HDFC Life Insurance Company Ltd

NSE:HDFCLIFE

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to the HDFC Life Insurance Company Conference Call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Ms. Vibha Padalkar, MD and CEO of HDFC Life. Thank you, and over to you, ma'am.

[Vibha Padalkar, executive]

Thank you, Davin. Good evening, everyone. Thank you for participating in this conference call to discuss the financial highlights of the year ended March 31, 2023. Our results, which include the investor presentation, press release and regulatory disclosures have already been made available on both our website and the stock exchanges. Accompanying me are Suresh Badami, Deputy Managing Director; Niraj Shah, CFO; Ishwari Murugan, our appointed actuary; and Kunal Jain representing Investor Relations. I will provide an overview of our FY '23 results and be happy to respond to any queries following that. As was done in the previous year, we will be presenting the financials, including the acquired business. Therefore, it is possible that the numbers from the previous year might not be entirely comparable. Before I proceed, I would like to take this opportunity to congratulate Niraj on his elevation to the Board of HDFC Life as Executive Director and CFO. As you may be aware, the RBI has permitted HDFC Bank or HDFC Limited, to increase their shareholding in HDFC Life to more than 50% prior to the effective date, thus clearing any uncertainty around HDFC Bank's eventual shareholding in us. We look forward to collaborating with our parent to be towards creating value for all stakeholders. Moving on to our operating performance during the year. We closed the year with a strong growth of 27% in individual WRP with a market share of 16.5% and 10.8% in the private and overall sector, respectively, clocking expansion of 40 and 70 basis points, respectively. We continue to grow faster than the private sector, and we ranked amongst the top 3 life insurers across individual and group businesses. In terms of individual WRP, we have outpaced the private industry over multiple time frames, including in the past 3, 5 and 7 years, thereby consistently demonstrating growth leadership. As you're aware, the fourth quarter saw budget announcements with respect to changes in tax regulations effective April 1, 2023. The Individual WRP growth until February was about 15% and did not have any impact of budget changes. The new business premium recorded in the month of March 2023 was buoyed on account of the additional demand, especially in the non-par and high ticket size segment. The incremental business can be estimated for us as a difference between actual growth for the year of 27% and extrapolation of the 11-month growth trajectory of around 15% to 16%. In the month of March, we were able to leverage the opportunity by offering competitive solutions, whilst managing profitability and adhering to a calibrated risk management approach. In this month, we stood #1 across agency, broker, bancassurance as well as sales through our website, which quadrupled. As a result, we registered a growth of 56% in quarter 4, more than 2x growth of the industry and ranked #1 amongst private players. Looking ahead, the medium- to long-term growth opportunity in our sector remains intact. The long-term guaranteed savings product proposition is unique, and the returns offered are best-in-class even after the recent tax changes. We believe that the opportunity has only widened with the tax changes for certain other asset classes. Moreover, protection and annuity remain areas that are exclusive to life insurers. In light of the above, we remain confident about being able to grow our APE in FY '24 after adjusting for the additional business that was generated in March, and we will continue to aspire for higher than industry growth. Our focus will be on broadening our customer base and increasing number of policies sold and the lives covered. The building blocks for this are in place, aided by our diversified network of distribution partnerships and agency distribution, which was boosted by our acquisition of Exide Life. These avenues give us the ability to reach out to multiple customer segments across Tier 2 and 3 cities and deepen our reach. Further, our largest distributor and our parent to be HDFC Bank has embarked upon its branch expansion in Tier 2 and 3 locations, which will be complementary to our strategy. We recognize that the persistency and mortality experience would be different for some of these segments and the same is being factored in our overall actual assumptions. Our distribution continues to be supported by suitable product proposition for this segment. Our overall product mix remained balanced. Amongst the savings products, non-par savings was at 45%, participating products at 27% and ULIP at 19% of individual APE. The non-par share increased to 53% in quarter 4 due to the higher demand and is expected to normalize in FY '24. Within the non-par segment, our shorter tenure product, Sanchay fixed maturity plan comprised about 13% to 15%. There has been an increase in protection share in total NBP from 24% in FY '22 to 29% in FY '23. Our overall protection APE grew by about 20% in FY '23. This was led by our market leadership in credit life, delivering strong growth of 46% across nearly 300 plus partnerships. Retail protection trends remain encouraging with sequential growth of over 50% and Y-o-Y growth of over 40% in quarter.Our FY '24 outlook for retail protection is positive on the back of the growth trends experienced over the last 3 quarters across channels. On the retirement front, we have steadily gained market share in the annuity business. Our annuity business in FY '23 grew by 18% on a received premium basis compared to a 2% growth for the industry. APE growth is much higher at 59% due to a pickup in our regular premium annuity product, systematic retirement plan during the year. Moving on to key financial and operating metrics. Our new business margin for the year was 27.6%, thereby delivering value of new business of INR 3,674 crores, which is a growth of 37%. Margin neutrality after considering the acquired business was achieved well ahead of target. The full year margin factors in an investment of INR 50 crores that was made towards that technology transformation strategic initiative named Product Inspire, which I've spoken about in the last analyst call. We expect to continue our VNB expansion in FY '24 through faster-than-industry APE growth whilst maintaining close to FY '23 margins. We will increase our investments in technology and distribution, including our proprietary channel to take advantage of digital opportunities as well as achieve our growth objective. We anticipate further investments of about INR 100 crores each in FY '24 and FY '25 towards Project Inspire to make us agile and future-ready by providing a 360-degree view of our customers, seamless integration with new partners, resulting in an improved customer experience and productivity across channels. Our embedded value stood at INR 39,527 crores as on March 31, 2023, with an operating return on embedded value of 19.7% for FY '23. Profit after tax for FY '23 stood at INR 1,360 crores, a robust Y-o-Y increase of 13%. This is despite the increased new business strain arising from the higher growth in quarter 4. The profit emergence continues to be aided by strong growth of 27% in back book surplus. The Board has recommended a final dividend of INR 1.90 per share, translating to a payout of about 30% of our PAT, in line with rent payout since FY '17. Our solvency ratio was 203% as on March 31, 2020. Renewal collection trends continue to be healthy on the back of steady persistency. Our 13th and 61st month persistency for limited and regular pay policies stood at 87% and 52%, respectively, compared to 87% and 54% last year. Next, on channel performance. Our bancassurance channel grew by over 25% in FY '23 based on individual APE. We are witnessing robust growth in all our partnerships. Our collaboration with HDFC Bank remains strong as we strive to enhance insurance accessibility to the bank's customer base. Our agency channel witnessed strong growth, supporting company-level growth by more than 1.5x in terms of individual APE. It has grown at a 5-year CAGR of 34%, almost doubling its share from 11% in FY '18 to 20% in FY '23, aided partly by a strong performance in the marketplace as well as by inorganic growth. Our focus remains on enhancing activation and productivity of our financial consultants and aim to drive growth by expanding our presence in new territories and reaching out a wider range of customers. Our subsidiary, HDFC pension management company doubled its assets under management in a year -- sorry, in 1.5 years to exceed INR 45,000 crores as of 31 March, 2020. It is the largest and fastest-growing pension fund manager in both retail and corporate NPS AoM segment. Our market share here has increased from 36.9% to 41.2% over the last year with 60% growth in assets under management. Our subsidiary, HDFC International has received the final approval from the concerned regulatory authority, enabling us to establish a branch in Gift City. We are excited about the new opportunities at present for us to expand our global presence as we target to commence operations in quarter 1 of FY '24. Moving on to regulations. IRDAI is proposing several changes that would enhance insurance penetration, facilitate sustainable growth and ease the operating environment. We are enthused about the new EOM regulations, which provides greater flexibility for cost management, encourage the development of longer-term products and improve persistency by offering higher allowances on renewals. These changes will also aid in the revival of the pension segment. Slide 5 of our investor deck plots, how we have said better than the industry post every major turbulence. The first significant disruption was in FY '11, post a new unit-linked guidelines. The second was when HDFC Bank adopted open architecture in FY '18. The third upheaval was the pandemic with the industry being hit both the business disruption as well as the massive surge in claims as well as change in unit-linked tax exemption limit in FY '21. The latest disruption is due to the budget announcement made on 1, February 2023. Between the first and second disruption, which is unit-linked to open architecture, we delivered 2x industry growth. Between the second and third disruption, i.e., open architecture to COVID, we delivered 1.5x industry growth. In the last 3 years, we delivered 2x industry growth despite COVID and the unit-linked tax changes. Hence, we have consistently doubled on all metrics, including new business premium, renewal premium, value of new business embedded value, amongst others, across multiple blocks of 4 years. Being able to deliver a predictable performance predicated on sustainable business [ tacticals ] remains a hallmark of our way of conducting business. Hence, we believe that the recent changes, whether on taxation, business models or regulations are part of the growth banks of the private life insurance sector that has only recently reached adulthood. The larger companies with strong corporate governance and disclosure standards are poised to fare better holistically on growth, profitability, business quality as well as risk management. To conclude, our focus remains to provide a wide range of insurance products that cater to the diverse needs of our customers, thereby ensuring their financial security. Furthermore, we are dedicated to leveraging technology and digital advancements to create a smooth and convenient customer journey. We are optimistic about the growth prospects of the industry and are committed to driving a significant increase in insurance penetration in line with the regulators' visions. The detailed disclosures are on our results is available in our investor presentation. We are happy to take questions now.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. Before we take the first question participants. You are requested to please limit your questions to 2 per participant. The first question is from the line of Suresh Ganapathy from Macquarie Group.

