HDFC Life Insurance Company Limited (HDFCLIFE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the HDFC Life Insurance Company Limited Q1 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Ms. Vibha Padalkar, MD and CEO of HDFC Life Insurance Company. Thank you, and over to you, ma'am.

Thank you. Good evening, everyone. Thank you for joining us for the discussion on our performance for the quarter ended June 30, 2020. Our results, including the investor presentation, press release and regulatory disclosures are already available on our website as well as that of the stock exchanges. I have with me Suresh Badami, Executive Director; Niraj Shah, CFO; Srinivasan Parthasarathy, our appointed Actuary; and Kunal Jain from Investor Relations. I will run through the key highlights of our Q1 FY '21 results and would be happy to take questions post that. Starting with an update on business performance. As the economy is coming to terms with the effects of the pandemic, we are increasingly witnessing encouraging on-ground trends. Business has started to pick up on a month-on-month basis, and we're seeing higher traction, especially in the individual protection business. As the situation begins to normalize, we expect life insurance to emerge as an important avenue for both protection as well as long-term savings and consequently help attract a higher quantum of inflows from Indian households. While we have been able to operationalize more than 75% of our branches across the country over the last 2 to 3 months, we are increasingly able to both garner new business digitally as well as continue to service our customers by providing 24/7 access and frictionless experience through our digital touch points. We have also been experiencing improving renewal premium collection trends with quarter 1 clocking 24% growth. However, we remain cautious about the sustainability of these trends, given the possibility of multiple lockdowns going forward and the consequent impact on jobs and small businesses. Our individual WRP market share increased by 100 basis points from 17.5% in quarter 1 FY '20 to 18.5% in quarter 1 FY '21. We de-grew by 19% during quarter 1 FY '21 on a high base of 63% growth same quarter last year and delivered better than the private industry, which de-grew by 23% on a base of 24% growth same quarter last year. We sold nearly 1,90,000 policies in the quarter, registering a degrowth of 4%. In the month of June, our degrowth was 3% on a base of 87% growth in the same month last year, thereby showing improving business momentum. Our market share for both the group and overall new business segments was at 20.7% each for quarter 1 FY '21. A calibrated approach of maintaining a balanced product mix has again enabled us to maneuver through a turbulent environment and adapt faster than the overall market. A wide bouquet of product offerings across segments resulted in ULIPs participating, nonparticipating, all accounting for 27% to 30% share each in our product mix. While we expect the demand for Unit Linked products to remain soft through the year, our suite of innovative traditional products would help us address demand for long-term saving solutions. We also saw a 50% growth in individual protection APE with the share of protection doubling from 5% last quarter 1 to 11% this quarter. Despite the expected drop in business volumes, we delivered a healthy new business margin of 24.3% on the back of a favorable product mix and cost management measures. Value of new business was INR 291 crores for the quarter, with an operating return on embedded value of 15.8%. While we have not had to utilize the COVID reserve of around INR 40 crores set up in the previous quarter, we believe that it is prudent for us to continue to carry it forward. As of July 15, 2020, 39 valid COVID claims have been reported, of which only 2 are for term policies and others are in the savings segment. Total summit risk net of reinsurance is less than INR 2 crores. Significant proportion of our cost is variable or semi-variable in nature. This, along with cost management initiatives and deferral of discretionary expenditure has resulted in a lower cost ratio of 11.5% for the quarter, down from 13.4% in quarter 1 of the previous year. Having said this, even during these difficult times, we have continued to invest in technology, training and employee well-being such as counseling support. Our profit after tax grew by 6% to INR 451 crores with new business strain being offset by sustained profit emergence from our back book, which grew by 10%. Our solvency position remains healthy at 190% compared to 184% as on March 31, 2020. The solvency was aided by strong PAT emergence and favorable market conditions. Next, on channel performance. Our digital assets have seen strong adoption across all our distribution channels. A positive outcome of the pandemic is that we are seeing online evolve from being a channel to a way of doing business across our distribution, with customers increasingly getting comfortable in transacting in a non-face-to-face manner. We have witnessed higher share of volumes in the bancassurance channel, especially in the months of May and June, assisted by a bounce back witnessed by our partner banks. Almost all our distribution channels were able to materially improve their respective term share with our bancassurance, online and agency, increasing their respective contributions by 200, 300, 700 basis points this quarter. Moving on to product performance. As is witnessed across financial savings products, inflows into insurance-led savings remain subdued with customers wishing to conserve cash. As mentioned earlier, our balanced product mix strategy has been effective even in the current scenario, and we expect demand to pick up in the latter part of this year. We continue to focus on the Protection segment with term protection growing by 50% over previous year to INR 113 crores. As was expected, our Credit Protect business, de-grew by 74% due to a tepid lending environment. We expect a meaningful improvement in CP only by quarter 3. Next, on technology. Our continued investments in technology have enabled us to offer an improved customer journey, whilst also helping us realize cost efficiencies. Our video-based sales enablement tool, WISE, enables our sales team to connect with customers over video, thereby providing a virtual impression of a face-to-face sale. Our chat-based verification process has seen increasing adoption by our customers, with over 65% of verifications being carried out through this mode. There is an increasing adoption of online payments and services by our customers, whereby about 89% of renewals are made through online or direct debit modes. I'm also pleased to share that HDFC Life shares will be included in the Nifty 50 Index with effect from July 31, 2020. To conclude, we are pleased to have maintained our performance across key metrics despite the prevalent scenario and are seeing encouraging signs on the ground. We remain upbeat about the medium to long-term prospects of our business and continue to focus on our strategy to build a sustainable and profitable business, thereby adding value to all our key stakeholders. The detailed disclosure on our results is available in our investor presentation. In the end, I would like to thank all of you for your continued support of our company. We are happy to take questions now.

