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

Ladies and gentlemen, good day, and welcome to the HDFC Life Insurance Company Limited Earnings Conference Call. [Operator Instructions] I now hand the conference over to Ms. Vibha Padalkar, MD and CEO of HDFC Life Insurance. Thank you, and over to you, ma'am.

Thank you, Sagar. Good evening, everyone. Welcome to the earnings conference call for 9 months ended December 31, 2024. The results, which include the investor presentation, press release and regulatory disclosures have already been made available on our website and the stock exchanges. I have with me Niraj Shah, Executive Director and CFO; Vineet Arora, Chief Business Officer, Distribution, Data and Technology; Eshwari Murugan, our Appointed Actuary; and Kunal Jain, Senior Vice President, Investor Relations and Business Planning. Turning to the key highlights of 9 months FY '25. Starting with our operating performance. We registered a healthy growth of 22% based on individual WRP for 9 months FY '25, outpacing private industry and overall sector growth of 19% and 14%, respectively. Our market share in the overall sector expanded by 70 basis points to 10.8%, and our market share in the private sector stands at 15.3%. We have witnessed both ticket size and volume expansion during this period. The number of policies sold has grown by 15%, outperforming the private sector's growth of 9%. The average ticket size has also grown by 8% during 9 months FY '25. Over 70% of the customers acquired during this period are new to HDFC Life, demonstrating progress towards our objective to expand our customer base. Retail sum assured has grown by 22% year-on-year for this period. We continue to clock secular growth across Tier 1, 2 and 3 cities, with number of lives insured crossing 36 million during 9 months FY '25. Moving to product mix. individual APE in 9 months was composed of ULIP 37%, non-par savings 35%, participating policies 18%, term 6% and annuities 5%. ULIP continue to remain range bound for us so far this year. Non-par savings products sustained this strong growth, growing by 55% year-on-year. Retail protection continues to grow well with APE for 9 months clocking a growth of 28%. Credit protect growth has been tepid due to slower disbursements among specific partners and the MFI sector in particular. However, we firmly hold our position as market leader in this segment. Momentum was sustained in rider attachments, both on individual as well as group policies. Annuity and protection together contributed 44% to our overall new business premiums. We are happy to introduce our latest offering in the participating category Click 2 Achieve Par Advantage, which provides flexibility to the customer to customize and combine plan options, policy and premium paying terms along with policy continuance benefits for single and joint life. On the surrender regulation, we have largely closed our discussions with all our distributors and rolled out a combination of measures, including deferred commission payouts, clawback of commission and reduction of commission. We are happy to share that we have been able to equitably share the impact between us and our partners. Moving on to key financial and operating metrics. Value of New Business for the 9-month period was INR 2,586 crores, reflecting a 14% year-on-year growth. New business margin for the 9-month period was 25.1%, with the compression mainly attributable to changes in product mix in line with macro trends. Our embedded value grew by 18% and stood at INR 53,246 crores as on 31st December, delivering an operating return on embedded value of 16.0%. We ended the quarter with a comfortable solvency ratio of 188%. Profit after tax grew 15% year-on-year to INR 1,326 crores, driven by an 18% increase in profit emergence from our back book. Renewal collections grew by 12% year-on-year. 13th and 61st month persistency stood at 87% and 61%, an increase of 110 and 780 basis points, so 780 basis points, respectively. Next, on distribution. All channels registered healthy double-digit growth. Our counter share at HDFC Bank has remained stable at close to 65% in 9 months FY '25. We are focused on building a profitable, high-quality agency franchise and are happy to report that protection business sourced by this channel grew more than 2x when compared to our overall growth in protection of 28%. On subsidiaries, HDFC Pension continues to be one of the fastest-growing pension fund management companies in the industry, enjoying a market share of 43.2% and asset under management of INR 1.06 lakh crores. We are pleased to inform you that HDFC International has maintained an insurer financial strength rating of BBB from S&P Global Ratings and has received a B++ rating from A.M. Best rating. On other updates, we are excited to announce the partial deployment of the first phase of Project Inspire, which includes the group business module. We expect our partners and members covered to avail benefits such as automated member onboarding, issuance of certificates of insurance, straight-through claims processing payout and real-time communication. We were recognized as India's top 50 best places for women by Great Place to Work. We also featured in Business Today's BT 500 list of India's most valuable companies, demonstrating our commitment to creating value for all our stakeholders. In closing, we remain focused on achieving our full year outlook on APE and VNB growth. We are committed to adapting to the evolving market and regulatory landscape with agility and resilience. This includes continued investment in distribution, tech and customer-centric product innovation to deliver long-term value for our stakeholders. For a detailed overview of our results, please refer to our investor presentation. We are now open to any questions from participants.

[Operator Instructions] Our first question comes from Avinash Singh from Emkay Global.

Great set of numbers, particularly that margins holding up a major surrender is pretty much comforting. The first question is that if I see the margin walk and if I compare with how it was at H1 versus 9 months, the impact -- Y-o-Y impact from the business mix change that seems to be -- I mean, on the margin seems to be turning favorable in this quarter despite the fact that sequentially, par has gone up slightly and protection kind of holding up and non-par even sequentially marginally just come down. So is it to do with that? Or can you have adjusted your guaranteed rates to reflect the new realities and that has helped you kind of recoup whatever margin you had lost some bit in last quarter on the non-par product. So if you can just help that, how you have adjusted your guarantees that has helped us, one. Second bit is if I see your kind of this New Business Strain, that seems to be growing again, very much similar, but like 18%, 20% kind of a rate Y-o-Y in the 9 months. So just to understand that which are the segments sort of that is kind of driving this New Business Strain? I mean, is it just because the non-par is increasing as compared to last year? So yes, that will be -- and related to that, if I go to your sort of accounting kind of surplus disclosure, and if I look at 9 months, I'm not fixated about quarter, the non-par individual and group life or surplus in the 9 months is turning a significant negative number vis-a-vis last year, it was positive. So I mean, what are the sort of factors that's underplaying here? So these are my 3 questions.

