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

Ladies and gentlemen, good day, and welcome to the 9 Months FY 2022 Earnings Conference Call of HDFC Life Insurance Company Limited. [Operator Instructions]. Please note, that this conference is being recorded. I now hand the conference over to Ms. Vibha Padalkar, MD and CEO. 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 9 months ended December 31, 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 9 months FY '22 results, and we'd be happy to take questions post that. It is quite heartening to note that India COVID vaccination coverage has crossed the 150 crore mark, with over 64% of the eligible population being fully inoculated and almost 90% receiving at least 1 dose. Further, the government has started vaccination drive for youngsters in the age group 15 to 18 years, and administration of booster doses to the vulnerable members of our society. These developments seem to have helped curtail the mortality impact of the more transmissible Omicron variant. Business sentiment remains positive, and the high-frequency indicators suggest economic revival is on track. We are optimistic about the sustenance of business momentum in the months to come. On the proposed merger, we are happy to announce the effective -- that effective January 1, 2022, Exide Life has become our wholly-owned subsidiary as part of the overall merger process. We are thankful to our regulator IRDAI for their PD approval. This first of its kind transaction is a reflection of our intent to build a stronger India by providing a financial safety net to more people. The integration process is underway, and we expect to seamlessly absorb the acquired business whilst maximizing value unlock over the next 18 to 24 months. We are happy to share that in the 9 months ended December 31, Exide Life individual WRP grew 31%, comfortably higher than industry growth of 20%. Moving on to our business update. We continue to deliver consistent and strong year-on-year growth of 21%, resulting in a private market share of 15.2% in terms of individual WRP for 9-month FY '22. On a 2-year CAGR basis, we registered a growth of 14% compared to a 5% growth for the overall life insurance industry, while maintaining a balanced and profitable product mix. On the claims front, we have honored close to 3 lakh claims during 9 months FY '22. Gross and net claims recorded at INR 4,657 crores and INR 3,406 crores, respectively. The overall claims experience in quarter 3 has been well within our estimates. We carried a provision of INR 204 crores into quarter 3, of which we have utilized INR 150 crores towards excess claims pertaining to Wave 2. Whilst early experience is not alarming, we have created an additional prudent reserve of INR 55 crores should we witness heightened mortality experience on account of Wave 3. Our product portfolio continues to be a balanced 1 with non-par savings at participating products at 30%, ULIPs at 26%, individual protection at 6% and annuity at 5% on individual APE basis. Our annuity business clocked INR 3,634 crores for the 9 months, resulting in a growth of 39% versus 9 months FY '21, with annuities now constituting over 1/5 of our new business premium. Protection APE, including group has grown by 34% in the 9-month period and contributes 22% to our new business premiums. After some headwinds, individual protection for the quarter showed a growth of 20% and an uptick of 2% for 9 months FY '22, recouping to 9-month FY '21 level. Credit Protect business continued to perform well, clocking growth of 76% versus 9 months FY '21. We believe that protection in India is a multi-decade opportunity given the level of underpenetration and protection gap and hence are confident of witnessing a calibrated growth trajectory over the next 5-plus years. We will continue to address this opportunity via a compelling combination of new products bundled with technology solutions offered on our retail group and hybrid platforms. Additionally, we continue to refine our underwriting practices, deploy new technologies, such as deep learning underwriting models and engage with our reinsurance partners to offer relevant protection solutions to our customers. To put things into context, protection prices in India have historically been a lot lower than some of the developed countries with superior health care infrastructure and higher life expectancy. Additionally, price hikes in India over the years have been lower than inflation. We should continue to expect pricing in underwriting norms to evolve in line with expanding geographical and demographic coverage overtime. Recent increases in protection crisis are a result of the above mentioned factors and can be expected to be business as usual events from time to time to reflect the widening market. As awareness grows on the need to protect ones family we expect demand for protection products to continue being robust in the years to come. We are also pleased to inform that our wholly-owned subsidiary HDFC Pension has crossed the milestone of INR 25,000 crores AUM on January 5, 2022. The journey has been gaining momentum with the first INR 10,000 crores achieved in 7 years. The next INR 10,000 crores in 14 months and the last INR 5,000 crores in just 3 months. The company has a market share of 37% as on December 31, 2021, making it the #1 private pension fund manager in terms of NPS AUM. As a recap, NPS is a significant feeder into our annuity business, growing at a rapid pace. Moving on to key operating and financial metrics. We have witnessed a 19% growth in renewal premiums and further improvement in our 13th and 61st month persistency, which stands at 92% and 57%, respectively, versus 89% and 53% in 9 months FY '21. The 13th and 61st month persistency for limited and regular pay policies was at 87% and 53%, respectively, for 9 months FY '22 versus 83% and 47% in the previous year. The value of new business generated in 9 months FY '22 was INR 1,780 crores, thus registering a year-on-year growth of 26%. New business margin stands at 26.5% for 9 months FY '22 versus 25.6% in 9 months FY '21. The operating return on embedded value before and after factoring the additional mortality reserves was 18.6% and 16.2%, respectively, as against 18.3% in 9 months FY '21. Our solvency as on December 31st stood at 190%. We are supported by a robust back book, have capacity to raise further sub debt and access to equity capital from supportive promoters as may be needed to fuel new business growth. Our profit after tax stands at INR 850 crores for 9 months FY '22, which is 18% lower than the previous year, primarily due to elevated claims paid during the pandemic and reserving for possible excess mortality claims in the near future. Next, on channel performance and products. All channels have registered double-digit growth with proprietary distribution, which includes our agency, direct and online channels growing by 25% based on individual APE. We are also happy to announce our partnership with South Indian Bank that was cemented in quarter 3. We are seeing a good momentum on our other new partnerships with HDFC Bank continuing to be our leading bancassurance partner. Our agency channel witnessed robust growth in individual APE of 35%. The channel has licensed more than 28,000 agents during 9 months FY '22, an increase of 52% versus previous year. Our capability building program, Agency Life is seeing good traction with 15% increase in participation, combined with noticeable improvement in productivity. All our major branches are now covered under the Agency Life program. In addition, there has been an increase of 30% in MDRT agents this year. This is $1 million round table agents, a testament of our high-performing agencies. We continue to drive product innovation and are excited to announce the launch of our new product, Systematic Retirement Plan. This is a regular deferred annuity plan which allows flexibility to choose deferment periods and annuity payout base. Our previously launched plan, Sanchay Fixed Maturity Plan has also been very well received in the market, and we collected a premium of INR 300-plus crores in the first 75 days post launch. Moving on to summarize our progress on ESG. We have launched an ESG-focused sustainable equity fund and the same is available in our ULIP offering. Our endeavor is to grow holistically and sustainably by continuing to invest in the 5 pillars of our ESG strategy, namely ethical conduct, responsible investing, diversity equity and inclusion, holistic living and sustainable operations. We have shared our approach and progress on ESG in our investor presentation as well as in our ESG report. We are humbled to win the best governed company in the listed segment, large category at the 21st Institute of Company Secretaries of India, ICSI, National Award for Excellence in Corporate Governance. To conclude, we believe that the Life Insurance industry is poised to grow given the heightened awareness and importance of insurance as a financial protection tool. Our objective remains to evangelize the need for financial protection whilst introducing new product offerings, maintaining an upward trajectory on new business margins and delivering consistent growth in embedded value whilst adhering to a clearly articulated risk management approach. The detailed disclosure on our results is available in our investor presentation. Wishing everyone a great year ahead. We are happy to take questions now.

