Detailed Rationale

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

 

The rating continues to factor in the strategic importance to, and expectation of support, if required, from its parent, Housing Development Finance Corporation Ltd (HDFC; rated ‘CRISIL AAA/FAAA/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 and relative disadvantage compared with leading peers in the bancassurance channel due to lack of exclusive partnership with group company, HDFC Bank Ltd. CRISIL Ratings also believes in a downward interest rate environment, there may be potential challenges in growth of savings products.

 

HDFC Life has been managed independently and is a self-sustaining entity; strong linkage with HDFC driven by ownership (currently holds 47.8%) and a shared brand name, adds to its strength. The foreign promoter, Standard Life (Mauritius Holdings) 2006 Ltd (a unit of Standard Life Aberdeen Plc), holds stake of 3.7% as on date.On April 4th, 2022, the Board of Directors of HDFC and HDFC Bank respectively approved a composite scheme of amalgamation (“Scheme”) inter alia involving merger of HDFC with and into HDFC Bank subject to receipt of requisite approvals/ no objections including from Reserve Bank of India (RBI) and other statutory and regulatory authorities. Post the merger amalgamation becoming effective, HDFC Bank will hold the shares held by HDFC in the Company. HDFC Bank has also additionally requested RBI to allow it to acquire such shares in the Company as may be required to increase its holding in the Company to over 50% upon the effectiveness of the Scheme. The requisite approvals for merger the amalgamation as well as the proposed increase in stake is awaited from respective regulatory authorities.

 

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 written in India stood at 7.7% during fiscal 2022. The company maintained its established position among private players with a market share of around 21% in new business premium in fiscal 2022. 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.

 

Total premium (net of reinsurance) grew by 19.1% in fiscal 2022 to Rs 45,396 crore from Rs 38,122 crore in the previous fiscal. In terms of Individual WRP, HDFC Life reported growth of 16% year-on-year in fiscal 2022, in line with industry growth of 16%. 

 

On January 1, 2022, the company announced the completion of the acquisition of Exide Life Insurance Company Ltd (Exide Life), subsequent to receiving all relevant regulatory approvals. Though Exide Life is now a wholly owned subsidiary of HDFC Life, the companies are currently operating independently. The merger of Exide Life with HDFC Life will happen after NCLT (National Company Law Tribunal) approval is received (expected in the second-half of the current fiscal). In terms of business performance, Exide Life grew 22% based on individual WRP in fiscal 2022, well-above the overall industry growth of 16%. Its embedded value as on March 31, 2022, stood at Rs 2,910 crore and the solvency position is comfortable at 2.17 times. In terms of distribution mix, agency accounts for 57% followed by broker, direct channel and banca at 22%, 14% and 7%, respectively. The 13th month persistency ratio stood at 78% in fiscal 2022 compared with 75% previous fiscal. CRISIL Ratings notes the transaction will lead to accretion in the embedded value of HDFC Life, and the solvency margin of the combined entity is likely to remain adequate. Furthermore, potential synergies may arise out of the transaction due to scale benefit. The primary benefit stems from access to larger agent base, which is expected to grow 30-40% in terms of number of agents, higher agency new business premium based on combined numbers and potential increase in business from southern India and Tier II and Tier III locations. The ability to retain the agents till the consummation of the transaction and subsequently improve productivity will be key monitorables.

 

In fiscal 2022, HDFC Life settled total death claims (gross of reinsurance) of Rs 5,804 crore compared with Rs 3,053 crore in the previous fiscal. The reserves created during the fiscal have been more than adequate to address increased mortality due to Covid-19. As on March 31, 2022, the company had reserves of Rs 55 crore as a prudent measure for the pandemic.

Analytical Approach

For arriving at its rating, 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. 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

HDFC Life is strategically important to its parent, HDFC, which is reflected in sizeable representation of its directors on the HDFC Life board, commonality of chairman and overseeing of HDFC Life functioning. The company also benefits from common branding with HDFC, which is the largest housing finance company in India with a strong retail presence, solid brand image, established franchise and large customer base. CRISIL Ratings believes HDFC will continue to support the growth plans of HDFC Life and will 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 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. It has consistently improved its market share in each fiscal. Market share in terms of new business premiums among private players stood at 21.0% during fiscal 2022 against 19.1% in fiscal 2018. The company has been in operation 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.

 

With the intent of maintaining 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 product mix for fiscal 2022, with ULIPs (unit-linked insurance policies) and conventional products accounting for 22% and 78%, respectively, of the total annual premium equivalent (APE). Despite higher demand for the protection business, growth shall continue to be in a calibrated manner on the individual side due to the cautious approach of the management. The contribution of the protection business to individual new business APE declined to 5.6% from 6.8% in the previous fiscal. However, the group protection business (Credit life) grew 55% on the back of healthy disbursements. In terms of total new business premium received, the protection segment (including group) contributed 24.0% in fiscal 2022 compared with 19.6% previous fiscal.

 

* 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 around 300 partners, comprising traditional partners such as NBFCs, MFIs and SFBs, and including new-ecosystem partners. HDFC Life has always tried to maintain a well-diversified distribution mix, with bancassurance accounting for 60%, 14% contributed by agency, 19% by direct including online and 6% by broker channels. With channels too, each has focused on a profitable product mix with no major concentration. HDFC Life has developed and nurtured each channel, while ensuring 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 persistency based on total individual premium (including single premium) improved to 92% in fiscal 2022 from 90% in fiscal 2021. The persistency on 61st month basis also improved to 58% in fiscal 2022 from 53% in fiscal 2021. Improvement in persistency across cohorts is led by focus on better quality of business and leveraging technological capabilities to provide a superior customer experience. The healthy persistency also reflects the ability to retain policyholders for a longer duration.