Yes, on your question on margins, we just start with basically what's happened on a 9-month basis from last year to this year. We started that last year was about 26.5%, currently, we're reporting 25.1%. The significant change is on account of product mix. That's primarily visible in terms of what you see on the unit linked front from 32% last year to 37% this year. That's largely what is driving this change. The other factor is really the implementation of the surrender value regulations. We're basically talking about on a 9-month basis, a 10 basis points impact, and on a quarter basis, about 30 basis points impact of the surrender value regulation implementation. So these are really the 2 big changes on a Y-o-Y basis. If I were to just quickly talk through what's happened sequentially because that will also completely make it clear in terms of what we had spoken about last time as well. So the number for quarter 2 last year appeared as about 24.3%. We had basically called out a lag in repricing and that is to the effect of about 100, 110 basis points. So the starting point really is about 25.3%, 25.4%. And as such, the margins are expanded by about 60 basis points if we were to look at it from that perspective. And that is largely on account of inherent product margins a lot better now, especially on the Unit Linked segment because of 2 reasons. One is our persistency has improved significantly, and second is our level of protection that we are able to attach on Unit Linked products is a lot higher than what it was in the prior period. This is obviously offset by the surrender value impact of 30 basis points that I spoke about. So on a net basis, we are talking about 24.3% going up to 26%, or if you were to actually just normalize last period's number to 25.3%, then it's about 60, 70 basis points delta.

The next question comes...

The growth in the new business trade is around 13%. Sorry, Avinash, are you there? I think he dropped off. Okay. Let's move to the next question.

The next question comes from Madhukar Ladha from Nuvama Wealth Management Limited.

Congratulations on a good set of numbers. Just a couple of questions, I think. We see growth in this quarter, particularly in the individual APE, has slowed down. So -- and definitely for non-par savings, I think that's a product line where growth is not there and the other thing also, even protection, I think, is a little bit flattish. So can you give us some color as to what is happening to broader growth? Second question would be, what has been the share of HDFC Bank, what is our counter share in HDFC Bank? And there's been a lot of noise around primary bank's contribution. Some color or some sense around that as to what would your sort of comments be on this current environment and this current talk that we seem to get in the media. And I think the entire investor community and analysts are slightly worried about this. So some sort of sense there would be helpful.

Hi, Madhukar. Vineet will answer your first couple of questions on growth and HDFC Bank counter share. I'll take the last question in terms of the noise.

Hi, Madhukar. So I think the growth the way we see it is it's largely in line with how the private industry has moved and slightly better than the overall industry. So we don't really see a very big concern about the growth slowdown and no particular channel has shown this kind of a slowdown. It's more, let's say, a holistic -- some base impact has come in from last year and it's more holistic and it's in line with the industry movement. Coming specifically to HDFC Bank, our counter share is steady. We have been in this range of close to 65%, and that's where we are staying in that range. We don't see an impact on the counter share in the HDFC Bank because of any of these noise that you were referring to. It remains the same. So I think that should answer your first 2 set of questions. Over to Vibha for the last part.

Yes. On this bancassurance related commentary. We've only heard it from media sources. We haven't heard anything at all from our regulator. At the same time, misselling is the purpose and misselling complaints is something that we anyway work on. And overall for the sector, bancassurance, misselling is actually lower than perhaps some of the other channels, but there's always scope for improvement. Now our focus has been on growing both agency channel or proprietary channel, which includes the agency and direct as well as tie-ups with other banks, and we have been fairly successful in doing that. Now from a bancassurance perspective, I think agency and broking and so on will be something that our focus will continue. And also, in terms of some numbers, our bancassurance, if I were to look at from an overall business perspective at a company, new business organization, it is only 35%, and HDFC Bank is about 1/4. This, of course, I'm including Credit Life business and all our businesses in because really, if the intent is to bring down in terms of concentration risk, then that's something that -- these are the numbers. And last point is that also while we are talking about some artificial construct on percentages, I think also the question to ponder about is, does the customer need choice in terms of open architecture? That also is something that really would give scope to give customer choice and hence, open up and widen the market, widen the reach and so on. So there are different aspects to bancassurance, but we'll see how and if it evolves.

Right. Got it. So -- and my last question, in the EV walk, our economic variance has reduced from the last quarter's numbers. So I presume, obviously, this will be mainly a result of the equity markets coming down. Can you give me a split of the equity and the fixed income breakdown of this?

Yes, for the 9 months ending December, the economic variance is mainly coming from the fall in the interest rate because the equity markets have -- on the 9-month basis, the performance is around 8%, which is in line with the expectation. So there is no positive variance from equities in the 9 months. But yes, in the 6 months, we had a positive equity performance, which was reflected in the higher investment variance that you saw in the EV walk for September.

We'll take the next question from Avinash Singh from Emkay Global.

Just there was a couple of questions. One that, first, I mean, what is driving this New Business Strain for the 9 months? I mean, is it again the change in product mix more towards this year or non-par that's sort of a driving? And the second one that if I look at the GAAP account surplus, there the surplus in individual and group non-par life category for the 9 months is a reasonably big number, negative vis-a-vis last year, [ a regional ] positive. So what is sort of underlying mechanics here?

So if you look at the growth in the New Business Strain, it's only 13% for the 9 months, which is in line with the new business growth. And the EB surplus has grown by 18%, which is in the range that we have always explained. So I don't think the New Business Strain has grown higher than expected. And obviously, it will always be influenced by product mix, but nothing very different in terms of reserving approach or anything that has happened and the product mix being very similar, slightly higher even, but the strain is not anything different from what we have seen in the previous quarters or in the previous financial year. Strain [indiscernible] premium, that's what I'm referring to.

Okay. And that the surplus generation from non-par life that sort of, yes, negative for the 9 months?

On the New Business Strain on the non-par you're referring to?

No, I'm referring to that the surplus that is part of your filing, the segmental surplus that you give in the exchange that your P&L filing. There, your know that -- yes.

