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Edited Transcript of HDFS.NS earnings conference call or presentation 23-Jul-19 1:00pm GMT

Q1 2020 HDFC Life Insurance Company Ltd Earnings Call

Mumbai Jul 26, 2019 (Thomson StreetEvents) -- Edited Transcript of HDFC Life Insurance Company Ltd earnings conference call or presentation Tuesday, July 23, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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

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Conference Call Participants

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* Adarsh Parasrampuria

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

* Atul Mehra

Motilal Oswal Securities Limited, Research Division - Former Research Analyst

* Avinash Singh

SBICAP Securities Ltd., Research Division - Lead Analyst

* Dhaval Gada

DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials

* Harshit Toshniwal

Jefferies LLC, Research Division - Equity Analyst

* Mayank Bukrediwala

Goldman Sachs Group Inc., Research Division - Associate

* Myung Wook Kim

JP Morgan Chase & Co, Research Division - VP

* Neeraj Toshniwal

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

* Nidhesh Jain

Investec Bank plc, Research Division - Analyst

* Nischint Chawathe

Kotak Securities (Institutional Equities) - Senior Analyst

* Nishant Shah

Macquarie Research - Research Analyst

* Nitin Kumar Aggarwal

Motilal Oswal Securities Limited, Research Division - Research Analyst

* Prakash Kapadia

Anived Portfolio Managers Pvt. Ltd - Principal Officer

* Prakhar Sharma

CLSA Limited, Research Division - Research Analyst

* Prashant Kothari

Pictet - Indian Equities - Portfolio Manager

* Punit Srivastava

Daiwa Securities Co. Ltd., Research Division - Head of India Research

* Sanketh Godha

Spark Capital Advisors (India) Private Limited, Research Division - VP

* Suresh Ganapathy

Macquarie Research - Head of Financial Research

* Vinod Rajamani

HSBC, Research Division - Asia Insurance Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good evening, and welcome to the HDFC Life's FY '20 Q1 Results 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.

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

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Thank you. Good evening, everyone. Thank you for joining us for the discussion on our results for the quarter ended June 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 spend the next few minutes running through the key highlights of our quarter 1 FY '20 results and would be happy to take questions post that.

Starting with an update on business performance. The quarter ended 30th June 2019 saw stellar growth underpinned by solid performance across product categories and distribution channels. We witnessed strong traction across savings protection and retirement solutions whilst maintaining a focus on profitable growth. On the back of a Y-o-Y growth of 63% in the individual weighted received premium, WRP, our market share amongst the private insurers saw a meaningful expansion of 420 bps from 13.3% in quarter 1 FY '19 to 17.5% in quarter 1 FY '20.

We continue to be the market leader amongst the private insurers in terms of putting new business premiums, with a market share of 25.1% in quarter 1 FY '20 compared to 22.3% in quarter 1 FY '19, driven by solid Y-o-Y growth of 49%. Our sustained focus on the 3 tenets of protection, namely mortality, morbidity and longevity, has resulted in a growth of 63% in total term protection APE, increasing from INR 187 crores in quarter 1 FY '19 to INR 304 crores in quarter 1 FY '20. The annuity business continues to show healthy traction, registering a year-on-year growth of 70% based on new business premiums, increasing from INR 409 crores in quarter 1 FY '19 to INR 695 crores in quarter 1 FY '20. We covered over 1.3 crore lives this quarter, and new business sum assured was INR 1.8 lakhs crores. This represents a growth of 26% and 46%, respectively, over the corresponding period.

We witnessed sterling growth in the value of new business, which has doubled from INR 249 crores in quarter 1 FY '19 to INR 509 crores in quarter 1 FY '20. This translated to an increased new business margin of 29.8% for the quarter. We may be able to achieve an industry-leading NBM on the back of a favorable business profile and continued cost efficiencies.

Our operating return on embedded value was 19.9%. Our profit after tax grew by 12% to INR 425 crores. The paid increase was on the back of a healthy growth of 27% in the backbook surplus. This resulted in a return on equity of 28.9%.

Next on channel performance. Our proprietary channels grew by 90%, led by agency, which grew at 121%. This has resulted in the share of our proprietary channels increasing meaningfully from 30% in quarter 1 FY '19 to 35% in quarter 1 FY '20 based on individual APE.

Our agency channel now contributes to 15% of our individual APE as compared to 11% in the same period last year. Our segmented agent recruitment strategy has helped us increase our new agent productivity by 82%. Our focus on ease of doing business for agents and higher agent engagement levels has resulted in our effortless productivity increasing by over 100%.

Focused on doing quality business has resulted in our agency business enjoying best-in-class 13-month persistency of 91%. Term protection has grown by 39% in agency channels. Our direct channel, which includes online, grew by 71% in quarter 1 FY '20. We have focused on a multi-dimensional approach covering branch walk-ins, tele-sales, digital touch points, cross-sell to Credit Protect customers, defense channels, amongst others.

Our online channel continues to be our fastest-growing channel. There has been a rapid expansion into savings and annuity products, with machine learning being used to improve search efficiencies and reduction of acquisition costs. Operating leverage kicked in due to strong growth, especially in our proprietary channel, that resulted in a lower OpEx ratio of 13.5% in quarter 1 compared to 14.4% last year.

Our bancassurance channel has grown at a healthy 42% based on individual APE, with HDFC Bank recording a robust growth of 44%. This was in the back of focused effort across multiple geographical zones and various nonbranch banking verticals. In addition, several initiatives have been taken to increase branch activation, productivity and manpower realignment.

We continue to tie up with new ecosystem partners. In our quest to build a financially secure India, we joined hands with Bharti Airtel in quarter 1 FY '20 to leverage Airtel's deep distribution reach. Airtel has launched a prepaid bundle that had an inbuilt life term plan from HDFC Life. This arrangement makes it very simple for millions of uninsured and underinsured Indians owning a mobile phone to obtain a life cover every time they recharge their phones. We are excited about the long-term prospects of such opportunities. We have deepened our relationships with many of our existing Credit Protect partners, including Bandhan Bank, Cholamandalam Finance, Bajaj Finance and small finance banks like Ujjivan, Utkarsh and Suryoday, who have also tied up with us as corporate agents to market our retail insurance products.

We have achieved significant growth across all distribution channels whilst maintaining a diversified distribution mix. We continue to expand our reach beyond the traditional modes of distribution, taking our partner count in excess of 270, including 40-plus new ecosystem partners.

Moving on to product performance. Growth was strong across all our product segments, with our non-par savings product, Sanchay Plus, being received with great enthusiasm. This has led to the share of non-par savings segment of 58% based on individual APE. We expect the share of other product segment to gradually increase through the year. Our Credit Protect business continues to do well, registering a growth of 21% based on new business premium, despite a high base and slowdown on NBFC disbursements.

Next on to business quality and technology as key differentiators. Our 13-month persistency in individual business saw an increase from 83% to 85%. Our 61st-month persistency has significantly improved to 53% from 49% in the previous year. As mentioned in our previous interactions, this is on the back of an improved persistency stream in our 49th-month cohort.

Moving on to technology. As we stand today, our operating model had moved away from being a traditional distributor and product play model to becoming an evolved matrix of platforms, digital channels, ecosystems and traditional avenues fueled by technology and analytics. All our efforts are focused on building a seamless experience for the customer across the policy life cycle, including smooth onboarding, deep integration with partner systems, hassle-free and simple servicing experience and focus on providing a personalized experience for the customer. In quarter 1, we launched HDFC Life Futurance, in partnership with IvyCamp, a unique program to which we aim to identify start-ups in the Indian insured tech ecosystem that will help us solve existing challenges and build next-generation capabilities.

As mentioned in our last quarter, we have gone live on our hyper-personalized sales incentive mobile application for our field sales force, which is also a first for the life insurance industry in India.

The app is designed to match individual sales personnel to execute specific tasks and then incentivize based on the closure of the assigned tasks. This is supported at the back end by a complex machine learning engine.

