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Max Financial Services Ltd
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Ladies and gentlemen, good day, and welcome to the Q4 FY '20 Earnings Conference Call of Max Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mohit Talwar, MD Max Financial Services. Thank you, and over to you, sir.
Well, thank you, Margaret, and good afternoon, ladies and gentlemen. Thank you for being a part of the earnings call. As customary, I'd like to introduce my colleagues on this call. So we have Prashant Tripathy, who's the Managing Director and CEO for the Max Life business; there's Amrit Singh, the Head of Strategy for Max Life; and there's Jatin Khanna, CFO for Max Financial Services. I'd like to begin first with certain key updates, one of which is around the 2 transactions which we've embarked upon. The first one is an update on the MSI swap transaction.I'm pleased to share that CCI and shareholder approvals for this transaction have been received. In fact, on the shareholders' approval, we had over 99% shareholders who were supportive of this transaction. So we're really thankful to all those who have participated in this postal ballot. IRDAI and DEA approvals, they are being processed. And from what we know, it's at a fairly advanced stage. We're hoping that we should be in a position to close out this transaction by -- within a month or so.As far as the update for the Axis transaction is concerned, the applications to the Reserve Bank of India as well as to IRDAI those have already been filed. The IRDAI application went on 20th, so it's kind of early days to get any sort of a reaction so far.The CCI approval that's being sought in a couple of days. We don't anticipate any problems in that one.The postal ballot notice for approval of the transaction, that's already been issued to the shareholders. And we're hoping that we would get an overwhelming response on this one as well.And all things being -- going well, we hope to close out the -- this particular transaction towards year-end.The third update is on the MTVL tax settlement. On our previous call, we had mentioned that we will offer the tax amnesty scheme to settle a contingent liability in relation to our telecom stake of the past under The Direct Tax Vivad Se Vishwas Scheme. So I'm pleased to update you that we have arrived at that number. We have deposited the tax amount, which was around INR 124 crores. And this matter now stands closed.So these were really the updates as far as some of our -- the deals which are concerned as well as on the amnesty.I'd like to now move on to the financials. And I mean a lot of it is what you will see here in terms of the performance has really been unfortunately affected by the COVID pandemic. March, as you know, is always a very, very robust busy month for insurance companies. And really the latter part of March, which is when all the sales really happens that was really kind of a washout. So I would encourage all of you to basically ask questions of Prashant around what are some of the things which have taken place post March? How we've done in April? How we are doing in May? And then you will find that the work around, the way -- the work habits, all that has undergone a dramatic change, and the results of that are playing out now. So please do ask him those questions.But anyhow, let me just give you a brief summary of our financials. So the consolidated revenue is lower by 7% relative to last year at INR 18,242 crores, and this was due to the mark-to-market loss on debt and equity portfolio of Max Life caused by the volatility in the capital markets because of COVID.Gross written premium grew 11% to INR 16,184 crores. And consolidated profit after tax was down by INR 34 crores to 273 -- 34% to INR 273 crores, largely due to shift in product mix towards non-PAR products, investments in proprietary channel and the provision which we've made for the impairment of the onetime tax expense on account of MTVL.Moving on to Max Life. The MCEV post-dividend payout as at 31st of March 2020 is at INR 9,977 crores. Operating RoEV is at 20.3%. Structural NBMs pre-cost overrun have expanded by 180 basis points to 24.3%. However, actual NBMs post-cost overrun is at 21.6%, which is in line with the previous year.VNB post overrun has grown 5% to INR 897 crores, driven by increase in proportion of non-PAR savings business, but partly offset by lower new sales growth and acquisition cost overrun.Individual APE grew by 5% to INR 4,116 crores, with a market share width and was maintained at 10%.The Max