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Ladies and gentlemen, good day and welcome to the HDFC Life Insurance Company Limited Q2 FY'23 Earnings Conference Call. [Operator Instructions] Please note that this conference is bring recorded. I now hand the conference over to Ms. Vibha Padalkar, MD and CEO of HDFC Life Insurance Company Limited. Thank you, and over to you, ma'am.
Thank you, Faizan. Good afternoon, everyone. Thank you for joining us for the discussion on our results for the Half Year Ended September 30, 2022. 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; Eshwari Murugan, our Appointed Actuary; and Kunal Jain from Investor Relations. I would like to take this opportunity to congratulate Suresh on his elevation as the Deputy Managing Director. We look forward to continue building an industry-leading and customer-centric franchise. I will take you through the key highlights of our H1 FY'23 results and would be happy to take questions post that. As you may be aware, our subsidiary Exide Life merged with HDFC Life on October 14, pursuant to the receipt of the final approval from IRDAI. The entire transaction, right from the announcement of the deal in September '21, followed by the acquisition in January '22 and the eventual merger was completed in less than 14 months. I would like to thank our regulator and all other authorities involved in the M&A for the encouragement, support and timely approvals. Customers across both entities will now have access to a wider bouquet of products and service touch points. All policyholders of Exide Life will continue to receive best-in-class service from us. All Exide Life distribution partners will now have access to HDFC Life's market-leading products, services, and digital capabilities. This merger accelerates the scale-up of HDFC Life's agency and broker channels and also enhances its geographical presence in Tier 2 and Tier 3 markets. We strongly believe that this amalgamation will result in value creation for our customers, shareholders, employees and distribution partners. As we emerge from the shadow of COVID, we wanted to take stock of the performance of the Indian life insurance industry compared to regional insurers. The Indian private life insurance sector has grown at a 2-year CAGR of 14% during the COVID years and continues to record double-digit growth in the current year. While growth in retail protection continues to be a challenge, companies had several other levers to deliver consistent margin expansion and hence robust growth in value of new business, while maintaining balance sheet resilience. This is commendable, especially given large life insurers in the Asia Pac region have experienced degrowth in both top-line as well as value of new business. We are happy to have played our part holistically, delivering a 2-year CAGR of 17% in top-line, 18% in value of new business, and about 150 basis point expansion in new business margins between FY '20 and FY '22. This was possible on the back of continued product innovation, diversified distribution, balanced product mix, focus on technology and calibrated risk management approach. It is worthwhile to note that despite the claims payout during the pandemic of over INR 40,000 crores in FY '21 and around INR 59,000 crores in FY '22 by our industry, adequate solvency levels were maintained, and there was a range-bound impact on the undervalues of large insurers. This speaks quite highly of the inherent strength of the Indian life insurance sector. We continue to be excited about the growth prospects of the industry on the back of renewed support and encouragement from our regulator. We are enthused for the regulator's vision of significantly improving the global ranking of Indian life insurance from its current #10 position to #6 and look forward to being a meaningful contributor in this journey. Starting with our business update. We continue to maintain a steady growth trajectory, growing by 11% in terms of total APE in H1 FY '23 on a pre-merger basis, i.e., excluding Exide Life. We have grown in line with the industry and faster than listed players this quarter, which also led to market share improvement from 14.6% in Q1 to 15% in Q2 on a pre-merger basis. We have maintained our market leadership position as a top 3 life insurer across individual and group businesses. Market share in terms of individual WRP for the merged entity, i.e., including Exide Life stands at 16.1% amongst private players and 10.2% within overall industry. Our product mix, both on a pre-merger basis, as well as for the merged entity remains balanced. On a pre-merger basis, non-par savings was at 37%, participating products at 29%, ULIPs at 23%, individual protection at 4% and annuity at 7% based on individual APE. Within the non-par segment, our shorter tenure product, Sanchay FMP, continues to grow well and now contributes over 1/5 of our non-par individual APE. The prevailing high interest rate scenario continues to auger well for demand across our traditional savings products. On the protection front, the credit protect business has registered strong growth of 66% for H1 FY '21 on the back of rise in disbursement across most of our partners. While growth in retail protection remain tepid on a Y-o-Y basis, quarter 2 growth was sequentially higher by 26%. We expect Y-o-Y growth to gradually pick up in the second half of the year. We also launched a new product Click 2 Protect Super during the quarter. This product has been received well across channels, especially on digital platforms. We continue to steadily improve our individual protection policy conversion ratios through process efficiencies and several other initiatives. Protection APE has grown by 24% in H1 FY '23 on a pre-merger basis. On the retirement front, our annuity business in H1 FY '23 has grown by 4% on received premium basis compared to a 4% degrowth for the industry. Growth of annuity on an APE basis is 44%. Our regular premium annuity products, systematic retirement plan introduced in December '21, last year, continues to attract interest from customers across channels. We also launched Click 2 Protect Optima Secure in partnership with HDFC Ergo. It is a comprehensive financial protection plan that offers dual benefits of health and life insurance. We continue to explore innovative ways to help deepen protection penetration, hence, in addition to the existing products such as pure term return of premium variant, credit life and group term, we are also now offering savings products that offer higher than typical 10x risk cover. Moving on to key financial and operating metrics. New business margin for H1 is 27.6%, up from 26.4% in H1 FY '22 on a pre-merger basis. There has been margin expansion for both the existing business, IEP merger and acquired Exide Life business in H1 FY '22. We are close to achieving our aspiration of maintaining FY '22 margin neutrality for the combined entity, having delivered 26.2% NBM compared to 26.4% in H1 FY '22. The value of new business has grown by 16% on a pre-merger basis and is at INR 1,258 crores for H1. Our embedded value on a pre-merger basis stood at INR 33,015 crores as on September 30, 2022, with an operating return on embedded value of 17.7% for H1 FY '23. The embedded value of the merged entity stood at INR 36,016 crores. Profit after tax on a pre-merger basis stood at INR 682 crores, a year-on-year increase of 18% during H1 FY '23. This was aided by strong growth of 35% in existing business surplus. Our solvency ratio is 210% as on September 30, 2022, as against 178% last year. The solvency was strengthened by way of an equity capital raise of INR 2,000 crores