A quick update on our 2 wholly owned subsidiaries. Our pension subsidiary continues to be the #1 privately-owned pension fund manager in India in terms of AUM and also the fastest-growing pension fund manager under the NPS architecture. Its AUM as on June 30, 2019, was INR 5,911 crores, which is a growth of 96% over June 30, 2018. Its market share amongst all private pension fund managers grew from 23% as of June 30, 2018, to 27.7% as on June 30, 2019. The inflows of INR 764 crores in quarter 1 FY '20 represented a strong growth of 64%.

As you see, International Life and Re continues to forge ahead, with revenues more than doubling on a Y-o-Y basis. The company also continues to trend positively on both technical and net profit.

A recap of our financial performance in quarter 1 FY '20. Starting with premiums, our individual APE and total APE have grown by 64% and 67%, respectively. The value of new business has more than doubled to INR 509 crores. We continue to maintain industry-leading new business margins amongst listed players. Our new business margin in quarter 1 FY '20 was 29.8%. Embedded value was INR 19,230 crores as of June 30, 2019, with robust operating return on embedded value of 19.9%. Our profit after tax for FY '19 was INR 425 crores, clocking a growth of 12%. Our assets under management was INR 1.3 lakh crores as on 30th of June, reflecting a growth of 18%.

To conclude, we are pleased to have commenced the year with a strong performance across all key metrics, providing the best value proposition to our customers, partners and shareholders. The detailed disclosures on our results is available on 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.

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Questions and Answers

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Operator [1]

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

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [2]

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Congratulations on a very good set of numbers. And my first question is on the non-par savings business, which has grown at such a robust straight this quarter. So how sustainable do you think that this growth momentum is? And what is the outlook on new business margins? Like, is it fair to say that we are also peaking out on the margins?

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

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So you know, just taking your second question first, Nitin, on the peaking of -- we will ask this question when we crossed 20%, we will ask this question when we crossed 24.6% last year. And we really have China to look at. And without giving any forward guidance, I think if we focus on doing 2 or 3 things: One is focusing on all 3 tenets of protection, mortality, morbidity, longevity as well as the entire retirement space continue to eke out cost efficiencies. I think there's still a long runway.

On your first question on non-par. While this is on the back of a product launch and also we had an earlier product launch last year, quarter 3, which was on our -- on the back of our -- before the annuity, so a lot of innovation happening in the space usually happens under the new product. On a full year basis, we would see some more rationalization in terms of us having a balanced product mix. That's always been something that we have talked about to the right product for the right set of customers to the right distribution channels. So you'll see some of that happening, but there will always be a place under the sun for non-par savings for us also.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [4]

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Right. Okay. And thanks for the additional disclosure this quarter, especially on the sensitivity for the non-par business. But how are you managing the interest rate risk quantities guaranteed savings product? Do you think that managing this risk would be a challenge as this product gains size?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [5]

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Yes. So before I hand it over to Niraj, yes, we -- when you look at the sensitivity, the reason for us to put out that sensitivity and specifically on the non-par portfolio as against overall portfolio, which we were looking at, we also showcased low levels of sensitivity. And also Niraj will talk through how we have moved away from looking at hedging just from a product perspective to more of category or a segment perspective. Okay, Niraj, go ahead.

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [6]

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So like we've started articulating last time, we have a fairly comprehensive approach to financing risk management, which we've actually put out on Slide 20. What we've done there is also spoken about how that has actually panned out in terms of quarter 1. This is something that we started doing from this quarter, putting out sensitivities on embedded value and VNB margin in light of the change in product mix to basically demonstrate that, at an overall level, in spite of the change in product mix, the sensitivities to interest rate on both our embedded value and the VNB margins are within the range that you used to see us deliver in the past. So that's mentioned in Slide 20, where both on EV and VNB, it's fairly well contained.

Coming specifically to the non-par products on Slide 21 of the investor presentation, what we've put out more details around how we are looking at managing risk on the non-par portfolio as a whole. So what we do is we basically look at this portfolio as 2 parts. The first one is the annuity business, which is a combination of both immediate and deferred annuities; and the second is the nonannuity business, which comprises protection in both retail and group as well as non-par savings. And each of them obviously have different characteristics, which we try to lay out in terms of the risks that are there. Some of them might have interest rate risk, carry investment risk, longevity risk and mortality; and within each product category also we have subsegments, which have different risk characteristics, which again we've quantified here on the slide. Again, each of these, we have a mitigation plan.

And as a result of all of that, we basically have a metric, which we track to, which is net sensitivity ratio. This is basically the relative sensitivity of assets compared to that of liabilities. And we try now maintain a ratio as close to 1 as possible. Ratio of 1 basically means that the sensitivity of the assets is very similar or equal to that of the sensitivity of liabilities.

In terms of looking at interest rate and reimbursement rates, basically we're looking at 2 elements. One is duration matching and the second is cash flow matching. Duration matching basically helps us ensure that -- if there is a balanced shift in the income, we are able to manage that. We do a rebalancing at very frequent intervals, and that's something that we are able to do from a duration matching perspective. On cash flow, that actually helps us manage any sort of slope change that could happen in the medium to long term. So what we basically are trying to show you here is that as a result of all of these deep thought and that goes into the way we are actually managing this portfolio, and also all of this is on the bed of what we have mentioned in terms of a diversified product mix and the channel mix that we have, which allows us to do this. And as a result of that, what we've shown at the end is basically portfolio level, non-par sensitivity itself is fairly low on embedded value. And on the VNB margin, it's in fact -- it's no sensitivity because, by design, we are trying to do both of these approaches to ensure that we are not exposed in case the interest rates move in either direction.

All of this is also backed by the disciplined approach that we have in terms of periodically repricing our products as and when required, both on the annuity side as well as on the non-par savings side. In fact, we've done that about 5 to 6x on the initial annuity over the last 12 months. And we have recently repriced our non-par savings product as well after launching it just in the month of March. And we'll continue to do that.

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Nitin Kumar Aggarwal, Motilal Oswal Securities Limited, Research Division - Research Analyst [7]

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Okay. So -- and the other question that I had is on the renewal premium growth. Now that is one number, which is relatively modest at 10% Y-o-Y growth. The persistency rates have slightly improved. So what explains the softness in the renewal premium?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [8]

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So the main reason is that when you look at the renewal premium, it's on the base. We're comparing it with quarter 1 of last year. And a lot of products have [started] premium-paying term. So the premium is held by the product architecture. The PPT ended last year itself. So there was a known fresh premium that was due and hence was not received.

Also, the -- just given our life cycle, the maturities, a lot of policies are coming up for maturities post having paid a premium in the first quarter of last year. If we were to normalize it for these 2 reasons, it comes up to 18%, which you'll agree is a fairly respectable growth number, and which is why you will see the traction in 13-month as well as our 61st-month persistency. But in accounting parlance, it will -- it looks like a muted growth of 9%.

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Operator [9]

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(Operator Instructions) The next question is from the line of Adarsh P. from Nomura.

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Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [10]

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Congrats, and thanks for the disclosure on the interest sensitivity. I'll again harp on the same thing. If you can -- this is -- you've given the sensitivity and the internal dynamics. Just terms of point of view of the kind of business, the run rate that you had in the first quarter. Even if a bit of that normalizes, we are looking like, again, a large book on -- which you'll need a hedge like the -- more like -- correct me if I'm wrong, a 10-year paying product. You are doing INR 150 crores, INR 200 crores kind of a run rate on a monthly basis. So if you can walk through the kind of the pool on which either a hedge or naturally how you are getting that hedge, firstly. And if some amount of your product cash flows will restrict, how much of Sanchay Plus you could do because you have a certain amount of cash flow, which you can invest in long-tenure bonds or assets. So if you can help to give some qualitative example and try and illustrate what's happening, it will help us a lot.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [11]

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Yes. So Adarsh, just have the Slide 20 in front of you, and I'll talk in context of that and I'll also hand it over to Niraj and maybe Srini will also add.

2 or 3 things here. One is my earlier comment that now we are looking at a portfolio base hedging strategy rather than a product base. So within the non-par segment itself, different product streams that we have sold in the past also have different liability profiles. And often, they have shorter tenured liability profile, which we are able to have a pretty good match against some of the Sanchay Plus products. Second aspect is that Sanchay Plus has different variants, and so we do manage it to, what are the variants that we're selling? So it's not that all variants -- everything what we are selling is very long tenure. It could also have shorter tenure. Third aspect is that on the residual strategy. We will also look at some of the aspect of residual. Giving a lot more than that is to some extent you'll appreciate a secret sauce, and that is why we have put out sensitivity just on this portfolio. Do you want to add anything, Niraj?

