ICICI Prudential Life Insurance Company Limited (ICICIPRULI) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the ICICI Prudential Life Insurance Company Limited Earnings Conference Call for FY 2020. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. N.S. Kannan, MD and CEO of ICICI Prudential Life Insurance. Thank you, and over to you, sir.

Thank you. Thank you, Rayo. Good afternoon, and welcome to the results call of ICICI Prudential Life Insurance Company for the financial year 2020. Today, I have several of my senior colleagues with me on the call: Puneet Nanda, Deputy Managing Director; Satyan Jambunathan, our Chief Financial Officer; Amit Palta, our Chief Distribution Officer. We are also joined by Judhajit Das, our Chief of HR; Deepak Kinger, our Chief Risk and Compliance Officer; Manish Kumar, our Chief Investments Officer; as well as Asha Murali, our Appointed Actuary. As always, I'm joined by a couple of my colleagues from the Investor Relations department who are Dhiren and [ Mukesh ]. It would probably be an understatement if I begin by saying that the last quarter of the financial year has been an eventful quarter. Just to highlight the key events during the quarter. First, the COVID-19 situation started developing in some parts of the world around early January, and no one quite saw it turning out to be what it has become today. Second, early February saw some Indian unit budget tax proposals, which had an impact on the life insurance industry. Third, there is also a lot of discussion on mortality pricing in the Indian life insurance industry and the fact that reinsurers were increasing their pricing for the industry as a whole. And finally, starting mid-March, we have had a near shutdown in most parts of India to contain the spread of COVID-19 infection. Even as we speak today, the country continues to battle to contain the spread of COVID-19. With the proactive steps taken by the government and with the cooperation of the citizens, we are sure that as a nation we will emerge out of this crisis stronger. In the meantime, our thoughts are with the families who are grappling with health issues, lost lives and livelihood issues. In this context, you would be aware that ICICI Group has committed INR 1 billion to support the nation in its fight against COVID-19 outbreak. Of this, INR 800 million is being contributed to the Pmcaresfund fund and the balance INR 200 million to state governments and local authorities in their efforts to battle the pandemic. As part of our company's CSR commitment, we have decided to contribute a part of this amount. Further, our employees have also voluntarily decided to contribute a part of our salaries to the Pmcaresfund fund and other initiatives for COVID impact mitigation. So before I get into the performance of the company and the results, I would like to spend some time talking through how these events have impacted us and how we are seeking to learn from these experiences to emerge stronger. First, the budget. As a very quick recap, the union budget for Government of India contained 2 elements that had implications for the life insurance industry. The first was the proposal to create an alternative tax regime, which would have almost no exemptions and deductions but would have a lower tax rate. Given that life insurance premiums are one of the many instruments that currently qualify for this deduction from income, there has been a concern in the minds of some if this will structurally impact the demand for life insurance products. We had also articulated at that time that given our relatively more affluent base of customers and our focus on protection as a key business opportunity, we do not expect that our business would be meaningfully impacted. We had also expressed our view that the industry as a whole over the past few years has moved significantly away from a predominantly tax exemption-driven sales approach. The second significant development was the removal of the dividend distribution tax and making dividends taxable in the hands of recipient. We had articulated that this would have an impact on VNB, Value of New Business as well as EV, embedded value, as our effective tax rate would change. We had also said that we would give effect to this in our full year results. And as we explain the results today, we will elaborate on this further. Second development relating to mortality pricing. During the quarter, we saw reinsurers seeking to change the rates. We had articulated that as the target market for the protection business is being expanded, overall, underlying mortality would need to be reflected in the pricing. Such a change in pricing would in fact make the opportunity larger by expanding the target market and hence, be an enabler to the sustained growth of the product category. We wanted to confirm to you that we have already filed our revised product with the regulator. The revised pricing fully absorbed the changes in the reinsurance rates while maintaining our margins at the same level. We continue to believe that this change to pricing is not likely to have a material impact on demand for protection products given the extent of the pricing change. And since the need for protection continues to exist, it's significant under-penetration. Third, coming to COVID-19. Clearly, the most significant event during the quarter was the progression of COVID-19 infection in India. Please refer to Slides #3 to 5 in our presentation. During the past few weeks, we have engaged very closely with the regulators and policymakers to ensure that our response sufficiently addresses the requirement of our customers, employees and the nation at large. While at a systemic level, this has a number of implications, ranging from health and well-being of the citizens to industry-specific impacts and to a larger impact on the economy as a whole, I'll now spend some time on the implications for the life insurance industry and how we are dealing with this situation. For the life insurance industry, the potential impact can be bucketed in 3 broad areas: market related, demographic and policyholder related and business and business conduct related. First, on the market-related aspects, the last few weeks have seen equity prices falling very sharply. We have also seen interest rates fall as policy measures have been triggered to deal with the economic impact of the disruption. What is also emerging is stress in some sectors that could have an impact on credit risk. Insurers have exposure to equity in both unit-linked as well as participating businesses, interest rate movement impacts the liabilities and guarantees embedded in the business and credit risk can impact investments in the corporates. Further, such sharp movement in markets, coupled with any mismatches in ALM that companies may have, could impact the solvency of the businesses. Our approach in this context to market risk has always been one of not taking on a risk that we cannot manage. This is manifested in the composition of our balance sheet. Of our total liabilities, unit-linked business constitutes 68% and participating business constitutes 13%. These product categories largely pass on the market performance to the customers. Non-par guaranteed return products comprise only 0.4% of our total liabilities and these are also invested with minimal ALM mismatches. We have been constantly monitoring our liquidity on ALM positions and we have no issues whatsoever to report. So from a liability perspective, our liability profile has withstood and is capable of withstanding the severe disruption we have seen in markets, liquidity as well as asset prices. Now on credit risk, we have traditionally been cautious in our assessment of investment opportunities. Consequently, 94% of our total fixed income portfolio is invested in either government bonds or AAA-rated bonds. Only 1% of our fixed income portfolio is invested in bonds rated below AA. We have also, at our past results, highlighted that we have no exposure to any of the defaults that have happened over the recent past and that continues into this quarter as well. So from the asset perspective, to summarize, we continue to be very proud of the fact that we have had 0 NPAs in about 20 years of our existence across cycles. This resilience of our balance sheet has meant that even after the recent market shocks of more than 33% drop in BSE 100 over the month of March and 24 basis point drop in 10-year government bond yield over March, our solvency ratio stands at 194.1%, 194.1% as of March 31, well above the regulatory requirement of 150%. In the current situation, as would be expected from any financial services sector players, we have also already carried out further stress testing of our balance sheet over the current year, subjecting the portfolio to further shocks to both equity prices and bond yields. Our conclusion is that even with this combination of further stress system and already stressed environment, our solvency is expected to stay above the minimum level of 150% required by the regulation. In this context, it will be worth highlighting here that we are permitted to raise Tier 2 capital of up to INR 12 billion under the regulation, which is completely unutilized as of now and which could be raised if needed to further improve our solvency position. So from a solvency perspective, to summarize, we continue to remain very strong, which is a great situation to be in, especially in this current environment. So as we move forward, our clear approach continues to be to maintain the resilience of our balance sheet by offering suitable products and deploying appropriate risk management practices. Now on the second aspect, after these market aspects which I have covered, the second aspect, as I mentioned, is demographic and policyholder behavior related. The spread of COVID-19 and the resultant death is still rising. We have been closely watching the developments and their impact on the insured life mortality. Given the low level of insurance penetration, we have observed that from the past natural catastrophes that even in situations of extensive loss of life, claims from our customer base was very negligible. Even in the current situation, out of the 723 reported deaths until yesterday, we had 2 claims from our portfolio. Further, at March 31, 2020, we are holding additional reserve towards potential COVID-19 claims. We also carried out the stress test where we assumed a shock to mortality arising from COVID-19. Even under this scenario, our solvency stayed well above the regulatory minimum of 150%. The other possible impact on policyholder behavior is the drop in persistency, arising from the sharp market discontinuity both in the past few weeks and going into the future as well. We have in the past always articulated that we believe that the core factor that drives persistency is the sales process. Of course, as the time passes, markets and performance, service standards and, more generally, customer experience can impact persistency at the margin. We have seen our persistency being stable even during the last quarter. Over the past few weeks, we have observed surrenders drop very sharply with the fall in market. This is a positive news for our VNB as well as embedded value. We will talk about these elements in greater detail later. Overall, on the second bucket of demographic factors, we do believe that we are well positioned to deal with the outcomes emerging from COVID-19. Now moving on to the third aspect, which is business and business conduct related. Organizations generally plan for business continuity on the assumption that some parts of the country will be inaccessible. With the COVID-19 situation -- or what the COVID-19 situation has tested is our preparedness to deal with the full country outreach. Clearly, this will also bring out the relative technology strength of various organizations within the industry. As a company, in mid-March, we moved to 100% work from home for the entire organization, except where required to provide essential service. This effectively tested our capabilities under 3 dimensions, one on customer surveys, and over the years here, we have built a digital platform that empowers customers to carry out almost any transaction from the convenience of their homes. This has enabled us to move about 87% of customer transactions to self-service over the years. At the commencement of the restrictions, we once again started a series of communication to our customers to reiterate this. We also reiterated that all claims, including due to COVID-19, would be processed while ensuring a round-the-clock access to our call center and faster settlement. During the lockdown situation, we observed a distinct increase in digital transactions with our customers. For example, between the period March 22 and March 31, as compared to the rest of the March month, daily average of interactions with our chat bot has increased by 42%, interaction through WhatsApp has increased by 61% and mobile/lap log-ins have increased by 94%. These lessons will come in handy as we work on enhancing the level of self-service to much higher levels. The work from home also effectively tested our capabilities under the dimension of support functions including financial reporting function. All the support functions moved to 100% work from home. Our technology platforms are fully enabled for secure remote access, which has enabled teams to function uninterrupted. This is best evidenced by the fact that we have finalized our results within the time line that we would normally do during the other years as well. Then this work from home has also tested our capability with regard to sale processes. We believe that we have built a truly world-class technology platform to support our distributors and sales management teams to be able to carry out all functions from prospecting to onboarding to servicing from any device of their choice. This positions us very well to continue sourcing business even as the COVID-19 situation stabilizes. While the technology platform exists, there has been a general comfort for distributors to do the last mile connectivity with the customer as a physical face-to-face. And this sort of a behavior varies from distributor to distributor. Changing this behavior and converting the last mile contact to a virtual face-to-face has been our key focus over the past 4 weeks. We are already seeing more and more distributors embracing this approach. This transition will, however, happen over a period of time. And during that period, if lockdown situation continues, new business could be impacted, but we see this as a tremendous opportunity to redefine how sales process operates and use these learnings to improve our efficiencies. The steps we have taken over the past 2 years to diversify the product mix into both traditional products for appropriate segments and protection business are standing us in good stead especially when it comes to VNB development. We will talk in some detail on how we are approaching this quarter, both from a business opportunity perspective and cost architecture later in the presentation. I'll now move on to other developments during the quarter. On the regulatory side, there are 2 key developments. The first one is on the Sandbox framework. The insurance regulator has approved 7 proposals for life insurance companies under the Sandbox framework. We are happy that 5 of the 7 approved proposals were our proposals. These proposals span across products and service propositions. This reinforces our desire to continue to innovate in providing solutions to our customers without compromising on our balance sheet strength. The second key development is with respect to the KYC process. As per the recent notification from Department of Revenue dated April 23, 2020, we are one of the insurance companies to be allowed by the central government to conduct online authentication of Aadhaar. This will be a powerful enabler in our digital fulfillment process going forward. Now coming to technology initiatives during the quarter. The company believes in leveraging technology to deliver enhanced customer experience, scalability and cost efficiencies. A part of our technology journey is to identify key areas where artificial intelligence can make an impact. During the quarter, we have invested in a speech recognition and conversational humanoid artificial intelligence tool which can not only converse with customers in multiple languages but can also reach out to over 50,000-plus customers in an hour's time. Given the positive feedback we have received from customers on the scalability of the solution, we intend to enable more aspects of our service with humanoid capabilities. Now moving on to ESG initiatives. Over the years, we have been building our organization with a strong focus on governance and ethical behaviors. We have also focused strongly on giving back to society. We've been putting in place various measures to preserve the environment. We have now brought all of this together as a document which captures our initiatives across the environmental, social and governance space. We will also be talking about it later in the presentation. Coming to other developments, I would like to inform you that the Board has amended the dividend distribution policy today, to bring down the maximum limit of dividend ratio, that's the payout ratio, to 30% of profit after tax as compared to 40% of profit after tax, which was there hitherto. This revision is in line with our stated objective of conserving capital primarily to support the strong growth in the protection business. However, given the uncertain environment, IRDA circular advising companies to be prudent to preserve capital and the fact that we had already declared interim dividend, the Board has decided not to recommend any final dividend to the shareholders for this year. I will now move on to our performance for the year and then conclude with our approach for fiscal 2021 before I hand over to Satyan for a more detailed discussion on the results. As I have mentioned in our previous calls, our 4P strategic elements, that is premium growth, protection business growth, persistency improvement and productivity improvement, continue to guide us towards our objective of growing the absolute value of new business, while ensuring that our customer is at the core of everything we do. With our customer-centric approach, we have had a robust performance across service parameters, as presented in Slide 8 of our presentation. Our claim settlement ratio stands at 98%. Very importantly, the average time taken for settlement of claims was just 1.6 days in fiscal 2020, a further improvement from 2.3 days for financial year 2019. The Claim For Sure initiative, which I spoke about in our previous results call, has helped us in reducing the average time taken. Our grievance ratio as well has improved to 48 per 10,000 policies sold during the year. During the fiscal 2019 results call, we had articulated our aspiration to double our fiscal 2019 VNB by fiscal 2023. This implies a minimum compounded growth rate of 19% per annum. In this context, as you can see in Slide 9, our VNB grew by 21% in the year to INR 16.05 billion in fiscal 2020, compared to INR 13.28 billion for fiscal 2019. This growth has been predominantly achieved through the growth in the protection as well as nonlinked savings businesses. Our VNB margin for fiscal 2020 was 21.7% as compared to 17% that we had put out for fiscal 2019. This VNB and VNB margin incorporates the full impact of change in effective tax rate due to recent change in the budget on taxability of dividend income. More importantly, for financial year 2020, 74% of our VNB came from protection and nonlinked savings businesses, which are the 2 fastest-growing business segments for us. We believe that this also strongly reflects the diversification that we have been able to achieve over the year. The reduced reliance on unit-linked business with that business accounting for only 26% of the VNB also reasonably insulates our VNB growth objective from any potential volatility in the new business of unit-linked segment relating to markets or otherwise. Now I'll talk about a little more on the drivers of our VNB growth, namely the 4Ps through Slides 10 to 13 of our presentation. Overall, during the year, new business received premium grew 20.4% over fiscal 2019. On the first 2 Ps of premium growth and protection growth, during the year, we saw the nonlinked savings APE grow by 62% and the protection APE grow by 55%. This has resulted in the share of nonlinked products increasing from 19% in fiscal 2019 to 32% in fiscal 2020, providing us again with further diversification in the product mix as well. Unit-linked business was challenged during the year, with that segment actually declining on an APE basis by 23% year-on-year. As I have described earlier, nonlinked savings and protection segments are the more profitable segments. The strong growth in these segments meant that while the overall APE declined 5.4% over fiscal 2019, the Value of New Business actually grew by 21%. As I had mentioned, our new business received premium grew by 20.4% year-on-year to INR 123.48 billion. Protection and annuity businesses continue to drive this growth. For fiscal 2020, over 1/3 of the new business premiums came from protection and annuity products, reinforcing our credentials as a meaningful protection and annuity provider in the market. On the third P of persistency presented in Slide 12, we have seen our persistency being stable since December 2019. This has indeed been a period of discontinuity in the market and we get confidence from the fact that persistency experience continues to be within the assumptions inherent in the margin and VNB. I would like to mention that our persistency ratios continue to be one of the best in the industry. On the fourth P of productivity improvement presented in Slide 13, we continue to make progress while we continued our investments across technology as well as in building distribution channels, such as agency, direct and partnerships. With close monitoring of our cost elements, we were able to bring down the savings cost ratio further. The cost to total weighted received premium ratio for the savings business has improved to 10.4% as against 11.5% in the previous year. As the cost ratio for protection segment is higher, with a significant growth in this business, overall cost ratio was 15.9% for fiscal 2020, compared to 15% for fiscal 2019. I'd like to mention here also that our cost ratios continue to be one of the best in the industry. Before I conclude, I would like to briefly cover our approach to business during this quarter through Slides 14 and 15. While at this time, lockdown situation still remains, the expectation is that a gradual easing will happen over the quarter. We would, however, expect some time before normalcy returns. So in this context, our approach to distribution, I described earlier the challenges that distributors are facing in terms of their inability to have a face-to-face meeting with customers. We are, therefore, setting our first priority as helping distributors to transition to virtual face-to-face interaction. We are doing this through a combination of training and handholding. Our objective in this regard is to get more out of sales employees digitally active. Given our strong technology platform and capabilities that we have spoken about at various times, including our technology day presentation, we believe that we are well positioned to achieve this. Secondly, during this interim period, we are redefining our channel objectives. For the agency channel, we are defining nonlinked savings products and protection products as a priority as these are also relatively easier to explain and sell. For ICICI Bank, we expect to focus on protection sales through their website and mobile application. Across partnerships, we are giving greater focus to those partners that are more evolved in digital capabilities, while we work with other partners to improve their digital capabilities. The focus of our direct channels will be digital campaigns and direct lead assignments to our field staff. As we talk about our various distribution initiatives for the quarter, I would also like to briefly cover our broader distribution approach for the year as well. Agency is a channel where we will continue to work on our objectives of widening the distribution through growing agent count, deepening the distribution through enhancing our relationships with key agents and also diversifying our product mix. On the partnership business, our focus continues to be on to build new partnerships and deep mine the existing relationships. We also continue to focus on new categories of partnerships, such as e-commerce entities. Our direct business will continue to be focused on growing our online capabilities and use cross-sell as a key lever to deepen the engagement with our customers. ICICI Bank has been a significant distributor for us, contributing about 46% of the total company APE in financial year 2020 and 37% of the total company APE in the fourth quarter of financial year 2020. Over the last few quarters, the bank has reviewed the life insurance distribution and made some changes to the distribution approach to focus on the under-penetrated protection segment and the increased requirement of annuities related to NPS. To facilitate their efforts in this direction, we have enabled various technology and process solutions to enhance buying convenience and distributor productivity. ICICI Bank has also added this protection offering to its ICICIStack, which we have talked about, which is their comprehensive digital customer proposition. The results of this focus can be seen in the strong growth in the APE in these 2 segments. For financial year 2020, protection APE grew by 137%, and annuities grew by 70%. This also serves the company's objective of VNB growth. As we move into financial year 2021, we would expect the above actions to reflect in the premium growth, product mix and VNB for the ICICI Bank channel. We will continue to diversify and invest in further strengthening our non ICICI Bank distribution channels as well. On the customer side, the efforts -- our efforts are to further migrate the customers to self-service mode. That effort will continue. On the expense management, obviously, it's a key imperative for us to manage cost dynamically even as we go through this period. The focus area for us would be to improve the manpower efficiency through a greater digital adoption and work on making our costs more variable. Through the year, we expect to manage this process well. So in summary, on APE for the quarter, even with significant restrictions, we would expect that the protection segments would grow and do well. For the nonlinked savings segment, our aim would be to achieve some growth year-on-year. Unit-linked business, however, will continue to remain challenged, and as a consequence, VNB for the first quarter could be challenged. Even as we had events that have impacted profitability such as tax change and events that could impact the growth such as the lockdown situation, we continue to hold on to our objective of doubling our financial year 2019 VNB over 3 to 4 years. So of course, the path towards doubling -- the slope could vary from here given the lockdown situation and the COVID-related impact. But as I said, we continue to hold on to our objective of doubling our fiscal 2019 VNB over 3 to 4 years kind of a time frame. Before I hand over to Satyan to go through the results in greater detail, I would be failing in my duty if I do not acknowledge the contributions of various stakeholders during this period. Apart from the financial strength I talked about, the key source of our strength is our employees, and I thank my colleagues for rallying together and staying focused on serving our customers in these difficult times. I would also like to acknowledge our shareholders for the patience shown as well as all the other stakeholders for their continued support. Over to you, Satyan. Thank you.