[Operator Instructions] The first question is from the line of MW Kim from JPMorgan.

Yes, I have 2 questions to the management. Number one is about the product mix strategy. The result shows that management is highly flexible on the product mix strategy on the different macro or the social scenario. So if the COVID-19 situation would last for next 12 months and bond age remains very low, what would be the company's optimized strategy to deliver the best value? So that's the first question. The second question is a big picture question. Now if we actually look at the developed market, normally, the vaccine is the part of the insurance coverage. We are actually hearing a lot of hope about the COVID-19 vaccine moving forward. Do you think that in India, so the COVID-19 vaccine could be the part of the insurance coverage under the group cover or the private health cover? Or it should be just out of pocket? My understanding is that if it is included in the insurance scheme, perhaps that could be very positive in the sector. So I want to get the opinion from the management.

MW, so a couple of questions that you asked. On the first one, on the optimal product mix, actually, we are fairly there. We've always said that balanced product mix, so you'll see between UL, par and nonpar savings, we are hovering in the zone of about 27% to 30%, give or take here or there. So perhaps Unit Linked can go down a little bit further. And the other 2 can pick up a little bit of share, but more or less, we are there. What we would love to see, and we're fairly confident is term and annuity continuing to ramp up. You will see that quarter 1 itself, quarter 1 of this year versus quarter 1 of last year, is 11% term versus about 5%, 6% last -- Q1 of last year. And that kind of a traction that you've seen, we'll continue to see that. And also annuity, we believe that the focus on that segment also we'll start seeing more of annuity business. So a little bit more of that, but largely very similar to what we have right now. On your second question about vaccine. As it is -- in terms of what we can do on health indemnity is fairly restricted. We can only do fixed benefit on health, although that's a separate conversation. We are, as an industry, trying to appeal to the regulator to allow us to sell health indemnity that we used to be allowed to earlier. As far as the general and stand-alone health insurance companies, I would suspect that this would be out of pocket.

The next question is from the line of Ajox Henry from B&K Securities.

Ma'am, my question is again on the Short Term. So you have witnessed a very strong growth. How far is that driven because of the Tata hiking its prices? So earlier you had problems in HDFC Bank. And what I mean by the problem is that slower growth compared to Tata's Short Term. Now that Tata is more expensive, do you think that being a big support for you going forward as well in HDFC Bank, particularly?

See, relative to our pricing, there will always be somebody or the other who's pricing it lower. And if not Tata, that you mentioned, somebody else will, and that will continue. So we have a brand promise. We have technology. We have been first movers in this space. And there will always be -- in a pandemic situation, you will find that there will be a strong preference for the top 2 or 3 players, at least as far as term is concerned. So it's more a pandemic-led thing as well as our focus rather than one company or another company having much lower rates. And even with the rates, there will -- one can play the game of having lower rates for some time, but you will find time and again, companies repricing it. So that's okay. That's all part of how you do business. So I think it's a deeper play rather than just someone who's pricing lesser over the other. And you know, it's a fairly large market. So it's not that what I win, somebody else has to lose. What ideally we would like to, given where -- how low penetration rates are, there is enough for everyone to grow.

Makes sense. Makes sense, ma'am. Ma'am, and on -- in the month of June, we did see a very good business happening. To what extent is that because of the 80C being deferred till June? I know that it's not the top reason why customer buys it, but do we see any shift in that -- correction, not only for you, for the industry for June to be a good month? Or is this a structural thing you're looking at, like July to be much better than hence forth?

Yes, you know, the whole 80C, we have not even -- we have never talked about it because when you look at Slide 29 of our presentation, you'll find there's an AC Nielsen study. It's a study which shows that it is now seventh or eighth reason. It's nowhere in the -- ninth reason, in fact, now. So nowhere in the reckoning and not certainly for the mass affluent class customer base that typically are our customers. So not at all. In fact, no mention of it even by our agency channel. And our focus has been largely on protection and annuity, which really has no bearing for 80C. So next to nothing. We -- as a management team, I don't even recall us having mentioned it once in the last month, for example.

Ma'am, my next question is on Sanchay Par. So is it being sold to the same customer segment as Sanchay Plus? And do we cross-sell the product to the existing Sanchay Plus customers since Sanchay Plus has been a huge hit? So what's our strategy for Sanchay Par, especially?

So Sanchay Par, when you look at, you will see -- this is on Slide 12, wherein we have tried to deconstruct it in terms of age-wise. And you will find that it is actually spread across as against when you see the nonpar. Nonpar, you will see that the 50-plus and above. And -- so it's slightly different. Also, the risk appetite is different. Also, when you look at what is the underlying product mix, which is segment-wise, you will find that, that is quite different. So our agency channel tends to do very well on selling participating products. Also, the feature that you have on Sanchay Par, which has immediate cash back, is an attractive proposition for someone who is somewhat stretched on their budget, at the same time want to have a fair level of security and very little exposure to equity markets.

Perfect, ma'am. Perfect. And on VNB margin, ma'am, what is impact on RFR move?

Srini, you want to answer that? I think we have a slide here.

Sir, we've given the walk-through there. You see that we don't have any impact for economic variance in the VNB because as economic conditions change, we also constantly reprice. So when you're looking at the value of the new business written in this quarter, that is with respect to the economic conditions prevailing in this quarter. So therefore, we don't see any impact coming through because of the movement in the yield coming from last quarter -- last year to this year.

Okay. Okay. Even after you like increased the rates, right, in June in Sanchay Plus?

That's something we constantly reprice to the prevailing investment conditions. So I think you probably -- your question is why we are not seeing the yield curve shift from the last quarter to this quarter?

Right, right.