[Suresh Ganapathy, analyst]

2-3 questions have got first, is there something about the contribution of the high-ticket policy. So just to understand this a bit better, your full year APE growth was 37% and your 4Q APE growth is 70% plus. So I mean what is the contribution of high-ticket policies to the overall business done in 4Q, can you tell in percentage terms letter than 5 lakh?

[Vibha Padalkar, executive]

I can give you some indication in terms of –

[Niraj Shah, executive]

Yes, Suresh, for the year, it was in the region of about 12% to 14%. And for the quarter 4, it was in about 35-odd percent of the business would have come in that ticket size. And that's the reason why we referenced the growth, actual growth and the normalized, basically, you could take it as 27% actual growth and 16% normalized growth, the delta would basically be the impact of the budget. That's what we are thinking.

[Suresh Ganapathy, analyst]

On normalized growth, what it is continue full year, you ended at 37%, right? So what are the normal is --

[Niraj Shah, executive]

37% is fully other actual. February, we were at 16%, right? But that impact was actually in the month of March, which is the incremental business, that's what we called out.

[Vibha Padalkar, executive]

Suresh, February had next to no impact. Most of the impact came from about the second week of March. And there, the delta works out to about INR 1,000 cores. INR 1,000 crores. Yes. Okay. So good. Now the other 2 questions I've got is the fact that you ended -- you had a 37% VNB growth for FY '23 means there is a very strong base Vibha, Niraj. So on the backdrop of good stock base can you deliver -- I mean, I'm not putting a particular number in here, but can you deliver a strong VNB growth heading into FY '24? Yes, we are very confident, Suresh, that we should be able to deliver growth that is in line with the APE growth, while more or less holding margins. The only caveat is the investment that I talked about in the tech transformation. But even that I have articulated, which is, see, overall, it's about INR 250 crores, of which we've spend INR 50 crores, INR 100 crores give or take would be the outlay. Otherwise, we should be able to deliver similar kind of margins, except for this tech transformation.

[Suresh Ganapathy, analyst]

Okay. And the last 2 questions, one is on the relationship with HDFC Bank. You said 45% to 47% is the contribution earlier in earlier call and that has come down from 50%. What is the target here? I mean any conversations with Sashi that you have done, that you can share, you can increase this to 60% or whatever it is -- can you give us some guidance on it? And finally, on the EOM guideline, -- how does this work? I mean depending upon players competitive advantage either in the product space or in the distribution space, there can be adverse effects, right? I mean if I want to pay a banker more, I can pay more. If I want to push a particular non-par product, I can pay more and push it and create an adverse testing that particular channel because it gives you complete freedom and flexibility. Do you think that's the way it plays out or then you be saying competition in the entire market?

[Vibha Padalkar, executive]

On the first point on percentage, we don't track as a percentage of our overall composition because different channels can grow at a different rate and by targeting that bancassurance has to be this and then you have to calibrate others. So that's not how we look at it. Yes, the counter share at HDFC Bank as HFC Bank and Sashi [indiscernible] have articulated, is that as they are now our parent to be, that should start inching up. And those are conversations that will fall in place because if you were to look at it, it's not just an HDFC Bank, but if you look at all the other new partnerships, we have been making very significant inroads even without them being our parent. So it is in terms of -- do we have the triangulation between product, between pricing, between the brand, between claim settlement, it's a package. And so if we are making inroads in other banks, then even here as a parent, that should organically happen. And of course, we will be the best in terms of presence in the branches and so on. So you should start seeing that trending upwards, but not tracking in terms of percentage of our business, but certainly, the percentage of the business that's being done by HDFC Bank. So that is on that front. And on the second one on this whole EOM, it all depends on how the regulator is looking at it is that to move towards a principle-based approach to sell more longer-term products and that very well August to that's really how we've been selling. And this is an aspect wherein we pride ourselves that we have one of the biggest share of longer-term products. We also give some of this information. So not very onerous for us and also really depends on affordability, different companies, and this is a public domain. Different companies have different levels of expense of management. So that determines affordability. So 100 minus expense of management is a maximum that you can go to. At the same time, we want to -- we hope that everyone triangulate in terms of distributor, what are the customer economics as well as regulators direction to bring cost down. So it's a 3-way triangulation, which will evolve. For us, we have 300 partners and these conversations are going on, keeping this principle-based approach in mind.

[Operator]

The next question is from the line of Deepika Mundra from JPMorgan.

[Deepika Mundra, analyst]

In terms of the margin guidance that you mentioned, looking at flattish next year, could you comment on in terms of the key drivers between the merger synergies expenses as well as product mix?

[Vibha Padalkar, executive]

Yes, sure. I'll start off and hand it over to Niraj. The way we look at this is that the VNB certainly, like I mentioned, will be driven by APE growth. Margins, there will be more and more margin extraction from some of the nuances on products, for example, on protection. And I also mentioned the quarter-on-quarter trend is also there in our investor presentation. So that will continue to go up. I also mentioned about [indiscernible] life continuing to do well. So that will continue to give us the upside. Also in terms of investments that we have made on a lot of partnerships, whether it is in AU Small Finance Bank and India Post Payment Bank and Yes Bank and so on. As you know, we have to invest ahead in terms of manpower before the revenue starts kicking in. So we expect that also to happen also the acquisition of Exide Life in our Tier 2 and 3 locations. So what I'm trying to say is that the costs have already been incurred and are being carried in our P&L and reflected in our margins. It is the exit margins in March. So the upside should start coming in, in terms of productivity increase. Niraj, do you want to add to that?

[Niraj Shah, executive]

No, but you covered it.

