HDFC Life Insur.

CM RATING55/100
HDFC Standard Life Insurance Company is among the top three life insurers in India by market share in new business premium, one of the most profitable life insurers based on the value of new business (VNB) margins and among the top five private life insurers in India. Established in 2000 as a joint venture between HDFC, one of Indias leading housing finance institutions, and Standard Life Aberdeen Plc, one of the worlds largest investment companies, initially through wholly owned subsidiary The Standard Life Assurance Company and now through wholly owned subsidiary Standard Life Mauritius. HDFC held 61.21% stake and Standard Life Mauritius 34.75% as on the date of the Red Herring Prospectus.

The total net worth was Rs 4460 crore and the solvency ratio of 200.5% end September 2017 was above the regulatory minimum requirement of 150%. It earned Profit after tax was Rs 886.92 crore, return on equity of 25.6%, Return on invested capital of 40.7% and operating return on embedded value of 21.7% in the financial year ended March 2017 (FY2017). Annualized premium equivalent recorded a CAGR of 114.5% to Rs 8696.36 crore between FY2015 and FY2017. The 13th-month individual persistency ratio was 80.9% in FY2017.

Total assets under management (AUM) were Rs 99530 crore and Indian embedded value Rs 14010 crore end September 2017. There is a track record of consistently delivering shareholder returns across business cycles. Being sufficiently capitalized, no capital has been raised over the last six years. Dividends paid totaled Rs 760 crore between the first in FY2014 to FY2017.

The focus on creating a multi-channel distribution platform to gain market share among private life insurers in India has resulted in total new business premium increasing from 15.8% in FY2015 to 17.2% in FY 2017. The bancassurance partners include banks, non-banking financial companies, micro-finance institutions and small finance banks in India. The number of major bancassurance partners stood at 125 end September 2017. The top 15 bancassurance partners had over 11,200 branches across India end September 2017. There were 66,372 individual agents end September 2017, comprising 6.8% of all private agents in the Indian life insurance industry.

The pan-India presence comprises 414 branches and spokes across India,, supported by a dedicated workforce of 16,544 full-time employees, end September 2017.

The broad, diversified product portfolio covers five principal segments across the individual and group categories: participating, non-participating protection term, non-participating protection health, non-participating and unit-linked insurance products. The product portfolio comprised 32 individual and 10 group products as well as eight optional rider benefits end September 2017.

A wholly-owned subsidiary, HDFC Pension, was set up in 2012 to operate the pension fund business under the National Pension System (NPS). HDFC Pension had approximately Rs 1162.98 crore of AUM from customers enrolled under the NPS end September 2017. HDFC Pension is the second-largest private pension fund management company in India by AUM and subscribers in FY2017. The first international subsidiary, HDFC International, was established in the UAE in FY 2016 to operate reinsurance business. The pension and reinsurance businesses will diversify sources of revenues and profitability in future.

Going forward, the aim is to continue to consolidate the position as a long-term player in the industry by focusing on customer service, strong product propositions and steady profitability. Strong financial performance and leading position will open up growth opportunities in the under-penetrated Indian life insurance sector.

The Offer and the Objects

The initial public offering (IPO) comprises sale up to 299,827,818 equity shares,, representing about 14.92% of its equity share capital for cash, through an offer for sale by HDFC and Standard Life Mauritius.

The offer for sale (OFS) is of up to up to 191,246,050 equity shares by HDFC and up to 108,581,768 equity shares by Standard Life Mauritius. The entire proceeds from the OFS will be paid to the selling shareholders. The OFS will mop up proceeds of Rs 8245.26 crore at the lower price band of Rs 275 per share (face value Rs 10 per share) and Rs 8695.01 crore at the upper band of Rs 290 per share.

The issue is to be made through book-building and will open on 07 November 2017 and close on 09 November 2017.

The objects of the offer are to achieve the benefits of listing the equity shares on the stock exchanges. HDFC Lifes listing will be an IPO after 22 years from the HDFC group companies. The listing of the equity shares will enhance the HDFC Life brand name and provide liquidity to the existing shareholders. The listing will also provide a public market for the equity shares in India. No proceeds from the offer will be received by the company.

As much as 0.11% of the issue is reserved for eligible HDFC Life employees, 0.04% for eligible HDFC employees and 1.49% for HDFC shareholders.