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [12]

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All right. Absolutely. So this is something that is coming from our ability to do this, the point that we made others in terms of cash flows coming from different kinds of businesses. Yes, there is definitely some sort of ability that is linked to the cash flows coming from different types of businesses, and we closely watch that. The lower-duration liability products will have to kind of grow at a certain level for us to be able to afford to write it up for Sanchay Plus, and we are very absolutely closely watching that. So you can kind of take us up on that in terms of every quarter, the way we will now keep sharing this result with you and happy to engage -- to speak more on this at future points.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [13]

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On your other question, Adarsh, on how much business can we write. I think we have enough sensitivity to be able to grow even at these levels continue that and saying that that's what we will do. But if that's how it pans out, we have enough in terms of underlying assets to be able to write business against it.

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Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [14]

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Okay. Thanks for broadly clarifying. But even if you continue the run rate, you have the kind of cash flow from various products, which you would match, at least the investment risk.

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

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Correct. And the residual risk being very, very negligible. Do you want to add anything, Srini?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [16]

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But if you don't have any cash flows, we won't take just a deep cause and just keep writing these books up. So only thing we can offer, because you don't have any books to write on, then we don't sort of just, for the sake of, you won't be chasing this book. So that's what I can add.

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Adarsh Parasrampuria, Nomura Securities Co. Ltd., Research Division - Executive Director [17]

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And last question on the same topic would be can you just broadly talk about -- you said different variants of Sanchay Plus, so can you broadly talk about the duration of the liability here, broadly on Sanchay Plus pool, what you've written in the last 3, 4 months? What would be the duration of the liability here?

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [18]

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So Adarsh, again, we wouldn't really want to get into individual-level durations. The reason why we are talking about this whole portfolio apart from other annuities, so just go back to -- on Slide 21, the immediate annuity and the deferred annuity portfolio. On a stand-alone basis, it's basically kind of matching each other in terms of duration between assets and liabilities. The nonannuity portfolio by its -- and the composite form is basically, again, well matched. That's the reason why the sensitivities are very small on the embedded value and aren't there for VNB margins. The very fact that we're writing this business on non-par savings is because we have these other liability profiles, which, on a composite basis, give us duration matching for both assets and liabilities. We wouldn't really want to get into unusual product-level durations. I mean you could -- I mean, actually plot it. I mean it's very easy to plot cash flows and generate a duration for any liability profile, but our approach is something that we're just trying to articulate here.

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Operator [19]

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

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [20]

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Congrats on a good set of numbers. Just a couple of specific questions on this. When you are pricing the non-par product on the margin calculation essentially, would you consider the 96% 13-day persistency that you have actually experienced in the quarter?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [21]

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13-month, if I assume higher persistency, it's actually going to be not as prudent from a margin perspective. So we assume a little lower than 96% because it actually has seen nice growth taking the profits. So I don't assume 96%. That's on the side of caution and be a little bit conservative in estimates, at least start off that. But then later on, the later years, yes. The higher persistency actually reduces the profits and, therefore, will assume that almost close to -- even higher than your 96%.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [22]

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So assuming that the philosophy, if I go back and look at all the pricing assumptions on -- persistency-related assumptions going back in time, across -- of course, it's not just non-par. Usually, we would err on the side of abundant caution. And after we start getting a fair amount of experience, maybe 3 or 4 years down the line, that's when we might start calibrating it closer to actual experience. But when we don't have enough experience and it's not -- so this 96% that you see is not necessarily the product related on the block, and it would usually be business that we have returned last year. And so there would be a fair amount of caution exercise.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [23]

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And in terms of sensitivity to this, would this be kind of -- I mean, I would expect that the sensitivity would be more than the sensitivity of the overall -- all products put together?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [24]

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So it's Srini again. The sensitivity...

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [25]

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I'm talking about sensitivity to persistency.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [26]

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Persistency sensitivity, right?

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [27]

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Yes.

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [28]

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Well, I just said that being very prudent in the persistency assumptions for Sanchay Plus one, because I don't know how the persistency is going to be. So whatever gives me the lowest profit, I'd assume that -- that persistency assumptions.

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

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And also, Nischint, in a falling interest rate scenario, we would expect at least for the more rural customer to really be persistent. I said so, it's not being as rampant as it is yet that there could be some amount of "not knowing what policy they have bought" syndrome, but we would also -- it's also our job. And we will be reaching out to customers to explain to them that they're actually in the money based on the policy that they have bought.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [30]

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And in this margin, you would have assumed the interest rate at the beginning of the quarter, right? Or at a point of time in the quarter?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [31]

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They are attached, right. So I mean, like I said, we won't write this business if we don't have specifications and mechanism in place. And since we already locked into those at which we have priced the products, then it doesn't matter whether what pricing and all that.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [32]

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Sure. And any comment on the new product regulations and -- that could potentially affect you?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [33]

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So overall, fairly neutral. A lot of regulation which are fairly positive, especially in the pension and also in the unit-linked space. And that should more than offset the broad forward nature of our non-par policies that are existing in giving the minimum set and the value. So really a nonevent as far as HDFC Life is concerned.

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [34]

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What we do gives us a fair number of customers and the measures, which have come true on this product based on the revival period, increasing competition, many of those. And we also see opportunities in terms of some of the new regulator -- regulations that come in, in terms of smaller tenure products. And also overall, we do believe that many of these can work in terms of the Indian or our insurance penetration and the value.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [35]

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And exactly this was Suresh mentioned, the shorter tenure products are something that we are anyway working, especially in new ecosystems, and it all goes very well. In fact, this has been our recommendation, and we're very pleased that this has come true.

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Nischint Chawathe, Kotak Securities (Institutional Equities) - Senior Analyst [36]

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Just finally, one last question. Any outlook on APE growth that you could share with us for the next 9 months?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [37]

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We should see next 9 months, very robust APE growth. We've done well in quarter 1, we think, and should see good amount of traction. The macro situation continues to remain volatile, but all things being equal, we should see very good levels of APE growth.

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Operator [38]

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Our next question is from the line of Mayank Bukrediwala from Goldman Sachs.

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Mayank Bukrediwala, Goldman Sachs Group Inc., Research Division - Associate [39]

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Just wanted to have a little bit on the Sanchay Plus product and the interest rates and sensitivity around that. I understand that a lot of that hedging is happening on a portfolio basis where you are combining it with lower liability duration products like credit life. What I want to understand is what would be your interest rate sensitivity assuming an interest rate move of greater than 100 bps, assuming a 300 bps of interest rate move or 200 bps interest rate move? Because the sort of hedging strategy that you're following over here could introduce a convexity risk.

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

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So it would be very much in line with the numbers we have put out here, if it's plus 1% or minus 1% that you see here. It should be very much in line. The volumes don't change things very significantly.

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [41]

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So also it would really depend on how well you are matched on your cash flows, right? So convexity is basically -- duration matching will only help you manage a certain kind of change in interest rates. Beyond that, cash flow matching is something that is equally or even more important. And provided that you have the discipline of repricing a product in line with the economic environment, very high chances that you'll be able to still contain the sensitivity of the product, both on the embedded value as well as the VNB margin. So -- and obviously, that assumes that the product is still going to be attractive to customers relative to some other product propositions at that point in time.

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Mayank Bukrediwala, Goldman Sachs Group Inc., Research Division - Associate [42]

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Understood. Again, putting out another question here. In terms of the profitability of the Sanchay Plus product from a NVB (sic) [VNB] margin perspective, this, I'm guessing, would be lower than your overall margins. Would that be correct?

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

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Not really. Talking about individual segment-wise, because it also depends on which channel is selling, and all our channels are selling Sanchay Plus. So it becomes a complex matrix in terms of which channel and which version of Sanchay Plus. So difficult to -- so a broad statement and it's something that we've been saying, all our channels are more than double digit, have been, for the past 5 years, more than double-digit margin profitable. And we don't write loss-making business into perpetuity for sure. And so all our products are profitable. So -- and it really varies in terms of that matrix that I referred to just now on which channel and which sub-channel is selling what product and also to what age group.

