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Max Financial Services Ltd
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Ladies and gentlemen, good day, and welcome to the Max Financial Services Limited Q2 and H1 FY '19 Earning Conference Call. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Mohit Talwar, Managing Director. Thank you, and over to you Mr. Talwar.
Thank you, and a good afternoon, everybody, welcome to this call. Let me introduce my colleagues. I have with me Mr. Prashant Tripathy. He is now the Managing Director and CEO designate. I also am joined by, Viswanand, who is the deputy Managing Director designate; Mr. Sujatha Ratnam, the CFO for Max Financial Services; and Jatin Khanna, who handles the Investor Relations business.So let me start with the key highlights for H1 '19 and then I'll update on the strategic priorities, which have been outlined at last calls.So Max Financial had a revenue growth of 19%, achieving INR 7,168 crores. Consolidated PBT for quarter 2 '19 was at INR 129 crores, up 6% year-on-year. However, due to a one-off expense relating to the IDBI Federal acquisition, which we had bid for, there was a certain amount of payment, which had to be made to the underwriting bank. So that was an expense, which we took in the first quarter. So the H1 PBT is, therefore, down by 14% to INR 180 crores.Moving on to Max Life performance. The MCEV on an operating basis, has grown at 18.5%, it is up 170 basis points year-on-year with INR 7,752 crores. Structural NBM's pre-cost overrun expands by 260 basis points to 22.9% and actual NBM, which is post cost overrun, expands by 230 basis points to 20.4%. Value of new business post-overrun has grown by 42% to INR 290 crores. Max Life's individual APE has grown at a strong 26% to INR 1,405 crores with a bias towards conditional and protection products. Investment in proprietary channels led to a 33% growth in H1, contributing 35% of sales, exceeding the banca growth of 21%. This has been in line with our aspirations to increase the proprietary share to about 35% to 40% by financial year '21.So to this effect, there is an arrangement which we've entered into, and this is a strategic knowledge partnership with New York Life and with some of their ex-New York Life leaders, who actually were heading agency and digital -- training. And this is an arrangement, which is going to further enhance the focus on our proprietary channel. We will be leveraging best practices in the agency distribution channel via cobranded selling tools like printed manuals and digital literature.To start with, this is a one-year arrangement and then we'll see how this kind of pans out. Continuing on our strong focus on digital, the e-commerce channel has grown almost 158%. Protection sales, including individual and group, grew 63% year-on-year, resulting in improvement in protection mix from 10% in H1 '18 to 13% in H1 financial year '19. Individual protection mix improved from 5% to 7%. Group protection mix improved from 6% to 7% and gross written premium grew a strong 17% to INR 5,619 crores.On renewal premiums, there is a 15% growth with INR 3,711 crores, led by a record improvement in conservation ratio to 91%, one of the highest in the industry.Trends in expense ratios and conservation and persistency all continued to show a healthy year-on-year improvement. Claims settlement ratio at 96.1 is best-in-class. Assets under management as of September 18, stood at INR 56,070 crores, that's a growth of 17%.Our Max Life has also been recognized amongst India's best companies to work for in 2018, #1 in life insurance and top 15 in the BFSI space and it's amongst the top 50 companies in India.Now I'll briefly update on the progress towards our strategic priorities. We have started investments in proprietary channels to build robust multi-distribution architecture. We plan to add 36,000 new agents every year over the next 3 years, and increase our agency offices from 205 to 350 over the next 12 to 18 months. To this effect, we have already opened 79 new offices this year and added around 8,000 agents. We will aspire to grow these channels by around 35% CAGR over the next 3 years to get a more balanced channel mix and get a 35% to 40% contribution from our proprietary channels.Max Life agency is one of the few agency channels that delivers positive margins. And the profitability of the proprietary channel is now similar to the nonproprietary channels, encouraging us to grow these channels sharply. We will continue to strengthen our market leadership in online sales because of consistent pricing advantage, powered by strong underwriting capabilities.We will also continue our efforts of deeply integrating with our bancassurance partners and build capabilities across products, marketing technology, while continuously attempting to acquire new partners.There would be a focus to pursue a more balanced product portfolio with a bias towards protection segments, which you have noticed in our product mix shift as well. So in summary, Max Financial Services is on a course to drive strong shareholder outcomes via its new strategic plan. With significant investments in proprietary channels, sustained improvement in cost ratios and improvement in protection mix, we're progressing our aspirations of a 25-25 target on EV, VNB and growth over the next 3 years.With that, I'll hand it back to the moderator and open the floor for questions and answers, please. Thank you.
