HDFCLIFENSEQ2 FY23November 1, 2022

HDFC Life Insurance Company Limited

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Management on call

Vibha Padalkar

MD & CEO of HDFC Life Insurance

Key numbers — 40 extracted

rs,

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 wante

14%

ared 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 gro

17%

e 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 bps expansion in new business margins bet

18%

. 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 bps expansion in new business margins between FY20 and FY2

150 bps

holistically, delivering a 2 year CAGR of 17% in top-line, 18% in value of new business and about 150 bps expansion in new business margins between FY20 and FY22. This was possible on the back of continu

Rs 40,000

ement approach. It is worthwhile to note that despite a claims payout during the pandemic of over Rs 40,000 cr in FY21 and around 69,000 cr in FY22 by our industry, adequate solvency levels were maintaine

11%

Starting with our business update: We continue to maintain a steady growth trajectory, growing by 11% in terms of total APE in H1 FY23 on a pre-merger basis i.e. excluding Exide Life. We have grown i

14.6%

ndustry and faster than listed peers this quarter which also led to market share improvement from 14.6% in Q1 to 15.0% in Q2 on a pre-merger basis. We have maintained our market leadership position as

15.0%

ter than listed peers this quarter which also led to market share improvement from 14.6% in Q1 to 15.0% in Q2 on a pre-merger basis. We have maintained our market leadership position as a top three lif

16.1%

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 b

10.2%

l 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 ent

37%

s as well as for the merged entity remains balanced. On a pre-merger basis, non-par savings is at 37%, participating products at 29%, ULIPs at 23%, individual protection at 4%, and annuity at 7% base

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Guidance — 20 items

Vibha Padalkar

opening

“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.”

Vibha Padalkar

opening

“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 bps expansion in new business margins between FY20 and FY22.”

Vibha Padalkar

opening

“We expect YoY growth to gradually pick up in the second half of the year.”

Next on channel performance

opening

“We expect growth in this channel to be driven by the larger agent base, with access to a wider suite of products.”

Vibha Padalkar

“Now to your point, will it be cheaper, I think some of those modalities will get worked out, but there will be no intermediation.”

Vibha Padalkar

“We'll have to see how the pricing evolves, but I think it will be more attractive at least for certain types of products than perhaps in some of the channels.”

Vibha Padalkar

“It is bound to happen, and HDFC Bank management has also alluded that closer to regulatory approvals coming through, there certainly will be alignment because your promoter is also your largest distributor.”

Vibha Padalkar

“So, while we remain enthused and we've been the first movers in this space, we will grow this brick by brick, and the traction is being seen Q2 versus Q1.”

Vibha Padalkar

“I expect to see that happening at lower end or lower ticket kind of simple products and younger people coming there and buying without the need for an intermediary.”

Eshwari Murugan

“At the start of next year, again based on the environment at that time and based on the assets we hold, we will reset the unwind rate.”

Risks & concerns — 15 flagged

While growth in retail protection continued 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.

— Vibha Padalkar

This was possible on the back of continued product innovation, diversified distribution, balanced product mix, focus on technology and calibrated risk management approach.

— Vibha Padalkar

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 the typical 10 times risk cover.

— Vibha Padalkar

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.

— Moving onto tech and innovation

And when you triangulate that holistically with how much of risk is being taken on the balance sheet as well as what are their cost ratios, with very little disclosure; then just one aspect of it becomes uni-dimensional.

— Vibha Padalkar

But on aggregator platforms or where there's a direct comparison, and we can see that the pricing at which there is an ask as well as the risk is not asking the right underwriting questions, which is not making sense to us , we want to stay away from those profiles of life.

— Vibha Padalkar

We do believe that down the line, and we are beginning to see some level of stress when you calibrate it with either claims rejections or from sum assured and so on.

— Vibha Padalkar

You know the balance sheet risk that is there.

— Vibha Padalkar

Anecdotally, we know that 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.

— Vibha Padalkar

We are also retaining more risk, calibrated risk, on our balance sheet.

— Vibha Padalkar

In the absence of that, it's very difficult to understand what is going on.

— Vibha Padalkar

But I would also say that, we have been fairly cautious in terms of which business and what quality of business we acquire, and we are quite happy in terms of the business that we are writing through HDFC Bank.

— Suresh Badami

So these are different ways of getting to the customer rather than just loosening on risk management.

— Vibha Padalkar

The primary objective of FRAs is risk management.

— Niraj Shah

So, for us, we continue to focus on FRAs as one of the tools of risk management for us.

— Niraj Shah

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Q&A — 14 exchanges

Mr. Ganapathy, your line is in talk mode. Please go ahead with your question. As there is no response from the current participant, we will move on to the next question from the line of Avinash Singh from Emkay Global. Please go ahead.

