HDFC Life: A Blue Chip Stock In The Kings of Capital Portfolio Of Marcellus PMS Fund

HDFC Life is one of the four savings plays in the Kings of Capital portfolio. Saurabh Mukherjea and Team Marcellus have issued a detailed note explaining the merits of the stock and why it deserves to be part of our portfolio.

It is pointed out that HDFC Life was the first private life insurer to launch operations in India. Its differentiated strategy of maintaining a balanced product mix and distribution mix along with a focus on technology and product innovation has delivered consistent market share gains (private life insurance market share of HDFC Life has increased from 8.7% in FY10 to 21.5% in FY20).

What differentiates HDFC Life from other private life insurers?

It is stated that HDFC Life differentiates itself from the other private life insurers because of the following:

(i) Diversified product mix and distribution mix: HDFC Life has the highest margins (26% new business margins i.e. the profit margin on new policies issued during a period) due to a superior product mix which has relatively low reliance on ULIPs. As the Indian life insurance industry matures, the contribution of ULIPs to the profitability and revenue of life insurers will substantially reduce as insurance companies and consumers move towards protection and annuity-based products. A diversified product mix and distribution mix also helps HDFC Life tackle the cyclicality of capital markets and changes in the regulatory and macro environment. Exhibit 6 below illustrates how HDFC Life has gradually reduced its reliance on ULIPs over the years.

(ii) Cross sell opportunity: HDFC Life has tied up with 270 partners (Micro finance Institutions, Small Finance banks, banks) for selling credit protect policies (designed to pay off a borrower's outstanding debts if the borrower dies). The customer data from these partnerships is now being used to cross sell other insurance products. Exhibit 8 below shows that now over 8% of total individual policies are sold to existing credit protect customers.

(iii) Open architecture at HDFC Bank: HDFC Life has a diversified distribution mix and is not over reliant on one specific channel. Unlike the other large life insurers, HDFC Life is not owned directly by a bank and while HDFC Bank is a group company, all transactions between the two companies are at an arm’s length basis. Even though HDFC Bank has already onboarded and distributes policies of other life insurance partners, HDFC Life continues to retain its market share within HDFC Bank. As a result, if the mooted regulations around reduction of ownership by banks in life insurance companies do get implemented, it will not affect HDFC Life. In contrast, most other large banks who continue to distribute life insurance policies of only their group companies are far more vulnerable in the face of such regulatory change.

(iv) Leader in product innovation, marketing, and technology: HDFC Life made pure protection, guaranteed products and lately, annuity products popular through their attractive value proposition and smart marketing. While its tie up with HDFC Bank gives it scale, none of HDFC Life’s products are channel monopolies. At the heart of this flexible model is its early investment in technology which is moving beyond being just a business enabler to being a driver of business decisions. While products can be copied, the DNA of being first to market with a new product has become a part of HDFC Life’s culture. HDFC Life’s constant knack of innovating and its smart marketing differentiate it from other insurers.

It is also pointed out that HDFC Life’s embedded value has grown at 19% CAGR over FY15-20 which signifies that HDFC Life is underwriting profitable business.

As regards valuations, it is stated that HDFC Life’s adjusted profitability is twice its reported profitability. As a result, HDFC Life’s adjusted P/E multiple is also half of the P/E multiple calculated on reported PAT.

In addition to being a high-quality life insurer, it is opined that life insurance as a business is likely to have a relatively low correlation with the lenders in the Kings of Capital Portfolio

As regards the future prospects, it is stated that during FY21, the Indian lending industry has struggled with asset quality issues and balance sheet stress due to Covid-19 induced lockdowns. However, during this time the awareness for life insurance has increased and HDFC Life has grown premiums at 16% YoY during the first nine months of FY21.

It is also noted that while life insurers do not have a long history of being listed in India, the past year has shown that even though insurance and lending are a part of the larger financial services universe, the balance sheet structures, and business models of insurers and lenders are quite different and uncorrelated to each other. This low correlation between the savings plays and lenders in the Kings of Capital portfolio act as a natural hedge and reduce the portfolio’s volatility.

Click here to read the full note