Thank you, Kannan. Good afternoon, everyone. Our primary focus continues to be to grow the absolute value of new business, that is VNB, through the 4P strategy of premium growth, protection business growth, persistency improvement and productivity improvement. On the first element of premium growth. As you would have seen, our new business composition over the years was dominated by unit-linked products. Over the last 2 years, we have been systematically working on diversifying our product mix through a combination of distribution buildup and product propositions. Through this diversification journey, the strength of our product range with propositions to suit different risk characteristics of customers has been a very important enabler. We have a complete range of product offerings, ranging from unit-linked products without any guarantees to fully guaranteed return product on the savings side and a range of retail and group life and critical illness products for meeting protection needs. As you can see on Slide 19, during financial year 2020, the nonlinked savings business has registered a strong growth of 62% year-on-year with the mix improving from 10% in fiscal '19 to 17% in fiscal '20. What is also worth noting is the strong growth seen in this segment across all channels. Protection continues to be a significant need of our society. With our continued focus on this need, our protection business continues to register a strong growth. The protection mix improved from 9.3% in fiscal '19 to more than 15% in fiscal '20. We see this as a significant opportunity going forward as well and are focusing on process simplification as a key enabler of opportunity. We continue to smoothen the process for all our distributors and have particularly focused on this for ICICI Bank's customers. With this, the share of nonlinked products has increased from 19% in fiscal '19 to 32% in fiscal '20. Moving to Slide 21 on distribution. We have continued to broaden our distribution through investments across channels with a strong focus on agency and partnership distribution. For the agency channel, the approach has been to ring-fence the highly productive agents and adding new agents to tap specific customer segments, pursuing a strategy of broadening the customer base. For fiscal 2020, we added over 23,000 agents to the distribution force. More than half our agency business for fiscal '20 was contributed by nonlinked savings and protection products. Within the bancassurance channel, the focus on growing protection and annuities has continued into fiscal 2020. The results of this focus can be seen in the strong growth in these 2 segments within the channel. For fiscal '20, protection APE grew by 137% and annuities grew by 70% for our bancassurance channel. With this, the protection and annuity mix for the bancassurance channel has increased from 4% in fiscal '19 to 10% in fiscal '20. For the direct channel, which comprises sales through our own websites and employees on our payroll, the strategy has been to -- of upsell to the existing customers with the help of analytics. The channel had a diversified product mix with more than 1/3 of the business contributed by protection and nonlinked savings products for fiscal '20. In partnership distribution, the focus on protection and nonlinked savings segments resulted in almost 80% of the business being contributed by nonlinked savings and protection products. We continue to build on our existing partnerships while seeking to add new ones. We have also tied up with various nontraditional distributors such as web aggregators, payment banks, small finance banks and insurance marketing firms. We believe that we have a well-diversified distribution mix with distribution channels other than ICICI Bank contributing more than 54% of our fiscal '20 APE. We have seen strong growth in nonlinked products across all channels, with an overall growth of 60% year-on-year. Retail business continues to anchor our new business, contributing more than 90% of the APE. The second element of protection growth. We continue to have strong growth in the protection business. With an APE of INR 11.16 billion for fiscal '20, the protection business grew about 55% resulting in the mix growing to more than 15% of APE as compared to 9.3% for fiscal '19. Within the protection business, retail products tend to be more profitable on account of their longer tenure and greater granularity. As you can see on Slide 25, within our protection business, the mix of retail has further increased to 70% with an APE of $7.68 billion. With an APE of $2.35 billion, the credit life segment continued to register a strong growth of 50% year-on-year. For the past years -- for the past few years, we have worked on building partnerships in this space. With this, credit life business through third-party segments contributed to 16% of our protection APE in fiscal 2020. While credit life business to third-party has grown significantly in the past years, it does not dominate the protection mix. The third element of persistency. As can be seen from Slide 27, during fiscal 2020, we have seen mixed trends on persistency across product segments. Protection persistency improved and nonlinked savings persistency was flat. There was some decline in the linked persistency during the year. Within that, however, persistency has been resilient during the last quarter with the ratios remaining stable across the cohorts, even as the equity market continued to be volatile with a sharp fall in equity prices. For fiscal 2020, our 13th and 49th month persistency, excluding single premium, was stable at 83.2% and 64.6%, respectively. From a profitability perspective, early period persistency and surrender experience is better than the assumptions factored in the VNB and EV calculation. The fourth element of productivity. We continue to make significant progress on improving cost ratios of the savings business. One of the challenges associated with the decline of the unit-linked business has been on managing costs to be commensurate with the level of business. Over the years, we focused on tighter planning and deployment of manpower to ensure that our savings cost ratios reflected the new business outcomes. The cost-to-total weighted received premium ratio for the savings business has improved to 10.4% as against 11.5% for fiscal '19. Given the robust growth in the protection business, our overall cost-to-total weighted received premium ratio was, however, higher at 15.9% for fiscal '20. Slide 30 gives you some details on how we managed to improve efficiencies on the savings business. Overall, the cost ratio, as I said, improved from 11.5% to 10.4%. We were able to achieve this through keeping the operating expense growth in line with the APE growth. More specifically, we also managed these expenses such that we would continue to invest in areas of competitive advantage, such as IT and digitization. While cost elements like manpower cost declined, it slightly lagged the APE decline. We therefore managed the overall cost by flexing variable sales-related cost so as to keep overall cost growth in line with top line growth. Kannan had earlier mentioned that the key imperative for us will be to manage costs dynamically. As we go forward into the coming years, we are seeking to improve manpower efficiency further by realigning spans, using training and coaching to achieve a greater degree of digital adoption and thus higher productivity. We are also working at making our cost more variable such that we are better able to deal with any uncertainties in the business environment. The outcome of our focus on these 4Ps, as you may see on Slide 21 -- in 31 has resulted in our value of new business of INR 16.05 billion for fiscal '20, a growth of 21% year-on-year. VNB margin improved from 17% in fiscal '19 to 21.7% in fiscal '20. Business mix comprising higher protection and nonlinked savings mix led to an increase in margin by 4.7%. The increase in the effective tax rate, consequent to the recent change in the taxability of dividend income, led to a 1.1% reduction in our VNB margin. We had a 1% increase in VNB margins with higher efficiencies mainly on the maintenance expenses. Excluding the effective tax rate impact -- or the effective tax rate change impact, our VNB would have been 22.8% and the VNB would have grown at 27% over the last year. If you refer to Slide 32, our embedded value increased to INR 230 billion at March 2020. Embedded value operating profit for the year was INR 32.88 billion. VNB continues to be a significant share of EVOP. Operating variances, namely persistency, mortality, morbidity and expense continued to be positive for the year with a total operating variance of INR 1.83 billion. Our return on embedded value was 15.2% for fiscal 2020. VNB contribution to RoEV was higher at 7.4% as compared to 7.1% in fiscal 2019. The operating variance has contributed 0.8% to RoEV in fiscal 2020. The operating assumption change on account of an increase in the effective tax rate had a negative impact of 2.5% on RoEV. Excluding this onetime effective tax rate impact, RoEV for fiscal 2020 would have been 17.7%. On the market side, a sharp fall in equity prices resulted in a negative impact of 6.8% on the opening EV through investment variance and economic assumption change. As markets improve over time, this negative would be expected to be reversed. Slide 33 presents the development of embedded value for the last 5 years. I would like to specifically highlight the positive variances seen across the operating parameters, which gives us the confidence on our assumptions built into VNB and EV computation. Our VNB and EV have been reviewed independently by Milliman Advisors LLP, and their opinion is available in the results fact submitted to the exchanges. On Slide 34, sensitivity of VNB and EV to various factors have been provided. Broadly, the sensitivities are lower than last year, given the diversified new business mix. Within the financial metrics, our profit after tax for fiscal 2020 was INR 10.69 billion, and the solvency ratio continues to be strong at 194.1%. Before I conclude the performance for the year, I would like to highlight our approach and initiatives around sustainability. The past 2 years have been a significant transformation of our business model and, more specifically, on our articulation of strategy as well as our aspiration of value creation for our shareholders. As our business model is intertwined with our sustainability objectives, we have now holistically documented our objectives and approach on ESG, that is environmental, social and governance. Our ESG framework is based on our company's vision to build an enduring institution that serves the protection and long-term savings needs of customers with sensitivity. Our Executive Committee, comprising the senior leaders of the company, oversees the integration of ESG within the organizational framework and undertake initiatives to balance the growth and the profitability objectives, while serving the welfare of society and the preserving of the planet and thereby ensuring sustainability. Our detailed report highlighting the initiatives undertaken on each aspect of the ESG framework is now available on our website. First, on the environmental aspect. Being a financial services company, our focus on the environment is primarily driven by what we consume and how we recycle. We continue to adopt environment-friendly practices around various aspects such as energy consumption, water conservation and waste management through a lens which is to reduce, replace, reuse and recycle. Some of these initiatives shown in the slides are around energy conservation -- consumption, water conservation, e-waste management and reduction of paper consumption through end-to-end digital solutions within each aspect of our business. On the social aspect, we are fortunate that our business is fundamentally of a social nature as our aim is to serve the long-term financial and protection needs of the society. Our success is ascribed to all our stakeholders, which includes our customers, employees, shareholders, business partners, regulators and the company at large. Our vision is supported by our commitment to 5 core values, customer first being primary. Each of our business activities revolves around the primacy of the customers. Our commitment to employees is based on the 3 pillars of our employee value proposition, namely fairness and meritocracy, providing a supportive environment and learning and growth. Our company is a gender-neutral, equal opportunity employer. Women employees comprise about 26% of the total workforce. The company has both leadership depth and breadth with 85% of the senior management team having served the company for more than 10 years and with 94% of the senior management having done at least 3 job rotations during their tenure with us. Our corporate social responsibility, CSR, policy is our commitment to provide resources and support activities focused on enhancing economic and social development. Some of our key focus areas for inclusive growth include skill development and sustainable livelihood and health and education. We also play a key role in channelizing household savings to provide long-term capital needed for infrastructure and housing and also investing significantly in government bonds. As of March 31, 2020, we had invested approximately 51% of our assets under management in industries related to infrastructure, housing sector and government bonds. Through our business, we also offer micro insurance products catering to the rural and social sector and have insured more than 3.9 million lives as at March 2020. On the third aspect of governance. We are building upon our organization foundation over these 19 years by continually enhancing the structures, processes, and controls in place that support and promote accountability, transparency and ethical behavior. We recognize ethics and governance to be of paramount importance. Through the policies, processes and practices, we have built a strong governance framework. We strongly believe that success in sustainable growth of any organization depends on good governance. The company's corporate governance philosophy is based on an effective independent Board and the separation of the Board's supervisory role from the executive management. The Board has 50% independent directors. The Chairman of our Board is an independent director. We have a Board-approved policy on Board diversity and criteria for appointment of directors. The Board committees comprise a majority of independent or nonexecutive directors and are chaired by independent directors. We have a Board-approved policy on compensation and benefits for all employees and nonindependent directors, which also includes an employee stock option scheme. As part of our compliance and risk framework, we have in place a compliance policy, anti-money laundering policy, Board risk management policy, information and cybersecurity policy, amongst others. We also have a business continuity management framework, which, even as we speak today in the lockdown environment, has ensured resilience and continuity of key products and services and the health and safety of our employees. We recognize the responsibility of insurance companies to protect the interest of the policyholders, which demands that we have in place good governance practices for sound long-term investments in addition to the robust risk management framework. We have laid out the operational framework through the investment policy and the stewardship code. I would also like -- I would like to conclude the governance section by mentioning that our company featured for the second consecutive year among the top 3 of 50 companies that listed between 2015 and 2017 based on its core on corporate governance. With this, I conclude our ESG approach and initiatives. As it was our first external disclosure on ESG aspects, we thought it would be appropriate to discuss the same in greater detail with you. To summarize, we monitor ourselves on the 4P framework of premium growth, protection business growth, persistency improvement and productivity improvement to improve expense ratios. Our performance on these dimensions is what we expect to feed into our VNB growth over time. Thank you, and we are now happy to take any questions that you may have.

