Initiating Coverage | 17 November 2017
Sector: Financials
HDFC Standard Life
BANKING
MORTGAGE
INSURANCE
Another 'compounder'
Nitin Aggarwal - Research Analyst
(Nitin.Aggarwal@MotilalOswal.com);+91 22 3982 5540
/
Anirvan Sarkar - Research Analyst
(Anirvan.Sarkar@MotilalOswal.com)
Alpesh Mehta - Research Analyst
(Alpesh.Mehta@MotilalOswal.com);+91 22 3982 5415/
Parth Gutka - Research Analyst
(Parth.Gutka@MotilalOswal.com)
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

HDFC Standard Life
Contents: HDFC Standard Life – Another 'compounder'
Another 'compounder' ......................................................................................... 3
India Life Insurance: Growth comes back full circle ................................................ 5
Insurance and Mutual Fund – driving the growth in financial savings ..................... 8
China has shown strong premium growth – How much can India replicate? ......... 10
Valuation of Indian life insurers – How does it stack against global peers? ........... 25
HDFC Life: Another 'compounder' ....................................................................... 27
High intangible entry barriers provides distinct edge to large insurers ................. 31
Business mix is well diversified; composition of ULIPs stands lower at 47% .......... 33
Strong distribution network will support business growth ................................... 35
Bancassurance – key distribution edge; however not cheapest anymore ............. 37
Persistency rate has shown an all-round improvement; expect trend to continue 39
SWOT analysis .................................................................................................... 48
Bull & Bear case ................................................................................................. 49
Valuations attractive; robust return ratios will drive stock performance .............. 51
Annexure ........................................................................................................... 56
Financials and valuations: HDFC standard life insurance ...................................... 59
Financials and valuations: HDFC standard life insurance ...................................... 60
17 November 2017
2

HDFC Standard Life
Initiating Coverage | Sector: Financials – Life Insurance
HDFC Standard Life Insurance
BSE Sensex
33,107
S&P CNX
10,215
CMP: INR290
TP: INR370 (+28%)
Buy
Another 'compounder'
Quality franchise; attractive valuations
HDFC Standard Life (HDFCSL) is one of India’s top three private sector life insurers and
offers a wide range of insurance products. It has strengthened its position in a highly
competitive industry and has a well-diversified business mix. HDFCSL has strong return
ratios (FY17 RoEV at 21%) and the highest new business margin (22% for FY17) among the
major private insurers, backed by its balanced product mix (47% ULIPs, 26% PAR, 27%
Non-Participating business in FY17), strong distribution network and lower operating
cost. HDFCSL has made significant investments in building its digital platform, which has
enabled it to improve customer satisfaction and attract new business. We estimate HDFC
SL to deliver RoEV of ~19% over FY17-20E and value it on 3.5x Mar-20E EV at INR370 per
share, which implies an upside of 28% from the issue price. Initiate coverage with BUY.
Stock info
Equity Shares (m)
MCap (INR b)
MCap (USD b)
Financial snapshot (INRb)
Y/E MARCH
FY18E FY19E
Net Premium
231.2 282.5
Total Income
331.7 398.3
Opex
27.5 33.7
Op. profit
292.5 350.6
Surplus/Deficit
10.9 12.7
PAT
9.5 10.8
New bus gr. %*
30
28
Renewal
11.9 16.9
Prem.gr. (%)
P/EV (X)
3.9
3.3
P/EPS(x)
61.5 54.0
*Un-weighted
Shareholding pattern (%)
Nov-17
Promoter
Others
%
81.0
19.0
2,009
582.6
8.9
FY20E
349.6
492.5
41.5
434.0
15.7
13.5
26
21.5
2.8
43.1
New business premium to grow at 25% CAGR over FY17-20E:
HDFC SL has
reported strong growth trends, which has enabled it to consistently rank
among India’s top three private insurers. We expect the company to deliver
25% CAGR in new business APE over FY17-20. This will be aided by aided by its
increasing bancassurance tie-ups, improvement in agency channel and higher
direct sales.
Diversified product mix, improving operating metrics to keep margins
buoyant:
HDFC SL has a balanced product mix between participating, non-
participating and ULIP products. It has steadily improved the share of high-
margin protection products to 26.4% as at Sep-17, which has helped it deliver
higher new business margins. Its diversified product portfolio and continued
improvement in operating metrics (persistency, productivity) will keep
margins/return ratios buoyant.
Strong distribution network; cost ratios to remain best-in-class:
HDFCSL
continues to benefit from the strong distribution network of its bancassurance
partners and has increased its bancassurance partner count to 125. This will
help widen its reach and support premium growth. HDFCSL maintains strong
control on cost ratios, aided by rising proportion of direct/online sales and
multiple technology initiatives.
Valuation:
We expect HDFC SL to further improve its new business margin to
23% by FY20E, while operating RoEV/RoEV should sustain at 21%/19%
respectively over FY17-20E. We value HDFC SL at 3.5x Mar-20E EV at INR370
per share (new business multiple of 28x), which implies an upside of 28% from
the issue price. HDFC SL’s strong new business margins, healthy return ratios
and stronger growth potential will enable it to trade at a premium to other
insurers. Initiate coverage with
BUY.
NBP
margin
19.9%
22.0%
22.3%
22.4%
22.7%
EVOP as
% of IEV
20.9%
21.0%
21.5%
21.3%
21.1%
RoEV
16.1%
21.1%
19.9%
19.0%
18.8%
RoE
28.5%
25.5%
22.7%
22.2%
23.8%
Dividend
9.0%
11.0%
12.5%
15.0%
17.5%
EV
102.3
123.9
148.5
176.8
210.0
P/EV
5.7
4.7
3.9
3.3
2.8
EPS
4.1
4.5
4.7
5.4
6.7
P/EPS P/AUM
70.7
64.9
61.5
54.0
43.1
78.5%
63.5%
52.9%
44.0%
36.3%
Exhibit 1: HDFC Life: Key financials
Net
Surplus
Premiums /Deficit
FY16
161.8
9.6
FY17
192.7
9.5
FY18E
231.2
10.9
FY19E
282.5
12.7
FY20E
349.6
15.7
INRb
PAT
8.2
8.9
9.5
10.8
13.5
VNB
7.4
9.1
11.4
14.8
18.3
17 November 2017
3

HDFC Standard Life
Exhibit 2: Snapshot of major insurers
HDFC Life
FY16
FY17
Profit and Loss matrix (INR m)
Operating Profit
Surplus / Deficit
PAT (Shareholder's a/c)
Premium (INR m) & growth (%)
New business prem – wrp
Total premium – unwtd
Market share
New business growth – wrp
Total prem growth – unwtd
New business mix – wrp (%)
Participating
Non-participating
ULIPs
Operating ratios (%)
Investment yield (%)
Commissions / GWP
Total expense ratio
Solvency margin
Persistency ratios (%)
13th Month
25th Month
49th Month
61st Month
Valuation ratios and other data points
NBP margin (%)
RoE (%)
RoIC (%)
Total AUMs, INRb
RoEV (%)
Operating RoEV (%)
Dividend (%)
Dividend payout ratio (%)
EPS, INR
Embedded Value, INRb
P/E (x)
P/EV(x)
P/AUM
VIF as a % of AUM
154,644
9,597
8,183
36,156
64,872
4.7%
13.5%
18.1%
26.8%
20.5%
52.8%
2.5%
4.3%
15.8%
198.4%
79.0%
67.0%
63.0%
50.0%
19.9%
28.5%
37.8%
742
16.1%
20.9%
9.0%
26.4%
4.1
102.3
70.7
5.7
79%
68%
273,421
9,476
8,921
40,852
86,964
5.0%
13.0%
34.1%
25.9%
27.4%
46.7%
12.6%
4.1%
16.3%
191.6%
81.0%
73.0%
58.0%
57.0%
22.0%
25.5%
41.0%
917
21.1%
21.0%
11.0%
29.6%
4.5
123.9
64.9
4.7
64%
67%
ICICI Life
FY16
FY17
177,018
14,124
16,505
51,085
67,658
4.9%
9.9%
26.9%
11.4%
13.6%
75.1%
1.2%
3.2%
13.1%
320.0%
82.4%
71.2%
62.2%
46.0%
8.0%
31.2%
34.3%
1,039
0.8%
15.3%
84.0%
87.7%
11.5
139.4
33.0
3.9
52%
60%
340,640
11,527
16,822
64,862
77,604
4.5%
27.0%
14.7%
11.7%
13.6%
74.8%
13.0%
3.4%
13.9%
3.4%
85.7%
73.9%
59.3%
56.2%
10.1%
28.7%
34.8%
1,229
16.1%
16.5%
73.5%
39.5%
11.7
161.8
32.4
3.4
44%
58%
Max India
FY16
FY17
83,708
4,632
4,391
21,627
28,817
2.1%
8.7%
12.0%
62.6%
13.0%
24.4%
4.2%
8.9%
22.5%
343.0%
78.8%
66.6%
55.6%
42.7%
17.9%
21.5%
22.1%
364
6.9%
17.0%
136.6%
100.0%
11.5
56.2
48.1
3.8
41%
63%
115,546
-1,721
6,599
27,485
36,664
2.1%
27.1%
27.2%
61.4%
13.7%
24.9%
9.1%
8.7%
23.4%
309.0%
80.4%
70.4%
54.9%
53.0%
18.8%
29.1%
33.2%
444
16.6%
19.9%
52.5%
25.5%
17.3
67.4
32.0
3.2
34%
62%
SBI Life
FY16
FY17
169,482
6,642
8,610
48,781
71,066
5.1%
37.4%
28.5%
27.7%
28.7%
43.6%
4.6%
4.5%
13.7%
212.0%
80.0%
72.1%
77.2%
50.6%
16.0%
19.6%
86.1%
798
NA
19.0%
12.0%
16.8%
8.6
130.0
75.5
5.0
81%
NA
277,959
6,543
9,547
66,009
101,439
5.8%
35.3%
42.7%
22.9%
29.3%
47.8%
10.2%
3.7%
11.6%
204.0%
80.6%
73.0%
65.0%
68.1%
15.4%
18.6%
95.5%
977
21.4%
23.0%
15.0%
18.9%
9.5
165.4
68.1
3.9
67%
58%
Source: Company, MOSL
17 November 2017
4

HDFC Standard Life
India Life Insurance: Growth comes back full circle
The insurance industry in India has staged a smart recovery over the last three years
after multiple regulatory actions had significantly impacted insurer’s business
operations. The industry has now aligned itself with the revised regulations, with
improved product portfolio, strong cost control and multiple productivity
improvement initiatives. Reforms to boost tax compliance, promote digital
transactions and curb black money have further catalyzed the industry’s growth.
Having successfully navigated through the turbulence, we believe the sector has
emerged stronger and insurers are now underwriting better quality business, which
will boost profitability in the medium term. During FY18YTD, private players have
reported strong 22% growth in new business APE (14% growth in un-weighted
premiums) and we expect the industry to grow at 17% CAGR over the next three
years. This will be led by rising share of financial savings, benign rate environment,
favorable demographics, and increasing customer awareness. Healthy GDP growth
and stable regulatory regime will act as further enablers for the industry’s growth.
Exhibit 3: Trend in new business growth – APE terms
Strong industry
growth led by ULIP
sales
Sharp decline in
equity markets
impacted industry's
growth
Regulatory
intervention
prolonged
industry's
slowdown
Industry returned to
normalcy with avg.
growth of ~18% over
FY15-18 YTD led by
private players
50%
30%
10%
-10%
-30%
Private players
LIC
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
YTD
Source: Company, MOSL
The profitability of the insurers is also likely to increase, as improving operating
metrics (persistency and product mix) and strong cost control help expand margins.
We expect large bancassurers to gain market share owing to their better distribution
reach and stronger operating models. The share of the agency channel in overall
business sourcing for select large insurers like HDFCSL is also likely to improve
gradually.
Exhibit 4: Industry’s total new business premium – APE terms
Private players
LIC
271
271
159
293
216
309
283
348
410
441
347
228
374
217
286
250
311
285
360
171
162
288
237
348
Source: Company, MOSL
17 November 2017
5

