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

Ladies and gentlemen, good day, and welcome to the Q1 FY '22 Earnings Conference Call of HDFC Life Insurance Company Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference call over to Mr. Vibha Padalkar, MD and CEO, HDFC Life. Thank you, and over to you, ma'am.

Thank you so much. Good evening, everyone. Thank you for joining us for the discussion on our results for the quarter ended June 30, 2021. At the outset, I must apologize for the delay, which was due to our AGM being slightly longer than what was anticipated. 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, Chief Actuary; Eshwari Murugan, our appointed actuary; and Kunal Jain from Investor Relations. I will run through the key highlights of our quarter 1 FY '22 results and would be happy to take questions post that. With signs of the second wave receding, we have seen a gradual pickup in economic activity across parts of the country starting June. We are expecting a continuing revival with easing of lockdown restrictions and extensive vaccination drives, and are hopeful that the severity of future incidences would be lower than what we have seen so far. Moving on to our business performance. We saw business disruption during the second wave of COVID. While the economic restrictions were fewer and also more localized as compared to the first wave, the health impact was a lot more devastating this time around across our country. Against this backdrop, we recorded a 22% growth and a market share of 17.8% in terms of individual WRP in Q1 FY '22. Given that the trends have varied by region and the possibility of future waves cannot be ruled out, we will continue to be more segmented and localized in our approach, taking 1 quarter at a time. Our product mix continues to remain balanced with non-par policies at 32%; protection and annuity at 8% and 5%, respectively; participating products at 29%; and ULIPs at 27%. Our annuity business saw a strong growth of 61% vis-a-vis quarter 1 FY '21. We continue to address the long-term opportunity in protection in a calibrated manner and remain confident about the medium- to long-term prospects of protection in India. We saw a pickup in Credit Protect business on the back of higher disbursement, registering a growth of 204% in quarter 1 FY '22. Moving on to our claims experience. In the quarter gone by, we witnessed a steep rise in death claims with peak claims in wave 2 at around 3x to 4x of the peak claims volumes in first wave. We paid over 70,000 claims in quarter 1. The gross and net claims provided for amounted to INR 1,598 crores and INR 956 crores, respectively. It appears that claims on individual business have peaked in June and expect them to normalize in the coming months with more people getting vaccinated and a fall in absolute number of infections. While this wave has been steeper, it has been shorter as compared to the first wave. Based on our current claims experience, we have provided for an additional reserve of INR 700 crores to service the claims intimations expected to be received across our individual and group businesses. Group claims tend to have a higher lag as compared to individual claims, and we remain watchful of emerging trends. Our continued approach would be to review the adequacy of this reserve at periodic intervals based on actual experience. At a broader level, we will monitor overall mortality claims at -- claims in excess of our estimates rather than segregating claims based on cause of death. We endeavor to promptly settle every bona fide claim. The strength of our balance sheet and back book surplus has enabled us to absorb the shock of heightened claims whilst continuing to deliver growth. Moving on to other financial metrics. In comparison to Q1 of last fiscal, the company saw higher renewal collections with 13-month persistency improving from 87% to 90%. We expect this trend to continue for the rest of the year. Our new business margin stands at 26.8% (sic) [ 26.2% ] for the quarter, higher than 24.3% delivered in Q1 last year and 26.1% in full year FY '21, with value of new business at INR 408 crores, a growth of 40% over last year. This has been achieved on the back of growth across channels and a balanced product portfolio. Our normalized operating return on embedded value, i.e., before factoring in the onetime mortality reserve creation, stands at 16.5% as against 15.8% in Q1 FY '21. Our profit after tax stands at INR 302 crores, 33% lower than quarter 1 FY '21, on the back of higher claims reserving. Our solvency position remains healthy at 203%. Turning to channel and product performance. Our banca channel grew by 16% based on individual APE, with robust growth being recorded across most of our corporate agency partners. We've also seen an upswing in face-to-face channels. Agency channel grew by 49% compared to the previous year. We are witnessing a gradual increase in branch walk-ins that aid our direct channels and continue to see improving trends in our online channels as well. We are proud to announce the addition of ICICI Securities and TVS Credit as our bancassurance partners. Next, on our response to COVID-19. The pandemic has impacted lives across the world. For organizations like us, it has been a test of our resilience and agility to adapt to the ever evolving situation. In the interest of the health and safety of our employees, we at HDFC Life started a program to facilitate the vaccination for our employees and their families. A majority of our employees are in the 18 to 45 years age group, and our endeavor is to get all of them vaccinated as soon as possible. More than 60% of our employees have received at least 1 dose. We have also undertaken various other initiatives like adopting a work-from-home model, introducing new digital platform for sales and service. Through our tie-up with medical service providers, we have been offering ICU at home in certain geographies, doctor on call services, oxygen concentrators, emotional and mental assistance help line, medicines and lab tests at discounts amongst other initiatives. We also provided financial assistance to our employees in case of medical exigency of self or a family member. We have embarked on our integrated reporting journey to articulate our approach to long-term value creation and sustainable growth. Our annual report, integrated report and ESG report are available on our website. To conclude, we see greater customer engagement and an increased interest in life insurance policies with the concept of human life value gaining relevance. Additionally, we have also seen an increasing adoption of digital services by customers. We are not still out of the woods and hence, we'll continue to maintain a cautiously optimistic stance. I would like to reiterate our focus on surpassing industry new business growth and delivering an upward trajectory on new business margins while adhering to a robust risk management approach. In the end, we would like to extend our sincere gratitude to our employees, partners and other stakeholders who have worked relentlessly during these trying times to provide best-in-class service to our customers, and also thank IRDAI for their continued support. The detailed disclosure on our results is available in our investor presentation. We wish you and families a safe and healthy time ahead. We're happy to take questions now.

[Operator Instructions] The first question is from the line of Suresh Ganapathy from Macquarie.