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

And good to know about and reiterate your philosophy on how you -- handle the defaults in this environment and how we are fulfilling customer needs, great to know. Thanks for that overview. I had 2 or 3 questions. So on the ULIP side, if I look at the premium trends, first year premium seems to be declining for, I think, 3 years in a row. This year also, I would guess. So it will be 4 years in a row. So why is it despite we're trying to move from a premium to a mass market, this is happening? And typically, ULIP is more sentiment-driven. So from earlier cycles, if you could give us some perspective how much time does ULIP take to come back after a rise or after 3, 4 quarters? How does ULIP tend to get to the normal mode?

Puneet, you want to take this question?

Yes. Sure. There are 2 aspects to this. One is what is the impact of market and hence, on customer behavior vis-à-vis ULIP. Second is what is the company's own strategy vis-à-vis this lower category. And hence, it's a combination of these 2, which actually determines what is the outcome in terms of the premium that we collect. Now in terms of the market, yes, there is certainly an impact that is there on ULIP as a category. Even though it is a long-term product and even though the proposition from a sales perspective is that think of it as a long term, at least a 10-year product, but you're absolutely right, the market sentiment does impact this category. And hence, whenever there is serious volatility, especially on the downside, the category does get impacted, as we have seen especially this year. And normally, the improvement from market sentiment perspective happens with a lag. And sometimes it can be a significant lag. That's what we have seen across sectors. The second aspect, of course, is the company strategy itself. As Kannan explained and then Satyan also detailed out, as a company, we have chosen the path, and we have clearly articulated there for us, the main objective is growing VNB in absolute terms. Now clearly, given the scenario where ULIP is, on a relative basis, the lowest margin product, what it does is, from a product mix perspective, there is greater focus on other categories. Not that we have any specific objective in mind on what should be the percentage of any product category, but clearly, if you want to use product mix as a key lever to increase VNB, there will be greater focus on other categories. Within that, of course, protection as a category is our single biggest focus and where we also see significant under-penetration. You have seen the data. Kannan has explained it. Satyan explained it. The results are there on our website. The reality is that for us, during this year and, in fact, that has pretty much been the story over the last year also, as we have focused more and more on VNB, we have seen extraordinary growth on the protection side. Protection, we are the clear market leader in terms of retail protection, including LIC, if I may say so. On the nonlinked savings side, it is more a need of the customer, those who are risk-averse and who are willing to lock in for the longer term are taking it. This is what we are seeing in this environment. So there has been good growth. ULIP has, of course, been impacted both by the market as well, as I have mentioned, the company strategy itself.

And you also mentioned protection growth will continue. And within that, obviously, retail protection has been the driver. So here, I would guess, mortgage would be a big driver to this. So is it just market share gains because these uncertain times, the outlook on mortgages could be muted in the coming few quarters? So what is going to drive the protection and, specifically, the retail kind of growth which we have seen?

This is Kannan here. The largest growth in protection, Prakash, what we have seen is in the absolute retail protection, which is retail term insurance. So as Satyan mentioned during his opening remarks, that actually, the proportion of retail protection in our overall mix has increased quite sharply, and it is a higher-margin product as well. So I think that we'll have to really keep in mind. Because if you look at the credit life, which is the mortgage and other areas of business, that can change from time to time. So if I have to put a number to this, between financial year 2019 and 2020, actually, retail protection, which is the retail term life product APE, has grown by 76.1%, whereas, overall, we have seen the protection growth at 54.6%. Yes, credit life grows depending on the credit outlook for the -- the credit growth outlook across all the players who we have tied up, but with about 69% of our protection being retail protection, I would rather say that our protection growth is largely led by the retail term policies rather than credit life, which could vary from quarter-to-quarter depending on how our partners do their distribution. So I would say that what has led to growth is more on retail protection rather than the credit life or mortgages.

Understood. And last bookkeeping question, what would be the number of employees as on this year-end? I think last year, we were around 14,000.

Judhajit, you want to take that? Head of HR, Judhajit, is there on the call.

It was 14,630 as of 31st March.

That is broadly stable. In certain areas where we felt there is a recruitment required, we have done. Otherwise, broadly, it's a stable employee base we have had over the period.

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

Kannan, I just wanted to check, do you guys still maintain the 19% to 25% VNB growth guidance in the current environment?