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

First is on the protection price increase. Can you let us know how much is the protection price increase range that you have done?

Suresh, it is in the range of 15% to 25%.

Okay. 15% to 25%. Now of course, this looks a bit higher than 1 of the larger peers who reported numbers. Have you changed your -- by any chance, reinsurance versus retention policy? Or does it still remain the same?

No, we have changed it because of our discussions with our reinsurers. So it has gone up on terms from INR 20 lakhs to INR 40 lakhs.

Okay. So anything earlier about INR 20 lakhs was reinsured. Now anything above INR 40 lakhs is reinsured, right?

That is correct.

Okay. So can you also share the percentage number as to what would be retained on the books now versus what was retained earlier? Or vice-versa, you can give the reinsurance number, the percentage number on the protection front?

Srini, you want to give those numbers?

Yes, it will be around, say, 30% or so will be -- because average how much it goes a little bit around INR 1 crore, Suresh. So -- and not all of that will be roughly around 30%, 35% might be what will be range from now, probably around 20% or so.

No, no. So no retained, okay. So just to understand this a bit better. So you mean to say that now the percentage reinsurance number would have come down, right? So because you have increased the number to INR 40 lakhs. So what was the earlier number? Currently, if it is 30%, earlier numbers would have been 50%, right?

No, you're talking about reinsurance or retained?

No, no. So okay. Let me -- you tell me how much is retained now versus how much was retained earlier?

Now roughly will be retaining 35%, earlier might have been around 20%.

20%, okay. So 20% has gone to 35%. Okay. So that's clear. Now can you tell me what has prompted you to do this?

See, the prices have also gone up, right? So the prices -- the INR 20 lakhs was level around a couple of years ago. Over the last 2 years, the prices have also hardened quite a bit. So we are a little bit more comfortable with the price we are charging the customers, coupled with the underwriting practices that are now the normal industry. So it's a function of both the price and the underwriting norms, Suresh.

So has it got to do with the fact that you're worried about increasing the production prices further and that would cause a dent in demand? Because the reason why I'm asking is, look, you had a 9-month FY '22 growth in protection of just 2%. And now you have gone at a hike the rates of 15%, 25% and also retaining higher on your balance sheet. So is there a worry that there is a genuine impact on the protection demand because of all these hikes that you are doing? We understand the long-term structural story, but numbers tell a different story altogether, right, Srini?

Yes. So Suresh, we've also widened the market, right? So the -- I mean, the urban is a little bit more or less there, but we are also at an industry entering the hinterland. So the prices have to slightly increase to be in line with the market we're addressing. So therefore, the prices are going up in relation to what we believe to be the expected mortality for the segment we are addressing. So that's a price it. And the INR 40 lakhs is largely with the fact that the overall prices have also gone up. And generally, as regulators direct, you are supposed to increase our retention gradually over a period of time. If you go back around, say, 10 years ago, our retention used to be INR 5 lakhs, then it went up to INR 10 lakhs then INR 20 lakhs, and now it's INR 40 lakhs. And if you look at what other established players are retaining, especially the large private/public sector, maybe paying much higher levels on the both. So I think it's line with the experience we have developed. And as you know, we have very large Credit Protect book as well. So we have fairly large experience in the mortality. So it's a reflection of our comfort and the experience we've gained over the past 10, 20 years.

I also want to add -- I want to come here, come in here, Suresh, and that is your point that you alluded that why are we not taking higher. 2 things here. One is that if you look at quarter 3, before we took this increase, we have not been the cheapest by any means. And yet we managed to grow by 20% in the quarter. So it is not only the pricing. And also, this kind of an increase makes us agnostic on our protection. So we didn't see the need for us to take more.

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

Just on Exide Life, now that it's going to be consolidated from the next quarter onwards. Can you give us some flavor on the margins? Or -- and how it is likely to look like -- the margins are likely to look like once consolidated?

Yes. Deepika, I'll start off and maybe Niraj can add. So overall, in terms of their margins and that's the reason why we also acquired the company is that the pre-overrun margins are very similar to our margins. So it's only when the merger happens, and we have included that in our investor deck also it's when the merger happens, that we'll be truly able to merge into -- merge the 2 companies and extract synergies. But as of now, we are running it as 2 separate companies. So a little bit away, maybe about 9-odd or 9 to 12 months away from truly being able to extract those synergies, but pre-margin accretive, pre-overrun accretive.

