Initial Public Offer

Analysis

By: Utkarsh Sharma

Batch 4 A
About the Company:

HDFC Standard Life Insurance is one of the top three private life insurers in the
country in terms of profitability; on Tuesday it launched its Rs. 8,695-crore initial
public offering (IPO) which is the biggest so far in the country’s life insurance sector.

HDFC Life is a joint venture between HDFC and Standard Life Aberdeen plc. HDFC
is a leading financial service provider in India offering finance for housing, banking,
life and general insurance, asset management, venture capital and education loans.
Standard Life is an Edinburgh based investment company offering wide range of
financial services across the globe. Standard Life is a public company established in
1825.

About the issue:

The price band for the offer was been fixed at Rs. 275-290 per share. This public issue
comprises sale of 191,246,050 number equity shares by HDFC, amounting to a stake
of 9.55% , and shares up to 108,581,768.

Risk Factors:

 The interest rate fluctuations can affect the profitability of the company.
 The company and some of its subsidies are into legal battles which may
adversely affect its business and profitability.
 Any adverse change or termination to its relationship with bancassurance
partners could have a material adverse impact on its financial condition,
business and future prospects.

Company Promoters:

 Housing Development Finance Corporation Limited ("HDFC")

 Standard Life (Mauritius Holdings) 2006 Limited ("Standard Life Mauritius")
 Standard Life Aberdeen plc ("Standard Life Aberdeen")

Objects of the Issue:

 To achieve the benefits of listing the Equity Shares on the Stock Exchanges.
 To carry out the sale of Offered Shares by the Selling Shareholders.
Particulars of the Issue:

Issue Subscription Detail / Current Bidding Status:

Portfolio mix
As of Financial Year 2017, the company has invested 41% of its Assets Under
Management in equity and preference securities as compared to ICICI Prudential's
17% and SBI Life's 23%. The fluctuation in the equity market has a direct impact on
its investment yield as well as overall profitability.

Valuation
Life insurance businesses are always valued at their embedded value. It is calculated
as the sum of net asset value and the present value of future premiums (without
assuming additional customers in the future). It is solely based on complex actuarial
assumptions. HDFC Life was priced at 4.1 times of its embedded value at higher band
as compared to 3.2 times for ICICI Prudential and 3.6 for SBI Life.

Industry overview
According to the Insurance Regulatory and Development Authority of India (IRDAI),
Life insurance in India is a Rs 4.1 Lakh Crore industry based on completely total
premiums. This industry is dominated by Life Insurance Corporation (LIC), which has
a market share of 72% for 2017. The remaining 28% is inclusive of around 23 private
players with HDFC Life, SBI Life and ICICI Prudential Life Insurance each holding
5%.
The Indian market is highly underinsured in terms of insurance penetration (total
premium as a percentage of the gross domestic product or GDP), insurance density
(premium per capita) and sum assured to the Gross Domestic Product.

Strong parentage
HDFC Life is promoted by Housing Development Finance Corporation Limited , one
of the country's leading corporate. The word 'HDFC' is easily recognisable and only
adds to its brand value. HDFC Life is able to leverage the existing network build by
its promoters. The company sold 51% of its policies through partnership with banks
(bancassurance) in 2017 and it formed 59% of its total premium. This arrangement
(between HDFC Bank and HDFC Life) is however, not exclusive and HDFC Bank
has entered into bancassurance with other insurers as well.

Profitable new business writing

HDFC Life was the most profitable life insurer in terms of Value of New Business
margin in FY16 and FY17. Its Value of New Business margin improved from 18% in
FY15 to 22% in FY17. The higher the VNB margin, the higher is the expected
profitability of the policies written over a specific period.
Balanced Product Mix
In Financial Year17, 47% of its products were linked to the market, while 53% were
non-linked. This product mix provides flexibility across the business cycle and unlike
its peers, the dependency on unit linked investment plans (ULIPs) is less (53% of the
total premium for 2017).