Yes. Suresh, we have deliberated it internally. And when we look at the combination of our product mix trajectory as well as the productivity improvement trajectory going forward, we do -- I actually take it in 2, 3 phases. The first phase will obviously be the product mix driven growth in VNB, followed by more cost rationalization, which Satyan talked about and, following that, the top line growth on APE. So that is the way I would like to take this up. So when we stacked up the numbers, we do not, at this stage, see any reason for changing our aspiration of doubling the VNB between 3 to 4 years. So only thing I would say at this point in time is that 3 to 4 years, maybe closer to 4 years rather than closer to 3 years, because we have a lockdown situation and there is an immediate compression of demand. So to that extent, we may just push it towards 4 years rather than changing the aspiration altogether. So to answer your question, yes, it comes well within the 19% to 25% range which we talked about, which we had talked about earlier. Then we also looked at what could be the path. The path could be a little different because of the immediate impact on APE and VNB, I talked about in the opening remarks. So the slope may change a little bit in terms of the -- immediately, there is some pressure and then picking up slowly over a period of time. But the endpoint at this point in time, we are not changing at all. We are quite confident of that and we do have a lot of levers available. For example, sometime back, we have discussed at length what is the impact on the tax issue, the dividend distribution tax. And to put out a number of a 21% growth in VNB with a 21.7% margin after taking into account the tax and other impacts gives us a lot of confidence on various levers we can work on. So that is the confidence it gives us to say that 3 to 4 years is the time period we will double the FY '19 VNB, probably closer to 4 years than 3 years, but that is what we would like to stay with this at this point.

Okay. And just 2 other questions, sorry, I'm just -- the first one be, any initial on-the-ground feedback of -- typically, during SARS 2003, once the crisis happened and there was a massive jump in new business sales in Hong Kong, I mean something like early stages, people are panicking and sad, they're going for more protection cover or increasing their sum assured. Anything that you can share of, that's first question. And the second one is, the investment experience has been pretty sharply down. That's because of the sharp revision in the reference rates on Page 78 of the presentation. Just wanted a clarification on that.

To give a color on what is the customer behavior, it is a fact that we have had lots of queries around the term insurance in the recent past. A lot of inquiries have been happening around, can we look at group insurance for a set of groups? There has been a lot of queries from people regarding various employer, employee groups or nonemployed employee groups to say that, can you guys look at group term cover for this set of people. And also, obviously, the queries to say that is COVID-19 situation covered in your policies, which we have said in the affirmative because our policies do cover death by COVID-13 also -- COVID-19 also. So that kind of anecdotal evidence is happening. The second color on data, if you ask me, the growth in protection clearly has been decent even with the lockdown. April over April, if I look at the protection growth, it has been -- in terms of the log-ins, in terms of inquiries, it has been quite a decent growth, I would say, despite the login (sic) [ lockdown ]. Of course, we'll have to see how much we are able to close from the perspective of having to shift from medical to nonmedical to see how much we can do telemedical, et cetera. So that we'll have to wait for the quarter to emerge because we get the numbers. But preliminary numbers, we do believe very strongly, as we said, that we would -- there would be a decent growth in protection during the first quarter also, notwithstanding the lockdown. The traditional policies, some growth I have told because even now we are seeing that it's a flattish to a little bit of growth compared to last April on traditional. And of course, ULIP is down. I mean ULIP, given the market situation and given all this market volatility we have seen and the index itself is down by 23%, and also ICICI Bank's focus has become more of protection than annuity, as I mentioned in the opening call, several combination of factors leading to a demand compression. But the good news is that ULIP is more like a 7% to 8% kind of VNB margin item as opposed to a much higher margin in the other products. So we will take it as it comes because it can be only margin positive in terms of our approach. On this particular issue of your Slide 78, I think you mentioned, I would request Satyan to clarify that part to see what has been the reason for that. If you are talking about the economic assumption change and investment variance of INR 14.76 billion, it is completely because of the market.

So Suresh, the economic assumption change and investment variance is predominantly led by equity market impact. That's the biggest factor. Even the unit-linked portfolio, that is what drives it. There is also a slide on sensitivity, where we are showing the impact of yield curve. That is Slide #34. Actually, a decrease in the reference rate is a small positive for us. So to that extent, the yield curve has helped us, but the equity market has been the bigger impact on market variances.

Okay. Okay. That's fine. And 0 NPA, when you're talking means, there is no YES Bank AT1 Bonds. No IL&FS, DHFL. No NBFC. None of it has created any kind of problem on your portfolio, right?

Yes. I don't want to go asset by asset. The bank exposure, we've told that, as of 31st of March, we have 0 exposure to the banks. And none of the other -- your statement is correct. None of the exposures -- we either having been -- we don't -- we didn't have the other assets which you mentioned, we never had any exposure.

The next question is from the line of MW Kim from JPMorgan.

Yes. And also thank you for introducing the ESG disclosure. I want to ask about the retail protection strategy, in particular. So what would be the specific benefit or the coverage to drive the new business value margin and then the volume post the COVID-19? There is a lot of the focus on the strategy. So I want to know more detail. And also, how would you design this protection product? Would it be as a additional rider or new term policy with a larger benefit?

Thank you for joining and asking the question. May I request Satyan to talk about both these issues of how to design the product as well as the strategy for retail protection. Satyan?

So if you see our protection business on the retail side, it is predominantly term insurance. These are not specifically COVID-19 products kind of designs. All of our term life products also cover death due to COVID-19. So to that extent, the coverage exists. What we are looking at doing is proceeding on similar lines to what we had before, which is focusing on the retail protection needs of customers across life and critical illness, and that's how we are progressing. In terms of going through this entire journey, one of our practical challenges in a lockdown situation, that Kannan also alluded to earlier, is how do we complete the medical underwriting process. And that's an area where we are taking different routes for different customer profiles. So we are actually segmenting our applications by customer profile and differentiating who we offer nonmedical processes to and, therefore, improve the ease of buying and who we put through a more detailed evaluation. So our entire approach to retail protection from a pricing, it is still long-term pricing. We're not doing short-term products. And from a need and proposition, it is still focused around the core of life and critical illness.

Yes. I just want to clear about this. So moving forward, the strategy would be more focused on the new term policy with a relatively larger benefit or the pushing more the volume on the new policy? It seems that there is more strategy there. So I just want to know a little bit more color on that.

Sure. In the shorter term, like I said, MW, it will be pushing more policies because larger cover will be difficult to underwrite in a restricted environment. As the restrictions lift and we are able to resume normalcy on underwriting, then larger covers will also become a very important part of our approach.

The next question is from the line of Nidhesh from Investec.

I have 2 questions. Firstly, sir, on the protection. If I look at the ticket size, growth is almost 100% Y-o-Y, which means that in policy count, probably there is a flattish or slight negative growth. So any comment on that going into next year? Do you expect policy count to grow at a material rate versus this number? And secondly, what is -- what sort of price hike we have taken on the protection to pass on the reinsurance rates?

So on the first question, Nidhesh, yes, as you would see from our presentation, clearly, on the protection, we have almost doubled the average ticket size. It is largely on introduction of the limited pay product during the period, which started in the second half, I would say, of the last year, because of which we had a little bit of a base effect which is coming through. So that has clearly reflected in the kind of growth we have seen. Going forward, I have a feeling that -- Puneet can supplement this answer, but I have a feeling that there could be a combination of both volume as well as value. That is the way we look at it. The volume will be driven by, as I said earlier, more and more people going for protection. And with this kind of situation, I think people are getting more anxious about having to protect themselves. I think that focus will continue. That will drive the value -- sorry, volume. And on the value side, there will be again 2 drivers. One driver would be clearly based on people realizing that even if a person is insured, he is underinsured. I think that realization is slowly coming along. So we are actually seeing a very high sum assured, which will increase the value. And finally, as you said, the pricing increase is also going to increase the value for the year. So those are the 2 levers, which will be there for the price increase. On the specific question about how much price increase we are doing, we are unable to give you the number to you because -- obviously, because of commercially sensitive reasons. But as I mentioned to you very clearly that we have filed the product. And based on our own assessment, without compromising the margin, we will be able to sell the product without any collapse of the demand. Those are the 2 things based on our analysis we can tell you at this point. So we are not nervous about this price hike. We think that we can pass it on, and we are not in a position to disclose it from a commercially sensitive -- commercial sensitivity perspective. So that would be my answer to the question. And, unless Puneet wants to add anything on your first question, Puneet?

Yes. Nidhesh, I think Kannan covered it. I will just say there are typically 3 reasons. One is that we've always said that all of us, most of us don't have adequate cover. So I think slowly people who understand the need for protection are taking higher cover. So that is leading to more premium and hence higher sum assured. We have also spoken about how our overall sum assured has increased. That is one element. Second element is, as Kannan said, limited pay we introduced and it has become very popular. And we feel it is a very specific customer need. In a society like ours where the vast majority of people are self-employed, whether they are white collar, blue collar, whatever, 75%, 80% people are self-employed, people actually prefer the flexibility of paying over the shorter term, but yet want cover over the longer term, and that is why limited pay became a good success, and we are seeing that will continue to happen. But both these things, higher cover as well as limited pay, are for the, I would say, more affluent or maybe mass affluent segment of the customer. For the next category of customer, which is more the mass, and that is where, I guess, some of penetration levels are very, very poor, that is where it will be driven more by more number of policies. And also, to some extent, it will be driven by group covers. Kannan alluded to that earlier, and groups can be of various kinds. So from our perspective, we will be covering more and more lives. So even in this year, while the number of policies may look less, actually the number of lives we are covering is actually increasing simply because a large number of people in the lower segment have been covered for group products, but which actually shows us only one policy in our results.

Sure. Sure. And then the second on the assumption side, if I look at, persistency is now very close to -- in the unit portfolio, the persistency is very close to our assumptions. And next year, we don't know how the growth scenario will pan out. So I just wanted to understand the rationale of taking this assumption change on the expenses side and your buffers on the persistency assumptions.

Satyan. Hello. Satyan?

Yes. Just to talk through the assumption changes you're referring to the expenses, again, expenses beyond a point are not assumptions for me. I'm only taking what is the actual expense for the year and projecting out to the future with inflation. So to that extent, it's not like I'm making a choice for making an assumption change or not. So this is genuinely reflecting the improving unit cost on my maintenance of the portfolio. So to that extent, it is factored into it. If I were to look at the persistency and headroom, when you see the persistency variance, you're right. It is closer, and therefore, the variance is lesser than last year. So what is quite important for us is to make sure that from here, we at least continue to protect the trajectory of persistency where it is and, if possible, try to improve it. The last quarter, like Kannan also described in his opening comments, while it was a difficult market for the unit-linked segment, we were still able to broadly protect our persistency from 9M through to the end of the year.

And Nidhesh, this kind of environment, actually putting out a higher persistency on protection on a year-on-year basis, that really augurs well for the kind of sale we have done and the kind of need, which is there in the market for protection.

Yes, sir. And sir, this operating assumption changes, if I look at the numbers, I think we have taken some positive operating assumption change. If you can just give some more color on that.

So large part -- so like you see on Slide 32, the total assumption change impact is minus INR 2.25 billion. Of this, the tax rate change was minus INR 5.5 billion. So we got roughly about INR 3 billion of positive, mainly coming from expenses. We haven't made any significant changes to assumptions at all. In certain small pockets, we have made some small adjustments to reflect reality, but there is no significant other change to any of the operating assumptions.

And with this tax rate assumption, we are now...

Mr. Nidhesh, I'm really sorry to interrupt, but may we request you to rejoin the queue.

He can go ahead. Let him finish this because he's asking the question on the tax assumption.

Yes. Yes. Just one question on the tax side. So now with this assumption, we are at complete effective tax rate, we are not taking benefit of DDT or...

No, I have done the dividend -- I have done the effective tax rate assuming a dividend payout of my policy, which is 30% of my PAT.

Okay. Okay. Okay. So there is low likelihood of this going downwards further.

At least at this point of time. But this year, like Kannan described in the opening comments, for the second half, we didn't declare a final dividend given the context. But once the context changes, hopefully, we should be back to our dividend policy.

[Operator Instructions] The next question is from the line of Ajox Frederick from B&K Securities.

Sir, my questions are related to protection again. We have seen a good jump in protection persistency. Have we factored this in when we price the product because did you expect this jump to happen? Was there any gap between the expectation and actual? That's the question. Protection persistency.

We always expect -- any product we decide, any sales process we do, we always hope for very good persistency. We do not, for example, write any policy which will sustain itself because of lapsation. That's not the approach at all. So all our internal performance metrics involve persistency improvement. So to the same extent, it gets included in the assumptions as well. So we are a free level of persistency company. The culture is about persistency, and we want to maintain it that way, and the assumptions also will reflect that.

