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

Ladies and gentlemen, good day, and welcome to HDFC Life Insurance H1 FY '22 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, HDFC Life. Thank you, and over to you, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us for the discussion on our results for the half year ended September 30, 2021. 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 H1 FY '22 results and would be happy to take questions post that. With the vaccination program going well, approximately 70% of the adult population has received at least 1 jab, and we are hopeful that the intensity of any subsequent COVID wave will be muted. In addition, the recent macroeconomic data augurs well for the economy and is indicative of swifter recovery trends. Consumer sentiment remains buoyant, and we are optimistic about the same increase in business in the coming few months. Moving on to our business update. The second wave of COVID has largely receded. We settled around 200,000 claims in H1. Gross and net claims amounted to INR 3,640 crores and INR 2,466 crores, respectively. While individual claims tapered off, group claim intimations were high in quarter 2 FY '22, both on expected lines. The overall experience has been well within our projections. Excess mortality reserve or EMR of INR 700 crores as on June 30, 2021, has been sufficient to cover claims received to date. Further, we have created an additional EMR of INR 60 crores in quarter 2. With this, we carry unutilized reserves of INR 204 crores into H2. We continue to remain watchful and are monitoring claims trends as well as adequacy of reserves at regular intervals. Our business performance delivered a strong growth of 22%, resulting in a private market share of 16.2% in terms of individual WRP in H1 FY '22. On a 2-year CAGR basis, our growth was 12% compared to industry growth of 5%. The product mix was balanced with non-par savings at 32%, participating products at 30% and ULIP at 26% on APE basis. Our annuity business recorded a healthy growth of 47% vis-a-vis H1 FY '21 with annuities contributing about 24% of our new business premium. On the protection front, the Credit Protect business registered a growth of 108% versus H1 FY '21 on the back of normalization of disbursement by lenders. The absolute APE for individual protection was in line with H1 FY '21 levels, which had grown by 38% last year. Protection APE, including group recorded year-on-year increase of 41% for H1 and comprises 21% of our new business premium. We remain confident about the medium- to long-term growth prospects of protection in India, and we'll continue to scale this business in a calibrated manner. We are also happy to announce that our subsidiary, HDFC Pension has crossed the milestone of INR 20,000 crores AUM, registering 97% growth year-on-year. The pace of growth has accelerated significantly. It took us 7 years to achieve the first INR 10,000 crore mark and only 14 months for the next INR 10,000 crores. HDFC Pension is also the #1 private pension fund manager in terms of NPS AUM with a market share of 36% as on 30th of September 2021. Moving on to key operating and financial metrics. Our overall persistency showed an improving trend on the back of strong growth of 18% in renewal premiums. The 13th and 61st month persistency was 91% and 56%, respectively, versus 88% and 53% in H1 FY '21. The 13th and 61st month persistency for limited and regular pay policies calculated as per IRDAI's recent circular which excludes single premium and fully paid policies was 86% and 52%, respectively, versus 82% and 47% in H1 FY '21. New business margin expanded by 130 basis points to 26.4% for H1 FY '22 versus 25.1% in H1 FY '21. Value of new business was INR 1,086 crores, an increase of 30% over last year. The sustained increase in value of new business has been driven by growth across channels and a balanced product portfolio. The operating return on embedded value before and after factoring in EMR was 18.4% and 16.1%, respectively, against 17.6% in H1 FY '21. Solvency remains healthy at 190% post payout of dividend. Our profit after tax was INR 577 crores for H1, which is 26% lower than H1 FY '21. The decline in profit after tax is primarily on the back of higher claims reserving warranted by the second wave of the pandemic. Next, on channel performance. All channels recorded healthy growth. The bancassurance channel recorded a growth of 20% based on individual APE. HDFC Bank continues to add meaningfully to our top line, whilst maintaining focus on a balanced product mix. We are also seeing good momentum in many of our new partnerships like Bandhan Bank, IDFC First, ICICI Securities, YES Bank, to name a few. We aim to expand our reach to a wider customer base through these partners. After the short period of disruption in quarter 1 last year, our agency channel saw a rapid adoption of technology and has recorded a strong growth of 27% on individual APE. The channel has licensed 18,388 agents in H1 FY '22 versus 9,164 in H1 FY '21. Our Agency Life program, which is aimed at capability building and productivity improvement has seen encouraging participation with 90% of our branches and 96% of our financial consultant base in Agency Life locations covered under this program. There has been a 21% increase in Agency Life unique FC participation and agent productivity has grown by 25% year-on-year. Our direct channel registered a robust growth of 19% on individual APE basis. On the product front, we are pleased to announce the launch of our new non-par guaranteed savings product, Sanchay fixed maturity plan. This plan offers complete flexibility in terms of age coverage, premium payment and policy terms, age agnostic returns and has industry-first liquidity features. It can cater to multiple financial role horizons and offer lucrative IRRs across variants. Moving on to our tech initiatives. Digital remains a key pillar of our growth story. We continue to collaborate with startups through our Futurance program. Through this program, we have been able to enhance our process efficiency, reduce non-value-adding activities, increased sales productivity amongst others, thus helping reshape our core business. We continue to deploy data analytics across our value chain. We have introduced an automated underwriting engine, which has helped us reduce manual interventions and increased objectivity in decision-making. We've also partnered with Insurance Information Bureau IIB to tap into and analyze their customers' data repository for better decision-making and mitigate fraud. We continue to take meaningful strides on all the 5 pillars of our ESG strategy: ethical conduct; responsible investing; diversity, equity and inclusion; holistic living; and sustainable operations. We've shared our approach and progress in our investor presentation. Our thought process and initiatives have been articulated in our ESG report. These initiatives have enabled us to be rated BBB by MSCI, which is the highest amongst the ratings currently assigned to Indian life insurers. Next is an update of the Exide Life acquisition. We have received shareholder approval for the issuance of equity shares to Exide industries in the AGM on 29th September 2021. This issuance is subject to receipt of final approvals from IRDAI and CCI. We have filed the requisite applications with both authorities and are engaging with them as exit. To conclude, we believe that the current environment is conducive for a robust growth of the life insurance sector as there is an increased awareness about life insurance as a financial protection tool. We remain focused on achieving sustainable new business growth and maintaining an upward trajectory on new business margins, while adhering to a clearly articulated risk management approach. The detailed disclosure on our results is available in our investor presentation. We wish everyone good health and safety. We're happy to take questions now.