during the quarter. Renewal premiums have grown by 21% on a pre-merger basis. Persistency continued to improve for both the existing business, i.e. pre-merger basis and the acquired business. Our 13th and 61st month persistency for limited and regulatory policies is at 88% and 54% respectively, on a pre-merger basis and 87% and 51% on a merged basis. Next, on channel performance. Our bancassurance channel grew by 12% in HY FY '23 based on individual APE. Within bancassurance, we continued to see strong growth momentum across our newer relationships such as Yes Bank, Bandhan Bank, IDFC First Bank amongst others. In our quest to expand and diversify our distribution, we have won the bancassurance mandate with India Post Payments Bank. IPPB has a vast network of 650-plus branches and over 1.5 lakh post offices, serving a customer base of over 55 million customers. A large part of the post offices are in rural areas, thereby giving us wider access and furthering our goal of ensuring India. Our agency channel grew by 23% based on individual APE in H1 FY '23 on a pre-merger basis. We added about 24,000 agents in H1 FY '23 and continued to focus on improving activation and productivity across our base of financial consultants. The share of agency to individual APE has increased from 15% to 18% in the merged entity. We expect growth in this channel to be driven by the larger agent base with access to a wider suite of products. Moving on to tech and innovation. We have integrated our customer journey with external databases such as credit bureaus, TRACES and EPFO to ensure seamless onboarding. This will enable us to access latest ITR returns and EPFO passbook with customer consent, ensuring stronger and faster underwriting and quicker policy issuance for both salaried and non-salaried customers. Innovative solutions such as enabling cardiac risk assessment at the customer's residence for medical underwriting furthers our motive of simplifying customer journey and provide best-in-class service. As an industry-first initiative, we have now launched Home Medical for our overseas customers in over 20 countries. Now an update on HDFC Pension. As on September 30, 2022, HDFC Pension had a market share of 39.3%, up from 35.9% a year ago and an AUM of INR 35,146 crores, clocking growth of 57%, they were maintaining its leadership position in the private NPS pension fund manager states. Moving on to regulations. IRDAI has taken several measures with a clear focus on increasing insurance penetration in the country and enhancing ease of doing business. One of the initiatives we have taken is the form of Bima Sugam, a digital platform that will give more choice to the customer. We believe this is a step in the right direction. Having several insurers on this platform would increase collaboration and help save resources, center individual campaigns to increase customer awareness. Bima Sugam can help sharpen underwriting through real-time data access from account aggregators and multiple depositories, with due customer consent, thereby enabling faster turnarounds. The most noteworthy distinction between Bima Sugam and existing digital marketplaces is opening up a direct-to-customer connect that besides policy purchase shall also serve as a platform for servicing and grievance redressal. To conclude, our objective remains to empower individuals to provide financial protection to their loved ones and widen insurance coverage to a mix of innovative products and diversified distribution. The detailed disclosure on our results is available in our investor presentation. We're happy to take questions now.
[Operator Instructions] The first question is from the line of Suresh Ganapathy from Macquarie.
So I had 3 questions.
Mr. Ganapathy, Your line is in talk mode, please go ahead with your question.
Yes, hello, you can hear me? Hello? Hello?
Mr. Ganapathy, Your line is in talk mode, please go ahead with your question.
Yes, sure, okay. So I had 3 questions. One is on the FRA aspect…
As there is no response from the current participant, we'll move on to the next question from the line of Avinash Singh from Emkay Global.
A couple of questions. The first one, particularly is a bit on segmental surplus/deficit. So what kind of product dynamic changes are there -- Hello, am I audible?
Yes, Avinash, go ahead.
Yes. So one is on the segmental part. I mean, in the non-par, your surplus/deficit movement now seems in this financial year with Exide and HDFC more normal, it looks like almost like you had no surplus, no deficit. But earlier where we had a stand-alone HDFC Life there used to be a bigger deficit. So what kind of product dynamics has changed because of this merger that's sort of leading to the -- or the quarter before, of course, we know that this number keeps moving with the product dynamics in that particular quarter? So that's one. Second, more in terms of -- because you touched on Bima on Bima Sugam, I mean, do you see, I mean, not immediately, but that will be a meaningful normal contributor? And how is that going to behave with other channels? Because I mean, I am coring for the fact, unless there is a kind of a pricing difference, the customer -- I mean you have #N of reasons to be in touch with a lot of distributors, be it agent or [ guy ]. So why I am pointing is, I'm going to get the product at the same price on that platform? Why should I just get attractive to that platform? And if there are any sort of a price benefit, but how is this going to manage channel conflict issue?
So on the first point, Avinash, the segmental non-par, it is largely because of the claims settlement. Segmental non-par will have a profitable outcome. As you know, compared to unit-linked, unwinding of profits to Indian GAAP will take a little bit longer, but that should be very, very healthy. Also in terms of your next question on Bima Sugam, the way we see it is that, may a 1,000 lotuses bloom, to put it very succinctly, that it is not this or that. It should be in whatever form or shape that we're able to extend insurance to the average Indian. So that by 2047 we are able to ensure, that this is a regulator's vision, that every Indian has some level of insurance cover. And so the -- the more modes of reach to the customer, the better. Now to your point, will it be cheaper? I think some of those modalities will get worked out, but there will be no intermediation. There will be no calling. So it is not that you log-in something and then there is a calling or there's an intermediary. That is not to say that, either all business will come to Bima Sugam or no business will come. I think it's a question of different avenues of purchase like everything else. Some people will want advisory, at least a more complex products, some lower ticket simpler products might go to the Bima Sugam and so on. I think what is very creditable is the vision of the regulator. In a way, it is like farm-to-table concept, wherein, as a manufacturer, I'm directly able to offer it to our customers. Another important aspect is, what the regulators rightly said that even existing distributors or partners can come on to Bima Sugam. So it can be that there's a broker, for example, who is also on Bima Sugam. Who says I'm Broker XZY/Bima Sugam/ whatever. So you go through that broker. So somebody might want that. It's a hybrid model, it's a phygital model. So really, it is a one-stop shop. We like to see how the pricing evolves, but I think it will be more attractive at least for certain types of products than perhaps some of the channels.
The next question is from the line of Suresh Ganapathy from Macquarie.
Vibha, am I audible now?
Yes, Suresh. Please go ahead.