[Operator Instructions] We will take the first question from the line of Avinash Singh from SBICAP Securities. [Operator Instructions]
So few questions. First one on Max Life PBT growth. The growth looks good, and particularly, if we look in the backdrop of a strong protection growth and also a strong yearly growth, the product typically have higher new business stream, I want you explaining this PBT growth? Because I mean, if you are growing strongly in protection and New Life, there could be any, I know that we are coming to about, positively lower as of last year. But some color around accounting profit or profit before tax growth at Max Life? Second question is that why is it that on a relative basis our non-active banks channel is growing slowly, whereas, I mean, in the nonactive channel, we have the banks who are sort of trying to do more on the retail side, so one would expect the growth to be stronger instead of being slower? So that's my second. And thirdly, if you can just highlight, what kind of partners that you have with New York Life? Who are these people? And how will it be costing you a significant amount? And what kind of arrangement, is it a consultant arrangement? Or those people will be working on your payroll? So these are my 3 questions.
All right, Avinash. Really appreciate your questions. Let me go one by one and answer. The PBT growth, of course, looks good. I think we, through the year, we have seen good growth, basically, being driven by a few organic items and also one-off item. I think the organic items have been good gains on the invested income plus the yields or the interest rates that have remained quite strong, so that yields more returns, especially on shareholder side, debt side. But we've had one-off items of about INR 50 crores that came to our books because of the realignment of results that we've done, which you should consider nonrepeatable. However, the sight -- all the investments that we're making in our own whole new channels as well as higher mix of protection, because of efforts around better investment deals and managing the expenses better used -- the expenses also -- it was initially improving, there is a positive or above to on the PBT number for Max Life insurance. On your second question on non-access and why the growth is a bit slower, your observation is correct. Overall, we have seen -- there'll be a single-digit kind of a growth number on the non-access. This comes because of the 3 banks, YES Bank, Lakshmi Vilas Bank and a set of urban cooperative banks that we work for and was made. And we've observed that growth from those channels, although are picking up, but has been slower than the growth on Axis Bank. We expect them to recover quite significantly in the second half of the year. Not many times that we also do with owned banks, historically, YES Bank, the [indiscernible], developed sales in the second half of the year as it relates to [indiscernible]. And on your last question on arrangement with the New York Life. You'd recall that we had disclosed to you, that for growth of our own channels, we are carving out money and that too is being planned. So this particular arrangement is a part of that investment. We are, as highlighted, we're looking at people from New York Life to come and work with us. It is a relationship/consulting project. The people that we're going to get have been really the top performers in the agency world of New York Life. The head of agency, people who have had very significant experience working on agency training as well as people who've worked on products. And the reason why we thought it will be appropriate, is because of the big bet that we're placing on growing our own channels. As we highlighted to you, we are opening a large set of offices. And when we open these agency offices, it becomes very important to bring those offices to sell quickly. And we believe that with the addition to those as well as the tailoring that we've seen and the growth that we've seen, we will be able to do faster. And hence, we've decided to make that investment. So I personally feel pretty good about it. It's a strategic channel and it is our chosen strategy to make investments and this is the final guided investment. It is, by the way, going to be a part of the total investment in the bucket that we had disclosed to you, a little over INR 100 crores, this is going to be a part of it.
Just a quick, that INR 50 crores, you said that the one-off gain kind of a reserve really. So which product or which sort of a book, it is coming?
This happened on the non-par book. We continued to build the level of reserves and we kind of aligned it to what we needed. This is actually a one-off correction that we made, that give -- this will be nonrepeatable.
They are non-par savings?
Yes.
[Operator Instructions] Next question is from the line of Nischint Chawathe from Kotak Securities.
Just a couple of questions. Now, 1 is -- if I kind of look at your effective unwinding rate and that seems to have gone down a little bit between the second half of the year and first half of the year. So how should one be thinking about it?