Because we constantly reprice almost every month or every other month, whenever we see a significant shift in the economic parameters. And therefore, the products we are selling today or this quarter corresponds to the economic conditions in this quarter. So therefore, for us -- we don't think it's relevant for us to compare to an yield curve that was prevailing in 1 or 2 years back.

The next question is from Utsav Gogirwar from Investec.

I just have few questions. To start off with on the cost front, the cost has been significantly improved in this quarter. I just want to understand what are the key measures we took on the cost front? And how would we look at our cost ratios for the full year basis?

Yes. So costs, like we've discussed in the past, we have broadly, we think about it in 2 ways really. One is the cost, which is linked to volumes, either in terms of top line or in terms of the kind of mix. The second one is in terms of the fixed costs. So across each of these elements, the approach is different. Now as we've seen in this quarter, we've had a de-growth on the individual business by about 19-odd percent, and we've had de-growth in CP by about 74%. A large part of the costs related to volume are reflective of that phenomenon. As far as the fixed cost is concerned, there have been initiatives that have been taken. The largest element within fixed cost is manpower. While we've been considerate in this quarter in terms of not doing any sort of mass layoffs, and there's no intent to do that going forward as well, we have taken all initiatives such as not doing any new hiring or taking, sort of, no increments in this year at senior levels or taking bonus cuts at senior levels in the company. So those are the things that have been done to try and contain that cost. Discretionary expenses, which will not come in the way of us being able to service customers or write new business using technology. They have been deferred. There are certain other cost initiatives that have been taken. We are looking at servicing customers in a way which does not necessarily be dependent on the physical branch infrastructure that we have. So virtual servicing, some of those elements are the way we are thinking about cost really. So what you see is that the cost ratio, which has fallen from about 13.4% to 11.5% is largely reflective of all of this. Going forward, as the volumes pick up, we do expect some of this to normalize, and we are hopeful that we'll be able to -- between these 2 elements get to a cost ratio, which is fairly similar to last year.

Okay. Second question is with respect to the business from the Banca channel. I think we have gained a very good -- decent amount of market share in the Protection business. What are the things happen at the Banca level because at branches, the customer footfall may not be that much. So which channel or how the bank is able to increase -- sold protection?

Suresh, do you want to answer that?

Yes. So -- look, I think like Vibha had mentioned in one of the earlier questions, we believe the potential in terms of how much we can sell term and some of the par and nonpar product continues to be fairly high. ULIP has been slightly volatile in the market. So we need to be very careful based on the customer requirement. So while there has been a lesser footfall at the bank branches, I think the bank has done a tremendous job, not just -- HDFC definitely has scaled up, some of our other Banca partners also have looked at cross-selling and reaching out to customers. So there's a lot of digital reach out, which has happened, a lot of enablement that we have done. If you really look at the prospecting that we can do digitally, end-to-end from actually reaching out to a new customer to finally giving them the policy, can actually be enabled online. The only place where we kind of got affected was on medicals term, where the customer has to go for hospitals. So there has been a little bit of a slowdown there. But otherwise, given the heightened awareness, given the bank looking out for reaching out insurance plus the entire tech enablement, we've managed to get a fair amount of growth. So I think good support from all our partners. And I do believe that this will continue for some time through the Banca channels. Even agency -- initially, agency and broking, which has slowed down, I guess, over a period of time, they'll get used to this new way of selling, and we will see an increase or uptick in the kind of sales, which is happening on insurance.

Sure. And third question is on the persistency. I think the persistency has declined for us as well as for peers, which is on the expected lines. I just want to understand 2 things over here, which segment, which has -- like is it the ULIP only or any other segment which has impacted the persistency? And how do you see -- at the initial comment, you have mentioned that we have to track on the reviewers front, but is there any expected persistency for the end of the year targets we have?

So if you look at Slide 31, you will see channel-wise persistency. And yes, there -- see, now as we are into July, we are almost tracking what we are meant to be collecting. So as against what we were seeing right at the start in April, we are in a much better position, but we will remain cautious because of people generally wanting to conserve cash. We are seeing it across, but lesser in terms of nonpar, more in terms of ULIP -- more stress in terms of ULIP -- in the ULIP segment.

[Operator Instructions] We take the next question from the line of Atul Mehra from Motilal Oswal.

Congratulations on strong performance in extraordinary environment. My question is on this is Slide 52. Basically, over here, one of the observations is to do with the par product policy term being substantially higher this year versus the previous year. So any particular reason for this? And any of the profitability measures for us have been impacted positively because of this higher tenor?

Yes. Atul, this is largely due to our new product, Sanchay Par, which is now a flagship par product, and that has a whole life architecture. And that's why you see a much longer tenure of our -- of people paying the premiums.

So fair to assume that the profitability metrics...

Even otherwise, our focus has been on longer term par rather than the shorter end. This is the reason why we have just extended a little bit more.

And ma'am, on the profitability side, this should have a much better positive impact on the VNB margins, right, in terms of policy term being much higher?

Yes, absolutely, yes.

Right. And secondly, in terms of the pure term as a product, we've seen very good momentum on the business at 50% plus growth. In terms of anything on the online side, how are things shaping up? And especially on third-party online like, say, PolicyBazaar? Has that in terms of picked up also quite materially? And our market share in a lot of the third-party channels, how is that shaping up?