Avinash Singh

So, one is on the segmental part. In the Non-par, we have surplus/deficit movement. Now it seems in this financial year, with the Exide and HDFC merged number, it looks like you have no deficit. But earlier, where we had standalone 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 this quarterly surplus? Of course, I know that these numbers keep moving with product dynamics in that particular quarter. So, that's one. Second, because you touched upon Bima Sugam, do you see, not immediately, but that beco

So, I have two questions or rather three questions. One is on the FRA aspect itself. 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 hamper your ability to offer non-par guaranteed products? That's question number one. Second thing, Vibha, very clearly, there is weakness in the protection segment. I mean, you may argue QoQ has gone up but YoY, the individual APE in the protection segment is down 39% as per my calculatio

Vibha Padalkar

Suresh, I am taking the second question first which is on market share. So, typically, in the private space, we have trended at about 14.8% to 15%. We are very much there in terms of market share. It is the mid-tier companies that have grown quite significantly on market share. And when you triangulate that holistically with how much of risk is being taken on the balance sheet as well as what are their cost ratios, with very little disclosure; then just one aspect of it becomes uni-dimensional. We are fairly confident of continuing to grow down the line faster than the market. This I'm talking

Two questions from my side. On the EV walkthrough, could you give the breakup of the 12.4 billion negative impact between debt and equity this quarter?

Eshwari Murugan

The part of the 1,250 odd crores of negative investment variance is mainly because of the increase in the interest rate, thereby having an MTM on the bonds that we hold i.e. about Rs. 1,000 crores. The balance is from the equity. We expected around 4% return based on an unwind rate, but the equities have been more or less flattish. That is why there is an impact due to the equity on the economic variance. And with the current interest rate regime, any change in unwind rates from the 8% envisaged earlier? Do we expect any? So, we have been following the method of setting the unwind rate at the

Thank you for the opportunity. My questions are on two areas. First of all, on your group portfolio, if I look at the product categories Group Term Life and Group Annuity, there are very divergent pictures there, and I wanted to have your comments on the same. 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, and your annuity portfolio seems to be driven by the individual side. So, what is happening on the Gr

Suresh Badami

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. See, in GTI, actually we have still not picked up and gone into fully because we are calibrating in terms of the risk as well as the pricing. It's an annual renewable product. So, in some sense, we will monitor and come into the Group Term. But the Group Credit Life is where, to add on to the earlier question which was there on protection, we have been fairly agnostic in terms of how do we cover protection overall.

So, my first question was on the ROP business. What will be the share of ROP in the overall business post the 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 are looking at? That is the first question.

Vibha Padalkar

So, Akshat, no target per se. We are reasonably agnostic as long as the end game is to protect oneself adequately in whichever form or shape. So, this is a product offering we have. We are in the zone of 20 plus percent, and it will also depend on which channel is selling it. So, we have had this product for quite some time, and we continue to sell this. Between this, regular premium, limited pay to credit life, these are all different modes of getting to adequate protection. My second question is on the FRA part. You know, given the current environment, what could be the mark-to-market losses

Firstly, on the EV walk, can you share the breakup of the operating variance between persistency, modality and expenses?

Eshwari

The operating variance is mainly coming from persistency and expenses. Mortality is almost neutral because the experience has now normalized post Covid. Secondly, how should we think about the volume growth for the industry as well because if you 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? Is this going to be the trend going forward also? So, you know, I'm smiling a little bit because when you say over the last 3-4 years, volume growth is weak.

Thank you for taking my question. 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?

Vibha Padalkar

So, we have not really been giving what the share is. There are 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. 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. We have demonstrated this for multiple time horizon, whether it's the recent Q2 or FY22 or FY21. So, the track record of channels

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 all the newer partnerships versus the existing partnerships? And how do you see it going forward?

Suresh Badami

We have 300 plus partnerships now across banks, NBFCs, SFBs and MFIs. We have registered a growth of almost 66% on this particular business in H1 FY23. We are a fairly large player across all the verticals. So, we do have a complete gamut of products whether it's unsecured loans to CVC to home loans to LAP, MFI all of that. So, you know, in H1, for instance, the LAP housing business was almost 29%, MFI was 35%. The housing and LAP grew by 44%. The MFIs grew much faster at 100% and the other segments grew by almost 50%. There is a, complete attachment range which varies from vertical to vertica

Thank you for the opportunity. With regards to the India Post tie up, can you give us some sense of what's the rollout schedule? And do they have any other tie ups other than us?

Suresh Badami

So, Vibha did mention in terms of their vast postal network which is there, they do have an Aadhaar enabled payment service, which is a single largest platform in terms of doorstep 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 their field teams. We see a huge opportunity in terms of both the protection and savings across the group and individual customers. The POSP model will work very well in this particular case. Secondly, you know, we should be able to go across not just through their o

Thank you for taking my question. Most of my questions have been answered. Just a clarification. You mentioned 46 to 48% of the business comes from HDFC Bank. Now does that also include the group side of the business or this is only individual?