Okay. So we are not -- I mean, this is not a negative per se with respect to assumption.

It is not. We want it to increase. We'll have to further work to increase it. So that is the way we would work on persistency across all products, not just protection.

Okay. Okay, sir. And in the current environment, how are you planning to weed out fraud? Because now I've observed that we have increased the minimum sum assured without medical from INR 1 crore to INR 2 crores. So how has the experience been earlier in such scenarios? And what is the strategy now to like remove frauds?

Yes. Satyan, go on.

So if you look at the pattern of where we saw challenges on frauds, it was more in the smaller sum assured bucket. Typically, the less than INR 25 lakhs, less than INR 50 lakhs is where we saw more instances of that. Because even offering a sum assured of more than INR 50 lakhs is contingent on a minimum income level of a person, which is evidenced by his own earnings capacity. So the profile for the larger sums assured is a naturally better demographic profile. I wouldn't sell INR 2 crores to someone who should have been buying only INR 50 lakhs. So to the extent that financial underwriting happens at the time of onboarding, we assess the appropriateness of cover. With respect to frauds otherwise, one of the things that we have done as an organization is we use data that is available in a collaborative space. Credit Bureau data is there. Insurance Information Bureau is there. So we have a few of these sources of data which can be pooled together. And on top of that, when we overlay it with our own analytics capabilities of spotting patterns that could be suspicious of fraud, that's how we have gone about our entire fraud management.

Do you want to add anything on the fraud, Deepak?

Apart from what Satyan just mentioned, there are some other key initiatives we've taken where we've used artificial intelligence too internally to really pinpoint on a case-by-case basis what could be more prone to fraud and look at that differently from underwriting processes.

Okay. Okay. And final question on the reinsurance price hikes. Sir, across the system, I've just observed that the, like Satyan mentioned, the lower ticket sizes, there you also get substantial hike compared to higher ticket sizes. So my question is, was there -- was the risk not priced in earlier, which is getting priced in now? Or is there any other reason behind that?

Satyan?

Yes. So we have said this before as well, Ajox, that the fundamental issue has been that we all thought we were selling to urban affluent. But systematically, our target market was expanding to other demographic profiles. So part of this pricing recalibration is to allow for this underlying mix. The idea of differentiating price between, let us say, a smaller sum assured and a larger sum assured is a natural discrimination differentiation between demographic profiles. Therefore, to that extent, we are trying to charge a price which is appropriate for the demographic profile, which is why you see different implications on price for different sum assured.

The next question is from the line of Sumeet Kariwala from Morgan Stanley.

So first question is, with respect to new business sum assured, if I can get that for the individual business and group business? Sum assured for the individual and...

I don't think we have split that out. We can connect separately afterwards and discuss that. I don't think at this point we have split that out.

Overall, we have had an increase in new business sum assured of 29%.

Okay. And there's some moderation in mortality variance. Can you please elaborate on that?

Satyan, mortality.

Sure. So the mortality variance also, again, is reflective of the mortality experience that the reinsurers have been experiencing. So the smaller sums assured, experience was a little worse, which we have made an adjustment for, which is emerging as a lower experience. But otherwise, at an aggregate level, it still continues to be healthy positive.

Got it. And just final question is...

And also, Sumeet, if you look at that chart, which has been put out in terms of analysis of movement of EV on Page 33 of our presentation. So if you look at across all the 5 years for which we have put out, a little bit here and there, but every item being positive that -- we are very proud of that kind of a record. Yes, we are also putting out the results amid a very deeply stressed environment of March and current. And even in that, if we are able to achieve these kind of numbers, we are quite confident and proud of the fact that we have been able to drive it across 5 years with every single item being positive in areas.

The next question is from Sanketh Godha from Spark Capital.

So I just wanted to understand, given the protection business growth was completely driven by higher contribution of LP over RP in individual business, so just wanted to understand how much LP contributes to the total retail protection? And whether -- and you really want to increase it further from the current level given you don't have some bit of lapse related risk not built in LP product over a RP product?

Puneet, do you want to take the question?

Kannan, can I just -- we have not given -- Sanketh, we have not given the split between LP and RP at this point of time. So we're still -- from a disclosure, it is...

But from my perspective, Sanketh, what I would say is that the reason for introduction of LP is primarily the customer demand driven. As Puneet mentioned earlier, there is a significant kind of demand which are coming from the customers who could see probably their income going up in about 7 years. They would rather pay in 7 years of premium rather than waiting for -- waiting to pay for over 30 years, though the premium is higher. So we would completely go by what the demand is and it is for us to manage the profitability internally. So that is the sort of approach we have taken. We will go by the demand, and we do believe -- we did believe at that point in time that there is a huge demand and which turned out to be what it is. And going forward, as I answered, in the future -- one more question, which was there, we have already said that there would be an increase in protection pricing, and there is an increase in volume also because of the heightened need for protection today. I think that should help us in continuing our journey on APE on the protection going forward as well. So we're okay. I mean some years, LP to RP shift may work. In some other years, overall protection premium increase will work. In some other times like this, the overall number of policies also will work. And April over April, for this year over last year, we are already seeing the growth in the number of policies under protection. So I think all the levers are available. Depending on the demand supply situation at that point in time and the customer behavior, we are very happy to sell any of that which goes. And overall, what we should see is that, yes, we are very confident of the demand. We are very confident of the sales growth, and we are very confident of protecting margins. We think that what sells at a particular period of time, whatever market takes, we will be happy to manufacture and sell.

But just wanted to understand that from a risk management point of view, whether you want LP to be certain percentage of your total retail protection business basically, basically beyond a point.

No. No. No, not really. We are not worried about having a particular combination of LP versus RP in terms of our numbers. So whatever gets reflected, we will do. In case price increase is required, as I said, we have already filed the product, we will increase it. So we will tweak it depending on the market demand and supply, but we are not working towards a target percentage ratio of LP, RP.

Okay. And just quick, wanted to ask another question is that with respect to the persistency, we have shown it as on February 2020, but the March number would be probably very different. Or is it we have shown because -- February '20 is because we are rather giving a leeway for guys to revise the policy due to the lockdown. So just wanted to understand what could be the full year persistency if I compare FY '19 versus FY '20 full year.

Sanketh, this is full year. We always measure persistency with a 1 month lag.

Because of the 13th month. Because of the 13th month, always it is February. It has got nothing to do with this year is my understanding. Satyan, you can clarify.

Yes. Yes. Every year -- every quarter, if you see the December, it would have been 8M. When you're seeing March, it is up to February. It is because we always give a 1-month lag before computing persistency.

Okay. Okay. And finally, this is more a theoretical question. So just wanted to understand, due to lockdown, if no business happens or very low volume of business happens...

Business is happening. Business is happening.

Okay. Okay. So sir, just wanted to understand that what is the fixed cost, per month kind of a thing? And minimum APE what we need to underwrite, so that it doesn't lead to significant cost overruns or a theoretical scenario of margins becoming negative or significantly lower?

Sanketh, my simple point on this one is that in -- I don't think you can take decisions on fixed cost of, let's say, people or infrastructure of saying that I shut an office today, open an office tomorrow or I hire someone today, fire them tomorrow. I don't think that is practical. So whenever we look at cost management, and I showed this on Slide 30 as well, what we have moved to doing is to evaluate our hiring strategy on manpower every month. So effectively, whatever is the pattern of business growth, we're trying to reflect it as closely as is practically possible in the fixed cost element, and that's how we expect to manage it going forward. So I mean is there a theoretical number of how much business I need? At least -- in the same way, I could also say that if there is no business, I may not need to have so much cost as well. But realistically, it doesn't scale that directly. And therefore, our approach will be that as we go through the year, we will balance it out. In the first quarter, can it hurt more? Yes, it can hurt more.

It -- and just to supplement that point, Sanketh, the way I would like to look at it is that there are certain items of the expenditure we'll -- we have listed down. For example, any of the capital expenditure which we were planning to do, we have already cut it out. Any of the other discretionary expenses like, we'll have some sales, rewards and recognition programs, et cetera, we have already cut it out. In terms of new people to be recruited, Jit is there on the call, my colleague. Very clearly, he has gone almost on not recruiting anybody till such time clarity emerges in terms of what is the likely demand in the medium term. And in terms of our increments, et cetera, we've been either 0 or very moderate. So those are the things, sitting here, we can take. But ultimately, the situation will pass, and we will get back to the growth not just in terms of protection, but across all the products. I think it is very important to use this period, on one side not to splurge, but on the other side, protect the franchise. I think we will have to calibrate it very carefully because suddenly, before we may realize, we come back to the normal demand. So beyond this, I would also request Puneet to supplement, if he has anything to add on this issue from a business perspective.

No, you have to consider that in some ways, life insurance industry is probably best equipped to manage this. The reason is, we are used to very extreme seasonality. Even in a normal year, Q1 is normally only about 10% of the full year. So we still carry, whatever cost we are talking about, we still carry. So yes, maybe instead of 10%, maybe 5% this year. But I think life insurance as an industry is used to the seasonality and is used to modeling this kind of thing. And hence, for us, the most important thing is to ensure that fixed cost stays low and we keep variablizing cost as much as possible. All the other things that Kannan and Satyan spoke about are obviously there. I just wanted to bring this angle that we are used to managing these kind of extreme change in business. It may be a little more than normal. But I think from our perspective, it's manageable.

Okay. Perfect. Finally, just a small clarification, Satyan. That VNB margin what you have said after the reinsurance rate hike, you are keeping VNB in rupees term constant or you are maintaining VNB margin as a percentage constant? So it means that if you're maintaining VNB margin as a constant, VNB itself will grow up by, say, 19%, 20%, suppose that is the price hike you have taken in the protection business.

We have said we will maintain the VNB margin.

The next question is from the line of Ansuman Deb from ICICI Securities.

Continuing on the previous question. When we look at our outlook, the outlook is not good for linked segment, while the company is targeting a small growth in linked savings. So protection becomes a very strong but a singular kind of a spot in our growth. In such a situation when you have taken a price hike, you've aimed at improving margins or guarding the risk? And if we have done to improve margins, is it driven by our analytics, which is that we will not lose volumes and the customers have the ability to pay? This will be my first question.

Satyan and Puneet can take this.

Do you want to take it?

No, Ansuman, I think we articulated and Kannan very clearly spoke about it, that the starting point for increasing the price was the reinsurer asking all insurance companies to increase the price given the experience that they were seeing, and we also discussed it a little later that the experience that they were seeing, which was a little adverse, was more in the lower end segment. So the starting point was that. Once it was clear that the reinsurance price will increase, then, of course, we had to then figure out how much, et cetera, et cetera. We have very clearly articulated that the entire reinsurance price will be passed on to the customer. That's the way we filed the product with no compromise on margin. So it's not as if we are using this price hike to either increase margin or to do anything else. It's simply coming from there. The larger point, though, of course, is that if the price increase, what can happen to demand. I think I will keep pointing back to what we have been saying consistently. I think this is a category where it is so underpenetrated. Demand is sometimes latent. We can -- we have to -- it's our job to go and create awareness. But the underpenetration levels are so low that we are fairly confident. And obviously, we have done our scenario analysis of all kinds of scenarios. We are fairly confident that this is not going to materially impact demand. In fact, I think the current crisis of COVID and one of the questions earlier was what it does given the experience that Hong Kong and China have seen because of SARS. If anything, it may actually increase demand. It's early to estimate, but it may increase demand. Already, as of now, in April, we are seeing increase in inquiry, though, of course, how much of that finally translates into the APE or WRP does depend on a lot of other processes. But on an overall basis, without any compromise on margins, we do expect no impact on the demand as such.