Yes. So if you look at Slide 15, you'll see that the term versus FY '20 has gone up from 37% to 40%. This subsumes aggregators as well as our own self-sourced people who come directly onto our website. So that traction continues. In fact, we'll soon trend towards the higher numbers of what we saw in FY '18, wherein we have started off small. So now on a bigger and bigger base, we are able to hold our term share. What is happening is that, one of the earlier callers that I mentioned, the senior 4 or 5 -- maybe 3 or 4 players is where largely the slightly more evolved customer is wanting to move towards, not very dissimilar to banks. When -- with a lot of stress around, they really don't want to go bargain hunting. And do want a safe haven. And it's a whole host of things. It's -- price is one aspect, but not the only aspect, and that is clearly coming out. And usually, in a -- when the times are tough, we find that HDFC Life has come out stronger, and that's what you're seeing on term over here. That doesn't mean that we have to continue to innovate and continue to focus on giving best value to the customer as well as the channel or distributor. But I think with the pandemic, there's an equal amount of pool also for term.

The next question is from the line of Sanketh Godha from Spark Capital.

I have 2, 3 questions, honestly. Sir, the unwind rate in the current quarter is at around -- if I annualize, it comes to around 8.1%, which is higher than what was there last year around 7.5%. So when the interest rates are coming down, why the unwind rate has gone up for us? So that is first question. Second question was basically with respect to the VNB walk. The 60 basis point impact due to change in assumption is largely related to the reinsurance rate hardening, where we have not completely passed on the price hike. And the third question, I just wanted to check, when we show these persistencies in our numbers, is it rolling 12-month persistency or the persistency for the quarter?

So on the last question, Sanketh, yes, it is rolling 12 months. I will ask Srini to answer your earlier 2 questions.

Sanketh, on the unwind question, so we've been doing the quarterly reset of the expected returns. And since, as you know, in the back end of March when the stock markets crashed, we were a little bit more conservative. And brought down the rates to 7.5% levels. And now since the market has bounced back, we think we can go back to normal levels. And therefore, it has come to 8.4%. And if you look at the unwind rate for other players -- listed players, you'd see that the unwind rate varies between 8% to 9%. So we come back to basically normal levels since, in the last quarter, we were a little bit more conservative because of whatever happened in March. So that's the unwind thing. The second thing is on the persistency assumption -- sorry, the change of assumptions. I think this is largely to do with the annual exercise we carry out every March end. And we put through in April. So that's the impact on the -- particularly, persistency is strengthened in...

Got it. Yes, I [indiscernible]. Yes, yes, yes. And just on EV walk, that INR 1,100 crores of economic variance, can you break it down into equity, ULIP-related and also maybe bond-related thing?

Yes. I can do that. So the equity is about INR 400 crores, Sanketh. On the -- the interest rates fall is about INR 200 crores -- INR 180 crores, INR 200 crores. And there is actually a slope change as well this quarter because of RBI's operation twist. The shorter end of the curve has actually come down much sharply, about 90 basis points compared to the longer end. And that has actually also helped our -- since there are lots of excess assets that we have. I think you would have seen it in the risk slide. So that also has helped our -- the slope change has helped our EV to go up by around INR 400-odd crores. And the credit spread has also narrowed down in this quarter by about 30-odd bps. And that has, again, contributed positively to our EV by INR 160 crores. So overall is INR 1,154 crores.

Okay. So ULIP-related is reflected in the equity only, right, INR 400 crores?

No. See, UL is part of the equity -- UL will be between equity and the yield curve fall. Yield curve fall is actually, like I said, the shorter end of the curve has come down sharply. And that is where most of the UL profits are because the UL is relatively a shorter term business. The average payback period, if you like, is 5 to 6 years. And therefore, any movement in the shorter end of the curve has got a higher upside on the UL profits. And that is where -- UL is actually sitting in both the yield curve fall as well as the equity going up. So it's split between the 2 lines.

Okay. Sir, credit spread, INR 160 crores. Can you explain a little? I mean, I did not get it what exactly it means. Credit spreads are narrowing, increasing it to INR 160 crores, what exactly it implies to?

See, credit spread narrowing means the bond -- the corporate bonds or MTM of the corporate bonds are much higher than what we purchased at.

Got it. Okay.

[Operator Instructions] The next question is from the line of Rishi Jhunjhunwala from IIFL.

Just give some color on the change in your product mix. So basically, we've seen after almost 4 or 5 quarters that ULIP actually has seen, the decline is not a sharp, whereas we have seen some declines or rather muted performance on annuity and probably guaranteed returns. So basically, over nonpar savings part. So just wanted to understand, in terms of positioning, are we trying to change anything there? What is the reason for this movement that has happened? And of course, you've talked about par also, which comes into picture. So just trying to understand how do you navigate between these 3?

So Rishi, if you look at Slide 15, I'll explain in context of that and how we drive product mix. So we don't drive product mix at the company level. So what you've referred to of UL and the sharp correction in terms of nonpar savings and so on, that is actually a summation of underlying channels. And so we've given each one of the large channels. And there you'll see that UL has been about 1/3 of Banca business, but it has been a lot lower in Agency business as well as Direct business. So -- and then the growth rates of the underlying channels is the summation that you see at a company level. So if a particular channel grows faster, then the product mix that we are driving at that channel level is what we'll have an overbearing on what the company numbers look like. We are less fast about overall at a company level as much because -- and why do we do that? We do that because of a couple of reasons. One is that the channel economics vary quite a bit. Their cost structures vary. As well as what is right for the customer also varies. And the risk appetite of the customers and the suitability of the products also varies. And so we drive it that way. But overall, we would say that we've always liked a balance product mix, at least for the last 5, 6 years. We've never been a ULIP-driven company. And so this is not very different from what we have been consistently seeing. And Banca has about 30% ULIP. It could go down a little bit more if the volatility continues, or it could go up a little bit if COVID recedes as a pandemic and market bounce back. But it'll always remain range bound. It's not going to become 80% of our business, for example.

Understood.