Okay. So I have 2 questions or rather 3 questions. One is on the FRA aspect itself. I mean, now that we have seen some problems emerging in some of the European banks and also the fact that the yield curve has significantly flattened out. Do you think there could be an issue of supply of FRAs in any way, which could, of course, hamper your ability to offer non-par guaranteed products? That's question #1. Second thing, Vibha, very clearly there is weakness in the protection segment. I mean Q-o-Q has gone up, but Y-o-Y, the individual APE in the protection segment is down 39% as per my calculation. And even in your overall business you have lost market share. I mean your overall growth for the quarter has been only 4% APE. The other guys have done brilliantly well. Some of your other channel -- HFDC Bank channel partners like Tata, Birla, all of them have done very, very well with very strong growth. So you have actually lost market share this year. So I wanted to understand what's happening on the growth front, because it's pretty rare that HDFC Life loses market share. And the third question is on Bima Sugam, obviously you did explain, but do you think it can possibly take away some of the market share from other digital marketplace players, in case they're really coming up with a great deal in an open platform like UPI, there is a possibility that the other digital market players may lose market share. I just wanted your views on that.
Yes. So typically, in the private space, Suresh, we -- I'm taking the second question first, which is on market share. We have tendered at about 14.8% to 15%. We are very much there in terms of market share. It is a mid-tier companies that have grown quite significantly on market share. And we are going to triangulate that holistically with how much of risk is being taken on the balance sheet, as well as what are the cost ratios, very little disclosure. Then this one aspect of it is quite -- it becomes unidimensional. We are fairly confident of continuing to grow down the line, and I'll talk about it, faster than the market. This customer, life insure -- the private life insurance sector. Yes, there will be some blips. One of the reasons for the blip, while quarter 2 has been better in terms of market share than quarter 1, market share, excluding Exide has been 15% in quarter 2 versus 14.6% in quarter 1. And we will definitely trend upwards. If I were to deconstruct between growth in HDFC Bank versus other than HDFC Bank. Other than HDFC Bank in terms of versus every metric you take, whether on quarter 2, whether it is on H1 and so on, we have grown faster than the industry at least 2x to 3x faster than the industry, other than HDFC Bank. So this is my proprietary channel, broker channel, on new tie-ups, so that has happened. With HFC Bank, we have slowed versus our -- versus the industry growth. And consequently, some of the mid-tier players have grown. Now 2 things here. One is that there is a base effect, the base effect will also normalize. Also the merger itself, wherein HDFC Bank becomes our promoter. It is bound to happen and HFC Bank management has also alluded that, further to regulatory approvals coming through, there certainly will be alignment because your promoter is also your largest distributor. So some of those things, alignment will start happening. So I think deconstructing where there's been degrowth. Wherever we've had a direct control, we have grown. So quarter 1, quarter 2 and so on, we have grown much faster than that the market.
How much did the HDFC Bank contribute now compared to an year earlier?
It's about 48%, between 46% to 48%.
And year before?
It's about 200 basis points higher than that.
Okay. So 200 basis points lower now, you mean to say?
Lower, yes.
Yes, okay, okay.
Yes. So about 50-50, if you see, then in quarter 2, for example, we've grown other than HDFC Bank, we have grown about 18%, which is about 2.5x of what the industry growth has been. So it's more in terms of getting this part of it sorted out with some of the structural changes should come through. Of course, we continue to offer innovative products and customer service and all of that, but I think structurally that changes happened. Second, if I can move on to Bima Sugam.
The protection, and the protection has been weak, Vibha, I want you to address that also. Trends in protection.
Yes, yes. So on protection, yes, we continue to -- like we mentioned, while Q2 is better than Q1. But yes, last year there was a bit of a ramp-up, before if you recall, end of December, when again price changes happen, second price hike on other reinsurers. So it was reasonably gaining traction before again reinsurers increased the prices. Now on retail protection, we, Suresh, strive to continue taking a calibrated basis. Obviously, we would not want to say no to business. But say, on aggregator platforms or where there's a direct comparison. And we can see that the pricing at which there is an ask is not making sense to us, as well as the risk is not asking the right underwriting question is not making sense to us. We want to stay away from those profiles of life. We do believe that down the line, and we are beginning to see some level of stress when we calibrate it with either claims rejections or from sum assured and so on, the balance sheet risk that is there. Anecdotally, we know that some -- a lot of high-ticket cases that we say no to does get converted elsewhere. And some of those balance sheets do show higher levels of risk that are being retained. And here, we are talking about maybe 400x the first year premium. So while we remain enthused and we've been the first mover in this space, we will grow this brick-by-brick and the traction we are seeing quarter 2 versus quarter 1 -- another data point is that, we did mention that we are low 6 -- around 60%. That is -- some of the channels have now exceeded 70% in terms of conversion. So we are looking at aspects that we can get right. We're also doing another thing. We are also retaining more risk in a sense, calibrated risk on our balance sheet. For example, if reinsurers are taking a very, very conservative view to say that, I won't say last 3 years of tax returns. We have the last 2, the last -- but the third year from today, going back in time, that individual doesn't have. We will try and triangulate that with some of the means rather than saying no to business. Now that we have more capital, and we've raised that in this quarter it's come through or we are taking some calibrated calls, rarely in the case of medical calls, but in the case of financial calls. So we're doing that, but we have no reason to believe that the business we're saying no to will magically exhibit very good levels of mortality. And when you triangulate that, Suresh, with some of the -- most of the industry, apart from mid-tier players, that there is no disclosure versus what has been -- what has been assumed by actuaries of their companies. In the absence of that, it's very difficult to understand what is going on. Suresh, you want to add anything on this?
No, I think you've covered it all. Suresh, just to say, I think there has been a fair amount of focus in continuing to diversify and grow on our proprietary channels, as well as the new products in HDFC Bank. And we see a significant traction there in terms of both market share and quality of business. I think even at HDFC Bank, while there has been a slight difference here, what Vibha has correctly mentioned that is to correct once the overall merger is in place, and we see the value in the subsidiary. But I would also say that we've been fairly cautious in terms of which business, or what quality of business, and we're quite happy in terms of the business that we're writing through HDFC Bank. And we do believe that over the next half of the year, you will see significant growth in terms of our market share with H1.