The surplus is lower because the non-par segment has grown at a higher percentage compared to total top line growth. So non-par savings, for example, has grown by around 55% compared to the overall top individual APE growth of 24%.

No, no. So I was referring to the same surplus generation in the 9 month in that the segment level, individual and group non-par life. That surplus last year was positive number. If I see for the 9 months, that surplus was somewhere INR 39-odd crores, now it's INR 54 crores kind of a losses. So if at all, I mean, is this referring to non-par savings? So what has changed this year, the surplus generation is negative big time.

Okay. Because the non-par savings has grown higher compared to the surplus generation from the back book than the strain -- overall net strain in the non-par savings book, which is why you see a negative number in the LODR that's what you're referring to.

Yes, yes, yes.

Last year, the growth was lower. The EB surplus was more than sufficient to offset the strain. This year, it is slightly reverse because of the higher growth.

The next question comes from Suresh Ganapathy from Macquarie Capital.

Sorry, again on this bancassurance, just to understand as per the data disclosure, 60% of the overall APE comes from banca, right? You're saying 35% didn't get that.

Yes. So this is EPI. As far as anything that is done with the regulator and any of our regulatory filings, EPI is nowhere in the picture. EPI is a very common industry usage in terms of weightage of single premium and so on. The only version, even in the way Life council's numbers come out and so on, the only thing is received premium, which is a cash received. And hence, these are the numbers if I were to look at on a received premium basis.

Then what we should look at because the like-for-like disclosure for everybody in the system is the APE and all that. On basis of that, you are at 60, somebody else is 50, 55, right? That's the number, but you're saying the regulator will look at EPI basis and not on APE basis. Is that the way you are arguing?

No. So what I'm saying is, first of all, we don't know whether regulator is looking at anything because the only news flow is from a channel. We have not heard anything from the regulator. I'm saying that as a percentage of anything, whether it is expense of management, there's no place in expense of management for an EPI number, right? So I'm saying that if a calculation had to be done, it has to be done based on how we report it in the financials as well as in the public disclosure. Do you want to add anything?

Yes, Suresh, in fact, if you just look at any of the data that comes out of Life Council, first of all, there is overall premium. That includes all businesses, including group. And then you have individual business, and within that, there are segments, but everything is about first year and renewals. There is nothing about anything which is equated or any of that. That's just a conventional use to basically explain some of the businesses that we do. But as such, it's -- the segments that get reported even at a granular level are only about new business and received premium. So that is something that can be used as a fairly straightforward measure to assess any of these things, if at all, it's getting assessed.

Okay. So -- okay, respective of whether that number and regulator is considering or not, how is the Board approaching it? I mean do you think there is a need to diversify the channel and reduce the concentration risk in any way?

I'm not able to hear.

Yes, sorry. Am I audible now, Vibha. Hello?

No, there is some background or there is some echo.

Are you able to hear, Suresh, clearly?

Yes, yes. Is it clear? Hello.

It is audible to me. From the management, is it audible to you?

You are audible, yes.

Yes. Am I audible now?

Yes, you are.

Okay. No. So what I was arguing here is, is there a thinking or thought process of the Board as well as the management say that, look, I think it's always better to reduce the concentration risk of any channel structurally. And within that also, for example, a dependence on HDFC Bank or whatever partner you're talking about. So ideally speaking, you want to distribute and diversify the channel. So longer term, you will be focusing perhaps much more in some of the other channels. Is that the thought process that you guys are considering?

So that has been the case even without this news flow, Suresh, that diversification. And if you look at our investor presentation, one of our core stated strategies has been this, and we've also talked about growing agency channel very specifically. It's more in recent times that the number has gone up to some extent. It's not just that bancassurance has gone up. But for various reasons, including tax changes, that was one of the single biggest reasons for our agency channel over the last couple of years being a tad weaker than normal. So nothing really in terms of that this is causing a change in strategy and so on, nothing. So if you were to look at Slide 10 of our investor presentation, and this is, at least for the last 7, 8 years, to my memory, you will find the same slide, which is when you see point #2, it says diversified distribution mix. So it will just be sharpening that, accelerating that and so on, which we will do in the normal course.

Okay. And just sticking to the distribution, just one last question on the liberalization of the agency model itself, I mean do you think we are a bit too early to talk about that. And the challenge here is we all, of course, follow tied agency model. What happens when you try to free that up? Because that's what perhaps is also mentioned somewhere in the amendments to the Insurance Act, perhaps the news reports are also talking about liberalizing that. What's your view on that?

This is Vineet here. So I think one, it's a little too early, but just from a point of view on how this channel does operate. Clearly, agents today, if they need multiple products, et cetera, do have methods of having themselves their colleagues, et cetera, to take multiple licenses. And they would operate with that. I don't see one agent taking too many companies just because it gets opened up, but they would want to continue to restrict themselves to the few companies that provide product differentiation, service differentiation, et cetera, and would keep themselves there. But as of now, till the time this really gets passed and the entire, let's say, notification happens and proper guidelines are drafted, I think that's going to take some time for this to really hit the ground.

[Operator Instructions] Next question comes from Nischint Chawathe from Kotak Institutional Equities.

This is actually on growth. You mentioned somewhere that your growth during the quarter, you're broadly in line with the market. And what we have seen is that quite a few of the larger peers have slowed down in the last especially 1 or 2 months. So do you see this as an immediate term impact of the change in surrender value guidelines where probably some part of the strain has been kind of picked up by distributors. And in that sense, after fairly strong activity in first half, do you really see next couple of months being softer by the distribution channels?

So I think see the surrender guidelines, et cetera, I think was practically because it was an industry event. The distributors and the companies were able to really have a logical discussion and do equitable participation on the entire impact of it. So I don't really think that, that caused any kind of slowdown. It's largely a base impact at the industry level and our level, which would have led to this. So there is -- across channels also, like I stated earlier, all channels have contributed equally and the growth is also broad-based.

But do you see sort of similar run rate continuing? Or do you expect things to sort of pick up as we go towards the end of the year?

