U.S. Markets open in 41 mins

Edited Transcript of HDFS.NS earnings conference call or presentation 23-Oct-19 9:15am GMT

Q2 2020 HDFC Life Insurance Company Ltd Earnings Call

Mumbai Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of HDFC Life Insurance Company Ltd earnings conference call or presentation Wednesday, October 23, 2019 at 9:15:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Niraj Ashwin Shah

HDFC Life Insurance Company Limited - CFO

* Srinivasan Parthasarathy

HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary

* Suresh Badami

HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director

* Vibha U. Padalkar

HDFC Life Insurance Company Limited - MD, CEO & Director

================================================================================

Conference Call Participants

================================================================================

* Adarsh Parasrampuria

Nomura Securities Co. Ltd., Research Division - Executive Director

* Avinash Singh

SBICAP Securities Ltd., Research Division - Lead Analyst

* Harshit Toshniwal

Jefferies LLC, Research Division - Equity Analyst

* Hitesh Arora

Unifi Capital Pvt. Ltd. - VP

* Myung Wook Kim

JP Morgan Chase & Co, Research Division - VP

* Neeraj Toshniwal

Emkay Global Financial Services Ltd., Research Division - Research Analyst

* Nischint Chawathe

Kotak Securities (Institutional Equities) - Senior Analyst

* Nitin Kumar Aggarwal

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Prakash Kapadia

Anived Portfolio Managers Pvt. Ltd - Principal Officer

* Ravi Naredi;Naredi Investment Private Limited;Director

* Suresh Ganapathy

Macquarie Research - Head of Financial Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, good day, and welcome to the HDFC Life's Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Ms. Vibha Padalkar, MD and CEO. Thank you, and over to you.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [2]

--------------------------------------------------------------------------------

Good afternoon, everyone. Thank you for joining us for the discussion on our results for the half year ended September 30, 2019. Our results, including the investor presentation, press release and regulatory disclosures are already available on our website as well as that of the stock exchanges. I have with me Suresh Badami, Executive Director; Niraj Shah, CFO; Srinivasan Parthasarathy, our appointed actuary; and Kunal Jain from Investor Relations.

I will run through the key highlights of our H1 FY '20 results and would be happy to take questions post that.

Starting with an update on business performance. The half year ended September 2019 saw well-rounded performance across all key metrics. We have sustained the momentum gained in quarter 1 FY '20. This has led to a significant expansion in our market share amongst the private insurers, increasing by 220 basis points from 13% in H1 FY '19 to 15.2% in H1 FY '20.

We continue to rank #1 amongst private players in terms of new business premiums with a market share of 22.4% in H1 FY '20, which is an increase of 120 basis points. Our position within the group segment which includes our Credit Protect business remains strong with a market share of 28.9% in H1 FY '20.

We recorded strong individual APE growth of 37% in H1 FY '20. In line with our commentary on our quarter 1 analyst call, individual APE growth moderated to 18% in quarter 1 FY '20 on the back of a planned shift in product mix. We covered over INR 2.8 crores lives this quarter, and our new business sum assured was INR 4.4 lakh crores, which represents a growth of 33% and 68%, respectively, over the corresponding periods.

In terms of profitability, we have delivered a robust new business margin of 27.5%, an increase of 320 basis points from H1 last year. This is on the back of a healthy growth of 57% in the value of new business, which has increased from INR 610 crores in H1 FY '19 to INR 957 crores in H1 FY '20. Our industry-leading new business margin was underpinned by a favorable product mix and continued cost efficiencies. Our operating return on embedded value was 19.6%.

Despite a 37% growth in individual APE that generated higher expense stream, profit after tax grew by 10% to INR 733 crores. The back growth was aided by sustained profit emergence from our back book with growth of 29% in existing business surplus.

Next, on channel performance. Diversifying our distribution mix has always been a key element of our strategy. We currently have over 270 partners, out of which more than 40 are new-age ecosystem partners. Our Agency channel witnessed solid growth of 80%, which included a notable growth of 32% in term protection. The Agency channel now contributes to 15% of our individual APE as compared to 11% in the same period last year. A segmented agent recruitment strategy has helped us increase our new agent productivity by 44%. Our focus on ease of doing business for agents and higher agent engagement levels has resulted in the productivity of our front-line sales increasing by 84%. Our direct channel, which includes online, grew by 62% in H1 FY '20.

We are focused on a multi-dimensional approach with the aim of providing outreach to different customer segments. The half year also saw increasing adoption of various technological enablers. The channel saw its annuity segment grew by almost 40% with term protection growth at 27%. In total, our proprietary channels grew by 69% on individual APE, with their share increasing from 21% in H1 FY '19 to 35% in H1 FY '20.

Our corporate distribution partners, which include bancassurance and brokers, grew by 24% in H1 FY '20 on individual APE with the broker channel growing by over 2x. This was achieved through close tracking of key business levers, namely activation and productivity across branches. We have also focused on growing our insurance offerings through our partners' non-branch channels, such as virtual relationship management, VRM and NRI channels, and this resulted in them contributing nearly 15% in certain relationships.

As communicated in our earlier call, we continued to expand our distribution through our new-age ecosystem partners. Our partnership with Airtel is progressing well. We have sold over INR 30 lakh policies through this partnership, and the policy can be issued in less than 1 second to the customer.

Our collaboration with Paytm is another such exciting opportunity. The entire buying journey can be completed in just 3 clicks. We have sold over INR 7.7 lakh policies till date to Paytm.

Moving on to product performance. We continue to grow profitably with our focus on maintaining a balanced product mix. Our savings business, which includes unit-link, par and non par segments grew by 39% in H1 FY '20. Protection continues to be a key focus area for us with our product suite adequately catering to the 3 pillars of protection, namely: mortality, morbidity and longevity. Protection and annuity comprises 43% of our business in terms of new business premiums. Total protection APE has grown by 43% to INR 580 crores in H1 FY '20. Individual term protection trended up to 6% of individual APE in H1 on the back of a strong quarter 2. Total protection received premium in H1 FY '20 was INR 2,225 crores, registering a Y-o-Y growth of 23% based on new business premiums. The annuity business for H1 FY '20 stood at INR 1,223 crores, registering a Y-o-Y growth of 18% based on new business premiums.

We continue to be enthused by the prospect of providing retiral solutions to our customers. This includes impanelments of profits and introducing new product variants whilst ensuring appropriate pricing and risk management. The share of non par savings has trended down from 58% in quarter 1 to 51% on individual APE in quarter 2 with our exit run rate at 41% in September. We look forward to introducing new products across customer segments in H2.

Our Credit Protect business has grown at 21% despite tough market conditions faced by NBFC. This has been possible due to: one, our diversification across partners in the traditional as well as new ecosystem space; two, spread across lines of businesses ranging from home loans to smaller ticket lending by MFIs and small finance banks; and three, improving value penetration and attachment rates.

Next, on operations and technology as key differentiators. A 13-month persistency in individual business saw an increase from 83% to 86%. Our 61st month persistency has significantly improved to 53% from 49% in the previous year.