What rate are you looking at, Nischint? What is the number that you see?
So essentially, I think the calculated rate is working out to around 9.2 versus 9.8 or so in the second half of the year.
Yes. I mean, so those 2 are -- could be a possibility depending on the underlying assets. So that typically is the reason. And just...
The view for underlying actually is constituted by what's there [ in EV at the ] beginning of the year.
Sorry, you're not very clear. Maybe if you can just come closer to the mike.
The underlying primarily comes from what was there when you started your EV. Actually, during March '18, what were the interest rates and how will it unwind. So that this is a minor fluctuation, if you see on an annualized basis. The 9.7 number, at the year end is now 9.5 on an annualized basis. So it's constituted by a lot of, I would say within the, what was the interest rate assumption in the starting EV. And now, how it has unwound over the year -- over the half year. So over the full year, this number could be very much similar to what was at the end of -- it was for the full year.
Because ideally, I would have expected the number to actually go up. So, I guess, the swing is not as much, but directionally, I would've actually expected this number to be higher this year versus last year.
The unwinding is actually dependent on the start of the period's interest rate. So I understand it, unwind happening over the year, with the interest rate going up, should be reflected. But this is what was the interest rate when you started your EV and so that's why it will be dependent on the interest rate at the beginning of the period. So that why, but -- yes on the full-year basis, as the interest rate continued to go up and stay at this level, the aligned should come back to the original level of 9.7% also.
If you could give a breakup of operating variance?
Operating variance. So we have an operating variance of INR 42 crores.
INR 42 crores. I think large part of our operating variance actually comes out of -- Nischint, one second, let me open that page and I'll be able to tell you. So we have, I think, a large part of variance, about INR 28 crores coming out of demographic variance. The experience variance on account of mortality is upwards to INR 10 crores. We have persistency assumption changes basis the current persistency trends of about INR 22 crores with pluses and minuses, but those are the large ones. We have reviewed our maintenance expenses and have done a -- reassigned basis to current maintenance experience and that has given us an upside of about INR 13 crores. So basically, if you look at the reason for operating variances, the large mortality, persistency and maintenance expenses doing better.
Sure sir. Okay. So basically you said mortality was INR 10 crores, persistency INR 22 crores and expenses INR 13 crore.
Yes, and there are many minor items, but I'm not going into details for all that.
Sure. And if you could give us some thumb-rule in terms of what you're really building in your persistency versus where you are currently?
We always build persistency, which is the latest assumption. So there is nothing futuristic. You would have noticed through our presentation that the persistency numbers have improved. Of course, there's more science to it because we look at different product categories and depending on non-par, ULIP or par, it has different implication on the operating RoEV, but suffice it to say that there has been improvement in percentage, which has been reflected appropriately. But it is nothing futuristic, it is all on the basis of what has been achieved.
Sure. If you could give some guidance on the dividend payment or not -- the dividend that you would pay out for this year?
Typically, Max Life pays out about 100% of the profit through dividends. Now, as you know there are obligations to buy out sort of 1% stake from Axis Bank as and when it falls due. So because of which we have been converting dividend at this stage, so we now -- we'll reassess it at the close of the year and there is a column whether Max Financial also can pay some dividend or not. But at this stage, we haven't paid any dividend because of Axis Bank adoption is coming due very soon.
We expect it to be consistent with -- from life insurance company, consistent with the philosophy that we have followed, which is giving full dividend on whatever the profit has dividend, because our solvency ratio continues to be around 250% or above. We'll continue with that until the solvency comes to or close to 180%. So until then we will follow 100% dividend philosophy from the life insurance company protection business.
And the way you're growing the protection business, you would expect this 180% to come in like months?
1.5 years time. 1.5 year.
So with next 1.5 year, I think you should be comfortable at 100% kind of payout.
Yes, if you reclass, we have some undeclared profits also sitting in our books. At times we do review depending on the cash flow release.
Sure. Okay, those were my -- so they just...
As for your other questions, you're requested to get back in the queue and give an opportunity for others to ask, please.
[Operator Instructions] Next question is from the line of Neeraj Toshniwal from Emkay Global.
