You had a very good sale in March before the tax incentive on high-ticket-size non-par policies was removed from April 1. Again April and May were better than the industry. Do you see any impact of the tax exemption going away and what is your expectation for the rest of the year?
There was a huge demand in March. It was more opportunistic as we did not advertise. What is interesting is that below ₹5 lakh (sum assured) grew by 50% in March. Also, we had 14% growth in annualised premium equivalent (APE) in April and May, especially when analysts are predicting we will have a degrowth. The way I see it is – the premise of locking in rates for the long term has caught the imagination of policyholders. Also, the Nielsen study shows that tax is ranked 7-8 among reasons why people buy insurance policies, and not amongst the top 2 or 3. Saving tax has been a sales pitch product for the agency force and they have to change to pitch the long-term guarantee benefit. But, if we ask where can the money flow, about ₹55 of every ₹100 goes into financial savings. Of the ₹55, ₹17-18 flows into life insurance and has been the case steadily for several years.
There is tax parity when compared with bank fixed deposits and debt mutual funds, and life insurance is 100 basis points better in internal rate of return (IRR) because tax incidence is delayed to say the 18th year from now. We will grow faster than the industry.
Can the Value of New Business (VNB) margin double from current levels?
Over the last decade, our VNB margin has doubled every four years. With the combination of growth and increased margins, we expect further improvement. We are already a few quarters ahead of margin neutrality, with standalone margins of HDFC Life rising and erstwhile Exide Life margins being in single digits. In the next 3-4 years, we expect to move up, driven by product innovation and cost synergies. Our top line will grow faster than the industry, contributing to margin improvement.
How will life change for you after the HDFC Bank-HDFC merger is completed? Your share of premium income from HDFC Bank has declined to 55% from 80% earlier. Do you expect it to change?
Ever since the merger was announced, HDFC Bank has been very clear on how it will convert into a conglomerate and has been looking at the power of cross-selling. It is very evident that there are cross-sell opportunities with brand protection and HDFC Bank is warming up to the idea of what it can be like a parent-child relationship. It has been clearly stated by HDFC Bank that it will go up to a meaningful number.
How has the merger with Exide Life helped HDFC Life?
Despite the challenges posed by Covid-19, we successfully completed the merger without any negative surprises. We have seen growth in both the top line and bottom line, contributing approximately 8-10% to our overall performance. The merger has also enhanced our agency channel and provided valuable insights into tier-2 and tier-3 cities.
You have been investing a lot to grow the agency. How is the share changing?
We have grown consistently faster than the market and doubled from 10% four years ago to 20% now. We have added 35-40% agents and are among the top two-three in terms of agent addition. That becomes the oil for the engine next year. We want to go up to 30% in 4-5 years. The agency channel has to be built brick by brick. The proprietary channel is when you can drive a lot of product innovation. It is more of an advisory which the agency channel does well. In the past two decades of turbulence that the industry has seen, we have come out stronger. We have seen that when the agency does not grow, banks or small finance banks are there to support like during the pandemic.
Companies are focusing on protection to improve margins. How do you plan to improve your protection business, which has been down for some time?
As our per capita GDP rises, which is currently around $2,000, people are becoming more aware to preserve their financial well-being. The fragility of life message has percolated, especially in the post-pandemic era. With a shift in focus from savings to protection, we are optimistic about the future. Our goal is to achieve a 17-18% protection share in APE from the current 13% in the coming years.
Will HDFC Life consider becoming a composite insurer once the regulator starts giving a composite insurance licence?
We will evaluate the pros and cons of becoming a composite insurer. We see the potential in combining life insurance with health insurance. Offering universal human life cover, adjusting premium allocation between life and health covers, or introducing guarantees on health premiums are some innovative possibilities. The composite insurance licence will provide flexibility.
Last year you raised ₹2,000 crore of equity capital for the merger. Your solvency is above 200 now. Is there a need to raise capital this year or in the near term and will you raise debt or equity capital?
The choice between debt and equity capital depends on the nature of the requirement. For short-term needs or working capital, we will opt for debt capital. However, for large-scale capital investments such as subsidiaries, mergers and acquisitions, or significant business expansions, we will consider equity capital. Currently, there are no immediate plans for capital raising.
After a decade, new life insurers are entering the market. Has the sector become more interesting?
The entry of new insurance companies is good, and considering the longevity and under-penetration of insurance in India, expanding the overall market is crucial. The new companies will require around ₹2,000 crore capital and around 10-12 years to break even. Becoming a full-fledged life insurance company will require substantial capital and patience, but niche segments offer opportunities for innovation and growth.
Do you expect price wars to grab the bancassurance channel now that the commission cap is removed?
I do not see much change as these different pushes and pulls always existed. Companies will have to offer a holistic package in terms of product innovation and technology, which can lead to seamless integration, bigger balance sheets and better claim settlement ratios. The regulator has left it to the board of companies and is moving towards a principle-based instead of a rule-based system. The regulator has given the freedom but asked companies to choose wisely between companies, customers and partners.