We continue to invest in technology so that it remains a key differentiator for us. For instance, one, with regard to service simplification, we have over 150 bots deployed across various functions managed by a super bot, which has processed over 138 million transactions in FY '19. The implementation of these bots has resulted in significant improvement in turnaround times as well as elimination of non-value-added activities. Two, on the sales and servicing front, we have deployed Insta. Insta is a virtual assistant that leverages AI, ML and NLP technologies to answer product and process-related questions for our sales and operations teams. This helps improve service levels for the customers. It currently handles over 12 lakh queries per month with an accuracy of around 99%. Three, we have improved search efficiencies and reduced our acquisition costs through machine learning, which has led us to achieve 84% incremental leads and a 46% reduction in the cost per lead.

To conclude, we are pleased to have maintained our solid performance across all key metrics whilst maintaining the core elements of our long-term strategy, namely profitable growth, diversified distribution and customer centricity. The detailed disclosure on our results is available in our investor presentation.

In the end, I would like to thank all of you for your continued support of our company. We are happy to take questions now.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from the line of Prakash Kapadia from Anived PMS.

--------------------------------------------------------------------------------

Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [2]

--------------------------------------------------------------------------------

Congrats on a good set of numbers. I had 2 questions. As we step in the second half, last year, we had a low base. Obviously, we've done very well in the first half. So what kind of APE momentum are we seeing? And specifically, if you could comment on ULIP, what trends are we seeing?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [3]

--------------------------------------------------------------------------------

For your 2 questions. The growth, we are fairly positive about growth in second half just as first half has been. And reason for this is, despite what's happening in macro, NBFCs, et cetera, that I mentioned, insurance is seen as a safe-haven product. And also, more importantly, HDFC Life has, for at least the last 3 years, been very focused on other than just savings-related products. We do that, too, but also the focus on protection, annuities, retirals, et cetera, has helped. And so when we have a discussion with prospective customers, it's not just about what's happening in the market and whether it's just a savings product with a fairly low level of life cover. And that has really helped us and held us in good state. And we expect that to happen and continue to happen in the -- at least in quarter 3, just given that there does not seem to be any signs of this volatility in the overall macro environment going down.

--------------------------------------------------------------------------------

Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [4]

--------------------------------------------------------------------------------

If you could also comment in terms of cross-sell. What is the ratio...

--------------------------------------------------------------------------------

Operator [5]

--------------------------------------------------------------------------------

Excuse me, this is the operator. I'm sorry to interrupt. Mr. Kapadia, may I request you to use the handset, please?

--------------------------------------------------------------------------------

Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [6]

--------------------------------------------------------------------------------

Yes. Seeing in terms of cross-sell ratio, what is the current ratio, where are we and what are we trying to increase this? And with technology and partner tie-ups, what kind of cross-sell are we witnessing?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. So a very good question because really it's a focus on the farming and not just the hunting, which typically Indian life insurance has been focused on. And we've been putting out some slides, even last quarter we did, where about 8-odd-percent was the cross-sell opportunity that we continue to trend upward. Also, this Insta -- sorry, in terms of Insta Insure, which is what we earlier used to call it pre-approved sum assured. And this is really piggybacking on our existing partners and their customers are also our customers. To say that with a 3-click journey and with very minimal pain, you can also, by the way, get covered for various things. And that's beginning to catch on big time because it's a very different kind of an instant value proposition that we are able to put out. Of course, there is risk management and also data security. So all of those things are taken care of. And yet, we're able to connect various data points, digital data points, so we are able to give that up-sell to the customer. We also have to see 360-degree view of the customer, again, through the use of big data. And also, we have -- we're in the process of going live on cloud -- cloud solutions, will enable us to know that this customer, what is the family view, what is the family net worth, where he or she might be in the life cycle and, hence, to be able to ping the customer with the right product at the right time with minimal pain, and that's beginning to happen in a big way.

--------------------------------------------------------------------------------

Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [8]

--------------------------------------------------------------------------------

Okay. And this Insta Insure is for Tier 3, Tier 4 or not necessary?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [9]

--------------------------------------------------------------------------------

Not necessary at all. In fact, it is beginning with Tier 1 with metros.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Nitin Aggarwal from Motilal Oswal.

--------------------------------------------------------------------------------

Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Congratulations on good results, ma'am. I have 2 questions. Firstly, the share of broker channel for us has been increasing very well like over last 1 year. So how do you see the profitability mix of this channel? And if you can also share the product looks, like what sort of products are best suited to be sold through this channel?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [12]

--------------------------------------------------------------------------------

Yes. So a couple of things, and it has been a long journey for us in terms of our broker channel. If you look at Slide 16, while we have not called it out separately because it is small in the whole scheme of things, but largely our broker channel along the same lines sells non par and participating products. So very little or next to no unit linked. They are now beginning to focus on term as well. So highly profitable channel, but we had to do a lot of things to shrink this channel before we -- it started really doing very well. And now our focus has largely been in face-to-face brokers rather than in tele. And we see -- that this being a niche space, we see very high levels of persistency with certain partners that we work with and these are very valued relationships that we have. Shah, do you want to add?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [13]

--------------------------------------------------------------------------------

Yes. Broadly, the broker channel has been focused on the tele venue as well as the face-to-face branches. I think what we have realized is, very clearly, it has to be, one, the product fit on the customers, the quality of the business that we get in and who are the key partners that we work with. And I think our focused effort has been in terms of engagement with some of these key partners on the technology side as well as looking at products which are best fit. So you will find the business growing as they grow because they are also expanding. They are increasing their number of branches. So we will continue to grow. It's just that we want to remain focused on the quality of business.

--------------------------------------------------------------------------------

Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

All right. And secondly, the persistency in the protection business, now they have been like -- in a range have been pretty stable and it's very close to what it is in the traditional savings business at the long end, it's a testament of persistency. So -- now with rising risk awareness as to why is it not like improving? Are you seeing customers churning to newer term policies as production pricing has been on a decline over the recent years?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [15]

--------------------------------------------------------------------------------

I think that over a period of time, customers will start realizing that it's not in their interest to churn. Whether churn is happening right now? I don't think it's really churn. I think it's more in terms of lack of awareness. We're not that worried about churn because a customer, by the time he starts thinking of churn, perhaps might be 2 or 3 years further down than when he bought it. And it's possible that some -- one of the 2 or 3 lifestyle illnesses is something that he might start showing signs of, which would mean that he could get rated up and so it's not really easy to shift. I do think that it's more in terms of lack of awareness. And also some confusion in terms of some claims on -- some percentage of claims, et cetera, which is, again, can be fairly confusing because, and I'll just explain that, wherein 2 companies which some of the newspapers report to have different claims ratio, it's really macro at the company level. Some -- a company like HDFC Life that's been selling term for quite some time, several more years in peer group perhaps, might have a larger proportion of back book of term business, which could be showing various claims outcomes. Some of them, we need to investigate, so -- which we might hold back. It might appear optically that the claims reputation might be slightly higher, et cetera, which comes back to my original point. It's more in terms of educating the customer rather than necessarily churn just for the sake of churn.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [16]

--------------------------------------------------------------------------------

And in any case, the higher value term will also mean fresh medicals for the customer if you have to do proper underwriting. So there may be a little bit of churn happening, but then the customer has to go through because we're fairly stringent in terms of what kind of medical checks have to be done for the high-value cases.