Vibha, I will just take this question first, a quick number clarification, the INR 5.5 billion impact on EV is net of that INR 1.65 billion that you have taken, right? I mean you had already provided for, right?

Yes, that's correct. So out of that INR 1.65 billion, we had some leftover. So out of INR 165 crores, we had about INR 69 crores left over, Suresh.

Oh, you still have another INR 69 crores left over, unutilized?

Unutilized, yes.

And then on top of that, you were provided another INR 7 billion?

Well, the INR 7 billion subsumes the INR 69 crores.

Oh, INR 7 billion subsumes the INR 69 crores? Okay, that's clear. Now, Vibha, don't get me wrong on this, but when we had specifically asked at the end of fourth quarter that is INR 1.65 billion adequate? Of course, nobody would have anticipated the COVID wave and second wave could be so lethal. But unfortunately, the eventual impact has been almost 3x, 4x more than what we had anticipated. How sure that the INR 7 billion now takes into account all possible things? You may be still having a lot of things in the pipeline. I understand some of these things come with a lag. Are you confident that this time around the INR 7 billion is adequate?

I think so because what we have done is the statistical modeling of deaths in India. Regions where that has happened to down at a state and even further granular level, whatever data is available, we have done that and then mapped that to our customer base and what is the shape of the curve. And that's why in my opening comments, I mentioned that the shape of the curve this time, Suresh, is that it is certainly thicker, but we -- it is shorter as against more prolonged. And so we believe that the deaths, the peak was I think on the 23rd of May, that will start resulting into claims, but will peter out maybe by the end of August with that kind of a lag. And that's really how we are seeing it pan out and also -- to give you some, we've touched about 300 claims a day, that is progressively going down sub-200, very, very steadily on a day -- and we tracked this on a daily basis, and we can see that decline in a steady manner. But having said that, with any projections, whether it is actuarial projections or claims projection, which is ultimately a projection, but at this point in time, we have actually erred on the side of caution. That's the other point I also made on group claims that it does take -- group claims typically take us a little bit longer to be registered as a claim. And so there's some bit of caution there. It might happen, might not happen. But right now, we believe that this is a reasonably cautious amount of claim that we have set up. Srini, do you want to add anything in case I've missed out?

Yes, just 1 point I just wanted to add. Suresh, when we set aside INR 165 crores back in April, that was like the claims already occurred as of 31st of March, and any sort of spillovers from March is what we were providing for. And like Vibha mentioned, after INR 165 crores, we are still left with INR 69 crores from that. So we couldn't anticipate what was going to hit us in the month of May because month of May was really fatal from a claims perspective. And what we are now setting aside is for, again, the kind of -- whatever happened because there is a little bit of a reporting delay that comes in. So whatever happened thus far at the 30th of June is what we are setting aside. Now if there is something that's going to hit us 2 months down the line, another wave hitting us and all, then that we are unable to foresee. So hence, what we set aside last quarter was based on what we knew then. And like I said, we are still left over with INR 69 crores of that INR 165 crores amount. Now based on what we now know, we've set aside INR 700 crores. But if there is something that's going to hit us in September, October, that we don't know.

That's very clear and helpful. So just quickly, 2 questions. One is on the reinsurance side. How are these guys viewing this? Because, obviously, unfortunately, they are taking the bulk of the pain. Are there any negotiations being carried out from a pricing perspective there? And secondly, or rather the final question is, in general, the protection demand, if you guys look at it, individual protection is down 4%. Now -- I mean I understand the longer-term potential. But Vibha, we need to be really careful about the tailwinds going into the smaller cities and centers. So is it a demand issue? Is it a supply side issue? We are hearing a lot of these life insurance companies curtailing group term insurance and all those stuff and being very reluctant. I just want your stance on that.

Yes, absolutely. And this is an area that we have been cautious right from the beginning, as you know. And 2, 3 parts to this. The first one is on individual protection. And it's something that we've been saying that, that was -- the formula that worked or the DNA of the customer that worked in what we were seeing in cities and salaried customers and metros versus interior, there was a deterioration in claims experience. And all of what I'm saying is before COVID. So nothing to do with COVID. Even without COVID, we were seeing a deterioration. And we were very, very careful in having additional checks and risk-based underwriting rather than 1 size fits all underwriting. So you're absolutely right, Suresh, that one has to be extremely careful, that is number one. Number 2 is that, to your point on reinsurers, they have a hypothesis, they have checks that are required, and we have to ensure that once we agree to a certain level of underwriting, we have to get it done because post facto, if we, as insurers, just do something else, then they would have the right to say, sorry, but I'm not going to honor these claims. So largely, it has to be in sync. It has to be done jointly. It cannot be that -- it will be a very short-term approach to say what my book is reinsured because it's a partnership. That's the second point. Third point is we've always stayed away from group term insurance unless we really understand the counterparty very well and we feel comfortable with it because the pricing tends to be extremely fine. So it has unfortunately become a fairly commoditized product. And we have not been successful in making money there because even 1 additional death can really throw your pricing out of gear. So we have largely stayed away from that. And it can suddenly be a large hit in terms of employees of 1 corporate or even in a nonemployee-employee relationship. And the fourth is on credit life. On credit life, also, they can often be a race to the bottom in terms of price cutting. And one has to see whether pricing versus what are the -- what is the underlying mortality experience and does it fit within our risk framework and be okay to say, no, it doesn't make sense for me at this point in time and maybe we'll come back at a later stage. And MFI experience could be very different from some other NBFC experience and so on. So look, I've always maintained this, that growing protection isn't very difficult, but making reasonable returns in protection is fairly difficult. And that's where I think it's possible, but it will happen slowly. And that's where I think calibrated risk and underwriting model calibrated way of growing it and the percentage in my mind is 15%, 20%. As against this undue focus on what is protection as a percentage of your -- it was 8% last quarter, the pressure for it to become 10% this quarter and so on. I think one has to really stay away from those kind of pressures or temptations to just grow that very rapidly.