Understood. That's very clear. Coming back to the protection subject, Vibha, is now that the price increase is largely done with, do you see a different approach to the various channels in selling protection? Mainly, are you going to be looking to push the channels more for selling given that a lot of supply side constraints, which were mentioned all of last year are sort of done with?

So if you see, when you look at some of our -- especially when you look at some of our own proprietary channels, that is trending well. It's there on Slide 19 in our investor presentation wherein you have channel-wise. All our channels have largely settled down into their ideal product mix. Maybe a month or so here and there, you might find something going up or down. But otherwise, it's largely settled. The focus has been balanced. And the NBM -- extraction of NBMs is not only with protection. It is holistic and that's something we've been known as a company that has a balanced product mix, and it has populated deep into the channels. Also, some of the nuances like selling longer-term participating products, even the design of our participating products, annuity and the interplay between Life and ROP. So there are various levers that we have, which all add to the NBM and this is run at a channel level and subchannel level. So you'll find that consistency. And of course, focused on both ends of protection, which is term and annuity.

Understood. And my last question Vibha, across the entire distribution, what are the low-hanging fruits that you would see now given that product mix is largely stable? So from a growth perspective, where do you find a low-hanging fruit still across the various channels?

So I'll start off and maybe Suresh can add. What is very noteworthy is that if you look at -- of course, HDFC Bank continues to be our dominant bancassurance partner. But if you look at the newer kids on the block, and you'll see that on Slide 11 of our presentation, the growth over there is above 80%, both for the quarter and for 9 months. So a lot of that growth is coming there. Growth is also from our agency channel and direct. Suresh, do you wish to add anything?

Yes. So look, we can look at it both ways. From a segment point of view, clearly, term remains an opportunity and annuity will continue to grow. From a channel perspective, we have a lot of new bank partners who are going for us. So we have some recent tie-ups with Yes Bank, we have a tie-ups with South Indian Bank, Bandhan is a growing partner. And some of the earlier partners who came in, that's a large growth. Secondly, our strategic focus on proprietary, for instance, we have the agency business, which has been in direct both, which have been growing very rapidly this year. With Exide acquisition 9 months down the line, we'll have that entire agency base, which will come in with us. So we can see a further spot in growth on our proprietary channels.

[Operator Instructions] The next question is from the line of Adarsh Parasrampuria from CLSA.

Couple of questions on the savings side. One is with the last 2 to 3 years you started off and everybody else replicated the nonpar mix is kind of on a -- over a period of time. With rate cycle turning to you, see a constraint or...

We don't see a constraint at all. Yes, there will be -- it also depends on relative to other financial savings debt -- similar to a debt driven financial savings product that might be an alternative. As long as that is also moving in the same direction don't really see that as a constraint. Our constraints really are internal wherein we at a segment in -- segment level which is a nonpar savings and channel level, we have placed internal constraints, wherein we don't allow our channels to sell more than what we are comfortable with. And the comfort is really more in terms of focus on balanced product mix. But if you were to remove that for example, our nonpar savings proportion can easily skyrocket from 33% to even 50%. So it's not really a demand constraint even at -- with impacting or likely rate changes. Niraj, do you want to add anything?

Yes. So as also the other thing to keep in mind is that interest rates go up, technically, you earn more on the bonds that you're largely investing in and then you decide the spread and pass on and ensure that the customer returns a competitor vis-à-vis other debt instruments. So that is 1. On the back book, clearly, the question really is in terms of irrespective of what happens to the interest rates going up or down, are you hedged and protected. So that's where these 2 things come in, in terms of being cash flow matched and also in terms of sensitivities going down. So that's something that we cannot -- we don't know whether the sales will go up or down. I mean in the near future likely to go up, but that's fine. But over the cycle of these products and the cycle of the company, there will be multiple such cycles. So you will not really be able to choose at a point in time as to what will happen to the back book. So the back book under all conditions have to be protected. As far as new business is concerned, the rates that you are providing to the customers have to be in line with what you're earning, and that's something that remains key, of course. And the other thing you just spoke about the new product which has been launched recently. That's at the lower end of the spectrum in terms of the term. It's largely a 10-year term. A large part of the business is single premium. So without increasing the risk profile, we are in a position to tap a segment of the market, which we were not able to tap earlier. So that's the way to kind of think about it like Vibha mentioned are a lot higher than what we would like to service and rates, of course, we could keep pace with what someone is able to earn. Otherwise, adjusted for all the benefits that you get from an insurance product, including tax and the coverage.

Good. No, this is clear. And the follow-up here is if you -- Vibha, you started off saying that most segments are in an ideal product mix that you would broadly like to have. In that context, a lot of the whole sector, including HDFC, we've got margin accretion basis, a lot of savings side improvement along with annuity and protection. Is it safe to say that from a margin perspective, product mix and savings is now optimized, difficult to kind of keep pushing the envelope? Or how would you look at it?

Not really. I think that at least our new business of VNB or NBP that will continue to grow. Margins, there is still some upward -- and this is all things remaining equal on the regulatory front. If there is progression on regulations, for example, on health or for example, on technology, there's also cost and scale benefits that is very much still out there not yet completely maxed out. So there will be a smooth upward curve, all things being equal others. So still hopeless for margin improvement.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just the first 1 on the savings point again. As I go to just dissect your par products this quarter, we've seen actually a decline. Is it just the recalibration of the products you're selling? Or is there something specific happening to the par?