--------------------------------------------------------------------------------

Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

Right. And...

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [18]

--------------------------------------------------------------------------------

So really, we believe that this whole focus on pure term will take at least the next 3, 4 years before really a credible experience and pattern emerges, especially companies that have just started.

--------------------------------------------------------------------------------

Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

Okay. And thirdly, on the VNB margins, like where do we see this heading now that the 1Q we have seen the impact of Sanchay Plus playing out in 2Q, we have seen some normalized levels, so will 2Q be the trajectory to expect on margins? Or maybe the new products that we are looking to launch are further going to bump that up?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [20]

--------------------------------------------------------------------------------

We've always said that, for us, a smooth upward curve is something that -- for us that's something that we are working on and it is very important. Profitable growth is important. So we see that a smooth upward curve continuing to pan out.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

The next question is from the line of [Ajax Hendry] from B&K Securities.

--------------------------------------------------------------------------------

Unidentified Analyst, [22]

--------------------------------------------------------------------------------

My question is with respect to term again. Why are we growing slightly lower than the competition, at least for the people who have released reports term -- retail term?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [23]

--------------------------------------------------------------------------------

Yes. So if you look at, I think, it's more in terms of the percentage that optically, it looks lower. But if you look at just the growth, that grow to 43%. We've had a much higher base. So it's also higher base. The growth is quite robust. But as a percentage of -- just given the offtake of Sanchay Plus, our non par flagship product in quarter 1, which we launched in March of last financial year, so optically, it looks like as percentage term has gone down. And also, as you know, term -- ticket size is much lower. But if you look at just the growth, that is -- you'll agree that at a 43% growth, it is more than robust.

--------------------------------------------------------------------------------

Unidentified Analyst, [24]

--------------------------------------------------------------------------------

Ma'am, if you can give me the number of policies, which are in-force term policy?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [25]

--------------------------------------------------------------------------------

We will get back to you on that number.

--------------------------------------------------------------------------------

Unidentified Analyst, [26]

--------------------------------------------------------------------------------

Okay, ma'am. And one more question on persistency. Ma'am, what is the persistency without regular premium?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [27]

--------------------------------------------------------------------------------

The way we look at this number is that persistency is entire part of the -- entire part of the business. Even in terms of margin, we've had variance of margin, wherein sometimes parts of the denominator are left out because some part of group funds business, for example, is left out or a five pay is treated differently than had it been a regular premium payment, et cetera. So instead of you show it as a smaller number so that your -- perhaps so that your margin is higher. These are all very memo kind of numbers. The only version of tracking for us is the regulatory version, and we are very much compliant with the way regulators ask us to track it.

--------------------------------------------------------------------------------

Unidentified Analyst, [28]

--------------------------------------------------------------------------------

And are margins giving the actual center picture?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [29]

--------------------------------------------------------------------------------

Yes, it is completely actual expenses. It was actual expenses forever.

--------------------------------------------------------------------------------

Unidentified Analyst, [30]

--------------------------------------------------------------------------------

And it's going to start like first half is actual and second half is tentative...

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [31]

--------------------------------------------------------------------------------

Which is why I said forever. For every reporting period, our expenses are actual.

--------------------------------------------------------------------------------

Operator [32]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [33]

--------------------------------------------------------------------------------

Two questions. One was, and if I look at the sensitivity analysis for FY '19 and I really try to compare it with first half FY '20, then we can see some change in terms of the impact or change in reference rates or for that matter, persistency. Any color that you can give as to why that has changed? And this is on the EV side. So it's on the outstanding book.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [34]

--------------------------------------------------------------------------------

So Nischint just to confirm the numbers that you are looking for, you're talking about FY '19, 1% increase having a negative 1.7% change in EV?

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [35]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [36]

--------------------------------------------------------------------------------

Right? Versus in H1, the minus 1.4%.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [37]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [38]

--------------------------------------------------------------------------------

Yes. And Srini can add. A large part of this is because of us having sold a lot more of non par book, which is fully hedged. So really, it has no interest rate impact or next to no interest rate impact on overall. Srini, on that.

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [39]

--------------------------------------------------------------------------------

I think that's validated by external consultant also. And I know we checked how closely the cash flows are matched and it has been validated by external expert as well. So it just reflects how closely matched our assets and liability cash flows are. Therefore, the impact on our EV on 1% change in the reference status has not been -- and it's been like that for some time. It's not that this quarter we are securing something. It's been like that for as long as I can remember.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [40]

--------------------------------------------------------------------------------

Also, the unique part in HDFC Life's mission, as you know, is that because of balanced product mix going back at least 5, 6 years, there are different pools of assets. So the asset liability profile as well as debt equity profile underlying is very different and often are complementary and our internal hedges. And hence, you will find these kind of much lower numbers because of this unique advantage.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [41]

--------------------------------------------------------------------------------

On the persistency side?

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [42]

--------------------------------------------------------------------------------

So on the persistency side, the proportion of the single premium book is increasing in the EV. So therefore, you'll see a gradual reduction in the sensitivity of -- due to persistency.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [43]

--------------------------------------------------------------------------------

Because the EV is no longer susceptible to whether a person pays or not in terms of his suited premium.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [44]

--------------------------------------------------------------------------------

Because of higher single premium?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [45]

--------------------------------------------------------------------------------

That's correct, yes. So the value has already come in. And also, the lapse rate is very, very small compared to regular premium lapse rate.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [46]

--------------------------------------------------------------------------------

And now if I look at the percentage change in VNB column and if I look at acquisition expenses, then does it mean that because you have higher-margin products, the impact of acquisition expenses on VNB is relatively lower? It's gone down from 18% to 13%.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [47]

--------------------------------------------------------------------------------

Sorry, which one are you referring to?

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [48]

--------------------------------------------------------------------------------

13...

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [49]

--------------------------------------------------------------------------------

If I'm looking at acquisition expenses, and now I'm looking at VNB column.

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [50]

--------------------------------------------------------------------------------

Yes, that's right, Nischint. So basically, it's on a higher base and also, where the business is actually coming from, which basically determines the sensitivity of acquisition expenses on VNB.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [51]

--------------------------------------------------------------------------------

Sure. The second one is, I'm just trying to look at, still trying to reconcile the breakup of numbers, but was there a marked increase on a quarter-on-quarter basis in the individual protection business for you?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [52]

--------------------------------------------------------------------------------

Yes, there was.

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [53]

--------------------------------------------------------------------------------

Yes, there was. From Q1 to Q2, there has been a significant increase in individual protection on a percentage.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [54]

--------------------------------------------------------------------------------

And that is because?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [55]

--------------------------------------------------------------------------------

We've been really focusing on protection. In the first quarter, really, the blockbuster product that we had in terms of Sanchay Plus was really full of the market, if you like. And we kind of reined it in as well as went back to our roots of focusing on protection amongst other things and that was clearly a very good outcome in quarter 2.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [56]

--------------------------------------------------------------------------------

And consequently, group protection has also gone down -- I mean has gone down?

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [57]

--------------------------------------------------------------------------------

So group protection is Credit...

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [58]

--------------------------------------------------------------------------------

Quarter-on-quarter, I'm saying.