[Operator Instructions] The next question is from the line of Arav Sangai from VT Capital.

I hope all well at your end. So I had a few questions. My first question was around the claims that we have received. The majority of the claims, are we seeing a deterioration in the group part of it or the retail part of it?

So right now, we're seeing it in the retail part of it. Group -- it's not that group is completely immune from what is happening overall in the country. There is deterioration in group as well. But right now, we are seeing an acceleration of individual claims.

Okay. So ma'am, in the -- like some of the disclosures, you have mentioned that we have almost expected that the claims have peaked out. So the INR 700 crore that we have made, is it keeping a reasonable amount of -- like a reasonable amount of cushion or we are more than certain that this might get utilized? Just a qualitative percentage, if you could share any details on that, just to give us some kind of assurance that we might not see any negative surprise going ahead.

Yes, absolutely. Like I mentioned to Suresh earlier, we have erred on the side of caution.

Ma'am, one last question I had was on the retail protection trajectory and the GTI business as a whole. So like we have been pretty cautious about this. And I think for the past 3 or 4 calls, we have been pretty cautious about retail protection. So like since the wave 2 is like kind of coming to an end, how do we see the demand or supply picking up here? Are we still being cautious here? Or do we see that maybe in the next few months, we might get active here? That's the first part. And second part, ma'am, like, on GTI, you mentioned that we have never been making money in this particular segment. But in the industry, we have been hearing that some players are getting very aggressive in this. So just wanted to understand, is it that they are satisfied with less profits on this business or they do some kind of different things that -- which we are not able to undertake or which we are not satisfied to do?

So on the first question, we do believe that there is an opportunity in protection. We are so underinsured as a country. There is a renewed awareness about the need for pure protection, thanks to the pandemic. So our approach remains calibrated. It remains wherever we are able to understand the DNA of the prospective customer and what fits into our risk appetite, we will cover. But at the same time, we will also walk away where we or defer where we think that underwriting right now is not possible, or medical tests are not possible, or there's always a case when somebody else is willing to underwrite, and that's okay, because these are all long tenure products and we'll really come to know only down the line. But is there an opportunity there? There is an opportunity. Is it going to be meteoric? That's where we will be cautious. To your second question on GTI, we have always remained calibrated in that because of the very fine pricing, like I mentioned to you, and also the situation where in a few worsening of a little bit of mortality experience can pretty much wipe out everything. And there is actually no underwriting there in terms of medical. There is at higher covers, but otherwise, you're underwriting somewhat in the blind and you are underwriting on the basis of some past performance that might have been with some other insurers. And it's often without and there is a race to the bottom. So in that kind of a situation, we've always stayed away. So we write next to nothing in terms of GTI business.

The next question is from the line of Shreya Shivani from CLSA.

Vibha, this is Adarsh. Couple of questions. One is the VNB walk chart that we have. The mix of business has broadly remained same between 1Q last year and this year and margins have picked up versus 1Q. Is that because 1Q last year would have had weaker protection because of repricing that's kind of rebased and hence, that's the margin uptick we see?

Adarsh, yes. And also, you'll remember that first quarter did not have next to nothing in terms of credit life. So that has come back with over 200% growth. So that also does help. And of course, there is repricing also that -- so it's -- these are the 2, 3 reasons why -- annuity is another reason, the 61% growth that I talked about.

Got it. Second is, again, this protection thing, and you've kind of already spoken about it. One other thing is clearly that the underwriters or reinsurers are also tightening up norms, right? They increased price and now tightening norms. I just wanted to understand when they tightened norms, it broadly means somebody or they're a little more -- their asking rate of what they want to underwrite has changed, and that leads into the population set, right? So I just wanted to understand the dynamics because on one side I would think a pandemic does make people to go and buy health or protection businesses -- policies. And on the other side, you have a supply side issue of person wanting to tighten underwriting and even the companies, right? So does it shrink the population set a little bit whom you want to underwrite or the system wants to underwrite, but underwriters are now very sure that they don't want to do that business? What's happening on ground and back there?

Adarsh, I think more than shrinking, I think it just makes the whole process more realistic. This is not an over-the-table, issue it in 2 seconds, 2 minutes, what you call it. So at a certain risk profile with some checks, a large population will get some kind of cover. But the realistic word of use is that maybe some more medical tests are required; maybe some more KYC and financial documentation is required; maybe a rate-up might happen; maybe the sum assured might be lesser than what they originally started off with; maybe some other forms of cover might be more suitable than just a very high term cover. So that is a more sustainable way of looking at it than just sign up something over-the-counter with no checks. We were getting into that mode as a sector just before the pandemic hit because term suddenly became the new kid on the block. And I think I've said this at least on 3 calls that, that is not in our view, at least high sum assured, that's not how it's going to be sustainable. Yes, low ticket, low sum assured over-the-counter, that's fine or a PMJJBY and you're talking about INR 200,000, INR 400,000, but it can't be for INR 1 crore kind of a cover. So it will just evolve, hopefully, to be more realistic from both ends; what are we asking for, what is the expectation of the customer and so on.

And any sense, Vibha, of what's the kind of business being weeded out given the higher asking rate of reinsurers?

Some obvious ones are wherein there are comorbidities, there is a nondisclosure which can get detected if someone goes through a medical test or the -- somebody is overinsured, and we do use data such as IIB data and say that what you need to show me more of income generation for a justification of such a high cover. Those sorts of more, I think, peripheral fringe cases will certainly get weeded out very quickly. And that is good because the last thing we want to do is not pay claims. We would rather philosophically just say no to such business upfront.

Got it. And my last question, Vibha, is through -- last few years have been quite innovative and got new products, scaled up those products, and they are relatively better margin products than where what the other products used to be, the older savings product. Now at the end of the day, these are commodities, right? There is a guarantee involved in some or there is a bonus involved in some. So just wanted to understand what gives the comfort on margin protection in these businesses over a medium term?