[Deepika Mundra, analyst]

Any comments on the potential for composite licenses? And how do you think about the health offering in conjunction with HDFC ERGO? Or would you like do it stand-alone? So if you recall, out of all the committees that have formed HFDC Life chaired the Development and Penetration Committee. And in that report, we did ask for a composite. So it's no surprise that, that has come through. We ask for whole lots of other things like the genesis of Bima to government to have a marketplace and also we talked about being allowed to distribute products, other financial services products, including other products that are regulated by IID and other regulators. So we're happy that this is hopefully seeing light of day wherein the bill gets passed and we are able to do this. Now in terms of, okay, if you are allowed to do this, there's a next step is the regulator needs to form regulations to be able to say what is it that they would like to see. But assuming that they are on board to your last question, we're not really interested in redistributing the pie. We want to grow the pie. And when you triangulate that, wherein 60%, 70% is still out of pocket and the numbers are not even a 1 percentage in terms of penetration much lower than what it is in life insurance, then I think we would be doing disservice by just redistributing the pie. So not really want to play just in the mediclaim space. But having -- to juxtapose between life and Mediclaim. There are many, many layers. It could be in terms of riders. It could be in terms of embedding health solutions within a life product and so on. So we do have a few ideas that are ready to press the button if you are allowed to sell it. At the very least, our ask has been -- which was in the earlier committee that at least allow us to distribute health products is not to manufacture. Yes, that is admittedly not the best outcome, but at least that. So all these options are open and worldwide health fits much closer with life and underwriting becomes easier understanding the person's health condition becomes easier and so on. So we'll wait and watch, but we certainly have our plan ready, depending on any of these Avatar that we're allowed to do.

[Operator]

The next question is from the line of Avinash Singh from Emkay Global.

[Avinash Singh, analyst]

A couple of questions. First one is on an your back book surplus in [indiscernible]. I mean, if I were to adjust for the last year's excess mortality reserve, probably the back book surplus division looks like 7%-8%, I mean, typically much weaker than OP or [indiscernible]. So if you can provide some more color on that, that's question one. And second question is more, again, to just repeat perhaps your kind of FY '24 outlook that is on this strong bumper base, do you expect your APE to grow in FY '24? And on the similar thing, the margin I'm a bit confused because I mean, of course, you are seeing a positive trajectory for retail protection you are going to see probably more granular growth as far as the non-par policies are concerned and probably some synergy from your HDFC-Life thing and also implied the base performance improving going forward as well. So no synergy playing out-- yet you are sort of being guided on margin guidance. So the other questions.

[Niraj Shah, executive]

So I'll start with the margin question, what you spoke about. What I did mention is that there will be basically a couple of things here. One is in terms of on the product mix side, we said that there will be more longer-term business that you would expect to get over the next year. We will look at the product mix beyond that. As we've said, in terms of protection for the quarter, we've had a significant growth around 40-odd percent, and we expect protection to continue to grow on a normalized basis as we go forward as well. Some of these things will obviously help in margin accretion. That will be balanced by the investments that we have made and we'll continue to make in building our distribution in terms of people on the ground as well as in terms of the technology investments that we spoke about. We started that, and we'll continue with that over the next couple of years. So the idea really is to generate VNB growth out of APE growth. We did mention that we are fairly confident about delivering growth next year on a normalized basis as well. And we -- the aspiration will be to continue to grow faster than the industry. And all our VNB growth we expect to come from APE growth next year while maintaining margins in spite of all the investments that we will make. And of course, there will be adjustments that will happen as the year progresses in terms of how the market evolves. There was an earlier question around EoM and the practices that may be followed across the industry. So we'll have to look at all of that as well. But all in all, we have talked about directionally how we would like to approach it, and that's how we are looking at margins for next year. As far as the question on EB surplus is concerned, even on a normalized basis, we are basically looking at adjusting for the COVID number that you talked about 18% to 20% EB surplus growth. So that is something that we believe has been achieved, and it's something that we can expect so on.

[Avinash Singh, analyst]

No, my question on the back book surplus that is on slide that has gone from third year. That was Slide 10. So that's on Yes, yes. So the 34.9%, if you normalize for excess mortality reserve for that COVID database , it goes to 41.4%. And from there, 44.2%, it's like some 7%-8% kind of a growth. That is a lot muted considering your past. I mean, of course, FY '21, '22 had some COVID impact. So what is driving this sort of a slower than your trajectory of back books -- is it Exide Life or is it something else?

[Niraj Shah, executive]

No, I think what you're doing is basically taking the full COVID impact into the EB surplus. That's not really the right way to look at it because there was a new business impact as well. So you have to actually distribute the impact on new business as well as on existing business -- and at that's the reason I mentioned the number [indiscernible].

[Vibha Padalkar, executive]

Yes. To add to that, there will be some other impacts like would have an assumption changes or some operating variants that would point the idea. So just completely excluding the COVID impact would not be the right way to look at the underwriting profit of the existing business profit emergence.

[Operator]

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

[Sanketh Godha, analyst]

Just wanted to understand that the exit bank, which will ultimately become 50% on an ship whether it will be a new fresh capital infusion or it will be a secondary market purchase. So just to understand if you say such capital infusion HDFC Limited did in the early part of this year, then what kind of capital or solvency you would be looking at? And the second – I mean after you answer that question, probably I have a couple of data [indiscernible]

[Vibha Padalkar, executive]

Yes, sure. See, at this point in time, we haven't had concrete discussions with HDFC Bank, we will, over the next few days. But we don't require extra capital. As you know, we raised INR 2,000 crores. So in all probability, it will be secondary.

[Sanketh Godha, analyst]

And if I look at the unwind rate, probably it is lower compared to what it was last year, which you even guided at the start of the year at around 8%. So given the interest rates are a little higher, so can we expect that your ROE next year could be driven by the better unwinded?

[Vibha Padalkar, executive]

Yes. Like we mentioned in the first quarter, we have completed the unwind for the year based on the assets that we had and the cash flow pattern at the start of the year. For the coming FY '24, we will do the same exercise. And based on the competition, we will let you know what I maintain the first quarter. But yes, as you rightly said, as the interest rate curve has gone up, we expect the unit at to be higher, but it's not that it's going to be completely only incurred by the interest rate increase in the shorter the longer and the interest rate has been fairly similar. So depending upon the composition of the cash flows that comprise the with, the unwind rate will be incented the average of the movement. And then we'll let you know the competition in the first quarter of the year.

[Sanketh Godha, analyst]

And last one, probably -- honestly, the 12% or 13% as of the entire year's business, which is high ticket, I entirely get disrupted. So assuming entirely get disrupted or you can't regain that business in FY ‘24. Then your confidence of the APE growth is largely driven by the market share increase in HDFC Bank? Or somewhere additional business could come from some other channels or just I wanted to understand the thought process because as 10% disruption, I mean, 100% becoming 90% and 90% even if it grows by 20% percentage for the next year, then the growth what we are looking is 7%, 8%. So in that sense, I'm asking you, what gives you confidence that the APE growth could be driven even if the hit can get disrupted next year?

[Suresh Badami, executive]

I mean just to let you look even until February before this spike came in March because of the budget changes, we were growing in the range of 15% to 16%. And if you really look at the growth which has come and has come across product segments and has come across different channels. So our proprietary channels, which is agency and direct have been growing. A lot of our new bank partners and other bank up partners other than HDFC Bank have also given a great support. So whether it's Yes Bank and Bandhan and IDFC, we have been tremendously supported in terms of growth from them. And we see that trend continuing as they expand. The third piece, of course, is the fact that there are certain opportunities, which we see in the smaller ticket par and non-par also because look, that will be a segment which will open up the number of policies that we'll be able to gather from there should be fairly high. Lastly, most importantly, we do believe that now with HDFC Bank as parent, they will give us a fair amount of spike in terms of market share, and we are working towards that in close coordination with them. So the -- while we will definitely -- like how we have done in the past target to grow faster than the industry. We're fairly confident of that. Now whether we are confident whether it's a 10% to 15%, I think, like Vibha, mentioned earlier, there have been 4 or 5 instances of disruption in the market. And across all those disruptions, you will find that we have somehow managed to grow in the range of anywhere between 10% to 15%. And we are hoping that even in this case, we'll be able to replicate that.