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

First is on this, I'd say, elephant in the room, which is reinsurance side. So what you are hearing from your reinsurance partner, what they are planning to do. And of course, your competitors or peers are telling that there are negotiations which are going on. So I also want to know what is the thought process behind these reinsurance companies to hike rates because -- has COVID structurally altered the mortality that they have to go ahead and take this 1 pandemic event to permanently hiking reinsurance rate. So I just wanted to complete picture on what you are going to do.

Yes, Suresh. Yes, we have also received intimation that they intend to increase rates. We are in discussions and negotiations with them, and that should get concluded in a quarter or so. To your point about why are we doing this? And they did this once earlier at the start of the pandemic. At that time, it has nothing to do with the pandemic, but it was just the timing seem like that. The way I see this is, I don't think it is only on the back of COVID per se. I think there are 2, 3 things happening here. The expansion and the fact that everyone now is focused on term and protection, which you'll admit that 5 years ago, nobody was talking about, except maybe 1 or 2 players like us. So that just means that we are moving away from the top 10 cities to more and more into smaller towns, different risk profiles, different human life value profiles and so on. So that will see the mortality trends will be quite different from a very small microcosm of metros, salaried employees, and the like that were perhaps buying term through online. And that was the genesis. So I would hazard a guess that rather than just saying that the reinsurers are increasing rates, I think that hypothetically, we were retaining all the risk on our books as insurers. I'm supposing there were no reinsurer in the picture. Even then, I would hazard a guess that we would want to increase rates to some extent if we really wanted to expand the pie. Also in terms of long COVID, I think they are being watchful that we hear of a whole host of fallout health-wise of people who've suffered due to COVID, especially those who have been hospitalized. We -- it's too early to say whether mortality will get impacted or not. That's a space that they are watching. But I think it's more in terms of developing nation. Everyone wants to increase a protection, information asymmetry is very high compared to other developing nations in Asia. So all of that as a melting pot has resulted in this is how I feel. And overall pricing also, we should admit is on the relatively low side. India is still 1 of the lowest in the world. And this is something that was somehow -- to some extent, not something that could be sustainable on a large scale going forward.

Sorry, Vibha, I have 2 follow-up questions because it's been very essential for all of us to understand. If this is the case or approach, and Vibha, this is going to be an annual recurring feature, because every time they will see the mortality experience is not good. Again, they will go ahead and hike rate 1 year down the line. Where does this stop? I mean I just don't know how the mathematical calculation works here? But these guys will keep on telling or penetrating into lower markets and we will hike reinsurance rates? And secondly, what is going to be your strategy? Do you think you can keep your margins protected by passing it on fully to the customers without jeopardizing growth? How are you guys looking at it? Because the sensitivity is huge. You don't high grade by 5%, your margins will drop by 50%. So it's a very, very tricky situation, right?

Yes. So over here, it will depend segment to segment. Right now, it looks like we are talking at a 20,000 feet that all of India is being increased. What they will do, perhaps is ask us to tighten underwriting standards in certain segments, whether it is financial underwriting or health underwriting or a combination of that. So that they are eventually able to segregate the good life, if you like, from the subprime life for wonderful better terminology ought to be -- the ideal thing, I think we are looking or barking up the wrong tree. I think -- we need to move towards risk-based pricing as far as term is concerned, wherein there could be somebody who is -- has recovered from a very significant illness, doesn't mean that, that person should just be not be able to buy term. We should be able to price appropriately. Same thing in terms of, there could be someone who has sporadic levels of income. That again doesn't mean that we are unable to price it because we only know how to price the salaried employee. Very akin to what is happening on the credit side, wherein the -- it started off with giving loans to salaried employees, but now you see a whole host of things happening on the small finance banks and MFIs and also some of the NBFCs. So the granular pricing starts becoming increasingly important. So I think we are just focused on reinsurer, but I think it's broader even allowing us to price differently.