So the way it works is -- couple of things. One is first mover advantage of being the innovator, and that's something that HDFC Life has consistently been. And so that segment is associated. So rarely will somebody buy a product of the contours of Sanchay Plus without evaluating Sanchay Plus. I'm not saying that they will always buy Sanchay Plus, but certainly, there is no struggle to be called to being part of the consideration set. And then it just increases your chances many fold of getting picked. Second is that it's no longer -- it's not -- especially post pandemic, it's increasingly becoming lesser of an IRR or a lowest pricing on term mindset, which is also a good progression and a good way of looking at insurance and not bargain-hunting on insurance. Third is that various other things. So for example, how we use analytics to ask lesser questions, because we already know or have a good view of who the customer is. Using -- connecting a lot of data to analytics to be able to give seamless onboarding, preapproved sum assured or InstaInsure that we call with a 3-click journey, easy policy for our term wherein a lot of -- the fields can be prepopulated. So those sorts of ease of onboarding through the use of digital and analytics starts becoming a differentiator. Fourth is that overall, the brand promise, the comfort that, ultimately, this is -- when it's a moment of truth, the company will honor its promise of paying the claims. So we'll be finding that evolving wherein, like I said, it's no longer just about the price of whatever it is that the person is trying to buy.

[Operator Instructions] The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.

I had 2 questions. If I look at the employee expenses, they are up 40% on a year-on-year basis. So is it some increment or any one-off in this quarter? And on a going forward basis, do we expect this INR 4.5 billion kind of run rate on employee expenses to continue? And on the VNB part, there is 1 negative item of change in assumption. What is that, if you could clarify that?

As you are aware, last year, first quarter was definitely an outlier in terms of the times are very, very different. It was a full lockdown and all of us were sure that there's a lot of uncertainty ahead of us. So all of us were very conservative. We were very conservative in terms of hiring. We were very conservative in terms of offering increments. So that is something that skewed the number in Q1 of the previous year. Since quarter 2, as growth started coming back, we did mention that expenses will start to normalize, and that's what started happening. And since then, there has been a growth in every quarter -- significant growth in every quarter, including quarter 1 of this year. So expenses have started normalizing. We've got into new partnerships. Vibha spoke about some new partnerships that we have added now. We had added significant partnerships last year like YES BANK and SBI Caps. So of course, we are looking at deepening our penetration in existing partners. So large part of the hiring happens in sales at our partnerships, and it's more normalization in line with growth. And what you see...

It's fair to assume this kind of a run rate should continue on a quarterly basis?

So you will see some sort of efficiencies that will come in with increasing productivities over a period of time. But as long as we continue to expand our distribution, we would continue to invest, as we mentioned in the past, both on digital as well as on human resources as and when required. And...

And this would have the impact of increment also given this year?

Of course, of course. Yes, absolutely. So we -- what we did last year, as things started to stabilize, for a large part of the organization at junior levels, we gave increments from the second half of the year. And we do expect, hopefully, if the times continue to be stable, normalcy to be restored, yes. And there would be increment impact in Q1 of this year, yes, absolutely.

So Niraj, if I can add, 1 would be the increment, the other would be at a certain level and above last year, we had not given bonuses, we had kind of hold on that. So that will reflect.

Absolutely.

So mid to senior level is also part of this?

Yes. So we were conservative. We had not -- or rather we had reduced bonuses at senior levels last year. This time, it has been more normalized given the way the year has ended.

Sorry to interrupt. May I request Mr. Prakash Kapadia to please rejoin the queue. We have participants waiting for their turn.

It was just that question only. And second, on the VNB thing, that negative...

So the VNB assumptions that you are referring to is to do with the assumption changes that we do every time in the month of March. So this was assumptions change that we put through last quarter, and this is with regards to mortality variance and a little bit of persistency variance or assumptions changes that we put through last quarter. So that's what you are seeing. We didn't put through anything this quarter.

[Operator Instructions] The next question is from the line of Udit Kariwala from Ambit Capital.

My question is, if I understood it correct, the INR 165 crores, which was provided last quarter, was more keeping in view the claims which were already logged in with a lag and hence that was the quantum. Is that understanding correct given the explanation earlier on the call?

It was for deaths that may have already happened, but may not have been reported in that period. So given what we were seeing, we did discuss earlier about looking at India mortality trends and looking at our own experience. So using that, we had looked at what claims could potentially come in from deaths that have not been informed to us yet. So lastly, it was that.

But then just other question was related to that was then why take it as a part of operating assumptions, right? Because my whole point is, you're taking a 500 -- whatever, INR 600 crore, INR 700 crore incremental reserve at this point, which is subsequent to an operating assumption change in the last quarter, which effectively kind of points out that maybe the earlier assumptions were too aggressive. Is that the right way to look at it?

So -- not really, Udit. See, the thing is if you look at the VNB walk or rather the EV walk, you look at right from the starting EV until the EVOP. All of it, as such, reflects what has happened to the EV from the beginning of the year at an operating level. Now we had made certain assumptions at the beginning of the period, if you recollect, we had also strengthened our mortality assumptions from a long-term basis perspective. We had made this INR 165 crores of reserve in anticipation of claims that could come in, in the future. And that's what we did refer to. We had settled X amount of claims in quarter 1, and our reserves were enough to meet all the claims that we actually settled, or all the claims that we recognized in the period. So this INR 700 crore is -- we do believe that it is fairly peculiar to the times that we are in right now. On a long-term basis, whatever we thought we had to reflect in our assumptions, we did it at the beginning of the year with that INR 120 crore assumption strengthening. This is not what we believe is an ongoing continuous -- rather adverse mortality that we will expect from -- for times to come. That's the reason why it's reflected as a onetime excess mortality reserve, which we've created. But whichever way you look at it, as such, ignoring that onetime impact, you look at the EVOP and then we've given you the impact of this onetime setup as well. So after that, it's about a 2% hit on the EV, which has been recognized in the P&L to the extent it belongs to other than par and the hit is reflected in the embedded value as well.