HDFC Standard Life
Exhibit 5: Latest new business premium figures for the industry, APE - INR mn
Life Insurer
Industry Total
LIC
Total Private
ICICI Prudential
SBI Life
HDFC Life
Max Life
Kotak Life
Bajaj Allianz
Birla Sunlife
Tata AIA
PNB Met Life
Canara HSBC OBC
Reliance Life
Exide Life
IndiaFirst Life
DLF Pramerica
Shriram Life
Star Union Dai-ichi
IDBI Federal Life
Future Generali
Bharti Axa Life
Aviva Life
Edelweiss Tokio
Aegon Religare
Sahara Life
Oct- 17
59,379
31,892
27,487
5,873
6,252
3,733
1,807
1,508
1,500
743
922
795
428
510
465
428
567
316
306
350
268
322
139
161
93
-
Y-Y
Growth (%)
28.7%
37.7%
19.5%
29.5%
44.7%
25.0%
13.2%
70.2%
-14.4%
-66.7%
62.6%
14.5%
27.6%
2.5%
48.9%
2.0%
181.4%
15.4%
40.8%
32.4%
1.6%
3.5%
-12.5%
32.5%
120.8%
-100.0%
M-M
Growth (%)
-14.0%
-5.7%
-22.0%
-12.5%
-11.0%
-26.6%
-35.6%
-21.0%
-26.9%
-36.2%
-19.9%
-32.2%
-54.0%
-33.0%
-26.9%
-12.9%
0.3%
-27.8%
-48.2%
-18.8%
-38.1%
-11.0%
-32.7%
0.0%
-8.1%
-100.0%
FY18 YTD
392,287
202,852
189,435
43,125
39,304
24,175
13,258
9,823
9,520
5,997
5,963
5,725
4,346
4,145
3,398
2,997
2,967
2,601
2,527
2,393
2,314
1,938
1,299
1,024
578
19
YTD
Growth (%)
17.1%
13.1%
21.7%
44.7%
38.5%
36.8%
16.9%
10.7%
-1.7%
-55.7%
37.5%
18.3%
79.8%
-20.3%
2.1%
31.3%
156.1%
4.4%
-6.6%
41.9%
21.4%
-3.0%
51.0%
29.0%
76.1%
-68.4%
FY17
7,09,040
3,60,376
3,48,664
64,966
66,028
40,851
21,302
27,495
21,592
10,755
24,721
9,667
11,270
5,285
6,598
4,341
6,513
2,468
4,831
3,749
4,098
6,780
1,936
2,369
893
155
Y-Y
Growth (%)
18.8%
15.8%
22.1%
27.2%
35.4%
13.0%
38.1%
27.2%
26.8%
11.6%
13.5%
-33.7%
55.2%
53.3%
15.6%
28.4%
35.7%
6.2%
6.5%
50.1%
8.8%
20.3%
26.2%
-24.3%
-33.4%
2.1%
Source: Company, MOSL
Exhibit 6: Market share trend in new business APE for private players and LIC
Private players
65%
52%
59%
55%
59%
60%
63%
53%
52%
51%
49%
51%
49%
LIC
48%
41%
FY08
FY09
45%
47%
41%
FY11
35%
FY12
40%
FY13
37%
FY14
FY15
48%
FY10
FY16
FY17
FY18
YTD
Source: Company, MOSL
17 November 2017
6

HDFC Standard Life
Exhibit 7: Trend in individual new business market share for private players and LIC
Private
63%
57%
50%
50%
43%
37%
FY08
FY09
FY10
FY11
FY12
52%
48%
46%
54%
51%
38%
FY13
35%
FY14
FY15
FY16
FY17 FY18 YTD
Source: Company, MOSL
62%
LIC
65%
49%
52%
48%
54%
56%
46%
44%
Exhibit 8: Market share trend in new business APE for private players
Insurer
ICICI Prulife
SBI Life
HDFC Life
Birla Sunlife
Max Life
Kotak Life
Bajaj Allianz
Reliance Life
PNB Met Life
Tata AIA
Exide Life
Star Union Dai-ichi
Canara HSBC OBC
Shriram Life
Bharti Axa Life
FY07
10.6%
4.2%
3.1%
1.9%
1.8%
1.3%
7.4%
1.7%
0.8%
1.3%
1.0%
FY08
13.7%
6.2%
4.1%
3.4%
2.4%
1.9%
10.3%
3.4%
1.4%
1.5%
1.2%
FY09
12.2%
8.9%
4.5%
5.3%
3.1%
2.5%
7.7%
5.8%
2.0%
2.1%
1.2%
0.1%
0.6%
0.4%
0.5%
FY10
9.6%
10.1%
4.4%
4.6%
2.6%
1.8%
5.9%
5.8%
1.6%
2.0%
1.0%
0.4%
1.0%
0.5%
0.6%
FY11
8.4%
5.4%
4.9%
2.9%
2.6%
1.3%
3.5%
3.4%
0.8%
1.6%
0.9%
0.6%
1.2%
0.3%
0.5%
FY12
6.4%
3.9%
4.6%
2.7%
2.4%
1.0%
2.9%
2.2%
1.1%
1.1%
0.9%
0.7%
1.0%
0.3%
0.3%
FY13
7.4%
5.0%
5.6%
3.2%
2.7%
1.4%
3.6%
2.1%
1.2%
0.7%
0.9%
0.7%
1.0%
0.4%
0.4%
FY14
5.6%
5.4%
4.3%
2.8%
3.1%
1.4%
2.9%
3.1%
1.1%
0.6%
0.8%
0.8%
1.0%
0.4%
0.5%
FY15
8.7%
6.6%
5.9%
3.6%
3.7%
2.1%
3.0%
3.7%
1.5%
0.6%
0.8%
1.0%
0.7%
0.6%
0.7%
FY16
8.6%
8.2%
6.1%
3.7%
3.6%
2.9%
2.6%
2.4%
1.6%
1.2%
1.0%
0.9%
0.8%
0.8%
0.6%
FY17 FY18 YTD
9.2%
11.2%
9.3%
9.9%
5.8%
6.1%
3.5%
1.6%
3.9%
3.4%
3.0%
2.5%
3.0%
2.4%
1.4%
1.5%
1.6%
0.9%
0.9%
0.9%
0.7%
0.6%
1.1%
1.5%
1.5%
0.9%
0.7%
1.2%
0.7%
0.5%
0.2%
0.0%
0.3%
0.2%
Source: Company, MOSL
17 November 2017
7

HDFC Standard Life
Insurance and Mutual Fund – driving the growth in
financial savings
India’s gross savings rate has declined over the past few years, impacted by a
sluggish macroeconomic environment and high inflation rate, which moved savers
away from financial assets. However, with inflation in control, government impetus
towards increasing formalization of the economy and subdued returns from physical
assets, the share of financial savings has begun to increase. While the share of
financial savings has been increasing over the past few years, the composition of
insurance sector has further increased by ~25% over FY14-16 and we expect this to
continue. We expect the share of net household financial savings to increase from
7.8% of GNDI in FY16 to 10% over the next few years while the gross savings rate
also recovers in the medium term (average of ~32% over past few years).
Exhibit 9: Gross Savings as a percentage of Gross National Disposable Income (GNDI)
Item
Gross Savings
Non-financial Corporations
Public non-financial corporations
Private non-financial corporations
Financial Corporations
Public financial corporations
Private financial corporations
General Government
Household sector
Net financial saving
Saving in physical assets
Saving in the form of valuables
FY10
33.7
9.2
1.3
7.9
2.2
1.5
0.5
-3.1
25.2
12
13.2
FY11
33.7
8.8
1.2
7.6
2.3
1.7
0.6
-0.5
23.1
9.9
13.2
FY12
33.8
9.5
1.4
8.1
3
1.9
1.2
1.8
23
7.2
15.5
0.4
FY13
33
9.7
1.2
8.5
3
1.7
1.2
-1.6
21.9
7.2
14.4
0.4
FY14
32.3
10.6
1.1
9.4
2.6
1.4
1.1
-1.3
20.5
7.5
12.7
0.3
FY15
32.3
12
0.9
11.1
2.6
1.3
1.3
-1
18.7
7.5
10.8
0.3
FY16
31.7
11.8
1.0
10.8
2.1
1.3
0.8
-1.0
18.8
7.8
10.7
0.3
Source: Company, MOSL
Exhibit 10: Financial savings of household as % of Gross National Disposable Income (GNDI)
Item
A. Gross financial savings
Currency
Deposits
Shares and debentures
Claims on government
Insurance funds
Provident and pension funds
B. Financial liabilities
C. Net financial saving ( A-B )
FY12
10.4
1.2
6.0
0.2
-0.2
2.2
1.1
3.2
7.2
FY13
10.5
1.1
6.0
0.2
-0.1
1.8
1.5
3.2
7.2
FY14
10.4
0.9
5.8
0.2
0.2
1.8
1.5
3.1
7.2
FY15
10.1
1.1
5.0
0.2
0.0
2.4
1.5
2.9
7.2
FY16
10.9
1.4
4.8
0.3
0.5
1.9
2.0
3.1
7.8
FY17
11.8
-2.1
7.3
1.2
0.5
2.9
1.9
3.7
8.1
Source: Company, MOSL
Within financial savings, we expect the share of insurance to increase, as a benign
rate environment keep savers away from fixed deposits and increases the
attractiveness of life insurance products for savings/protection. Moreover, with
expectations of recovery in GDP growth and continued buoyancy in capital markets,
ULIPs will continue to do well and dominate the bouquet of insurance products. We
expect the life insurance industry to grow at a CAGR of ~17% over the medium term,
led by large private players that have strong bancassurance tie-ups, robust
technology platform, and healthy product profile.
17 November 2017
8

HDFC Standard Life
Exhibit 11: Contribution of insurance funds to change in household financial assets (%)
Contribution of insurance funds to change in financial assets (%)
26.2%
22.0% 21.0%
15.2% 14.3% 15.0%
19.5%
21.0%
16.9% 17.2%
23.3%
17.6%
24.2%
13.4%
Source: Company, MOSL
Exhibit 12: Trend in composition of change in household financial assets (%)
Year
FY12
FY13
FY14
FY15
FY16
FY17
Currency
11.4%
10.5%
8.4%
10.4%
13.2%
-17.4%
Bank
deposits
56.4%
54.0%
53.7%
47.0%
41.1%
60.2%
Non-banking
deposits
1.1%
2.6%
1.9%
2.6%
2.4%
1.9%
Life
Provident &
insurance
Pension fund
Fund
21.0%
10.3%
16.9%
14.7%
17.2%
14.9%
23.3%
14.7%
17.6%
18.3%
24.2%
16.3%
Claims on
Govt.
-2.3%
-0.7%
1.9%
0.1%
4.4%
4.6%
Shares &
Debentures
1.8%
1.6%
1.6%
1.5%
2.7%
10.0%
Others
0.5%
0.3%
0.4%
0.3%
0.3%
0.2%
Total change
100%
100%
100%
100%
100%
100%
Source: Company, MOSL
Mutual Fund AUMs as % of deposits
MF AUMs as % of system deposits
19.7
16.2
9.9
10.4
10.7
12.7
12.7
Exhibit 13: Mutual Fund & Insurance AUMs as % of GDP
Insurance AUMs as & of GDP
7.1
7.3
MF AUMs as % of GDP
8.7
6.7
9.0
1.8
1.8
1.7
1.8
1.8
Source: Company, MOSL
Source: Company, MOSL
17 November 2017
9