Life grew at 17% till YTD February, which is more than the private industry, which is growing at 14%. Like I mentioned, I mean, March was really a setback for -- not just for us, I think, it was for the whole industry. So you've got to look at it in that constant.Full year growth impacted by COVID-19 in March '20, but we managed to kind of preserve our market share.Proprietary channels delivered 10% growth in financial year '20, faster than the Banca growth of 3% on an APE basis.Share of proprietary channels and sales increased to 31% from 29%. Max Life agency channel, 1 of 2 agency channels which delivers positive margins. Axis Bank delivered 5% growth in FY '20, though Yes Bank sales was down by 2% in FY '20. And I think all of you all are familiar with all that happened with Yes Bank.Overall protection sales, which is including individual and group, they grew 42% year-on-year. Individual protection grew by 49%. 13% growth in renewal premiums to INR 10,600 crores with a conservation ratio at 85%.On persistency, as you may be aware, IRDA has allowed for additional grace periods, which has an implication on persistency competition for March. For comparison purpose, we have provided for 11-month FY '20 period. There is a slight moderation in persistency for 13th month to 83.3% and 61th month to 52.1%, primarily due to lower collections in ULIP as a result of market volatility. Max Life claim paid ratio improved to 99.2% in FY '20 and is the best amongst the top quartile players. Solvency surplus is at INR 1,378 crores with a solvency margin of 207%.Our AUM crossed INR 70,000 crore mark for the first time in February 2020. AUM as at March '20 has stood at INR 68,471 crores, it grew 9% year-on-year owing to market impact due to COVID. Controlled fund AUM crossed INR 50,000 crores for the first time in April '20.Controlled fund premium grew 15% year-on-year with more than 95% of debt instruments in sovereign bonds and AAA-rated securities. Max Life is ranked #1 for ULIP funds for the quarter and for the year -- financial year '20 across all the categories.And finally, Max Life improved its ranking by 8 places to 35th amongst Great Places to Work and was among top 25 BFSI places to work; and #1 in a life insurance company to work for.So to -- in summary, Max Life will continue on its trajectory of driving strong shareholder outcomes with Axis Bank coming in as a JV partner and MSI becoming a shareholder at Max Financials. Yes Bank renewal also for the next 5 years, that's going to be an added traction as far as the performance is concerned.So we continue to be a strong franchise, and I've stress tested on multiple accounts like solvency, ALM, credit, market, liquidity risk and we don't anticipate any immediate or medium-term stress as far as these are concerned. So on that note, let me hand it back to the moderator and open it up for questions and answers, please. Thank you.
[Operator Instructions] The first question is from the line of Shreya Shivani from CLSA.
Sir, I wanted a few bookkeeping questions and one more -- I have 3 questions, basically. First, can you tell me the total tax rate for FY '20, the net investment income for FY '20? And third thing, which I wanted was that if I see historically, Max Life, has its premium concentrated largely in the fourth quarter, like around 42% to 43% of the entire year's premiums comes from the fourth quarter, and that is why we believe that the run rate of growth, which we were seeing for Max Life till 9 month of 18% to 20%, suddenly got impacted with what happened in March this year. In comparison to your peers who do manage to have little less concentration in fourth quarter, around 34%, 35%, can you give us some idea how the company is going to change its strategy or change its product lines? Or what changes would you bring about to reduce this concentration in the fourth quarter?Yes, those are my 3 questions.
Prashant, would you like to take the third question first?
I will take the third question and then maybe first and second, Jatin, you could take? I'm assuming that the tax rate questions are more for Max Financial as against Max Life?
Sorry, it's actually for Max Life.
Okay. So the -- let me address some of the questions. So you know the tax rate of 14.56%, whatever is the effective tax rate, we have -- to the best of our abilities, we have taken into consideration the tax changes. With regards the dividend distribution tax, and that has been adjusted. So the effective tax rate is -- Amrit, correct me if I'm wrong, but close to about 14.7%.
No effective tax rate, Prashant, is 11.8%.