Sorry, if I may just clarify one thing here. The INR 165 crore is not assumptions change. The assumptions change is separate from this INR 165 crore. So INR 165 crore is the one-off hit, if you like, to the P&L taken. On top of that, we had assumptions change of INR 120 crores. They are 2 different things, that it is in the last quarter. And this year, when we are setting aside INR 700 crores, that is not assumptions change. It is, again, a one-off hit to the P&L. And assumptions, there are no new assumptions change that we put through this quarter.

So we would put in an assumption change only if we believe it's a long-term trend that we should expect. Like if we expect something to deteriorate on an ongoing basis, then we would reflect it in the assumption change. But if there is something which is a onetime hit, we would recognize it as something which is different from what we had -- what we are seeing on the ground.

[Operator Instructions] The next question is from the line of Nitin Aggarwal from Motilal Oswal Securities.

So a couple of questions. Like, firstly, what has driven the slight increase in solvency ratio during the quarter? Despite like sharp rise in claims and creation of excess mortality reserve, the solvency ratio has still improved. So what has driven this?

Go ahead, Srini.

So solvency typically goes up every quarter. So this is in spite of we setting up a reserve because even in the first quarter, as a normal basis also, we see the solvency going up because of new business trend being lower in the first quarter typically than the last quarter of the year. Plus also this year, because the market is doing very well, other available solvency margin is also much higher than the usual. So both these things combine as since then solvency ratio being better than last March.

Okay. And secondly, if you can share some color on mix of claims across savings and protection line of business and like the COVID claims in these kind of businesses. And also, any insights on the geographical distribution of these claims as -- like wave 2 was far more deeper versus wave 1. So any particular geography or state which has driven more claims for us?

Primarily, the Western geography like Maharashtra, it sort of falls in line with the overall country-level pattern that we've seen. So primarily Maharashtra, Gujarat, and that is also where our business concentration is also. So I think it falls well in line with the overall country-level trends. So what was the other question, sorry? You had 2 questions, right?

Across these lines.

Sorry?

Mix of COVID claims across savings and protection line of business.

Right.

If you can...

So I think it also depends on the -- that you've got. I mean in terms of absolute rupee growth, if you look at the COVID claims alone, it is INR 40 crores on protection, and savings -- sorry, INR 120 crores on protection and INR 410 crores on savings. And this includes -- this is not like -- and this is the overall actual claims that we received. This includes what we'd have normally expected to come through, plus whatever the funds -- the customer own funds also included in it. But only stand-alone COVID, I don't know how much you can attribute to only COVID given the cause of deaths being a little bit unreliable. But COVID claims we have received as COVID in our cause of death is only INR 115 crores on savings book and INR 40 crores on pure protection.

The next question is from the line of Deepika Mundra from JPMorgan.

I just wanted to know on the distribution side, I mean how is the strategy evolving now? Is there a greater push towards, let's see, getting -- the society channels for more nuanced customer selection? And on the banca side, given that you have added a few more partners lately, what would be the mix between HDFC and newer partners?

Yes. Look, this is Suresh here. So we have, in any case, decided that we will try and diversify our distribution and grow both irrespective. There's been a focus on the proprietary channel because our control in terms of the mix, the training and what we can do with the agents and the financial consultants, it's probably a little bit higher. But having said that, look, we have very, very strong partnerships on banca, primarily led by HDFC Bank. A lot of new partners. So we have had SBI Caps, I-Sec, YES BANK, who have tied up with us. So we do expect their contribution to the overall business that we grow. So even if you were to estimate us gaining a market share of anything between 30% to 50% over a period of time in the kind of banca that they do, it will be fairly significant but may not significantly change our overall banca mix. But on the agency side, the runway is fairly high in terms of the kind of penetration and distribution depths that we can get across the country, right? Banca is a little limited, but we grow with the way the banks are growing. So many of our banca partners, whether it's the small finance banks, whether it's Bandhan in the East, whether it's IDFC is another bank which is growing, along with the larger banks who have been with us, are expanding their distribution base. So what we do find is that maybe the proprietary as a mix may not change dramatically. It will probably keep increasing. But our overall business will keep increasing as we grow with the banca and agency. The good bit is that in some sense when -- for instance, in quarter 1 of last year, when the agency and the direct business were under stress because our employees and the financial consultant partners couldn't go out to source and we had themselves advised them not to venture out given the lockdown, the banks were open at their branches. So we kind of got the upside on the bank, whereas the agency was low. This year, when some of the banks are going slow, the agency and direct businesses are now picking up again and being able to give us growth. So we will continue to focus on the proprietary channel. I think that is one area we've mentioned that we would like to grow, both on the online, the agency, as well as the direct business. But there's no reason why we would not want to ring fence and grow our market share and new partners on the distribution on the banca side.

Okay. Sorry, and with that I can ask, at the product level, are there any -- how are the margins evolving with some of the tightening of the assumptions that have taken place a little bit last year? So across the savings and protection products, are the margins fairly similar to maybe a year ago or is there margin dilution at the product level?

So I'll take this question. So the last time, if you recall, there was a little bit of a disruption due to reinsurers changing the prices and we were waiting for our products to be approved by the authority and all that. So this time, it's a little bit more stabilized, and therefore, you see margins on protection being slightly better that we had last time. Plus the interest rates have gone up a little bit. And for insurance business, interest rates going up is always a good news because you can make a little bit of a spread. So therefore, margins are fairly decent in both protection and nonpar savings.

Got it. And if I can just 1 last question. Last year, in 1Q '21, in your VNB walk, you had disclosed a 400-odd bps expense impact. I guess, it was largely potentially due to the volumes dropping as well as maybe some protection price -- protection pricing related. But we haven't seen a full reversal of that 400 bps expense impact in this quarter. So is it -- I mean is it related to the employee expenses, et cetera, going up and with the new statement of incentives, et cetera, which was mentioned earlier on the call?