Just wanted to understand on the follow-up question on solvency. So when we are likely to raise capital -- I mean, 180 -- so you're saying 1.5 years would be -- what are you looking at?
So Neeraj, very good question. Actually, we're not trying to raise any capital in the near future. Even if we were to raise, it would be very minor, because we are a profit-making company. So the way solvency will get managed will be by declaring net dividends and keeping a bit more assets within the business. But there is no big need for the need to raise capital.
Okay. And on the Axis partnership, I think on the [indiscernible] you will be joining soon Axis. And so what are the key pointers we are taking? I mean, now we are [indiscernible] anything in plans, strategy?
So let him join first. I'm not sure this is the going to be the first item which he will take up when he joins. But as far as our plans are concerned, it is topmost on our agenda that as soon as we can, we will be meeting with the him to engage in a dialogue for a more deeper, strategic partnership than we currently have.
Okay. And I think I -- you previously mentioned that at this current level of the interest we are looking at VNB closing at 21%. So can there be any positive surprises? Because interest rates are inching up, which is I think beneficial for your product mix.
Yes. So basically with -- the margin is driven by certain parameters, interest rate being just one off and not very big. I think the big driver of margin is product mix, which [indiscernible] highlighted we're doing a very good job. And also, you would have noticed that life insurance business is quite seasonal in nature, so first half sales generally is only 40% and about 50% or 65% volume comes in the second half. The expenses of this company or life insurance business are not that seasonal. They are more fixed in nature and hence typically in the second half you will see an assessment of margin that can happen because of lower cost overrun. So when we finish the year, currently you get delta between 22.9% to 20.4%, which is somewhat similar to current costs. That delta we expect to have less than 1%. So anyway you will see margin upliftment of 20.4% [indiscernible].
[Operator Instructions] Next question is from the line of Ashish Kacholia from Lucky Investment.
I have a basic question, I don't know whether it's explained elsewhere. But I want to understand what is the value of the equity that we are giving to the Axis Bank every year in lieu of the business that we are doing with them?
So it's not a related value question, not a net of what -- last time what we had done was, for a 5-year relationship, we had given them about 5% equity. So you could assume that it's 1% per year if you were to generalize it, but there is no connection, I would say, between performance and the equity, which we have given. It's more because they are strategic partner for us, which is why it is given.
Okay. So the equity is already issued out to them?
In some form, yes.
They already hold the equity? Or this is likely to be issued every year on an ongoing basis?
No, it was -- it is already done, when we negotiated in 2015, '16, we gave [indiscernible]
And so buying back the equity from them every year, we're buying back about INR 200 crore worth of equity every year, in the RoEV calculation, this INR 200 crore is subtracted? This is RoEV number of 18.5% that you have reported.
Actually, we can debate from both sides. However, you must understand that [indiscernible] it is really [indiscernible] of appropriately sharing value with a very important partner. So we don't make any adjustment in the report because that's something which is already taken on board. The further buyback actually happens at the fair market value [indiscernible]. So really -- you can see from -- as a dilution that the shareholders have to take in [indiscernible] equal to the [indiscernible] but after that there's no impact on the company's financials.
[Operator Instructions] Next question is from the line of Hitesh Gulati from Haitong Securities.
So my question is on the stand-alone financials that we see in the press release, there is an item called loss of fair value change on derivative financial instruments of around INR 37 crore. And in the footnotes, it talks about an option with Axis Bank and Sumitomo. Can you just throw some light on this?
Yes, sure. We have entered into an agreement with Axis wherein we have said that we would be buying back about 20% every year spread over next 5 years at [ SMB ] or float, whichever is higher. And now [indiscernible] has come into the picture in the current financial year. And that mix is crystal clear that we need to fair value all these options. And the INR 30 crores that you see, it is linked to the market price. Right now it is an expense because the price is such. Tomorrow, if the prices are to go up, this can also become an income. So please take this something like below the line item because you can't be sure right now whether it's going to be an expense or income over the tenor. And in any case, over the 5-year period, out of which only 4 years remain, this is likely to be nullified.
[Operator Instructions] We would take the next question from the line of Abhishek Saraf from Deutsche Bank.
Just one small question on, sir, what is our exposure to ILFS? And what is the status of that exposure, if any?