Okay. Any response?

Pardon, sorry, I missed that.

I said, your response to that, will you hike rates? So what are you planning to do?

Right. So like we did last time, when a similar kind of situation happened, we said that we will use a risk-based pricing because we have -- we work in a multi-time environment. We need to be competitive. At the same time, we need to protect margins. Also, there are several levers for us that are -- that deliver margins, and this is 1 of them. Credit Life delivers almost the same level of margin. So -- and right now, we're only talking about individual terms. So we will -- margins will not be impacted, Suresh. So there would be some lever or the other combination, which would ensure that the upward trajectory on margins, like we have demonstrated every year for the past 7 years will continue as is.

The next question is from the line of Arav Sangai from VT Capital.

So I have 2 questions. My first question is on the demand side of protection. So we have been hearing that the industry took a hike last year. So I just wanted to understand how is the demand on run? Because we know that the supply has been constrained but in the number of requires that you have been getting even after price hike, how has the demand situation pan out on ground?

So actually, if you were to look at quarter-on-quarter, while as a percentage, it might have looked like we are slightly lower. In rupee terms, we are actually higher, about 10% higher, quarter 2 versus quarter 1 on individual terms. So that's your answer to demand, wherein demand is increasing, and presumably your question is only to do with individual retail protection, right?

Right.

Yes. So that demand has shown an increase. We don't drive protection as a percentage because really whatever is topical for that quarter will sell. And there will be some segments that do well in a particular quarter because of a combination of events, including macro things that are a little bit outside our control. But what we do drive is that each 1 of the segments should grow and that's exactly what we are seeing.

Okay. And ma'am on the protection part, you have mentioned in your disclosure that on the group side, we have seen some more -- like more claims in Q2 compared to, say, Q1. So are we anticipating some hike on the group side as well?

We haven't heard yet on the group side. I think what -- right now, what we are doing is that to tighten underwriting things like having a COVID questionnaire, ensuring that we have a member information forms, those sorts of things that also the use of analytics to try and see whether there is any early warning indicators on any of the policies so that we don't have to later on, either decline a claim or add that under a bit of a question mark. So that's what's happening right now. Also, we retain more. So this overall reinsurer dependency to some extent is a lot less over there. So not on the horizon as of now.

Ma'am so with this price hike coming now, what has your experience been in the past 1 year as to the elasticity of demand? Because in all my talks, I'm not able to understand how can someone -- we can pass on 10% to 15% of hike and you just answered that we are going more towards the risk-based pricing. But if we go more granular, it means that someone like it will become, insurance might become unaffordable for some people. And I just altogether choose not to get insured. So I am not able to understand the elasticity of demand in the coming 1 or 2 years for the protection?

So I think there are quite some distance away from reaching a point where it is inelastic. Right now, wherein is at elastic. Right now, we are in an inelastic zone and will continue to remain that in my opinion for quite some time. Because term insurance is not an IRR kind gain or something that you will defer. It has a very deep suited -- deep-seated underlying thought process wherein the realization that you need to cover your loved ones. And price is not necessarily -- and something that will stop people from doing that. In fact, I feel the reverse will be true, wherein when people realize that they can get a 200 to 400x cover and the prices are only probably going to go up. There will be additional demand. That's my view over the next year or so rather than people not buying it. At least over the next 2, 3 years, I don't see demand being an issue at all.

Right. Understood. Just 1 last question ma'am on the Sanchay fixed maturity plan that you have launched. So are the margins there similar to our other non-par or is it a little lesser -- because I think the liquidity feature, there are more advanced.

No, they're very similar. Of options in that right from single premium to very bespoke terms of both premium payment term and policy terms. So we expect also in terms of the reception to be very good, and margins continuing to be in the similar zone.

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

I had 2 questions. If I look at the current rate of unwind, it's trending slightly lower than last year. So should it be in this range in the near term?

Srini, you want to take that question on unwind?

Yes. Unwind is around 8.6% annualized I don't know how well you're looking at unwind. And in our walk, you can see that unwind is fairly fixed rate of 8.6% on an annual basis.

Okay. Okay. This was based on last year's EV and current H1, whatever unwind we've seen. So I was calculating that and try and annualizing that so was getting a slightly lower rate.

So the unwind is INR 1,116 crores, I think for first half, and that translates 8.6% per annum based on the opening EV. And it was the same percentage for the first quarter as well.

And given where interest rates are, we don't expect a major change in that?

For unwind, doesn't change during the -- because it's the expected return as at the start of the year. So any operating maybe and say any change that either the investment returns or equity markets will be reflected in the investment variance. And any operating changes will be different in operating variance, but unwind doesn't change as a rate.

And secondly, any claims on which are pending. I think Vibha mentioned in the opening remarks on the group side, still claims are on the higher side, individual are lower. So any major backlog in terms of claims to be processed and the reserves should be enough for any further claims if any or any scenario which is not as per our expectations in the coming months?