Once again, I think, look, other than the fact that when we look at the channel economics as well as what's the right fit for the customers being served by that particular channel, I think we're also very closely in terms of what kind of quality of business comes in. We also in the -- and what kind of capability building we have done in terms of the fund classes for those products. So typically, you will find that agency meets both -- only with partners or financial consultants, who'll give a very, very high persistency, which is why our agency persistency is very high, and the UL mix is right. And then what Vibha was saying, based on customer, based on channel economics as well as the capability which we do through build as well as quality, it all totals up at an overall distribution level in terms of whatever mix. So in some months, you will find when bank growth is high, maybe UL will be slightly higher, but where agency is lower, the par and nonpar maybe slightly higher, but term and annuity would be uniformly pushed across all the channels because those are clearly good products and clear segments that we can grow.

Fair enough. And secondly, just on protection. So apologies if I'm repeating a previous question, but just wanted to understand how much -- on the retail protection side, how much pricing increase we have already taken versus probably something that we will in the near future. And secondly, on Credit Protect, where have margins trended as a result of a significant decline in the NBP. And you had mentioned in the past that you would give away some of the tail accounts there. So just wanted to understand how things are playing out there.

Yes. So Rishi, on the -- on your first point on term pricing in the individual space, I've mentioned this in the April call that it's not just going to be a simple spreadsheet wherein whatever reinsurers hike up the rates, we're going to pass it on to the customer. We haven't done that, but we have done it in a risk-based calibrated manner as to wherever we see a stress on mortality experience and only selectively we have increased in certain age groups because that is adequate. Because we need to also be competitive. We -- most of our partners are in multi-tie scenario as against having a 1:1 relationship wherein -- then there isn't that much of requirement for elasticity of pricing and demand. While for us, we do require -- there -- because there is a very high level of elasticity between the 2. And so keeping that in mind, we have only done it very, very selectively, wherein we are seeing poor mortality. Yes, we will -- as and when we see certain profiles generating poor mortality, we will increase rates there. And we might relax where we see no stress at all or next-to-no stress. So it will -- this will be an ongoing exercise. We have repriced for a product and when we get approval, we will have the ability to increase it further, increase prices further if we see stress on mortality. But it will all depend on how that is panning out. On Credit Life, yes, we continue to go back to a partner if we see very disproportionate levels of poor mortality experience. And we have to renegotiate commercials or even be prepared to walk out because like with anything we do, we don't want to have a top line just for the sake of top line. And it has to be a win-win for the distributor, the customer and for the insurer. So yes, we continue to have those conversations. And usually, the partner does see where we are coming from. And usually, we have succeeded in a sensible kind of a repricing.

The next question is from the line of Abhishek Saraf from Jefferies India.

Ma'am just a few things from my side, on non-par savings part, obviously, we had grown last year very fast on the guaranteed product. And so this quarter, we have settled at a much lower share. So just if you can share your thoughts on how we see it going forward? And is it we have slowed down primarily because we had reached a certain level within our own mix? Or you are also witnessing like the market is also getting a bit tighter in the non-par savings given that many players have now jumped in with the guaranteed product. So just your thoughts on how you see this product evolving in your mix and the overall scenario? And secondly, on the margin front, so there's clearly a very reasonable hit on account of fixed cost absorption. This -- so -- which presumably is because of the lower scale right now. So is there a likelihood that as we gain the normalized scale back or the scale rises, so we could see a reversal of that fixed cost absorption that we have shown this quarter.

Yes. It's a very valid question, Abhishek. On the non-par savings, frankly, we -- demand is not the issue. We have -- in the spirit of balanced product mix, we have reined it in. If we did not want to rein it in, we could pretty much get to similar levels that we had in Q1 of last year. But we did tell all of you that we will rein it in because Q1 last year was an aberration. We did not frankly expect it to do so well, and to be accepted by people so well. But -- so that is what has caused that. It's not that we don't have enough paper to back it up or we -- others have got in. Others will always get in. And also the others who have got in were the very ones who have said that product was not worth it or not the right product to sell, but that's a different story. So it's more a conscious demand curbing rather than not being able to sell that. And we are happy because balanced product mix is what helps us as a company do well in all the turbulence that one is bound to see, whether it's in macro environment or whether it's regulatory or customer preferences or a combination of all these things. So it's in the spirit of that. As regards margin and cost absorption, you're absolutely right that it is only because of the top line. In fact, when I deconstruct our costs and look at fixed costs and variable costs. Fixed costs, rupee value of fixed costs is absolutely flat, rupee to rupee, despite at least at lower levels and full year impact of people we hired at lower levels last year and so on. Despite that, it's absolutely flat. And so when you look at some channels, like, say, an agency channel, which has about 70-odd percent fixed cost or 65% to 70% fixed cost. As agency channels and some of the other channels start recovering in terms of their growth, you will find the fixed cost leverage coming through or getting better absorbed. And that's when the throughput to margins will come in. A point I want to make here is that our new business margins, the costs are based on actual costs and not our full year estimates of lower costs.

Sure. Sure. One last bit if I can squeeze it in this question on solvency. So obviously, it's 190%. We are -- means, we've generally been at the lower end among peer set, but we have managed it well. But going forward, how are we seeing on the solvency front and on our alternate capital raise plans, if you can just give some light on that?

Yes. So solvency has been fairly steady and comfortable in the 180% to 200% range, and we've been comfortable with this right through. So it's just never been a situation where we've thought otherwise. In the current situation and what we saw in the last quarter, circumstances did lead us to think about shoring this up to build some cushion because we were expecting 2 events to continue and build up over a period of time, and we mentioned that on the April call as well. The first one was the volatility in the equity markets. We expect that to continue for the foreseeable future. And at the same time, we expect demand for protection products to really take off from here. And both of these things imply, it would be a good position to actually build some cushion. That's the reason why we are looking at raising sub debt to the extent that we can, INR 600 crores would give us about a 15% additional cushion to deal with both these situations. Equity market volatility, which we saw in the last quarter, some of it which has got basically recouped in this quarter. But that can go in either direction over a period of time. As far as protection is concerned, we will need more capital when the protection mix goes up significantly from hereon. So we want to plan ahead and go with that. So that's how we're thinking about it.