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Mayank Bukrediwala, Goldman Sachs Group Inc., Research Division - Associate [44]

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Understood. And in terms of repricing of the Sanchay Plus, I mean you did some repricing recently, but that's not commensurate to the extent that [G6] have declined. So are we looking at further cutting down the IRRs on that product any time soon?

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

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So we have an automatic repricing mechanism based on movement in yield. And IRD has a regulation wherein we can't keep repricing it, say, every week. It has to be a 1-month cooling-off period. And that's why you might see some lag. But I think, rest assured, in terms of -- we would always have enough reserves to be able to cover in cases if there's a sharp movement in yields just after we have priced it or reduced the Sanchay Plus rates or any of the non-par product rate. Maximum, we might be out for maybe a couple of weeks before we can reprice again.

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Mayank Bukrediwala, Goldman Sachs Group Inc., Research Division - Associate [46]

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Understood. And sorry, if I can just slip in one more. And this one's not on Sanchay but on credit life. You've got very good growth for this quarter, but if you'll sort of look at what's happening on retail loans, you've actually begun to see some sort of slowdown over there. So just want to get a sense on what's still driving a very high level of growth over there, one. And second, in terms of your mix of credit life, could you give us a sense how much of that on an APE basis comes from the micro finance segment?

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

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Yes. So your last question first is about 1/3 is MFI, MFI small finance banks. In terms of -- we've grown at 21%, so yes, decent growth just given on the back of all the turmoil that NBFCs and banks are going through. What is important is that while disbursements have definitely gone down and some NBFCs are not disbursing, but our attachment rate has continued to do better. And so we are kind of making up for lower disbursement. And also some of our -- and also stepping back, we've always said that about 28% comes from overall HDFC group, and that's continuing to do well. Some of our marquee partners, which have anything between 6% to 8% share of our Credit Protect business, and I also mentioned some names like Cholamandalam Finance and Bajaj Finance, et cetera, they're also continuing to do well. And so it's -- the 21% growth that you saw isn't really -- it's an outcome of all of that put together.

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [48]

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Even within the CP portfolio, we have a fair number of partnerships, which run across various verticals. So depending on some balances, it keeps happening in terms of growth between different partners and different verticals. We manage the overall growth. Of course, we are often dependent on the base underlying disbursements for our partner. But then we try and make up by ensuring there is a higher penetration or we add products like group [payers or riders] and we try and see what is it that we can offer, which will also add value to the customer.

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Operator [49]

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(Operator Instructions) The next question is from the line of Prakhar Sharma from CLSA.

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Prakhar Sharma, CLSA Limited, Research Division - Research Analyst [50]

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A great set of numbers, congratulations. Again, I think this is probably going to consume the -- most of the call, so I'm sticking to the understanding on the guaranteed business. So just a couple of things, which I wanted to understand. So basically, the interpretation that I'm probably partaking is that technically, we probably interpreted non-par product as a guaranteed return product. But technically, it is a monthly guaranteed that an insurance company is committing to. Effectively, there is enough flexibility for companies to assess whether existing guarantee is serviceable, profitable. And if not, they can change it. And there are no...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [51]

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Sorry, I just want to interrupt this. No, that is not the case. This is only for new business that we can reprice. Whatever business we have already sold, we can't reprice.

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Prakhar Sharma, CLSA Limited, Research Division - Research Analyst [52]

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Okay. So if basically, you know -- I know you've had for existing business, a supposed rate, 450 basis point, and you've hedged it. But because it's a saving product, you would have large ticket size, and I think it's probably the most sold product on the street right now. There will be a sort of a capacity ceiling that you will hit because the cash flows you are probably getting from the other products will probably -- part of it is required in the ALM bucket that was already done till the 2, 3 quarters back. And part of it can be reallocated in the way you are now thinking of it. Do you think there is a capacity constraint that comes through because it's a saving product, there will be large flows and there is a limit to the existing book that can be reallocated?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [53]

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Again, without revealing too much in terms of our detailed strategy, like I mentioned on one of the earlier callers that we don't see, even for the next [2 or 3 years], whether grow by what we have grown in the first quarter of this year. We will not run out of capacity. So there is -- as long as all the other businesses that we are currently in continue to grow at their existing rates and not super normal rates, we should be okay. And I think Srini mentioned earlier also that in the event that, say, down the line for whatever reason, we don't have -- we will not write this business. So in terms of risk mitigation, we are very, very clear that unless we have an internal hedging book within the non-par space, we will not write new business. But as of now, no visibility at all or no fear at all that we will run out of capacity at this point.

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Prakhar Sharma, CLSA Limited, Research Division - Research Analyst [54]

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And from the deferred annuity business, the new regulations could still be positive because they allow better computation flexibility under...

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

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In fact, there is more computation, but that gives us lesser throughput for annuity. This is on the new products that you're talking about?

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Prakhar Sharma, CLSA Limited, Research Division - Research Analyst [56]

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That's right. That's right.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [57]

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Yes. They would be lesser in terms of what comes through automatically for annuity, so that it is both. But it also gives us an opportunity to cross-sell to them. So people who take out a higher amount of computation, we can cross-sell to them. So yes, largely, anything that relaxes and gives more flexibility to the consumer, we would see it as -- through a positive lens.

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [58]

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Especially the kind of investments we've made in our subsidiary and the kind of growth that we are seeing on pension, anything which can grow their whole segment is welcome. So I do believe that there's a great move for us in the pension space.

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Prakhar Sharma, CLSA Limited, Research Division - Research Analyst [59]

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And just again on the protection side, what would be the lead indicator that you would watch out to probably control the growth in this product, like if peers also come up with a similar product or a higher-risk product? Or I don't know, what are your assessments of what is basically make-or-break of change in environment for this product?

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

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So we continue to forge ahead well in terms of overall growth. So protection growth was 63%, like I mentioned. So we're doing well on that. And what you are saying, Prakhar, is already happening. So either the race to the bottom in terms of price setting has already happened. Despite that, there will be a sweet spot wherein the consumer wants to differentiate between a brand that can be trusted or a brand that has a very high level of claims payout ratio, like us, and we ended 99% last year, to another also [ran] kind of a plan. The areas that we would want to avoid, and we see a lot of peer group, peer companies going down this path, is in underwriting. And that does worry us, wherein then we have rated our policies. We do find these policies getting converted at normal rates elsewhere, which just means that perhaps not pricing for that risk. Often, the level of disclosures when they're writing that is also limited. So it's those sorts of things because it's not just one company versus the other, but it's more in terms of -- for an orderly growth of term insurance in India, one needs to have these checks and balances. Otherwise, the regulator clamps down or there is a lot of public outcry. All companies that start making losses down the line after they will -- sold it maybe a couple of years and mortality experience starts kicking in. And it's not to say that we have got it right all the time. We were the early movers in the space, and we've got badly burned back in time. And we've kind of evolved and learned from our mistakes. We used to sell term policies that were below INR 50 lakhs, as low as INR 20 lakhs with very limited underwriting, and we've got badly burned. So I think one needs to be very careful. It's not just a price lever that it is made out to be.

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Operator [61]

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The next question is from the line of MW Kim from JP Morgan.

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Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [62]

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And also congratulations for your very strong results. I have 2 questions. One is about your balance sheet. So the last 2 or 3 years and especially this quarter, there has been some potential change on the product mix. So my question is whether this product mix change would also impact on the future growth on your free surplus or the backbook surplus? The idea is perhaps the previous product would have a very short term. The profit recognition process versus non-par and other type of product would have longer period of the profit recognition process. So should we expect a potential slowdown on this backbook surplus growth going forward? So any view on this?

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

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Yes. Kim, you are absolutely right that when you look at the product profile of Indian GAAP profit, if you look at Slide 9 and you see the backbook loss, so you'll see for the quarter INR 4.5 billion. And there is, of course, a backbook profit but offset by the strain. So all of the strain, all things being equal should unwind exactly like we're alluding to over the next few years. And again, with reasonably conservative assumptions built in here, this should start unwinding. But yes, it does cause a strain when we write some of this business and -- but hopefully this will come through.