Sorry, 11 -- I beg your pardon, 11.8% from 11.45% earlier, we have moved to 11.8% and that gets computed on the basis of expected dividends that we were giving earlier and also has been adjusted for the IRDAI embargo on paying out dividends. So as you know, we are a dividend-paying companies. We've been paying dividends for many years. We have taken into account a brief period when we will not be able to pay dividends. So we have made adjustments for that because you get credit for the dividends that you pay out. So basis that, we have increased the effective tax rate, and it has a bearing of close to about INR 5 crores on VNB, about INR 30 crores on EV, that has been adjusted for, number one.Number two, your observation is absolutely right, Shreya. And it has to do a lot with how our distribution networks work and ever since our existence and more so with companies like Yes Bank coming onboard or Axis Bank, there's lot of sale that we would do typically in the last quarter. And historically, you would have seen at least in last 2, 3 years, the sales momentum has picked up quite a lot in the last quarter. So yes, there was an impact because of 2 weeks of sales that we missed. And that is why if you do a weighted average from almost 17% we came to actually 5% versus some of the other players who saw a bit of a lower reduction. This particular thing is because of historical reasons on how the sales machinery actually gets activated, the reward recognition, the platforms that have been created, et cetera. Now do we want to adjust for it? Yes, it's slowly getting adjusted versus history, some of that has been adjusted.One of the ways to adjust that is also to write more and more sales through our own channels, which do considerably well through the first 9 months and that adjustment is underway. Like Mohit just mentioned to you, the growth in our own channels is more than the third party channels. And slowly, that should get adjusted.
Okay. Great. And sir, the net investment income for, say, just the policyholder book for FY '20. That will be very helpful.
I don't have that handy right now, for me to share with you. But if you could just e-mail either to me or Amrit, we'll be able to -- we are very happy to respond.
Sure.
Or Amrit, if you have the number, please share.
No, actually, I probably understand from Shreya, what she is looking for because if it's a UL investment income, which is actually a bit P&L neutral. So I'll check with you off-line, what exactly you are looking for.
Yes, we'll get in touch off-line.
Sure. Sure. We'll be very happy to provide, sorry.
The next question is from the line of Ajox Frederick from B&K Securities.
Like you mentioned, I would like to know what have you changed in April and May. Because your performance has been much better than your peers, particularly in April. So on that to start off with, sir.
Yes. I like this question really quite so. So after the March, it was very clear to us that we will have to do things very differently. And as management team, with shareholders, we decided that we want to leverage this more as an opportunity as against a risk. And while it was clear to us that there'll be some impact on sales there will be a few things that we can do quite differently from other people to make sure that our performance vis-à-vis competition improves significantly. And no points for guessing the first thing that we had to do was to digitize the sales. Now our digital sales, wing-to-wing digital sales earlier was everything that we'll do through our Internet channel, which was close to about 2%. The mammoth task was to move that 2% to maybe almost all of it or maybe 95% on digital.The good part was we were making investments in our digital capabilities. That was one of the top 5 things that we have been focusing on. You will notice that on our presentation for last many quarters of the 5 things there is digital -- 4 things, there is a digital that we're working on. And we had digitized bits and pieces of our journey starting from solicitation, to issuance, to recruitment of our agents, to customer services' journey. And all it needed was a bit of momentum, a bit of weaving it all together. But the good part is that within 2 to 3 weeks of when the lockdown happened, the entire sales process got fully digitized, which means no face-to-face meetings, everything either happens on phone or video calls, Zoom calls.And then starting from there, pitching the product to taking all the information onboard to issuance, everything is happening completely digitally, and we successfully implemented. That, to me, is -- was a very important step because of which, you would notice momentum in our sales activity. So for the month of April, we were about 80% of last year April, which means we are running 80% of our run rate.But the good part is we wrote more number of policies. We also noticed that the protection mix almost doubled from about 10% to 20%. So we're writing around 