So we had a total exposure of INR 40 crore in ILFS. About INR 30 crore of them were through ULIP and the balance other policyholder. Because the downgrade -- please remember that they have not [indiscernible] come through us. But because of the downgrade, we follow the guidance to take a [indiscernible] of 25%, so the current value of asset as in our books is about INR 30 crores. We are working on to review the revival. We're very hopeful that there will be something positive that will come. But suffice it to say, our exposure is not very [indiscernible] to date. Our total investment in this [indiscernible] INR [ 3,000 ] crore. Our [indiscernible] exposure is not very large in either.
[Operator Instructions] Next question is from the line of Sneha Ganatra from Subhkam Ventures.
Sir, you mentioned something on 25-25-25% by '21, so I'm not able to get what is that thing?
Sneha, it's actually '21, '22. So in the year '21, '22 we should, by then we're looking at annualized growth rate CAGR of new sales growth of about 25%. We hope to increase our margins, which are we are expecting by the year-end to be around 21% to go to 25%. And as a result of this growth as well as margin, we hope our [indiscernible] projection that our return build value would also become 25%. So 25-25-25 is 25% sales growth, 25% margin and 25% RoEV. We previously were saying, we believe that, that very comprehensive financial measures to reflect the strength of the company and that's what they are.
So this would be explained more on the protection policy? Or how would this be?
So the growth actually -- let me spend time to talk to you about growth as well as protection. The growth of 25% we anticipate to happen because of our investment in the new channel, growing agency offices, that should give a kicker to our growth rate. By the way, last 2 years, our growth has been in the range of about 24%, 25%, so it is not something unachievable, it is on the basis of something that we've achieved in the last 6 years. The growth in margins happens because of higher protection as well as because of leverage of size of scale. So about 60% to 70% growth in margins should happen because of protection. About 30%, 40% happen -- should happen out of the leverage that we get or its operational efficiencies that we get because of scale. That should take our margin to about 25%. Because we are constantly paying dividends and hence our EV is not -- at a next level it is growing very rapidly, we expect that our return [indiscernible] value because [indiscernible] parameters will also lead to about 25% because of those 2 factors.
[Operator Instructions] Next question is from the line of [ Nakul Gupta ] from CLSA.
Just a quick question, can you give us an idea of the share of credit protect in total group protection?
So the share of credit protect as a percentage of total group is absolute 1%. So of the numbers that you've seen of about 6% of that about 1% is credit protected. The balance is broad employee protect.
[Operator Instructions] Next question is from the line of Ashish Kacholia from Lucky Investment.
Given the size of our investment book of INR 50,000 crore plus, do we as investors need to be worried about significant exposures to the real estate industry [indiscernible] all the industries, which are currently kind of giving [indiscernible] heartaches to people.
Yes. Absolutely, a very good question and quite contextual. I will like to give the comfort that [indiscernible] has been very conservative. And as a result of that we have today very strong mechanism to keep a close eye on [indiscernible] investments. I can say that our exposure in real estate kind of NBFC is negligible, really close to 0. Nothing that we can't manage. So that's really a result of very strong risk timing in the area of investment management and we are monitoring that very, very closely. So nothing to worry about on the papers that we have been or [indiscernible] are very well in AAA category. Also, our investment predominately using the [indiscernible] government [indiscernible] government-based enterprises. So as an existing CFO as well as [indiscernible] roll over can tell you that we are quite protected.
So you when you say government-related kind of entities...
Power finance, those kind of things.
Okay, so REC, PSE, that kind of stuff, is it?
Yes.
Okay. Is there a implicit guarantee kind of a situation here? Or is there a explicit guarantee?
Generally, you could argue things. The government-backed companies have implicit guarantee of the government, but there is -- currently there is no impact record of individually [indiscernible] without government intervening and helping them.
Next question is from the line of Abhishek Saraf from Deutsche Bank.
Yes, sir, one small clarification on the 25-25-25 strategy that we are pursuing. So in terms of getting to the 25% view in the margins, are we also working with some kind of share of protection? Because as you said, the 60% to 70% of this margin expansion will be driven by protection. So is there any number that we are working with? And what will be the breakdown between different kind of protect products, whether they be individual term or group credit life and the employer-employee?