So towards the end of the year, we always see seasonality coming in, and that seasonality does help in picking up the run rate. We do expect that to happen in [ JFM ] also to be able to pick up what we have been guiding as our annual numbers. So I think we do expect that to happen.

Sure. And I think from a slightly more medium-term point of view, do you see the overall ULIP shares coming down, maybe not like in next 1 quarter, but maybe over the next 4 quarters, do you see the ULIP share coming down? And in that sense, getting a little bit of a lift in terms of margins?

See, there is a close correlation between ULIP and the markets. And we've seen -- I've seen over the past 1.5 decades that with maybe a 9- to 12-month lag if markets continue to remain volatile, then ULIPs start -- the [indiscernible] starts coming off ULIP and maybe that's how it will pan out again. And that's why, regardless of what's happening in the market, this is the other stated very core strategy of us that balanced product mix is important for this very reason. So that a line doesn't get used to just selling one kind of product that is relatively easy to sell because of the market, but it has to be balanced. So we are not overthinking as to what -- where ULIP might be or might not be because regardless of it, regardless of, for example, some peers selling over 50% ULIPs, we have remained range bound. And in the past also, when we launched Sanchay Plus, again, we reined it in, and that's what we will do to some extent, regardless of whatever else is happening. So margins, yes, with ULIPs coming down and [indiscernible], then yes, that will aid margins.

The next question comes from Dipanjan Ghosh from Citi.

Two questions from my side. One, if I look at the HDFC Bank channel, while you mentioned that your counter share has kind of stabilized around 65%, just wanted to get some sense of whether you also look at the VNB counter share in that channel? Or in other words, in terms of product mix that you're getting from the channel and whether there is kind of levers available to kind of improve that now that the counter share has kind of stabilized. And if so, what steps are you really taking in that direction? And the second is a data keeping question, for the quarter or maybe the 9 months, if you can just spell out, what would be the growth at HDFC Bank and other banks separately?

On the first question, Dipanjan, yes, we are working to make it a win-win on the right product mix without sharing too much, but I think, at a broad level, looking at product mix, we do put out data in terms of bancassurance and how much of -- what is the mix in bancassurance. There bancassurance is fairly low. This is Slide 16 of our investor presentation, wherein if you look at banca, you will see that term is only 4% of what banca sells while if I were to pick agency, term is close to 10%, so 2.5x where they are. So even baby steps on 50% of our business can make a very material impact. So that is one. Second is in terms of what is the optimum manpower, and we really need more and more people at their branches. I think we have a fair bit of now commonality in our thought process as to what is optimal because the bank is also there for banking business. So just flooding with people probably is not the best approach to take. So that's another lever. And there are a couple of other levers on how are we using more and more of digital. So yes, we are working very closely on many small and big initiatives to get that margin to inch up.

And I think your question around HDFC Bank growth, for the year, we have seen HDFC Bank growing at 20%. And for the quarter, it's around 10%, where we have seen the base impact of last year also coming.

The next question comes from Nidhesh Jain from Investec.

First question is on banca. So what are the next steps that you are expecting from regulator on bancassurance? Do you expect a draft or discussion with the regulator or -- because that is becoming a bit of a overhang for the entire sector. So as you mentioned that there is no communication from the regulators, but what are the expectations that you have now?

So expecting nothing, Nidhesh, because we have our work cut out. We know that as a sector, we are responsible in how we're looking at both derisking, complaints, giving customer a choice and so on. Like I mentioned, if there's anything, it is already there because maybe I just need to remind that we did have a draft paper that was issued by the regulator. There were discussions. We did go back in terms of what the discussion -- some of the tightening of the processes and so on. And I'm sure us and many of our peers have already rolled that out in terms of tightening the sales and servicing process. So that's where it is at this point in time. A couple of points here, which I'm sure everyone knows that bancassurance does play a very important role. And one data point to chew on is that the number of touch points of banks is comfortably 10x of the touch points of life insurance companies, all life insurance companies. So do we want to miss out on those touch points? Second is that if you see insurance penetration, life insurance penetration in the recently issued annual report of our regulator, that also shows a downward trend. So given that, is it a time to really reduce the touch points and what those touch points can do, right? So that's where it is at this point in time. Like we mentioned to the earlier caller, we are focused on more broad-basing distribution. This is not new. We will continue to work on it. And there are many other things also up our sleeve in terms of -- it's not only organic, there could be inorganic solutions to things. So nothing is really -- it's difficult to give an answer because you don't know what the question is. And we will, of course, continue to ensure that what the regulator has in mind in terms of best product, most transparent, best service, ease of onboarding, transparency, all of that, we will continue to provide to our customers.

Sure. Secondly, on the VNB margin, sequential improvement in VNB margin is driven by ULIP VNB margin improving. Is that right understanding?

No, it's not just Unit Linked margin improving. It's inherent margins across the board improving. Unit Linked definitely plays a part there because we're able to attach higher levels of protection. And over the period of time, persistency is improving. So largely that really is contributing to that. And of course, the gap looks larger than what it actually is because of the repricing lag that we had in the previous quarter. Once you normalize for that, then the gap is just about 60, 70 basis points in our view, and that can be explained by some adverse product mix because of Unit Linked being higher and the inherent pricing more than compensating for that, along with the surrender value regulations gap of about 30 basis points for the quarter.

So just to clarify, there's no one-off kind of thing on the margins. Because last quarter, there was a one-off of lag in pricing. This quarter, we have seen interest rates have gone up through the quarter. So because of that, we have not got any benefit in our margins in this quarter.

I'm sorry, can you just clarify. You're talking about the interest rates?

No, he is asking for one-off, Niraj. I can clarify that there are no one-offs in this quarter.

Yes.

Yes. These are inherent margin Improvements, yes.

The next question comes from Supratim Datta from AMBIT.

