HDFC Life front-ended excess mortality reserve (EMR) of Rs 7 bn which is ~5x of net Covid claims of FY21. While management guides reserves must be sufficient to meet wave-2 Covid claims, it is mindful of prospective third wave. Higher reserves impacted Op ROEV. VNB grew 40% y-o-y to Rs 4.1 bn, largely in line with estimates, aided by a 30% rise in APE and ~200bps y-o-y margin expansion to 26.2% (vs 25.9% estimate). We see a 19% VNB CAGR more than FY21-24 with 18% FY23 ROEV. Buy.
Sharp enhance in Excess Mortality Reserve: HDFC Life developed an EMR of Rs 7 bn in Q1FY22 (which includes Rs 690 mn from unutilised Covid reserves) – this is substantial vs Rs 1.5 bn of net Covid claims in FY21 and Rs 1.7 bn of reserves developed at the finish of FY21. This impacted operating ROEV, which moderated to 14.4% (-140bps y-o-y/ -410 bps q-o-q). EMR+estimated Covid claims in Q1FY22 collectively would account for ~3% of FY22 EV on gross tax basis. However, it has not altered its lengthy-term mortality assumptions. It expensed the net reserve accretion in Q1FY22, impacting net profit which declined 33% y-o-y to Rs 3 bn. Mgmt guides that the peak of person claims is behind and the existing level of provisioning is adequate for excess death claims. However, any surge in claims due to a prospective third Covid-wave remains a monitorable.
In-line VNB development on low base: HDFC Life’s Q1FY22 VNB rose in line by 40% y-o-y to Rs 4.1 bn on low base (2yr Cagr of -10%), led by a 30% development in APE (2yr Cagr of -4%) and margin expansion (~200bps y-o-y owing to favourable item-mix). Group protection more than tripled on a really smaller base riding on sturdy development in credit safeguard. Non-par also saw excellent development of 39% y-o-y, and aided margins. Other Saving solutions (ULIP/Par) saw moderate development, when retail protection expectedly weakened (-10% y-o-y) as HDFC Life adopted stringent underwriting.
Demand for retail protection in Q1 has stayed sturdy, but HDFC Life has been converting 60-65% of policies vs. 80-85% in regular instances. Going forward, retail protection must develop with Covid restrictions largely lifted, although its method will be calibrated. Most channels saw excellent development, with broker and agency major the development on smaller sized bases. During the quarter, it struck a new partnership with ICICI Securities and TVS Credit.
Persistency trends sturdy: Persistency was steady/improved across buckets more than Q4FY21 with 13th month persistency staying sturdy at 90% when 61st month stayed steady at 53%, with substantial improvement y-o-y. Solvency ratio at 203% was above the regulatory requirement, and also improved y-o-y and q-o-q. We sustain our Buy rating with a cost target of Rs 800 based on 4.4x Jun-23e Price/EV.