Strengths

Strong parentage and a trusted brand enhances consumer appeal: Both HDFC and Standard Life Aberdeen are known in their businesses. HDFC is listed on the NSE and the BSE. Over the years, the HDFC group has emerged as a recognized financial services conglomerate and was ranked as one of the best Indian brands in 2014, with 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. The Standard Life Aberdeen group was formed by the merger of Standard Life Plc and Aberdeen Asset Management Plc on 14 August 2017.

Strong financial performance: Focused execution has helped in continuous delivery of consistent and profitable growth to the stakeholders. The overall total premium recorded a CAGR of 14.5% to Rs 19445 crore between FY2015 to FY2017. As many as 64.5 million lives had been insured across individual and group customers end September 2017. The VNB margins improved from 18.5% in FY2015 to 22% in FY2017 by improving cost-efficiencies, increasing persistency ratios and selling a balanced product mix. The share of protection in the individual and group new business premium increased from 12% in FY2015 to 21.8% for FY2017. Profit after tax registered a CAGR of 6.3% to Rs 886.92 crore from FY2017 to FY2015, while insurance profit recorded a CAGR of 9.7% between FY2015 and FY2017.

Growing and profitable multi-channel distribution footprint: Individual and group customers are offered products through a diversified distribution network comprising four distribution channels: bancassurance, individual agents, direct, and brokers and others. All distribution channels have been independently profitable. Bancassurance remained the most significant distribution channel, generating 50.7% of total new business premiums, in FY2017. The individual agent network generated 7.5%, direct sales 39.8%, brokers and others distribution channel 2.1% of total new business premium in FY2017.

Customer centricity enabling growth across business cycles: Customer-centricity has resulted in long-term profitable growth, as reflected in the consistent increase in EV at a CAGR of 18.4% from Rs 8888.2 crore in FY2015 to Rs 12470.5 crore in FY2017. As many as 99% of customer complaints were resolved within 15 days, the turnaround time prescribed by the Insurance Regulation and Development Authority of India, in FY 2017. The individual claims settlement ratio was 97.62% and the group claims settlement ratio 99.67% in FY2017. The overall claims settlement ratio of 99.16% in FY2017 is among the best in the Indian life insurance industry.

Leading digital platform: The digital platform gives competitive edge across various distribution channels and customer segments. The investments have enabled benefiting from the increasing digitization of the Indian economy. Annualised premium equivalent earned through online channels recorded a CAGR of 27.9% between FY2015 to FY2017.

Weaknesses

Despite developing a multi-channel distribution platform over the years, bancassurance remains the most significant, contributing 68.2% of the annualized premium equivalent for FY2017. HDFC Bank contributed 59% of the annualized premium equivalent. Any termination of, or any adverse change to, relationships with or performance of bancassurance partners, including HDFC Bank, can have a material adverse impact on the business.

There is exposure to fluctuations in interest rates, with fixed-income securities portfolio representing 58.2% of the total AUM end September 2017.

Any catastrophic event, including natural disaster, can result in significant claims and have a material adverse effect on business, prospects, financial condition and results of operations.

A significant proportion, at 51.7%, of total new business premiums was generated by unit-linked products, and by participating products at 29.7% in FY2017. Any regulatory changes or market developments that adversely affect sales of such products can have a material adverse effect on the business.

Maharashtra, Gujarat, Karnataka, Tamil Nadu and Delhi accounted for 58.5% of the total premium received from new business retail policies in FY2017. As a significant portion of the business is generated from a few regions, there is susceptibility to economic and other trends in these areas.

Valuation

HDFC Standard Life Insurance Company is among the top three life insurers in India by terms of market share in new business premium one of the most profitable life insurers based on the VNB margins, and among the top five private life insurers in India. The overall total premium recorded a CAGR of 14.5% to Rs 19445 crore between FY2015 and FY2017. The VNB margins improved from 18.5% in FY2015 to 22.0% in FY2017 by improvement in cost-efficiencies, increasing persistency ratios and selling a balanced product mix. Profit after tax registered a CAGR of 6.3% to Rs 886.92 crore in FY2017 from FY2015.

The company is valued at Rs 58260 crore at the upper price band of Rs 290 per share. With embedded value (EV) at Rs 14010 crore end September 2017, the scrip is offered at 4.2 times the EV.