No, absolutely. So just to clarify, whatever claims we have received have already been booked and accounted for. And despite that, we have excess to which we have added INR 60 crores, and hence, we're carrying forward INR 204 crores. The INR 204 crores are more in terms of just giving us comfort that if there are any debts that have happened, but not being reported because group business does have a longer reporting cycle than individual business. And also these some are sure tends to be typically lesser than in individual terms, so people probably don't report it immediately. It is more to cover that. It is more -- it is as a comfort rather than wherein deaths have happened and we haven't accounted for it.

Okay. Okay. That's helpful. And lastly, given the low base of ULIP and what we are seeing in markets, do we expect ULIP to have a positive momentum for the year-end, given that Q3 and Q4 typically would see higher demand. Are we seeing that?

So ULIP do have a very close correlation to equity markets. And time and again, we have seen these cycles. As a philosophy -- and you'll see in our case, quarter 1 and quarter 2, ULIPs are -- as a percentage of total is very similar. We have stayed away from swing with the market because that goes against the gain of balanced product mix. And also we -- in the past, we have seen wherein people do enter markets at a high and then are somewhat disappointed leading to surrenders and so on. So to your question, we will see as long as equity markets stay elevated, it's very possible to see that demand. And for the same demand to possibly turn if there is -- we start entering into a bearish phase.

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

Just a data keeping question to start with, can you give us the COVID claims paid in first half or in second quarter? And if possible, breaking down into group and individual because I think we paid around INR 245 crores net debt last quarter Q1. So a similar number, what was the number in Q2 or 1H?

Yes. So I can give you in terms of -- so Q1 and Q2 is what you're looking for?

Yes, even 1H is fine ma'am. We can see how Q1 numbers.

Yes. So YTD, in terms of COVID claims in the number of claims is 11,114 total, of which individual was 7,300 approximately and group was about 3,800.

And in rupees?

And in rupees for H1 COVID claims is -- the excess mortality claims was INR 2,466 crores, of which individual was INR 976 crores and group was INR 1,490 crores.

This INR 2,466 crores is total claim, right? I'm just looking at the big COVID claim, COVID claim how much we have paid?

The offset and COVID claims was INR 462 crores and for individual and group was INR 124 crores, adding up.

Okay. Perfect. Perfect. And the second question which I had was that -- honestly, you said that you launched a new Sanchay product. But given our Sanchay Plus was doing very good already, and there is a naturally high demand for that particular product, then the logic of introducing a new plan, maybe you are saying that there are additional features. So is it related to cater to the new customer segment, which are probably not catered by Sanchay Plus. And that's why this product has been launched. And don't you think that it will cannibalize into be Sanchay Plus or it will add to the market basically?

Srini, you want to answer that?

Yes. So the new product is -- well it's a lump-sum product, Sanchay Plus is an income-paying product. So this -- it's called fixed maturity plan. And you also have a single premium option in it. So if people are looking for to parked their one-off money in a bald like structure, so they can package here and minimum term is 5 years, and they can take the returns on a tax-free basis. So this provides a different market, from a single premium perspective, where the IRRs are very competitive compared to alternative instruments available as well. So that is a new market for this. And the lump sum, yes, partly, it was already there in our old Sanchay. But Sanchay Plus you talked about is an income product.

Got it. Got it. But does it change our strategy of capping the total non-par contribution to 30-odd percentage. If the demand is bad for this particular product, so just wondering whether it will cannibalize into the other products or not?

So that strategy of capping non-par to 30% is more from an interest risk management perspective. Now if you sell this product in more towards, say, a single premium, where the interest rate risk is virtually can be very easily managed without the use of derivatives or other strategies I talked about in the past. So this is -- this doesn't have as much interest rate.

Fair point. Got it. Got it, sir. And finally, just 1 small observation, given the first time we have disclosed a persistency excluding single premium. So the ULIP persistency at 78% seems to be very, very, relatively very weak compared to what others have reported on ULIP persistency. Sir, I just wanted to understand a 78% persistency ULIP actually makes even a single-digit VNB margin for us are not easy, just wanted to understand. And more importantly, why it is so relatively weaker for us compared to what -- maybe the largest player in the industry reports, maybe 80% to 84% is kind of a number.

Here, I don't -- at least I'm not aware of people having reported at a segment level. But nevertheless, even before our disclosures show that ULIP has a lower level of persistency. And the main reason there is an inherent structure of ULIPs. After 5 years, there is no downside to someone surrendering his policy or exiting it. And not just that even if 1 were to stop paying halfway through, there is a very attractive level of return that 1 gets through the discontinued policy fund, which is almost competitive to most or even better than some of the debt products that are today available. So that is -- that needs to be fixed, and that's something that is critical to increasing the persistency on ULIP. But yes, the -- and that's why about 1/4 of our business is ULIP. And that's why we want to keep it that way because until the controls of the -- or the structural aspect of ULIPs are -- is addressed, exit barriers are relatively low. And we don't really have a lot of five pay ULIP products, which the industry is moving towards. Because if you have a five pay, then in a way, saying that that's all you need to pay. But that, again, is not in line with long-term nature of -- to insurance.