My first question is on agency. Now you have been making investments in that channel. However, if I look at the growth rates on a quarterly basis, it has been fluctuating. So just wanted to understand when should we start seeing these investments that you're making start delivering fruit? And what have been the challenges? Now you have been making investments in this channel for nearly 2 years. So what have been the challenges that you have faced and how you are trying to address that? If you could give some color on that, that would be helpful. Now moving to credit life. Now credit life contributes around 6%, 7% of your APE. And recent comments from the [ FN ] suggests that there could be -- banks could look at reducing the cost of borrowing, particularly with respect to insurance. So are you hearing from your channel partners any rationalization on the products that they are attaching with loans? Or what could you do to improve the product proposition there better? And then the corollary to that is how would that result in the margins moving in that product, given it's a fairly high-margin product? And lastly, coming to the recent data breach, could you give us an update on what happened and what have you done to address that? You have been investing in technology to improve the processes. So why did it happen? I don't know what has been done to address this gap?

Yes, I'll take the data breach, and then I'll hand it over to Vineet. So nothing further than what we had reported to the exchanges. But in the meantime, we have strengthened obviously closed wherever the leak was from. It was identified very swiftly. We have closed that. Fortunately, no material impact on the company's operations as far as -- from a customer servicing point of view. Since then, a lot of tightening has been done, and we have looked at robust security across our IT environment, and we also have working closely with a couple of external partners who are doing an independent audit and a review of our entire system. We have also got -- we have obtained a court injunction from Mumbai High Court. This is to prevent the circulation of leaked customer data. So this is just a preemptive measure that we again obtained very swiftly, so that was fairly reassuring for us while we put in a lot of controls to stem anything further. So we are in that stage now. And we're ticking off each and every aspect of our IT, networks, cloud, our APIs so that we ourselves and the Board are fairly reassured that it's fairly water tight.

Got it.

Yes. Coming to your question on agency, I think the agency growth this year has been 19%, which is quite in line with what we have grown as an organization. Last year, we had seen a lower growth, and that largely came in from the impact that we had on greater than INR 5 lakh regulation, which changed -- the tax benefit we changed. So that saw some impact. And last channel, it took some time to recalibrate, retrain all the agents, et cetera, to pick up products within -- with the new story and everything else. Within that also, we have now been able to really clearly establish a very strong product mix in the agency channel. Term contribution for agency is one of the highest in the organization. So that kind of brings in a good profitable mix for the agency channel as well. UL is lower than the entire company level at agency channel. And also this entire initiative of attaching more sum assured to UL is also working well on that channel. So I think the investment in agency continues. The growth that we are seeing has come back this year. And we are also confident that this investment will result in good margin as well as higher growth going forward. We also added a lot of agents in this year. We've also expanded by adding nearly 35 branches this year. So -- and that expansion of branches will also continue. Our mix from not just Tier 1, but Tier 2 and Tier 3 is also high, thanks to this channel.

Got it. And of credit life?

Yes. So on the credit life, the entire, let's say, suppression of this is coming from the MFI segment. The MFI segment has been suppressed because of the NPAs and all the action happening around the banking space and the lending space. So every other line of business in credit life has been stable. We have seen MFI getting impacted as much. Now the question about the noise around cost of insurance over loan, the MFIN guidelines also which came out, I think, 2 months back, also very clearly stated that insurance is a critical factor especially in the segment of MFI because it helps cover the loan in eventuality. So RBI also recognizes that and MFIN also very well articulated that in the entire circular. So it's very much part of the proposition, good for banks, good for customers, it's a clear win-win strategy. And these products today also fit in that bracket of the cost that RBI allows NBFCs and the banks to charge the MFI customers. So we don't really see an impact. It's an impact more because the total disbursements have come down. Once that cycle starts to come back, the business should also come back.

The next question comes from Sanketh Godha from Avendus Spark.

Niraj, you said that in the third quarter, the margin impact is 30 basis points. So our previous guidance was if we don't change anything, then it will be 100 basis points. So naturally, that 30 basis point impact is much lower compared to what you told initially when the surrendering rules came at 100 basis. So is it because of clawback in commissions or IRR change or attachment of more riders has played a role for the impact to be lower compared to what initially we anticipated it to be 100 bps? So that's my first question.

Sanketh, if you recollect what we had said at the time when the regulations came out in our exchange notice was that on a gross basis, we expect an impact of 100 basis points if we do not make any changes. And our intent was to try and see what we need to do in terms of sharing whatever pain there is with the distribution and trying and keeping the customer proposition intact. And given that our reliance on the earlier regulation in terms of our profitability was very, very low as we had shown in one of the slides or investor presentation, we did not really need to touch the customer proposition at all. In fact, because of our disciplined pricing approach, whatever pricing was warranted by changes in the interest rate, we were anyway doing. So we did not need to do anything in addition to that after the surrender value regulations. In fact, if you -- I mean, that data is all available in the public domain in terms of how pricing has changed after October 1 for various players, you can look us up on that also. As far as the impact of 30 basis points for the 3 months is concerned, it's more a function of having put some of these new arrangements in place in terms of clawbacks, deferments and reduction in commission to some extent. Those of -- all of that on an annualized basis, we expect the impact to be closer to what we reported for 9 months. It's 10 basis points because it's only been 3 months since the regulation has come in. But our endeavor will be to try and keep it as close to 20, 30 basis points on an annualized basis going forward as well because that's basically more in terms of sharing this burden with our distributors and leaving our customer proposition intact.

So to summarize, it is largely because of the payout structure change to the distributors played a role in containing the impact of the margins, right?

Yes. Yes. So basically, this is -- we're trying to isolate the impact of these regulations, and that's the reason why we've completely just kept it as if nothing has changed and only if the surrender value regulations change, this would be the impact, just to make it easier for everyone to appreciate.

Got it. Got it. Perfect. And just, Niraj, this clawback thing, you implemented for the entire quarter fully or it was partial, and therefore, the benefit might be more in fourth quarter relatively? Just wanted to understand that part whether when we had the second result call, you still mentioned that you were in discussion phase. So I'm assuming it was partial for the current quarter. I mean if it is for the full quarter, the benefit would have been a little higher?

That is correct. So some of the arrangements are in place. Some of the arrangements will take -- come into effect as we go forward in quarter 4 as well.