Among the peers, ICICI Prudential Life Insurance Company currently trades at 3.4 times EV end September 2017. SBI Life Insurance is trading at 4 times EV end March 2017. However, ICICI Prudential and Bajaj Allianz computes EV using Indian EV principles set out in actuarial practice standard 10. SBI Life, Max Life and HDFC Standard Life compute EV using market consistent EV principle.

HDFC Standard Life Insurance Company: Issue highlights

Offer for Sale Offer size (in Rs crore)
- On lower price band8245.26
- On upper price band8695.01
Offer size (in no. of shares )29.98 crore
Price band (Rs)275-290
Minimum Bid Lot (in no. of shares )50
Post issue capital (Rs crore) 2008.97
Post-issue promoter & Group shareholding (%)81.0
Issue open date07/11/2017
Issue closed date09/11/2017
ListingBSE,NSE
Rating 55/100

 HDFC Standard Life Insurance: Policyholders Account

1303 (12)1403 (12)1503 (12)1603 (12)1703 (12)1709 (6)
Premium earned (net)11446.0511976.4414762.4516178.7719274.869050.96
Income from Investments2542.655073.0812249.271790.5711140.645278.28
Other income25.6623.8832.2159.11103.5378.32
Contribution from the Shareholders account1.90217.3346.6938.0035.397.42
Total Income14016.2617290.7327090.6218066.4530554.4214414.98
Commission647.26514.10623.47701.85792.02403.72
Op. expenses related to Insurance business1216.011280.521488.831871.832385.281282.62
Others127.98161.51150.67188.57222.34125.28
Benefits paid (Net)3921.544694.848233.768241.9510000.405580.36
Change in valuation of policy liabilities7414.9310058.3815652.505928.1116054.766482.51
Provision for taxation50.92151.60119.34174.55151.9822.36
Total Expense13378.6416860.9526268.5717106.8629606.7813896.85
PAT637.62429.78822.05959.59947.64518.13
Transfer to Shareholders account390.01765.40670.86718.25786.34455.80

 HDFC Standard Life Insurance: Shareholders Account

1303 (12)1403 (12)1503 (12)1603 (12)1703 (12)1709 (6)
Amounts transferred from Policyholders account390.01765.40670.86718.25786.34455.80
Income from investments71.14116.07203.30171.21230.30123.07
Others0.000.000.0110.570.0813.34
Total461.15881.47874.17900.031016.72592.21
Expenses (apart from Insurance)7.7821.6022.9028.6572.4013.88
Contribution to policyholders account1.90217.3346.6938.0035.397.42
Total9.68238.9369.5966.65107.7921.30
PBT451.47642.54804.58833.38908.93570.91
Tax4.24-82.7719.0716.5922.0116.77
PAT447.23725.31785.51816.79886.92554.14
EPS (Rs)*2.233.613.914.074.41#
* on current equity of Rs 2008.97 crore of face value of Rs 10 each
## EPS can not be annualized due to seasonality in business
Figures in crore, Source: Capitaline Database

Industry Comparison

ICICI Prudential Life HDFC Standard Life SBI Life Max Life Bajaj Allianz Industry
Business performance (FY17) New business premium (FY17) Rs billion 78.687.0101.536.832.91750.2
5-year CAGR (till FY17) % 9.117.89.214.03.98.9
Individual-New business premium (FY17) Rs billion 69.842.064.733.110.7776.8
5-year CAGR (till FY17) % 18.07.714.114.1-10.03.8
Group-New business premium (FY17) Rs billion 8.945.036.83.622.2973.4
5-year CAGR (till FY17) % -15.337.02.913.019.514.4
Individual WRP (FY17) Rs billion 64.136.459.426.410.1532.2
5-year CAGR (till FY17) % 17.96.023.011.9-5.12.1
Renewal premiums (FY17) Linked + non-linked Rs billion 144.9107.5108.771.128.92429.0
5-year CAGR (till FY17) % 8.611.010.59.6-9.57.0
Total Premium (FY17) Rs Billion 223.5194.6210.2107.861.84181.1
5-year CAGR (till FY17) % 9.813.89.911.0-3.77.8
Costs (FY17) Commission ratio % 3.44.13.78.72.45.3
Expense ratio^^ % 10.712.68.015.718.0
EV (FY17)Rs billion 161.8123.9165.467.4112.6
NBM (FY17)% 10.121.615.418.80.0
Persistency (FY17) 13th month % 85.780.981.180.468.2
25th month % 73.973.373.970.451.1
37th month % 66.863.967.459.743.9
49th month % 59.358.362.554.938.2
61st month % 56.256.867.253.031.6
Profitability ROE (Average FY15-17) % 31.229.420.123.612.2
ROIC (Average FY15-17) % 34.338.487.925.271.4
Market share (FY17)Industry level % 12.06.811.25.01.9
Private sector % 22.312.720.79.23.5
Product mix (NBP, FY17) Linked % 79.135.250.524.441.712.1
Non-linked % 20.964.849.575.658.387.9
No of products Individual Number 19.030.029.018.023.0536.0
Group Number 9.010.010.05.011.0169.0
AUM (FY17) Total Rs billion 1229.0917.0977.0444.0493.029806.0
5-year CAGR % 11.923.316.020.84.613.5
Channel mix New Business Premium (Individual) (FY17)* Individual agents % 23.515.534.125.084.768.9
Corporate Agents-Banks % 57.161.164.761.83.823.6
Corporate Agents-Others % 3.64.30.43.20.61.3
Brokers % 2.24.20.00.31.71.2
Direct Business % 13.614.80.89.79.25.0
Claim ratio Claims settlement % 97.299.298.098.399.296.9
Claim Repudiation % 2.40.71.61.50.80.5
Average turnaround time Days 3.05NA## NA## NA## NA## NA
Source: HDFC Standard Life Insurance Company IPO prospectus