So I'll take that. If you look at our 2-year -- or our growth versus FY '20, we are still marginally lower. So we haven't surpassed FY '20. It's low single digits, but that's where we are. Had we surpassed that, this would have virtually been eliminated. So there's still a volume play that we need to get up. Yes, we -- when you just looked at for the quarter, you're seeing a 22% APE growth and 200-plus percent CP growth and so on. So that's fueling the margins. But your question on, again, the expenses, that leverage will come in when we're able to wipe out versus 2 years back.

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

I just had 2 questions on the reserving that we had done. If you can just help me explain the INR 700 crores, would all of it have been expensed in the P&L as well? And is that one of the key reasons that our PAT has come down to around 30%? Secondly, on the EV walk, if I see, there is a positive mortality variance, although it is very small, but still the direction wise it's a bit -- I'm not able to understand given that we are actually making higher reserves on mortality, but yet we got a positive variance in the EV walk. If these 2 things, you can simply explain, it will be very helpful.

Yes, sure. So -- I'm sorry, again, could you come back on your first one, please? I just...

Reserving the INR 700 crores that we have done...

Right. So yes, the INR 700 crore is basically the overall number out of which par funds would be about INR 115 crore, and other than par would be INR 585 crore. And that is what is flowing through the shareholder P&L. All of it will be flowing through the combination of the revenue and the P&L as change in reserves. So that's something that you will see at an overall level. Through the shareholder P&L, you will see the impact of INR 585 crore. And what you see on the EV walk as excess mortality reserve is pretty much that number adjusted for tax. The mortality variance that you're talking about is -- operating variance is not mortality, it is persistency and expense. The INR 0.7 billion that you see there is actually a positive variance on expense and persistency. Mortality, of course, given the situation, we've indicated what we've seen in this quarter as a separate -- in a separate column here as excess mortality -- impact of the elevated mortality that we see, which required us to create this reserve.

Sorry to be laboring on this, but just that in the notes on the EV walk, it's mentioned that mortality...

So that is because, see, like I think Vibha alluded to at the start of the call, that -- of the INR 165 crores that we set aside, so we are still -- there are some leftover. So overall, strictly speaking, the mortality variance compared to what we have already set aside was actually not negative. I mean it was very close to 0, but that's what you've seen in the footnote as 0.03. So we had enough money, thanks to us setting aside INR 165 crores at the start of the quarter.

Okay, great. That helps [indiscernible] clarify. Just 1 thing on the INR 700 crore. So what will be the period over which we think that this will be utilized? Like INR 165 crore, you said that probably the first -- we're looking at first quarter. So for the INR 700 crores, what is roughly the period that we are seeing to utilize this?

See, it depends on the delay pattern that we would actually see. But this we believe would pan out over, say, July, August, September quarter largely and a little bit spillover into OND quarter as well. So we believe it will be sufficient. And this -- bear in mind that this is in respect of the deaths already taken place, and you're talking about only the delay in reporting to us. So it's not for new deaths. New deaths, we have set aside the normal, as a BAU, we do set aside reserves for normal sort of period deaths to occur, that we are sufficient. This we're talking about only the extra deaths in respect of what has already happened now -- what has already occurred in the AMJ quarter.

Is that deaths which have occurred, but for which we have not yet received claims, right? Is that the...

Yes, correct. Because of the delay in the intimation, yes.

Just one last bit. So the INR 700 crores would not show up in VNB as such, in this quarter's VNB. We have not taken any -- this won't be showing up in our VNB as such, right?

No, no, this is not a new business. This is all deaths in respect to the back book. So this won't affect the VNB.

The next question is from the line of Nischint Chawathe from Kotak Securities Limited.

Am I audible?

Yes, Nischint.

Just, again, goes back to the INR 700 crore reserve that is created. Somewhere you mentioned that the claims from the individual book have broadly stabilized. And we are sitting with this reserve at the end of the quarter. So can we say that most of the reserve that we are sitting -- now sitting on now is for the group business?

No, no. I need to clarify, they have not yet stabilized. They are spending southwards as everyday costs are trending southwards. But they are still elevated compared to pre-COVID.

Sure. But then would it be fair to say that since they -- obviously, the understanding of -- or probably the knowledge of the group claims is still nascent, probably a larger part of this INR 700 crores would be for the group business?

It's possible. Yes, I mean we are seeing this in totality in a way one might subsidize the other, but which one will subsidize which one, it's difficult to say. We might get a better sense maybe by mid August. And there is a conservative overlay on top of it because we don't want to keep revisiting with the only caveat that I think maybe Srini mentioned that we have not provided for wave 3. But for wave 2, hopefully, this should be sufficient for both. So to answer your question, Nischint, it is a little bit difficult to say because in the past also, over the last 10 days, sometimes, it's again gone -- it has spiked up and then dragged down. So it's -- [ they only talked about the ] 10 days of almost steady decline day after day. But -- so it's reasonably a small time frame for us to base hypothesis very, very convincingly to ourselves. And that's why I'm a little bit hesitant to say, yes, we are out of the woods, and we have -- a bigger part might be out of group. It might be a combination of both. So how long is the tail is really that million-dollar question, and that's why we do have a hypothesis, but that -- we need to see that that's how it's panning out.

Just 1 more point is if you could give some guidance on the dividend payouts.

Also last part, I just want to clarify, is that this is something for deaths that have already happened, that we're reasonably sure of. So the chunk of the deaths during the peak that I talked about was the third and fourth weeks of May. So that is now kind of a runoff in terms of intimation. So that we are sure of that in terms of containment of the size of the problem. Yes, there will be further new deaths and so on, but that will start normalizing. But how many people have already died and what is still in the pipeline is really what we are trying to figure out.

So 1 point on guidance on the dividend payouts?