Yes. So Shyam, this is just a seasonality more than anything else. If you were to look at each of our underlying segments, they sell participating products in different proportions. So that hasn't changed very significantly. However, the growth of each of the channels does vary over time and from quarter-to-quarter. So what you see at a company level is a submission of the underlying channel growth and if that changes. So it's not a mix impact than anything significantly different that's happening. We are -- we've always believed in the participating product having its rightful place in terms of our product offering.

So maybe just following up wherein the rising rate environment, you would assume the Sanchay Par product to underperform say, coming to your other hires percentage product you think? Or is that how we should think about it or no?

Sorry I didn't -- you're not very clear. So you're saying that rising rates should actually help Sanchay Plus? It'll make it more attractive.

Yes. No, but the Sanchay Par would be underperforming, right?

No, Sanchay Par also will be helped by higher rise in interest rates.

Fair enough. Okay. Great. Second question is on the solvency. I think you've made a few opening remarks now with higher retention. Are we comfortable 190%, probably 1 of the lower end in terms of peers. So just your thoughts on how we will navigate that.

Yes. Simple answer is, yes, we are comfortable. And Srini, you can elaborate on why we are comfortable.

Yes. So as per the current regulatory norms, we are supposed to hold 50% of the sum assured as a minimum solvency. So even in our retention when it was only INR 20 lakhs, if say, average sum assured of INR 1 crore, we were holding INR 50 lakhs for every policy roughly, right? So even after this -- whatever the increase we're now seeing from INR 20 lakhs to INR 40 lakhs, we will continue to hold the solvency at 50%, which is at INR 50 lakhs. So it's not like it's improved. It is increasing from what we were holding last time.

Got it. And the instruments you had at your disposal to increase solvency. I think Vibha, you made a few points. I missed some of that, sorry.

I didn't understand the question. When you say instruments to improve solvency.

See, in your opening remarks, you had mentioned that how we can.

Yes, understand. So a couple of things. One is, of course, the profit accretion that will happen. And as with COVID, we feel reasonably optimistic about -- while we have sending our COVID results, we -- I feel reasonably confident about not having to dip into it. So normal profit accretion. That will add to solvency. Second aspect is sub debt. While we have raised INR 600 crores in the past, there is further scope for us to do that should we choose. And the last point is our promoters is what I mentioned have always been supportive in case we require solvency -- further capital infusion to support growth.

The next question is from the line of Jayant from Credit Suisse.

I just wanted to ask on the fixed income product in second -- last quarter, you mentioned that the interest rate risk can you manage better, which also opens up some headroom to improve the nonpar share in the mix. So where do you see that number going up and now that there's some calibration happening on protection, are we willing to sort of relook at our internal limits?

Yes. So I'll start off and maybe Niraj can add and he also alluded to it earlier. So there are various parts of nonpar. There is -- the annuity is nonpar and there is all the variants under Sanchay Plus both shorter end and longer end in terms of life long income. And somewhere in between is also our new product Sanchay SMP, which is on the shorter end. So we will -- there is scope to -- the short answer to your question is, yes, there is scope to increase it, slightly longer is that we will calibrate it in terms of what kind of mix, what kind of underlying hedging that we feel comfortable with. Niraj, do you want to add anything?

Yes. Just a quick one that, the new products, there are multiple options and significantly the key one is around single premium. So that is a significant part of the business that we have written since launch. And I would obviously appreciate that the risk profile of the single premium nonpar product would be different from a regular premium category. So it's very similar to, of course [ synanty ] there is no term, then this will be a fixed term. So that is what we were talking about in terms of expanding the market without increasing the risk on the books and that's like I mentioned earlier, and that's to reiterate it is reflected in the interest rate sensitivity as well as of December compared to September which is available on -- in the investor deck.

But there is no trigger internally that you have set for yourselves to relook at those limits?

So we are -- we were always comfortable with about anywhere between 4 to 1/3 of the business. So we are pretty much there. So 30%, 35% is something that we're reasonably comfortable with, especially from a risk profile perspective. Now if the risk profile is lower, then of course, we have the ability to go higher and that we can take a call based on how the demand is shaping up as well. And not much to do with what's happening on protection really. This is a stand-alone kind of decision really in that sense. And again, just to connect the dots, margin profile is fairly broad-based and it's not necessarily dependent only on or disproportionately dependent on 1 product category.

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

Yes. I just had 1 question. You explained the nonpar in the rising interest rate. Just in continuation of that, our customers just look at IRR before deciding that or it's a diversification while they are choosing products, what is the sense you're getting from customers in lieu of the potential interest rate hike?

Suresh, you want to take that question? So while Suresh joins. Yes, the customer looks at -- the way nowadays, customers are getting more and more evolved and that is a good place to be is that they're looking at different insurance objective for different needs. Protection is clearly emerging as a well understood or reasonably well understood segment for them to focus on, so is health. And now with the launch of Sanchay Plus, the fact that post retirement, there is a stream of income that comes to them. It can't be repriced no matter what, gives them a lot of comfort. And should an untoward event happened before these objectives are met, then we will pay a fairly hefty summation. So it has emerged as a segment and that did not exist earlier. So people go searching for that because there's a need. And unit linked is, of course, another product, which is here and now, yes, there's a quick bundle product of 2 or 3 objectives. And they see that more in terms of some excess money that they might have. And at the same time, they want to put that aside for a few years and with a life cover. Annuity sells a different need. So these are all emerging as against just 1 or 2 products in all of these different segments are sharply getting defined and that's something that is a good trajectory that customers are going.

