INTERVIEW: HDFC Life’s Padalkar eyes ideal product mix in medium term

Informist, Friday, Dec 1, 2023


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–CONTEXT: HDFC Life CEO Padalkar's comments in an interview to Informist  

–HDFC Life CEO: Aim 35-40% share for non-participating policies

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–HDFC Life CEO: Aim bancassurance share at 45% of business in 5 yrs

–HDFC Life CEO: Continue to tie up with new banks for bancassurance 

–HDFC Life CEO: Want govt bonds of over 50-year tenure

–HDFC Life CEO: Have capacity for 17-20% business growth

–HDFC Life CEO: Seeing recovery in higher premium policies now 

–HDFC Life CEO: Unified licence to boost health insurance penetration

–HDFC Life CEO: Insure-tech arm to create further opportunities

–HDFC Life CEO: IRDAI working on norms on climate-related risks


By Subhana Shaikh and Richard Fargose


MUMBAI – Known to have one of the most balanced and diversified product baskets in the industry, HDFC Life Insurance Co Ltd is looking to further build on these parameters that would ultimately help the private sector insurer boost its margins and growth over the medium term.


"My ideal product mix would be non-participating savings policies around 35-40%, participating about 30-35%. I would want unit-linked insurance plans at a company level to be under 30% and closer to 25% and the rest would be in term insurance," Managing Director and Chief Executive Officer Vibha Padalkar in an interview to Informist.


The share of unit-linked policies in Apr-Sep was 28% of the life insurer's total product mix, while the share of non-participating products was at 28%. Participating products' share was at 30% and annuity and non-participating protection contributed 8% and 6%, respectively.


Unlike a participating insurance policy, a non-participating policy does not pay out any bonuses or dividends based on the insurer's profits. However, these life insurance plans do give guaranteed benefits on maturity.


A better product mix, including higher protection and annuity, could further enhance the scope for margins over the next few years, Padalkar said. She expects retail term insurance products to be at about 9-10% in the medium term, as against 5-6% now.


For the current financial year ending March, Padalkar sees the company's new business margin at a level similar to last year's and expects to slightly higher at 28% in 2024-25 on the back of a favourable regulatory environment. In 2022-23, HDFC's new business margins were at 27.6%.


The value of new business–a measure of profitability of the new business written in a period–came in at 14.11 bln rupees in Apr-Sep, clocking 10% on-year growth.


To a query on the government's decision to tax income from life insurance policies, excluding unit-linked insurance plans, Padalkar said it had dented the topline of HDFC Life by 10-12%. However, the life insurer has started covering that lost ground, she said. 


Following are edited excerpts from the interview that covered subjects including regulatory aspects and the insurer's financials:


Q. After the merger with Exide Life Insurance, you reached margin neutrality quite quickly. What are the challenges that you face in this segment? What kind of trajectory do you foresee for the current financial year and the next?

A. This year, we have said we will hold margins versus last year, including Exide Life, which was low single-digit. That means erstwhile HDFC Life's margins continue to grow well. Exide Life has been a drag because of lack of scale… but as we progress from low single digits, we are getting towards the low double digits and then converging towards HDFC Life margin.


That will happen perhaps another year down the line when that convergence starts happening. Holding margins is not an easy outcome because the government stripped exemption of tax relief on policies above 500,000 rupees. That it is not an easy deliverable because we have the capacity for 17-20% business growth. For the financial year starting Apr 1, it should move upwards slightly to 28%, given things are fine on the regulatory front.


Q. Are non-participating policies at product level seeing any margin pressure because of spread compression?

A. Not so much because of the spread compression, but pressure because of the 500,000 rupees tax exemptions. As long as other products, such as in financial services, also get compressed, there might be a little bit of timing difference, but eventually, the spreads all converge. 


I firmly believe that this is a matter of time. Yes, there will be a little bit of going slow today… but we have to be patient because the core proposition has not changed. 


Q. HDFC Life has always had a balanced and diversified product mix. Do you expect non-participating policies to disrupt that mix? Is that a challenge?

A. Maybe in the short term, a little bit of reduction in non-participating policies, but if you look at the first half of the current financial year, we ended non-participating at 28%, which is fairly respectable.


