crore as on March 31, 2022). While CRISIL Ratings expects capital support from HDFC Bank to be forthcoming if required; HDFC Life has been maintaining its capital position through internal accruals, not necessitating any such support.

 

Robust risk management in non-participating segment (non-par)

HDFC Life has a robust risk management framework across all its product segments. The products offered under the non-par segment are typically those wherein the minimum returns are guaranteed to the policyholders. The company has grown substantially within the non-par segment during the last three fiscals. However, given its philosophy of adhering to a balanced product mix, it has been able to maintain it to close to a third of its product mix. HDFC Life follows a fairly comprehensive approach to financial risk management, targeting duration matching on the annuity business and cash flow matching on the non-par savings business. The company also follows a strategy of prudent pricing and dynamic repricing of new business. A judicious mix of multiple instruments is used to hedge interest rate and renewal premium reinvestment risk. These include aggregation of non-par savings and credit life cash flow. The relative scale at which these businesses have been written allows them to achieve close asset-liability management (ALM) at an aggregate level. Secondly, investing in partly paid bonds of high-rated issuers that complement the cash flow profile of these products and offer attractive yields. Thirdly, using government securities (G-Sec) strips to improve the efficiency of the cash investments, improve ALM and reduce interest rate risk. Finally, it also uses external hedging instruments such as forward rate agreements to lock in interest rates for future premiums of the non-par savings portfolio. A combination of the above allows HDFC Life to be in a positive net assets (policyholder assets minus policyholder liabilities) position under base case and stress scenarios (very low interest rates and 100% persistency). The result of all the above is visible in low interest rate sensitivity for embedded value and NBM. CRISIL Ratings understands that the risk management approach of the company has also been validated by a leading external actuarial consultant.

 

Weakness:

High operating cost compared with peers.

The operating costs (excluding commission), remain modestly higher compared with some large competing peers. Overall expense ratio of the company has remained within 16-20% range in last three fiscals. The operating expenses have inched up due to investments in technology, distribution, and human resources. CRISIL Ratings notes the company’s efforts and investments to ensure a balanced portfolio mix, strengthening its distribution mix and making efficient use of technology to ensure ease of purchase for the customers will result in long-term benefits for the company. The company also operates in open architecture model across all corporate distributors. Hence, the overall expense ratio continues to be relatively higher than peers.

Liquidity: Superior

As on December 31, 2023, total non-linked policyholder investments stood at Rs 1,71,325 crore. The company had debt investment (non-ULIP) market value of Rs 1,64,448 crore of which 99% was in sovereign instruments and 'AAA' rated instruments. The major outflow for the company is benefits paid to claimants; it stood at Rs 25,957 crore for the first nine months of fiscal 2024. Since life insurance inherently is a highly granular and stable business, liquidity is likely to remain comfortable on an ongoing basis.

Outlook: Stable

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

Rating Sensitivity Factors

Downward Factors

• Revision in rating or outlook of the parent HDFC Bank, resulting in a similar action on HDFC Life
• Significant reduction in cushion in the solvency ratio taking it below 170%.

About the Company

HDFC Life is subsidiary of HDFC Bank, India’s leading bank.

 

Established in 2000, HDFC Life is a leading, listed, long-term life insurance solutions provider in India, offering a range of individual and group insurance solutions that meet various customer needs such as protection, pension, savings, investment, annuity and health. The company has more than 60 products (including individual and group products) and optional riders in its portfolio, catering to a diverse range of customer needs. HDFC Life continues to benefit from its increased presence across the country, having a wide reach with branches and additional distribution touchpoints through several new tie-ups and partnerships. The count of distribution partnerships stood over 550, comprising banks, NBFCs, MFIs SFBs, insurance marketing firms, brokers and web aggregators as partners. The company has a strong base of financial consultants as well.

Any other information: Not Applicable