Ansuman, I want to add here, Kannan here, that even in the past, we have been used to operating at a premium pricing. We are not undercutting type of a player when it comes to protection because we firmly believe that a lot of things have to come into place for success in the protection business. Obviously, apart from pricing, we do believe that things which are more important are the brand because we are promising somebody that I will pay that person's family even in the absence of that person after 40 years. So they better be clear that the company will exist, the brand will exist, the financial strength of the company will exist. So I think brand is a primary consideration followed by the process. The ease of buying is -- that is where we believe that we have really cracked in terms of how easy and the fact that today we are able to -- under the lockdown scenario, we are able to do some sales in protection is a real testimony to that process we have. Then technology is something which is extremely clear and the partner integration. Whenever we do a protection with a partner, the kind of broad partner integration has been a real success for us in terms of being able to push it. So despite our pricing being premium, we have been able to push this protection. So all that gives us the confidence. And coming back to your question on whether we want to desperately decline ULIP, that's not so. I think when the market sort of recovers, when there is not a 33% of the market decline, I'm sure that the distributors will come and ask us for the ULIP products. And given the kind of cost income ratios we have, if not the best, we will be one of the best in terms of ability to manufacture ULIP in a most cost-efficient manner. I don't think anybody -- not many players can challenge us on ULIP pricing. So I have a feeling that yes, ULIP in the current immediate, medium situation, there could be a drop, continued drop, especially given the market situation. But it is the most transparent product, can be manufactured only by people with a lot of efficiency. That would be there. So let's see how this will -- we are not working towards a particular mix of ULIP or a partial mix of protection. What we are seeing in the immediate term is that protection growth is likely to be far higher. That is the only point we can say at this point in time. But we are very, very happy to grow all this, in all our VNB positive segments, different margins, but then ticket sizes are also different. So dollar value of VNB may be actually comparable. So we are very happy to do that.

Right, sir. So that's very clear, sir. One -- second question was that, in our -- and you kind of touched that point in some question earlier also. One was, in our claims -- in our disclosures with the Milliman, they have said that the results reflect only the conditions till 31st of March. So the experience that we had from 31st March, what -- if you can give any color on that, and kind of any assumption, any changes or surprises which can come?

We have already talked about what has been happening in April. Now I would like to say that April over last April, things are getting better when it comes to our protection business. More volumes -- we have more inquiries. More volumes are getting in protection. On the other areas of our business like ULIP, there is negative business year-on-year. And then if you think about the traditional products, it is broadly stable and growing compared to the last April. So I do not see any -- apart from the overall business being less than what it was in the last April because of the ULIP decline, which was also there in the last couple of weeks of March, so I don't see any material difference in the situation in April compared to March to really challenge the Milliman report, but I can ask Satyan to supplement that in case there is any -- in the context of the statement Milliman has made that these are all as of March and April situation, they're not really signing off. Satyan?

Sorry, Kannan, I got dropped off the line. So I'm...

Yes, the question he was asking is that in the Milliman report, specifically, there is a mention to say that all this is based on the situation prevailing as of 31st of March. And the question was -- Ansuman's question was that, is there any material deterioration or anything else we are foreseeing in April, which will challenge those assumptions or the Milliman's view on that?

No. This is general reviewer representation that what is in the future that is not related to what they have already seen, they are not commenting upon.

The next question is from the line of Vinod Rajamani from HSBC.

Just in terms of the lockdown, would you say that all the sales which are happening in terms of term insurance, all these are happening via telemedicine? And just are you restricted in terms of what the sum assured you can sell because it's not a proper medical -- you're not doing a proper medical checkup before actually taking the customer onboard. So what kind of restrictions do you have on sum assured when you're trying to offer this product via telemedicine? And in normal circumstances, what kind of proportion of sales do you do via telemedicine, say, irrespective of the lockdown, in normal conditions. That is the first question.

Vinod, this is Puneet. There are 3 kinds of way the underwriting is done. And it depends. This is a lot of analytics on the customer, on the distributor, on the segmentation, on the location, geography, a lot of input factors are used. But basically, the outcome is there are 3 categories. One will be what we call straight-through processing, where even telemedicals are not required. It is based on some questions that the customer answers and that's pretty much it because we have done a lot of analytics on the background of the customer, and we feel comfortable. And depending on the customer, but -- that level may be different, combination of customer, distributor, geography, for some it may be INR 50 lakhs, for some it may be INR 1 crore or whatever. Then there's a second category where over and above this, for whom higher cover can be done through what we call telemedical, where a doctor speaks to the customer. So these are going to be higher limits compared to that.

And what kind of limits, what kind of limits?

I cannot give an absolute figure, Vinod, because it will depend on the customer. For certain customers, maybe even at INR 70 lakhs will be telemedical. For somebody else, it will be telemedical at INR 2 crores. So it depends on that. Conceptually, I'm just telling you. And then only a third category, which do not seem to fit into any of these, which will typically be very, very high cover. Typically, it will be beyond INR 2 core kind of thing for the more affluent customer, is where the actual medical is required. So you are right. For the absolutely high category, medical is a constraint. But for all other categories, I think it is going through. Even within that, I can tell you that what has happened during this lockdown period is that, ultimately, a lot of these things get reinsured. A lot of discussions have happened with reinsurers. We have shared our analysis with them. They have a lot of global experience. Through a combination of all of these things, for certain category of customers versus the pre-lockdown era, telemedical limits have indeed been increased. So we are able to use that as well. And then finally after that, even if some category remains where medicals are still required, the way we try to convince the customer is, just as an example, suppose somebody wants to go for INR 5 crores cover, but only up to, say, INR 2 crore is allowed through telemedical, the way we try to convince the person is saying that, sir, please take INR 2 crore through telemedical. We keep the remaining pending. As soon as medical is possible, we will then issue the remaining part. So this is the way it is normally done. In general, for us, the process in the lockdown has been reasonably smooth, more because we have already been using a lot of analytics in the past. Yes, of course, the higher category is suffering. Satyan, do you want to add anything?

No. That's fine. See, again, at this point of time, the fundamental question that one has to answer as a customer is, do I want some cover quickly? Or am I willing to wait for an uncertain period to buy a very large cover? And therefore, a simpler way of actually dealing with that situation is to say that at least start off with taking a cover that you are eligible for with the telemedical process. If you want to subsequently take more cover, of course, when the environment improves, you can do more.

Understood. Understood. Just on this dividend policy for FY '21, so this will revert back to that 30% now, the new change, 30% of PAT, I mean, from FY '21?

So the policy has been changed. From up to 40%, we have changed it to up to 30%. That is the policy even for this year, next year, every time. Within that, the Board still has -- within that ceiling, Board has an ability to decide and recommend to the shareholders what kind of dividend to be paid. So there was a specific IRDA circular. You can see -- 2 circulars, in fact. You can see it on their website, that allows the Boards to look at the payout of dividend in the context of the environment and having to protect the capital. Considering that circular, for this year, no final dividend has been declared. Otherwise, the policy is applicable across years. As of now, it is up to 30%. And within 30%, they could, of course, decide whatever they want to pay, looking at the capital, looking at the industry expectations, et cetera.

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

So one of the bookkeeping questions that I wanted to ask was if you can give us the breakup of the nonlinked savings products into Par and non-Par savings. And second question, which I wanted to ask was, again, on the dividend policy. So the circular which you mentioned, which came out yesterday on IRDA also says that till 30th of September, insurers are requested not to pay out any dividend. Now given that assumption changes have been made to up to 30%, but with like no dividend payout and you're still earning a dividend income, can you explain how the effective tax rate might still get impacted in FY '21 keeping in mind that half of the year we will not be allowed to give out any more dividends?

You're right. First one, for FY '21, the effective tax rate can end up being higher because of the dividend payout being lower. But eventually, what I'm taking in my VNB is what is the average expected over the life of the policy. And therefore, to that extent, it should reflect the policy of 30% dividend and not what is 1 year's implication. So to that extent, yes, next year, dividend payout less could mean a higher effective tax rate for next year, but overall, over the term, it should level out.

The next question is from Madhukar Ladha from HDFC Securities.

Sir, we have a very big negative economic variance despite interest rates actually going down, so obviously, most of it is because of mark-to-market on equity. But my question is more -- that most of the equity exposure is in the ULIPs. So how does it impact our EV then?

Satyan?

Yes. The way it impacts EV is that my future profits are based on fees from the AUM. Therefore, to the extent that the market value has dropped, my future fee stream will drop, and that is what shows up. So tomorrow, if the markets recover back up again, then you immediately see the capitalized value of that come back when the market moves up.

Understood. Understood. Sir, the other question is, can you give the split between individual and group protection? And also in the group business, the split between GTI, funds and sort of protection automatically?

It's all there in the pack. On Slide #25, 69% of my protection APE is retail. The balance is group. Within that 31%, I have a mix of 3 segments. One is ICICI Bank credit life, one is third-party credit life and one is group term. So Slide 25 will give you the full split.

Okay. So I missed this. All right. Yes, so this is helpful. Yes, that's it from my side.

The next question is from the line -- [Operator Instructions] We take the next question from the line of [indiscernible] from VT Capital.

I just have a couple of quick questions. My first question is, sir, do you expect that in the coming scenario, the lapsation rate might go up because as people -- the people that have taken the insurance, they might be in need of money. So your surrender and lapsation rate might go up in the coming scenario. Is there any expectation on that?

Our experience so far has been that the surrenders have drastically reduced because surrender, it is also a function of what is the size of amount one can get from the policy. And if it is linked to the market, the current market, the prices are so low, equity markets, that nobody wants to surrender. So I think there are naturally mitigating factors in terms of one discourse taking away and then towards large surrenders. So that's why in our own sales processes, we focus on this, nature of this instrument being a long-term instrument, the need for taking into such an instrument being the long-term financial need of the customer. So whatever outcome comes out of persistency lapsation, et cetera, we'll take it as it comes. But if I look at the color of persistency, even in this environment, nonmarket-linked products, such as the traditional products, the drop in persistency has been very minimal. And something like a protection, actually, the persistency has increased. So I think there are multiple factors playing here. And in a stress situation in the financial markets like it is today, normally, nobody wants to surrender because they stand to lose [indiscernible]. And this is what we keep telling the customer through communication from my desk, from everywhere, to say that this is a time where people should stay invested and focus on long-term financial goals rather than getting swayed by either immediate needs. Of course, there are other instruments for them to meet with their immediate needs such as mutual funds or some liquid instruments like bank deposits. But before lock-in period, doing it or doing it at a much shorter than the original tenure, it ends up making a loss to the customer. So that is what we keep emphasizing to the customers.

That was helpful. Just one follow-up question. Sir, you mentioned about some kind of sensitivity analysis that you've done to ensure that you are well within your portfolio limits. So I just wanted to get an idea as to -- you might have certain expectations of when the lockdown or the business might resume. So can you give us one particular date or one particular tenure after which you might have to revisit that sensitivity, like some near-term scenarios, which you can share, which you expect to play out?

You mean the stress scenario on the solvency side?

Yes. As to what extent do you expect like this scenario -- you might need to revisit your scenario?

But -- I wish I knew the answer, but it is a very dynamic situation. I guess the policymakers are extremely focused on when to -- how to -- how and when to relax. But the way we are looking it is that, assuming that this will be the new normal, at least for the time being, conduct the business in a way it is to be conducted, which is digital, limiting face-to-face and making virtual face-to-face, et cetera, which I described. And then our balance sheet is so robust in terms of both assets and liability side that we don't have to really be bothered about any of the bad assets we talked about or any high guaranteed products. Nothing of that we have sold. So we are actually in a very fortunate and very good position to be in, in terms of not requiring capital, not having any asset quality issues on the asset side, not having written very high guaranteed products on the liability side. It's a very pristine situation to be in. The only equation is that when is the top line is going to come back, and like the previous question was there on how to balance the costs vis-à-vis the top line. That is actually a great place to be in as a company in this kind of environment. So for us, we don't know exactly when to trigger, to answer your question. But we are very happy to operate and then be in this situation and then not make mistakes like we have not made any mistakes in the past and then take the demand as it comes and cut out all the discretionary expenditure, any capital expenditure we have committed, we will cut out. That is the only -- about the action we'll have to take. I don't think in the near foreseeable environment we need to compare with the capital need at all. We have done various scenarios. And as Satyan mentioned, already stress scenarios, we've done further stress. We have also put extra reserve for COVID requirements. We have done that already. For COVID claims, if it includes the -- not got claims at all, there are only 2 claims. But still, we thought that we should put some additional reserve just to be on the safer side. We have done all that, mortality, market and everywhere, we have done all these steps. And with all that, we find that we don't require capital. And as I said, INR 12 billion of Tier 2 bond we can always raise whenever we want. Even that, we don't see us raising now. So we will see when the situation happens, but I'm very happy that we are in a situation where the fundamental business model, protection proposition or the balance sheet, none of that is really challenge for us.

The next question is from the line of Prateek from Nippon India Asset Management.