Yes. So some arrangements would be there, but a lot of our arrangements are under discussion to have an impact from first of October only. So I don't see there would be, let's say, more benefit coming in the next quarter. So this would be the benefit. And whatever is left right now is a very small percentage of our business. I would maybe not have the exact number, but maybe 90%, 95% of business is already discussed and closed.

Got it. Perfect. And the second question was that your unwind rate in the 9 months looks to be lower at 7.3% compared to almost 8 percentage in first half. So anything to read there why unwind rate has come down? And the other question which I had is that your deeper bucket's persistency has improved meaningfully. The 61st month is up 780 basis points better. And if I look at the presentation, it seems to be largely coming from traditional products. So if you can give a bit of color what led to this improvement in the persistency? Is behavior better than expected and that also helped in kicking the margins up. Just wanted to understand that point?

The unwind rate, it has remained same as in H1. It's 8.1%. And as we have explained earlier as well, the unwind rate is based on the economic environment at the start of the year. It's based on the investment return on the debt or the assets that policyholder funds are invested and will settle the funds. And that has been fixed at 8.1%, and that is what has been consistently reported in all the 3 quarters. So I don't see a decline in the unwind rate which you're referring to.

Okay. Maybe I will redo the calculation, sorry on that part. And on persistency, if you can give a bit of more color and if any benefit on that margin?

Yes. The increase in the 61st month persistency, it is relating to the cohort of policies we sold 5 years back. That was a year where the non-par guaranteed IRR products were introduced and these products have had a much better persistency right from the 13th month. And that is now getting reflected in the 61st month. And sometimes the experience may be different from what is assumed, and that will get reflected, but it's not very different because if you see the operating variance in our EV walk, that's always been a small positive. So it's not going to be a big material difference from the assumptions that we have. But whenever we see [indiscernible] keep doing up the assumption.

[Operator Instructions] The next question comes from Shreya Shivani from CLSA.

Yes. All my questions have been answered. And congratulations on a good set of numbers.

Next question comes from Swarnabha Mukherjee from B&K Securities.

Congrats on a good set of numbers. I just wanted to understand...

I can't hear you, there is a disturbance. I'm not sure whether you're wearing headphones or not.

Yes. Is this better? Are you able to hear me better?

Yes.

So I just wanted to understand on the surrender charges impact that you have taken the 10 basis points on the 30 basis points number you alluded to. So I mean what I understood was that this largely factors in the impact of the higher payout. So just wanted to understand that whether you have factored in any kind of change in the lapsation behavior, maybe not immediately, but, say, third or fourth year down the line of the policy, so whether that is there? And also like over the next 2, say, next 3 or 4 quarters, would we expect that this number to broadly be remaining in this range only going forward? So that was what I wanted to understand. And also in terms of the persistency that you are discussing, I think, on a 9-month basis, if the number looks fairly strong. It has inched up even in the longer duration cohorts. But if I look at second quarter versus third quarter, that number has come off across cohorts. So just wanted to understand whether there is anything more to read into this apart from the fact that maybe last year same quarter, the mix have started to go up. So these are the two questions.

Yes. On the surrender values, when the regulations were announced, we had actually added a disclosure in our investor presentation last time, which basically said that all the impact of the surrender value regulation change for us is in the second year and there is no impact thereafter. And the reason for that is basically pretty much the entire book stays on the books either as premium paying or as paid-up policies. So we have not changed any -- we've not made any assumptions on whether more or lesser number of customers will continue with the policy or they'll surrender or they'll lapse or they do any of that. So there's no change in any of our assumptions. This entire change is flowing as a consequence of the enhanced value that needs to be paid to customers if the second premium does not come in. And that is what we had articulated as 100 basis points on a gross basis. And what we just reported now as 30 basis points for the quarter on a net basis after making whatever changes that we had to from a distribution perspective and our own operations without changing anything from a customer perspective. So also what we had mentioned is that given that the surrender value will now build up in a different way compared to what it was building up earlier, whether a customer decides to surrender earlier or stay paid-up does not really affect us economically. We, of course, would want the customer to stay in the policy, continue paying premiums. If not that, then be paid-up and stay in the policy. But if they still choose to surrender, we will not be any worse off economically given the way the benefits are structured from a regulatory perspective.

Understood. And in terms of...

Just to add, we have not assumed any improving persistency in our margin calculation. If there's an improvement in the persistency because of the way that distribution payout has been now structured to align with the persistency, there will be an upside in the margins. But that has not been currently factoring because we have to see the experience how it emerges.

Understood. So -- and it would be safe to assume that before you update any kind of assumptions going forward maybe after a year or so, this is likely going to be the benefit that it is going to like play out over the next 3 quarters also. Would that be a fair resumption?

Yes, that's right. Yes.

Okay. And if you could respond to the persistency question on a quarterly basis, how to look at it?

So at a generic level, I would like to say that the [ 3 months ] ratios are generally influenced by a lot of factors. There will be some collection pattern. Generally, we see that, for some reason, the Q3 is a little low in collection, maybe it was festive or something and that the collection pattern actually picks up in the subsequent quarter, which is the [ JSF ]. This is why looking at the quarterly trends may not give the right picture. And it also depends on other things like product mix, et cetera. And that's why the 25th to 49th months, the drop that you see is mainly because of the difference in the collection pattern that we have. Otherwise, on a 12-month rolling basis, the persistency is improving. On 13th month, typically, the higher UL mix that we had in the last year that is resulting in a slightly lower persistency. But here also, we believe that given the improvement on a 12-month basis in quarter 4, this should pick up.

Understood. Understood. Very helpful. Just a quick one, if I can squeeze in. So I think what has been in vogue is that as a way to also customers surrendering I think this product loan against insurance and you have been doing also a bit of that. So that is, I think, one of the methods that has been kind of discussed that will be used to circumvent challenges of surrender of customers. So just wanted to understand how this segment is playing out for you guys? What are your thoughts on that? And as it picks up, how should we think about how the revenue will get booked and what would be the arrangement, whether you will do it yourself or you [ will tie ] up with a lender? If you can give some color on that.