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [59]

--------------------------------------------------------------------------------

Credit Protect has grown at 21%. Group term has been a fairly -- we've been running it based on how the experience really pans out. So we're not really targeting any particular growth number from a group protection.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [60]

--------------------------------------------------------------------------------

Yes, Group Protect (sic) [Credit Protect], Nischint, quarter 1 was 21%, quarter 2 was 22%, was almost the same. Credit Protect.

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [61]

--------------------------------------------------------------------------------

There, again, in group terms, our focus has been to ensure that we stay on a profitable course.

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [62]

--------------------------------------------------------------------------------

So group term here is the employer and employee course we are referring to. So group term is different from Credit Protect.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [63]

--------------------------------------------------------------------------------

Yes. On GTI, it really depends on the deals that are coming through. And like Suresh was saying, it depends on whether it's profitable. We do walk away from deals that are just a top line game and so that tends to be lumpy.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [64]

--------------------------------------------------------------------------------

Okay. And that was possibly a little lower in the second quarter?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [65]

--------------------------------------------------------------------------------

Yes, I think, which is okay. I think it wasn't...

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [66]

--------------------------------------------------------------------------------

I'm just comparing sequentially.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [67]

--------------------------------------------------------------------------------

Yes. So our GTI, actually, if I were to look sequentially, grew 108% in quarter 1 and grew 384% in quarter 2. So we'll maybe give you the breakup separately. But these are very small numbers, Nischint.

--------------------------------------------------------------------------------

Operator [68]

--------------------------------------------------------------------------------

The next question is from the line of Adarsh from Nomura.

--------------------------------------------------------------------------------

Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [69]

--------------------------------------------------------------------------------

Question on the margin side. I don't see a material change in the business mix in the first half versus the first quarter, and we've had a change in the VNB margin from 1Q to 1H, while if guided and indicated that things will normalize. This quarter is not a quarter where you actually had a big shift in business mix. So if you can just walk through what would have led to the delta in margins?

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [70]

--------------------------------------------------------------------------------

This delta margins, as we spoke about in Q1, also -- Q1 was largely, as you saw, 60% plus growth with new product, Sanchay Plus, just coming in. And in Q2, we've had both these elements moderate as per our expectations. So you're seeing both moderate to 18%, which basically impacts the operating leverage quantum, which you see on second last column, right? And what you did mention in terms of the change in product mix, though 58% non par savings in the quarter 1 and 51% in quarter 2, and all of it came at different points in time, right? And the interest rates have been changing as well, and our ability to reprice at different points in time based on -- there will be an execution lag of a few weeks, both on annuity side as well as on the Sanchay Plus side. So both of these would actually have good result in this impact, which we had spoken about in Q1 itself, right? So from 29.8% to [25.3%] in Q2 on a stand-alone and 27.5% for H1. So it sits honestly in line with -- exactly in line with what we've been expecting, both in terms of scale as well as in terms of the product mix shift. And the third aspect in terms of dynamic pricing required for both these product categories.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [71]

--------------------------------------------------------------------------------

To add one other point, Adarsh, is that one vector is product mix, which is what you're alluding to. But the other very important one is also the segments as the channels through which we sell. And that mix also comes into play on quarter 2 versus quarter 1. And some of it is also, that because your question that how is it that margins have dropped without that much of change in the product mix, right?

--------------------------------------------------------------------------------

Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [72]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [73]

--------------------------------------------------------------------------------

So that is also a factor in terms of -- and we're looking at really smaller time frames. When you look at it over the full year, it will be a lot more meaningful than something specific that has happened in a particular quarter. So to -- just to give you a sense that if I were to look at our broker channel, for example, it grew 200% in the first quarter, it grew 274% in the second quarter. So these nuances will -- our online channel, for example, grew 162% in the first quarter and [170%] in second quarter. So it's also the cost of acquisition of that channel along with the product mix.

There are different variations like that. Another aspect is, for example, the point with that earlier caller was, I think, Nischint talked about, wherein if you're selling more term and more protection, I also have some duty costs, for example, hitting me in a particular quarter than would have been in quarter 1. So it is a little bit more involved in terms of impact on margins.

--------------------------------------------------------------------------------

Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [74]

--------------------------------------------------------------------------------

Understood. And the second question, just wanted to check, just trying to compute the numbers on the non par guaranteed book, right, from your individual product mix. It broadly looks like you would have sold a similar amount of Sanchay kind of products in 2Q versus 1Q? Is that a fair kind of win?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [75]

--------------------------------------------------------------------------------

Yes and no because if you look at Slide 16 and that's why we have given, we have also given Q2. It optically looks like non par savings hasn't really moved that much, 54% to 51%. But like I mentioned in my opening remarks, the exit rate in September was 41% and trending downwards. So you will find that there is an exit rate in March. We are targeting anywhere between 35% to 38%.

--------------------------------------------------------------------------------

Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [76]

--------------------------------------------------------------------------------

Understood. No, I was -- that's understood. And last thing is, again, we'll go back to the same thing, majority of this line would be Sanchay, right?

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [77]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [78]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [79]

--------------------------------------------------------------------------------

Sanchay Plus and Sanchay. Yes.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [80]

--------------------------------------------------------------------------------

Sanchay also and Sanchay Plus. Sanchay was a variant one, key different variants.

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [81]

--------------------------------------------------------------------------------

So basically, Q1, it was 58%, right? Q2 was 51%. So that 7% is a fairly significant shift in one quarter, and like we've just said, this is in different points in time in the quarter, right?

--------------------------------------------------------------------------------

Operator [82]

--------------------------------------------------------------------------------

The next question is from the line of Raj Rishi, an individual investor.

--------------------------------------------------------------------------------

Unidentified Shareholder, [83]

--------------------------------------------------------------------------------

From your view, what is the trajectory of the sector? What sort of growth you see panning out (inaudible) the whole sector and secondly, for the private sector? And there's another question like I believe the LIC policies are guaranteed by the government, right? So if and when, suppose LIC is listed, I believe, the guarantee will go away. So how do you see that impacting the private players? Like if you can give some comments on this.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [84]

--------------------------------------------------------------------------------

I think there -- here there are lots of assumptions. I really don't know which way, whether it's going to do an IPO or whether guarantee will go away. So I think we are focused as a private player on the entire opportunity that is ahead of us. And there's room for all players, all 24 players to grow. And I -- we are very convinced about that. And all the macro data, anyway, show how underpenetrated insurances and especially, the younger population as well as much deeper penetration into India. And also if you look at the data, the private sectors gained higher market share for the first time in FY '16. That is when the regulatory changes and then -- were behind us and the inflection point happened, wherein there was decoupling with just a close correlation to where Sensex was. So what is beginning to emerge was that there are several things that finally result in whether customer buys and what he chooses and not just the market. And that's really the growing up of the sector, wherein companies like HDFC Life, we're very, very convinced that we have to cover one of the risks, if not more than one, so either mortality, morbidity, longevity or.

interest rate risk and some combination thereof. And so the nature of the products being sold started changing their color gradually but in a very clear manner. So you'll see -- and that's also the reason why insurance as an industry has done reasonably well. When you look at individual WRP growth for the first half of the year, 11% growth, and private did better at 16% growth. So that growth is a fairly respectable growth versus what's happening in the overall environment. So we see with the continued bearishness, we will see insurance as an industry continuing to track better than other financial services.