HDFC Standard Life
China has shown strong progress in premium growth –
How much can India replicate?
Insurance penetration in India declined from a peak of 4.6% in FY09 to 2.5% in FY13
and recovered marginally to 2.7% in FY16. Bulk of the decline happened during the
years of major regulatory changes, which necessitated significant effort on the part
of the insurers to adapt. Several products (predominantly ULIPs) were rendered
ineligible and insurers had to re-design them to comply with the new regulations,
resulting in a sharp decline in product offerings. With improving product offerings
and macro drivers, we expect insurance penetration in India to increase over the
next few years.
Exhibit 14: India: Insurance penetration and density trend
$60
$45
$30
$15
$0
Density (USD)
Penetration (%) - RHS
6%
5%
3%
2%
0%
Source: SwissRe, MOSL
Exhibit 15: Trend in life insurance premium volume for China & India in US$
China - Life insurance premium volume
India - Life insurance premium volume
262,616
210,763
141,208
53,300
152,121
52,174
176,950
55,299
56,675
61,817
FY12
FY13
FY14
FY15
FY16
Source: SwissRe, MOSL
We note that while the advanced economies are reporting muted trends in
premium growth, China has reported very strong growth in total premium
collections over past few years. Its share in world life insurance market has thus
grown by 420bp between FY13-16 to 10% while India has reported modest 40bp
gain over the similar period.
17 November 2017
10

HDFC Standard Life
Exhibit 16: Market share in world life insurance for India &
China
India
China
8.3
5.39
2.03
5.8
6.7
103
2.4
42.7
110
10.0
Exhibit 17: Trend in Insurance density for China & India
China
127
India
153.1
189.9
2.0
2.1
2.2
41
44
43.2
46.5
FY12
FY13
FY14
FY15
FY16
FY12
FY13
FY14
FY15
FY16
Source: SwissRe, MOSL
Source: SwissRe, MOSL
We believe that India’s strong economic growth, rising share of financial
savings/disposable income and huge protection gap will enable healthy growth
trajectory over next few years. The larger private insurers are thus well positioned
to capitalize on this strong opportunity and are likely to deliver healthy double digit
growth rate in premiums and gain further market share.
Exhibit 18: Individual Sum assured to GDP for India (%)
Source: Company, MOSL
Insurance density has been stagnant for a while; expect it to recover with pick-up
in financial savings
India’s current insurance density (measured as insurance premium per capita) at
USD43 is nearly 21% lower than the peak of USD55.7 in FY10. It declined
consistently over FY11-13, the period that witnessed intense regulatory action
coupled with weak economic environment. However, there has been a mild
recovery during FY13-15 and we expect it to pick up pace as the financial savings
rate improves and India maintains its medium-term GDP growth rate of 7-8%.
Regionally, we see that insurance density in India is significantly below China
(USD190) and other emerging countries. China has reported ~17% CAGR increase in
insurance density over FY12-16.
One could argue that insurance penetration in India is not very low when compared
to developed countries, but we note that developed countries have (i) healthy social
security benefits for their citizens, and (ii) in many such countries, life insurance and
pension savings are held separately – the latter do not get counted in insurance
sales.
17 November 2017
11

HDFC Standard Life
We believe it is more relevant to compare insurance density in India with other
Asian/regional peers and emerging countries. We note that the dynamics in the
Indian insurance industry are similar to Taiwan, Korea and South Africa – these
countries also offer tax incentives on insurance premium, though the extent of
benefits varies. Insurance penetration in these countries is higher and this points to
strong growth potential in the Indian insurance industry.
Exhibit 19: Insurance penetration and density in developed
countries – FY16
4,000
3,000
2,000
1,000
0
0
2
4
6
Penetration as % of GDP
8
United
States
Australia
Germany
Switzerland
Singapore
United
Kingdom
Japan
France
Exhibit 20: Insurance penetration and density in Asia & other
emerging countries – FY16
350
280
210
140
70
Russia
0
0
Philippines
Pakistan
1
2
3
Penetration as % of GDP
4
Brazil
PR China
Malaysia
Thailand
India
Source: Company, MOSL
Source: Company, MOSL
Exhibit 21: India has the highest gap in protection
requirement amongst key Asian countries (%)
Exhibit 22: India's mortality protection gap ($ bn)
92
88
85
78
73
56
56
Source: Company, MOSL
Source: Company, MOSL
17 November 2017
12

HDFC Standard Life
Reduced mis-selling and focused efforts to boost persistency are
yielding results; we expect trend to continue
Insurance industry’s operating metrics has improved over past few years aided by
improved product designing, reduced mis-selling and strong control on operating
costs. Thus, persistency trend (most important operating metric to assess the
performance of the insurance company) has shown an improvement for most
insurers. It is significantly more important for ULIP products as by regulation insurers
have to even out their expenses over the life of the ULIP policies while the business
may not stay with them for the entire term. The insurers thus offsets the front
loaded expenses incurred in new business acquisition by miscellaneous charges
(Fund Management Charge, Policy Administration Charge etc.) over the life of the
policy which makes persistency very important. Participating products however are
least sensitive to persistency given that shareholders participate in only 10% of the
surplus and surrender penalties are generally high.
Exhibit 23: ULIP regulations: Minimum sum assured was raised to 10x of annual premiums
Type of Products
Single premium
Life regular premium
Health regular premium
Age at entry below 45 years
Age at entry of 45 years and above
125%
10 times the annualised premiums or (0.5xT x
annualized premium) whichever is higher.
5 times the annualised premium or Rs.100,000
per annum whichever is higher.
110%
7 times the annualised premiums or (0.25xTx
annualized premium) whichever is higher.
5 times the annualised premium or Rs.100,000
per annum whichever is higher.
Source: Company, MOSL
IRDA revised ULIP regulations in 2010 and mandated lower surrender charges /
commissions on ULIPs and increased the lock-in period from three to five years. This
coupled with subdued equity markets resulted in a sharp rise in surrenders and
impacted persistency adversely. However, improved product features, controlled
misselling and decline in surrender rate of ULIPs have aided a steady improvement
in persistency rate over the past few years. Shorter-end persistency (13th month to
37th month) has improved sharply for several insurers and we expect the trickle-
down benefits to improve trends at the longer end (61st month).
Exhibit 24: Trend in persistency for major insurers 13 , 25 and 61 month —
HDFC life
80.9%
87.0%
80.6%
ICICI PruLife
80.4%
56.8%
68.1%
55.6%
53.0%
SBI life
Max life
th
th
st
13th mth
61th mth
Source: Company, MOSL
17 November 2017
13

HDFC Standard Life
Exhibit 25: Persistency rate of major insurers as on 2QFY18
13th Month
37th Month
49th Month
61st Month
HDFC Life
Max India
ICICI PruLife
Bajaj Allianz
Birla Sunlife
Source: Company, MOSL
ULIP/traditional products have been made much more competitive
ULIP/traditional products have become more competitive, with the IRDA
significantly reducing the surrender charges and specifying the maximum gap
between gross and net yields for ULIPs. However, this also implies that cost
management has become much more important for the insurers. As such, insurance
distribution via the banking channel has gained importance owing to its lower
distribution and sourcing cost.
Exhibit 26: ULIP – gross and net yields
Annualized
Premiums Paid
5
6
7
8
9
10
11 & 12
13 & 14
15 & thereafter
Maximum difference between Gross
and Net Yield (% p.a.)
4.00%
3.75%
3.50%
3.30%
3.15%
3.00%
2.75%
2.50%
2.25%
Source: Company, MOSL
Exhibit 27: Surrender charges on traditional products
Premium payment term
Less than 10 yrs
10 yrs or more
Consecutively paid for:
2 years
3 years
Single premium policy
Year of Surrender
Minimum surrender value
3rd year
70% of total premiums
4th year
90% of total premiums
Last 2 yrs (if policy term is less than 7 yrs)
90% of total premiums
Regular premium policy
Year of Surrender
Minimum surrender value
2nd & 3rd yr
30% of total premiums
4th - 7th yr
50% of total premiums
Last 2 yrs (if policy term is less than 7 yrs)
90% of total premiums
Reduce any survival benefits paid earlier to arrive
at the minimum surrender value
Source: Company, MOSL
17 November 2017
14

HDFC Standard Life
With improvement in persistency rate, renewal premium growth has begun to
improve, contributing to the build-up of policy reserves, and hence, value in force.
Exhibit 28: Trend in renewal premium growth for major insurers
90%
60%
30%
0%
-30%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
Commission structure has also been designed to boost persistency
In December 2016, IRDA made further changes in the commission structure to bring
more consistency into the commissions paid on regular-premium insurance
products. Commissions were capped at 2% of the premium on single-premium
products, and at 15% in the first year and 7.5% thereafter on regular insurance
products with a premium paying term of at least five years. In case of pension
products, the commission was capped at 2% on single-premium products, and at
7.5% in the first year and 2% thereafter on regular products. With these changes,
the IRDA has adequately incentivized agents / distributors, and has ensured that the
right product gets sold to the customers.
Exhibit 29: Commission structure for regular premium based insurance products linked and
non-linked
Premium Payment
term
Maximum Commission as % of premium
1st year
5
6
7
8
9
10
11
12 & more
15
18
21
24
27
30
33/30
35/30
New
2nd & 3rd Subsequent
year
years
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
1st year
Old
2nd & 3rd Subsequent
year
years
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
7.5/5
5
Source: Company, MOSL
Maximum
35
17 November 2017
15

HDFC Standard Life
Exhibit 30: Commission expense across different channels for major insurers
10.0%
8.0%
6.0%
4.0%
2.0%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
Cap on total expense will ensure further discipline in operations
The IRDA also implemented an expense cap on insurers based on their years of
operation. For insurance companies in operation for over 10 years, the expense cap
is 80% of first-year premium and 15% of renewal premium. However, for players in
operation for less than 10 years, the expense cap is higher at 90% of first-year
premium and 20% of renewal premium due to high costs involved in the first few
years of operation.
17 November 2017
16

HDFC Standard Life
Regional comparison of persistency trend – further room for improvement exists !
The persistency ratio of Indian companies is still below their Asian peers. Bulk of
their new business was led by ULIPs, which are more savings oriented. With a slew
of regulatory changes and volatile equity markets over 2010-14, the surrender/lapse
rate spiked, resulting in a sharp drop in persistency rate. However, with the change
in product structure, curb on mis-selling and buoyant equity markets, the 13-month
persistency rate has improved for most insurers. We expect persistency rate to
improve further, as quality of business improves and customers begin to see
insurance as a protection-cum-savings product rather than just a play on capital
markets.
Exhibit 31: 13-month persistency comparison of Indian vs Asian insurers - FY17
FY16
FY17
85.7
90.9 91.4
90.0 90.2
90.3
92.3
79.0
81.0
80.0 80.6
82.4
HDFC Life
SBI life
ICICI
Prudential
Ping AN
insurance
China Life
Insurance
China Pacific
Insurance
Group
Source: Company, MOSL
Exhibit 32: 25-month persistency comparison of Indian vs Asian insurers – FY17
FY16
67.0
FY17
73.0
72.1 73.0
71.2 73.9
86.5 86.4
85.5 85.9
85.6 86.6
HDFC Life
SBI life
ICICI Prudential
Ping AN
insurance
China Life
Insurance
China Pacific
Insurance Group
Source: Company, MOSL
17 November 2017
17

HDFC Standard Life
Bancassurance – the key distribution edge; however no
longer the cheapest channel
Insurance companies promoted by banks (ICICI Prudential Life, SBI Life) or those
having strong bancassurance tie-ups (HDFC Life, Max Life) have consistently gained
market share and reported strong improvement in operating costs. Multiple
changes in regulations have impacted the economics of the agency channel, forcing
several agents to move away from the industry. The bancassurance channel
provides unmatched distribution to the insurers and has been the key growth driver
for the larger players.
Bancassurance accounts for
58%, 65%, 61% and 62% of
total premium for ICICI
Prulife, SBI Life, HDFC Life
and Max Life
Exhibit 33: Private insurers: premium composition through different channels -
Individual agents
Corporate agents -Others
15%
4%
61%
0%
4%
15%
HDFC Life
34%
SBI life
Brokers
Micro agents
1%
Corporate agents-Banks
Direct business
12%
4%
58%
2%
24%
ICICI Pru
10%
3%
62%
0%
25%
Max life
Source: Company, MOSL
65%
However, bancassurance is no longer the cheapest channel for insurers, as banks
now have an option to tie-up with more than one insurer and are bargaining hard
for higher share of commissions. Insurers are investing significant efforts to
strengthen their direct sales channel and technological capabilities to maintain
strong control on their cost ratios.
Exhibit 34: Cost of bancassurance channel as proportion of new business APE for major
insurers (%)
60%
50%
40%
30%
20%
10%
HDFC Life
SBI life
ICICI Pru
Max
Source: Company, MOSL
17 November 2017
18

