HDFC Life's second-year renewal rate slips to 83% as unit-linked customers are slow to pay

New sales sped up, but second-year renewals slipped

HDFC Life's new business picked up in the September quarter. Annualised premium equivalent, or APE, the industry's measure of new sales, grew 13%, against 9% in April–June. Sales through HDFC Bank, which the company had called subdued in July, grew 12%. The value of new business, the company's estimate of the profit those new policies will earn over their lives, grew 14.8%.

The weak spot was renewals. Thirteen-month persistency, the share of business sold about a year earlier that is still being renewed, was 83% for April–September, against 86% a year before. In July, reporting 84% for April–June, the company said it was working "to drive improvement through the year". As in July, it describes persistency as "broadly in line with expectations". Older business did better: 61-month persistency rose to 66% from 62%, and total renewal premiums grew 14%.

Those later payments are where much of the profit sits. A life insurer pays heavily up front to write a policy and earns that back over the years the customer keeps paying. HDFC Life's own figures for the half show the pattern: writing new policies cost it ₹3,090 crore, while older policies produced a surplus of ₹3,630 crore.

Unit-linked customers are taking their time

Management's explanation centres on unit-linked policies, which invest the customer's premiums in market-linked funds. They made up 45% of individual new business in the half, up from 42%. Niraj Shah, the chief financial officer, said market sentiment had split these customers: more new money is coming into the plans, while "customers who have already invested in the past are taking their time to kind of come through with renewal premiums". The pressure was spread across the unit-linked range rather than sitting in one product, he said, and the company was "reasonably confident of being able to recover with efforts".

Shah also pointed to the residual effect of one non-participating product, a type whose benefits are fixed in advance, which he said is now running off. That product is the older problem: last year's review of assumptions dealt with the lower persistency the company was seeing in it.

So far the shortfall shows up as a variance, not in the assumptions

Persistency feeds straight into embedded value, the company's estimate of its net worth plus the future profit on policies already in force. That estimate assumes a rate of renewal, and when customers renew less than assumed the gap shows up as an operating variance. Shah said this half's operating variance was primarily persistency. That variance is one of several items behind operating return on embedded value, which was 14.9% over the past twelve months against 15.8% a year earlier.

The company compares its assumptions with experience once a year, before the year end. Last year's review lowered the assumption for the non-participating product, and the margin bridge shows that change taking 0.4 percentage point off this half's new-business margin. Unit-linked renewals were holding up at the time, so the new weakness is not in the assumptions. The chief executive, Vibha Padalkar, said: "It's only the recent trend that's captured in the variance, which we hope to recover most of it by end of the year". For scale, the company's sensitivity table shows that a 10% increase in lapse rates would reduce embedded value by 0.5%.

Each rupee of new sales is worth slightly more

The margin on new business, its value as a share of APE, was 24.7% for the half, against 24.5% a year earlier. In the company's bridge, a better mix of business added 1.8 percentage points, more than covering higher expenses, last year's persistency reset and the cost of the GST change. In April, Shah had said the GST cost should be absorbed by the end of this half. On this call he said the company had "managed to expand margins even after absorbing the entire impact of GST".

Most of any further gain is meant to go back into the business. As scale returns, Shah expects some benefit to reach the margin, but said "I think most of it will be plowed back into business", with the objective of "delivering VNB growth in line with or slightly ahead of" sales growth. For the half, value grew 12.1% against sales growth of 11%.