Vibha Padalkar

Only individual. And on the group side, how much comes from HDFC Bank? It's relatively very small. Like Suresh mentioned, all HDFC entities put together, which is HDFC Limited, HDFC Bank and HDB is about 30%.

Vibha, you mentioned that, you are looking at margin neutrality over the next 12 months. But if I look at the data today, you are almost there, right? So, I wonder why it would take another four quarters or so for you to achieve margin neutrality.

Vibha Padalkar

So, you are right. I think the more likely scenario is faster. However, Nischint, you will agree that now it is truly a part of us. While we are very, very happy that our key distributors have migrated to us, key employees have migrated to us and so on, but we are just a little bit cautious that post some of these, the migration, golden handcuff and so on; we want to see that stability. So, we will have a better sense certainly, and we will give you an update when we connect in Jan. Because whatever could have, I mean, you know it's been almost four quarters, right? So, whatever had to go out

Thanks for taking my question. Just again on HDFC Bank, post the bank becomes the parent, how you foresee the visibility on, better alignment given that some of the other competitors within the channel, of course, are selling very attractively priced products it seems. Given the growth that we are seeing in HDFC Life versus some of these?

Vibha Padalkar

So, Deepika, this is not the only the first one, in terms of open architecture and 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 are allocating the shares between their insurance partners while at the same time, of course, giving the customers a choice. So, if other banks are also doing it and all the various partners that we work with, HDFC Bank would. There are various levers of doing it and that's what you will see happen. It's not only a product thing. There are also many white spaces that today

Thank you for the opportunity. The theme that we are seeing as an industry wide phenomenon about protection is that despite low penetration levels, periodically, there is bounce of de-growth and it doesn't sustain secular growth. As an industry, is there a kind of campaign required like you've seen in case of mutual funds, there is a consistent, high decibel campaign by the industry? Do you think, there is a change in approach needed by the industry? Maybe campaign is one of the options, but any other option do you think that industry as a whole could do, needs to do for this to not happen on

Vibha Padalkar

So, Anand, maybe you have 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, 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 prod. Just comparison versus some of the other sectors might not really work. That's why I am a great proponent that some level of hand holding of all our channels. That's why there is a place under the sun for all our channels to evangelize the need for life insu

Thank you everyone for joining the call today. I wish everyone a Happy Diwali. Thank you. Take care.

Management

Speaking time

Vibha Padalkar

Moderator

Suresh Badami

Suresh Ganapathy

Anand Bhavnani

Niraj Shah

Prakash Kapadia

Akshat Mehta

Nidhesh

Eshwari Murugan

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Opening remarks

Vibha Padalkar

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 FY23 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 14th, pursuant to the receipt of the final approval from IRDAI. The entire transaction – right from the announcement of the deal in September 2

Moving onto key financial and operating metrics

New business margin for H1 is 27.6%, up from 26.4% in H1 FY22, on a pre-merger basis. There has been margin expansion for both the existing business i.e. pre-merger and the acquired Exide Life business in H1 FY23. We are close to achieving our aspiration of maintaining FY22-margin neutrality for the combined entity, having delivered 26.2% NBM, compared to 26.4% in H1 FY22. The value of new business has grown by 16% on a pre-merger basis and is at Rs. 1,258 Crore for H1. Our embedded value on a pre-merger basis, stood at 33,015 Crore as on Sep 30, 2022, with an operating return on embedded value of 17.7% for H1 FY23. The embedded value of the merged entity stood at 36,016 Crore. Profit after tax on pre-merger basis stood at Rs. 682 Crore, a YoY increase of 18% during H1 FY23. 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 quarter. The solvency was strengthened by way of an equity capital rais

Next on channel performance

Our bancassurance channel grew by 12% in H1 FY23 based on individual APE. Within bancassurance, we continue 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+ 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 “Insuring India”. Our Agency channel grew by 23% based on individual APE in H1 FY23 on a pre-merger basis. We added about 24,000 agents in H1 FY23 and continue 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 age

Moving onto tech and innovation

We have integrated our customer journey with external databases such as credit bureaus, TRACES & EPFO, to ensure seamless on-boarding. This will enable us to access latest ITR filings 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. In an industry first initiative, we have now launched home medicals for our overseas customers in over 20 countries. Now an update on HDFC Pension. As on Sep 30, 2022, HDFC Pension had a market share of 39.3%, up from 35.9% a year ago and an AUM of Rs 35,146 Cr clocking growth of 57%, thereby maintaining its leadership position in the private NPS pension fund manager space.

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 they have taken is the formation 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 spent on individual campaigns to increase customer awareness. Bima Sugam can help sharpen underwriting through real-time data access from account aggregators and multiple repositories, with due customer consent, thereby enabling faster turnaround. 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

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