Got it. Got it. And finally, if you can take 1, last 1. So sir, just wanted to understand, because 1 of the best ways to negotiate or overcome the reinsurance problem is selling a lot of ROP. And we introduced ROP plan in the fourth quarter of last year. I just wanted to understand the trajectory, how it is growing? And what is the contribution of the total plan and that can be used as a tool to overcome the reinsurance challenge, what industry as a whole, because I believe retentions will be much higher than ROP compared to your term plan.

That's the wrong end of the stick, I feel that to try and address that problem. We do believe that ROP is more -- for someone who's really talked about getting -- leaving a corporate for his nominees and there is both savings and term -- nothing wrong with it. But it's not the purest from of insurance. And so we want to be able to offer all sorts of insurance and it's really up to the prospective policyholders on what is suitable to them. ROP also tends to have a [ lower sum assured ]. So more like 200x rather than 400x because also the premium is more expensive, is costly. So I don't really want to try and fix 1 issue by something else like that. We need to figure out in terms of how overall we can address that issue, as well as through pricing as well as some of the other levers that we have to make good the drop in NBM, which is -- we have demonstrated time and again and a combination of these factors. Srini, you want to add anything here on ROP? And by the way, today, it is about 17%, 18% of our overall.

Yes, yes, yes. Correct. It's gone up from the low sort of teams to 17%, 18%. But broadly, I agree with what Vibha said, see, the fundamental issue is not about reinsurance. The reinsurance increasing prices because experience warrants that. I see the pre-COVID levels, the inherent longevity assumption assumed in the crisis that the population will -- or the cohort to which this caters to this product on the market, caters the longevity was 93 years. Now with the repays that took place last year, it had come down a little bit to, say, in late 80s, so 87, 88 years. So -- but the average population longevity, as you all know, is close to 70 years. You can say that the insurance population may be slightly healthier, maybe 75, 80 years. But still even after this, the replace that we saw last year, it is still for the population it caters to, it is quite low. The prices are fairly low even now. So which is why reinsurance are hardening the prices. So it is not that changes we are wanting to harden because of COVID or to boost their profits. It's because the underlying mortality experience is sort of warrants that kind of a price.

[Operator Instructions] The next question is from the line of Deepika Mundra from JPMorgan.

Just 2 questions. Firstly, with any impact on the Credit Protect segment in terms of pricing over the last year? And has that impacted attachments at all? Or do you see that segment to be relatively not so impacted despite rising pricing?

It has been fairly stable and largely business as usual on Credit Protect. It's just that in some situations wherein we've had quite terrible mortality experience for various reasons. We've had to go back to our partners to either tighten some of the underwriting requirements or look at it -- look at segmentation, look at analytics, those kind of conversations. But we do retain more on the Credit Protect business and reinsured lesser. So this year has been a phase of growth as far as Credit Protect is concerned.

Okay. And just secondly, on the Sanchay FMP product, what are the types of IRRs that you're seeing versus Sanchay Plus?

Srini, you want to answer that?

Yes. So if I look at the single premium IRRs, it varies by age, sort of say, 5-year term to 10-year term varies from 4.8, 4.9 to about 5.5 and 5.7. So depending on the age and the total term 1 takes.

And versus Sanchay Plus?

Sanchay Plus is a -- Sanchay Plus a not a comparison products. And so it is the income product, which offers income for a very long term, 30-year, 40-year or some of the options even of our income until for the entire life. So there, the IRR will be, again, varies by age, but it can be starting from, say, 5.5 to -- it can go up to 6, 6.1 also in some cases. But that's an income [ product to ] a different market. Here, you should be more comparing with sort of short-term deposits.

Got it. And just a follow-up to that with the hardening of yields of late, is the profitability of these products improving on the margin? I know your VNB sensitivity shows otherwise. But intuitively, shouldn't be the profitability improves?

Yes. So if the price to the customer is the same and you're earning more, yes, your profitability should increase, yes.

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

Question on this supply side tightening. Since last year, a lot of these price hikes have also come with quantitative tightening of what reinsurers will write and even what the insurance companies on themselves would have done. So if you can quantify what happened in the last -- just talk about what happened in the last 12 months? And whether in this round, you expect the terms also to be further tightened? Or we are just looking at a price hike?

Srini, you want to take that?

Yes. So the underwriting terms are not going to be tightened at least for our company, but it really depends on the experience of different companies. I know from sort of some the market sources that some companies are asked to change their underwriting norms as well as changing the prices. But for our company, there are no changes to the underwriting norms.

Got it. And could you talk about what were the changes we would have had to do in the last 12 months?

We brought in some video, video call for [ E-KYC ] and the [some sessions ], which are certain types of relax on writing is allowed and some geographies where we've seen some adverse experience. So all those things -- those and also the minimum income levels for which you can give a little bit leaning underwriting. So all these other sort of areas where there have been some changes. So income levels, at those locations, whether as an education level as well and some session. So these are the broad parameters based on which the underwriting terms have changed over the last 12 months.