[Niraj Shah, executive]

Just to add to that, apart from on the distribution side that Suresh spoke about. On the product front itself, this whole premise of 100% going to 90% and 90% being the starting position is something that we don't necessarily believe in. Because even after the budget changes and specifically more after the other announcements that were made around debt mutual funds, we believe that this product category still is uncomparable. There is no product proposition that exists over this period of time, which gives this kind of proposition even on a post-tax basis. So we don't want to -- we don't really subscribe to the thought process of the starting position being lower. Of course, the bump up that has happened. We have definitely -- we are looking at normalizing that. But the starting position in our mind, there will not be less than 100 from that perspective. And we'll aspire to grow from a normalized base.

[Vibha Padalkar, executive]

And I want to add one more point to this. While there's a lot of talk and focus on more than INR 5 lakhs in budget, an important data point is that in the month of March, our below 5 lakh grew by close to 50%. So it is not that there is no growth in that. Another data point is that unit-linked also when this INR 2.5 lakh tax change happened, our composition of unit-linked is actually -- has gone up significantly. So rather than one would have expected it to have gone down. So there is a fair bit of decoupling between tax being the reason, at least for our section of customers, and it's actually translating into their buying behavior.

[Operator]

The next question is from the line of Swarnabha Mukherjee from B&K Securities.

[Swarnabha Mukherjee, analyst]

So first question is on the cost structure. So given that the VNB walk that you have provided, given that we have had a very strong scale up in FY '23, despite that, I see that the VNB has a negative impact coming from fixed cost absorption, while I have thought back because of the strong growth, there will be some amount of operating less actually playing out in a positive manner. So I wanted to understand how to read this and what will be the proportion of, say, variable cost in this cost structure which voting in this? And also, if you could look at it from the lens of the EoM ratio like part. Where are we? I mean our EoM ratio, I think, is almost closer to 20% the number that you report. So how should we look at it? Are we above the limits that the ID calculations strive and how the light part would be. So this cost related would be my first question. And secondly, in terms of persistency, I see that in the 61st month bracket, there is a drop in the persistence is in all other cohorts you have improved the persistence. So just wanted to understand, sir, is this related to some kind of persistency challenge in the ULIP book that has played out particularly or anything else to read into that?

[Niraj Shah, executive]

Yes, just quickly start with the second question on persistency, 61st month that you're referring to, it's largely the impact of the merger. There were certain cohorts of business -- of the acquired business, which was historically trading at lower persistency. While there has been improvement across the business that has happened over the last few years and Exide Life, the business that was written 6 or 7 years back, did indeed have overall persistency. That is something that is getting addressed and that was basically the impact that you saw. If you look at whether it's category-wise in terms of product segment or in terms of ticket size, persistency across the board has been improving over the past few years, and we expect that trend to continue as we go forward as well. To your question on the VNB trajectory, there has been Clearly, some operating leverage that we saw in Q4 because of the volume pickup. Some of that got neutralized by the investments that we have made and continue to make in -- on the people front as well as on the technology front that we spoke about. And this also does carry the impact of the Exide Life business, which was operating at a particular scale. And while some of the synergies have been realized in this period and the cost of acquisition or the cost of rating business has come down from over 100% to in the 70% or 75%. We expect that to go down even further in the -- going forward as well.

[Swarnabha Mukherjee, analyst]

Got it. So just a follow-up on the answer. Sir, the INR 100 crore investment that we plan to mean this how much headroom does it leave us to pushing some kind of favorable terms in terms of commissions in certain stores -- do we have a lot of headroom given that we would also have to have a light part for EoM directionally, which should be lower.

[Vibha Padalkar, executive]

So I didn't understand your question. Are you saying that whether we can afford the INR 100 crores of EoM, yes, very comfortably we can because we do have a fair bit of headroom on -- and have had for the last several years, we have been one of the few companies that have been compliant both at the company level as well as at a segment level. So no issue at all on that front.

[Operator]

Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants please limit your questions to one question per participant. The next question is from the line of Madhukar Ladha from Nuvama Wealth.

[Madhukar Ladha, analyst]

First, I missed out a little bit in the beginning. So when you see the growth in this quarter was what, 16% was normalized and 11% was the high ticket size tax impact, right? So are these numbers on what basis, these numbers are for the full year or for the quarter because for the full year, the individual APE has grown about 39% year-over-year. And for the quarter, it's at about 75%, right? So I didn't quite follow these numbers.

[Vibha Padalkar, executive]

You need to take Exide Life into the base. So the growth is 27%. And what we explained it at the beginning of the call is that if you were to look at where we were trending, which is YTD Feb, we were trending about 15%, 16%. So if you back up from 27%, you back out 15%, 16%, that could be attributed, which comes to about INR 1,000 crores is what we said is the March effect.

[Madhukar Ladha, analyst]

Got it. No, I missed the Exide Life part of it in the earlier part of the call. Sorry about that. And the other thing also about this Project Inspire, what exactly are you trying to do here?

[Vibha Padalkar, executive]

So it is a holistic transformation of everything from having a 360-degree view of the customer and looking at various capabilities, for example, looking at our application architecture, the IT governance model, our cloud strategy, especially on the road map on the cloud strategy, while we've embarked upon it, suitability in terms of which of our IT assets, the tech assets, how much would be on-prem, how much would be on cloud to look at our overall architecture. Typically, we would have the core policy admin system, every life insurer, whether in India or abroad would have that and then you have a middleware. But that does reduce our speed to market, both in terms of customer propositions, partner integration, new products and so on. So apart from having a single view of the customer that I mentioned, the 360-degree view and not only of the customer, but we would like to have a 360-degree view of the family as well with a lot of adjacencies that we can triangulate as well as having a data strategy at the core of it, not only tech but tech plus data. We already have a data lab in Bangalore. And how do we use data also enriched by what IIB is trying to do, Bima Sugam, will hopefully happen. And angulating that, how can we reduce the pain that a customer goes through in terms of underwriting? How can we give pre-approved summer short? How can we have customer nudges? How can we triangulate where in exactly like you have where we start watching a movie on one device and then end up on a handheld device and you're traveling. Similarly, how can we have a customer conversation on sales or servicing on one platform and end up seamlessly on another platform. And many, many things like that. When the time is right, we do intend to have and we haven't had one for some time. We do intend to have a tech day wherein we would like to showcase to all of you in terms of the inroads that we have made towards in this journey.

[Madhukar Ladha, analyst]

And one final question. So you also mentioned that you saw growth of about 50% year-over-year in the less than INR 5 lakh category as well. So are you worried or what are your thoughts on how much pre-buying has sort of happened so that people keep their INR 5 lakh limit available for FY '24 and beyond. Could that sort of dampen sales a little bit in FY '24?

[Vibha Padalkar, executive]

Yes, I just want to put out very, very categorically. I don't believe and Niraj mentioned this, but I just want to mention this again, and Suresh mentioned this at all. I have no doubt in my mind about the prospects of life insurance, and that has nothing to do with the year and now tax or no tax. Also because now there is parity which is rightly so between similar kinds of products, right? With that, Niraj also alluded to it even if I exclude life cover throw-in, our IRRs are better and the product proposition, that's the most important in terms of there's no other product that gives long-term assurance of return. I think there's somewhere minimizing it and narrowing it down to an IRR conversation that an HNI will want. I think that cannot be further away from truth. Another part is that a lot of HNI whether fortunately or unfortunately, have very low tax rate. So tax is often not the driver for it. And the fact that you get no ambiguity in terms of what am I going to get 20 years from now, no other product can give that. So that doesn't change. So -- and that's what gives us the confidence that we go back to basics in terms of engaging with the customer and explaining some of the nuances. And to say that, okay, it's unfortunately something where I happen to your dependence will get this no matter whether a person is there or not. Suresh , would you like to add?

[Suresh Badami, executive]

I think Vibha covered it, but one is not the issue in terms of where the prebuying has happened. I think the fact that now almost everybody who is less than 5 lakhs in terms of the number of unique lives that we can cover can see this as a product that they can buy because it's a very strong value proposition below 5 lakhs in any case, right? Because it's not that, that has gone away below 5 lakhs. So the number of customers who may want to look at this almost like an 80c even from a tax perspective, it's almost similar to that to say that look, why don't they invest at least 5 lakhs into it, and we should be able to broad base. And this is really in line with the vision to sale of the smaller ticket size, everybody should have insurance in India. We should be now able to maybe drive multiple policies because the proposition remains very, very strong.