 

Healthy accrual has supported capital position. The RoE has consistently been above 18% during the last five fiscals. In fiscal 2022, it stood at 10.1% mainly on account of substantial increase in networth due to fresh issuance of shares to Exide Industries in lieu of 100% equity shares of Exide Life and one-time Covid-related provisions. The value of new business (VNB) margin also remained healthy at 27.4% during fiscal 2022, improving from 26.1% during fiscal 2021. In absolute terms, the VNB improved to Rs 2,675 crore during fiscal 2022 from Rs 2,185 crore in fiscal 2021. The company has also shown healthy growth in its embedded value to Rs 30,048 crore as on March 31, 2022, from Rs 26,617 crore as on March 31, 2021.

 

*Adequate capital position

HDFC Life maintains adequate capital position which is reflected in healthy solvency margin of over 1.80 times maintained for the last 10 fiscals. However, as on March 31, 2022, the company reported solvency margin of 1.76 times. The deterioration in the solvency ratio is on account of cash payout of Rs 726 crore to Exide Industries as part consideration for the acquisition of Exide Life. Excluding the cash payout, the solvency would have been 1.89 times. To improve the solvency ratio, the company is in the process to raise sub debt of Rs 350 crore, which should increase the solvency by about 600 basis points. Networth was Rs 15,401 crore as on March 31, 2022 (Rs 8,430 crore as on March 31, 2021). While CRISIL Ratings expects capital support from HDFC to be forthcoming if required; HDFC Life has been maintaining its capital position through internal accrual, not necessitating any such support. Although there has been no incremental equity capital infusion during the last nine years, HDFC Life has maintained solvency margin of above 1.80 times.

 

HDFC Life reported embedded value of Rs 30,048 crore as on March 31, 2022. The ratio of embedded value to networth stood at close to over 3 times as on March 31, 2022. The embedded value can be seen as a representation of actual capital position since it includes the future profits that the company is expected to receive from the business it has underwritten till valuation date. The steady increase in internal accrual enables the company to maintain capital position while achieving healthy business growth.

 

* 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 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 two fiscals. 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 flows. The relative scale at which these businesses have been written allows them to achieve close 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 also offer attractive yields. Thirdly, using G-Sec STRIPS to improve the efficiency of the cash investments, improve asset-liability management 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 VNB margin. 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), though improving, remain modestly higher compared with some large competing peers. For new business premium, operating expense ratio of the company has remained within 23-26%, whereas for net premiums the ratio has been at 12-13% in the last three fiscals. However, CRISIL Ratings notes the company has been working to ensure a balanced portfolio mix, strengthening its distribution mix and make efficient use of technology to ensure ease of purchase for the customers. Hence, the operating cost ratio is expected to be relatively higher than peers.

 

* Relative disadvantage compared with leading peers in the bancassurance channel

HDFC Life does not have an exclusive partnership with HDFC Bank, the second-largest bank in India with an impeccable track record of profitable growth. This puts it at a relative disadvantage as compared with leading private peers who have exclusive tie-ups with their parent banks (among the top five in India). While the business generated from HDFC Bank stood at 80-85% of the bancassurance channel, the bank has embraced an open architecture model over the last 2-3 fiscals. Consequently, as a percentage of overall life insurance business sold by HDFC Bank, HDFC Life’s share has reduced. However, subsequent to the merger, CRISIL Ratings believes that HDFC Life will benefit from the direct linkage with HDFC Bank, and it may enhance the business growth of the company. Furthermore, the share of HDFC Bank under bancassurance channel may also witness an upward trend.

 

* Potential challenges in growth of savings business

During fiscal 2022, the company launched non par savings product i.e., Sanchay Fixed Maturity Plan that contributes more than 15% of the non-par savings mix. Every year, the company launches an innovative product that becomes the top selling product for the company and significant revenue contributor. During fiscals 2019 and 2020, the company had launched two customer-centric products – Sanchay Plus and Sanchay Par Advantage. These products have helped HDFC Life to increase its proportion significantly within the traditional business during the last three fiscals. The non-par products come with guaranteed returns over a longer policy tenure. CRISIL Ratings believes that while these products do well, sustainability of healthy future growth given significant concentration from single product type remains a monitorable.

Liquidity: Superior

As on March 31, 2022, total non-linked policyholder investments stood at Rs 1,08,311 crore. The company had debt investment (non-ULIP) market value of Rs 1,04,775 crore of which 98.7% was in sovereign instruments and 'AAA' rated instruments. The major outflow for the company is benefits paid to claimants (net of reinsurance), which was at Rs 30,079 crore for fiscal 2022. 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 over the medium term, both on an ongoing basis and in the event of a financial distress, and that it will maintain comfortable level of cushion in its solvency ratio over and above regulatory minimum on a steady-state basis.

Rating Sensitivity factors

Downside factors

* Revision in rating or outlook of the parent HDFC, resulting in similar action on HDFC Life

* Significant reduction in cushion in the solvency ratio taking it below 170%

About the Company

Established in 2000, HDFC Life is a leading 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. As on March 31, 2022, the company had 39 individual and 13 group products in its portfolio, along with 7 optional rider benefits catering to a diverse range of customer needs. HDFC Life continues to benefit from its presence across the country with 372 branches and additional distribution touch-points through several new tie-ups and partnerships. The total partnerships are nearly 300 comprising traditional partners such as NBFCs, MFIs and SFBs, and including new-ecosystem partners. The company has a strong base of financial consultants.

Any other information: Not applicable