While in the short run that could be the case, by that I mean a couple of quarters, but in the longer term, if you look at more normalisation in the next financial year and thereafter, I firmly believe that non-participating policies will have their rightful place under the sun.


Q. How is HDFC Life coping with the challenges after the government removed the exemption of tax relief on maturity proceeds of policies with more than 500,000 rupees annual premium? How much has it affected the company's business?

A. A lot of interaction happened at the time when the changes were made to explain to the government… we have been increasingly engaging as a sector with the government and the government has called us along with our regulator to present to them all the things that we are doing. That dialogue has started happening.


It has impacted the sector and us. Fortunately for us, we have grown faster than the sector. Above 500,000 rupees ticket size, we have seen de-growth as I'm sure our peers also, but, below 500,000 rupees, I am happy to share that the growth has been there. Below 500,000 rupees have grown in double digits, but above 500,000 rupees has shown de-growth.


The good news is, we can slowly see the higher ticket demand also coming back, and I had an unwavering belief that people will make rational decisions in the longer term. We are beginning to pick up larger ticket sizes, even 1 crore (10 mln rupees) ticket sizes. Overall, we had 10-12% impact, but now we have started covering that lost ground.


Q. In the first half of the current financial year, bancassurance contributed 65% of HDFC Life's channel mix. Are there any plans to bring that number down and increase the dependence on other channels?

A. We are channel agnostic. I want my proprietary channel to initially be about one-fourth of my business in the medium term, over the next five years. We are on track and will continue to grow faster.


This year might be a bit of an aberration, but it will continue to grow faster from next year and so the share will grow. Having said that on bancassurance, we continue to tie up with new partnerships so that, in a way, it is not depending on only one bank.


In five years, agency channels will be one-third of our business, bancassurance should be about 45% of the business, and the rest will be through direct channels and online intermediaries.


HDFC Bank contributes about 80% to our overall business. HDFC Bank has been more unit-linked insurance plans heavy because of the kind of customer base that they have. But other bancassurance relationships–whether its YES Bank, IDFC First Bank and Bandhan Bank–are not so unit-linked insurance plan heavy.


Q. What is the product mix that you are looking at?

A. My ideal product mix would be, non-participating savings around 35-40%, participating at about 30-35%. I would want unit-linked insurance plans at a company level to be under 30% and closer to 25% and the rest would be in term insurance.


I would like to see term insurance or retail term to be in double digits around 9-10% in the medium term. Over the next four-five years, we really need to aspire to get there. Today, the term insurance product is about 5-6%.


Q. What is the value of new business growth outlook? Would you continue to stick to your guidance? What is the outlook for the current financial year and the next?
A. We expect our VNB (value of new business) growth to be in line with APE (annual premium equivalent) growth. We are on track to achieve mid-teen APE growth excluding excess 1,000-1,100 crore (10-11 bln rupees) budget impact for full year. We definitely have the capacity for higher growth, but we will not cut down on investments as the larger goal is to deliver sustainable, profitable growth, that is, double all the key metrics every year.


VNB growth will be supported largely by topline growth and gradual margin expansion over the medium term. There is further scope to enhance margins through better product mix (higher protection, annuity, riders) and operating leverage (higher scale) playing out over the next few years.


Q. What is your annual premium equivalent outlook for the current financial year?

A. We have said mid-teens around 11-13%. We should be back to doubling the growth every four-five years that we have delivered so far. We should get back on track. So that translates to 17-18% of APE (annual premium equivalent) growth.


Q. It's been a year since Exide Life merger. How are the business operations going on? Are you seeing the full effect of the merger on your operations?

A. It has been successful in every way. It has been more of an operational merger than worrying about something we didn't know.


In terms of our top line synergies, tier-II and tier-III markets and also agency channels have been well met because that part of the agency channels, which we call a variable agency model, was much bigger than our agency, and it was going to add about one-third of additional business to our existing agency model.


To give you one data point, our tier-II and tier-III shares have grown in the first half of the year, two times what tier-I has grown.


Q. Insurance Regulatory and Development Authority of India has been proposing unified licences for insurance business. How do you see this affecting the industry?

A. It has been one of our ideas also. If we look at the development and penetration committee report which I chaired, we did put that down in the report.