[Vibha Padalkar, executive]

And the last point I want to make is that in the overall objective of going back to basics, HDFC Life has been a middle class to upper middle class to affordable segment focus insurer. Somewhere we were getting pulled into -- as the market was pulling us into the high net worth segment. So it is, in a way, playing to our strength to come back to the core of what we are comfortable with, wherein the levels of underwriting, especially on mortality because it's not difficult to say, I won't ask any questions, I'll ask very few questions. I will keep this on my books. You just have to triangulate with a lot of public information that is available of a lot of insurers that have kept more and more retail, more and more on the books. Now some of this, there's no reason to believe why that retention at high ticket sizes is okay, and it's going to pan out the way it is going to pan out. So a limited point is we are now playing to the strengths of HDFC Life, and that's what gives us also the comfort and the confidence that the growth is unaffected.

[Operator]

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

[Nidhesh Jain, analyst]

Two questions. So first, on the protection, the growth that we have seen in this quarter, is it any channel specific? Or are we seeing broad-based growth? I mean if you can comment how the growth we have seen in the AMC on a run side, specifically on the protection. Secondly, if you can share the mix of APE, which is coming from more than 5 lakh category because I remember that when the budget announcement came at that point of time, we have said that such policies contribute around 10% to 12% of our business. And I believe in Q4 that share of business would have gone up quite significantly from those policies. So what is the share for the full year from 5 lakhs plus policies in our APE.

[Vibha Padalkar, executive]

So the growth, if you were to look at almost all channels have done fairly well. But one noteworthy aspect that is showing very good traction is our bancassurance channel and also on the back of some of the product launches that we've had. And another noteworthy aspect is that other than the top 10 cities, we are beginning to see traction in the protection space. So this absolutely we're delighted by that kind of a traction that we are seeing. Of course, somewhat early days because we're talking about a quarter, but that is quite noticeable. And also if you're aware to look at HDFC Bank itself, the branch activation on protection, and this is there on Slide 15, that has increased by 50% year-on-year. So that focus will only increase, and we had multiple conversations with HDFC Bank to say that this is an opportunity. It's a question of focus. And there are solutions such as the return of premium and so on to give lighter touch underwriting. So all of that has come through and worked well. Also to summarize all channels have done well, but noteworthy is what we see in bancassurance. Sorry, your second question, I –

[Nidhesh Jain, analyst]

So what is the share of high ticket more than INR 5 lakh policies for full year. You remember that the last time when you showed the data that number was around 10% to 12%, given that we have seen a growth in Q4, that number would have been quite high. So what is the number for the full year?

[Vibha Padalkar, executive]

Yes, it remains far until February, it was 10% to 12%. And for the month of March, Niraj given the something.

[Niraj Shah, executive]

About 1/3 for the month of March.

[Nidhesh Jain, analyst]

And when we're talking about normalized base, should we remove the entire number from FY '23 APE ? Or should we just win INR 1,000 crores of delta that we have seen in March?

[Niraj Shah, executive]

Yes. Nidhesh, that's what we should do because honestly, all this -- a lot of it is conjecture in terms of what will happen to greater [in discernible] and all that in -- we all have points of view on that. But what is data is what was the growth YTD February, which was normalized growth? And what has happened in March. If you just back that out and you take a 15%, 16% as the normalized growth for the year, that's what we would have actually achieved had it not been for the budget. That's what we are working with. And then various segments within that, I guess, will anyway evolve as the business progresses going forward.

[Nidhesh Jain, analyst]

Sure. So basically, we are guiding that on a INR 1,300 crores of APE, we expect positive growth next year.

[Niraj Shah, executive]

Yes, absolutely.

[Operator]

Ladies and gentlemen, we request you to kindly restrict your questions to one question per participant. The next question is from the line of Nishchint Chawathe from Kotak Institutional Equities.

[Nischint Chawathe, analyst]

Two questions actually. If I look at the increase in existing business surplus, is a part of it kind of contributed because of the merger as well?

[Niraj Shah, executive]

No, Nishchint. Actually, if you just look at the stand-alone business, which we now don't track, there isn't any significant accretion to the PAT or EV surplus coming from that business because of the cost at which the business is getting done. Like I just mentioned that at the time of acquisition, the cost was over 100%. Now we've brought it down significantly below that. So there isn't any significant EV surplus generation from that business? Yet. Sure.

[Nischint Chawathe, analyst]

And any specific drivers that you could call out for this growth?

[Vibha Padalkar, executive]

So our product mix has been changing quite significantly over the years, and it is taking longer for profit to emerge. And if you recall, we started on this non-par as well as some of the new par products last about 4, 5 years ago, and that has increased in its intensity. So it has taken about 4 to 5 years for the for those profits to emerge as against more of a unit-linked strategy or even a par strategy, which will all emerge sooner in -- over the 2, 3 years kind of a time horizon. You want to add anything? Just to add to that, unlike the earlier product mix where uniting profits could be mostly coming in the first 5 years and not much around -- the contracts that we're writing now are longer term in nature and will continue to get the profits over a period of 25, 30 years, which means that after, say, 5, 10 years, the supply margin or the growth will be much higher. But because in the transition period of the last 5 years business getting replaced, the emergence or the growth looks lower.

[Nischint Chawathe, analyst]

And just one more question is about the new business -- sorry, about the business that you're looking at from the new branches of HDFC Bank, you somewhere mentioned that the persistency outcomes and the mortality outcomes would be different. Does it mean that margins in those branches would be a little lower.

[Vibha Padalkar, executive]

No, overall, looking -- it's a portfolio approach. So we don't clearly see it that way, wherein overall -- it's an overall approach, and it will be subsumed within the company-level margin.

[Suresh Badami, executive]

Yes. So Nischint, just to add to what Vibha mentioned, the good thing is we've been tracking our processing across geographies, customer segments and there has been an improvement across the board. And that's the reason why we're very confident about getting into Tier 2, Tier 3 with very good experience now compared to what we would have done probably 3 to 5 years back. So what we basically are saying is that can we expect Tier 1 kind of persistency in a Tier-3 market? Maybe not. But will our Tier 3 persistency keep improving from where it is today, answer is yes. So all of this would be priced into our products, and we will ensure that this is factored into our assumption setting as well.

[Operator]

The next question is from the line of Akshen Thakkar from Fidelity.

[Unknown Analyst]

Most of my questions have been answered. But just going back to the point on growth on sort of 27% and 15%, that's largely towards retail APE, right? If the group business shouldn't get impacted by that path?

[Vibha Padalkar, executive]

That's right. Yes.

[Unknown Analyst]

Okay. All right. And so broadly, just assume INR 1,000 crores of excess APE and then think about growth and the way you're thinking about it is on a normalized base, you see industry-leading growth, INR 1,000 crores, maybe.

[Vibha Padalkar, executive]

That's right. Yes.

[Operator]

The next question is from the line of Supratim Datta from Ambit Capital.

[Supratim Dutta, analyst]

So 2 questions here. One, on the annuity side, it looks like the growth in the fourth quarter slowed. So is there any particular reason for that? And number two would be, do you see a scope for this 5 lakh threshold that you have partly been given also being taken away going forward? And based on that, what kind of product innovations are you looking at? That would be the 2 questions.

[Vibha Padalkar, executive]

Yes. So on the annuity front, so we held our market share and continue to be robust even in quarter 4. So it was -- overall, it was an industry thing in terms of -- and also what are the government employees? And is there some deferment? Or is there a lesser in terms of the funds that are flowing into annuity, sometimes the release is not done by the public sector undertaking, a myriad of issues like that. You want to add anything Suresh ?