 Market share (among entire industry) in FY2017

Individual WRP Group NBP Total NBP received Number of policies
LIC 46.10%81.00%71.10%76.10%
SBI Life 11.20%3.80%5.80%4.80%
HDFC Standard Life 6.80%4.60%5.00%4.10%
ICICI Prudential Life 12.00%0.90%4.50%2.70%
Max Life 5.00%0.40%2.10%1.90%
Bajaj Allianz Life 1.90%2.30%1.90%1.00%
Kotak Mahindra 2.30%1.50%1.60%1.10%
Birla Sun Life 1.70%1.60%1.40%1.10%
IndiaFirst Life 0.80%1.30%1.00%0.50%
PNB Met Life 1.90%0.10%0.70%0.80%
Tata AIA Life 2.00%0.10%0.60%0.70%
Reliance Nippon Life 1.30%0.30%0.60%1.00%
Canara HSBC OBC Life 1.20%0.40%0.60%0.30%
DHFL Pramerica Life 0.30%0.70%0.50%0.20%
Exide Life 1.20%0.00%0.50%0.70%
IDBI Federal Life 0.80%0.20%0.50%0.50%
Shriram Life 0.70%0.30%0.40%0.80%
Star Union Dai-Ichi Life 1.10%0.00%0.40%0.50%
Bharti Axa Life 0.70%0.20%0.30%0.40%
Future Generali Life 0.30%0.20%0.20%0.20%
Aviva Life 0.30%0.10%0.10%0.10%
Edelweiss Tokio Life 0.30%0.00%0.10%0.20%
Aegon Life 0.20%0.00%0.10%0.20%
Sahara Life 0.00%0.00%0.00%0.10%
Source: HDFC Standard Life Insurance Company IPO prospectus

 Industry Comparison (FY17)

ICICI Prudential Life HDFC Standard Life SBI Life Max Life Bajaj Allianz
Profit / Surplus (Rs bn) -Total 16.88.99.56.68.4
PH (Policy holder) 11.37.55.95.52.3
SH (Share holder)5.51.43.61.16.1
Sum assured (Rs bn) 2,9403,8882,1861,3951,982
Solvency ratio (%) 281192204309582
Dividend payout ratio 39.50%29.60%18.90%25.50%NA
Agent productivity (NBP, Rs)12753195,073234501165933108097
Number of individual agents13611454,51695,35554,28377,097
Average policy size -new business (Rs)
Total 111,89780,28679,54072,845120,167
Individual 99,41838,81750,77865,78138,953
Portfolio mix
Equity 46.80%41.00%23.20%NA 32.00%
Debt 53.20%53.60%68.20%NA 61.10%
Others 0.00%5.40%8.60%NA 6.90%
EV (Rs bn) 161.8123.9165.467.4112.6
EVOP (Rs bn) 2321.428.911.27.5
Conservation ratio83.781.981.484.565.6
Source: HDFC Standard Life Insurance Company IPO prospectus

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