HDFC Standard Life
Exhibit 35: List of insurance companies and their key bancassurance partners
Insurer
ICICI Prudential
HDFC Life
Kotak Life
Canara HSBC OBC
Aviva
India First
SBI Life
Bajaj Allianz
IDBI Federal Life
Max Life
Birla Sunlife
PNB Met Life
Tata AIA
Bancassurance Partners
Standard Chartered Bank, ICICI Bank
HDFC Bank, Saraswat Bank, Ratnakar Bank, IDFC Bank
Kotak Bank, DNS Bank
Canara Bank, HSBC, Oriental Bank of Commerce
RBS, Punjab and Sind Bank
Bank of Baroda, Andhra Bank
SBI, BNP Paribas Cardiff
Dhanlaxmi Bank, ujjivan
IDBI Bank, Federal Bank
Axis Bank, Laxmi Vilas Bank, Yes Bank
Deutsche Bank AG, DCB Bank
Punjab National Bank(PNB), J&K Bank, Karnataka Bank
Citibank, IndusInd Bank, DBS
Source: Company, MOSL
17 November 2017
19

HDFC Standard Life
New business margins have been on an up curve; expect selective
improvement here on
The new business margins for larger players have improved over the past few years,
led by continued improvement in persistency rate, strong cost control and better
product mix. Currently, margins are at 12-14% on participating products, 10-14% on
ULIPs, and >30% on non-participating products (>50% on protection products).
New business margins are the highest for HDFC Life (at 22%; 350bp improvement
over two years) and Max Life (at 18.8%; 90bp improvement in one year), aided by
higher share of non-linked business. While ICICI PruLife stands relatively lower on
the margin curve, it has shown 370bp improvement since Mar-16, led by strong
growth in protection business, improving persistency and continued cost control.
Exhibit 36: Trend in new business margins for major insurers
30%
23%
15%
8%
0%
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
Exhibit 37: Share of ULIP in total premium mix for major insurers
HDFC Life
100%
80%
60%
40%
20%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
SBI life
ICICI Pru
Max
Exhibit 38: Product types and characteristics
Product characteristics
Participating
Non-participating
ULIPs
Protection / Term plans
Capital
Consumption
High
Medium
Low
Low to Medium
Regulatory
Risk
High
Low
Low
Low
Market
Risk
Medium
High
Low
NIL
Ease of
Selling
Medium
High
High
Low
Reinvestment Product Cost
Savings or Protection
Risk
Structure
Low
High
Low
NIL
Medium
High
Low
Low
Savings
Protection + small savings
Savings + Small protection
Pure protection
Source: Company, MOSL
17 November 2017
20

HDFC Standard Life
We expect share of protection business to pick up, as customers become aware of
the true benefits of insurance. Significant decline in mortality charges has already
made the protection business much more attractive. This would drive margin
expansion for most players over the next few years.
Exhibit 39: Regional comparison of NBAP margins: NBAP margins are lower in India than
other countries
FY16
FY17
Note: For Chinese insurance companies, data is as of December ending 2015 & December 2016
Source: Company, MOSL
17 November 2017
21

HDFC Standard Life
Balanced product mix is key to sustainable profit growth
We believe that a life insurance company should have a balanced mix of
participating, non-participating and unit-linked products, with participating products
forming the core. Non-participating products help boost profitability due to their
inherently higher margins. ULIPs are easier to sell due to their higher medium-term
return potential, despite being cyclical in nature. Participating products help provide
stability amidst periods of equity market volatility and through interest rate cycles.
Exhibit 40: Product mix comparison of large private insurers
Participating
Non-participating
Unit Linked
47%
48%
75%
27%
26%
HDFC Life
29%
23%
SBI life
14%
12%
ICICI Pru
Source: Company, MOSL
Diversified product mix also minimizes the impact that an insurer might face due to
regulatory changes. In the past, we have seen significant changes in the structuring
of ULIPs, lower surrender charges on traditional products, ban on NAV guaranteed
products, etc.
Amongst the top private insurers, we believe that HDFC Life and SBI Life followed by
Max Life have the most diversified and balanced product mix, which will help them
deliver steady growth and profitability across equity market / interest rate cycles.
On the other hand, ICICI PruLife, being ULIP-dominated, may witness growth and
profitability pressures if the equity markets are subdued for an extended period of
time; lower margins in ULIPs will anyway keep profitability lower than peers.
Product innovation will drive market share gains and boost profitability
In a highly competitive market with more than twenty four life insurers present,
product innovation will play an important role in driving healthy business growth
and stronger profitability for the insurers. Insurers need to be responsive to the
needs of a wide variety of Indian customers and introduce products that address
these specific requirements. This requires high level of innovation at the insurers’
end and right level of marketing to ensure the products’ success. Such a strategy will
also enable insurers to gain customer mindshare and cross sell other basic insurance
products. Recently, few large private insurers (HDFC Life and ICICI PruLife) have
launched a variety of term insurance with (i) critical illness cover, (ii) savings and
investment option, and, (iii) added riders of accident and disability benefits, to
capitalize on the rapidly growing protection market.
17 November 2017
22

HDFC Standard Life
HDFC Life has recently launched
Cancer Care
and
HDFC Life Group Health Shield,
and
has received approval for one other non-participating protection product,
HDFC Life
Cardiac Care,
which it plans to launch during FY18.
Exhibit 41: Product offerings of life insurers
Name of the Insurer
Aegon Life Insurance Company Limited
Aviva Life Insurance Company Limited
Bajaj Allianz Life Insurance Company Limited
Bharti Axa Life Insurance Company Limited
Birla Sun Life Insurance Company Limited
Canara HSBC Oriental Bank of Commerce Life Insurance Company Limited
Future General India Life Insurance Company Limited
HDFC Life Insurance Company Limited
ICICI Prudential Life Insurance Company Limited
Kotak Mahindra Old Mutual Life Insurance Company Limited
Max Life Insurance Company Limited
Reliance Nippon Life Insurance Company Limited
SBI Life Insurance Company Limited
TATA AIA Life Insurance Company Limited
PRIVATE
Life Insurance Corporation Of India
TOTAL
Individual
Sep-2017
22
26
24
23
29
24
23
35
20
27
17
27
30
30
537
27
564
Group
Sep-2017
6
11
12
4
8
6
6
15
9
15
5
10
8
4
176
12
188
Total
Sep- 2017
28
37
36
27
37
30
29
50
29
42
22
37
38
34
713
39
752
Source: Company, MOSL
17 November 2017
23

HDFC Standard Life
Solvency ratio remains healthy
The solvency ratio (ratio of available solvency margin to regulation-required
solvency margin) of life insurers remains healthy, aided by improved profitability
trend and lower share of protection business, which requires higher capital. Most
insurers remain well capitalized (significantly above the minimum regulatory
requirement of 150%), which will support business growth over the next few years.
Also, migration to economic capital will further ease capital requirements for the
insurers, as the insurance industry in India is still savings oriented and overall sum
assured still remains relatively lower than most countries.
The listing of the top four private players (ICICI PruLife, SBI Life, HDFC Life, Max Life)
will allow insurers to raise capital as and when needed to meet growth
requirements. Tier-II bonds also remain a viable option for fund raising. We note
that Indian insurers’ solvency margin is comparable to their larger Chinese peers.
Exhibit 42: Life insurers’ solvency margin (%) remains healthy
China Pacific
China Life
Ping An
Bajaj Allianz
Canara Hsbc
Aviva
Icici Prudential
Kotak life
Reliance
Aegon Religare
Sbi Life
Birla Sunlife
Hdfc Standard
Lic
208
204
182
192
173
Source: Company, MOSL
Note: Data Ping An, China life, China pacific is as of Dec’16
289
300
272
346
401
257
297
226
582
17 November 2017
24

HDFC Standard Life
Valuation of Indian life insurers – How does it stack
against global peers?
There has been a clear re-rating of the Indian life insurance sector over the last two
years, which has resulted in many of these insurers trading at significant premium to
their embedded value. While such valuations may appear excessive compared to
other global insurers the multiple differential is accounted for by the difference in
business growth and profitability. We note that the five-year average premium
growth for life insurers in advanced countries is a muted 1.5% against 9% average
new business APE growth for Indian life insurers (10% average growth in total un-
weighted premium) over the similar period. Also, several global insurers are
reporting single-digit RoE against 19%-29% for the top four listed private insurers in
India.
Exhibit 43: Trend in global life insurance premium growth
FY12
FY13
FY14
FY15
FY16
5 yr avg
gr. (%)
1.5%
9.4%
2.8%
Exhibit 44: New business APE growth for private players (%)
FY13 FY14
Individual, APE
Group, APE
Total
FY15 FY16
FY17
5 yr avg
gr. (%)
22.0%
9.6%
8.6%
Advanced markets 1.8% -0.2% 3.8%
Emerging markets 4.9%
World
2.3%
6.4%
0.7%
4.3%
2.5% -0.5%
4.0%
2.5%
1.9% -48.2% 116.2% 13.6% 26.4%
-20.1% -47.3% 94.2% 16.1% 5.3%
-4%
-5%
16%
14%
22%
6.9% 12.0% 17.0%
Source: Company, MOSL
Source: Company, MOSL
As highlighted in the exhibit below, the disparity in valuation between Indian and
Chinese Insurance companies is justified by the differential in return ratios. We note
that China Life Insurance company and China Taiping are trading at 1.5x/1.2x of
FY16 EV respectively however have recorded modest FY16 RoE of 6% - 8%. On other
hand, Ping An Insurance, which recorded superior RoE of 17.4%, trades at a rich
valuation of 4.1x FY16 EV - comparable to HDFC Life which recorded FY17 RoE of
28.5%. We thus believe that current valuations of Indian insurers are a rightful
reflection of their return ratios and potential growth trajectory.
Exhibit 45: Valuation comparison across Asian peers
China Life (CNY)
FY16
Return on Common Equity (%)
Return on Assets (%)
Return on Capital (%)
Return on Invested Capital (%)
EPS
BV
EV (b)
Mcap (b)
Price
Price Earnings Ratio (P/E) (x)
Price to EV (x)
11.4
1.5
9.5
8.7
1.2
11.4
560.3
FY17
6.1
0.7
6.4
10.2
0.7
10.7
652.1
1,010.6
26.7
40.4
1.5
China Taiping (HKD)
FY16
12.6
1.4
7.7
10.9
1.9
16.6
92.0
FY17
7.8
1.0
6.1
11.4
1.3
15.6
87.4
106.2
30
23.4
1.2
Ping An Insurance (CNY)
FY16
17.4
1.2
2.6
7.1
3.0
18.3
325.5
FY17
17.4
1.2
3.7
47.9
3.5
21.0
360.3
1,480.4
77
22.0
4.1
Source: Company, MOSL
17 November 2017
25