Vibha, if I can add, sorry I was on mute. Just 2 quick things. See the way we are also looking at building capability in our sales team is to ensure that they are able to do entire end-to-end solutioning and financial funding for our customers. So if you look at the way we are moving our financial consultants, so I'm just playing distribution to actually looking at how do they help plan the customers and goals. I'm trying to tie this in with what Vibha just said, we see a market out there for customers who clearly have the risk and appetite to take unit in products. We see the customers who are willing to look at insurance products as part of their financial allocation. Term and annuity are clear segment needs which are there in place. So we, of course, balance the composition of our product mix based on which channel and what profitability needs to be done. But there are enough customers out there who understand these requirements to say, okay, look, Sanchay can be a long-term savings product like how Vibha mentioned. There is a certain financial allocation which can be done for a nonpar product. There is certain allocation which can be done for a par product based on what kind of bonus. And insurance is a little bit of a different product, not comparable with some of the other asset classes. But it does allow people to take both the summation. There is a risk cover attached to the returns that they are getting. So there's a fairly large profile of customers who are happy to take part. There is a set of customers who want to guarantee, there are customers who are willing to look at unit linked and of course, term and annuity are clear requirements. So between this whole portfolio, we are able to kind of drive at our end as well as meet the customer expectations on the other end.

Sure. That's helpful. And just last bit, what was the last IRR and the IRR changes in the nonpar products, especially on the Sanchay front over the last 6 months. Has there been any change? Or more or less, we are there in that 5.5, 5.7 range? Srini, you want to take that please?

I don't know.

So we confidently review this IRR on a regular basis. We look at what the market is at, what we can afford based on how we've invested. And even now, we are in the -- looking at how we can revise our nonpar IRR. So this is something that we monitor almost on a quarterly basis. There are certain regulations in terms of how often we can do it. But obviously, it's a long-term strategy. But in the meanwhile, we do tactically get how we can change our IRR depending on what the market is offering and how our products are competitive.

Okay. It's been broadly in that range or there has been any change?

Broadly in that range.

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

Sir, I have -- largely, 2 questions. One is just wanted to understand within the total protection what we have done given they have demonstrated very good growth in the third quarter. The ROP correspondent in the total individual protection business how much it contributes. And secondly, just wanted to understand your retention strategy which is applicable PO terms is similar to the ROP and Credit Protect business too. So that's the first question I have. And the second question is with respect to new Sanchay SMP plan. So basically just wanted to see that given this particular product has a tax break of 10D benefit. Whether this product will cannibalize into deferred annuity kind of a plan because ultimately the end feature seems to be similar maybe only the period where you get the income is known in case of Sanchay SMP. And more importantly, just wanted to understand that if single premium is the product which you want to grow incrementally, then whether the nonpar contribution can go because to manage that particular product from balance sheet point of view is much easier compared to a regular premium paying Sanchay Par -- Sanchay Nonpar. So just wanted to understand the strategy there? So these are the two questions?

Srini, go ahead.

On the retention, the first question. See the retention like I said earlier, depends on a number of factors. See you asked about Credit Protect. In Credit Protect the retention limit is INR 20 lakhs on the -- and the individual term recent increase from INR 20 lakhs to INR 40 lakhs. Like I said the underwriting...

My question was more on ROP, whether there also we have changed it or not?

Right. So same, then it's at the product level. So whether ROP or nonROP the individual term is INR 40 lakhs.

Okay. And ROP contribution to the total protection business, what we have done because we have seen a strong growth, whether that contribution has gone up?

It's still fairly steady. I think it's around...

It's 16%.

16%, yes.

Okay. Similar to what we have...

Yes, slightly higher, but not massively higher.

Okay. On the Sanchay SMP, whether it will lead to the higher nonpar contribution and whether it cannibalizes into your annuity business, different annuity business rather?

No, see the SMP is actually shorter end of the term, annuity is a longer end of the term. Annuity, typically the outstanding term an be 30, 40 years, whereas in SMP is like Niraj alluded to earlier on the single premium actions around 5 to 10 years, we're selling more of 5-year in the single premium auction of SMP. So it's actually playing at the shorter end of the interest rate curve.

Got it. And do you think we can increase the contribution of this particular piece because it's easier to manage from balance sheet as well as nonpar contributions could go up?

Yes, in Vibha's remark at the outset, she mentioned that we just -- 75 days of the launch, we have sold INR 300 crores already. I think the volumes are ramping up, and we are very happy with this product because like you said, the balance sheet is easier in this product. And customers also see not a value of this product and margins are also reasonably good. So yes, it's a win-win then.

And the reason why I asked this question is that because we have internal limits, which Vibha was alluding to that maybe you don't want to do nonpar more than 30 -- or broader that kind of a number. So that limit can be briefed if there is a steady or decent demand for Sanchay SMP.

Yes. Yes, so we will...

Sorry, I'll just take that, sorry. Srini, I just want to clarify, Sanketh, and that is we -- and maybe next quarter, we will give further granular details of our nonpar savings portfolio based on tenure. So it's not just overall nonpar because that's how we started off given our introduction of this product into this market but we will start getting no nuance. Certain tenures, we might go a little bit with the cap. Other tenure, which are shorter end like SMP that Srini mentioned, we really -- that will be outside this cap.

Got it. Got it. Perfect. And finally, if I can squeeze one. See, pre-overrun margin with Exide Life is fine. So you said that it will be pre-overrun accretive. But just wanted to understand post-overrun how much time it might take or what are the levers which are low-hanging available so that even in post-overrun basis, combined entity margins should be similar to what HDFC -- means what we report right now in that sense?

Yes. So once we merge, I think in a time period of between -- around 18 months on average most of the synergy extraction should happen. This is about top line synergies and bottom line both put together. And if you put things into context, it's about 10% of our business. So it's not as big that it should really sway the margins of HDFC Life over that kind of time horizon.

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

I have 2 questions, both pertaining to Slide 10. This is essentially the IEV work. The first 1 is, it looks like there was some negative economic variance during the quarter. And I think if I look at the COVID impact as well, this has gone from negative stage to negative. So if you could maybe just explain what's happened in the three line items.

Sorry to interrupt you, Mr. Nischint, but we cannot hear you clearly, sir.