We're also trying to get to the same answer, like I mentioned in my opening remarks of higher levels of sum assured, rather than going through just pure protection. Also looking at return of premium, how do we increase that to customers that want to buy that, also riders. So these are different ways of getting to the customer, rather than just loosening on risk management. Yes. The next one is on Bima Sugam, I'll just finish that before I hand over to Niraj on FRA. On Bima Sugam, you mentioned as to how this is versus other digital platforms and so on. In the near term, I don't think it will get impacted. However, what we have seen in the payments ecosystem of, at least on smaller ticket payments, massively taking off. I expect to see that happening at lower and lower tickets kind of simple products and younger people coming there and buying without the need for an intermediary. I do see that taking off, but it will take some time. It will take some time and traction, word of mouth because none of this is going to be massive advertising budget. All companies have to come together to perhaps pool together advertising money. We already have that through the Life council, but everyone needs to join to be able to also include it in there. Otherwise, how do you pass on the message that, "hey, you can come on to this website." And if you're reasonably savvy, you can do your own search, pinging the companies you want to ping and then do your buying journey from here? So it's conceptually very, very strong proposition. I think over the next 2 or 3 years, that kind of a road map, it can start getting meaningful, especially in the term space. Yes. And FRAs, I'll hand it over to Niraj. Do you want to take that, Niraj.
Suresh, on FRAs, a couple of things that you mentioned in terms of a situation with a couple of banks and securities in terms of the way the interest rates are moving. So I'll start with the second one first, the primary objective of FRAs is risk management, yield pickup, if it comes because of a certain interest rate environment is just a bonus. Yes, that source has obviously dried up now compared to what it was a couple of years back, but that's fine. It's about spread management to be able to be neutral on that front, and that is something that we continue to do. So for us, we continue to focus on FRAs is one of the tools of risk management for us. Our dependence on FRAs probably is very different and lower than some of the other players who may be actually looking at this instrument. For us, this continues to be diversified across more than 10 counterparties. The 2 banks that are in the news -- not more than about 10%, 12% each. And again, from an instruments perspective, as you know, these are basically daily margin segment in any case, that there is no credit risk that is carrying on in this instrument. What happens is, in a scenario where there is an event because of which further operations are not profitable to be continued. It's about unwinding the contract and carrying on the contract with somebody else. So that's the only aspect of it, which can be a bit of an operational issue or challenge for maybe a couple of weeks before that can get done. But nothing really beyond that. And as we speak, we see more and more banks coming into the FRA, domestic banks are getting larger in this space. So we don't see a supply side issue here, Suresh.
The next question is from the line of Prakash Kapadia from Anived Portfolio Managers.
Two questions from my side. On the EV walk through, could you give the breakup of the INR 12.4 billion negative impact between debt and equity this quarter?
Yes, I'll hand it over to Esh. Eshwari, do you have that?
So part of the INR 250-odd crores of negative investment variance is mainly because of the increase in the interest rates, that they are having an MTM on the bonds that we hold, that is about INR 1,000 crores. The balance is from the equity. We expected around 4% return on the equity base on our undying rate, but the equities have been more or less flattish, that is why there is an impact into the equity on the…
Okay. And with the current interest rate regime, any change in unwind rates from the 8% envisaged earlier? We expect any?
We have been following the method of setting the unwind rate at the start of the year. At the start of the year, we take a view based on the economic environment at that time. This 8.1% has been set based on the environment at the start of the year, and we don't change it during the year. Any difference is reflected in the investment variance. At the start of next year, again, based on the environment at that time, and based on the asset we hold, we'll reset the unwind rate.
Sure. Sure. That's helpful. And lastly, now given the Exide merger is done, what kind of APE growth and VNB margins can we look at in the second half? Because this quarter also a few months have been good in terms of growth, a few quarters have been muted. As we step into the second half, Q4 was a bit muted. So on a consolidated basis, what are we looking at in the second half of the year?
So we are looking at about a 15 to 17 kind of percent growth. And again, some of the things that I mentioned in terms of a parent company merger also will help accelerate that. On the margins, what we have said is that, we will get to margin neutrality by middle of next year, which means that if you exclude this 1 year from 14th of October onwards, 1 year from that of a merger with Exide Life. Thereafter, we should get back as if we're back on the treadmill of where HDFC Life stand-alone was. So the entire merger and synergy extraction would have got subsumed within us.
The next question is from the line of Swarnabha Mukherjee from B&K Securities.
My questions are on 2 areas. First of all, on your Group portfolio. So if I look at the product categories, Group Term Life and Group Annuity, so very divergent pictures there and I wanted to have your comments on this thing. So Group Term Life looks -- seems to be doing pretty well. But what are the trends you are seeing about pricing in that portfolio? And how do you see it growing ahead? And on the Group Annuity book, it seems to be de-growing every quarter. So -- and your annuity portfolio seems to be driven by the individual side. So what is happening on the Group Annuity side, if you can give some color on this as well. So that is the first area. On the second thing, if you -- I wanted some color on how we should think about the EV role forward after this merger for the combined entity. So how should we think about the ongoing heat -- how should -- given that, VNB is a very small component for Exide Life right now. So what would be the operating ROEs you expect when you start reporting the consolidated number in ROE? And how would be the persistency given that the renewal rate for Exide Life is much lower than what our stand-alone entity has right now? So those are my questions.
This is Suresh here. So let me address your question on the Group product. I think you are referring to the Group Credit Life. I'll cover both the Group Credit Life, as well as the Group Term Insurance kind of product. See, GTI, which is likely we have still not picked up in one Group fully, because we are calibrating in terms of the risk asset value, it's an annual renewable product. So in some sense, we will monitor and add in to the Group Term. But with Group Credit Life, which is where we see -- and to add on to the earlier question, which was there on protection, we have been fairly agnostic in terms of how we cover protection overall. That business has been growing considerably for us on -- because of multiple parameters. One, of course, is the fact that our partnerships credentials are growing in terms of disbursements. Second, there has been a deepening of relationship across most of our partners in terms of the value penetration, as well as the newer loan verticals that we have been able to add on. We have also been able to add on a fair number of renewal partners. And more importantly, having gone through the whole COVID experience, understanding the market across each of these relationships, we have been able to reprice significantly in terms of what is it that we can do across each of these verticals. So both in terms of profitability, as well as growth, we are seeing a significant improvement on the Credit Life business. And in some sense, frankly, while the individual protection has been slightly muted overall for the industry, we have managed to get our overall protection growing on a combined basis. On the Annuity, Group Annuity side, clearly, we had invested in the pension company. We have also a huge amount of relationships, which is happening in terms of the PSU relationships. And we do believe that, that market in terms of market share across most of the key clients, we have a significant presence. So we have been able to grow that. We have had a steady increase in market share if you were to look at it in terms of the Annuity business. In fact, while the overall annuity numbers for the industry has degrown, we have been able to get a growth at HDFC Life. So there has been a little bit of a slowdown in the Group Annuity because of deferment in anticipation of better risk. But I do believe that over a period of time, the Annuity segment will continue to grow at fairly significant rates over and above the industry growth rates.