It is our chosen strategy to operate more and drive protection through individual business as against credit protect business, we have repeated that many times in the call. So the focus is going to be on individual business. Like you see [indiscernible] a little over 7%. We're hoping that by the time we finish the year, we will be closer to 6%. We're hoping that in 3 years' time that number should be closer to 9%. Every year it grow by 1%. If we were to do that, I think it will be easier for us to or possible for us to achieve 25%, because equally we're looking at a growth of 25% and then revenues or new sales grew by 25% [indiscernible] grow at volume, great. There is typically a leverage pickup that the margins get and a combination of higher protection and leverage to take us from 21% to 25%.
Next question is from the line of Kunal Shah from Edelweiss.
Sir, this is Prakhar. Just one question. Sir, can you run me through what are the sort of OpEx revenue probably envisaged for this investment in proprietary channels? And what is the sort of investment that we have already made?
So we have carved out close to about INR 120 crore to open 145 offices across. And this is not an investment, investment, this is more like an additional expense that we have to build because we have to have more offices, more people, more firepower to hire agents and augmentation of distribution capabilities. I think as we spend half of the year, I think we should be done with close to 40% of expenses on what we have planned. And by the time we finish the year, we will have a good view on what has been the expense level. Also, I would like to give you the comfort that many of these models that we're trying are quite effective in terms of the cost ratio on the total OpEx and CapEx is required. Because of which, you would have noticed that two things have happened. A, our expense ratios have improved actually versus last year. One would expect that when you're making such investments the expense ratio will go worse. Hasn't happened to us. It improved. And B, investing in our margins improved. Again, we [indiscernible] you'll expect our margins to go down, but you've seen our margin rate of margin overall to grow by 230 basis points. So while we are making the investment [indiscernible] investments very judiciously in the business to make sure that there is no looking back on the financial outcome.
So this knowledge partnership that we have with New York, this expense is also included in this INR 120 crore?
Yes.
Next question is from the line of Nischint Chawathe from Kotak Securities.
Just two points. One was, Prashant, if you could give any comments that you would have on the draft product regulations and how should we think about Max index out there?
Yes, we are -- we just spent [indiscernible] been. I think if you are to assess that, there are -- the good thing is, we had series of discussions and many people would ask us saying, what happens to your cost outcomes and margins if there is a big change in the [indiscernible] scale on the participating and nonparticipating side that was a bit clear that we kind of were talking about. Very happy to share that in the draft there's no proposal to [indiscernible]. There's of course a proposal to have a guaranteed surrender value available after the year 2. But that's not very material for us. However, there are many positives that regulators have come up with. There are proposals about collections. There are proposals about how we could drive the business of retirement by allowing close to about 40% commutation. There is more around new product design. We [indiscernible] add all of it together in addition to the changes -- this minor changes that have happened. I see that as more positive than negative, and hopefully it is not going to have an impact -- material impact on our ability to create margins.
Sure. And just one last micro question. The business that you're seeing from other banks, which is the -- other than Axis, there has been -- as we kind of said, the growth rate has been lower, it's been kind of almost flat. So did you see a slowdown in the last month of the quarter? Or was this kind of the momentum sort of a little subdued across all the 3 months?
No. Actually, like I mentioned to you, these are banks which have a different seasonality to the sales. So they don't grow very substantially in the first half of the year. Generally, the growth is more in the second half. And we are not concerned. We believe that by the time we finish the year, we will have robust growth across in all banks' relationships.
But is there any specific trend within the quarter? Or is it kind of sort of uniform across [indiscernible]
A lot better. A lot better, actually. I mean I saw growth [indiscernible] I saw growth in YES Bank. So we're hoping that as we approach the second half of the year it should get better.
Okay, so what you're saying is that the growth at YES Bank was actually better in the last month.
Year-on-year, yes, we continue to grow.
There's always a base effect that we -- that plays out versus last year, what was the growth in the first half of the year versus this year. I think YES Bank grew quite handsomely in the first half of last year and hence there's a bit of base effect. We are -- we -- I generally feel that by the time we finish the year the second half it should improve and be at the same level as the other banks.