No, I could hear them. So I think the main reason is the equity markets are not doing so well in the last quarter. So that's the reason why you've seen a little bit of a dip in the investment variance.

Okay. And the COVID impact?

COVID impact actually in the last quarter was very in line with expectation. In fact, we went into the quarter with INR 200-odd crores of COVID reserves. And we are still carrying over about INR 50 crores from that INR 200 crores. So it's actually a little bit better than what we expected. But we don't know how the third wave is going to be. But so far for Q3, it is in line with expectation.

Sure. And investment finance, the entire negative of around INR 500 crores for the quarter would be on account of equity, is it?

A large portion of those was on account of the equity, but a little bit of that is also due to the interest rate shift, the change in the yield curve -- shape of the yield curve.

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

So I just want to get some clarity on what was mentioned earlier during the call that as a regulatory requirement, we -- insurers need to raise the retention level and protection and probably getting closer to what the PSU player is doing. So I just wanted to understand what stopped us from -- means why did we settled with INR 40 lakhs because 1 of the player has actually gone through higher retention. And maybe if we go for higher retention and could have gone for a lower price hike. So if you can just explain the philosophy behind that? And going forward, should we also again assume that taking retention higher in absolute amount will be more like a regular business feature?

I'll start off and maybe Srini can add. So there is always a calibration between -- sorry, I'm getting an echo. Okay. Now it's better. So it's a calibration in terms of how much we want to keep on our books and how much we want to reinsure. There is -- we are doing this against the backdrop of a pandemic. So this is, in our opinion, not the best time for us to take a call, which is more than the INR 40 lakhs that we thought would be reasonably okay to retain. Over a period of time, it will depend on profile base. There might be some profiles that we think fits within our underwriting norms. And at a price, what can be supported in terms of long-term mortality expectations. We've always gone in a very calibrated basis and I think we'll continue with that. That's not to say that we won't -- we are not enthused to take on more on our balance sheet over a period of time. And Srini did mention this in the previous call, that we've gone from INR 5 lakhs, INR 10 lakhs, INR 20 lakhs to INR 40 lakhs over, I think, the last maybe 8, 9 years. As we have learned from experience on different profiles, different geographies, different professions, gender, smoker, nonsmoker and now, of course, the pandemic thrown into that melting pot. Srini, you want to add anything here?

Yes. Just 1 point and it's also to do with what price we are able to charge in the market. So with now the price is hardening in the market generally, it makes sense to retain a little bit more risk than what we did earlier. So I think other points would come later.

Yes. Maybe I'll just add 1 more aspect here, Abhishek. See, ultimately, whether the risk is carried on our books or the reorder book, that shouldn't really decide what is the right price to be charged for the risk. So there has been a time where the reinsurers apparently were charging a lot lower than what the experience was and that's reflecting in the numbers. So our approach really is in terms of ensuring that over taking the risk is able to get the rupia price for it. So that's something that should also dictate how people recalibrate this over a period of time. So last bit also is in terms of the segments that we spoke about. So that also is a -- it's a function of that as well.

The next question is from the line of Neeraj Toshniwal from UBS.

So I wanted to understand whether we have become margin neutral with the price hike? Or is still some margin part might come on the protection portfolio, first? And second, have you treat any mortality assumption in the lower cohorts given that we are releasing our retention strategy or it's already there in pricing right now? Or how do you think about...

Sorry, Neeraj, I'm not able to hear you. I got your first question, I'll answer that quickly. This will make us -- this increase that we have taken will make us margin neutral. But second question, we could not hear you very well. Maybe your on the speaker.

So second question was on the mortality assumptions. Have we done any mortality assumptions or you will actually do it to the end of the fiscal year? Or how do you think about it? The lower cohorts because we are retaining more, how 1 should think about it?

Srini, do you want to take that question?

See, the mortality is priced and right. So assumptions are changed. That's why the prices have gone up. So mortality assumption has been changed and therefore, the price has gone up. Now as to whether the different segments of the population will have different prices. Currently, that's not the case in the industry. But ideally, what you're saying is right. I think different customers have different socioeconomic profile will experience different mortality and that should be reflected in the price to the customer. So -- but that's not where the industry is today. But that's where I think it will move towards.

Got it. And in terms of insurance underwriting tightening also, are you back to normal standards in terms of after all the prices on the new terms whether the medicals are now allowed or the rejection rates have improved, what we can see as a normalized run rate to happen in terms of protection going ahead? What are you taking?

See your voice was a little muffled. I couldn't hear your question clearly.

Yes, I couldn't either.

Sorry, maybe some network issue. Just wanted to ask basically in terms of underwriting standards, which were tightened earlier. Are you back with the normalized offering of policies or rejection rates still within 5 or that the medical have been again started?

I'll answer that. So we are continuing to look at this carefully because we are still not out of the pandemic and this is something we mentioned last quarter as well, and we don't know how many such waves will be there. Having said that, we are learning to live with it. So COVID recovered folks are certainly being covered. And as we move deeper into India, we are also learning into different kinds of access to health care and triangulating that with various other factors. So there is some level of learning as we move deeper. But I think that is really to be in a good place because it shows that penetration of the much-needed pure term products in India. Hopefully, that answers your question. If there is anything else, let us know.

So was looking for a normalized run rate in terms of protection growth, when can we expect 1 to resume to normal?

It's a little bit difficult because it also depends on the pandemic. To date, even now people are fairly hesitant to go in to get their medical. And that is something that I think will continue for some time. So there is only that much that we can cover. About 51% is what we cover as part of 50%, 51% is part of tele and rest is a combination of somebody visiting in your home or having to go in person to the medical center. So we are in the midst of Wave 3 as we seek. And I think there are some way away, but I'm hoping that we are hopefully about 6 months away and not longer than that.