[Suresh Badami, executive]

No, I think --frankly, the idea was also to maximize on the opportunity and the March numbers are almost like a full year number of what normally happens across some of the others. So the volume, the channel, everything was devoted to this. And we ensure that we didn't slow down an annuity, we continue to maintain our market share as such. So -- and like Vibha mentioned, some of the group annuity numbers depends on a lot of other factors on the ground in terms of how many people are coming in. But really, the channel in the field were quite swamped with the kind of budget related business, which flowed into us, thanks to the brand as well as the product. In fact, our annuity business in FY '23 grew by almost 18% on the same premium basis compared to maybe a 2% growth for the industry. So you can see that we focus on annuity like we've been saying, continues to be there.

[Supratim Dutta, analyst]

And on the second question?

[Vibha Padalkar, executive]

Sorry, can you just repeat that question?

[Supratim Dutta, analyst]

So what I would say is that now you have been given a 5 lakh threshold but a similar threshold has not been given to even MS or fixed deposits. So should the government take back away, what would be your strategy? Or are you -- have you started strategizing for the similar event or not?

[Vibha Padalkar, executive]

Yes, absolutely. And it goes back to what I mentioned that we have no doubt in our mind that the whole concept of reinvestment risk is very well understood. See if this has happened just when we had launched Sanchay Plus and nobody else was in the industry who are selling Sanchay plus, then people would not have appreciated what reinvestment risk does and long-term assurance of returns. Now that almost every player in the most of our peer set is selling some avatar of this product, a category has been born over the last 2, 3 years, and there's a full for this product, and it is well understood versus the nuances of fixed deposit or a debt neutral fund. So we believe that it will go back to the basics of asset allocation. If a person has, say, INR 50 lakhs, maybe there could be INR 30 lakhs into a Sanchay Plus kind of a product and 20 lakhs or 10, 10 lakhs into other forms of -- which will give them more liquidity, that could happen, but it's not going to go down to 0. And that's what gives us the confidence that whether the -- I mean, the 5 lakh going away will be somewhat of a unfortunate outcome because of the fact that people do need to save longer term and something that they don't dip into at the shortest -- or the first emergency or for discretionary spending, that is very important. But yes, we do believe that it goes back to the fundamentals of what this product has to offer, and that's not going to change. I'm sorry, and last point is the math very clearly shows that the post-tax IRR is more attractive versus any other product that is there. And also today, people buy annuity, just now we talked about and you raised a valid point about annuity and that we are market leaders via mile. Annuity is taxed, and that is something that is factored in by people. So it doesn't deter people from buying annuity. And these are not only people who are buying annuity because they -- that's the feature, but also people buy annuity in open market. So longevity risk is very well understood, and that's only going to increase as people -- a population shift more and more towards 50 and above.

[Operator]

The next question is from the line of Parag Thakkar from Annual Wealth.

[Unknown Analyst]

Yes. So congratulation for the entire team and HDFC Group that you bought through relaxation and due to which HDFC Life would be able to increase stake. And definitely, it skin the game, I can also understand that now every brand the entire machinery of HDFC Bank, will be more willing to sell HDFC Life products. And the one other trend, which I'm saying is that, again, in order to mobilize more and more deposits, including HDFC Bank, which is taking the lease from the front because of mergers with HDFC Limited -- many other banks are also opening branches in Tier 2, Tier 3, Tier 4 cities. So I would say that the HDFC Life is very focused on developing products for this Tier 2, Tier 3, Tier 4 cities where HDFC Bank is now going to open branch or any other banks are also going to open branch to attract those customers where the ticket sizes might be small and the insurance penetration might be negligible.

[Suresh Badami, executive]

Absolutely. So thanks for the question. I think like we just discussed in terms of our progression to Tier 2, Tier 3 in terms of quality of business. And that gives us the confidence that as we broad base our customer base in these branches that you're talking about across not just HDFC Bank but other new partnerships that we have like AU Small Finance Bank and some of the other larger banks which have -- which are also increasing presence in Tier 2, Tier 3. And also our variable agency business, which is primarily in Tier 2, Tier 3 markets. We are very confident of being able to not just distribute and get growth out of that, but get growth with quality and maintaining our profitability. In terms of product construct, yes, definitely, what we have to address is in terms of recognizing that the kind of documentation that's probably available in Tier 1, Tier 2 may not be available in Tier 3. We are looking at a lot of solutions around that as well. A lot of information is now available across third-party databases, which we are able to leverage. And lower ticket size is typically the kind of underwriting from a medical perspective that's required is a lot limited. We are already in arrangements and discussions with our reinsurers to be able to participate in this kind of an opportunity and the reinsurers are fairly enthusiastic about it. So all of this put together gives us a lot of confidence in our ability to not just create products and reach out to these customers, but do that business at scale and on a sustainable basis.

[Unknown Analyst]

Yes. So sir, basically, if we put all this together, the banks are opening branches in Tier 2, Tier 3 towns where insurance penetration is not there. Looking at this if you just tell you aside FY '24, where you have a disadvantage of FY '23 is very high pay because of the budget thing. But what is the overall expectation of growth over the next 3 to 4 years Considering the under penetration of insurance and considering the fact that now banks are opening branches everywhere because in order to mobilize deposits.

[Suresh Badami, executive]

So you're absolutely right. But I think took our whole strategy of ensuring that we reach to every segment in every part of the country, we have been working on this for the past several years. And it's -- of course, we have the advantage of HDFC Bank, which now has increased their branch network to 7,800, -- they added some 638 branch even during the last quarter, right, the whole set for 1,479. But if you really look at it, whether it's Bandhan in the East, whether it's CSP, SIB, Ujeevan, Equitas, whether it's Capital Small Finance Bank, whether it's Utkarsh, whether it's AU Small Finance Bank, a lot of them have very, very strong regional presence, and we've been actually getting extremely good support, like I mentioned earlier, from all of them. So clearly, if we have to work with them, think our strategy in terms of their growth plan on deposits, we will find our growth and our product strategy also syncing with what they are doing. Of course, we've had the added advantage of now getting the entire Exide Life. And if you remember, the entire proposition of looking at the acquisition of Exide Life was to look at the South market, which was a little weak for us as well as the Tier 2, Tier 3. There's a lot of learning, which has come in terms of their product and the way that they go around, whether it's in terms of the venue marketing, whether it's in terms of the agency model that they have, and we plan to now scale that our and take it across.Thirdly, more importantly, I think being pioneers in technology, we've had a fairly strong presence in a lot of ecosystem partners. Now with multiple things happening in terms of the India stack in terms of 5G, in terms of mobile penetration, in terms of how we've been working in the past, we do believe that this is again an opportunity in terms of increasing the NOP as well as our penetration into the Tier 2, Tier 3 markets. So clearly, this year, we will focus in terms of how do we expand in some of these markets. And of course, the regulator is also looking at some of the other initiatives like Bima Vistaar, which will go through Bima Vahak. These are great initiatives to be able to take market ground even the Tier 2, Tier 3.

[Unknown Analyst]

And the HDFC Bank increasing stake. So HDFC Life does not need capital. So mostly, it happens to a secondary route, right? And Standard Life generally standard like we have seen that they have been selling stakes in the past. So what is the stance over there?

[Vibha Padalkar, executive]

So you're right. In all probability, it will be secondary because we don't need capital. And you're also right that Aberdeen has been a seller. And there's a last bit that is there of 1.66% more because what it is part of the promoter group and so on. So these are all conversations between HDFC Bank and who they want to buy the stakes from? And I guess that should materialize in the next month or so.

[Operator]

The next question is from the line of Dipanjan Ghosh from Citi.

[Dipanjan Ghosh, analyst]

Just 2 or 3 datakeeping questions. If you can provide your rider attachment rates. Second, some color on the credit life growth maybe across your channel partners, maybe segregate it across some of the channel partners out there on the MFI side. And lastly, on the annuity margins, we have seen the market leader take multiple rate hikes. So how are the margins shaping up across that particular business segment without taking into consideration the mix change within annuities.