The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

I had 2 questions. One on the ULIP side, given the low base and capital markets recovering, Vibha, why are you still so cautious for the remainder of the year because for now the base has been low for quite some time, the way markets have stabilized and, in fact, recovered quite a bit why some of the caution on the ULIP side?

So it's not that we are being cautious, it's just that my earlier comment about balanced product mix, whether it is non-par, whether it's UL, we've never been an 80% UL or an 80% non-par on a full year basis kind of a company just because market today augurs well for a particular kind of product. It's really in light of that. And also ULIP typically has had poor persistency. And time and again, we've seen that at the end of 5 years, people say, I want my money back and -- these are financial investors. The higher the ULIP ticket size, the more...

More the volatility?

The person is a financial investor and not an insurance coverage seeker. So we've always remained -- there is definitely a place under the sun for Unit Linked, but for a particular DNA of the customer. And so we -- when you overlay Unit Linked with the DNA of the customer, with the segment -- customer segmentation, his understanding of the product, the channel economics, then this is the kind of outcome you -- optimum outcome that you arrive at. There will always be some pulls and pushes. If the customer wants to buy ULIP, it's not that they're going to say, "I won't sell you a ULIP." But it's also that the customer today is not looking to actively buy a lot of ULIP. Some of it is there, but not -- it's not a huge pull of market.

No. And Vibha, if I can add, I think even the customers who -- where we sell UL is part of the overall allocation. So that is one of the reasons why UL through banca where the bank RM does a lot of financial planning and allocation for their set of customers. So it is much higher there. And we've seen better quality business coming in through banca, and that's how we kind of be cautious on where we sell UL through banca channel. And similarly, on the agency side, where we have financial consultants who are very, very good in terms of financial planning and all of their returns, UL level, there is a little bit of allowance in terms of UL there.

Have we seen any major change in ticket sizes in ULIP over the last quarter or 2?

It has gone down by about close to 19%, 20%.

Okay. And secondly, if I looked at year-on-year performance, Q1 had some base effect of last year. So does because of that, the growth look optically lower or not real?

When you say -- yes, it definitely does. So if you look at Slide 5, you will find that, on the top left-hand side, the month-on-month that you see, you'll see that June, for example, de-grew by 3%, but the base effect was 87%. On a quarter basis, to 19% de-growth, the base was 63%, which is significantly more. If you look at the right-hand side, industry, if you were to look at overall industry, the Q1 of last year, growth was 14%. And against that 14%, there was a de-growth of 18%. We had a growth of 63%, and then we had a similar kind of a de-growth. So we had huge base impact.

Which slide you said, sorry, I missed that?

Slide 5.

Slide 5?

Yes.

So that also had...

Yes, exactly your question is what we tried to answer here given the basis right there.

So it does depend on when some of these products have got launched. So last year, last quarter, we had launched some very good products where there was a spike. But if you really look at it from a full year basis also, last year, we took a market share of 1.6 basis points and already in quarter 1, market share is growing. So that's the other way to look at it to say, it's not just a base effect, are we trying to see whether our growth is happening and market share is also increasing.

And given the current situation, there seems to be room for improvement of market share for the remainder of -- there -- what is our sense, some of the smaller players will get affected, there could be more volatility, as you said. Can you...

Yes. So if you see the top 10 private companies have 88% market share and it's getting bigger and bigger. So there is a clear consolidation that's happening on market share. And this will continue to pain the, say, the bottom 15 players.

And just to add, again, in terms of how that moves within the top 10 would also depend on how wide the product bouquet is for various players. And for a player like us, the bouquet is fairly wide, and the protection journey continues, but so does the momentum on savings as well. So that's something that has put us in a position that we are and we hope to continue on the path.

And I will add that, look, it's always a balance between top line market share, quality of business as well as the profitable product mix. So all 3 have to be balanced well.

And to the point of your top 10 market share, in fact, if I look at the top 5, they have been in, I think, 60, 65 market share for quite some time.

Right.

So even though 6 to 10 can get marginalized over a period of time because these top 5 have been more or less in that range for quite some time.

Yes. Yes, absolutely, you're right. See, it's also one needs to have strong bancassurance as well as other channels, broker, online. Without that, if one only has 1 kind of a channel, it could be a small bancassurance, it could be just agency channel rather than being multichannel across and growing and taking advantage of opportunities as they come up. Without that, I think getting scale starts becoming difficult because you also have mid-tier companies that have a lot of banks with them, but little of else -- anything else and really haven't done very well.

The next question is from the line of Harshit Toshniwal from PremjiInvest.

Just 1 question. So when I compare Q1 of last year versus this one. I think on protection, we have slightly -- the mix has reduced primarily because of the lower credit protect. And even in the savings, we have done more of par and less of non-par on a related term. But the impact of new business margin in the VNB walk from the business mix is just 100 basis points. So just want to understand that has any of the segments like par or non-par become more profitable for us that it has compensated for the product mix shift? And is it that the...

Yes. Harshit, when you say par, par has replaced ULIP quite a bit. So -- and it's a fairly long-tenured par, like 30 years, whole life par. So fairly profitable and Unit Linked at best would be low single digits of profitability. And protection has also gone up. The retail protection has doubled from 5% to 11%. So that has also helped.

Okay. Okay. Because in ULIP currently, ma'am, so it's largely flat and maybe plus 200, 300 basis points in this quarter. But I think the par has improved much more. And 1 more thing. So I'm not sure that that's the right way to look at it. But in par, the expenses have passed through predominantly. So you see that doing more of par in today's environment shields the margin in some way?