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Myung Wook Kim, JP Morgan Chase & Co, Research Division - VP [64]

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And the second question is about the distribution. So the company is very active diversifying the distribution, [the partner.] So in company's point of view, in next 5 years, what would be the optimum mix on the distribution? And then in the next 5 years, what should we think about the real value on the bancassurance distribution? It seems that overall the industry is trying to focus on the non-bancassurance business. So should we actually expect that, that distribution channel would provide more cost efficient or the better way to generating the new business? Or this is the one way to diversify the potential to build a pressure over the headwind on the bancassurance in the future? So what -- how we should think about the potential optimization on the distribution? And why this is the case?

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

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Yes. So the way I would see it is that agency should certainly go up. This quarter, we've ended at 15%. We used to be not long back about 5 or 6 years ago, agency channel used to contribute 22% to our business. So I would say agency going up to 25% our own direct channel, which are direct and online, another 25% and maybe 10% -- 5% to 10% some of the other channels, brokers and small corporate agents; and maybe 40% would remain as bancassurance is what -- how I would see it in the near term over the next maybe 3, 4 years.

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Operator [66]

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

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Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [67]

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One fundamental question. So when I look at the non-par savings and our approach towards expanding that business mix and then the return guarantee product, clearly we are relying on other products, be it Protection, Credit Life or different short-term duration products to match the cash flows for the longer run. But in a business where we have experienced volatility in business flows that is linked to market where we have experienced volatility in even the Credit Life Protection business because of multiple factors. So just wanted to understand that is it actually increasing the balance sheet risks in general? And even more importantly, by making the shift, should this -- ultimately the flow into the non-par savings has actually been coming from the cost of the ULIP in part because that business has started reducing on the same channel. So shifting the channels and the business mix so quickly over the next -- over 2- or 3-year period of time. Does it make the relationship of bancassurance a bit unstable versus the normal ones?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [68]

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So actually, Harshit, I am confused because you started off with product and nonpar and you went to bancassurance. So

I'll come to that, and I'll just ask you a little bit more on that connection. But to your first point on non-par, like my opening comments, we would expect to see lot more normalization of non-par, like we've always maintained that balance product mix. So we would see par going up closer to 20% on a full year basis. We would see unit-link going up as well. And correspondingly, nonpar as a percentage coming down. Non-par, we'll continue to grow non-par, but I think as a percentage, quarter 1 has been all eggs in this basket because of the product being [single,] but it wasn't entirely -- that's how -- it wasn't strategized that that's how it should be. And often, different quarters and even in the months we've had a particular quarter, for example, if I look at quarter 3 of -- sorry, quarter 2 of last year, especially September, very high spike in unit-link. So this is not the first time. Like I said, one-off things, it could be macro. It could be on the back of a product. In that particular last September, for example, was in the back of a new product launch that we have had, Click 2 Invest. And we had Click 2 Wealth, all these in the unit-link space, which again caught the imagination of policyholders and did very well. So this is quarter 1, so we would see a fair amount of normalization down the line. I didn't quite catch your point on the -- connected to bancassurance, if you could elaborate.

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Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [69]

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Right. So when I look at the bancassurance channel, the business which they have been doing, so the increase in the non-par savings product, which has come from that particular channel, has replaced ULIP and past ULIP business, which maybe the bank would have done. So is that a cannibalization between now the ULIP savings business and the HDFC Life Sanchay business?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [70]

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See cannibalization means that at the same levels of rupee value, I am selling one versus the other. That's not the case. Everything is growing. And if you look at just the par, I would just say that just watch this space and you'll be pleasantly surprised.

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [71]

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I think also key to note that -- look, our -- primarily a lot of our bancassurance business comes from HDFC Bank. And they issues both on their base. So you know -- I mean, frankly, a new bunch whenever it comes in does show us a spike on one particular thing, but it has led to an overall growth. So it's not that it has cannibalized fully. It's just over a period of time as they continue to grow at that rate, we will hopefully have more of the newer products on par or we will be coming in back again.

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [72]

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So the change in product mix itself, HDFC Bank has grown at 44%, right? So the product mix is something that will keep evolving. What we'll be focused on is running a profitable mix and growing the channels.

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Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [73]

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And one last question, if I may, gentlemen. So Tata and Birla, do they have similar products in terms of nature like HDFC Life and Sanchay? So -- you have always been one of the innovators in terms of products. So this product, do you see Tata and Birla also offering these kind of non-par guaranteed return?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [74]

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Difficult to say really what's happening on their table.

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Harshit Toshniwal, Jefferies LLC, Research Division - Equity Analyst [75]

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Okay. Okay. Okay. And why is the unwind so low? And VIF declining in this particular quarter, more from the easy momentum?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [76]

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Conservatism here. Rather than first coming up on much lower yields and then reacting to it, a little bit of conservatism built. Srini, you want to elaborate here?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [77]

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So yes. So unwind, we've reduced the rate that we've been using in the past since the investment team tells us that the outlook for the states is actually going to be lower. So little bit more cautious as we kind of frame to measure we reduced it further. So that's how -- and the reason for VIF going down, I think I explained this earlier is because we are writing non-par products and as the intercedes go down you would appreciate that the VIF falls, but since we are hedged positively, there will be an uplift in the net worth. So that's why it goes up and the VIF falls. So at the EV level, the non-par book...

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

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Neutral.

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [79]

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Is neutral. So that's why movement in the EV level, but within the EV, you'll see the movement [quantum more clear].

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Operator [80]

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(Operator Instructions) The next question is from the line of Suresh Ganapathy from Macquarie.

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Punit Srivastava, Daiwa Securities Co. Ltd., Research Division - Head of India Research [81]

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My question is on the Sanchay product. I was going through the brochure, and it looks like the effective IRR on this product is only 6% to the customer. I mean it all depends on the way you calculate. There is very rapid growth in this product, obviously, and the surrender penalty it looks like it is 70% in the first couple of years. What I'm trying to decipher is that -- and, of course, the agency channel has massively sold this product. I mean, how well trained the agents are and how well informed the customers are? Would there be a chance of misselling? Is there a proper check and balance in place because we are just worried that there could be a regulatory IRR on this product eventually if such kind of stupendous growth continues?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [82]

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So good point, Suresh. They actually understand this product better than certainly perhaps a participating product or some of the other products, even a more complicated unit-linked product. They understand that they have to pay x, and they will get y after maybe a holiday of 1 year. So they understand that. They also understand the company cannot reprice the y no matter what. They understand that. They understand that if they want -- unfortunately, the policyholder dies during that x period when he's paying, then his family will get whatever the sum assured. These are the 3 simple things that are there. He also understands that like you said, 6% or 6.5%, he will get tax-free. And so actually the construct when it is explained in this manner, he is able to understand it, I think fairly well. And as of now, at least, we are witnessing say in the agency channel since you mentioned 91% persistency, including the shorter pay products that we have. So -- and it was 90% last year when we didn't have this product. So I actually think that in a falling yield scenario, this product will continue to remain persistent. We will also call our people to say not to surrender their policies because they would actually be in the money. Often, they might not understand that they're in the money, so that's our job to educate them that interest rates have moved very sharply, which is how -- what the outlook is. And they're in the money, so it doesn't make sense for them to surrender. And we can always give a loan against the policy in case they are in any financial trouble rather than them surrendering the policy. So don't really see that anything more than what we would see in any other product, for example.

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [83]

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In fact, it's the simplicity of the proposition actually that makes -- that made it a big success because you pay x for 10 years or 12 years and you get 2x, 2.25x for the following 12 years. So I believe that it's because of the simplicity it was able to gallop so fast in probably 1 or 2 months of its launch.

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Suresh Ganapathy, Macquarie Research - Head of Financial Research [84]

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No. But okay. I mean, my point here is, for an astute investor, it may still not appeal a 6% return over a period of 15 years. Having said that, just on the surrender penalty, which is so high in the first couple of years, I mean this would conform with the new IRDA product regulations on surrender charges on non-par products. I mean, but there hasn't been any issue, right? I mean, because it seems to be exceptionally high.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [85]

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So we will have to refile it. But overall, like I mentioned, overall as HDFC Life not -- no material impact on margins because we have a balanced portfolio, so we have unit-linked also, we have non-par also. Quarter 1 is perhaps most skewed to a non-par. But other quarters, like I said, have been skewed towards ULIP. So we have a balanced mix of all and so the outcome of the product regulations are something that negate any material impact on margins.