Guidance. We don't give guidance, Nischint, but I think it will continue to be -- this you're talking about next year? Because today at our AGM, shareholders approved the payout of dividend. So [indiscernible] per share. Now that works out to close to 30% payout ratio.

And that probably stays is what one can say?

Whatever we do is really a smooth upward curve. So you do not find yo-yoing of anything, all things remaining equal.

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

I just have 1 question. On the gross claims versus net claims, I see that the retention is much more higher than what we observed in the annual report where the retention is closer to 30%, sum assured being retained by us. So why is this gap coming in? And like, how should I relate it?

So I think you -- the net claims would be INR 956 crores versus a gross of INR 1,598 crores. I'm assuming that you're referring to that in the month of -- in the first quarter of this year?

Yes.

So typically, the retention is lower in the case of, say, term products. Term products average sum assured for us is INR 90 lakhs, in which -- of which we retain INR 20 lakhs in the new business. But in the past, we've retained much lower amounts, whereas the retention in the case of savings products is a little higher. We retain INR 30 lakhs. So I think it's a combination of what claims we receive and our estimate or our experience is that during COVID, we have received a little bit higher proportion of, say, term insurance claims for the size of the book that we had. So -- and therefore, you will see it does vary from quarter-to-quarter and depending on what sort of claims we get in that quarter.

The next question is from the line of Harshit Toshniwal from Premji Invest.

The 1 thing, ma'am, so we get that the COVID period is something which is challenging. But I just want to understand that from -- so we have not changed anything with respect to our mortality assumptions on the longer yield for the similar products. So we are factoring in the higher claims possibly this year or in the near term. But I just wanted to check that at this point of time, ex of COVID how the demand for protection has panned out. So I understand that due to the medical restrictions and all, conversions might be a little low. But in terms of inquiries and new requests, has that started inching up given this was a wake up event? And wanted to know that -- so no one knows about the third wave. But at some point of time, you think that we'll have to again start being more optimistic about the entire book itself and maybe possibly factor some of third wave when we price the product because this is a good time to even pass on the price hikes on the reinsurance part. So how is the demand part looking and the pricing part on this term protection?

I'll take the demand part, Harshit, and then I think Srini can cover. We definitely continue to see elevated levels of demand. And like I mentioned earlier, it's more a supply side constraint than the demand side and more so with a second wave. Today, even when you just look at 1 data point that in our bancassurance channel, maybe we end up converting about anything between 65%, 67%. So about 2/3 of what we get through the door is what ultimately we convert or maybe even slightly lesser now with absolutely a little chance of people going in for a full medical. So there is clearly demand. And this is when people have paid the money and the -- and logged in a proposal. So that is there. It will continue to be like this. Now to your point about pricing, Srini, you want to take that in terms of if there's wave 3 and how do we...

Vibha, if I can just add on the first point. In the first quarter of last year, there was a very elevated demand for term. We don't see the same level of elevation on term demand. It is probably normalizing now which is there in place. So actually, our term in this particular quarter, if you compare it to the last quarter, was at a time when everybody was trying to get a term policy and we haven't fully understood the implication. So it's after -- slowly when we started slowing down and reinsurers started tightening. But still, we see a fairly high level of demand, both in terms of Google searches, which is where online in terms of the demand which is coming in through our partners and our agents.

Harshit, you asked a question on mortality assumptions as well, right, [ and the price for ] this COVID?

Yes, the question is that -- so I understand that at this point of time, pricing any third wave is a very difficult aspect. But I'm saying that if there is a demand and can't it be that the price and possibility of third wave in that pricing itself because that's just a 1 year of additional mortality that we'll have to price in the assumption, and then be more optimistic of the demand and start growing that book. I understand the risks, but I'm just saying that is it a good time to sell because price hikes might be slightly easier to pass?

Yes, see, reinsurers are telling us, say, in March, April time, the tailings will come us -- come back to us at a price space. But after having seen wave 2 , we've again gone back to the drawing board. And so they are -- they will come back to us. So -- but as far as COVID wave 3 is concerned, there is at least a belief that it may not be as lethal as the second wave has been because of various reasons; maybe vaccination, there is oxygen cylinders, et cetera. But the current status is that the reinsurers who were supposed to come back to us with a sort of a stricter underwriting condition and possibly a price rise in April, they have -- they've gone back to the drawing board after seeing wave 2. So they've not come back to us. So maybe they will come back with some level of price rise or maybe stricter underwriting norms. Then post that, we will see, but this has been work in progress for the last 3, 4 months now. Yes, if they do come up with a rise -- price rise, then we may have to pass it on to the customers. But we have a few sort of tools around to manage the transition as we did last time around. We can manage the transition this year as well.

[Operator Instructions] The next question is from the line of Sanketh Godha from Spark Capital.

Just in the press release, you said that individual annuity business is 5% of the total business of [indiscernible]. And in Slide #13 of the presentation, you say it is 6 percentage of the total APE. Just wanted to understand the difference between both the numbers is basically the group annuity business. And if it is so, then I just wanted to understand whether we have incrementally started focusing on this business or it was always the case? And I wanted to understand the margin profile of the group business compared to individual business -- individual annuity business. That's the first question I have.

The margin is the same for individual or group, largely the same.

And the size of group annuity would be what percentage of individual annuity? Or any color you can give?

It's growing now. It's growing.

Okay, okay. And the second question was on Credit Protect itself. So just wanted to understand that whatever growth we have seen in 204 percentage almost in first quarter, if you can give color with respect to the mix, whether how much is mortgage and MFI? Because last year also, we benefited because mortgage's contribution was relatively higher compared to MFI's, and also it supported margin. So are we seeing the similar kind of trend in the current quarter also? That the mortgages are a little higher compared to MFIs and therefore margins in Credit Protect is holding up better than what we anticipated?

Yes, that is the case, Sanketh. The mortgage is indeed higher compared to the other segments.