20% protection. And even for the month of May, we see similar momentum, close to about 80% sales. You may also want to keep in mind that Yes Bank, which is one of our large channels is also undergoing change. They just came out of their own moratorium conditions. And hence, that is yet to pick up steam versus last year. So I think there's lot of tailwind, which is working because of the work that we did on digital across all channels.You'll be surprised with some of the numbers very quickly in about 2 to 3 weeks' time, we trained about 10,000 of our agents and close to about 25,000 of specified person working with our partners on the digital sales process, the adoption went up. So that part really has started to fire and it is bearing fruits.The second thing that we did was, of course, identify areas of cost reduction that we have kickstarted. We have very defined path that we are going to follow with respect to working on costs. There are already cost decisions that we've taken, we should have about 10% to 12% of cost impact or positive impact on the first half of the expenses, and we are also working on structural review of our cost vis-à-vis our distribution networks, our infrastructure, work from home, all the elements of the business actually, and are very hopeful that we'll be able to have a good arms around that. That's the second one.We are working really hard to maintain our persistency levels, our collection levels. I saw a bit of stress in the month of April. But by now, it's been corrected. We are running to almost similar kind of collection rates like we ran in the month of May. And hopefully, when the grace period extension goes away, I think we'll be able to cover up for the deficit that we saw in the month of April. And we have taken lot of steps to enable sales, which are decisions around the -- most of the diagnostic centers got closed. We had to write a lot of protection. So we made decisions with respect to tele-medical underwriting or video-based medical underwriting, taking very, very judicious calls around risk and return.So some of those things coming up with new variants, which could help being agile about pricing, looking at our pricing closely because there are things which are happening in the space of interest rates. So really, we looked at the business from 360 angle, and some of that is there in the presentation that we have shared with you and I'm very happy and satisfied with the progress that we have made so far. And hopefully, through this experience, we wish to come out stronger, gain market share and do better than competition. For the month of April, the private industry de-grew 40%. We had a degrowth of minus 20%. I'm yet to see the number for the month of May. But I'm very positive that with the change in product mix and with the actions that we're taking around costs and the other elements of risk management, the business is getting stronger day by day.
Sir, my second question is a follow-up to your presentation. On protection pricing, you were telling that we are writing more products in protection, the mix has gone up. But the information you're getting is lesser, you are doing through tele-medical instead of medicals. So my question is twofold. One, what is the proportion of your tele-medical to medical now versus earlier? And two, are you adjusting for the lack of data now through increasing prices in protection products?
So let me answer the question -- second question first. We are going to be very focused on margin this year. And it is important to remain focused because I personally think that there'll will be stress on the saving part of the business, and hence, one needs to be focused on protection. And within that, we will deploy everything possible to make sure that the margins are protected. And it may mean some bit of repricing or coming up with new product designs. We are in the process of doing that. And I think by the second half, which is October, we should have a new product design factoring into all the things that we see with respect to reinsurers, rates, et cetera. And as you can understand, it's a game of being competitive, yet making good margin and lot many times it's also about taking very balanced calls on pricing as well as margins. So we are in the process of doing that.On your first question on tele-medical versus medical. Yes. We were, of course, unlike many of the people we believe in doing medicals and the medical part came under stress. So we have moved to tele-medicals and Amrit, you may correct me, but I think close to about 35% to 40% of our policies might be going through tele-medicals.
How -- what was this percentage earlier, sir, when your normal days...
I'm not sure. I think it would have been around 15% earlier or even lower.
Okay. Okay. And sir, final question on your distribution side. What support are you giving to your agents now compared to earlier, extra, you were talking about sir, yes. Yes, please go ahead.