--------------------------------------------------------------------------------

Operator [85]

--------------------------------------------------------------------------------

The next question is from the line of Suresh Ganapathy from Macquarie.

--------------------------------------------------------------------------------

Suresh Ganapathy, Macquarie Research - Head of Financial Research [86]

--------------------------------------------------------------------------------

I have 2 questions. One is the sustainability of your backbook growth. I mean it's been very impressive at about backbook surplus, I mean. It's about 29%. Do you think you have enough reserve releases which can happen, and all these protection policies that you have sold over the year should sustain this current momentum?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [87]

--------------------------------------------------------------------------------

Hopefully, and I'll tell you why I'm saying that, Suresh. And that is because the major factors for this backbook unwinding of the profits that they have written are really not -- this is nothing but a VIF unwinding into IGAAP profits. And let's say, and so what is it dependent on? It's dependent on couple of things. One is persistency assumption, mortality assumption and expense assumption. Of course, there is interest rate as well, but these are the large assumptions. And given that our operating variance over several years has been very close to our assumptions, so actuals is -- are very close to our assumptions means that all things being equal, whatever business we have written in the terms of VIF should unwind over the next few years as Indian GAAP profit.

--------------------------------------------------------------------------------

Suresh Ganapathy, Macquarie Research - Head of Financial Research [88]

--------------------------------------------------------------------------------

No, but then the rate has been way ahead of competitors. I know none of them disclosed this.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [89]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Suresh Ganapathy, Macquarie Research - Head of Financial Research [90]

--------------------------------------------------------------------------------

But then on a reported profitability basis, obviously, nobody is close in the terms of the way the growth has happened. Look, clearly, in your case, the backbook has contributed much more if we were to interpret it that way, right? So do how you justify? I mean because everybody's seeing a positive opening -- or operating variances or mortality charges amongst their peers.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [91]

--------------------------------------------------------------------------------

Yes. The reason there is variation is one other thing. If you look at the VIF, this is about 67% -- 66%, 67% of our EV. While if you look at a lot of companies, especially smaller companies, their VIF will be a lot smaller, network will be larger. So while EV looks like a good number, really, the VIF accretion is a lot smaller. And reason there is -- VIF accretion is a lot smaller is because they've perhaps gone in for a top line-driven strategy. So the VIF buildup has been -- the pace of VIF buildup is heavily dependent on the new business margins. So new business margin is one, your expenses, maintenance costs, those sorts of things but largely new business margin. So given that we have been -- we've crossed the 20% very long ago in terms of business margins, that has aided to a VIF buildup. There is VIF buildup.

--------------------------------------------------------------------------------

Suresh Ganapathy, Macquarie Research - Head of Financial Research [92]

--------------------------------------------------------------------------------

Okay. And of course, we have talked a lot on these guaranteed products. I don't want to name the competitor, but we just had a meeting today with one of your competitors, and this is what their thought process was. If you're going to give a guaranteed return of about 6%, 6.5% on your products and 50% of the product has to be invested compulsorily in government securities, which yield only 7%, which means -- and if you add a distribution cost of about 2%, the effective return that you have to generate on your book is 8%, which means that the balance, 50% of the book, the return needs to be generated is even higher than 9% to arrive at a 6.5% or whatever, 6% tax rate return to an investor. All these economics makes it very difficult to go ahead and try to justify launching these guaranteed products. And maybe the assumption here is that a lot of these things is compulsorily reliant on higher lapsation because the higher is the lapsation, the better is the calendar profit. And eventually, your cost subsidizing your nonprofitable customers or profitable customers is bond profitable. Is that true? Is that logic wrong somewhere?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [93]

--------------------------------------------------------------------------------

So Suresh, that logic might be right for someone wanting to enter ab initio now. The thing with us is that we have been working on this product now for the last 24 months. So we have -- at that time itself, we have been accumulating assets. So we have an inventory of high-yielding assets, against which we are writing new business. So for us, that is really not an issue based on the math that you've quite rightly talked about. So there is a unique advantage.

Second unique advantage is that because of our balanced product mix over the years, what we have in our INR 1.3 trillion assets under management are also assets with -- asset liabilities with very different profiles in terms of duration and so are the business that we intend writing and which we have written under non par savings. We have other assets whose liability profile is more short term, so we can utilize the project life of these non par products to pay that off, while the underlying assets in that asset class can be utilized for this, for paying over the long term. So -- which is what the interest rate sensitivity that we put out on Slide 22 shows virtually 0 impact on margins.

Next quarter, Suresh, because we didn't have enough time, we've had this -- again just for the sake of giving further comfort, we've had an external leading actuarial firm review our numbers and the entire strategy. And there is 0 risk is what they have given us a report.

--------------------------------------------------------------------------------

Suresh Ganapathy, Macquarie Research - Head of Financial Research [94]

--------------------------------------------------------------------------------

Can we have the persistency numbers in this product category? You have deposits and small...

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [95]

--------------------------------------------------------------------------------

So a little bit early because we haven't completed a year. But when we -- when I look at quarterly and monthly, absolutely high levels of persistency. So the counter that some industry peers are talking about that this is lapse-supported is absolutely untrue. And even the sensitivity review that this leading firm has done shows that at 100% persistency level, we are still -- there is 0 ALM mismatch.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [96]

--------------------------------------------------------------------------------

And Suresh, just to add to that, the bit that you started off with in terms of the yields that are actually translating into customer returns. So we had discussed this earlier as well. So the thing is these investments, today, the G-sec rates are what they are. When the investments have been started was about 150 basis points depending on which part of the curve you're looking at. So basically, between what we earned and what we are promising to the customers, we've repriced it a couple of times since the time we launched it. And the spread that we are maintaining, based on all the assumptions that we spoke about, is enough to meet our margins, expenses as well as, on a risk-adjusted basis, get to the ALM situation that we want, both on cash flows and on sensitivity.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [97]

--------------------------------------------------------------------------------

Suresh, in fact, earlier on the call, I had one point that I wanted to make. Actually, while there's a lot of focus on non par savings, I would also urge a fair amount of focus on this -- on annuity repricing. Because what we do find is that even after cuts in rate, there is a -- almost a 4-, 5-months lag before annuities are repriced. And that clearly, in our mind, is a very big risk and very aggressive in terms of giving out those rates. And there, you'll find that in this financial year, in 6 months, we have (inaudible) full time. And which is part of the reason why our annuity business in quarter 2 has been flat because of us not wanting to take a business cost on interest rates.

--------------------------------------------------------------------------------

Operator [98]

--------------------------------------------------------------------------------

The next question is from the line of Avinash Singh from SBICAP Securities.

--------------------------------------------------------------------------------

Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [99]

--------------------------------------------------------------------------------

Two questions. The first one was on unwind. Again, I would not go on quarter-to-quarter, of course, very volatile, but even look at the first half. The unwind rate has come down meaningfully versus last year. Yes, there has been a sort of a falling piece. But in -- I mean, typically, this unwind has 2 components. You have the risk-free rate and the expected real-world rating of your reference rate. Now the thing is that, okay, can this change so dramatically and quarter-over-quarter? Your unwind rate was too low in Q1. In Q2, of course, it has improved. But still on a half-yearly basis, it is dramatically or materially lower than what has been occurring over the last year. So that's one.