Yes. Sir, just a clarification. In one of the earlier responses, you talked about that you would maintain the margins in protection after the reinsurance cost increase. Does that mean -- that means that the absolute VNB which you are earning pre-COVID and -- sorry, pre this rate hike and post rate hike will increase. That's a fair understanding?

That is the expectation as of now. That is why I reemphasized to a supplemental question to say that, yes, we said that the margin is going to be maintained.

Sure. Sure. And sir, the second question. How do you think about growth when there is concentration risk to the business model? What I mean by that is if I look at MH [indiscernible] that's 33% of your APE, if I'm not wrong. And there are hotspots and these 2 are hotspots. So could you just talk a bit about how do you think about growth? And also in your PPT, there are 2 slides where you say way forward. Is it for only quarter 1 FY '21? Or it is for entire of FY '21? And lastly, when it comes to annuity, given that the interest rates are on a way down and we have done beautifully well in FY '20, will there be a customer response? Or will there be a customer pushback for annuity given the rates of interest which you will offer them?

Yes. I'll ask Satyan to take a couple of these questions. But our approach in this kind of environment, saying that we don't know exactly how and when the lockdown will be lifted, we only know one thing that the immediate short term and medium term, we have to digitally enable customers and employees on distribution. That, we are very clear. So to that extent, the 2 slides we have put in there is really for the quarter. So I believe that the top management, all of us believe that this is a dynamic environment. One has to take it quarter-by-quarter. And suddenly, demand may come back, and there could be heightened need for protection type of products. We should be absolutely prepared to be able to take advantage of that. So to that extent, as of now, what we are saying is only for the quarter. And whenever we need to revisit, we will revisit this strategy. And I said, on the long-term strategy, overall basis, the VNB doubling what I have mentioned, that will continue to guide us. On your question of the product mix, my own feeling is that if I look at our journey over 2 years, we have been a little bit ahead of curve in terms of [ breaking ] our product mix. Look at protection, we saw it as a great opportunity. From about 5% about 2 years back, we have come all the way to 15% now. Yes, you could argue that there was a bit of a drop in the top line. But nevertheless, even if you look at the growth, there has been a huge growth in protection line of business. Then similarly, if I look at nonlinked, we had deemphasized it in ICICI Bank about a year back because of their decision. And from there, we saw the opportunity earlier to say that there is a set of customers who would require a smooth rate of return and who don't want to lose the principal. So we said, we'll let those customers go ahead and use non-ICICI Bank channels to sell. From less than 10%, it has come down to 17%. So my belief, contrary to what you are saying is that we are much more diversified today compared to 2 years back. So even if there is a bit of a challenge in one of the product segments, we do believe that we have a great opportunity to be more resilient in terms of our growth is what I would believe. Satyan?

To quickly take on the other 2 questions of geography, diversification and annuity demand. Geography diversification, you'll find a very similar pattern across almost every private sector life insurance company. So to that extent, even if the challenge of a hotspot that you're talking about in the current context exists, we are actually trying to work around, as Kannan and Puneet have said over the conversation, of how do we live a new life even in the absence of a physical contact, and that's the focus area. So it's not so much about whether we're operating in hotspots or not. But like you said, our concentration of the geographies is not going to be very different from what it could be for others. With respect to the demand for annuity, annuity demand can come from 2 quarters. One is suddenly a person decides that I'm retiring tomorrow, so I need to put a corpus to buy an annuity. The other is that a person has been saving towards retirement for a while and that corpus is getting converted, let's say, for example, a deferred pension which matures or it could be a superannuation which matures when a person reaches superannuation age, or it could be an NPS accumulation, which is due to be annuitized. Now these parts, which are the retirement savings which have to be annuitized mandatorily at a point of time, will have to happen irrespective of what the yield levels are and therefore what the annuity rates are. So at least that part I don't think it's going to be so sensitive to the level of rate. It will be more sensitive to relative rates across companies.

[Operator Instructions] The next question is from the line of Hitesh Arora from Unifi Capital.

Yes. Sir, we've been sort of maintaining that given these all sort of strong technological backbone that we have, we could see -- and for example the lockdown that we see sort of [ flexed into ] that, we should see strong growth in -- reasonably strong growth in April vis à vis last year. But our experience has been that the APE in March for 15 days of lockdown sort of fell very sharply, units fell by around -- kind of that's the message. So what gives us the confidence that April should be a reasonably strong month in comparison?

So let me just repeat what I said. I never said that April is a reasonably stronger month. We -- I never said that. What I said was that on protection, we are seeing a very reasonable decent growth despite lockdown in April compared to last April. In traditional products, I mentioned that we expect to finish the quarter in the positive territory in terms of growth. Those 2 I had mentioned here. But ULIP, I said that it will continue to be challenged and continues to be declining, given the market situation and what is it happening here. So -- and you should remember that ULIP is also 65% of our product mix, even as you speak. So I think we should keep that in mind in terms of assessing the situation in April as well as for the first quarter. And we are hoping that, as I said, in Q1, ULIP will continue to be a decline. I don't think we are projecting ULIP to grow. We also said that on the protection side, we said we want to grow and we will grow, and we have some confidence that we would have grown in the first quarter. And on the traditional, we would have put up a small growth. So those are the kind of sense we can give depending on how we are seeing the demand. If you look at the March, we've started off extremely well in terms of the first 10 days. Across the board, we started off very well. So we were very extremely confident about March. But then the next 10 days, if you look at it, it started muting. And the last 10 days, it came down to a trickle because of the lockdown. So that is how March sort of panned out. So if it is hypothetical to just guess what would have happened if the situation has been normal, I would have thought that we would have lost about INR 4 billion to INR 5 billion. It's quite hypothetical, as I said, INR 4 billion to INR 5 billion APE would have been lost. So -- and consequently about INR 1 billion of VNB could have been lost in March. And we would have lost another INR 800 million because of the tax change on VNB. Despite that we have been able to put out INR 16 billion of VNB. That we look back with a lot of satisfaction. And to answer your question of ULIP, in March, yes, we have talked about ICICI Bank strategy. We have articulated a paragraph there. It said that they also sort of shifting focus more on protection and annuity as against ULIP and also not doing traditional. So those kind of impacts do get sort of mixed up in the month of March. So I would say that whatever can we book it and despite all these, we could manage the VNB quite nicely, which is, I think, the credit to the team, they have delivered it. But going forward, April, we'll have to -- traditional and protection, we are quite clear on the path. ULIP will be completely dependent on the partner preference -- customer preference and the market condition.

The next question is from the line of Prayesh Jain from Yes Securities.

Yes. Question was on the protection VNB margins. So if I just rough calculate the VNB margins for the protection business, it seems to have fallen from 109% in FY '19 to 86%. So what was the reason for the same? And could you throw some light as to what could be the future trend?

Okay. 2 reasons. One, the share of limited pay increased. The way we designed the limited pay product is that for the same sum assured, both limited pay and regular pay would give the same absolute VNB, which means that margin as a percentage of APE is lesser for limited pay than it is for regular pay. Second, during the year, we have seen interest rate fall, yield curve fall. For a term life, which is long term, yield curve fall is negative on VNB. So both of these put together is where we are. Kannan also spoke about going forward the repricing that we are doing. And the repricing was in the context of the margins that we have had for full year.

Okay. So in a sense what you're saying about this current level of margin can be sustained even with limited space, other expected to increase in this year? Is that the right assumption?

Again, some of the base has got really reset there because last year was one big jump, I would say, because a part of the period on the previous year we didn't have for the period we have. But I think that will quite come into the base business.

The next question is from the line of Rishi Jhunjhunwala from IIFL.

Just a couple of quick ones. Firstly, in the INR 14.8 billion negative impact in EV because of economic and investment variance-related changes, just wanted to understand how much of that is purely attributable to the equity market movement. And secondly, if we look at operating assumption changes and operating experience variances, just wanted to understand what have you taken in terms of persistencies there? Is it still 11 months itself? And if that is the case, then the drop in persistencies in March and April, would that reflect in a big amount going forward? How do we think about that?

On the economic variance, the biggest part of it is actually coming from equity. That's the biggest contributor. So I haven't got a specific breakup between equity and debt. But like I said, interest rate down is positive to EV. You can see that from the sensitivity. So the EV impact is being driven primarily on economic assumption changes and investment variance by the equity change. With respect to the persistency assumption, we have said this before. For the unit-linked business, the 13th-month persistency assumption is 82.5%. So if you look at my overall experience, it is still in line with the experience. I don't think it is so much about 11M or otherwise, but it is more to do with what is the longer-term trend for experience. So at 82.5%, we are still within assumptions, not just for the 13th month, but across the board of various buckets of persistency overall also you can see that we are within assumptions when you see the persistency variance for the year, which is close to INR 850 million, INR 900 million.

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

Just -- Satyan, a small clarification. Why VNB should be negatively sensitive to the fall in the equity markets? Because we assume incrementally to earn EV to grow at sensitivity rate? So ideally the -- I understand that it should be negatively -- should be sensitive to the equity markets. Why VNB is sensitive to the equity markets?

Satyan?

Yes. When we are measuring VNB, my VNB comes from various portfolios. I have it on the Par portfolio. I have it on the other portfolios as well. But more importantly, you will see that the VNB sensitivity to equity is far smaller than the EV. This is because what comes in sensitivity of equity in VNB is from the start of the year, when I have received the money and I have invested it through till the end of March, it builds up a corpus. That impact is what comes out. So you get an impact of just about 0.5% or 0.7%. So the way sensitivities are worked out on new business is, I sell a policy on a particular day, that money, whatever it does through the rest of the financial year, is sitting in the sensitivity.

The next question is from the line of Ankit Pande from Quant Mutual Fund.

The question is on a couple of data sets. Could you give me your dependency on reinsurance and sort of quantify that? And in terms of your liabilities and your AUM, could you give maybe breakup of the equity and debt mix change?

Dependency on reinsurance, overall, on the protection portfolio, half our sum assured is reinsured, half is retained. On the group -- on the savings portfolio, we almost retained the entire risk. So on protection, we are roughly 50-50 retained and reinsured. In terms of reliance on reinsurers, even the 50%, which is reinsured is actually spread across a variety of international reinsurers as well as GIC Re. That's how it is spread. What was your second question?

Yes. Just on your equity and debt mix change.

Overall, on my balance sheet, about 40% to 45% of my balance sheet is equity. The rest is fixed income. This is because about a little under 70% of my balance sheet is unit-linked business. Within unit-linked, I roughly have 16% of the money chosen by policyholders to be invested in equity. On the participating business, I will typically run about 25% of the corpus in equity. The rest will be in fixed income. On the guaranteed return business, I will have 0 equity. On the shareholder fund, I have about 25% in equity. The reason I hold that is some of my required capital comes from the fund value in the unit-linked business. So this portion is kind of a hedge against that.

Next question is from the line of Nischint Chawathe from Kotak Securities.

Just wanted to check one technical aspect. The unwinding rate for this year, does it reflect a lower interest rate? Or should we see the unwinding rate next year kind of going down?

This year's unwind rate, Nischint, was based on 31st March 2019. FY '21's unwind rate will be based on 31st March 2020.

Got it. The other thing was on the ULIP side, we have seen ticket size going up. I think our understanding was that you're sort of focusing more on retail ULIP. So how should we think about this?

No. I think the way to think about it is this is a product which is probably ideally suited for the affluent segment in terms of their understanding of the market asset mix as well as the product being very transparent and giving out NAV on a daily basis. So the way I think it has turned out to is that the lower end of ULIP customers probably moved to Par. So if you really look at the average ticket size across ULIP and Par, ULIP actually went up by some INR 160,000 to INR 183,000, whereas Par also went up a little bit from INR 60,000 to INR 64,000. So yes, there could be some demand compression genuinely has happened. But the lower end of our ULIP customers or our customer type customer segment -- customer profile type customer segment moved to Par. That is the way we would look at it. But some demand has probably shifted to Par.

The next question is from the line of Haren Kapoor (sic) [ Haresh Kapoor ] from IIFL.

Sir, just one question. So you obviously mentioned about the persistency retail side. Now for the month of March and April, IRDA has also given the 30-day grace period for premium policy payments for life insurance. Could you just kind of comment on that? What is the trend that you're seeing in your book? How many policyholders are actually taking the grace period kind of benefit? Because you're already at the end of April. So a lot of these policies, which would have been due, there would have been some color that you would have. So in terms of percentage, et cetera, if you could comment would be helpful.

I will request Puneet and Amit to sort of comment here. Thank you.