Yes. And we -- you would have noticed some bit of that here. We believe -- as an organization, we believe that the best of relationships are established in tough times. And hence, it is important to remain empathetic and compassionate towards all the stakeholders, but namely employees, customers and agents. So for agents, we have created a special plan where we are allowing them to take advances against their renewals that may be due. We have created or enhanced their group medicals and COVID-related hospitalization benefits. And I think that has created a lot of positive momentum and goodwill. So those are level of support, but the biggest support actually is our digital process.At this point of time, agents do want to protect their income. And they, of course, were looking for a solution where they could face customers digitally and virtually rather than going and meeting face-to-face, which is nobody in a mood to do right now. And we have proactively worked with them. We have trained them, we have supported them, we have helped them get trained, not just on the process, but what kind of products they could sell. And all that is bearing fruit for us.So well, suffice it to say that in our own channels, especially agency, the -- I'm not noticing a minus 20% number. I think agency is closer to last year's sales.
Okay. Just a question on persistency. 36th month persistency saw a slight dip, was it due to ULIPs or?
Yes. I think that has been noticed. I don't know exact reason, but most probably, it will be ULIPs. We have seen a bit of stress because of the market downturn throughout last year on ULIPs. We haven't noticed drastic reduction across. And you'll notice that equally 48 months has gone up little bit. So these are plus and minuses that will continue to happen in the portfolio.
[Operator Instructions] The next question is from the line of Madhukar Ladha from HDFC Securities.
Sir, on your VNB margin walk, you mentioned the business mix and assumption change is 2% positive. Can you break that down how much is with respect to business mix? And within the assumption changes, what assumption changes have happened?
Okay. So maybe one of you Amrit or Ashish, you could answer that?
So the -- I think the way to kind of look at it is that because there's a higher proportion of non-PAR savings and protection in the business, which has given us a kicker, but at the same time, the interest rate curves have also kind of come down. So it has kind of counterbalanced it to some bit of a proportion there. Those are the largely -- the key changes actually around assumptions. So which is the interest rate curve moving.
So Madhukar, you should read this as change in business or product mix adjusted for change in the curves. That's the way you should read it.
And no persistency, mortality or expense assumption change in there? Or would that be like a smaller amount of it?
They will be very small amount, you -- as you can see on our embedded value. Change in assumptions has caused about INR 103 crores of profit. So all of them are small pluses; pluses, minuses all adjusted. We don't have a negative operating variance.
Okay. Okay. Got it. And this negative INR 317 crores in -- that is the economic variance, most of it, I'm guessing will be...
Yes, mark-to-market.
Yes. So can we get a split of that also in terms of debt and equity? And also the forward rate assumption change?
Ashish, do you want to take this? Ashish, are you there?
Yes. Yes, yes, Prashant. So this INR 317 crores is actually constituted, as you rightly said, there's a negative impact on equity in there, which is close to a INR 270 crore hit. Then there is interest rate, which is rather INR 180 crores, INR 190 crores. Then the tax rate impact, which Prashant mentioned around INR 30 crores [Technical Difficulty].
Hello?
You are not clear, Ashish. Ashish, you're not clear.
Sorry to interrupt you, sir. Your voice...
Yes, Ashish, your voice is not clear. So I think I'll just kind of reiterate it for your -- so around equity is around INR 270-odd crores is what Ashish was indicating. The debt related is around INR 190 crores impact there. There is a small impact of that effective tax rate movement of around INR 30-odd crores. You would also note that in this year, we had done a readjustment to the capital charge on the CNR cost of non-hedgeable risk that also has given us a positive figure of INR 133 crores.
Yes. So it's negatives of debt and equity adjusted for the positive of the cost of capital.
Right. Right. Sir, and can you give me some indication of what -- which products will drive growth into FY '21? So obviously, protection is going to do very well. And on the savings side, what do you think which products will drive growth over there?