Perfect. And my last question to Vibha. As we go into second [indiscernible] over the last 12 months, there could have been some I believe there were some self-imposed restrictions or so self-imposed brakes on issuing policies, right, which are not linked to reinsurers demanding something. So given the trajectory of COVID. Will the industry and HDFC Life relax grow, so you should get to better growth in protection? Or how do you look at that?

Adarsh, I couldn't hear you very well, but what I get is that you're asking is the outlook for protection, individual protection?

Yes. I was asking this in the context of as we were in the second round of COVID, where some self-imposed restrictions of brakes that companies put on themselves on what they wanted to underwrite as well. So as the COVID trajectory goes away, at least that part can easily be relaxed by companies themselves. I'm just trying to understand.

Yes. I mean, to some extent, yes. So at least the COVID-related wherein if somebody had recovered from COVID, we would ask them to wait for some time or undergo some further tests and so on. So that hopefully will retrieve. It will go back to largely business as usual, unless long COVID starts wearing it at, that's an unknown, unknown. We know that especially people who have been hospitalized and were critical when they were suffering from COVID, there are some lingering other health issues that are manifesting in different manners. But whether mortality experience is going to deteriorate, that's a space we'll watch, but I don't think we'll know very much about it in terms of trends, at least for another couple of years. We'll be watchful, but yes, it should get better on from where we are today.

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

First thing on -- just a data keeping question. This time, I don't think you've given the net fund flow, net investment income and market movement, the change in AUM disclosure. Second, the rates are pretty low. So even in the new product, we are offering 4.8 to 5.6 sort of a range in the Sanchay FMP plan. Now I wonder what can be the offtake or how much can we actually sell in this low rate environment and individual protection rates are again going to go higher. So what are your thoughts on the product mix going into FY '23, if the balance half of '22 and FY '23, and markets have done well. They've stabilized now at a pretty high level, the interest is much higher, do we again see ULIP sort of -- the share of ULIP increasing in the overall mix? And the traditional products actually coming down a bit? And what sort of an impact could that have on the margins? Any sort of comments on that would be appreciated.

Right. So on your first question on analysis of assets under management. So H1 AUM went up by about INR 17,372 crores, and within that market movements were INR 8,141 crores, and net investment income was INR 8,871 crores. Net fund inflow was INR 360 crores. To your question about how unit-linked and vis-a-vis traditional products, there is a close correlation, as you know, between markets -- equity markets and how unit -- does the pull of the market for unit-linked products. Not surprisingly, that's what we're seeing right now, given the overheated nature of equity markets. From our point of view, we want to stay focused on balanced product mix as well as what is suitable to a particular channel. And that's why you'll see that quarter 1, our ULIPs was 27%, and quarter 2 was actually 26%. So we haven't allowed that to go up to, what, 40-odd percent that you're typically seeing in the industry. And saying very much true to our balanced product mix philosophy. Even in our agency channel, typically, you will find amongst several leading players, wherein unit-linked sold through agency channel is anything between 50% to 70% or 75%. That's not the case with us wherein typically, it is less than 20%. So to summarize -- so what you see in the -- what you see happening overall is slightly different to how we have driven our product strategy.

Got it. Ma'am, just a follow up on the net fund flow number. So at INR 360 crores, that would mean that only about INR 460 crores have come in 2Q. That number seems a little bit lower. Any particular reason for this?

Largely, it was -- all the claims payout, all of that resulted in an exit. We did see a large chunk of claims -- all the conversations we've been having. We did see that both in individual claim, group claims, some level of surrenders also because while overall, it is within our assumptions. But in first quarter, we hardly saw any surrenders because of the impact of wave 2. That picked up. On a YTD basis, it's very much in sync. But just if you were to look at quarter 2, that surrenders, did pick up quite substantially. Again, unit-linked surrenders, which are a function of markets. So the combination of these aspects is what resulted in that lower number.

Any particular product which is a sort of responsible, ULIP would it do?

Yes, largely, ULIP. In fact, the persistency on our [ cash book ] book is pretty good, largely on our ULIP. And as you know, ULIPs even after you discontinue, you do earn a fairly handsome return. So that longer a deterrent, people want to end cash and so on.

The next question is from the line of Avinash Singh from Emkay Global.

I have 2 questions. The first 1, I mean, on expense. I mean [ still we have a] way we look. I mean, the product mix is broadly stable. The distribution remains is stable but there is hardly any sort of benefit of operating leverage now coming from it. I mean, we are getting a scale, but cost is something where, I mean, but that has also been 1 of the factors that is keeping, I mean, sort of a new business strain higher any. So at a certain point, I would expect the cost flatten a bit, and that will provide some operating leverage to that product mix. I mean going ahead, if not for cost, I mean, product mix and sort of, can moderately because you have certain product mix. Then if cost is not going to provide operating leverage then i just sort of a what would help in terms of your margin trajectory, that cost. Second 1, I mean, because there have been a lot of talk around mortality experience. So if we go back a couple of years, I mean back when particularly, I mean, [ retail ] rate was broadly stable. Can you just sort of give an idea that your mortality experience on the retail protection side, in terms of how sort of a different demand from that standard that ALM mortality [ rate] that was published. And typically, if I'm not wrong, the private life insurance, retail protection mortality experience is very, very different than that all in the mortality that curve. So if you can just provide some color on that.