I think the first aspect is that this grace period is only for renewals due in March and April. In any case, a 30-day grace period is always there. So for example, for anybody who had a premium due on, say, 30th or 31st March, in any case could pay up to 30th April. That was the normal grace period. Now there's an additional grace period. So it's very early for us to assess this impact to say whether people are going to use this, not use this, et cetera. But we must understand that this is a category of products where if people do not pay the renewal premium, it is actually they themselves will suffer because it is actually -- in a way, we are investing for their future. So we generally think, while it is early to assess that impact, yes, some people who have serious cash flow problems may well going to use the grace period here. But we actually don't expect it to have too much impact overall. It may create a little bit of delay. But certainly, we don't think we will have too much material impact on the overall persistency level over the course of the year. That's our current understanding. Having said that, it is still early days.

Puneet, if I may just add a couple of things there. One, our profile of customers also is relatively the more affluent customers who generally have a better ability to weather these things. And second, it is not as if people put a very large part of their cash flows into insurance savings. Normally, the share of wallet, which is allocated to insurance savings is fairly small. And therefore, to that extent, given that it is for a particular goal and a need, it is not as if people suddenly pull the plug from that as a mechanism, unless it's a really desperate situation.

The next question is from the line of Udit Kariwala from AMBIT Capital.

Sir, I just had 2 quick questions. One is on the nonlinked savings, the growth has been very good. But this time, you've not given the split. So if you could give some split as to what is annuity and what is the other segment? And do you still continue to stand by no deferred annuity kind of sales? And the second question I had was on the protection persistency. We have seen that historically, the persistency in protection had dropped because the pricing had come down. Now assuming that the price will go up, is it fair to assume that the persistency is across the -- should improve? And do limited -- is it also because of limited pay that the persistency has gone up? So these are my 2 questions.

Satyan?

So on the annuity disclosure, it is already there. There is a slide which we see absolute annuity for the year in one of the earlier slides. I'll just tell you the slide number. Slide #11 has got the annuity amount for the year. So that separate disclosure is there. With respect to persistency, the point that you make is intuitively it resonates with me. If prices go down, some people may consider lapsing one and rebuying it. Even though sequentially as people increase in age and as time passes, it becomes more difficult to buy. So it really needs a very large discontinuity of price for persistency to drop sharply. But on the way of price going up, persistency can be expected to improve, which again, like Kannan said earlier is really very good thing for us.

The next question is from the line of Nidhesh from Investec.

So firstly, on the solvency margin, we don't see a possibility of solvency margin going below 150% over next 12 months under various stress test scenarios. And what is the minimum solvency margin at which we will like raise capital?

So Nidhesh, we have said this before. The current regulatory capital regime is actually quite, shall we say, conservative. And therefore, from a regulatory point of view, even 150% is fine. The way we would look at a capital trigger is more in terms of economic capital. And on an economic capital, our solvency ratio is actually far higher. So economically, I don't need to have a trigger. But purely to make sure that I see that the solvency ratio requirement of the regulator, a little above 150% is when I would trigger something if I need to so that I can do a few months of business before that gets challenged.

And you don't see that possibility in this financial year, FY '21?

At least not from the stress scenario that we modeled.

Yes. And sir, if you raise Tier 2 capital, will that improve our RoEV, operating RoEV? Or operating RoEV will remain constant?

So to the extent that if I'm capital-constrained and I'm not able to do business, as against that, if I raise Tier 2 and I'm able to do business, it will improve. Otherwise, I don't think it should meaningfully change RoEV from where we are now.

Sure, sir. And sir, lastly, I saw some reduction in CRNHR Y-o-Y in absolute amount. So what is the reason for that in EV?

So that has -- that's our cost of capital in the CRNHR. So that has changed from last year to this year. We had not changed it over the past couple of years. That's a change that we made.

We take the next question from the line of Mayank Bukrediwala from Franklin Templeton.

I got dropped off the line. So apologies if I'm repeating any of this. On the basis of what data you presented on the presentation, it would appear that your -- on the protection product, your VNB per policy has increased to a good extent. Could you sort of give some sense on what's driving it? Is it any positive operating leverage because you're seeing very high levels of growth over there?

Mayank, I'm not so sure one should look at it as VNB per policy. It's probably more appropriate to look at it as VNB per unit of sum assured because that's really where you're trying to get the margins from.

Next question is from Prateek from Nippon India.

Sir, in the first 9 months of FY '20, the savings line of business cost to TWRP was 11.1%, and we ended the year at 10.5%. So I'm presuming that the last quarter, there would have been a fair reduction in the cost. Could you just talk about this? Because our understanding or my understanding was that quarter 4 is seasonally very strong, and you would build up capacities to get that kind of volume growth. Because COVID was a shock, I was under the impression you would have not budgeted this or not thought about this. Yet the cost on the savings line item coming down is a fairly positive surprise. So could you just talk a bit about this? And also in addition to this about the variabilization of costs which you were talking about, maybe you could talk a bit about that also.

If you see Slide 13, where we are talking about how the costs have moved Y-o-Y, you will see that the sharpest reduction was in variable cost. So when we got to the last quarter and we saw that actually that the top line numbers were not at we were -- at we would have liked them to be, one of the things that we did straightaway was on discretionary elements of cost, which are mainly relating to distribution. We started paring it down, and that is the sharp change that we see for Q4 compared to 9 months. Normally, when we are building through a year, we are factoring in an expectation of some of the sales activity is going up during the period. But given that in the month of March, there was a lockdown for a large part, a lot of the activities themselves came down, and therefore, the cost was not incurred. Going into the future on variabilization, the biggest opportunities for variabilization for us arise from certain channels where we may have employees who are on a fully fixed basis. To the extent that we are able to move them to a more variable approach is one lever of doing it. The second is in process and corporate functions. Using outsourcing as a lever to reduce fixed cost becomes a very important part of the way we are looking at bringing down the fixed cost. But predominantly, of the fixed cost, wages and infrastructure are 2 very large components. Beyond that, IT expenses is a very big component. So across these areas, our way of looking at it is even if I don't fully variabilize wage cost, our management of wage cost will be far more granular and far more frequent. So even if we see for FY '20, on the savings side, my wage costs went down -- my fixed wage cost went down by about 8.5%. And this was because, like I had spoken before, month after month, we would review the trends of business, the patterns of productivity across various business units and reallocate resources where we were getting more out of it and, therefore, optimize the cost of employees even though we kept the same level of headcount through the year.

The next question is from the line of Manish Shukla from Citigroup.

Can you please provide the breakup of nonlinked savings APE across Par, non-Par as to during December?

Par is actually the most significant part for us. You've seen the numbers till December. I don't -- it's not changed materially from there.

So I should assume the same proportion as December?

Yes.

Okay. Fair point. Second, a small request. If we can have a bit more gap between the announcement of the results and the call. I think the current time line is too short for us to go through the numbers before the start of the call.

Sure. I understand.

Next question is from Nischint Chawathe from Kotak Securities.

Sure. This is on sensitivity. Why has the interest rate sensitivity increased this year and the persistency consistently goes down?

So interest rate sensitivity has actually decreased from last year. If I take VNB, interest rate sensitivity for 100 basis points increase in reference rate was 4.3% last year. That has now come down to 2.4%. The reason the sensitivity has dampened is because we have had a bit more of nonlinked business coming in with the linked proportion going down, and that's why you're seeing this moderation. So the product mix diversification is what is moderating the sensitivity.

Sure. And just one more thing. I'm not sure if it is discussed. But on the Tier 2 bonds, are you raising it? Or you just said that there's a possibility that you can do that as well?

We are not raising it. We said there's a possibility, and we have unutilized the limit available. That's all we have said. We don't have plans to raise that now.

Next question is from Nitin Aggarwal from Motilal Oswal.

Yes. Am I audible?

Yes.

Yes. So you mentioned that we are seeing strong trending on the protection business during April. So can this be because of the potential price hikes in the segment?

Could be also, because lot of people have talked about it. So maybe that is also possible. But secularly, this has been a secular increase story quarter-on-quarter. Maybe there is a general heightened awareness plus aided by the current environment. Of course, I have heard of distributors talking about the potential price increase. It could be a combination of everything. Puneet, anything else you want to add there?

Yes, you're right. It could be because of that. But I see that in itself is encouraging. You know what it shows is that if people are willing to respond to a potential price hike and they in spite of lockdown are willing to certify the sale, it just shows that when there is a customer proposition, then lockdown or no lockdown, things can actually work. So we would take it in a very encouraging manner.

Right. And do you expect any large buying to happen in life insurances? Tax benefits were extended through June. And especially if the COVID situation stabilizes, can this happen? Or like just unlikely given the tax laws also that have changed?

No. I think we have said that the industry itself has moved away a lot from being a tax day and first year sales. What is probably important for the customer is the maturity tax benefits, not so much on upfront tax benefit because there is a lot of other instruments are also coming in, including housing loan, rent, et cetera. So I don't -- sorry, housing loan payments, et cetera. So I don't think there is going to be a material change because of that.

Okay. And one more clarification on the shareholder account -- transfer of funds from shareholder account to policyholder account. Now that has increased sharply this quarter. So what has driven this increase?

That's a bit artificial. There is a regulation on expenses of management of the regulator -- on expenditure of management which require that if any segment, even a nonparticipating segment, if the actual expense is more than the limit, then you should show it explicitly as a transfer. So effectively, you'll see 2 lines, 1 transfer in and 1 transfer out, with the net implications on P&L being neutral. So this is more of a representation than a real movement back and forth.

Okay. So the improvement in cost you're sure that you have -- you all are including this transfer?

Absolutely.

Okay. And lastly, on the group margin, now that has improved during the year despite this being one of the very tough years -- quarters and probably because of the cost control that you have the same growth. So can this like -- can this improve further, particularly as things stabilize on ULIP side? Or you think that margins are already basically peaking out in ULIPs?

Margin outlook will be driven a lot by the product mix into next year. If we end up with a situation where the unit-linked business top line continues to be challenged and Par and protection become more important, that is natural tailwinds as far as margin is concerned. What we need to be conscious of is if overall unit-linked growth slows down or the business decline, then we have to ensure that the cost also reflects that. If we are able to do that, then the overall margin should improve just because of mix change.

Right. But as of now it looks like this improvement will be more because of mix change and not because of ULIP. But last year, it has been like more than 200 basis point improvement in ULIP margins alone.

Yes.

The next question is from Harshit Toshniwal from [ P&G Invest ] (sic) [ Jefferies ].

One question on the operating assumption. So we saw some positive assumption change in the operating variance. Can you clarify that? Actually, we saw a lot of cost efficiencies in FY '20. The extrapolation of that number is leading for that particular positive variance. But going forward, do you think that when situation improves, our costs will again be higher than what it is? So can you throw some color on how exactly did we get a positive assumption variance over there?

The positive assumption change is coming from maintenance expense. It's not coming from new business expense. So this is the cost of managing and maintaining the policy through -- into the future. Now as the overall book itself grows, this is a logically reducing cost element. And therefore, to that extent, next year also, you may see some improvement in that. The only way in which the maintenance cost will worsen going forward is that persistently falls off a clip and my book becomes much smaller. Otherwise, in a normal course, one would expect the maintenance cost per unit to come down year after year.

Okay. Got it. And maybe if I can just add one more question, sir. When we look at the protection, so our ticket size improved drastically in the current year, and you are mentioning that the limited pay VNB in absolute terms are same between both limited pay and regular pay. Despite that, the relative fall in protection margin was not high. So it came down from 110% to 85%. So is it fair enough to say that limited to is relatively lesser than even 50% of our premiums on protection?

We have not disclosed that split of limited pay. But I don't think that is that important. I think what is important on the protection side is to look at margin per unit of sum assured because that's eventually what I'm taking the risk on.

The next question is from Vinod Rajamani from HSBC.

Sorry, my question has been answered.

That was the last question in queue. If there are no further questions, I'd like to hand the conference back to the management team for closing comments.

Thank you once again. Thank you, everyone, for joining on the call and staying for so late. And my team and I are available for any other questions you want us to answer off-line. And once again, I thank your patience and my own team because with this environment, it is commendable that we have been able to put out the results like we would do every year around the same time. Thank you, and have a good evening. Bye-bye.

Thank you very much. With that, we conclude today's conference. Thank you for joining us. Ladies and gentlemen, you may now disconnect your lines.