Yes. As to your question on what happens to the embedded value post Exide Life. So there are a couple of things here. We will discuss in terms of our aspirations to get to margin convergence in the next few quarters. As you know, on a half yearly basis already, including Exide, we are very close to last year's margin levels. So the 2 components of embedded value would be the VNB accretion and the second would be what is earned on the existing assets for the unwind. On VNB, as we are talking about convergence to HDFC Life margins over a period of, say, 3 to 4 quarters, you should see that coming through in a similar form as it is in HDFC Life. So there should not be any sort of leakage from that perspective. Unwind is more in terms of the kind of assets that you hold, given that the product mix, as you're aware, is very little unit linked, largely it's a bond kind of a portfolio. So the unwind rate and the methodology will be set when we're looking at setting our assumptions at the end of the year. So that would be a uniform approach on those assets as well. So given that Exide Life is about 10% of the embedded value of -- less than 10% of the embedded value of the overall combined entity today, we do not see much of a gap coming through on account of that. There could be a couple of quarters while this alignment happens. But over a year or a couple of year basis, we do not see any sort of gap in the pre-merger and post-merger EVOP? Persistency, also you mentioned it has been improved. So on a stand-alone basis this number improved from 73% to 76%. We have a line of sight of getting to 80% very quickly. And given the kind of product mix that they are -- that is being generated in those segments, we do believe that this can be fairly -- the experience is fairly close to the assumptions that have been set. So that's something that we had very carefully assessed at the time of -- in the early part of the transaction itself. So no concerns on that front either.
[Operator Instructions] We'll take the next question from the line of Akshat Mehta from Sameeksha Capital.
Hello? Yes, so I…
Mr. Mehta, sorry to interrupt you. The audio is not clear.
Okay. Can you hear me now properly?
Yes, sir, please proceed.
So my first question was on the ROP business. What is the share of the ROP in the overall business post-merger? And what kind of strategy are you planning to expand the share going forward? And if there is any kind of target share that you're looking at? That was the first question.
Yes. So target -- yes, so Akshat, no target per se. We are reasonably agnostic of -- as long as the end game is to protect one selves adequately in whichever form or shape. So this is a product offering we have. We are in the zone of 20% plus and it will also depend on which channel or selling it. So we've had this product for quite some time, and we continue to sell this. And really, between this, between regular premium, between limited pay to Credit Life, these are all different modes of getting to adequate protection.
Okay. My second question is on the FRA part. Given the current environment, what would be the mark-to-market losses in your FRA. If you can give some kind of a number? And I mean, because of that, is there a requirement to increase the rates in annuity and non-par products, given that the FD rates are increasing? And what would be the impact on the margins on account of that?
Yes. So on FRA, the mark-to-market really on a net basis is -- there is no impact because of the equity FPC that you can set off against any sort of FPC negative that you may have on the net side and then increasing interest rate environment. So there is no impact on that front on a net basis. As far as being competitive on non-par products, the headline rates, if they continue to move up, we have the opportunity to increase the rates, and we've taken those opportunities both on the annuity front, as well as the non-pat savings, while managing our spreads. So that is something that we can continue to offer. Compared to shorter-term products, you know that these are on a tax advantage basis, a fairly strong proposition from a customer perspective and also the tenure is 10 years and above. So as such, we do not really compete with the shorter-term products that are offered by other financial services.
Okay. Any new products that you're planning to launch in second half of the year?
Yes. So that journey continues. In fact, across all segments, Vibha mentioned, we've already -- we introduced a new product, it could take us forward, which allows a fair bit of flexibility to customers to switch and change their cover mid policy, as well that was launched just a couple of weeks back. We've launched 2 products on the retirement front, one on the participating side and one regular premium annuity product. So that's something that has been done in the last few months. We've launched in partnership with our sister concern, HDFC Ergo, a combination product with a fairly well regarded, Optima Secure, best-in-class health product in the market. And we have a combination product along with that as well. So that was something that was launched last month. And as we go forward, there are many such products in the pipeline across protection, savings as well as retirement and pension. So you will hear more about it as we go forward. With some of the guidelines having been -- be more flexible in terms of the go-to-market with use and file, I think there'll be more coming through in each of these categories.
Thank you. Mr. Mehta, may we request that you return to the question queue for follow-up questions. We'll take the next question from the line of Nidhesh from Investec.
Firstly, on the -- Vibha, can you share the breakup of the operating branch, the persistency, modality and expenses?
The operating variance is mainly coming from persistency and expenses. Modality is almost neutral, because the experience has now normalized post-COVID.
Sure, sure. Secondly, how should we think about the volume growth for the industry, because if I look at the data for last 4, 5 years, the volume growth for industry and for most of the players have been quite weak. So how should we internally think about the volume growth for the industry we can -- is this be the trend going forward also or how do we think about that?