So Avinash, on your first question in terms of the kind of role that expense and operating leverage can play in terms of how our margins develop. A couple of things. 1 is in terms of if you were to look at it from a 2-year kind of perspective, the rate at which the costs have grown is less than half at which the revenues are growing. So that basically does tell you that if you take out the anomaly of what we saw last year because of a very different year in terms of deferral of expenses, no hiring cuts and bonuses and so on and so forth. When you take all that away and you go back to a normalized kind of a comparison, you find that, that will starting to come through at scale. In terms of how our margins has also developed over on a sequential as well as on a quarter and half yearly basis as well, there is a significant impact of volumes that is coming in, which is actually, again, in some sense, the operating leverage that's coming through, where costs are not growing linearly in line with volumes. So it's already something that we are seeing. And we've mentioned in the past as well from time to time, the margin expansion is going to be a combination of product mix as it evolves towards protection and annuities and more longer-term products and benefits of scale as they come from time to time. Again, there could be some sort of variations within quarters and within years, depending on the kind of volume impact that you see as well.

Yes. I just want to add to that, Avinash, if you remember, last year, H1 of last year would not have had any salary increase and bonus and so on because of going through COVID. In fact, beyond a certain grade, we skipped an entire year and even below a certain grade, it was only for half year, which is the second half of the year. So like-for-like, I think it was long overdue in terms of back to normalcy and so on. And so the comparison with 1 year prior is what we believe is the correct comparison. And H1 FY '21 [indiscernible], was at 14%. H1 this year is 12%.

Okay, okay. And in this ad and marketing expenditure, I mean, it's a combination of 2 things. Of course, 1 is [indiscernible] advertisement and 1 is [indiscernible] advertisement via your distribution partners. So is there some sort of a breakup between how much -- what [indiscernible] to that distribution partner marketing ad via them? And I mean -- and the other via your electronic, or TV, or print media?

Today, we are in an increasingly connected world. And I might be having my add on 1 of our bank partners and several bank partners, ATM, for example, while you're waiting to withdraw cash. Now who is to say that, that ad is less effective than if I had a hoarding outside an airport or digital marketing, for example, that I might do on a partner, some allied partners who has a large customer base on their platform. And that's why this kind of [ simplistic ] classification, I think will not -- doesn't -- we don't track ad spend in that manner.

Okay, okay. And now some color on that mortality experiences prior. I mean, 2 years back on the retail side, I mean, how they were different from that [indiscernible]?

Srini, you want to take that question?

Yes. Sir, this is broadly in line with what that we assumed in the crisis. I mean it does vary quite a bit between savings and protection book, and depending on whether medical has been done or whether it went through nonmedical. But largely, at least pre-COVID, it was within our expectations.

And my question is more on that typically, you would expect this pre-COVID ALM, I mean was it like your [ insured tool ] mortality experience, for example in materially different from what is that [indiscernible]. I mean was there a huge difference in terms of the new risk pool? Or was it like -- I mean, some color on that disclosure on why I mean having any sort of a different mortality profile?

Yes, it would be. Generally, in short, a number of population always has a favorable mortality or lighter mortality compared to the population mortality. And within that also within the insured lives, the private players mortality will be much lighter than the overall mortality for the industry. And even within the private sector, you will have, say, HDFC and some similar types of profiles will be even more lighter. I wouldn't want to give you an exact number, but it's certainly much lighter than the population mortality.

Yes. And within that also, I would expect your retail mortality experience will be far I mean, lighter than your credit life portfolio.

Yes, that's right.

The next question is from the line of Arjun from Spark Capital.

I'd like to know what percentage of term insurance comes from the data aggregators? And as the range was tightened the underwriting norms, what would be your approach towards this channel. Can the price mix impact be mitigated to some extent by changing the channel mix or from where the term insurance is sourced? And would you be shifting the focus to other channels if so? That's the first question. Yes. I'll follow the second question afterwards, here.

Yes. So less than 1/4 comes from your question.

Less than 4% of the termination comes from [ data aggregator ]. Is it?

Yes, between 1/5 and 1/4.

And if I can add on the other part. So look, the term pricing is a kind of fixed based on what we have filed with the regulator. So we do, of course, look at the pricing, how it will impact across channels. You can't change the pricing across channels and then seeing it as. There's a very marginal difference between the online pricing as far as the off-line consumes. But what we normally do is we try and maintain that balanced product mix for which Vibha was talking about, by ensuring that a certain channel focuses on term or we push a certain particular product based on what the customer requires and where the demand is. So like across products, there is a balanced product mix across channels also, we try and make sure that all our products are present in the right volumes.

Okay, yes. Now the second question is within annuity, what percentage would be coming from HDFC's pension fund. I believe when the NPS mature, the customer can opt also to other life insurers. So what percentage would be from HDFC pension fund that flows to HDFC Life. Any sense over there? And also, what would be the kind of the mandatory annuity part that is coming in.