So I think there's going to be a big play of mix as it is quite obvious to me. So growth is a word that is very difficult to use in the current circumstances and growth in terms of new premium is, of course, a challenging environment where they tried doing so well. The industry is looking minus 40%. So I think our strategy will be to remain focused on driving protection and profitable protection mix, which where we are positioned well with vis-à-vis market, and we are making good margins. So there's already a tailwind that I'm seeing, the market demand is generally higher, and that's definitely a COVID-generated demand, which we do want to leverage. Of course, it will require us to be agile, to be issuing the policies well, to be taking measured risk and we'll do all that. So there's mix related growth that will come from protection.Also, in times like these where there is a lot of uncertainty, people do look for certain outcomes. And I think the non-PAR savings design, especially the long-term non-PAR savings designs are going to come quite handy. For the first time, I'm seeing that the curve is quite favorable over a long period of time. So I think that will be a big support, and we will drive that to increase our share in the savings side. Also insurance products are not driven by how the market is. And we do find that skilled sellers are able to sell ULIPs as well as participating designs. So for example, in agency participating designs continue to do very well even during COVID.So I think it will be a combination, but if you were to ask me which 2 products can drive growth, I think it will be protection, protection-related products as well as non-PAR savings.
Despite the interest rates coming off, so...
The long part interest rates are holding up, Madhukar, as you can see. Actually, hardening a little bit, which is good. The shorter tenor may be difficult. So we'll have to readjust the mix.
So how long are these products that you are now writing?
8 pay. Currently, we write a lot of 8 pay, 6 pay. So I think we'll have to move more towards the 8 pay.
Understood. And a final question from me. With Axis Bank now taking -- expected to take the stake, will we change -- will there be any change in the business on the group side with them? Is that part of the arrangement or are the JV partners thinking in some way to do more group business?
So we already do group business. There is part of group credit life that we already do.
Yes, but it's a lot smaller right now. And...
Yes. I mean we -- in our scheme of things, I think 2/3 of our sales actually come from -- close to about 2/3 of group credit life comes from Axis Bank. And the deal, to be honest, is more around individual, but as you can understand, when there is a shareholding kind of strategic relationship, of course, there are many possibilities that will exist. When the time comes, we will have a discussion. We'll try to leverage that. But at this point of time, very hard to predict.
Understood.
But I'm sure there'll be leverage with respect to product mix, with respect to selling designs, which are mutually beneficial because it's a new dimension of Axis Bank being our shareholders. So of course, their interest will go far beyond just doing sales. And all of that will be quite beneficial to the overall shareholders as well as to Max Life Insurance.
The next question is from the line of Dhaval Gada from DSP Investment Managers.
Two questions. First is could you give some sense on collections in the month of April and May so far? How have they been versus the sort of expected premiums? So that is the first question.And the second question relates to the cost of residual non-hedgeable risk. So I believe we've made some changes, if you could explain what those changes are, which led to lower deductibles? Yes. Those are 2 questions.
So just talk more clearly the second question, Dhaval, if you don't mind.
Yes. The CRNHR, there has been some change, I understand in terms of assumed assumption, so what drove that reduction is what I wanted to understand. And...
So this change actually we made. Let me answer the second question. This change we made in the first quarter itself. So -- and it was more to do with aligning with the market. So most people were using 3.5%, 4%. We were the only ones using 5% without any reason or cause for us to become more conservative and use higher cost of non-hedgeable risk component. So we just aligned it to the -- to market, and that was a change that happened long time ago, but on a full year basis, it's been shown.On your question on collection, that's a very interesting question. You may know that it's very hard to talk about collection at this point of time, predominantly because of extensions or grace period extensions that IRDAI has given. IRDAI has said, for the month of April, one could collect until June. So there are a couple of months of extension. And for March, it has been given until May end. So we need to just watch out because there's always a set of people who like to use the grace period because it's been given by IRDAI and we are duty bound to inform the customer that there's a grace period which has been given.So really, the collection numbers, while I can share with you are nonrepresentative, and we will have to give us some time at least until the end of May or June, to get a handle on where the collection rates are. But looking at whatever I have seen so far, in the month of April, we had a bit of stress on collection.
Sorry, Prashant, we lost you in between.
Can you hear me?
No. We can hear you.
Yes, yes, I can hear you.
Can you repeat the last sentence?