We would take the next question from the line of [indiscernible] from [indiscernible]
Just one clarification. You have given the total APE as INR 1,420 crore, while individual APE is at INR 1,405 crore. So difference is group APE of INR 15 crore. While on the protection slide you are saying group APE of INR 101 crores, so could not understand that point?
So let me help you reconcile the APE number and individual [indiscernible] number. So when [ IDF ] publishes the number that is on the basis of collected premium -- adjusted collected premium, which is a 24% growth, which you would've seen in the competition base. However, when you come to the annualized premium, that number is 26% growth. So for the purpose of consistency, with respect to how other people report, we have shown that on a life premium. The VNB actually is on the basis of the [indiscernible].
Sorry, sir, I didn't get your last sentence.
So VNB actually includes the only the [ GCL ] business, not the GTL business.
No. But what I'm trying to...
Well, looks like we've just lost the line for the current participant. We proceed to the next question. It's from the line of Adarsh from Nomura.
Question on the savings mix between ULIP and par over the next 2, 3 years as you ramp up margins, what's the expectation on the mix there?
So basically we are as close to where we want to be. Actually, there is some bit of reduction in par that we anticipate to do more in favor of -- not in favor of non-par savings. So the desire will be in [indiscernible] time be around 35%, 37% in par. [indiscernible] where we are, but take the nonpar, including protection in the range of about 20% to 25%.
And if this mix from par possible? Because, again, because of efficiencies, it's cost pass-through products, so is that some bit of design element there as well?
Both, actually.
Sorry. I didn't get you, sir.
Both -- you would have noticed in the last many years -- last 5, 6 years, we have taken conscious efforts to diversify the product mix. You would have noticed [indiscernible] close to 70% that's quite low compared to where it was earlier. This happened out of the conscious effort [indiscernible] impact to [indiscernible] go after and also with respect to the internal strategy to optimize the margins. We believe that there is a bit of work more to be done to balance the mix more in favor of nonpar. You would noticed that nonpar actually is bit lower in the first half of the year versus last year. So there we're able to put more focus by redesigning products or improving the overall customer benefit, taking advantage of the hardened yields to make sure that we have a higher mix of numbers. That's something that we want to do.
Understood. And my -- the other question is more a confirmation. So you said that whatever persistencies you get in the end of the quarter is part of the margin that you would want to save. Say, you have a gain in persistency in a quarter that's already reflected in your margins?
That's correct. Usually these happen on a 6-month period. So every -- on a rolling basis. So we will do an experience study twice every year. And then we do the calculation on EV. Whatever is the last study that we've done will be included as a part of that outcome.
So which means this quarter's margins or the first half margin reflect the 13-month large improvement that you have seen from the arch levels.
Yes.
Next question is from the line of Avinash Singh from SBICAP Securities.
Just a quick one on this margin and the group APE part. So I mean to say that, okay, you're saying when you are using that INR 1,420 crore of APE, that does not include the group term life that employer-employee [indiscernible]
That's correct.
And does it include group fund base, if at all you have?
No. No, actually.
So it is individual plus credit protect?
That's correct.
And INR 290 crore number, again, that in VNB, does that also exclude those or like does INR 290 crore have some whatever?
That's actually correct. Thing is that the margin on those product elements are much smaller. So even if I were to add, it is not going to make a big difference in the VNB number. But just to confirm, the INR 290 crore does not include the GTL business or functional.
Okay. So basically in the denominator, numerator, both are excluded.
Next question is from the line of Hitesh Gulati from Haitong Securities.
Just a small, technical question. So on the participating product on the taxation issue before surplus, I think it gets taxed at 12.5%. And then when we move 10% of the surplus to the shareholder account, does that also get taxed at the same rate or there is a dispensation given there?
All movements from par to shareholder, then it goes to shareholder is taxed at 12.5%. That's correct.
So once it goes into the surplus, it moves to the shareholder account, does that also get taxed at the same rate, 12.5%?
Whenever any movement takes place from par to shareholder, it is taxed at 12.5% only once.
Ladies and gentlemen, that seems to be the last question for today. I would now like to hand the conference over to the management for their closing comments.
Thank you. Thank you very much for being on the call. We look forward to more interaction in the future. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Max Financial Services Limited, we conclude today's conference. Thank you all for joining us. You may disconnect your lines now.