Did not follow your question.

I'm sorry. What you are asking for is lending for premium payment. Is that what your question is?

No. So in case of like one, there is a surrender requirement, loan against the insurance, whatever is value of the insurance product that is there, surrender value, sometimes loan is given out rather than doing a surrender of the policy. So wanted to understand that part.

Yes. Okay. Okay. So the loan value is obviously linked to surrender value. You're right. And higher is the surrender value, higher is the loan eligibility, definitely. So we definitely believe that a loan against policy is a very efficient way for a customer to utilize their own resources. And for us, it works like a fully secured loan in that sense. So as such, it works for everybody. Whether this will change customer behavior remains to be seen. But everything else remaining the same, our customer will be able to, I guess, avail of a higher loan compared to what they were earlier on their policy because the surrender value will improve.

And is this lending outage...

Mr. Mukherjee, may we request you return to the question queue. The next question comes from Aditi Joshi from JPMorgan.

On the commission structure, is it possible for you to share which all channels have [ responded ] to the changed commission structure, either clawback or reduction in commission across the bank agency and the brokers? That's my question.

So I think like you articulated, we have a combination of these 3 things, which means the clawback, deferment and reduction. And depending on partner and depending on business models, et cetera, various combination of these 3 factors would have been taken in. So there is no one standard approach to say that this channel has been approached with a particular method. All these 3 as a combination or as individual are the methods that have been used to close the negotiations.

Okay. And can I ask that all the negotiations are going on across all the channels no matter in which form it's going on, but is it across the channels or there's 1 or 2 channels where it's almost done and any channels that you would like to highlight are somewhat lagging in terms of [indiscernible]

So like I said, this is more or less a done deal from our side. And maybe business is impacting to about 90%, 95% of our business is already closed. Certain let's say, partners, not specific to any channels, have their internal approval process, et cetera, which might be taking slightly longer, but that should also get closed in the next few weeks or maybe a month.

[Operator Instructions] The next question comes from Neeraj Toshniwal from UBS Securities.

Most of my questions have been answered. Just on the competitive density, how do we see things changing post surrender norms getting implemented? We see IRR getting rationalized and protection going up. But wanted more sense how you are thinking about it?

Yes. So as we mentioned, we've not made any changes to our pricing, whether it's on protection or non-par savings or annuities, but we definitely have seen some downward revision in pricing from some of our peers. And I guess, the only thing that we could correlate it to, apart from changing interest rate environment, which applies equally for everybody, was the differential impact of the surrender value guidelines. I guess that's the only thing which we could impute from some of the reactions that we've seen across the sector. So that's the way we've seen it. We have seen non-par pricing, non-par IRRs come down. We've seen annuity prices being revised downwards. We've also seen term prices increase. So we've seen a combination of all these measures across the sector.

Got it. And does it really help big players like you and others, I mean, the private players to gain market share out of this given the environment has actually kind of improved. Are we able to leverage and gain disproportionately out of this?

It's difficult to say. It's just been 3 months. So we'll have to wait and see how some of these things pan out. But I mean, yes, factually, if you were to look at market share, has it expanded for us in this quarter? It has. Has it expanded in 9 months? It has. This could be one of the reasons, but obviously, a large part of it could be our own operations and expanding distribution as well as all our channels. That's the way we look at it. Over a period of time, we do expect some of these regulations, which will, we believe, be beneficial for companies who are relatively more, let's say, balanced in their approach, whether it's in terms of listing requirement or in terms of implementation of risk-based capital or IFRS. So all of these things would definitely, we believe, help companies who are taking a more balanced view over the business.

The next question comes from Rishi Jhunjhunwala from IIFL Institutional Equities.

Most of the questions have been answered. Just one clarification, right? So in this quarter, the impact of surrender on a net basis has been 30 basis points in the margins and you still have some of the benefit from a full quarter impact of clawback of commissions to play out. So is it fair to say that keeping everything in place, the overall impact of surrender regulations on our business will eventually end up being lower than 30 basis points?

Like we mentioned, as such, there is no further benefit in quarter 4 from implementation of these distribution arrangements. But I mean, if you were to just annualize the numbers, will it land somewhere between 10 and 30 basis points, mathematically, it looks like it will.

The next question comes from Prayesh Jain from Motilal Oswal.

Congrats on great set of numbers. Just one question on the protection business, and that's mainly on retail pure term business. How are you thinking about this business and some granularity if you can share as to how the behavior is in as you enter the lower tier cities more? What is the kind of ticket sizes? And just one more thing on the Tier 2, Tier 3 strategy, Vibha spoke about this a couple of quarters back, and you mentioned that the persistency and all things will evolve and eventually, you will kind of -- you cannot have a differentiated pricing between geographies, but then you will have to figure out in some way the impact that could be there from a lower persistency or a higher mortality and some capital charge or some kind of charge would have to be levied and that could impact margins. Is there anything -- is there any thoughts around it that has been evolved and can come into the picture now? So yes, those would be my two questions.

Yes. So happy to share that our growth in protection has been -- retail protection has been very secular. Just to recap, overall, our growth was 28%. Tier 1 was in the early 20s and Tier 2 and 3 put together were in the early 30s and thereby giving an average of 28%. So happy with that, and that was the intention as well. Now there are different preferences. While products might be the same, but there are different preferences in terms of whether it is return of the premium or regular pay and so on. So that -- those nuances, we will continue to calibrate over there. We will also look at affordability, what kind of alternative underwriting tools that we have, what kind of modes of payment give an indication, what kind of claims experience, persistency and so on. So it's an ongoing learning for us, but we continue to do fairly well in all 3 tiers in our country. Noteworthy is that the ticket sizes don't drop significantly between the peers. So we've also articulated that our focus or baby steps will be on the upper quartile or the top quartile of Tier 2 and top quartile of Tier 3.

The next question comes from Himanshu Taluja from Aditya Birla Sun Life AMC Limited.