When we -- it is better than a lot of channels. It's not so much shielding the margins. Indian GAAP, yes, there is some shield on Indian GAAP, but not so much the margins. And also when you look at ULIP, it is not just what you see at a total company level in terms of 26%, 27%, but it's also important where the underlying -- which channel has sold that underlying ULIP. Because again, the channel economics are very similar.

Okay. Got it. So typically, since agency has been doing much better relative to the last quarter so you have got the benefit?

Right.

Just 1 thing, ma'am. So if we compare as a 10-year, say, Sanchay Plus versus a 25-, 30-year-old 10-year par products, which we sell, will the margins be very different or they would both be really profitable products?

So Harshit, both are profitable. It would vary based on the PPT and the term mix. Sanchay Plus is -- Sanchay Par Advantage is also a long term product, it is whole life, it has multiple options that the customer can choose and so is Sanchay Plus. So margins for non-par, I mean, directionally are higher, but not as dramatically different for a well-constructed participating product. So this par product, for example, is definitely a much richer design, both for the customer as well as for the shareholder.

Got it. Great. Congratulations for great results.

[Operator Instructions] The next question is from the line of [ Arat Sanghi from VP Capital ].

Congrats on a good set of numbers. So I just wanted to know, ma'am, what is driving this par growth? Because I wasn't expecting much of a demand for par business in this quarter. So what is the on ground situation that is driving the par growth? And will it continue throughout the year? So some color on that.

So we've been working on this product for a while, and we felt that there is a certain segment. First of all, we intrinsically believe in par product. We do believe that par also has a place in the sun, just like Unit Linked has a place in the sun. And that conviction is important. So that it's not just a gratuitous reason for selling something. And then when we looked at deep analysis of customer segmentation and then having a picture on par and on top of it, there is an immediate cash flow that starts coming to the customer. So it is a holistic proposition. And somehow, the timing has been great just as timing of Sanchay Plus was very good. Similarly, timing of Sanchay Par, we were blessed by the timing. Because in boom times, it might not have done as well as it has been doing now. So the combination of those reasons that why you've seen a ready acceptance by the market. And also, we -- the products that we launch are first of its kind. And so there is a good reception by the market. And usually, they're solving for something that is anyway worrying a prospective policyholder.

Right. So ma'am, like on the Slide #13, there's some new group Poorna Suraksha plan that you have launched. So I just wanted to know, are we trying to move into the group term insurance business also dramatically? And like if we are, then what are the kind of margins that we see there? Will it be very accretive?

So I'm really happy that you spotted it. Srini, you want to talk a little bit more about that?

Yes. Yes, sure. So the key difference between this new product and the GTI that we mentioned is the GTI is usually a 1-year renewable term insurance product versus this new product, which is actually like an individual term, you can buy for a 30-year, 40-year, or 50-year term, and you can offer to your employees. And it works exactly like an individual term, but with a group wrapper around this, so you can actually give it as a long-term retention scheme for employer to retain their employees. So it's -- we can do a lot of various term offerings at a group level. And you can also do it for an affinity scheme, meaning not necessarily an employer-employee relationship, you can give it to a, say, Flipkart customers or different -- types of different -- variety of customer bases can be explored with this product. So that -- in that sense, it's new in the market. So therefore -- since it's very much like an individual term product with a group wrapper around it, the margins are also as good as -- can be as good as an individual term, depending on how you price the product. And also, we believe that a lot of onboarding that happens that you have in individual term, you can probably have a higher nonmedical if you are confident about the employee base that you're selling this to. So there are a lot of these different dynamics can be explored of this product. It's a first of its kind in the market. So we need to see how we can capture that white space that is currently there. So we'll see how things pan out.

The next question is from the line of [ Harish Rawalkar ], who is an individual investor.

I just want to congratulate the management for the great performance in worst environment. I just wanted a single question from my side. The question regarding the -- do you have any technology upgradation over the period of time, like artificial intelligence or data analytics?

So [ Harish ], if you look at Slide 16 onwards, 16 to 18, and I'll take only 1 example. This is on Slide 17. While there are lots wherein everything from servicing the customer to new business sales using bots in a lot of areas to handle right from customer queries to resolutions to risk management and so on. One example I will take is on Slide 17, which is under the -- we've launched a platform go-to-market platform called WISE. This is the industry first. What this does is, first of all, it's on your handheld device. So there's no setup, there is no -- so it's not onerous to engage with the prospective customer. You would be able to do your authentication, you'd be able to do your pitch, product pitch, right selling, run some videos, and hone down on a product, do illustration and then do the KYC of the customer, help him with the filling of the fields, which are anyway fairly concise. Telemedical, if that is required. Capture his photograph. If you can record it if he wants for posterity, issue him with a digital policy he makes -- after he's made the payment online and complete the verification call. Everything can be done in 1 sitting, everything that one can do with sitting next to -- front of the customer or prospective customer, you can do it. You can have a tri-party connect. So for example, if a bancassurance person, he is the guy who has a relationship with the prospect and -- but he doesn't know insurance products very deeply, he can rope in our person and have a 3-way connect on this platform. So this is something which has been phenomenal, and we are in the process of rolling out. Some of the channels have embraced it, others are coming up to speed on this. So this is a game changer, wherein we are very decisively moving away from necessarily having a face-to-face to be able to do everything that you can do face-to-face. Now some channels have taken to this very well. And surprisingly, for example, our agency channel is tracking well. When actually, for April and May, we were worried whether they'll be able to shift from largely being a face-to-face to moving digital, but it's right up there when we track channel-wise that our agency channel has taken to this well. Some of our partners under the broker channel also have taken to this well. Now we are waiting for our bancassurance to really take this off because that's where large numbers can happen. And so we're very proud of several such innovations that we have -- that have enabled business. And of course, overall on the cloud platform.