And second question, more on business. I mean if I were to look at individual, you are selling more protection. So definitely, there should be increase in number of policies. But overall, individual number of policies for the first half are down. So I mean what sort of underlying factor behind the sort of falling policy count...

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [100]

--------------------------------------------------------------------------------

So Avinash, let me take the second question first, and Srini can answer the first one. On the second question on NOPs. So if I were to, from the base, exclude our very small ticket health policies that we sold last year first half because there've been very low levels of persistency, my increase in number of policies is actually 6%. It's still lower than what we would like. But some of that is also because of the effect of larger ticket size sale of Sanchay Plus. That -- like you're seeing even in quarter 2 in terms of cost correction, that's beginning to happen. So we're not that worried about because there is a focus on getting that number up. So there is the base effect of health is causing it to look optically like it is flat. Srini, you want to...

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [101]

--------------------------------------------------------------------------------

So on the first one, I think, Avinash, the first one on the unwind rate, so we basically start with the -- since we publish MCEV numbers. The MCEV numbers, you have to stay start of the yield curve. And there is no subjectivity in getting the yield curve. So that sets us 3 years within the market of time. So -- and that is resulting somewhere between 7.5% or so to 7.5% or 8% for the H1 of this year. So we basically take The Street curve and unwind at the same -- at the prevailing rate with -- there's a little bit of expectation added to it. Since the outlook now for the yields are to sort of downwards, we've allowed for that outlook also to be factored in the unwind calculations. But other than that, it's largely between 7% to 8% is what we used in between Q1 and Q2 as well.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [102]

--------------------------------------------------------------------------------

So we don't want to really wait till the end of the year to really do that. So our view on interest rates, like on all other operating aspects of our business, we will like to reflect it as and when we think it's kind of different from what is the current experience or the current rates in this case.

--------------------------------------------------------------------------------

Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [103]

--------------------------------------------------------------------------------

Yes. So -- but if I again look at the stand-alone quarter. I mean in Q1, you have taken almost close to 7%. And if I just break Q2, come closer to 8%. So I mean from Q1 to Q2, I mean, yield curves have not really materially gone up. I mean, of course, I know there will be various cost attainments. But that's something that -- the material difference between what you assumed in Q1 and now in Q2. So I mean does that explain by sort of all your -- just a 10, 15 yield curve? Or you have tweaked on your expectation over that reference set materially in these 2 quarters?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [104]

--------------------------------------------------------------------------------

So Avinash, it's basically when we are sitting on September 30, we made certain assumptions on the way the yields are moving in June. At June end, we had a certain expectation in terms of how the rates are going to move. We probably had a slightly more in terms of where the interest rates were headed. We probably had a -- we may have heard that the interest rates are maybe heading downwards faster than what they are at this point in time. That would have been done at the point of time in June. And September, where we are standing today, that we would have got calibrated based on where we are sitting today. So it's more a function of as on date, as on June and as on September, not much in terms of what would have happened intra-quarter, really.

--------------------------------------------------------------------------------

Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [105]

--------------------------------------------------------------------------------

Okay. Okay. And quickly, on the third, Sanchay Plus. I mean margin from Q1 to Q2, I mean, would margin have come a bit down before you reprice the product for certain? I mean your repricing would take some time, but yield curves are falling down. So would it be fair to assume that, okay, by the time you reprice, there would have been some sort of a place around that margin of that Sanchay Plus in Q2?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [106]

--------------------------------------------------------------------------------

Yes, Avinash, and we did mention that in our earlier conversation, maybe 3 or 4 callers ago. We did mention that, that was, in fact, I think it was Adarsh. So we did speak about that in terms of the pricing lag between when the rates are panning out differently and our ability to reprice from an execution perspective. There could be a few weeks lags, which could result in what you just said.

--------------------------------------------------------------------------------

Operator [107]

--------------------------------------------------------------------------------

The next question is from line of Harshit Toshniwal from Jefferies.

--------------------------------------------------------------------------------

Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [108]

--------------------------------------------------------------------------------

Congratulations for a good set of numbers. I have 2 questions, ma'am. One, when we look at -- so as you said that we already started investing in the long-duration bonds earlier, and we have a better product, basically single premium product suit, which allows us to sell the Sanchay. Is there any limit to which I can sell this product or maybe another 4 -- 3 to 4 quarters, which you plan? Because in a way, the kind of volumes which I'm running in this product is far more than the backbook or basically Credit Protect or annuity business, which I'm generating. So I want to understand that how -- till when can we match this risk, interest rate risk by our existing products and the new cash flows?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [109]

--------------------------------------------------------------------------------

So Harshit, there is no longer any capacity concern, not that there was even in quarter 1. But now IRDA has allowed at fair rates also. Clearly, there isn't any constraint to write this business to the extent that any company wants to write this business.

--------------------------------------------------------------------------------

Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [110]

--------------------------------------------------------------------------------

Okay. But even from an internal company management perspective, so when I look at your AUM book, around INR 50,000 crores is a non-linked book. If I exclude par business, then it would be around INR 15,000 crores, INR 20,000 crores of non par, nonlinked book. Is there any limit internally where we would want to restrict this return guarantee business for the balance sheet?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [111]

--------------------------------------------------------------------------------

Yes. So it is less caused by capacity constraints, but we just want to go back to basics, wherein we always believe that we want to follow a balance in whatever we do, and so balanced distribution and balanced product mix. So in the -- hovering somewhere between 35% to 40%, 40% being an outer level, is what we would like to see our product mix on an ongoing basis.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [112]

--------------------------------------------------------------------------------

And second -- oh, sorry.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [113]

--------------------------------------------------------------------------------

Go ahead.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [114]

--------------------------------------------------------------------------------

So just to add to that, Sanketh...

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [115]

--------------------------------------------------------------------------------

Harshit.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [116]

--------------------------------------------------------------------------------

Harshit, I'm sorry, in terms of what we've said on Page 22. The starting point really would be -- the key thing would be basically what Vibha mentioned in terms of the customer segment and how we want to really manage the product mix. The other end of the spectrum would be the risk management. So in terms of if our intent is to actually match cash flows for Sanchay Plus as a non par savings plus Credit Protect, that is something that would become a -- something that we would monitor dynamically every month. Our ability to be able to do that, whether through internal hedges like Credit Protect business or through instruments, structured instruments such as partly paid bonds or now in the case of our forwarded agreements, our capacity would be actually determined by that on a collective basis. And on the other end, this is basically our intended product mix. So it would basically be determined by both of these elements.

--------------------------------------------------------------------------------

Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [117]

--------------------------------------------------------------------------------

And one more thing, if I may ask. So this is -- when I look at the public disclosure, so they give the duration of the investment book, non-linked book. So what was that surprising is that when I look at your duration, kind of average duration of the non-linked book versus other players, the 2 peers, it is not very different. So yours comes to around 9 to 10 years, and it was similar for even SBI Life, too. So want to understand that our business being -- mix being so different and a much more longer duration business mix versus others, then why -- should there be some difference in the duration of the bonds which we are holding?