I'm smiling a little bit because when you say over the last 3, 4 years, you're saying volume growth is weak. Actually, that's exactly what I covered in my opening remarks, wherein if you're looking at -- so for us, for example, we have doubled over the last 4 years in terms of everything, top line and bottom line and so on. Also if you were to look at the 2 years CAGR in terms of top line, it has been a 17% 2 year CAGR. This year, a little bit weaker, but there's also -- it's also a little bit weaker on the number of policies. So that I will certainly admit that as a sector, we were all selling higher ticket size policies and perhaps thanks to -- the father of all of this is perhaps Sanchay Plus, and so perhaps we are cycling more affluent customers. So all of us need to also focus on how do we increase penetration in the real terms in terms of number of lives covered. So there we do have work cut outs for us. At the same time, we have covered the number of lives overall to Credit Life of 28 million lives or close to 3 crore life. And this is a growth of 41%. So Group has done well, individual not so well. So the less than 50,000 repeat ticket size, I think that also has not done very well while more than 1 lakh ticket size has done well. So all of this, in terms of if data is available, then we can price it more appropriately and maybe Bima Sugam, while we've talked a lot about it on this call, what the regulator is promising is that different databases that the government collects -- and with customer consent, this could be more enriching in terms of how we underwrite policy, which today, frankly, it is a challenge and especially it's a challenge at the lower end in terms of ticket prices. So a combination of that would mean nothing has changed in terms of demand. And so the demand is there, lower penetration, our insurance coverage is there, the protection gap is there. So there were also a little bit of inverse correlation perhaps with banks, minorly, because the size is very big. But protection, again, and I talked about it in this call, retail protection, while Credit Life has done well, retail protection for almost everyone in the industry has lagged versus the past couple of years. As protection starts getting fixed and it's a matter of time before it does, Again, protection is based on much higher levels of number of policies covered, ticket sizes are small, but number of people covered are more. Some of this should start turning around. Also if you were to look at cyclicality on a few things, for example, unit link has not done well at all. While for us, it's always been calibrated, but even as a sector unit link has not done well. Some of our tie-ups, for example, I did mention about India Post Payment Bank. So we're very gung ho about it. We're talking about 650-plus locations over 1.5 lakh number of feet on street fleet and so on. So the Gramin Dak Sevak, so -- and that augurs well in terms of expansion in non-metros, Tier 2 and 3. Exide Life acquisition was also for us to increase our footprint in Tier 2 and 3. And also this -- we won this RFP with India Post Payment Bank and we will start work as we speak. That also should see a lot more of penetration in the true sense of the world. Do you want to add anything, Suresh?
Probably, look, we will look at expanding the distribution. But I think even on an industry outlook, the number of steps being taken by the Chairman of IBA and the regulator in terms of looking at growth, allowing so many new flexibilities in terms of how the overall sector should open. I think at an industry level, there is clearly given the opportunity, a fair amount of growth that we will see. I agree with, Vibha, I think, the challenge really for all of us to get together and look at an NOP increase or we need to be increasing the number of lives. And our strategy in terms of how do you reach out to Tier 2, Tier 3, how do we reach out to newer geographies, how do we have state level coverage. There are a fair amount of detailing that, I guess, each one of us is doing as insurance, definitely at HDFC Life we are very clearly focused. And some things like whether -- in terms of how do we deepen some of these markets will -- it's just a fact that we can look at use and file, we can come out with more innovative products. There's so many such things that will aid the overall industry growth. And as HDFC Life would expect to grow a little faster than the industry.
Sure. And lastly, just one question that -- so if you look at the competition and earlier it used to be very intense competition on protection, now on non-par and on annuities, I see that there is significant price based competition which is increasing. So in that context, are these products becoming commoditized. And in that context, how should we build our presence so that we will be able to generate higher returns for shareholders despite these segments that is commoditized?
Only market share is something that every financial services industry sees, whether it's banking, mutual funds, especially banking. And so growing market share isn't, but if you look at insurance and you talked about growing market share on the back of non-par, when you triangulate that with -- and you read the balance sheet as well as what is the retained risk, also we're able to triangulate in terms of what hedging strategy is based on the interest rate sensitivity that some has set out. It could be something that we don't want to go down that path. So we want to have market share growth -- at the same time, I think the previous caller asked in terms of what is your operating variance. We want to have an operating variance that is close to 0, which is very close to what actuarial assumptions are, and we disclose this every quarter. So that's really the treadmill that we have been for the past decade, and we want to continue with this. And so -- but it's not to say that we don't want to grow, we do. And so amongst all these constraints, that's why we launched Sanchay FMP. And today, it's close to 30% -- or I say, between 25%-odd of our non-par business in non-par savings business and continuing to grow. That is easier to hedge shorter end of the spectrum, and we can have an aggressive play over there as against having an aggressive play on lifelong payout on some of the non-par products. So we will continue to push and pull on this -- in this space so that the combination of various stakeholders, including risk management is something that we are fairly comfortable with. We pride ourselves on having a pristine embedded value, and there is no known risk that has not been factored into our embedded value, and we want to keep it that way.
Thank you. Mr. Nidhesh, may we request that you return to the question queue for follow-up questions. Thank you. We'll take the next question from the line of Shyam Srinivasan from Goldman Sachs.
Just on HDFC Bank again. I think you mentioned 46% to 48% of your revenues comes from there. But how is it the other way around? In the sense, market share for you in their Life Insurance business? How has that been trending?
So we have not really been giving what the share is. There are very many nuances to this, because again, just looking at the share as against looking at the share of value of new business becomes a very one-sided discussion, and not looking at the persistency, claims ratio and so on. So I think the way we look at this is, even from a risk management perspective, we like hovering around 50% in terms of HDFC Bank share, growing our other channels faster than industry growth, which we have demonstrated for everything, whether it's quarter 2, the recent quarter 2 or FY '22 or FY '21. So a track record of other channels, other than HDFC Bank growing faster by a mile than a private sector. So we'll continue to do that rather than just looking at one metric of HDFC Bank. You want to add, Suresh?
No, I think, look, we do expect a greater alignment in terms of the overall strategy of the HDFC Bank team along with us, and the merger is not very far away. So hopefully, we will be able to get our market share up. But like Vibha rightly mentioned, I think it is also a question of what quality of business, where we want to do the business, what is the share of the GMV that we are looking at. All those are into consideration. And we do believe that getting the top-line back based on our product mix will move upwards.
Got it. And just the second question. I think, Vibha, in your opening remarks, you talked about multiple levers for VNB growth, right? I think retail protection, like you mentioned, has been challenging. But what are the other things now, right? I think you called out, like product innovation, risk management and stuff, but I'm just looking at product mix. Now we have reached a phase where we think there is further -- and just keeping aside Exide merger, right? So let's assume '24 and '25, what can change in terms of helping VNB growth to be not correlated to APE growth, for example? What are some of the other levers that are still there?