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Operator [86]

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The next question is from the line of [Pratik Poddar] from Reliance Nippon Asset Management.

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Unidentified Analyst, [87]

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Question on Slide 21 -- ma'am, on Slide 21, if I were to look at the longevity risk for a return of purchase price product, the longevity risk is written as low. I didn't understand that. Could you just help me understand that completely?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [88]

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So this longevity risk is actually because most of the policies that we sell here in the annuity is return of purchase price, which means that supposing a policyholder is going to get x, he gets actually a haircut on the x because at the end, when he is no more, his nominees would get the purchase price back. He is willing to do that because typically an Indian, unlike in the West, wants to leave something to his or her nominee, and so he's willing to take a haircut during the person's lifetime and so that becomes a natural hedge for us.

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [89]

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And just to add to that, basically return on premium is [sum] -- and if you were to just look at the present value of all the flows that the policyholder will get, the longer the person lives, the coupon will continue, but the principal payment will get shifted out. And in present value terms, it moves in both directions. We are kind of managing our longevity risk by returning the premium back to the policyholder's family when the policyholder dies. So basically, it's just time value of money, which gets adjusted between coupons and the principal. Given that's a single premium product, there is no reinvestment risk, longevity risk gets kind of managed whichever way the mortality or longevity moves at a portfolio level.

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Unidentified Analyst, [90]

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And just to add to this, the natural hedge part where you say protection and longevity business, and when I look at this ROPP, how should I link these 2? I was a bit confused because I understood this but then I don't understand the protection and longevity offsetting each other, right? Because if there is no longevity risk on this product, then you understand, right, what I'm trying to...

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [91]

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Yes. Yes. So see the thing is, what is there on Slide 20 is basically more conceptual in terms of the portfolio of businesses that we write. We don't mean to say that every policy -- longevity product policy will kind of cancel off the mortality risk that we write on a term protection plan. It's more just to highlight the point that diversified product mix will help you manage each of these risks at a portfolio level. And depending on how -- either on a stand-alone basis or on a portfolio level, you'll be able to look at each of these. So longevity risk gets mitigated by product design, but also when you write mortality, I mean, a perfect hedge would be when you write both the products on the same life. When you don't do that at a portfolio level, it gets a little broader. Just cools off risk, which are basically working at different directions like the example that we've given on unit-linked and non-par savings as well. They both react differently to change in interest rates, may not be in the same magnitude, but that's basically the point we're trying to make at a very broad level.

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Unidentified Analyst, [92]

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Okay. Understand. And just 2 more questions, if I may. One is on, you talked about product rationalization strategy, which was anticipated. Thus on the ticket size also, is it fair to assume that if I see quarter 1 growth, in fact the quarter 1 growth has come from ticket size increase? So is it fair to assume that, going forward, we would see even the ticket sizes getting rationalized as and when the product gets rationalized? Fair to assume that?

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

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Yes. It would get -- and if you just look at the NOP also, if we were to exclude health business, it would be 13%. So while if you look at NOP, number of policies have been flat but actually last year, in the first quarter we wrote these are very small ticket size health business, and that health business did not have great persistency. And so we stopped writing that in this quarter. If I were to correct for the impact of the health policy, then it would grow by 13%. But yes, to your point, the much higher levels of ticket size is on the back of non-par. That also may come off to some extent. And for example, unit-link, we have never been very enthused by very high ticket size. So we would not go down that path.

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Unidentified Analyst, [94]

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And ma'am, when you say 13%, I'm just asking a clarification, this 13% increase is just when you say the ticket size increase, right, adjusted for the number of health insurance policies which you have sold?

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

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So NOP would be 13%, yes.

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Operator [96]

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

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [97]

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Just going through the VNB walk, which is in the Slide #26. We see that the margin expansion happened, the operating leverage played 300 basis points for the margin expansion. So this operating leverage is basically, we have adjusted our cost, which we have experienced in Q1, while reporting the at-term margins? Or this is still based on the FY '19 cost assumption?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [98]

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No. This is exactly what we have in Q1. So Sanketh, as you know, unlike a lot of peer companies, we don't have any straight-line basis of cost or estimated cost. What we incur in quarter 1 is what you see here.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [99]

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Okay. So basically the cost is mark-to-market kind of a thing. But the persistency is based on -- the last persistency and morality still based on last year's assumption?

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

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Yes. And we might have slightly strengthened something if we found any adverse, not that we have anything significant, but I'm just saying philosophically speaking, yes, typically, it would be, we do this once a year in March. And beyond that, if we feel the need to strengthen our persistency assumption, which mean make it more conservative, we might do that. But usually, it's once a year.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [101]

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So the clarification is, for example, in the next 9 months, the growth slows down to some extent, moderates to say 25%, 30% growth compared to 63%, then the operating leverage, which is 300 basis point, will moderate over a period of time?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [102]

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Yes, as a percentage, it would. Yes.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [103]

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So the margins, which delta you got it from 300 basis point will, to some extent, moderate if the product mix also moves in favor of ULIPs and par, even maybe for the full year margins will not be true to the extent what you have found in Q1?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [104]

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So our full year margins would be robust. It would be a smooth upward curve. We ended at 24.6% last year. There will be a balanced product mix that we will pursue or we think that we can get to a balanced product mix over the next 3 quarters. So that's what you'll have to factor in, in terms of margins.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [105]

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Okay. And just one more thing if I can...

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Operator [106]

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(Operator Instructions) The next question is from the line of Dhaval Gada from DSP Mutual Fund.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [107]

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Just couple of clarifications. First, internally, do we have a gap around the amount of deferred annuities that we want to underwrite? That's the first question. And second is on -- just on Slide 21, one clarification. In the past, you explained this internal cash flow hedge that we have. If you could just elaborate with an example, that would be very useful.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [108]

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So Dhaval on the first one, do we have a cap? No, we don't have a cap, except that goes back to what all of us have alluded to about having balanced product mix. So in that context, we will continue to diversify what we sell and also see the need-based analysis. And in that context, we would see some rationalization happening, which means that unit-link and par also will pick up, and we're fairly confident of that.

Do you want to...

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [109]

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Just to add to that, to your point on deferred annuities. Deferred annuities, again, product design is one way we are very, very closely monitoring in terms of the deferral period as well as the age at which we write. So we put that again on Slide 20 in terms of both of these elements, average age at which we write the annuity business as 59 years. So we are not really writing this at young lives. And also in terms of deferment period, it's less than 4 years, which is again the way in which we want to manage our reinvestment risk. So it's clearly both of these elements, which are very critical to ensure that we are able to manage the sensitivity on our annuity portfolio on a stand-alone basis, as we've highlighted on Slide 21.

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Dhaval Gada, DSP Investment Managers Pvt. Ltd. - Assistant VP of Investments & Equity Analyst for Financials [110]

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Sure. On the second one, just on the internal cash flow hedge.

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [111]

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So that again, we discussed few times on the call. Yes, the ability to write non-par savings is dependent on our ability to continue to write shorter-lability products on the protection side. We've said that earlier, and we've reiterated that on the call. And like Vibha mentioned, we have enough visibility in terms of cash flows coming from other parts of our business to be able to write this. And yes, that will be the natural cap, without which we will not be able to manage this internally. And as we've said that we have a fairly long runway to go there. The last box on Slide 20 is basically what we will have access to if we want to really go beyond what we have internal in the company, which is basically any sort of external hedges that we can get over a period of time. At this point of time, it's all based on internal ability to manage this risk.

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Operator [112]

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

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [113]

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So on Sanchay Life Plus product, what is the average IRR that we have been promising in Q1? Because there are 3 or 4 variants and the IRRs are quite different in all these 4 variants?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [114]

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Yes. It's close to 6%. Now that we've also repriced it, 6% but...

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [115]

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At 6% IRR, we must be assuming that our investment return will be around 8.5% to 9% to make decent money on the product given the acquisition cost and all-in cost? So are we having such instruments to invest for the next 12, 24 years, which are linked to those sort of returns?