--------------------------------------------------------------------------------

Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [118]

--------------------------------------------------------------------------------

So Harshit, even a 35-year bond will have a duration of about 13 or 14 years, okay? So 33-year bonds, you don't actually have asset duration of 35 years. So because the coupon sign up, it's a -- this is called a mean term approach. So when you cap rates using your dMt formula, you actually end up with a 13- or 14-year duration for a 33-year G-sec bond. So just because you have a 40-year bond doesn't mean the asset duration will be 40 years if that's what your expectation is.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [119]

--------------------------------------------------------------------------------

And also in terms of matching the liability against it, we've always maintained that on a stand-alone basis to manage the liability duration of non par savings product is not possible without any external hedge. So it's -- so far, we've been doing it through a combination, and we'll continue to do so going forward as well, along with -- supplemented with other external instruments.

--------------------------------------------------------------------------------

Operator [120]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from the line of Ravi Naredi from Naredi Investments.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [121]

--------------------------------------------------------------------------------

In September '19 month, our premium come down in -- as compared to April to August month. What is the reason behind it?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [122]

--------------------------------------------------------------------------------

So a couple of reasons there, Ravi. One is that the base effect. So last year, we grew well, both in September and October. Second is that last year, when we grew well, it was on the back of a lot more of unit-linked products that were sold, especially a flagship unit-linked product at that time. And based on a balanced product mix, we were not that keen to follow that same approach of selling a lot more unit-linked, especially through bancassurance. So we had a calibrated product mix, resulting in a more muted September.

So just September, overall, when you look at -- the degrowth was because of the base effect. However, down the line, so once its base effect of September is out of the way, which it is now, we've -- we should be back on track on robust growth. October has -- also last October had a little bit of spillover effect. But beyond that, it should be business as usual.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [123]

--------------------------------------------------------------------------------

Okay. And one more, what is the unrealized gain on September 30 on our investment?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [124]

--------------------------------------------------------------------------------

Just allow us a moment, we're just pulling it out.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [125]

--------------------------------------------------------------------------------

Okay.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [126]

--------------------------------------------------------------------------------

So it is INR 1,875 crores, INR 1,874 crores.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [127]

--------------------------------------------------------------------------------

1-8-7-4 crores.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [128]

--------------------------------------------------------------------------------

Yes, unrealized. It's an unrealized loss because of market movements.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [129]

--------------------------------------------------------------------------------

Okay, okay.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [130]

--------------------------------------------------------------------------------

Yes, because the BSE 100 decreased by close to 200 basis points versus the last half year increased by 600 basis points.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [131]

--------------------------------------------------------------------------------

So it is loss, 1-8-7-4.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [132]

--------------------------------------------------------------------------------

Yes, it's a fair value change. So it's not really a loss but unrealized. Yes, so fair value.

--------------------------------------------------------------------------------

Ravi Naredi;Naredi Investment Private Limited;Director, [133]

--------------------------------------------------------------------------------

Unrealized.

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [134]

--------------------------------------------------------------------------------

Yes, yes.

--------------------------------------------------------------------------------

Operator [135]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [136]

--------------------------------------------------------------------------------

Just a question, a hygiene question that we ask everybody. Is there anything in the debt book that we should be worried about? Are you envisaging any provisions?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [137]

--------------------------------------------------------------------------------

For additions, apart from (inaudible) efforts, which is something that we have also mentioned in the past, based on current visibility, there has been no default on the debt securities that we are sitting and for which we have not provided.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [138]

--------------------------------------------------------------------------------

And some of the bonds that we've been holding and CDs we're holding there've been prepayments very recently. So as of now, nothing to report on the debt side.

--------------------------------------------------------------------------------

Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [139]

--------------------------------------------------------------------------------

Nothing that concerns you beyond whatever you have reported in the past.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [140]

--------------------------------------------------------------------------------

That's correct, Nischint.

--------------------------------------------------------------------------------

Operator [141]

--------------------------------------------------------------------------------

The next question is from the line of Hitesh Arora from Unifi Capital.

--------------------------------------------------------------------------------

Hitesh Arora, Unifi Capital Pvt. Ltd. - VP [142]

--------------------------------------------------------------------------------

Yes. Just a clarification. The regulator had said that banks not to cut stake in insurance firms to below 30%. Could you throw some light on that?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [143]

--------------------------------------------------------------------------------

I'm not sure which regulator has said that apart from reading it in the newspapers. So really, it's something that makes a lot of sense, but not sure that I've actually seen any notification to that effect.

--------------------------------------------------------------------------------

Hitesh Arora, Unifi Capital Pvt. Ltd. - VP [144]

--------------------------------------------------------------------------------

Okay. So there's been no formal notification to that effect either IRD or IRDA?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [145]

--------------------------------------------------------------------------------

No, no, nothing.

--------------------------------------------------------------------------------

Hitesh Arora, Unifi Capital Pvt. Ltd. - VP [146]

--------------------------------------------------------------------------------

Just one more question, please. On Slide 15, just wanted to understand better how you classify your protection products. You classified as term protection and then you classified as annuity. I would have thought that annuity will be more of a savings for us, which will be classified under non par. Could you throw a little more light on this?

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [147]

--------------------------------------------------------------------------------

Yes, sure. So we've always talked about 3 tenets of protection. So mortality, which is the term part of it. Morbidity health, it's very small. So we haven't shown it separately. And longevity, is where annuity comes in and hence, showing annuity separately.

--------------------------------------------------------------------------------

Hitesh Arora, Unifi Capital Pvt. Ltd. - VP [148]

--------------------------------------------------------------------------------

Okay. But would that be a protection product per se? Or is it a...

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [149]

--------------------------------------------------------------------------------

No, we're showing it -- when we say protection, what we mean is that there has to be some risk transfer. And annuity products, certainly, have a risk transfer in terms of longevity.

--------------------------------------------------------------------------------

Operator [150]

--------------------------------------------------------------------------------

The next question is from the line of [Vinayak Mohta] from JHP Securities.

--------------------------------------------------------------------------------

Unidentified Analyst, [151]

--------------------------------------------------------------------------------

So I just had a small question. If you're looking at Segment F in the Segment Reporting standards, the premium for that segment has gone down significantly in this quarter. So if you could throw a light on that part, the non-participating pension group regulatory.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [152]

--------------------------------------------------------------------------------

Yes. So that's basically the annuity business. We just mentioned that while the long-term opportunity is something that we extremely believe in, we want to ensure that we balance growth with profitability and risk management. So whenever we actually need to reprice the annuity rate that we offer to customers, we will do that. And depending on how the market is actually reacting to it, that could affect, in the short-term basis, how the business really works. But we do expect that in the medium to long term, there would be prudence that would be used to offer this, to write business in this segment. And that's how we plan to write it now as well as in the future.

--------------------------------------------------------------------------------

Operator [153]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [154]

--------------------------------------------------------------------------------

I have 2 question. Number one question is about the new business, the disclosure. So when you actually look at the new business trend growth, actually that there has been a big increase on the new business trend. So my question is what is the major driver on this new business trend growth? Is it more due to the commission or the leisure being related with the non par? That's my first question.