Many, many. So for example, new pools of profitability -- and obviously, I can't share all of them. And we have been a market leaders, whether everyone talks about pure term now, market leaders in pure term or looking at the cancer cardiac to looking at deferred annuity to Sanchay Plus kind of products, to riders to -- you name it. And we -- the more recent kid on the block, Sanchay FMP, again, margin accretive for us. Even if you look at par, we believe that we are the highest in terms of par margins. And so any switch between some of the other lower margin products to par, of course with customer consent, makes a lot of sense. Also some of the tweaks in terms of whether it's rider, whether it's group annuity, whether it's individual annuity. Also in terms of expense leverage, that's an important point why if I -- optically look like our expense ratios have gone up, but actually, the fixed costs have continued to trend downwards. And that is -- and when you look at agency, in our agency channel, say, about 60%, 70% is fixed cost. So with agency growing upwards of 20% plus, most of that should fall to the bottom line as margin accretive contribution to the growth contribution. Also mix change becomes important, especially on, say, participating. Even with Exide Life we saw, right at the beginning, we did mention that it's low-single-digits, now we're talking about high-single-digits in terms of Exide Life, around 8-odd percent. So in a span of less than a year, we've been able to get Exide Life margin from low-single-digits to close to 10%. So -- and that has not been with any major surgery, as you know, because it was still a separate entity. So that can only continue to increase getting to margin neutrality. So I'm adding in a way market share of 1.2%, 1.3%, but at the same time, able to get Exide Life very close to HDFC Life's margins. So all of these are levers, but obviously, I can't talk about some of the things that are in the pipeline. But we will continue to extract -- and I think some of the core strengths, because we have not dropped margin in any quarter versus the previous year. For the last several years, I think except with the exception of Sanchay Plus, when we launched Sanchay Plus, and we told all of you that. So that was a product-specific aspect. But apart from that, this margin trending to its upward curve every quarter every year has been because of many, many levers to margin as against just one big bang lever that could be as a copied or it could be where there is some disruption, macro disruption that happens to us.
Thank you. Mr. Srinivasan, may we request that you return to the question queue for follow-up questions. [Operator Instructions] The next question is from the line of Dipanjan Ghosh from Citi.
Hope I'm audible. Just one question. I think you mentioned on your Credit Life business that some of the newer partnerships have been delivering strong growth and also some new product verticals have been added. So can you kind of extend this argument and give some color on the attachment rates or maybe the growth across or the newer partnerships versus the existing partnerships? And how do you see it going forward?
Look, I think we have 300-plus partnerships now across banks and NBFCs, SSBs and MFIs. We have registered a growth of almost 66% on this particular business in H1. And we are a fairly large player in terms of -- across all the verticals. So we do have a complete gamut of products, whether it's unsecured loans to CDC, to home loans to LAP, MFI, all of that. So in H1, for instance, the LAP housing business was almost 29%, MFI was 35%. The housing in LAP grew by 44%. The MFI grew much faster at 100%. So any other segments, we were almost 40%. And there is a complete attachment rates, which ranges from vertical to vertical, it varies anywhere between 30% to 70%, depending on what product mix and which loan vertical we are talking about, or obviously for MFI it's 100% because they need to work on that particular model. And we are trying to see how we can look at the value penetration more than just the attachment rates in terms of the number of loans, and that's something that we have done. In parallel, what we have also done is we've integrated a lot of our technology platforms across all our partners. So in terms of claims settlement, in terms of processing, we have significant embedding which has happened with many of our partners. So we have been looking at this. So I do believe that, look, if the industry continues to grow in terms of disbursement, we will grow so much. And this is across outside HDFC also. HDFC sometimes gives only less than 30% overall Credit Life business. So it's fairly well diversified even within the Credit Life aloe.
We'll take the next question from the line of Anand Bhavnani from White Oak Capital.
With regards to the India Post tie-up, can you give us some sense of what's the rollout to be? And do they have any other tie-ups other than us?
So Vibha did mention in terms of their vast postal network, which is there. They do have an Aadhaar Enabled Payment Service in a single largest platform in terms of postal banking to a set of customers. We have recently launched the relationship only last week or 10 days back is when we had the official launch along with the field teams. But we see a huge opportunity in terms of both the protection and savings across the Group and individual customers. The POSB model will work very well in this particular model. Secondly, we should be able to grow across not just through their offices, but through the Gramin Dak Sevaks, which is under the Department of Post. Now one of the challenges, which we mentioned earlier on the call was in terms of growing our number of NOPs, as well as looking at a certain set of products, which can go into the Tier 2, Tier 3 and the rural markets. So normally, it takes anywhere around 90 days to 120 days for us to be able to launch our relationship end to end in terms of integration, in terms of product training, in terms of resourcing on the ground. And we have been fairly successful in terms of onboarding new partners. So you should see us active in terms of logging fairly quickly on this. Even as we speak, internally we have already aligned a fresh vertical, which will handle this particular relationship, and we should start seeing the business soon.
I want to add one more point, Anand, and that is HDFC Bank is also tied up with them. So down the line, while the HDFC Bank becomes our parent promoter, there can be a lot more of integrated working and integrated offering. And these are 2 independent tie-ups, and so we look forward to that. The second point I want to make here is that, persistency is robust. So what we have struggled typically in smaller towns is, one is reach, how do you get to them and second is, quality of business. So what we feel very amused is the very good work and the traction that have been seen, so we intend to be able to grow quite meaningfully into Tier 2 and 3 towns.
We'll take the next question from the line of Madhukar Ladha from Elara Capital.
Most of my questions have been answered. Just a clarification. You mentioned 46% to 48% of the business comes from HDFC Bank. Now if -- does that also include the Group side of the business or is this only individual?
Only individual.
And on the Group side, how much comes from HDFC Bank?
It's very relatively small, like Suresh mentioned, all HDFC entities put together, which is HDFC Limited, Group and HDB is about 30%.
The next question is from the line of Nischint Chawathe from Kotak.
Vibha, you mentioned that you're looking at margin neutrality by -- over the next 12 months. But if I look at the data today, you're almost there, right? So I wonder why would it take another 4 quarters or so for you to achieve margin neutrality?
So you're right. I think the more likely scenario is faster. However, Nischint, you'll agree that now it is truly part of us. While we've been -- we are very, very happy that our key distributors have continued to have migrated to us, key employees have migrated to us and so on. But we're just a little bit conscious that, of course, some of these -- the migration, golden handcuff and so on, that we want to see that stability. So we'll have a better sense firstly and we'll give you an update when we connect in Jan.
Because whatever could help, I mean, it's been almost 4 quarters, right? So whatever had to go out, could have gone out already. I mean...