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

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So you've made some assumptions on the spread where we need to basically get to this level, this -- that may not really be the case. The spreads that we work with are probably different from what you're suggesting. And what is available in the market is something that we would try and reflect on our price as dynamically as we can. Like Vibha mentioned, that is once a month that we can do this. And we've just done one repricing after launch last month, and we plan to do one shortly as well.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [117]

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Yes. So the spreads are nowhere what you have said. They're far more wafer thin than what you've said.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [118]

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Sure, sure. Because what I want to understand is because a lot of peers are saying that it's a lapse supported product. So if hypothetically, a customer continues with you for that entire duration, is it still making money for the company? Or does that serve that customer?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [119]

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So in that case, to the earlier question that, I think, Srini answered, as to lapsed support, then it would reflect a lot more in terms of our persistency assumptions. In a falling yield scenario, I don't see -- I think if we were to bank this as being lapse supported -- like I know that some of the smaller insurance companies have done that in the past. I think it would be very, very risky strategy, and I think that's something that I don't think it augurs very well with corporate governance of our company to say that you're writing business to make it lapse supported and that's what makes margins. I don't even know how to answer that question.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [120]

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Sure. Sure. Sure. But for customer who will stay with us for the entire term, still it will be a margin-accretive for us?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [121]

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Yes, very much. I bought this product.

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Operator [122]

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The next question is from the line of Prashant Kothari from Pictet.

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Prashant Kothari, Pictet - Indian Equities - Portfolio Manager [123]

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Vibha, just -- sorry, one more question on the Sanchay Plus. So I understand that the liability profile is probably matched for the fair premium that you are getting. But what about the future premiums, because if, let's say, for whatever reason, these premiums on the Protection or the Credits side drops a lot, how would we kind of match the liability profiles?

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

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So we have mentioned this earlier on the call that basically this is a regular premium product anywhere between 5 years to 10 years. And -- but the fact that we're talking about duration matching and cash flow matching is basically to cover both interest rate risk as well as reinvestment risk and reinvestment risk is from future premiums, which basically does get matched both on the duration side as well as on the cash flow side through different liability product categories that we have. So it's not just covering the first premium. It's also covering future premiums as well from products which have actually bought assets to be able to help us manage this risk both for duration as well as cash flows. And then there are ways in which we are absolutely able to deal with this internally, some of which we've shared with you on the call. The rest of it we believe is proprietary, we'd like to kind of keep it with us. So we would just urge you to look at the results. And basically, we are absolutely clear that this is something that we watch very closely. And we will share this with you every quarter in terms of how this is panning out.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [125]

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If I could make a broader point given that we have about 10 minutes or so left, if any further questions are there on this particular product, then we could perhaps take it off-line because I think that we've covered every aspect of this product. And if there are any other questions that people on this call would like to ask, then happy to take those questions.

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Operator [126]

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(Operator Instructions) The next question is from the line of Nishant Shah from Macquarie.

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Nishant Shah, Macquarie Research - Research Analyst [127]

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Right. So one thing I noticed in this presentation, your ROE is not changing materially. In fact, it's like going down like maybe 2 basis points or something. So it's at 19.9%. So do we understand that like these non-par products are a lot more capital-intensive and though margins may be higher or like some productivity gains would be higher, in terms of return on capital, they're not really changing the profile that much for the whole company.

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

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Not really. Because if you compare like-for-like quarter 1 of this year versus last year, last year was 18.4%; and this year, 19.9%. So there has been a meaningful expansion of ROE. And as you know, on a full year basis, especially when you include the uplift that you get in quarter 4 because of the higher volumes that comparison would not be the right comparison.

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Nishant Shah, Macquarie Research - Research Analyst [129]

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Okay. Fair enough. And one more question, just in this quarter,, because we've seen a lot of growth in these non-par products, still somehow we're seeing a sequential rise in solvency. So how does that happen?

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

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So because usually, if you look at every quarter 1, it is the solvency you will find as higher than quarter 4. So this is just a seasonality of it and that's why you will see, I am guessing that you're comparing it with...

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Nishant Shah, Macquarie Research - Research Analyst [131]

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4Q, yes.

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

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Yes, but you'll find that when you look at Q1 of last year, it will be higher than March of the previous year.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [133]

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What explains this seasonality?

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [134]

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So basically in Q1, what happens is that the growth in PAT is higher than the required solvency margin growth. So that basically kind of adds to solvency. That's what happens pretty much every first quarter.

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Nishant Shah, Macquarie Research - Research Analyst [135]

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Okay. Fair enough. And just one small clarification...

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Operator [136]

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(Operator Instructions)

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Nishant Shah, Macquarie Research - Research Analyst [137]

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It's just one tiny question. So 15% going to 58% in non-par, I'm making the assumption that 58% includes Sanchay Plus?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [138]

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Yes, it does.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [139]

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Yes. And all the variants, including the life-long variants?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [140]

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Yes.

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Nidhesh Jain, Investec Bank plc, Research Division - Analyst [141]

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Which -- and they're not classified under annuity. They're classified here under non-par, correct?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [142]

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Right. Correct. Yes.

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Operator [143]

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

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Prakash Kapadia, Anived Portfolio Managers Pvt. Ltd - Principal Officer [144]

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Thanks. My questions have been answered.

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Operator [145]

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The next question is from the line of [H. R. Gala] from Finvest Advisors.

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Unidentified Analyst, [146]

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My questions are also answered.

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Operator [147]

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

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Unidentified Participant, [148]

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Just wanted some feedback. So what would be your reasonable aspiration as far as ROE is concerned over a period of time, say, 3 to 5 years, if you can give some comment on that?

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

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See ROE, you will agree that is anyway healthier than I think any other industry that I can think of in the BFSI sector, right? So we don't really project our ROE, reason being that even Indian GAAP is really an outcome of whatever that we are selling. And you'll also see that the 12% growth in PAT is really very different from the traction that we have seen in margins or ROEV. And so ROE, I think, is a little bit way off from becoming a mature company and it's really ROE-driven. But we would expect to see a lot of unwinding of the business, good business that we are writing right now, reserving for it and over the period of -- over the tenure of the policies, unwinding of those profits. So ROE should move upwards, but really ROEV that at this point in time that we are focused on. ROE is more outcome.

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Operator [150]

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

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [151]

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Yes. One is multi. There has been a slight increase in your investment provision for standard and nonstandard both in the policyholder accounts and shareholder accounts. Can you just provide some color on which investment has happened? And also, the policyholder account, the tax savings, I mean, of course, provision for tax savings has dropped [industry-wide] companies and as well. So just 2 clarifications?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [152]

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So on the second point, Avinash, it has dropped because of -- the way taxation works is that the projection of how much each component of your underlying emergence of Form I surplus as well as what is the dividend cover that we have, what is the mix of pension and that can vary. If you're looking at quarter 1, this will normalize as we go. For the full year, it will not be very different in terms of effective tax rate versus last year. Your first question, I didn't really get. Can you just -- something about shareholders and policyholders. Can you just...

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [153]

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Yes. On both the accounts, the provisions -- the provisions for your standard and nonstandard investments? In Q1 FY '20, it's meaningfully higher. I mean, it's almost comparable to the full year '19. So could you provide which investments in particular, I mean...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [154]

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Avinash, I don't want to give split-wise, but some of the usual names that have -- that are undergoing something. And it is based on -- it's rule-based, wherein if a scrip equity drops a particular percentage then, over the period, then it's similar to the RBI rules.

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Avinash Singh, SBICAP Securities Ltd., Research Division - Lead Analyst [155]

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Okay. Is it equity or debt? I mean in debt, I think you have 50% in year 1 or something like that?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [156]

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Yes, it is both. Yes. But none of the big names, to give you comfort. IL&FS, I've said in the past, we had INR 65 crores, wherein 75% of that has been written down. And when you say INR 65 crores in the context of our assets under management of INR 1.3 trillion, it's really nothing.

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Operator [157]

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

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Vinod Rajamani, HSBC, Research Division - Asia Insurance Analyst [158]

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I wanted to know the split of this deferred annuity product. What is the split in terms of how much is return of premium and say non-return of premium, on both the 2 variants?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [159]

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So we have this on -- given this on Slide 20, wherein we talked about 95%.

