Fundamental Analysis Of HDFC Life: Many people insure their vehicles, mostly to follow the law. However, only three percent of India’s population has life insurance. That’s frightening! People find it easy to buy gold or invest in fixed deposits. Albeit, they wait for a few years to buy insurance, until an unfortunate incident jolts them into reality.
Going through mundane policy documents is tedious for many, and we get it. But knowing the type of life insurance one wants is important, and so is the insurer. Choosing an insurer or insurance company depends on various parameters. And, one of the most important ones that people tend to overlook is the kind of company that it is.
The probability that a claim, if any, will be settled depends on the financial situation and the fundamentals of a company. In this article, we are going to do a fundamental analysis of HDFC Life Insurance Company, with the hope that we simplify it for you. Let’s take a look, shall we?
Fundamental Analysis Of HDFC Life
Industry Overview
In the financial year 2021, India’s life insurance penetration stood at a measly three percent. In other words, insurance is highly underpenetrated and there is ample room for growth. The pandemic has led to higher awareness about the need for insurance.
In fact, the industry sees higher customer interest, with the concept of human life value gaining relevance and increasing the adoption of digital services by customers.
The life insurance industry will grow at an exceptional rate of 6.6% (in real terms) in 2022, according to the Swiss Re Institute. Further, it will grow at 7.1% in 2023. They say that life insurance premiums are expected to cross $ 100 billion for the first time in 2022.
The insurance sector will register a growth rate close to 8% Compounded Annual Growth Rate (CAGR) between 2023 and 2032, as per expectations.
About The Company
HDFC Life Insurance Company is a leading long-term life insurance solutions provider in India, established in 2000. It offers a range of individual and group insurance solutions that meet various customer needs.
It is a joint venture between HDFC Ltd., India’s leading housing finance institution, and abrdn plc (formerly Standard Life Aberdeen plc) a global investment company.
The Company has 38 individual and 13 group products in its portfolio, and 7 optional rider benefits, as of September 2021. These include Protection, Pension, Savings, Investment, Annuity, and Health. It has a wide reach with 372 branches and additional distribution touch-points throughout the country.
It has an established market position and is undeniably one of the top three players in the industry (private sector).
Moat and Competitors
- A diversified product mix and distribution mix help it tackle the cyclicality of capital markets.
- It has an open architecture of distribution which gives it an opportunity to cross-sell.
- HDFC Life has a robust risk management framework in order to hedge interest rate and renewal premium reinvestment risk.
Some of its major competitors are:
- Life Insurance Corporation of India Ltd.
- SBI Life Insurance Company Ltd. and
- ICICI Prudential Life Insurance Company Ltd.
Opportunities and Threats
- High entry barriers in the insurance industry are favourable for its business. This business requires bancassurance partners and a long break-even period of 9 to 10 years. HDFC Life is already an established player.
- The number of senior citizens as a percentage of the total population has been increasing.
- In fact, life expectancy has also increased from 69.3 years in 2020 to an expected 76.1 years in 2060. Therefore, the demand for its products will increase.
Market fluctuations, and changes in tax rates, or interest rates can significantly affect the future prospects of a company. Moreover, the business is sensitive to a change in relationships with key distribution partners.
HDFC Life – Financials
Revenue and Profitability
The company’s revenues dropped in 2020, during the onset of the pandemic. However, the demand for life insurance went up due to increased awareness among people. As a result, the revenue shot up 2.4x in 2021. However, its net profit has grown sideways. In CAGR terms, its sales grew at a 3-year CAGR of 32.26%, while its net profit grew at a 3-year CAGR of 1.90%.
Fundamental Analysis Of HDFC Life – Key Metrics
| Particulars | Values |
|---|---|
| Face Value (₹) | 10 |
| EPS (₹) | 6.45 |
| Debt to Equity | 0.04 |
| ROE (%) | 8.5 |
| Current Ratio | 0.9 |
| Market Cap (Cr) | 112341 |
| Promoter’s Holdings (%) | 51.52 |
| Dividend Yield (%) | 0.33 |
| Stock P/E (TTM) | 81.05 |
| Net Profit Margin | 1.97 |
- HDFC Life has an ideal debt-to-equity ratio of 0.04 and a very good interest coverage ratio of 58.91.
- However, it has a low return on equity of 8.5% and a very low return on capital employed of 0.64%.
- It has a low current ratio of 0.9, indicating that the company might have a difficult time paying its immediate debts and liabilities.
- The company has a promoter’s holding of 51.52%. Its promoters have not pledged their shares. Further, 27.66% of its shares are held by Foreign Institutional Investors(FIIs) and 6.92% by Domestic Institutional Investors (DIIs), 13.87% by the public and 0.03% by others.
- Its shares were trading at ₹ 522.75 apiece at the time of writing this article. The company has a market capitalization of ₹ 1,12,341 crores. Therefore, it is a large-cap company.
- Its shares were trading at a PE TTM of 81.05, which is lower than the sector PE of 96.97. Therefore, this might indicate that the stock is undervalued and its price might rise in the future. However, this statement is not conclusive.
Sector-specific ratios
There are a few ratios that are specific to the insurance sector. They form an important part of the analysis:
Persistency Ratios
| Particulars | Values | |
|---|---|---|
| Face Value (₹) | 10 | |
| Particulars | March 31, 2022 (%) | March 31, 2021 (%) |
| 13th month | 87.46 | 84.86 |
| 25th month | 78.82 | 71.27 |
| 37th month | 67.47 | 65.15 |
| 49th month | 63.23 | 62.73 |
| 61st month | 53.99 | 48.88 |
This ratio helps us understand how persistent customers have been in renewing their policies every year. It is measured at different levels as indicated above. HDFC Life’s persistency ratios have improved in the past year. This measures the trust customers have in the long-term products and services being offered by the insurer.
Solvency Ratio
All companies are required to maintain a solvency ratio of 150%, as per IRDAI guidelines, to avoid the risk of bankruptcy. This helps us identify if the company has enough buffer to settle all claims in extreme situations.
HDFC Life’s solvency ratio has been growing. It was 188% in FY19, 184% in FY20, 201% in FY21 and 176% in FY22. The ratio is lower in FY22 because HDFC Life paid ₹ 726 crores in cash to acquire Exide Life. Therefore its solvency was reduced by 13%.
Commission Expense ratio
This ratio tells us what is the outflow towards commissions from the written premium during a particular period. It is important to keep a tab on this ratio as it directly impacts the premium that we pay.
HDFC Life’s Commission expense increased by 14% from ₹ 1,676 crores in FY21 to ₹1,940 crores in FY22. This happened because of an increase in renewal premium, higher contribution by-products with higher commission rates, and higher business volumes of policies with lower premium paying terms.
Claim Settlement Ratio
This ratio indicates how many claims a company has settled against the number of claims received. The higher the CSR, the greater the chances of settlement of a claim. It is also a measure of the insurer’s reputation. HDFC Life has a claim settlement ratio of 99.6%.
In Closing
In this article, we did a fundamental analysis of HDFC Life Insurance Company. We took a look at the industry and it functions in. Then we get to know about the company’s business, its moat, and competitors. Later we took a look at its opportunities and threats.
Finally, we took a look at its revenue, profitability, key metrics, and ratios that are specific to the sector.
That’s all for this article folks. We hope that you found this article insightful. Happy investing until next time.
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