HDFC Standard Life
Exhibit 46: Valuation comparison across listed players
HDFC Life Ins.
FY2016
FY2017
28.5
25.5
37.8
41.0
20.9
21.0
16.1
21.1
4.1
4.5
102.3
123.9
NA
290
70.7
64.9
5.7
4.7
79%
64%
68%
67%
SBI Life Ins.
FY2016
FY2017
19.6
18.6
86.1
95.5
19.0
23.0
0.0
21.4
8.6
9.5
130.0
165.4
649.0
649
75.5
68.1
5.0
3.9
81%
67%
NA
58%
ICICI Pru
FY2016
FY2017
31.2
28.7
34.3
34.8
15.3
16.5
0.8
16.1
11.5
11.7
139.4
161.8
546.3
381
33.0
32.4
3.9
3.4
52%
44%
60%
58%
MAX
FY2017
18.8
29.1
33.2
19.9
17.3
67.4
147.1
548
48.1
32.0
3.8
3.2
41%
34%
63%
62%
Source: Company, MOSL
FY2016
17.9
21.5
22.1
17.0
11.5
56.2
RoE (%)
RoIC (%)
EVOP as % of IEV
RoEV (%)
EPS (INR)
EV (INRb)
Mcap (INRb)
Price (INR)
P/E
P/EV
P/AUM
VIF as a % of AUM
We believe the life insurance sector in India is in a sweet spot, where strong
structural potential is now overlapping with buoyant equity markets, rising share of
financial savings and higher disposable income. We expect Indian insurers to trade
at a premium to global insurers, though trading multiples would vary with economic
cycles.
Exhibit 47: Snapshot of global insurers (INR b)
HDFC Life
FY16
Profit and Loss matrix
PAT (Shareholder's a/c) 8,183 8,921
Premium (INRm)
& growth (%)
Total premium*
163130 194455
Operating ratios
Investment yield (%)
Total expense ratio
Solvency margin
Persistency ratios (%)
13th Month
25th Month
Profitability ratios (%)
RoE (%)
Valuation ratios
Embedded Value,
INR b
*Un weighted
0
0
130.0
165.4
139.4
161.8
325474 360312
560277 652057
151918
181603
Source: Company, MOSL
20.9
21.0
19.6
18.6
31.2
28.7
17.4
17.4
11.4
6.1
14.2
9.1
79.0
67.0
81.0
73.0
80.0
72.1
80.6
73.0
82.4
71.2
85.7
73.9
90.9
86.5
91.4
86.4
90
85.5
90.2
85.9
90.3
85.6
92.3
86.6
2.5
15.8
198.4
12.6
16.3
191.6
4.6
13.7
212.0
10.2
11.6
204.0
1.2
13.1
320.0
13.0
13.9
283.2
8.4
50.5
219.7
6.2
48.3
225.9
6.4
17.4
359.02
4.6
19.7
297.16
6.8
31
262
4.9
31.9
257
8.6
9.5
16.5
16.8
22.5
18.9
34.6
19.1
17.7
12.1
FY17
SBI Life
FY16
FY17
ICICI Prudential
FY16
FY17
Ping AN Insurance
FY15
FY16
China Life
Insurance
FY15
FY16
China Pacific
Insurance Group
FY15
FY16
158.2
210.1
191.6
222.5
222.0
291.2
363.9
430.4
203.3
234.0
17 November 2017
26

HDFC Standard Life
HDFC Life: Another 'compounder'
Quality franchise; attractive valuations
HDFC Standard Life insurance is a JV between HDFC (India’s leading housing
finance company) and Standard Life Aberdeen plc through its wholly owned
subsidiary, Standard Life Mauritius. The company offers a complete bouquet of
insurance products comprising of protection, pension, savings & investment and
health solutions for both its individual and group customers. HDFCSL has
emerged as one of the top three private insurers in India with a new business
premium APE market share of ~13% for FY18YTD amongst private insurers. It
has strong return ratios (FY17 RoEV at 21%) and highest new business margin
amongst private insurers (22% for FY17) backed by its balanced product mix
(47%
ULIPs, 26% Participating, 27% Non-Participating business in FY17),
strong
distribution network and lower operating cost.
As on Sep-17, the company operates out of
414 branches, has 16,544 full-time
employees and a growing base of 66,372 individual
agents. HDFC SL has a
solvency ratio of 200.5% (requirement of 150%) and has insured 64.5 million
lives across individual and group customers as on Sep-17. We expect HDFC Life
to deliver average RoEV of ~19x% over FY17-20E and value it on 3.5x Mar-20E
EV at INR370 per share, which implies an upside of 28% from the issue price. We
initiate coverage on the stock with a BUY rating.
Strong growth and market share gains; expect 25% cagr in new business
over FY17-20E
HDFC Life has strengthened its position in the industry and consistently ranks
amongst the top three private insurers. The company has a market share of ~13%
amongst private insurers (from ~8% in FY10).
Besides maintaining healthy trajectory
in premium growth the company has also diversified its business mix and
strategically reduced its reliance on low margin ULIP business. This has enabled the
HDFCSL to report industry leading return ratios. We expect HDFC Life to deliver 25%
cagr in new business over FY17 to FY20E.
Exhibit 48: Composition of ULIP has steadily declined to 47%
Participating
Non-participating
42%
ULIPs
40%
38%
Exhibit 49: We expect HDFC life to report 25% cagr in new
business premium over FY17-20E
New business prem - APE (INRb)
66.7
51.9
36.2
40.9
82.8
57%
56%
53%
47%
14%
28%
FY14
19%
25%
FY15
20%
27%
FY16
27%
26%
FY17
31%
26%
FY18E
33%
26%
FY19E
35%
27%
FY20E
31.8
FY15
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, MOSL
Source: Company, MOSL
17 November 2017
27

HDFC Standard Life
Exhibit 50: Lives insured and new business policies issued
Number of lives insured (individual customers)
Number of lives insured (group customers)
Number of new business policies (individual customers)
FY15
830,951
4,861,059
659,672
FY16
1,181,597
14,226,737
849,181
FY17
1,098,329
19,774,194
851,536
Sep-17
430,273
11,312,543
429,799
Source: Company, MOSL
Exhibit 51: Trend in APE premium and growth
Total New Busienss APE
5%
-22%
26%
14%
13%
27%
YoY growth
28%
24%
Exhibit 52: Trend in new business margin
NBP margin reported (%) - post overrun
22.4
22.3
22
19.9
18.5
12.7
15.2
22.7
FY13
FY14
FY15
FY16
FY17
FY18E FY19E FY20E
Source: Company, MOSL
FY13
FY14
FY15
FY16
FY17
FY18E FY19E FY20E
Source: Company, MOSL
Exhibit 53: Composition of ULIP has steadily declined to 47%
Participating
Non-participating
ULIPs
Exhibit 54: Persistency ratio has improved across the curve
FY 2014
FY 2015
FY 2016
2QFY18
57%
56%
53%
47%
42%
40%
38%
14%
28%
FY14
19%
25%
FY15
20%
27%
FY16
27%
26%
FY17
31%
26%
FY18E
33%
26%
FY19E
35%
27%
FY20E
13th Month 25th Month 37th Month 49th Month 61st Month
Source: Company, MOSL
Source: Company, MOSL
Exhibit 55: Trend in operating RoEV and RoE
43%
40%
34%
28%
26%
22%
19%
FY14
FY15
21%
16%
FY16
FY17
20%
19%
19%
25%
24%
ROE
RoEV
Exhibit 56: We value HDFC Life at Rs743bn (3.5x FY20E EV)
INRb
RoEV
RoE (%)
Embedded value
Appraisal Value
Fair value / Embedded value
Number of shares, m
Valuation per share
Implied P/E multiple
Implied new business multiple
Issue price, INR
Upside
FY20E
19%
24%
210
723
3.4
2,009
370
53.5
28
290
28%
Source: Company, MOSL
23%
22%
FY13
FY18E FY19E FY20E
Source: Company, MOSL
17 November 2017
28

HDFC Standard Life
Exhibit 57: Insurance industry new business sales (APE) for Oct’17 and FY18 YTD (INR mn)
Life Insurer
Industry Total
LIC
Total Private
ICICI Prudential
SBI Life
HDFC Life
Max Life
Kotak Life
Bajaj Allianz
Birla Sunlife
Tata AIA
PNB Met Life
Canara HSBC OBC
Reliance Life
Exide Life
IndiaFirst Life
DLF Pramerica
Shriram Life
Star Union Dai-ichi
Future Generali
IDBI Federal Life
Bharti Axa Life
Aviva Life
Edelweiss Tokio
Aegon Religare
Sahara Life
Oct - 17
59,379
31,892
27,487
5,873
6,252
3,733
1,807
1,508
1,500
743
922
795
428
510
465
428
567
316
306
350
268
322
139
161
93
-
YoY growth (%) MoM growth (%)
28.7%
37.7%
19.5%
29.5%
44.7%
25.0%
13.2%
70.2%
-14.4%
-66.7%
62.6%
14.5%
27.6%
2.5%
48.9%
2.0%
181.4%
15.4%
40.8%
32.4%
1.6%
3.5%
-12.5%
32.5%
120.8%
-100.0%
-14.0%
-5.7%
-22.0%
-12.5%
-11.0%
-26.6%
-35.6%
-21.0%
-26.9%
-36.2%
-19.9%
-32.2%
-54.0%
-33.0%
-26.9%
-12.9%
0.3%
-27.8%
-48.2%
-18.8%
-38.1%
-11.0%
-32.7%
0.0%
-8.1%
-100.0%
FY18 (YTD)
392,287
202,852
189,435
43,125
39,304
24,175
13,258
9,823
9,520
5,997
5,963
5,725
4,346
4,145
3,398
2,997
2,967
2,601
2,527
2,393
2,314
1,938
1,299
1,024
578
19
YTD growth (%)
17.1%
13.1%
21.7%
44.7%
38.5%
36.8%
16.9%
10.7%
-1.7%
-55.7%
37.5%
18.3%
79.8%
-20.3%
2.1%
31.3%
156.1%
4.4%
-6.6%
41.9%
21.4%
-3.0%
51.0%
29.0%
76.1%
-68.4%
Source: Company, MOSL
Exhibit 58: HDFC has been successfully leveraging the group customer base to cross sell
individual insurance products
FY15
Number of policies from existing group customers
Total number of individual new business policies
Cross sell on group customer base (%)
10,508
659,672
1.6%
FY16
29,685
849,181
3.5%
FY17
46,959
851,536
5.5%
Sept'FY17
28,860
429,799
6.7%
Source: Company, MOSL
17 November 2017
29

HDFC Standard Life
Exhibit 59: Market share amongst private insurers for Oct’17 and FY18 YTD
Life Insurer
Total Private
ICICI Prudential
SBI Life
HDFC Life
Max Life
Kotak Life
Bajaj Allianz
Birla Sunlife
Tata AIA
PNB Met Life
Canara HSBC OBC
Reliance Life
Exide Life
IndiaFirst Life
DLF Pramerica
Shriram Life
Star Union Dai-ichi
Future Generali
IDBI Federal Life
Bharti Axa Life
Aviva Life
Edelweiss Tokio
Aegon Religare
Sahara Life
Oct - 17
100.0%
21.4%
22.7%
13.6%
6.6%
5.5%
5.5%
2.7%
3.4%
2.9%
1.6%
1.9%
1.7%
1.6%
2.1%
1.1%
1.1%
1.3%
1.0%
1.2%
0.5%
0.6%
0.3%
0.0%
1.6%
4.0%
0.6%
-0.4%
1.6%
-2.2%
-7.0%
0.9%
-0.1%
0.1%
-0.3%
0.3%
-0.3%
1.2%
0.0%
0.2%
0.1%
-0.2%
-0.2%
-0.2%
0.1%
0.2%
0.0%
2.3%
2.8%
-0.8%
-1.4%
0.1%
-0.4%
-0.6%
0.1%
-0.4%
-1.1%
-0.3%
-0.1%
0.2%
0.5%
-0.1%
-0.6%
0.1%
-0.3%
0.1%
-0.1%
0.0%
0.1%
0.0%
22.8%
20.7%
12.8%
7.0%
5.2%
5.0%
3.2%
3.1%
3.0%
2.3%
2.2%
1.8%
1.6%
1.6%
1.4%
1.3%
1.3%
1.2%
1.0%
0.7%
0.5%
0.3%
0.0%
3.6%
2.5%
1.4%
-0.3%
-0.5%
-1.2%
-5.5%
0.4%
-0.1%
0.7%
-1.2%
-0.3%
0.1%
0.8%
-0.2%
-0.4%
0.2%
0.0%
-0.3%
0.1%
0.0%
0.1%
0.0%
YoY
change
(% pts)
MoM
change
(% pts)
FY18
YTD
YTD
change
(% pts)
Source: Company, MOSL
17 November 2017
30

