Insurance industry entering a phase of sustainable growth: HDFC Life CEO

Very few players can go for listing in the life insurance space, says Amitabh Chaudhry

Ahead of its initial public offering (IPO), HDFC Life’s CEO, Amitabh Chaudhry tells Subrata Panda and Anup Roy the reason why the insurance sector is seeing a surge in listings and how its protection business has been doing better than peers.  

There were reports that Standard Life was pushing for the listing when the initial structure for the merger with Max Life was rejected by the regulator. Is the IPO driven by Standard Life’s drive to cash out some of its stakes?

When we announced the merger in August 2016, a couple of months before that the board had decided that we would be the first company to go for an IPO. We gave the merger plans one full year to find the structure which can allow us to merge. When we decided to call off the merger, there was still no structure on the table which would have given us hope that in a relatively short period of time it would get us the approval of the authorities. So, the board decided that given the fact that we don’t have a structure on the table, thus it makes sense to finish the IPO.

It is not as if they knew about it when they were planning the merger but it was in the hindsight. And only when they solve their problem, they can have a discussion with any party to go and look for a merger. And that’s what Standard Life said that because you don’t have a structure in place, so, it’s better to go for listing.

Moreover, HDFC and Standard Life are selling on the propionate basis because we have to go to 25 per cent in a 3 year period. So, our intention was rather than selling only 10 per cent, in order to bring in more liquidity in the market, we decided to sell 15 per cent.

The listing involves dilution of shares by both the stakeholders. So, will HDFC Life in future look to raise capital through fresh issuance of shares?

We are quite clear that if the right opportunity comes along in the future, we can look for a fresh issuance of shares which will be treated as part of the public so we might not need to go and do another secondary sale. Right now, we don’t think we will need to raise capital for our growth purposes.

Was the merger one way to list HDFC Life on the bourses given the fact that the structure was designed in such a way that at the end of it HDFC Life would have got listed?

Actually, it didn’t make sense to have two listed companies. So, we created a structure where at the end of it there would have been one listed company. It was not to get listed that the structure was put in place.

So, our objective of doing a merger was not listing. Our objective of the merger was that the merger of the two entities made strategic sense.

How do you make sense of the very high valuation of insurance companies in IPO? Is there a huge investor appetite for insurance companies given the fact that so many insurers are listing their business almost at the same time?

The valuation is being determined by the investors. So, it’s a market-driven valuation and not necessarily company driven. The confidence of the investors in terms of what the growth story could be has changed. Moreover, the performance of the industry has been very consistent for the last three years. So, they believe that Indian insurance industry is entering a phase where the growth seems to be solid and I think it can be sustained, which was not there earlier.

Also, the industry has started doing much more in protection than what they did in the past. So, the margins of the industry have also moved up. Moreover, in the life insurance space, there are very few companies that can be listed and I think pretty much after this there would only couple of companies which would go for listing. So, given all these factors, maybe there is euphoria around the insurance industry.

As a company, we have been meeting investors for the last five years. We have been consistently meeting investors and been in touch with them. So, we don’t have to go and sell to them because they know our story.

Would you hold Max Financial Services responsible for the failure of the structure to pass through the regulators?

No. When we did the structure, there we five law firms involved. All of them looked at it and none of them thought it was a problem. But it turned out to be a problem on a post facto basis. Then we looked at every alternate structure but every structure had a problem. There was tax issue involved plus the issue of two listed companies and insurance act issue also didn’t help.

After the listing, will HDFC Life look to merge with Max Life?

If the right opportunity comes along in the market, we will look at them with anyone not only Max. After one year of trying to engage with them, we have not been able to put anything in place. The deal is off. But, we believe that there is a place for consolidation in the industry and if we can play a role in that, we would like to play it.

Right now with all the approvals required, any merger transaction is a 12-18 month effort. So, we have to be very careful.

ULIP’s have been the major revenue gainers for the private life insurers. Is it because there is more demand in the market for such kind of products? If so, why is there a dearth of pure protection products?

As far as HDFC Life is concerned, we stand out amongst others in this aspect. 22 per cent of the premium we received in the last fiscal is from protection products.

From the number of lives covered perspective, an insurance company has to do 5-10 more lives in the protection side to match the scale of what you can get in one ULIP transaction. So, that is why the topline growth for a lot of the companies is coming from growth in ULIPs. While, from a protection perspective, it might not give the insurers a topline growth but from the perspective of the number of lives covered, it might be higher than ULIPs in many cases.

Is sale of more ULIPs linked to the average ticket size going higher?

Yes, there is a gradual growth in the average ticket sizes across a lot of players as they are pushing more ULIPs. The average ticket size for some companies which don’t sell much ULIPs is between Rs. 13000 to Rs, 14000 while for others it is much higher.

The number of lives covered is getting affected by the higher ticket size. If we look at a five-year time horizon, a number of companies have seen the lives covered come down. But as far as HDFC Life is concerned, while we covered 10,00,000 lives on the individual side last year, on the group side we covered more than 19.3 million lives. So, for us, the total number of lives covered was upward of 20 million last year. So, if we are covering these many lives and people are willing to pay a term insurance premium that means they have the capacity to buy term insurance. So, we have attacked the market in a different way.

Bancassurance has become one of the major ways of selling insurance products. How has HDFC life done on that front and how is it impacting the traditional agency distribution?

Bancassurance has always been big for us. On an individual basis, it contributes about 68 per cent of our individual business. We have been in the 60-70 per cent zone pretty much for the last 5-7 years. We have also been expanding our direct channel as well as our online channel. Compared to our competitors, our share of agency distribution is lower than what we would like it to be. And we are very focused on getting it into a profitable mode.