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

Most of my questions have been answered. But just a couple of things. One, can you provide me with the change in AUM, the net fund inflow, NII and market movements. And the AUM growth has been pretty sluggish. So maybe you can dwell a little bit on that. And second you mentioned that the individual protection in the quarter has actually gone up. My calculation seems to suggest that it's around INR 90 crores. Am I right or am I missing something? If you think like just confirm that number?

So we grew our AUM by 18%. So I'm not sure. And I think that is industry leading growth in AUM. So I'm not very sure as to what is that -- also when you look at the base of it because market earlier days is significantly better than what...

I am looking at it from a quarter-over-quarter basis? So on a quarter-over-quarter basis, it's grown only about INR 3,500 crores?

It's a function of the markets also, largely function of the market. So if you look at the BSE 100, last quarter versus this quarter, it is a significant deduction.

Can you give me the...

If you triangulate that with another data point, which is our unrealized gain on our policyholders P&L, you'll also see that quarter-on-quarter that fall -- the unrealized gain having gone down.

And maybe just -- to add to that, 1 thing to keep in mind really is even we can't really look at it as with 1 broad brush really, right? It has different constituents in terms of whether it's coming from unit-linked of traditional products, what is the debt equity mix in that? And that -- if you look at the investor presentation also lays out that there's been a gradual shift that's coming through there because of the way the products are being offered, the customers are looking at them. Suresh spoke about it in terms of markets for all 3 kinds of categories on the savings side. So this is something that will become a more longer lasting trend in terms of the larger the debt base you have in your book, whether it's through traditional products or in fact, increasingly more and more unit linked product or unit linked customers are also preferring to increase the allocation to debt. So the accretion is obviously going to be in line with that. And similarly, you will find volatility also be lower than what you would find with higher equity allocation. So you have to see this over a longer-term period, not over 3 months or 6 months. That's the way we'd like to look at it.

Can you give me the split, the net fund inflow, investment income and market movement that split that you provide?

So maybe we can connect with you separately, but I don't have the details readily available. But you can -- when you look at the LODR, you'll be able to see it immediately on our unrealized gain also. On your question on term, I'm not sure how you have derived the INR 90 crores, it's at least 33% higher than that. And that gives the 20% growth in individual terms.

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

So there were 2 questions like related -- both of them are related. One is like is price hike that you've taken in the protection is more in the lower ticket size segment versus the higher ticket size given that now we have increased the threshold to INR 40 lakhs. So does that mean that the claims in the less than INR 40 lakhs are higher proportionally versus more than INR 40 lakhs? Or is it like we are okay carrying higher exposure in the lower ticket policies. So how do we interpret that? And secondly, how should we look at this recurring price hike by the insurers because this thing is going on repeatedly and we are discussing same thing every few quarters. And because otherwise, the general belief has been that the longevity in India has been increasing, and this should have supported benign protection pricing over the medium term. So do you think that the current round of price hike that you have been repeatedly seeing is more of a reaction to COVID related comorbidities and this will not be structural and sometimes reverse?

So Nitin, I'll take your second question first, and I'll ask Srini to answer the first one. See, every industry goes through price increases. So why should insurance industry be different? Why should the premiums not increase at all? Because underlying there is a risk that is being covered. In my opening remarks, I also mentioned that back in time, this was around 2009 to 2011, term prices were at least 40% higher than what they are today. That's not -- I'm not saying that we should go back to that. My limited point is I think it's a lot more is made out than a term price increase every 18 months or thereabouts. And the increases so far, if you were to look at it in the last 8, 9 years has been lower than inflation. So I just want to put it into that context or even lower than average salary increase. So it is in the basket of goods of buying whatever it is that we buy. And it is very essential to -- for protection. It could be motor insurance, it could be health insurance premiums that continue to go up. It's very similar to that, and it'll start becoming business as usual over a period of time. I'm just preempting your question, although you didn't ask, and we do believe that as more and more awareness comes through, on pure protection. It's not going to be so elastic in terms of -- sorry, it's not going to be very inelastic. It is let me just rephrase, demand is not going to get impacted because of price hikes that would happen every 15, 18 months. On the first question, Srini, do you want to take that one?

Yes, I can. So the average summation, like I said earlier, is roughly INR 1 crore in our term book and INR 40 lakh retention is on every single policy we have retained. And it's not that the sort of the experience is adverse or less we are retaining more, it should be the other way around, right? But like I said earlier, we are increasing the retention not just today. We've been increasing the retention periodically, like starting from, say, INR 5 lakhs some 8, 9, 10 years ago to then we doubled it to INR 10 lakhs, then we doubled it further to INR 20 lakhs and now INR 40 lakhs. Maybe this is what has attracted the attention to provide a committing now, but we have been periodically increasing retention limits, not just on the book but also on various other parts of the business. So it's a function of the sort of a maturity the industry is at. And like I said, some larger companies that have been in the market for much longer. Their retention is much, much higher. So therefore, this higher retention, yes, if you were to increase suddenly from, say, INR 20 lakhs to a much higher level, then yes, then there could be something. But we are gradually increasing every couple of years or so, we've been increasing. So it's more to do with the price that we are able to size the customer and the stringent underwriting norms that are being used to screen the life before we onboard them and the overall experience we've seen in the book. So if we are not comfortable with a certain life, then we will not onboard them. But now we are sort of almost every single life goes through a medical, which was in the case, say, 2, 3 years ago. So those are things that are giving us more confidence that also we do analyze our experience almost every month. So our retention limits factor of all -- is a function of all these factors. And we will continue to increase over a period of time and not only HDFC Life, but same time, industry will gradually move over a period of time. So it's just a normal course of evolution.