HDFC Standard Life
High intangible entry barriers provides larger insurers a
distinct edge over others
The Indian life insurance industry consists of 23 private insurers and one public
insurer. Despite this we believe that there are huge intangible entry barriers in this
business and it is therefore be extremely difficult for any new entrant to make a
mark in this business. The top bancassurers have made significant investments in
building their brand, customer service touch-points, digital platform and distribution
which gives them a sustainable competitive edge over most other insurers. Also,
unlike any other industry in the country the insurance buyer in India is not very price
sensitive and faith and sustainability of the company is a critical factor behind the
purchase. We have seen instances of aggressive term insurance pricing by some of
the smaller private insurers however they have not had much success in scaling up
their protection portfolio. We believe that large insurers are sensible enough not to
indulge in any aggressive pricing war as they are already accounting for ~70% of
private market share and thus expect the industry to report healthy new business
margins over next few years.
Exhibit 60: Market share trend in new business APE for key private insurers
16%
12%
8%
4%
0%
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
YTD
ICICI Prudential
Bajaj Allianz
HDFC Standard
Birla Sunlife
Max Life
SBI Life
Reliance Life
Exhibit 61: Market share trend in Individual new business APE for key private insurers
ICICI Prudential
16%
12%
8%
4%
0%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18 YTD
Source: Company, MOSL
SBI Life
HDFC Standard
Max Life
Bajaj Allianz
17 November 2017
31

HDFC Standard Life
Top 5 insurers are accounting for nearly the entire growth of the private
industry
The following chart shows that the growth contribution of top five bancassurers has
increased from 88% to ~100% over past few years even as their combined market
share amongst private insurers has increased from 54% in FY14 to 68% currently.
This highlights that despite a condusive macro environment the smaller players are
getting marginalized in the industry and the larger insurers are going to benefit
disproportionately more from the strong growth potential of the sector.
Exhibit 62: IRDA : Market share trend of top 5 bancassurers and their contribution in
incremental growth
140%
100%
60%
20%
-20%
FY14
FY15
FY16
FY17
FY18 YTD
Source: Company, MOSL
Combined market share of top 5 bancassurers
Share in incremental growth (%)
Overall growth for private players
Strong brand and customer service brings some "pull" to an otherwise highly
"push" industry:
HDFC Standard Life insurance has a strong parentage and a
very reputed brand name which enables it to attract and gain new business
from potential customers. The company has won several recognitions for its
strong brand and has figured amongst 50 most valuable brand list in India in
2016. It was selected as a superbrand in India for three consecutive years from
2014 to 2016. Reputed brand and superior customer service has further enabled
the company to create a strong positioning for itself and build a high customer
recall.
17 November 2017
32

HDFC Standard Life
Business mix is well diversified; composition of ULIPs
stands relatively lower at 47%
HDFC Life has a balanced product portfolio. Despite 15% CAGR in new business APE
overFY15-17, it has been able to scale up the share of traditional and protection
products in its new business mix. Par/non-par products and ULIPs constitute
26%/27% and 47%, respectively in the total new business mix. The company has also
improved the share of protection products by1440bp between FY15 and 1HFY18
and now has the highest composition of high-margin protection business (26.4% in
1HFY18) amongst all leading insurers. The company intends to maintain a healthy
50:50 product mix between ULIPs and traditional business. While ULIPs is a low-
margin business, it is still an attractive product for low-cost bancassurers since they
do not expose the company to volatility in interest rates and also now carries
negligible regulatory risk.
Exhibit 63: Trend in business mix
Participating
Non-participating
ULIPs
82%
70%
65%
57%
56%
53%
47%
2%
16%
FY11
7%
23%
FY12
8%
27%
FY13
14%
28%
FY14
19%
25%
FY15
20%
27%
FY16
27%
26%
FY17
Source: Company, MOSL
Exhibit 64: HDFC Life has one of the most balanced business mix
Participating
Non-participating
Unit Linked
25%
75%
27%
26%
HDFC Life
29%
23%
SBI life
14%
12%
ICICI Pru
Max life
Source: Company, MOSL
14%
47%
48%
61%
17 November 2017
33

HDFC Standard Life
Exhibit 65: Share of ULIP business is lowest amongst larger private peers
100%
80%
60%
40%
20%
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
High share of protection business + lower ULIP composition has boosted
margins
HDFC Life’s new business margins are much higher than its other larger peers. This
has happened on the back of healthy underwriting, strong cost-control and well
balanced product mix. HDFC Life is currently making new business margins of ~22%,
which is significantly higher than the average margins of other top four insurers. The
company has a higher share of high-margin protection business and higher
proportion of low-cost online sales, which enables it to maintain healthy margins.
The strong control on cost ratios led by multiple productivity improvement
initiatives has has further enabled a decline in cost overrun and supported margins.
Exhibit 67: Business mix is well diversified with share of
Exhibit 66: New business margin has improved steadily to 22% protection business improving to 26.4% over 1HFY18
New Business Margins (%)
18.5
12.7
15.2
12.0%
19.9
22.0
22.3
Contribution of protection products (as % of total NBP)
22.4
22.7
21.8%
17.2%
26.4%
FY13
FY14
FY15
FY16
FY17
FY18E FY19E FY20E
Source: Company, MOSL
FY15
FY16
FY17
1HFY18
Source: Company, MOSL
Exhibit 68: Regional comparison of NBAP margins: NBAP margins are lower in India than
other countries
FY16
FY17
Note: For Chinese insurance companies, data is as of December ending 2015 & December 2016
Source: Company, MOSL
17 November 2017
34

HDFC Standard Life
Strong distribution network will support business
growth
The company offers its products through diversified distribution network which
comprises of four distribution channels, namely: bancassurance, individual agents,
direct, and brokers/others. The multi-channel distribution network provides HDFC SL
the flexibility to adapt to changes in the regulatory landscape and mitigate the risk
of over-reliance on any single channel. All the company’s distribution channels have
been independently profitable over past three years. The company benefits from
the strong bancassurance channel which generates ~61% of total new business
premium even as the company has rationalized its own branch network over past
few years. Besides strong bancassurance tie-ups, the company has over 45 broker
and other tie-ups, comprising of 21 major insurance brokers and 29 key insurance
marketing firms. We thus expect HDFC Life to maintain strong new business growth
at 25% CAGR over FY17-20E.
Exhibit 69: Trend in premium sourcing mix
Individual agents
Corporate agents -Others
6.0
2.5
69.6
5.3
16.6
FY13
10.2
2.1
65.3
6.2
16.3
FY14
Brokers
Micro agents
10.0
2.2
67.0
4.4
16.5
FY15
Corporate agents-Banks
Direct business
12.0
2.7
68.1
3.7
13.5
FY16
14.8
4.3
61.1
4.2
15.5
FY17
Source: Company, MOSL
Exhibit 70: Number of employees, branches and agents for major private insurers
As of FY17
HDFC Life
SBI life
ICICI Pru
Employees
14,800
12,051
12,397
Branches
414
500+
512
Agents
54,516
145,516
136,114
Source: Company, MOSL
Agency channel relatively weak; aims to develop this, going ahead
Contribution of the agency channel to total new business premium is relatively low
at ~15% against 23-35% for other large bancassurers. In fact, the contribution of this
channel has declined gradually over past few years. Post IRDA cap on commissions
and ULIP charges, the commission payout to agents declined significantly. This
resulted in a steep decline in the agency force for all private insurers. However, with
growth returning and cost-optimization efforts paying off, the company has now
started putting significant efforts in building up this very important but often
neglected distribution channel. Over 1HFY18 the company has thus added 11,856
agents and thus increased the size of its agency channel to 66,372 agents.
17 November 2017
35

HDFC Standard Life
Exhibit 71: Contribution of agency channel to total individual premiums
75%
62%
49%
36%
23%
10%
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
Productivity of agency channel has already begun to increase
HDFCSL is alongside also focusing on improving the productivity of this channel.
The company has thus reported an improvement in agent productivity, with average
Premium per agent increasing from INR59k in FY12 to INR84k in FY17. We expect
productivity of the agency channel to improve further on sustained efforts made in
building this channel, adequate training provided to agents and reduced cases of
mis-selling. This will further diversify the company’s distribution mix and enable
healthy business growth
Exhibit 72: Agents productivity : New business Premium (NBP) as of 2QFY18
234,501
165,933
95,073
127,531
108,097
HDFC Life
ICICI Pru
SBI life
Max lie
Bajaj Allianz
Source: Company, MOSL
Exhibit 73: Size of agency channel for major insurers as of 2QFY18
136,114
95,355
54,516
77,097
54,283
HDFC Life
ICICI Pru
SBI life
Max lie
Bajaj Allianz
Source: Company, MOSL
17 November 2017
36

HDFC Standard Life
Bancassurance – key distribution edge; however, no
longer the cheapest channel
Bancassurance has been the top most distribution channel for all major private
insurers. Its share in total new business sales for HDFC Life stands at ~61% and we
expect this channel to maintain its dominance aided by the growing number of
bancaussrance partners. The company’s bancassurance partner includes banks,
NBFCs, MFIs, SFBs and now has a tie-up with 125 partners, significantly higher than
any of its competitors.
However, we note that bancassurance is no longer the cheapest channel for
insurers, as banks now have an option to tie up with more than one insurer and are
now bargaining hard for higher share of commissions. HDFC Bank, for instance, has
already announced tie-ups with other life insurers (Birla Sunlife and TATA AIA).
Insurers have thus invested significant efforts to strengthen their direct sales
channel and technological capabilities to maintain strong control on their cost
ratios. The increasing number of bancassurance partners will enable the company to
deepen its distribution reach and thus create a wider customer base.
Exhibit 74: Trend in premium sourcing mix
Individual agents
Corporate agents -Others
6.0
2.5
69.6
5.3
16.6
FY13
10.2
2.1
65.3
6.2
16.3
FY14
Brokers
Micro agents
10.0
2.2
67.0
4.4
16.5
FY15
Corporate agents-Banks
Direct business
12.0
2.7
68.1
3.7
13.5
FY16
14.8
4.3
61.1
4.2
15.5
FY17
Source: Company, MOSL
HDFC Life has formed bancassurance tie-ups with a large number of banks/NBFCs
such as Bajaj Finance, Capital Small Finance Bank, Catholic Syrian Bank, Chola
Insurance Distributions Services, Equitas Small Finance Bank, HDFC Bank, HDFC
Credila Financial Services, HDFC Sales, HDFC Securities, IDFC Bank, Indiabulls
Housing Finance, Janalakshmi Financial Services, Manappuram Finance, PNB
Housing Finance, RBL Bank, Saraswat Bank, and Suryoday Small Finance Bank.
17 November 2017
37

HDFC Standard Life
Exhibit 75: Key bancassurance partners of major insurers
Insurer
ICICI Prudential
HDFC Life
Kotak Life
Canara HSBC OBC
Aviva
India First
SBI Life
Bajaj Allianz
IDBI Federal Life
Max Life
Birla Sunlife
PNB Met Life
Tata AIA
Bancassurance Partners
Standard Chartered Bank, ICICI Bank
HDFC Bank, Ratnakar Bank and IDFC Bank
Kotak Bank, DNS Bank
Canara Bank, HSBC, Oriental Bank of Commerce
RBS, Punjab and Sind Bank
Bank of Baroda, Andhra Bank
SBI, BNP Paribas Cardiff
Dhanlaxmi Bank, ujjivan
IDBI Bank, Federal Bank
Axis Bank, Laxmi Vilas Bank, Yes Bank
Deutsche Bank AG, DCB Bank
Punjab National Bank(PNB), J&K Bank, Karnataka Bank
Citibank, IndusInd Bank, DBS
Source: Company, MOSL
Exhibit 76: Trend in number of bancassurance partners for HDFC life
Major bancassurance partners
FY15
31
FY16
58
FY17
117
Sept'FY17
125
Source: Company, MOSL
Exhibit 77: Almost 83% of employees belongs to sales function
Sales (Frontline)
8%
9%
14%
8%
9%
14%
Sales mgmt
Operations
7%
9%
14%
Others
7%
9%
13%
70%
70%
70%
70%
FY15
FY16
FY17
Sept'17
Source: Company, MOSL
17 November 2017
38