Most of the questions have been answered. Just a few ones. Given now the most of the surrender norms impact is largely over and what you have delivered around the VNB margin of 26.1% probably for the quarter. Can we say has the margins broadly bottomed out, assuming not a very significant change in the product mix will do happen over the next 6, 9 months. How do you expect this VNB margin trajectory to behave over the near to medium term? And the second part of the question is, what led to the slowdown in the agency channel? And how do you expect it over the next few months to behave basically? What triggered this slowdown in the agency channel, if you help me to address that part? And lastly, if in the insurance amendment bill, if this open architecture in agency comes and pass-through, how do you expect this to behave for the -- particularly from the industry?

Yes. On the VNB margins, we'll basically just reiterate our outlook that we were gunning for after the first quarter. We basically said that we will try and get to 18%, 20% APE growth and try and deliver a VNB growth of upwards of 15%. We believe that is something that is -- we are on course to deliver that. We've not changed any of our aspirations on that front. And to your question in terms of on a quarterly basis for this year have the margins bottomed out? I mean, we are still in the quarter, so we don't know, but a couple of things we can maybe look at. One is that we definitely expect the scale of business to be a lot higher in quarter 4 compared to any other quarters in the year. We don't expect any significant deterioration in product mix. So with putting those two together, I guess, we can expect margins to be in a similar zone or maybe slightly better. But honestly, that's not something that we are really solving for. What we are solving for is trying to deliver a VNB growth. So we will try and see what growth opportunity is there in front of us, and then we will take a view in terms of what product mix really solves for that and try and just get to the VNB growth answer.

Sure.

And answering your agency question, I think I will repeat my comment there. This year, the growth on agency, we have seen it to be 19%, which is pretty much in line with what we have seen at the organization level, maybe just a tad bit lower. The lower growth from agency we had seen last year, and that was primarily due to the changes which happened on the greater than INR 5 lakh tax changes. And because the distribution was aligned to that particular product category a lot more, it took some time for them to realign themselves.

Sure. Yes. And anything on this, if open architecture in the agency channel also comes, how do you expect to behave for the industry? And given many of the other players because we have a lot of unlisted players as well where the profit pool, they operate in a different profit pool band as well. So overall, how do you expect the benefits to play out if this gets passed through?

So like I said, most of the agents, which are top agents for any company and do a reasonable amount of business, they do have within their friends and families multiple companies, products available for themselves. So I don't think at that segment, it will make much of a difference. For the other agents also, I mean, depending on the size of business that they do, if they need multiple products from different companies, I think that will open an opportunity for them to pick up the best suitable product that they might need for their customers. Will it impact us? I don't, at this point, anticipate much impact because of this. If any, it would have both positives also available to us. So I think once the guideline comes out and the entire operational details also get notified, we might be in a better position to anticipate what's -- or we analyze the impact. But as of now, I don't see any impact from this.

Ladies and gentlemen, we will be taking the last 2 questions of the day. The next question comes from Raghvesh from JM Financial.

Congratulations on a strong set of numbers. So broadly on ULIP, we have been selling high sum assured variants since the last year. So what has changed in this quarter? Are we attaching higher sum assured as compared to [ 48 ] which we were doing earlier? Or has the proportion of people choosing the higher sum assured variant increased? And if that has changed, is it specific to any channel?

So what has happened is that our journey of enhancing the level of protection in all our products, including Unit Linked products started sometime last year at scale. Of course, the efforts werewere being made earlier as well, but we started picking up a lot of scale once the Unit Linked volumes also started increasing. But of course, they've gone to the next level in this period that has resulted in some of the improvements that we spoke about, both in terms of a higher proportion of business being sold at higher levels of sum assured and rider attachment as well. And within riders as well, I think now we are getting to a stage where people are looking at riders differently compared to when it started out with a very low level of coverage that was being sort of sought out earlier. Now things are changing. People are getting more and more nuanced about it. Customers realize that this is a very efficient way of buying more coverage while buying a savings product. So some of these behavioral changes are definitely healthy. And also, of course, persistency is improving. So some of these aspects all add up as far as the behavior is concerned.

Yes. So I'll just add maybe one more point there is that our experience over the last maybe a year plus has also helped us identify those sweet spots where we get good persistency and a good coverage and the focus on those [ cohorts ] has increased, which has helped us increase this number.

Okay. And just one yes, and no question. So in the old policies before the new surrender norms, you are not seeing any -- essentially no people were surrendering after the second year, they were just keeping them paid up. So you werewere not making surrender profits. Now even if they surrender, there will be no loss to you. At the same time, there will be no profit, as you said today, right?

Exactly. That was the whole objective of giving you that data point last time that for us, the impact is largely related to whether people pay the second premium or not, nothing after that.

The next question comes from Prithvish Uppal from Elara Securities.

I just wanted a sort of clarification on the first year commission number that seems to be north of 50% for this particular quarter. So with the implementation on commission deferment and clawback, just wanted to get some sense on where that reconciliation is with this number because it seems higher sequentially?

Actually, if you werewere to look at it, we've had changes in regulations that happened over the last year, which basically -- if you werewere to look at our total expense ratio that has changed from 19.5% to 20.2% in this period. So that basically encompasses all expenses, including what is our cost of acquisition, what is our direct cost and overheads. So as such, that basically gets subsumed in our accounting profit as well as in the value of new business. So as such, the change is not anywhere as dramatic as one of -- some of the line elements might be indicating.

And just to add. So overall, if you were to look at the commission plus expenses, the growth has been about 15% in the quarter.

Which is largely in line with...

It's in line with the overall growth.

Okay. So because even the commission norms would have been placed last quarter also, so just the rise in first year commission or which would -- which is sort of offset by the lower OpEx, so there's nothing much to read into it. That's what you're basically indicating?

Yes, you just have to look at overall cost, new business cost.

Ladies and gentlemen, as there are no further questions, I now hand the conference over to Ms. Vibha Padalkar for closing comments.

Thank you, everyone, for joining today's call. Please feel free to reach out to our IR team in case of any queries. Have a great evening.

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