No, no. Nischint, absolutely not, because we didn't tamper with their model at all. The last thing we wanted to do is, start meddling into their model. Of course, we had our HDFC Life person there and so on. Oversight was certainly there, the Board was our -- members of our Board, but the business model on the ground was as is. So given that now it is -- we are, for example, having an overlay of, say, persistency, Niraj mentioned about, it also know but lower levels of persistency. So we are now mandating to say at least above a certain ticket size, please have a SI ECS mandate, standing instruction like it is in HDFC Life. So this is one example. Like that, there could be several other examples wherein there is an HDFC Life rigor, governance and so on, which we fade away from largely up to now. Branch reductions will happen. Technology revamp will happen. Products -- today, they have from day one most of our marquee products, we will also have how is that panning out, and so on. So we will also move into other geographies. So the whole point of this acquisition was not just to acquire it and have a 1.2% or 1.3% increase in market share. We will be investing in new geographies because they are strong typically in the south. But we will -- as we speak, we are expanding into Tier 2 and 3 and replicating that model into especially West and North. So that will require investments. So all of that was factored in here. So there is nothing that we know that we're not telling you, but it's just that, for us to really invest in the Exide Life formula and grow it and invest in it, just a little bit of caution in terms of margin neutrality. Yes, it could happen a quarter or so earlier.
We'll take the next question from the line of Deepika Mundra from JPMorgan.
Just on the -- again on HDFC Bank. Post the Bank becomes the parent, how do you foresee the visibility on better alignment given that some of the other competitors within the channel, of course, are selling where we attractively priced products, it seems given the growth that we are seeing in HDFC Life versus some of these?
Deepika, this is not the only -- the first one in terms of open architecture, how do they handle. We are in many, many open architecture situations. And the senior management of those banks have a rough way of how they're allocating the shares between their insurance partners. While at the same time, of course, giving the customer the choice. So if other banks are also doing it, and all the various partners that we work with, HDFC Bank has -- there are various levers of doing it. And that's what you'll see -- that is just not only a product thing, there are also many white spaces that today nobody is doing. Obviously, I don't want to talk about those white spaces, but they are there and these conversations have already been hand with the bank, right? So you'll see some of that happening. Also ultimately, bank is going to be a promoter, and so governance, risk management, all of that also the Bank will part-take in those aspects. So -- and also it is not a surprise that no bank today that holds more than 50% has embraced open architecture, right? So from that -- so HDFC Bank also understands that, while they're not going to roll back on open architecture, but there's a reason why -- apart from HDFC Bank, there is no bank in India today that has opened up that hold. So clearly, there is a balance between 3 things. One is open architecture accretion, being a parent of that entity. And hence, all the risks and rewards being aligned. And third is that, at the same time, giving customer a choice. So all those conversations are had and they are completely aligned on this.
Just to add to what Vibha had said. Many of our products have clearly a much stronger value proposition both from the brand servicing, claim settlement, and overall technology. So given the customer profile, given the segment we operate in, I think that there is a significant upside even in terms of the product value proposition which is [indiscernible].
I also want to add to what Suresh is saying. So hypothetically, what you're saying is that, if somebody has a much cheaper product then in the open architecture, then that's where business goes through. By that logic, with an aggregator, for example, we would not be able to sell it on a single policy, because we are really the cheapest that we do. And we had enjoyed share of anything between 20% to 25% in sale in term. So it goes beyond only pricing, especially when you're buying protection, especially when you're buying long-term larger ticket savings, is it's holistically in terms of the experience, the brand, are you in the zone in terms of pricing? Or what is your track record on claims settlement, servicing, entire thing. So while it's made out to be about price, it's a full package. And so the Bank is also as our promoter, would be promoter very cognizant, but it's an entire package and so there is involvement.
Ladies and gentlemen, we'll take the last question from the line of Anand Bhavnani, White Oak Capital.
Given that we are seeing as an industry-wide phenomena that protection despite those penetration levels, periodically each balances the growth and it doesn't sustain secular growth. As an industry, is there a kind of campaign required, like we've seen in papers like in terms of the consistent high digital campaign by the industry. Do you think -- is there any change in approach needed by the industry, maybe campaign is one of the options, but any other options do you think that industry-wide you used to do for the kind of -- it's not happened on a recurrent basis.
So Anand, maybe you've not seen some of those campaigns. So we have had Sabse Pehle Life Insurance. So that campaign again, will take off, you will see some more visibility on that. But ultimately, this will -- anywhere in the world, people are not going to wake up and buy insurance. You do require that nudge, you do require a little bit of fraud. And this comparison versus some of the other sectors might not really work. And that's why I'm a great proponent that some level of handholding of all our channels. And that's why there is a place under the sun for all our channels to evangelize the need for life insurance. Even Credit Life was hardly divalent, and with our CAGR of about 15% to 18% growth in credit -- in retail credit uptake, now Credit Life has come into its own. So it takes time. And it will -- I have no doubt in my mind, especially younger population will continue to be interested in buying this. And also it's easier for them in terms of light-touch underwriting. We do have a portal, if you've not seen it, please do on -- called KlarifyLife, that's with a K. And there it is to engage with younger people to say, it's not so complex. It is -- don't buy it if you don't have XYZ situation with your family, but you have an honest conversation on what your term is. At the same time, it will take, like I said, like I mentioned, for it to percolate, for the need for it. But I have no doubt in my mind that all things being equal on this reinsurance, COVID and so on, it should grow faster than overall industry level growth.
Sure. I have one data keeping question, if I may. So if I just look in the persistency numbers, we have 2 different sets given in the display. One is in the IRDAI format, which is on the Page 10 on the PDF uploaded on the exchange. Where I see the 60-plus month persistency has fallen year-on-year and somewhat even sequentially as well. Whereas in the presentation on Slide 6, we see year-on-year persistency is higher and it's different. So I presume the methodologies are different in 2 cases. Can you kind of explain this a bit?
Yes. Anand, it is because of the merge -- one is a merged number.
Okay. So fine. The first one in the IRDAI format is completely more and the second one is pre-merger company.
The higher number is pre-merger.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to Mr. Vibha Padalkar for closing comments.
Thank you everyone for joining the call today. I wish everyone a Happy Diwali. Thank you. Take care.
Thank you. Ladies and gentlemen, on behalf of HDFC Life Insurance Company Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.