The next question is from the line of [ Yung Juen Yeoh ] from AR Capital.

I just wanted to check on the company's view of the fintechs going forward. They provide quite a powerful channel for distribution. I just wanted to understand the management thinking on that. And what are the potential upsides potentially, partnering with more fintechs for distribution and using the underwriting engine that HDFC Life has?

Yes, so on the fintech side, we have been partnering. We have almost 50 such partners, which are there across various types of right from the telecom where we have something on -- with Airtel. Similarly, we have been partnering with many of the other players in the financial services, technology space. We continue to kind of look at why -- how we can ease our journeys with the fintech partners in terms of being able to get preapproved and being able to get single or a 3-click kind of a journey, looking at how we can push each one of them on [indiscernible] space. The only thing is a lot of the fintech space is right now more towards term where we have been cautious in some sense, but we do see being able to be going through this channel to reach out to fairly in terms of diversified geography also on the savings side. So we are looking at products which could be simplified, the whole journey by itself can be simplified and then we will look at how do we expand. On the term side, I think we are being a little cautious with some of our relationships right now.

The next question is from the line of Madhukar Ladha from Elara Capital.

First, I noticed that the net new investment flow is negative at about INR 100 crores in this quarter. So I wanted to understand what could this be attributed to. Is it more because of surrenders in ULIP? Or is it more because of COVID or some other sort of cohort maturing? Some light on that will be helpful.

It is indeed attributed to ULIP surrender, while -- as you can see, the investment income as well as market movements have been positive, but we -- this can be attributed to ULIP surrender.

So 1 point I want to add here is typically in the first quarter, given that first quarter is usually the lowest in terms of acceleration towards growth, but if fixed costs remain what they are, your addition and accretion to your AUM is the lowest. Last year, it artificially looked like it was higher because of very, very low surrenders just given the pandemic. People were just not able to get to the branches, and we ourselves -- for people to get trained on how to use digital and so on was -- it took some time. And so you see that catch up. But it's really last year, that is more an aberration.

The next question is from the line of Mayank Bukrediwala from Franklin Templeton.

I've got 2 questions. One is if you could break down your retail protection, which was flat, between, say, some assured and pricing or volume, number of policies and pricing? And second, in your VNB walk, from Q1 of last year to Q1 of this year, you've taken a very small positive impact on cost. But your cost growth versus Q1 of last year is substantially higher. So I just needed to understand whether we smoothen the cost when we calculate quarterly VNBs or we take the entire cost of that quarter into the VNB?

So I'll answer the second one, it's a simple one. We take actual cost. whatever we've incurred, we take it. There is no smoothening. We've never done that. So that is just what we incur. On the -- on -- Niraj, you want to take the question on protection?

Yes, sure. Mayank, so specifically, what is that you wanted to understand in segments within that?

No, no, just the retail protection, which is flat Y-o-Y. But if you could break it up between how much was it pricing and how much was it volume?

Right, so what we did mention is that we have been reasonably conservative in terms of writing this business, while it still continues to be a fairly significant part of our mix. The average sum assured in the term business has increased. People are looking to buy more limited pay. That is something that has definitely been the case. On the policy side, we've been in a situation where the demand has far exceeded the ability to kind of fulfill the entire process. So for every 100 cases that come in, we're able to fulfill about 60-odd. And the rest is basically either in process or we need more information or we need the customer to want to take medical exams, as we discussed earlier on the call. So that's where -- on a base of 50% growth last year, we are kind of a little under about minus 3% or 4%. So it's very similar to last year's, the level before that, and it's just largely on account of the prices or rather the average ticket size is going up. Some repricing is something that had happened compared to same quarter last year. So some part of it would be that as well.

Got it, just if I could slip in 1 more question, which is, our reinsurer has potentially paid something like INR 600 crores this quarter and the premiums that they received from us is relatively much lower. So the losses are huge. So do you see the risk of that industry or the reinsurance industry in India getting consolidated between a couple of players? I don't think it's -- do you expect a large -- or some of the fringe reinsurers to bear these kind of losses and still stay put in the market?

So Mayank, again, it has been a tough market. Things have been difficult for everyone in general. Reinsurers have taken a view in terms of how they want to approach the market. So they -- some of them are recalibrating how they want to look at this, and it will probably take some time for them to come back with how they're thinking about this from a long-term perspective. The short term definitely is affecting some of the thought processes, but we'll have to wait and see. Anywhere globally, even in good times, we have about 4 or 5 large global reinsurers, and all of them were or are operating in India. Some of them have maybe decided to take a bit of a -- they've taken a bit of a pause. And I guess they'll think about how they want to operate. Yes, so your point is, is this kind of valid that some of them have decided to just think this through a bit more. And we will see how that goes. So at this point in time, everyone is looking at tightening the ship upfront rather than worrying about claims coming through later.

Yes, so my broader question was that this -- that there is a potential issue around capital from the reinsurance side or the lack of capital to support insurance growth in India. How many -- how long do you think it might take for those issues to go away before some of these supply issues go away and all of that?

Mayank, what you have to think about is in terms of -- is it still a long-term opportunity in India? Do you all believe the answer is yes? Will we have to be patient to ride this wave out? Of course, we will have to. So as long as people are able to be responsible in terms of the way they price, the way they underwrite and then are able to live with the experience that will come through, it will work out. But yes, in the short term, there could be -- the supply-side considerations are for real. There's no getting away from that. And that's the reason why we believe that the growth in this segment has to be more calibrated rather than something which we cannot handle as an industry.

Ladies and gentlemen, this was the last question for the day. I would now like to hand over the conference to Ms. Vibha Padalkar for closing comments.

Thank you. Before I wrap up, my team has pointed out that there might have been an error in my mentioning the NBM. For sake of clarity, I want to reiterate that for the quarter, it's 26.2%. Thank you all for the participation today. Stay safe. And if there are any further questions, please do reach out to our Investor Relations team. Thank you, and good night.

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