The next question is from the line of [ Ashish ]. He is an individual investor.

Yes, I have a very basic question that is I am facing -- actually, I'm a research analyst and also working with HDFC Life as an agency channel. So what I find difficult on ground is one thing that you're providing a 5% discount to HDFC Bank customers by paying online payment, okay, in all policies. And in HDFC, in life agency channel, there is no such type of discounts allowed. So the customer...

So Ashish, if I can take this question of yours offline because this is more on the results-related forum that we have.

Yes, I know, but it is the main thing to grow your agency channel. It is -- I don't face this type of problems in any other company. So this is the basic problem, which I'm facing in your company. So I would like...

So if you could give your full name, Ashish, we'll certainly have -- we'll reach out to you.

[ Ashish Shikhar Chand Gura. ]

Yes, Ashish, we'll reach out to you. I think we'll explain it to you as to how it works and what the advantages and how the whole system works. We will connect back to you.

The next question is from [ Raj Mehta ] from [ Raj Mehta Associates. ]

Last time I got the opportunity to meet you face-to-face, but this time, the AGM was virtually. So I could not get the opportunity to ask question in AGM. So I wanted to ask 1 question with respect to your term plan. Ma'am, I wanted to know what are the basic margin which you earn in term plan. Because if you look at the industry level, Bajaj Allianz and ICICI Prudential, Tata AIG and the HDFC Life, these 4 companies are well recognized in the market. And your premiums in term plan are basically way higher than the lower end of Bajaj or, say, Tata AIG. So if you have grown this retail segment by upwards of 50%, so customers are preferring HDFC as a brand, not just focusing on the premium aspect, but also on the focusing on the brand aspect. So what do you expect the margin on these term plans?

So [ Raj, ] we take a portfolio approach rather than just 1 segment because it is a fairly involved matrix, and there is no 1 margin as such. But I can give you the -- in sequence, protection margins are right up there, followed by non-par savings, followed by participating products. And then the last is Unit Linked products. So that is the picking order. Now it gets more complex because which channel is selling what. So for example, a particular channel that is selling par might have fairly good margins while somebody else who is selling protection might actually not have that great margins because of the intrinsic cost of acquisition and so on. So that's why there is no 1 particular. So we have to ensure that overall, both in terms of getting traction on top line volumes, like you mentioned, wherein the bigger companies are attracting more of term growth and what is the intrinsic cost of those channels put together is what the portfolio approach that we take. And we have to keep tweaking that so that overall at a company level, we are able to give a smooth upward curve.

The next question is from the line of Saloni Jindal from Compound Everyday Capital.

Congratulations for good set of numbers. I want to ask the reason for the change in valuation reserve for year-on-year, which is a huge change in the figure?

Yes. So Saloni, this is in our financial statements, right?

Yes, ma'am, in the P&L.

Yes, it is nothing but mark-to-market on our Unit Linked portfolio.

So it is totally because of that, ma'am, only and these are the mathematic schemes.

Yes. That's correct, yes. So this is a pass-through for us.

The next question is from [ Arat Sanghi from VP Capital. ]

I just have 2 bookkeeping questions, if it's really possible for you to share. So this new product, ma'am, how will you be keeping it? Will it come under the first year renewal premium kind of setting? And my second bookkeeping question is, if it is possible for you to share a hierarchy of new business stream because essentially focusing a lot on protection, I believe it requires a lot of capital going ahead.

Srini, you want to answer that?

Yes. On the first one, yes, it is -- it does have a renewal premium. So persistency will be a factor to reckon with. But we believe since most of the sale will be to employer-employee kind of a relationship, and we believe that will be used as a retention tool, we believe the persistency will be much better than what we are getting on the individual. But yes, there is a renewal premium involved in this. But we can also have a single premium also over a 5-year or a 10-year product. So we have a single premium option also. So depending on what the employer would prefer, he can go for either a single premium or a renewal premium.

And then second question, hierarchy of new business?

We didn't quite catch your question. When you say hierarchy, can you just explain it?

Ma'am, I just -- no, ma'am, so suppose since we'll be writing a lot of protection, and I believe protection is right there on top of like it requires the most -- as a percentage, it requires the highest amount of new business gains. So just wanted to know if that's the case with you all as well?

So I'll answer this question, Vibha. So the strain, if you have to break down strain into different components, you have an expense strain, you have a reserving strain and you have a capital strain. So different strains are operating. So, for example, capital strain will not come through in the P&L at all. So this -- it just directly goes to the balance sheet. But if you are looking at only the strain that affects the P&L, then they're all fairly clustered around a fairly narrow range. Even UL, since the charge extraction is very, very low in the first year compared to the expenses that we incur in procuring the business, UL also has got a massive strain. So all the products have got similar strains. Some will have an additional strain because of capital, which doesn't flow through the balance sheet. It will directly go to the sort of solvency of the company. So a short answer is from IGAAP perspective, the -- a lot of these businesses are fairly clustered together in terms of strain. Barring probably some of the single premium businesses where you could have a very low strain, but all the renewal premium businesses will be, whether it's UL or non-par, will have a similar kind of a strain profile. But participating products will have a very, very low strain portfolio, close to 0, over the par book. But all the nonparticipating books, whether it's UL or protection will have there or thereabouts, they have very low between the 2 sets of business.

That was the last question in queue. I would now like to hand the conference back to the management team for closing comments.

As mentioned, the detailed disclosure on our results is available in our investor presentation. I would like to thank all of you for participating in this quarterly results call. Take care and stay safe. Good night.

Thank you very much. On behalf of HDFC Life Insurance Company Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.