If you look at insurance, it is fairly under-penetrated. We need to expand the pie. Same thing with health insurance if you look at the penetration of health insurance, it's less than 1%. At least life insurance is three times as much. We firmly believe that the more people, the more companies that are able to sell health insurance and solutions to the average Indian, the better it is than just the re-division of the pie.


Let's look at it worldwide. Health sits closer with life than it sits with motors. We are artificially splitting it up into different regulations.


I'm not mandating it. Whoever wants to do it, can do it. Let's see, maybe open it up for three years or five years. If it doesn't work, take it back.


Q. Insurance companies have been served notices for huge Goods and Services Tax payouts, especially on the commissions paid. What is your view, and how are you contesting the same?

A. The point here is that there has been no loss of GST revenue for the government. When I talk about HDFC Life, a payment has been made and services have been rendered on which GST has been collected and paid to the government. It's a moot point, going forward.


Q. Life insurance companies have started investing in illiquid and private credit. Mutual fund investors have burnt their hands on this in the past. What gives you the comfort to invest and do you feel insurance companies have the necessary framework to assess, measure and monitor such credit risk?

A. Each investment will have to follow the principles of asset liability mismatch. One is the credit worthiness of the investee company that one has to undertake with the utmost care and diligence. Second, IRDAI has limits. It is restricted to less than 5%. Thirdly, not each one of them will be bad because the horizons of mutual funds might be different to the horizon of life insurance companies. 


I won't say everything is wrong, but the stock pick has to be creditworthy, there has to be pedigree in terms of who you are investing in. For example, the government's 50-year bond, we would love even longer tenure bonds because growth of long-term guarantees is on the back of good quality government. That actually, we want more, and we will consume more of.


Q. Insurance companies have huge forward rate agreement trades outstanding. Do you see any potential risk, including regulatory, in such transactions? 

A. On interest rates, yes, but not on the credit, because if you look at the sensitivity to our embedded value, we are locked in. So, neither do we make a profit, nor do we make loss… it really depends on the asset liability matching, and how you are locked in, because your FRAs (forward rate agreements) could contract, while guarantees, you give a much higher level of guarantee, and we try to stay away from that.


We really don't know the kind of hedging risks, how people are doing in our industry, but I'm sure the regulators have oversight of that. 


Q. Investment risk-return environment is changing fast. Do you expect any changes with respect to investment guidelines from IRDAI?

A. In the context of the risk-based framework, it's actually there in the insurance bill, wherein we have asked that, as a sector, we should be allowed to invest in insurance technology subsidiaries. That has not come through yet because the bill has not been tabled in Parliament.


I think that will open up a lot of opportunities and adjacency and that is the right way and how I can do that through a technology platform.


Today, we can't do any of that. With finance technology companies or an insured tech subsidiary, we'll be able to do that. I would love it to be sooner, but pragmatically, it may probably come after elections.


Q. What is the broad asset allocation for equity versus debt? How much flow do you see going into each of these segments in Jan-Mar?

A. In terms of our AUM (assets under management), the debt to equity ratio was at 68:32 as on Sep 30…it depends on how each segment grows. But yes, given that unit linked insurance plans will be about 25% of our business and non-participating savings and participating will be the majority of our business, yes, more flows will come into debt.


Q. You said you are in partnerships with several fintech companies. With fintechs not falling under the Reserve Bank of India's purview and with so much scrutiny around them after recent regulations on personal loans, is there any hesitation or risk towards partnering up with these companies? 

A. No, we will not have any tie-ups just for the sake of it. One is that we only cover life, and we don't cover the credit even if a fintech goes belly up. We are very focused on KYC (Know Your Customer). We absolutely make it non-negotiable to say that we will carry on with the partner, but beyond that point, we are not afraid to walk away. We'd rather grow in a sensible manner doing the KYC checks and ensure that the partner is equally focused.


Q. Are there any talks happening with the regulator on climate risk norms? Any guidelines expected from IRDAI on the same?

A. They are working with all of us and a fair bit of brainstorming is happening. They also scrutinise our business sustainability reports as well as on the disclosures, at least for the listed companies. A lot of conversations are happening, and I would expect something (guidelines) like that to happen.  End


Edited by Ranjana Chauhan


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