[Vibha Padalkar, executive]

Yes. See, on Rider, we are growing, not really giving out specifics of that, but the focus continues to be -- be there at every product that we can attach and so on at every channel level. Yes, there are pushes and pulls, but that has grown fairly well, both in terms of individual and group riders. Your second question was in terms of MFI.

[Dipanjan Ghosh, analyst]

Sorry. On the credit life business across channel is –

[Vibha Padalkar, executive]

Yes, credit life, we are very, very happy over the years in terms of how well distributed it is. And the reason why we are happy is that many possible business disruptions or one kind of a sector goes up or down or one kind of a line of business is unattractive, mortgage is unattractive for something or it is attractive or something, something else LAPs. So it's about 1/3, 1/3, 1/3. So about MFIs is about 1/3 and HDFC is about less than 1/3 and balances whole host of marquee banks and NBFCs. So that's how it is. And similarly, we are very well spread across the lines of business as well.

[Dipanjan Ghosh, analyst]

Sure. And maybe the last part on the annuity margins and how for the industry that is shaping up?

[Vibha Padalkar, executive]

Very robust. You want to -- and I was a bit surprised on -- I thought we were the market leaders on annuities in the private sector, but maybe you're referring to –

[Dipanjan Ghosh, analyst]

PSUs you play out there.

[Suresh Badami, executive]

So the annuity market has been developing quite well. And what we are really seeing is a fairly calibrated approach from all the players who are participating in this primarily the 3 or 4 large players who are writing this business. And if you were to track in terms of how the market is behaving, you'll find fairly frequent repricing that is happening in the marketplace as a consequence of any changes in the interest rate environment. And that's something that we expect to continue to see, given that this is a long-term risk management product, and we will be in a position to manage our spreads and maintain higher than company level profitability in the annuity business as we go forward because of the market conduct that we have seen over the past many years since this product category has expanded. And across the whole business, there are multiple sources from which this business really comes, whether it's what we mentioned in terms of discretionary savings that as a segment has been growing in the annuity business. As the NPS business becomes larger, that is also contributing fairly well to this category of business. And in terms of -- we did discuss in terms of some of the regulatory changes that have happened more recently in terms of AoM. We do expect that the pension category as a product will also get revived very shortly. When that happens, that will also become a feeder to the annuity business as it was still a few years back.

[Operator]

We have the next question from the line of Nitin Agarwal from Motilal Oswal.

[Nitin Aggarwal, analyst]

So Vibha one question around how easy do you think it will be to redesign the KRA and change the overall strategy, focusing on granularity, so to limit the impact of negative changes? And also if you can provide as to how the April has trended so far to suggest that the impact of new tax laws.

[Vibha Padalkar, executive]

So on the first one, it's going back, if you look at 3 to 4 years previously, we were exactly doing this, wherein we were selling to more and more customers. We were selling a lot more to, like I said, middle class up, upper middle class kind of customers as well as solving for how do we broad-based growth. So going back to that, it plays to our strength, again, because of the DNA. So I think it's a question of maybe a quarter or so, if at all. This was coming. And really, one point I want to make is that even if the budget had not come, this is exactly what we would have done. And this is something that my management team is very aware of that our focus has been to go back to basics about number of policies because that broad basing and getting more and more customers was equally important. And so this is not really a budget led recalibration of KRA sheets, and that gives me a fair bit of confidence. As regards April, et cetera, this is a forward-looking statement, and that's something that we will give you an indication when we come to our June numbers.

[Nitin Aggarwal, analyst]

And one more question as to how do you see the HDFC Bank counter share now moving over coming years?

[Suresh Badami, executive]

Yes. So look, I think, obviously, the overall strategy once they become the parent, they will see it more closely, and we expect a huge amount of support in terms of how HDFC Life is . It's not that we don't have that support right now. But I think the way we are looking at it is in any of the business that we do, we have always looked at the right balance between the quality of the business as well as the risk that we take. And given the relationship that we have at all levels across the bank and their comfort with HDFC Life brand, we do see the contract share moving up in various forums, we've had the senior management of both the entities saying that we will inch it back up to the 70% mark. And I don't see any reason why we shouldn't be heading there. Obviously, it is open architecture and HDFC Bank has very clearly stated that they would want to remain in the open architecture model. So we will have to be competitive, whether it's in terms of product, whether it's in terms of servicing or whether -- so those actions clearly are planned for us. So -- but you will see a sequential quarter-on-quarter growth in terms of our market share, and we are working very closely with the team there to see how we can take this up.

[Operator]

We have the next participant in queue, Ms. Pallavi Deshpande from Sameeksha Capital.

[Pallavi Deshpande, analyst]

I wanted to know what would be the share of ROP in the product mix? And any expected hardening on the insurance trade.

[Niraj Shah, executive]

ROP overall would be about 20-odd percent of the business. It has gradually expanded over the last couple of years. We started in single digits a couple of years back and now it has got on as we go deeper into Tier 2, Tier 3 markets and also in terms of the Exide Life business, which was catering to this segment. So we are around 20-odd percent at this point in time. On the reinsurance front, I think it's been a fair bit of conversations that we've had with them in terms of how they are looking at the marketplace now, while 2 of the reinsurers are fairly active now. And I did mention some time back in terms of we are fairly excited about now getting back to the growth mode given the situation that was -- in terms of -- from a tendering perspective, there was a bit of defensiveness of course, at that point in time, but all of that is now gone. It clearly is in terms of ensuring that we are back to growth in this segment. There is a lot of excitement around the protection growth coming back, and there is a fair bit of enthusiasm among the reinsurers on that front as well in terms of taking on new risks, new segments as well as deepening the current business. Also, the good bit here is that some of the practices have been put in place, which I will say that the interests of the customer as well as the insurers and the reinsurers and we expect that to continue. And pricing will continue to reflect the changing risk environment. So as you go deeper into Tier 2, Tier 3 markets, the mortality experience is likely to be different, and that will get priced in as appropriate.

[Pallavi Deshpande, analyst]

And sir, lastly, on the banca channel, which you mentioned HDFC, which would be -- which out of the products would be the more focused one.

[Vibha Padalkar, executive]

We are having a balanced product mix at HDFC Bank, and that will continue. Really, it's all the products that we have. The only nuance there, which I alluded to one of the earlier callers is that we are also having a thorough focused strategy, which is the semi-urban and rural. And the non-top 10 cities, branches in the top 10 cities. And there, we have seen a fair bit of traction for us in both protection as well as some of the easier underwritten product. So that will continue.

[Suresh Badami, executive]

So sorry, if I can also add, I think really, the way we are looking at our product mix also is in terms of the overall opportunity on the product penetration at every branch level. So we understand at a specified person level or RFS map, what is the opportunity in terms of being able to be par active, non- par active term at that. So while Vibha mentioned that we always drive a balanced product mix, our objective would be to make sure that we don't keep penetrated in terms of the customer base on whether it's the annuity opportunity, whether it's in terms of the power opportunity less than 5 lakhs as well as we talk. And even in certain markets, we will sell ROP in certain markets. But some of our -- across all the channels and the segments, we should be able to get to the right product mix with the right quality.

[Operator]

Ladies and gentlemen, we will now take the last 2 questions. The first from the line of Viraj Shah from Axis Capital.

[Unknown Analyst]

So the first thing that I wanted to understand is that with the merger going through, the kind of branch addition that is expected to be done in the next 2 years would be about 1,200 to 1,500. I wanted to understand what could this take the bancassurance contribution to in the overall distribution side? And what kind of impact could it have on the expenses itself, distribution expenses itself, could they significantly come down with the addition of the branches and the bancassurance network going up? And the second question was, there have been various reports about some GST and income tax notices being sent to the company. Is there any ask in terms of what could be the amount? What are the charges? And what could be an impact of this on the company?