HDFC Standard Life
Persistency rate has shown an all-round improvement;
we expect trend to continue
HDFCSL has reported a consistent improvement in persistency ratio. The persistency ratio for
the 13th month bucket stood at 80.9% in FY17 (82.2% in 1HFY18) while at the longer end the
61st month persistency stood at 56.8% in FY17. The improvement in persistency rate has
helped boost operating returns for the company and have supported healthy growth in
renewal premiums. We expect persistency rate to improve further as company’s focus on
need based selling and superior customer service further improves satisfaction levels while
the macro environment is likely to remain conducive.
Exhibit 78: Persistency rate has improved significantly; but its not done yet
13th Month
25th Month
37th Month
49th Month
61st Month
FY13
FY14
FY15
FY16
FY17
Source: MOSL, Company
Exhibit 79: Persistency rate of major insurers
HDFC life
80.9%
87.0%
80.6%
ICICI PruLife
80.4%
56.8%
68.1%
55.6%
53.0%
SBI life
Max life
13th mth
61th mth
Source: Company, MOSL
17 November 2017
39

HDFC Standard Life
Strong cost control has helped deliver healthy return ratios
While HDFC Life already operates on a very low-cost structure, it has further
strengthened its cost-leadership by increasing the proportion of online sales. The
company sells a variety of term plans, ULIPs, and pension/annuity plans online. It
expects gradual improvement in cost ratios, as opex growth remains modest while it
continues to fare well on margins and new business growth.
Exhibit 80: Total expense ratio has been under control
Total Expense Ratio
21.9%
18.1%
17.5%
3.7%
14.9%
14.2%
15.8%
16.3%
2.8%
2.5%
2.7%
2.9%
Exhibit 81: Operating expense as % of AUMs
4.3%
Opex/Avg AUM
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
Source: Company, MOSL
Exhibit 82: Comparison of operating expense as % of weighted premiums for key insurers
50%
40%
30%
20%
10%
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
Exhibit 83: Comparison of operating expense as % of AUMs for key insurers
9%
7%
5%
3%
1%
FY12
FY13
FY14
FY15
FY16
FY17
Source: Company, MOSL
HDFC Life
SBI life
ICICI Pru
Max
17 November 2017
40

HDFC Standard Life
Significant investments in building the technological backbone are yielding
results
HDFC has made significant investments in building its digital platform which has
enabled it to streamline and digitize customer on-boarding and servicing.
This has boosted productivity levels across all levels in the value chain, including its
distribution partners. During FY17, the company sourced 48% of the new
applications through mobile devices. Besides customer acquisition and policy
issuance the digital platform also helps the company in efficiently handling customer
queries and grievances. This thus provides the company an edge over many other
insurers and makes the business highly scalable without incurring material
incremental costs. The annualized premium equivalent earned through online
channels has thus increased at a CAGR of 28% over past 2x years. The continued
increase in smart phone user base, improved and cost-effective data services and
government’s continued thrust towards formalization of the Indian economy will
help sustain stronger growth trajectory for the digital channel.
Exhibit 84: Usage of digital channels has increased significantly over past few years
Fiscal Year Ended March 31
% of new business initiated through digital platforms
% of customer documentation uploaded through digital platforms
% of customer verification through mobile devices
% of renewal premium collected electronically
% of renewal policies collected electronically
% of policies with auto-debit and digital payments
FY15
NA
NA
NA
51.5%
65.1%
71.0%
FY16
90.0%
76.9%
2.0%
61.2%
70.8%
79.5%
FY17
99.2%
97.0%
22.7%
69.6%
77.7%
76.0%
Six months Ended
September 30,
FY17
99.9%
96.0%
45.0%
72.9%
82.1%
66.1%
Source: Company, MOSL
Product innovation will drive market share gains and boost profitability
In a highly competitive market with more than twenty four life insurers present
product innovation plays an extremely important role in driving healthy business
growth and stronger profitability for the insurers. Insurers thus need to be highly
responsive to the need of wide variety of Indian customers and introduce products
which address these specific requirements. This requires high level of innovation at
the insurers end and right level of marketing to ensure the product success. This
strategy will thus enable insurers to gain customer mindshare and cross sell other
basic insurance products. Recently, few large private insurers (HDFC Life & ICICI
Prulife) have launched a variety of term insurance with options of – (i) critical illness
cover, (ii) savings and investment option, and, (ii) added riders of accident and
disability benefits, in order to capitalize on rapidly growing protection market.
Their first online term product, HDFC Life Click 2 Protect, in FY12. Their range of
Click2Series products sold through online channel collectively generated an APE of
INR1.09b in FY17 (31% CAGR over past two years) while the APE premium collection
in 1HFY18 has further improved to INR0.87bn. HDFC Life has recently launched
“Cancer Care” and HDFC Life Group Health Shield product and has received approval
for one other non-participating protection product - HDFC Life Cardiac Care, which it
plans to launch during Fiscal 2018. The company has already insured 245,000 lives
under the HDFC Life Cancer Care product over past two years.
17 November 2017
41

HDFC Standard Life
Exhibit 85: Product offerings of HDFC Life
Products
Name of product
HDFC Life Super Income Plan
HDFC Life ClassicAssure Plus
HDFC Life Sampoorn Samridhi Plus
HDFC Life Personal Pension Plus
Participating
HDFC Life Uday
products
HDFC Life Pragati
HDFC Life YoungStar Udaan
HDFC Life Super Savings Plan
HDFC Life Group Pension Plan
HDFC Life Click 2 Protect 3D Plus
HDFC Life Click 2 Protect Plus
HDFC Life CSC Suraksha Plan
HDFC Life Group Term Insurance Plan
Non-participating
protection (term)
HDFC Life Group Credit Protect
products
HDFC Life Group Credit Protect Plus Insurance Plan
HDFC Life Group Credit Suraksha
HDFC Life Group Jeevan Suraksha
HDFC Life Pradhan Mantri Jeevan Jyoti Bima Yojna Plan
HDFC Life Cancer Care
Non-participating
protection (health
HDFC Life Easy Health
insurance) products
Click 2 Protect Health
HDFC Life Sanchay
HDFC Life Guaranteed Pension Plan
Other non-
participating
HDFC SL Sarvgrameen Bachat Yojana
products
HDFC Life New Immediate Annuity Plan
HDFC Life Group Variable Employee Benefit plan
HDFC Life Click 2 Invest – ULIP
HDFC Life Click 2 Retire
HDFC Life ProGrowth Plus
HDFC SL ProGrowth Super II*
HDFC SL ProGrowth Flexi*
HDFC Life Assured Pension Plan
HDFC Life Sampoorn Nivesh
HDFC Life Capital Shield
Unit-linked
insurance products
HDFC SL Crest*
HDFC SL YoungStar Super Premium*
HDFC Life Smart Woman
HDFC Life Single Premium Pension Super
HDFC SL ProGrowth Maximiser*
HDFC Life Pension Super Plus
HDFC Life New Group Unit Linked Plan
HDFC Life Group Unit Linked Pension Plan
Accidental Death Benefit
Total & Partial Permanent Disability Benefit
Total Permanent Disability Benefit
Critical Illness Benefit
Riders
Accident Death Benefit
HDFC Life Income Benefit on Accidental Disability Rider
HDFC Life Critical Illness Plus Rider
HDFC Life Group Critical Illness Plus Rider
Primary customer need addressed
Income/Savings
Savings
Savings
Retirement/Pension
Small Savings
Small Savings
Child Education/Marriage
Savings
Retirement/Pension
Protection
Protection
Protection
Protection
Protection
Protection
Protection for micro loans
Protection for micro loans
Protection
Health
Health
Protection (Term plus Health)
Savings
Retirement/Pension
Savings for micro segment
Retirement/Pension
Gratuity, leave encashment and superannuation
Wealth Creation
Retirement/Pension
Wealth Creation
Wealth Creation
Wealth Creation
Retirement/Pension
Wealth Creation
Wealth Creation
Wealth Creation
Child Education/Marriage
Wealth Creation for Women
Retirement/Pension
Wealth Creation
Retirement/Pension
Gratuity and Leave encashment
Superannuation
Protection (Individual)
Health (Group)
Health (Group)
Health (Group)
Protection (Group)
Health (Individual)
Health (Individual)
Health (Group)
Source: Company, MOSL
17 November 2017
42

HDFC Standard Life
Stable and experienced management team
HDFC SL has a strong management team with rich experience across banking,
financial services and insurance sectors. All the key management personnel have
been employed with the company for several years and indicate the healthy stability
at the top management level. The leadership team is committed to deliver healthy
returns to the stakeholders and work with the HDFC group ethos of pursuing
profitable growth.
Experienced management team
Mr. Deepak Parekh
is a Nominee Director and Chairman of the company. He has
been on the Board since August 2000. He is also the chairman of HDFC. Mr.
Parekh is an associate of the ICAEW. He is on the board of several leading
corporations across diverse sectors. He is the non-executive chairman of HDFC
AMC Ltd, HDFC ERGO General Insurance Company Limited, Siemens Limited and
GlaxoSmithKline Pharmaceuticals Limited
Mr. Amitabh Chaudhry
is the MD & CEO of the company since Jan-10. Mr.
Chaudhry holds a B.E. degree from BITs Pilani and post graduate diploma in
management from IIM A. Mr. Chaudhry was the MD and CEO of Infosys BPO and
has worked in diverse roles across banking and finance, head of technology,
investment banking, wholesale banking & global markets and CFO of Bank of
America (India).
Ms. Vibha Padalkar
is an ED & CFO of HDFC SL and joined the company in Aug-
08. Ms. Padalkar is a member of the Institute of Chartered Accountants of
England and Wales and also Institute of Chartered Accountants of India. She
leads the finance, legal, secretarial and compliance, internal audit and risk
functions as well oversees pension subsidiary, HDFC Pension.
Mr. Srinivasan Parthasarathy
is the Senior Executive VP - Chief Actuary &
Appointed Actuary of HDFC SL. He holds a bachelor’s degree in science
(mathematics) from Loyola College, University of Madras. He is also a Fellow of
Institute of Actuaries of India (2008) and Institute of Actuaries, UK (2004). He
has been associated with the company since Dec-11. He was appointed as
Senior Executive VP - Chief Actuary & Appointed Actuary with effect from Apr,
2015.
Mr. Prasun Gajri
is the CIO of the Company. He holds a bachelor’s degree in
electronics and electrical communication engineering from Punjab Engineering
College, Chandigarh and a post graduate diploma in management from IIMA. He
is also a CFA from the CFA Institute, USA. He has been associated with Company
since April 24, 2009. Prior to joining our Company, he was associated with
Citibank N.A and Tata AIG Life Insurance Company Limited.
17 November 2017
43