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Vinod Rajamani, HSBC, Research Division - Asia Insurance Analyst [160]

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Okay. Okay. And what is the rate that you offer? What is the differential in terms of the return of premium and the...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [161]

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It varies quite a bit, Vinod, between what age group, et cetera. So...

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Vinod Rajamani, HSBC, Research Division - Asia Insurance Analyst [162]

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Yes. But on average, for the same cohort, how much would it be?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [163]

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It's about 2% lower.

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Operator [164]

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The next question is from the line of Neeraj Toshniwal from Emkay Global.

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [165]

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Congrats on the good set of numbers. Just wanted to understand what kind of IRR you're offering in terms of deferred annuity and midannuity vis-à-vis Sanchay Plus? I mean how different...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [166]

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If we could take the questions on this off-line, like I mentioned, I'd really appreciate it.

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [167]

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Just a bit on that, if at all you can answer that one, how much will be the IRR be on...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [168]

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IRR on...

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [169]

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On the deferred annuities and mid-annuity vis-à-vis Sanchay Plus just wanted to understand...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [170]

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That's a little bit more, I think, involved. You're comparing different products, et cetera. It's difficult to give a simple answer to that.

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [171]

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Okay. Any color?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [172]

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Anything else that you wanted to ask?

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [173]

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So are we [clubbing] a new pension group variable with this deferred annuity and limited annuity and Sanchay Plus annuity business, non-par annuity?

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [174]

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Annuity is in the pension segment. Sanchay Plus is in the non-par life segment. So we are not clubbing the 2. It's basically...

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [175]

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Non-par is only non-par. Annuity is separately carved out on Slide 15.

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [176]

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No. No. Actually in the LODR, there's a deficient non-par annuity business and non-par pension group variable. That has also grown a lot. I mean that has become 3.9% of APE just from 1 point (inaudible) ...

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [177]

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(inaudible)

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [178]

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So just wanted to know what has led to the sharp rise into the pension group variable coming from the deferred annuity, limited annuity, anything else as well?

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [179]

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Group funds. They are group funds.

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [180]

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The fund administration business, the group (inaudible).

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [181]

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That would be a little lower-margin business, if I'm correct. So that's the flow business -- fund flow business just led to such sharp increase in the pension group variable?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [182]

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That's correct. And the pension business is a feeder to our annuity business.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [183]

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What you're seeing is the volume, and we do a fair amount of volume there. It's not a percentage right? So you can't really make out in terms of what it is as a percentage.

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [184]

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Okay. Okay.

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [185]

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Okay. Because LODR would have the rupee value.

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Neeraj Toshniwal, Emkay Global Financial Services Ltd., Research Division - Research Analyst [186]

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Got your point.

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Operator [187]

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(Operator Instructions) Next question from the line of Sanketh Godha from Spark Capital.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [188]

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So the annuity rates for a 60-year guy, we are offering it around 7.2%, immediate annuity return of purchase and the G-Sec rates are as of now trading below 7 percentage -- or closer to 7 percentage. So looking at that thing, we see that the margins made on immediate annuity return of purchase would be significantly lower or that is because multiple times in the call, you mentioned it's backed by G-Sec paper. So my understanding is right or we will be in the future probably our G-Sec yield average was better than 7.2% and therefore, we are making margins there, and we will reset in the subsequent quarter, therefore, the margins remain intact?

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Niraj Ashwin Shah, HDFC Life Insurance Company Limited - CFO [189]

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Yes. It's a combination of both. We will reprice this at the next possible opportunity. And the asset allocation between immediate and deferred annuity is a combination of last week G-Sec for some corporate bonds as well. So the yield pickup comes from there as long as we're able to match the duration for both the immediate and deferred annuity portfolio as a whole. We are -- that's how we are basically managing that book.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [190]

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But bulk of the investment backing the annuity EVM is G-Sec?

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [191]

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It has some corporates as well, not 100% G-Sec yes, state bonds, we have corporates, which are all slightly -- they give a decent spread over the G-Sec.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [192]

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Okay. And one last question, if I can. ANW growth if you see in the slide, it has grown by INR 11 billion from last March to June. But in balance sheet, we have grown it by INR 400 crores. And economic variance is just INR 80 crores. So I'm not able to understand what that INR 6 crores is coming from -- INR 600 crores is coming from.

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [193]

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In ANW, you're looking at the balance sheet, right? So there it's amortized. But what you see in the MCV is MTM.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [194]

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No. So that MTM is captured as economic variance, right, if I'm not wrong, of INR 80 crores?

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Suresh Badami, HDFC Life Insurance Company Limited - Chief Distribution Officer & Executive Director [195]

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No. See the MTM there and here may not be exactly matching. There will be...

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [196]

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Because sir, my understanding was that economic variance which we see generally for any insurance company it is basically MTM gains on the fixed income portfolio?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [197]

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That's in excess of expected return. Anything in excess of expected return is economic variance that flows into the operating.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [198]

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Risk flows directly into ANW, you mean to say, right?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [199]

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Yes.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [200]

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So we have an MTM gain of around INR 600 crores in the current quarter?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [201]

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Yes.

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Sanketh Godha, Spark Capital Advisors (India) Private Limited, Research Division - VP [202]

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So just -- I was asking, we have an MTM gain of around INR 600 crores in the current quarter on the fixed income portfolio. That reading is right, if I back-calculate it?

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [203]

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Yes. So there is an offsetting impact between the risk and the ANW, right? So that's basically what happens. When interest rates move in a particular direction, it affects risks in one direction, the ANW in other. So that's basically the offsetting impact that we were just talking about.

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Operator [204]

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The next question is from the line of Atul Mehra from Motilal Oswal Asset Management.

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Atul Mehra, Motilal Oswal Securities Limited, Research Division - Former Research Analyst [205]

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Sorry for asking a question to do with the same product, but ma'am, just one thing in terms of, given the attractiveness of the product for say investors and the distributors alike, so do you see this product actually displacing a lot of mutual fund flows or otherwise other insurance flows or debt flows or any kind? Because given, adding the current environment, do you see this particular thing panning out? And in this context, how do you see these products gaining going forward, because in one of the comments you mentioned on the call was there is no limit as to what you're looking at. So you may consider 50% of the book now in terms of increment billing, you're okay maybe [ascending] higher? So is there anything on that sort of how scalable this can be going forward to you?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [206]

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So it can be scalable. And having said that, right sale of the segment has to be right to the customer who is looking to lock in his long-term savings into a particular rate, not necessarily having an equity upside, for example. So not only looking at Protection product. So depends on what the customer is looking at. On your question about whether it's going to displace something. I think insurance is, overall, fairly underpenetrated. So even without beginning to displace some other part of the BFSI in terms of savings, I think there's enough in terms of offering this as a niche product for people who are reasonably risk-averse who want to lock in these rates, especially during their retirement period. So it's a very good product. And again, I want to put things into context. We've been the innovator, whether in cancer care or whether in some of the joint life unit-linked variants. So while we're talking a lot about this product, we've been there and done it on various other products, especially when we go to the market with something new. There is a lot of interest and...

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Atul Mehra, Motilal Oswal Securities Limited, Research Division - Former Research Analyst [207]

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Right. Just one more clarification of this because in the past what we've always done and demonstrated is we wouldn't like any particular product to be predominant part of our sales pool. So why this time -- why is it different this time?

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [208]

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Because we're looking at only 1 quarter.

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Srinivasan Parthasarathy, HDFC Life Insurance Company Limited - Senior EVP, Chief Actuary & Appointed Actuary [209]

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And on your earlier question, in terms of what we can scale and whether it can displace some of the other variables of the product, I think we do have a lot of other good products on the UL side, which we can clearly target against the MF segments. So we have products like Classic One, we have products like Click 2 Wealth, which by itself can come back and scale up so over a period of time term opportunity is huge. The annuity opportunity is huge, the ULIP products it can displace MF, is huge. So I do believe it will balance out as a product portfolio.

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Operator [210]

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

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Vibha U. Padalkar, HDFC Life Insurance Company Limited - MD, CEO & Director [211]

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Thank you, everyone, for patient listening, and thank you all for your questions. As mentioned, the detailed disclosure on our results is available in our investor presentation. I would like to thank all of you for participating in our quarterly results call. Good night.

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Operator [212]

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