[Suresh Badami, executive]

Yes. So let me answer the first thing about the branch expansion and what will be the bancassurance contribution. Really, we don't look at that, that way. I think we were answering one of the earlier questions, it's not to say that, look, we don't target by contribution. Yes, obviously, bancassurance will go up because the branches are expanding, and it's not just at HDFC Bank. I think all our partners, there are like 300 partners, 28 partners on the Scheduled Bank side, where we'll be expanding and we can see that going. But similarly, the investment in terms of how we are looking at growing the agency business or where we have a broking partner or where we have large other direct relationships. I think that will also continue to grow. So the way we look at it, each of our channels, in some sense, are regular business lines, and each of them is headed by almost a channel CEO, who is looking at end-to-end growth, profitability and quality of business. So yes, we do believe the bancassurance growth and we gained share in HDFC Bank and they expand, maybe the HDFC Bank contribution will go up. But really, the idea would be to ensure that we have a diversified distribution mix as well as grow each of the other channels. And obviously, the cost structures will also be accordingly in terms of if we can get scale and can get volumes. I think we have demonstrated that in the past also in terms of how this brand expansion and what kind of -- and we have amongst the best-in-class productivity across most of our banca partners.And on the GST, I just hand it over to Niraj.

[Niraj Shah, executive]

Yes. On the GST front, as we are aware, this is an industry-wide issue, and there has been a request for information to be provided around the deductions that have been availed off on the input tax credit. We've been cooperating with the authorities and giving them all the requisite information. And we await to hear from them in terms of a formal showcase notice and future course of action, we will obviously determine based on what we hear from them. As of now, we are not in the seat of any such communication from the authorities.

[Operator]

The next question is from the line of Neeraj Toshniwal from UBS India.

[Neeraj Toshniwal, analyst]

So first question is on the product line margin. If I look at the product mix, it has moved significantly towards higher margin products. But in terms of margin outcome with energy respective of the scene, so any gaps here or we would see it is largely because of the investments we are doing into it? Or there has been some big weakness because of the higher plus coming in because of high competition in the last 15 days? How to think about it?

[Vibha Padalkar, executive]

If you're talking about the waterfall of margin. Is that what you're referring to?

[Neeraj Toshniwal, analyst]

Yes, that is one question. whatever margin is obviously you can see the result that new business profile have been – [indiscernible] has gone down significantly from what was there 9 months. But yes, I wanted to understand any change or drop in any production margins we have seen?

[Vibha Padalkar, executive]

Product level margin. No. So see, actually, that's a very good point because when there is intense competition that you see, even if you saw that even in the month of March in terms of giving very aggressive rate on non-par, we stayed away from doing that, and that just means preservation of product level margins. You will find the same thing, especially on aggregator platforms. We are really the cheapest because then there is -- the pricing becomes extremely thin, especially if even 1 or 2 lives are worse off than what you have factored in. So it's a very calibrated approach and there's been no drop in product level margins. So I mean when you compare a March versus before March or quarter 4 versus before quarter 4, there's nothing that is at a product level.

[Neeraj Toshniwal, analyst]

Got it. So what kind of margin over the next 2, 3 years next year, obviously told that will be somewhat flattish, but over the next 2 years, where do we aspire to kind of reach in terms of margin profiling.

[Vibha Padalkar, executive]

So over a period of time, as the synergies between HDFC Bank and us as its subsidiary starts coming through, then you would see some level of margin expansion. Also, there are some optionalities that we talked about that are there in the insurance bill, whether it is in terms of being allowed to do some part of health, whether health riders, whether it is in terms of being able to distribute other financial products. So there are a lot of optionalities that are out there are Gift City, because you're talking about next 2 to 3 years, apart from our base, which should not change, we will be able to layer it and be first mover in many things that we already are. So that will start showing some margin uptick once this year, which has a couple of moving parts settles down, then we should get back on to the upward movement on margin.

[Neeraj Toshniwal, analyst]

So why I'm asking this, particularly because at one point, we were the leaders in margins in terms of compared to peers now, I think as the these terms have passed that -- what are the print because we are the best products and still somewhat margin-wise, we are probably not at the best in terms of the product level. So I wonder when we are getting back to that because, obviously, that will be an outcome, which will be given a lot of factors.

[Vibha Padalkar, executive]

Yes. So a couple of points here. When you say that we're not the best in margins, I think one thing is that we need to look at, are we holding market share. So if you look at HDFC Life, we are holding market share as well as growing market share and holding our positioning. So we are amongst the top 3 life insurers by in any which way that you cut it in terms of new business and renewal premium and that continues. So without -- if you were to give up 1 or 2 positions, then the margins can be much higher. So one is that -- so that triangulation between top line margins, VNB growth, EVOP. So all of that is a holistic score card. That is number one. Number two is that if you look at the consistency of margins because if you take one particular cut, then one can say that, okay, in this period, you have not grown in terms of margin. But if you look at the 4-year period, and that's why we put out our chart in our investor presentation, that if you look at any 4-year period, we have doubled in all parameters. Right. So I don't -- you would agree that, that is not an easy ask and we will continue to do that. Even way forward over the next 4 years, we will continue to double. So whether it is embedded value, assets under management, value of new business and so on. So that kind of a trajectory, we have time again showed over many cohorts of 4 years and not just 1 cohort of 4 years, and we'll continue to do that. So margins will go up over time in a nutshell.

[Neeraj Toshniwal, analyst]

Second question, is on the HDFC Bank.

[Vibha Padalkar, executive]

Sorry, last point I want to make on margins is that very little in terms of headwinds because the open architecture, there are companies wherein the banks have not opened up to open architecture. So it's more in terms of is that the right approach? And do customers really need a choice because down the line, if customers don't have a choice in this world, then in all probability, the younger ones at least are going to wander into other ecosystems, whether it is into an aggregated platform, whether it is into some other kind of digital platform and perhaps at least explore and eventually buy. So information asymmetry cannot contain as a way of life. And so those headwinds line do exist, which is not the case in HDFC Life.

[Neeraj Toshniwal, analyst]

So that was like my second question in terms of HDFC Bank, will you get support in terms of market benchmark rates also because now they become the period instead of second person we had earlier -- and the time line for the 70% wallet share, I think we are at 55%, how much time line we kind of are pending within -- to reach that target 70% mark?

[Vibha Padalkar, executive]

So I couldn't really understand your -- I couldn't hear you very well on the first part. I think what you're saying is that –

[Suresh Badami, executive]

The question is basically in terms of the time line on when we'll be hitting 70%. I think, look, once the entire merger is through, and I'm sure the bank will be equally review the merger. But already once you become a subsidiary, and we have those discussions, we will want to inch it up quarter-on-quarter. Now how fast, frankly, we'll be able to get to the 70% market in terms of the broad direction which comes in from the bank as well as probably the hard work that we need to put in from HDFC Life. But we do see this happening. Difficult to put a time line to it, but as early as possible, given the efforts on both sides.

[Neeraj Toshniwal, analyst]

So first question on the first part was on the cost side. Will we get support on the commissions market benchmark rate or we will continue what you are seeing in?

[Vibha Padalkar, executive]

Look, right now, we're just focused on how do we work more closely with HDFC Bank and other conversations will follow because the merger announcement or the 50% stake has just come in. The ink is still not dried. And I'm sure over the period -- over the next few months, we will have those kind of conversations.

[Operator]

I would now like to hand the conference over to Ms. Vibha Padalkar for closing comment. Over to you, ma'am.

[Vibha Padalkar, executive]

Thank you all for joining us on the call today. Please feel free to reach out to our IR team if you require further information or have any follow-up queries. We look forward to speaking with you again. Thank you, and good night.

[Operator]

Thank you. On behalf of HDFC Life, that concludes this conference. Thank you for joining us. You may now disconnect your lines.