So in terms of annuities, the sources of business have been evolving over a period of time. A lot of initial amount of business came from the compulsory annualization. And over a period of time, more and more business started coming from the group side, where we have tie-ups with various corporates, public sector as well as private sector. And in the last year, 1.5 years, ever since the NPS book has been opened up, especially for the government sector. That's where more and more businesses started coming from the annuity side. So it's a bit difficult to kind of talk about NPS annuity as a percentage in the current scheme of things, but it is becoming a more and more meaningful source anywhere between 15% to 20% of the business over a period of time, we can expect to come from this book.

So Niraj, if I can add. I think, look, in H1, Niraj is right, there are a few channels from where we get, 1 is the vesting based, 1 is the open market, and 1 [indiscernible] group and the NPS. So NPS in H1 was almost 17% of our business. We expect this to grow. In fact, we saw fairly solid growth of almost 300%, 320% in terms of the NPS annuity in terms of how we are growing. So clearly, the investment that we made in the NPS, the pension company and the AUM that we are now developing NPS, will lead to a significant annuity group for us. Yes, the customer can choose. But frankly, in many of these cases, HDFC Life is strong brand. Our pension fund has been performing best-in-class, and it's a known brand. So we do find that we will gain significant market share on the overall annuity choice by the customer.

The next question is from the line of Vineet Mehta from Sameeksha Capital.

So my question was regarding that we had an EMR of around INR 700 crores at the end of quarter 1. And if I back calculate the claims, COVID claims in Q2, it's somewhere around INR 1,500 crores. So why has this been -- is our experience was than what we estimated at the start of Q1?

So you -- what we did mention at the beginning, really, overall claims have been in line with what we've expected for H1. And at the end of quarter 1, we had made a provision of INR 700 crores, as we had mentioned, a split between individual and group. We had mentioned that on the individual side, we have a lot more visibility with -- at that point in time, itself, claims have started tapering off. And we saw a lot more pronounced effect of that in quarter 2 as anticipated. But on the group side, we had said that it's still early days. The trends are yet to emerge, and we had created a provision at a high level for group claims, which we anticipated will get to be elevated in Q2. And that's exactly what happened. At an overall level, like we mentioned, even at the end of the quarter, we carried a surplus reserve of INR 144 crores at the end of quarter 2, and to which we supplemented that by another INR 60 crores to take care of any more delayed reporting situation that we may have on the group side. So today, we carry a number of more than INR 200 crores into H2, which we believe would be sufficient to cover any sort of elevated claims that would come through on the group side.

The next question is from the line of Dhaval Acharya from Kotak Life.

My question is along diversified distribution. While we are constantly building our proprietary workforce and partnership business, if you can give some color and future ones to how emerging ecosystems are likely to come into play as far as life insurance distribution is concerned?

Suresh, you want to take that?

Yes. So look, it is a growing segment. Firstly, emerging ecosystems help us reach out from a technology, ease of convenience, 3-click, multiple ways to wider markets, which probably the traditional markets may not allow us to do. So for instance, what we did in terms prepaid bundle product with Airtel, helped us to reach through the prepaid platform or a very, very large set of customers. Now where the emerging ecosystems and 1 of the reasons why we are investing in emerging ecosystems is that, look, it allows us to build small ticket, it allows us to build flexible products, it allows us to build pre approved products. And on tech platform, we're able to reach out to customers for anyway, onto a certain platform for 1 of their needs. So there are multiple verticals within the emerging ecosystems, whether it's telecom, whether it is in terms of health platforms or whether it's in terms -- all these platforms which are available. And we do believe over a period of time, all of them will have a reach out to the customers. So we continue to invest in these. We're trying to make the journeys as easy as possible. And what we really see in the future is an ecosystem building, right? And when some of these ecosystems build, then you will have certain trigger points where you will be able to grow. And we have similarly like this, we tied up with Paytm, we have a tied up with its [ Chase ] capital, we have a tied up with [ Citibank ]. So these -- we do believe over a period of time, it may not be immediately in terms of percentage contribution, but will be significant contributors to the overall insurance. And we have started seeing that in general insurance, but you will find that maybe over a period of time, even in life insurance, especially when the customer comes in for a second purchase, these ecosystems will pick up.

The next question is from the line of Ashwin Agarwal from Akash Ganga Investment.

Hello.

Yes, go on Ashwin.

Yes. Sorry, my answer has been -- the question has been answered.

The next question is from the line of Gaurav from BNP Paribas.

Most of my questions have been answered. Just 1 question. So even though the share of protection has decreased, that's quarter-on-quarter based on my calculation, still margins have increased by just 50 basis points. So can you please explain what has led to this margin.

Yes. When we say protection, I think you're only looking at individual protection. Our group protection has more than increased more than 100%. Credit Life has grown by 108%. So that is a big contributor to margin expansion.

Okay. So actually, yes, that answers my question.

As there are no further questions, I now hand the conference over to Ms. Vibha Padalkar for closing comments. Over to you, ma'am.

Thank you, everyone, for participating in the results call. Stay safe. Good evening.

Thank you. Ladies and gentlemen, on behalf of HDFC Life, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.