HDFC Standard Life
Key management personnel
Mr. Amitabh Chaudhry
Ms. Vibha Padalkar
Mr. Srinivasan Parthasarathy
Mr. Suresh Badami
Mr. Rajendra Ghag
Mr. Sanjay Vij
Mr. Prasun Gajri
Mr. Sanjeev Kapur
Mr. Subrat Mohant
Mr. Khushru S dhwa
Designation and Role
MD & CEO
ED & CFO
Chief Actuary & Appointed Actuary
Chief Distribution Officer
Chief HR Officer
Executive VP - Bancassuran e
CIO
Sr E VP Group Sales and Bancassurance
Head- Strategy, Operations, Business Systems and Technology and Health
Ex VP - Audit & Risk Management
Source: Company
Strong customer service and claim settlement record will help attract new
business
Strong customer service and high claim settlement ratio will help attract new business
HDFCSL places a high emphasis on offering high quality customer service across the
life of an insurance policy, from product development to customer on-boarding and
policy issuance to customer service and claims settlement. This has helped the
company in lowering the customer complaints to 81 complaints per 10k policies
from 498 complaints in FY13. Besides, the reduction in customer complaints the
company has shown strong improvement in turnaround time for complain
resolution and now resolves ~99% of complaints within 15 days.
HDFCSL has one of the best claims settlement ratio of 99.2% in FY17 (individual
claims settlement ratio of 97.6% and a group claims settlement ratio of 99.7%). The
company’s continued efforts in improving the quality of new business, strong
commitment to customer service and efforts to digitize premium collection and
policy servicing has resulted in an improvement in its renewal premium growth.
Exhibit 86: Trend in customer complaint has shown significant improvement
Customer complaints per 10,000 new policies
FY13
498
FY14
594
FY15
348
FY16
107
FY17
81
Source: Company, MOSL
Exhibit 87: HDFC has one of the best-in-class claim settlement ratio amongst private insurers
FY15
Number of policies from existing group customers
Total number of individual new business policies
Cross sell on group customer base (%)
10,508
659,672
1.6%
FY16
29,685
849,181
3.5%
FY17
46,959
851,536
5.5%
Sept'FY17
28,860
429,799
6.7%
Source: Company, MOSL
17 November 2017
44

HDFC Standard Life
Exhibit 88: HDFC has shown strong improvement in claim settlement ratio over past few years
Fiscal Year Ended March 31,
Settled
Repudiated
Rejected
Pending
Settled
Repudiated
Rejected
Pending
FY15
90.5%
5.9%
1.3%
2.3%
98.7%
1.1%
0.2%
NA
FY16
95.0%
4.2%
0.2%
0.6%
99.5%
0.5%
0.0%
NA
FY17
97.6%
1.9%
0.1%
0.5%
99.7%
0.3%
0.0%
NA
Individual customers
Group customers
Six months Ended
September
FY17
94.1%
1.3%
0.1%
4.6%
98.2%
0.3%
0.0%
1.5%
Source: Company, MOSL
Exhibit 89: HDFC has one of the best-in-class claim settlement ratio amongst private insurers
99.2%
98.0%
97.2%
98.3%
96.9%
99.2%
HDFC Life
ICICI Pru life
SBI life
Max life
Bajaj Allianz Overall industry
Source: Company, MOSL
HDFCSL plans to leverage the large customer base, primarily from their group
business, to distribute and cross-sell individual insurance products. As on 1HFY18,
the company has insured more than 59m lives under various group products
(~19.8m lives insured in FY17 alone) and this vast customer pool is enabling them to
cross-sell other individual products and riders.
17 November 2017
45

HDFC Standard Life
Solvency ratio lower than peers; however robust profitability will support
business growth
HDFCSL’s solvency ratio (ratio of available solvency margin to required solvency
margin) remains lower than its peers at 192% as at FY17 though stands well above
the minimum requirement of 150%. However limited annual capital consumption
and strong internal accruals will support the company’s business growth over the
next few years. Also, migration to economic capital will further ease capital
requirements for the insurers, as the insurance industry in India is still savings
oriented and overall sum assured remains relatively low. The listing of the company
will further enable it to raise capital as and when needed to meet growth
requirements; tier-II bonds also remain a viable option of fund raising. The company
has been making healthy dividend payouts (~30% for FY17) and yet reporting
healthy EV growth as the insurance profits have been growing while the strain from
new business acquisition has declined.
Exhibit 90: Trend in solvency ratio
217.4
193.9
196.1
198.4
191.6
191.2
187.0
188.8
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, MOSL
Exhibit 91: Trend in dividend payout
29.6
31.9
33.6
31.3
26.4
21.3
16.1
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, MOSL
17 November 2017
46

HDFC Standard Life
Exhibit 92: Trend in RoE, RoIC, Operating RoEV & RoEV
RoE
ROIC
Operating ROEV
ROEV
FY13
FY14
FY15
FY16
FY17
FY18E
FY19E
FY20E
Source: Company, MOSL
Earnings quality has been improving with steady growth in insurance
profits
HDFC Standard Life has been demonstrating an improvement in its earnings quality
with proportion of insurance profit in total net earnings increasing gradually over
past few years. Insurance profit as a percentage of profit after tax has thus
increased from 79.5% in FY15 to 84.7% in FY17 even as the shareholder net profit
has grown at a modest CAGR of 7% over FY14-17. We expect earnings growth to
pick up as the strain from new business subsides while the maturity of back book
helps release healthy provisioning. We thus expect HDFCSL to report an earnings
cagr of 15% over FY17-20E. We expect operating RoEV to sustain at healthy levels of
21% and new business margins to improve further to 22.7% by FY20E (22% in FY17).
Exhibit 93: Insurance profit as % of total PAT has been improving
Insurance Profit as a% of Total PAT
83.6%
84.8%
79.6%
FY15
FY16
FY17
Source: Company, MOSL
17 November 2017
47

HDFC Standard Life
SWOT analysis
One of the top 4 leading life insurance companies in India (~13% market
share), led by top notch management
Broad distribution network comprising, Wide range of product offering
catering to diverse customer classes
Strong and reputed brand which gives the company a distinct edge over
others.
Superior customer service and strong technological capability
Strength
High dependence on bancassurance channel for distribution
Agency channel is relatively weaker than other large private insurers
Weaknesses
Underpenetrated market in India provides enough headroom for
growth
Gain in market share on the back of strong product offering, superior
customer service and development of agency channel
Product innovation and further investments in digital platform will
sustain higher growth
Cross sell individual business to its large pool of group customer base
Opportunities
Dilution of largest distribution channel (banca) may adversely impact
business growth
High proportion of protection business may result in high claim incidence
in the event of a natural calamity or a major disaster
Increase in competitive intensity in its high margin group protection
business can adversely impact profitability and business growth
Threats
17 November 2017
48

HDFC Standard Life
Bull & Bear case
Bull Case
In our bull case we assume strong premium CAGR (FY17 – 20) of 32.3% (v/s 25%
in base case). We believe strong growth opportunities in an underpenetrated
market could surprise on the upside
We expect PAT CAGR of 12% (7.5% in base case), leading to average RoE/RoEV
of 23.8%/21.5% over FY18-20 (vs base case of 20.9%/20.9%)
Based on the above assumptions we value HDFC Life at INR456 (4.2x FY20 EV)
Bear Case
In our bear case we assume strong premium CAGR (FY17 – 20) of 25.8% (v/s 25%
in base case). Increasing competition and dilution in bancassurance channel
could lead to lower than expected growth
We expect PAT CAGR of 3% (7.5% in base case), leading to average RoE/RoEV of
15.7%/20.4% over FY18-20 (vs base case of 20.9%/20.9%)
Based on the above assumptions we value HDFC Life at INR259 (2.5x FY20 EV)
Exhibit 94:
Scenario Analysis – Bull Case
Bull Case
Total Premium
Total operation expenses
Surplus
PAT
PAT gr
NBP - APE
NBP margin
EPS, Rs
RoE (%)
Embedded Value
EVOP as % of IEV
RoEV (%)
FY18E
265,734
29,593
12,109
10,384
16.4
61,785
22.5
5.2
25.1
154.1
23.0
21.4
FY19E
342,621
38,228
13,439
10,931
5.3
85,817
22.6
5.4
23.0
185.6
23.7
21.3
FY20E
449,897
50,078
15,855
12,538
14.7
114,546
22.9
6.2
23.3
224.6
24.1
21.8
Exhibit 95:
Scenario Analysis – Bear Case
Bear Case
Total Premium
Total operation expenses
Surplus
PAT
PAT gr
NBP - APE
NBP margin
EPS, Rs
RoE (%)
Embedded Value
EVOP as % of IEV
RoEV (%)
FY18E
221,852
27,294
8,950
7,675
-14.0
51,582
22.0
3.3
18.5
145.1
19.2
19.2
FY19E
290,517
35,803
10,138
8,246
7.4
72,767
22.2
3.6
17.6
176.1
17.6
17.2
FY20E
387,411
47,623
12,207
9,653
17.1
98,637
22.6
4.3
17.9
214.6
17.1
16.8
Source: Company, MOSL
Source: Company, MOSL
17 November 2017
49

HDFC Standard Life
Sensitivity on key parameters
Exhibit 96: Sensitivity on key parameters
Scenario
An increase of 100 bps in the reference rates
A decrease of 100 bps in the reference rates
Equity values decrease by 10%
Equity values decrease by 20%
Implied swaption volatilities increase by 25%
Implied equity volatilities increase by 25%
10% increase in maintenance expenses
10% decrease in maintenance expenses
10% increase in acquisition expenses
10% decrease in acquisition expenses
10% increase in the discontinuance rates
10% decrease in the discontinuance rates
10% increase in mortality/ morbidity rates
10% decrease in mortality/ morbidity rates
HDFC life
ICICI Pru
Max life
SBI Life
% change % change % change % change % change % change % change % change in
in IEV
in VNB
in IEV
in VNB
in IEV
in VNB
in IEV
VNB
-1.9
0.1
-2
-2
6
-6.2
3.6
1.9
-2.0
-4.1
-0.1
-0.1
-0.8
0.8
NA
NA
-0.3
-0.3
-0.5
0
-10
-0.5
0.5
-3.3
3.4
-1.1
1.1
Nil
Nil
-1.1
1.2
-0.8
0.8
-5.5
5.4
-20.5
20.5
-10.6
10.9
-6.1
6.1
-2
2
-1
1
-6
6
-5
5
Source: Company, MOSL
-1
1
-6
5
2.1
2
1
-1
-8
N/A
N/A
6.6
-1.7
-3.4
-0.8
-0.1
-0.7
0..7
N/A
N/A
-4.9
N/A
N/A
-2.4
-0.3
-2.9
2.6
-8.6
8.3
17 November 2017
50

HDFC Standard Life
Valuations attractive; robust return ratios will drive
stock performance
HDFC Life has delivered strong return ratios with average FY15-17 RoE/RoEV at
29%/21% respectively. We expect return ratios to remain strong on healthy new
business margins, quality underwriting, and strong cost control.
We note that the quality of earnings for HDFC Life has improved over the past
few years, as the share of investment income and surrender profits have both
declined. The company has wiped out its accumulated losses and is delivering
healthy return ratios, with RoE/RoIC of >30% and is thus capable of supporting
healthy business growth. We expect RoEV to sustain at an average of 19% over
FY17-20E and estimate FY20E EV at INR210b.
We expect the company to deliver new business margin of ~23% in FY20E (22%
in FY17) and new business value of INR18.3b, while operating RoEV sustains at
21%. This will be aided by further improvement in operating metrics (business
mix, persistency and cost).
We believe that the life insurance sector in India is in a sweet spot, where strong
structural potential is now overlapping with buoyant equity markets, rising
share of financial savings and higher disposable income. We expect Indian
insurers to trade at a premium to global insurers, though trading multiples
would vary with economic cycles. Over the medium term, the valuations of life
insurers would be a function of operating performance, growth and profitability.
We value HDFC Life using embedded value methodology. We value HDFC Life at
INR743b using P/EV multiple of 3.5x, which implies a price target of INR370 and
implies an upside of 28%. We initiate coverage with a BUY rating. We note that
our TP implies a new business multiple of 28x as per appraisal value
methodology. We believe that HDFC Life’s strong new business margins,
consistently healthy return ratios and stronger growth potential will enable it to
trade at a premium to other insurers.
17 November 2017
51

HDFC Standard Life
Exhibit 97: India Embedded Value
INR b
Opening EV
New Business Value
EVOP
Dividend payout
Closing EV
- Closing VIF
- Closing Networth
AUMs INRb
PAT INRb
EPS
FY13
48.2
6.0
9.6
-
58.7
41.8
16.9
401
4,515
6.6
FY14
58.7
6.6
11.1
(1.2)
69.9
49.8
20.1
506
7,253
3.6