And then the second question is about the product mix. So if you're actually looking back to the last couple of years, the company actually has been most innovative in the market. And then the -- most of the changes mix that your margin and then the product mix was the surplus generation, very different from the rest of the player. So moving into the next 3 years, what would be the company's overall, the product mix look like? Do we expect that the current non par product could continue to be as a major product? Or are you preparing another or the more stage of the new product?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [155]

--------------------------------------------------------------------------------

Certainly on the first part, new business trend, the biggest driver of that is the acquisition expense. And that is a function of the growth and also a function of where the growth is coming from, both in terms of channels or in terms of products. So while the growth for H1 has been 37%, that has resulted in new business trend. The business that we're writing are from profitable channels as well as products, which is ensuring that our new business margin is fairly healthy, which we've spoken about. And also, in terms of the way this is supported by the surplus generated by the backbook. We do expect, on an ongoing basis, to continue to generate that as we write the business and unwinding of it that we spoke about earlier on the call.

As far as product mix is concerned, we've always maintained that we will continue to launch new products in different segments. And depending on how the customers react to those and the macroeconomic environment, those products will take share from each other. While overall basis, we would expect to grow as well. So we -- yes, we do expect to launch new products in different segments over the next few quarters.

--------------------------------------------------------------------------------

Operator [156]

--------------------------------------------------------------------------------

Next question is from the line of [Omkar Kulkarni], an individual investor.

--------------------------------------------------------------------------------

Unidentified Shareholder, [157]

--------------------------------------------------------------------------------

My question was regarding the -- how to value the companies in the insurance sector? Or is it only about EV or embedded value or the profitability is also should be considered?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [158]

--------------------------------------------------------------------------------

So that's a -- I think you -- honestly, you could ask your fellow colleagues on the call. They'd better positioned to answer that. We'd rather answer questions on the business really. But based on whatever we understand, it's all of everything that we've mentioned. It's the growth, the quality of the growth, the economic value generated as well as the accounting surplus emerging over a period of time. So all of these elements would form a part of the consideration set, in my view.

--------------------------------------------------------------------------------

Unidentified Shareholder, [159]

--------------------------------------------------------------------------------

This is mostly to do with regards the growth in the profitability is comparatively lower than all other parameters.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [160]

--------------------------------------------------------------------------------

So that's actually just anomaly in the life insurance business, where the accounting surplus gets affected or distorted because of growth and upfronting of expenses. So that's the reason why economic growth is something which is given more prominence, along with the growth and the quality of growth. So new business margins and the embedded value operating profit is something which is given significant weightage, and we do that as management teams as well. But we also have a very keen eye on how the accounting surplus is emerging. Vibha mentioned earlier in the call in terms of how operating variances are panning out. That is equally important as well because ultimately, the economic value has to translate into cash or near cash, which is basically accounting profit.

--------------------------------------------------------------------------------

Unidentified Shareholder, [161]

--------------------------------------------------------------------------------

So what will be your, say, medium- to long-term guidance in terms of EV?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [162]

--------------------------------------------------------------------------------

So as you know, we don't really give guidance on any of the metrics that you spoke about. But we do expect that if you were to break down the components on new business margins, we do expect a smooth upward curve on a going basis on new business growth. We've maintained that we like to grow faster than industry. If all of that pans out, then the rest of the things would follow as well.

--------------------------------------------------------------------------------

Unidentified Shareholder, [163]

--------------------------------------------------------------------------------

Certain issue -- would we, like, try to hold on to this line?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [164]

--------------------------------------------------------------------------------

We believe we can steadily grow from here on all parameters.

--------------------------------------------------------------------------------

Operator [165]

--------------------------------------------------------------------------------

Ladies and gentlemen, we'll take the last question from the line of Neeraj Toshniwal from Emkay Global.

--------------------------------------------------------------------------------

Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [166]

--------------------------------------------------------------------------------

Congrats on good set of numbers. So just wanted to understand in terms of margin movement, can we attribute to what does it do just because of the distribution channel? And what does lag from come -- what came from the movement in the interest rate because of the lag impact? And yes, if -- what if we have used the Credit Protect portfolio? And any, like, growth margin because of that, use of that particular portfolio in our hedging of the Sanchay Plus? I mean mix of questions related to margin.

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [167]

--------------------------------------------------------------------------------

So Neeraj, we laid this out on the stage of NBM walk-through, right, from basically 24.3% right up to 27.5%. And the biggest component there is basically the growth leading to the operating leverage.

In terms of product mix, this profile also is a significant contributor to that margin uplift. And so it's both of these elements.

In terms of pricing impact, yes, it would get netted off in the product level margins. And like we've discussed in the past, we do not lend too much of importance to product or channel level margins, given that it can be a function of allocation of expenses and also a function of the timing of business generated by the channels. So it's more in terms of the overall growth and growth coming from channels which are doing good quality business and generating high level of new business margin. We spoke about it earlier in the call in terms of agency. If you look at the product mix, you will get a sense of that. If you look at online, we spoke about the broker channel as well. So all of that would give you a sense in terms of the interaction between the channel and the product mix and also the operating aspects of pricing lags that you rightly alluded to.

--------------------------------------------------------------------------------

Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [168]

--------------------------------------------------------------------------------

Okay. And any let go of margin do you use for Credit Protect portfolio for writing Sanchay Plus? Anything on that, if at all?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [169]

--------------------------------------------------------------------------------

So there, again, it's about how you look at it, right? Credit Protect on a stand-alone basis and Credit Protect, along with non par, gives us a very -- it -- on a stand-alone basis, a profitable product category, and so it's a very strong customer need. When you club it with Sanchay Plus kind of a product, it addresses a need in the market and a sentiment like this. And it allows you to grow and generate margins out to a different product line. So we do not really see it as a subsidy coming from one aspect to another, especially given that it's both the non par segments, where the risk/reward profile from a shareholder perspective is absolutely the same.

So the key aspects are in terms of how do -- how does Credit Protect help us manage growth, profitability at a portfolio level as well as enable us to manage risk at the company level? So that's how we see the role of Credit Protect or any product in our portfolio.

--------------------------------------------------------------------------------

Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [170]

--------------------------------------------------------------------------------

Okay. So on the exit run rate of non par, we have 35%, 38%. On the overall, do we have any strategy or any number to how we are looking at it because your leverage is still very low. And there's (inaudible) available there in the market. So are we looking at any particular mix or in nearby, not necessarily -- maybe the range if we can just have on the terms of mix we are looking at?

--------------------------------------------------------------------------------

Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [171]

--------------------------------------------------------------------------------

So yes, yes. We did the balancing earlier in the call. Our intent would be to get to maybe at the 25%, 30% mark on ULIP, 35% to 45% maybe on non par. And participating would be maybe in the 15% to 20% range, and the rest would be protection annuities.

--------------------------------------------------------------------------------

Operator [172]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [173]

--------------------------------------------------------------------------------

Thank you. As mentioned, the detailed disclosure on our results is available in our investor presentation. I would like to thank you all for participating in this quarterly results call. Thank you.

--------------------------------------------------------------------------------

Operator [174]

--------------------------------------------------------------------------------

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