Sorry, I just wanted to add to the second question which Vibha answered. I think we need to understand that the pricing in India on term is still fairly cheap, one. Two, the demand which is there in the market, especially given the awareness around the pandemic is also fairly high. So while there may be a little bit of a price increase, I think from a customer point of view, he needs to -- he or she needs to see the value of what term insurance at what price. And we do believe that look, some of these may happen because the reinsurer may come back based on experience or based on what they are looking at their targets, and some of it will get passed on. Some of it will not get passed on. But as long as the market remains competitive and it's fairly cheap the way it is right now, the demand for term products will continue. And frankly, the customer benefit if they were to take it as early on as possible. And probably, we don't see why the pricing has to remain the same for a longer period of time. It can increase. But it's at that moment when you want term, you need to buy the term process.

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

Quickly 1 on retail protection. I mean broadly, if we see the kind of a 20% price hike roughly. So for 9 months, is my understanding correct that the volumes are down roughly around 20%? And related to that, on -- I mean, as we have seen earlier, the retail protection prices were sort of going down. So policyholder have a tendency to shop and that was sort of a leading to a growth on the new business side, the persistency is lower. So are you seeing business price hike on the new policy? Are you seeing some sort of a trend that the persistency is improving on the existing retail protection? So that's on the trigger.

Avinash, it's too early for us to know trends on persistency because most of our policies are annual policies. So I'm not very sure about -- if I've understood your question right.

Yes, yes, yes. But price hike, now what has been happening for almost 2 years, even last year, there was some price hike.

Yes, the earlier customers -- the existing customers -- persistency on term is good. We'll have to see whether because of this hike, it gets even better. There is a correlation, I agree in terms of the policy that we have sold. Especially, the correlation is stronger in people who are 45 and above. Very young life could anyway go and shop around and that's always possible. By the time you're 45, something or the other catches up in terms of comorbidity and get more difficult to get term a favorable rate and stickiness does increase over there.

So Vibha, just to add, typically, the term persistency is fairly, even for us, our term persistence will be upwards of 95, 96 on the 13 month something and it remains fairly high. What we also realized is, yes, initially, the customer may shop in the initial 1 or 2 years. But as every year, the age increases, the term pricing also effectively changes for the customer. So you do find that term persistency remains fairly common. And in this particular case, as price increases, maybe the persistency will only improve.

Yes. Quickly on group. Just 2 questions. How do you treat your GTI premium in terms of your APE calculation? Because some of the peers have a tendency to treat a single premium where -- I mean, IRDAI says this is regular premium. So how do you treat GTI in your APE calculation. And related -- sorry, on the group, how are you sort of witnessing growth on annuity where overall market for annuity, I mean, including the public sector by most LIC has been pretty muted. So what sort of excellence your growth in annuities?

Niraj, do you want to answer that?

Yes. So I'll start with the second one. The annuity growth trends have been fairly strong quarter-on-quarter, as you can see that will be in the late 30s. As a whole, over the past 3 to 5 years, since we started offering this product category, starting with basic products and then graduating to more innovative products like the fatality. We have seen the overall total book that we have is in excess of about INR 15,000 crores to INR 16,000 crores. And our overall market share is something which is fairly significant, we will look at LIC supposed of 10%. So we've had multiple sources of business for the annuity products that we have. It's obviously a lot of the pension policies that are vesting. It's group policies where corporates are buying annuity on behalf of the retiring customers, employees rather. Also in terms of our NPS business, which you would see in our presentation as well as significantly adding to the LIC business that we write. So we've been able to find multiple sources of growth for the LIC business at scale. And that's what largely contributes to us.

On your other -- sorry, on your other question, Avinash, on GTI renewals -- of GTI is stated as renewal premium, not in APE.

[Operator Instructions] The next question is from the line of Bhuvnesh Garg from Investec Capital.

Sir, in your Slide 10 on ESOP, we see a negative impact of 2.3 billion per ESOP exercises. So could you please elaborate where did this impact has came from? And how should we look at it going forward?

Yes. So this is -- we paid out a dividend of INR 408 crores and there were ESOP exercises. So this is actually netted off because of net impact on overall nothing to do with the rest of the business. So ESOP exercises would be a fresh inflow and -- of capital and INR 408 crores is an outflow of dividend.

The next question is from the line of Raj Kumar. V, an Individual Investor.

Can you hear me?

Yes, please go ahead.

Ma'am, my question is a general question. I just want to know, given the increase in the protection premium, so I just want to how dependent this industry is on the tax. Because I have been seeing from articles asking, the industries are asking for additional shops in the coming budget?

So regardless of what's happening on the protection front I think that is just one of the segments that is topical. But there has been -- there have been several arks that as an industry and a sector we believe that, if we are fairly nascent and some of those not soft but I think enablers would help us grow penetration levels that you know are still fairly low, protection gap is uncomfortably high. So we're asking for a GST waiver on the premiums because we do believe that maybe having a full GST rate of 18% is somewhat debilitating especially on protection. We are also asking for annuities not to be tax wise because annuities are typically, say for the salaried employee, annuities are paid -- are purchased out of post tax income. And then again there tax in the hands of the individual especially when he or she is a senior citizen and that is not equitable. So some sort of a deduction for at least to the extent of purchase of the annuity or some kind of indexation would be more equitable. Also, the ATC carve-out is very crowded. So can we have some sort of a carve-out for insurance or carve out for pension. So these are all, I think, more in terms of nation building to increase protection of Indian citizens slightly more longer term than here and now.

The next question is from the line of Rohan Advant from Multi-Act.

My question is on reinsurance rates. I wanted to know if these rates differ based on the distribution channel that the premium is sourced from for example, is sourced digitally our reinsurance rates lower or anything in that aspect?

Srini, do you want to take that?

No, it doesn't vary. Reinsurance rate doesn't vary. It varies mainly on account of whether it's a medically examined life or is it nonmedical and whether it's a smoker or nonsmoker, it's a female life or male life. So it's all more to do with the underlying risk factors.

And not the channel?

Not the channel. No.

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

Thank you. We would like to thank all of you for participating in the results call. Stay safe and take care.

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.