Yes. So sorry, Dhaval, for not being able to hear, but let me just clarify.
No. I was able to hear you. Yes, yes.
Okay. So in the month of April, because of extension of grace period, we saw some bit of stress because there were customers who were saying we'll pay later. Now does that mean a big impact on collection permanently? The answer is no. But we have to see how it plays out. But in the month of May so far, I have seen it flow right, and we are also letting the customers know that by 31st or 30th May, they need to make the payment. So the collection is picking up. Hopefully, by the end of May, we will be in a good position to tell you. But at a summary level, I saw a bit of stress in April. That stress has already been corrected in the month of May. We are targeting to maintain our persistency levels. That's the target with which we are working.
And just to sort of elaborate this, so some of the players have been reporting 30%, 40% reduction in their collection?
No, no, no. So sorry. So then I should talk about the numbers. In the month of April, we were 8% lower than last year, so 8% degrowth. In the month of April, so far, we are 13% higher on collection versus last year on renewal income.
In the month of May.
Yes, so far.
Okay. May, you're saying is back to normal?
13% up year-on-year.
Okay. Okay. Understood. And June onwards, it comes to normal [Foreign Language] this...
I'm -- that's the way I will hope because there is this behavior -- consumer behavior that when IRDAI gives more time, people like to use that time to manage their cash flows. So hopefully, those extensions will go away after May, that's my hope. And then it should fall to normal. I must also say that we have upped our collection efficiency, collection machinery quite significantly. The kind of coverage that we work with, we have increased that by 30% to 40% to make sure that there is no deficit, number one.Number two, we have changed all the scripts. It is very important for the customers to continue with their plans. Earlier, we didn't have to explain, but in times like these, where people are homebound, some of the businesses have shut down or not working temporarily, we have now changed our script so that we are more explaining. So time taken per call has gone up. So we're doing whatever it takes to make sure that the collection machinery works, not just for ourselves, but also for the customers because in times like these, we believe that coverage of life is more important.
And just one -- sorry, one last follow-up. Is there a pattern that you saw in April where salaried sort of was far more resilient than self-employed or the bank channel was more resilient than the non-bank channel? Just any color around your customers...
Yes, I mean I -- it's a mixed bag, actually, to be honest. But honestly, on bank channel where most of the people come through direct debit, they appear more robust versus some of our own channels where there is a mixture of people who are paying through check. Now collection of check became a big deterrent. And there were all kind of issues in April, so April that way is very unrepresentative month. We had issues with respect to -- not issue really, but extension of time line, offices were predominantly shut, so people -- while they came or they wouldn't have perhaps come to our offices to deposit checks, and there was no way to go and collect checks from home. There was -- logistics was a big nightmare. All of them have been corrected.So now we have people who can go pick up checks. We have opened at this point of time, about 225 of our offices, so people could walk in and deposit checks with skeletal staff and of course, the grace period, hopefully, will not get extended beyond of May. So all that should have a positive impact.
The next question is from the line of Harshit Toshniwal from PremjiInvest.
Two questions. First, on the bank channel. So I think as you pointed out, that agency has been recovering up quite well. If you can throw some color on how the bank channel is recovering? And specifically, so in a normal time, how much percentage of the banks would have been kind of digitally enabled or through a web-based application versus -- because higher the number that would be, it would be easier to recover. So, yes.
So I think it's a mixed bag. Actually, agency is closer to where it was last year. Some of our own channels are close to where we were last year. Axis is also close to where they were last year, like I mentioned to you earlier, every passing month, Yes Bank is becoming stronger and stronger because they, of course, went through a moratorium condition. So they are trying to work and bolster the bank, hopefully, it should come back up in a couple of months' times, they are a bit behind last year. In the Internet channel, we are seeing significant growth versus last year because of all the obvious reasons that I described. So it's a mixed bag really. Almost all channels are coming closer to where they were last year, except Yes Bank for all the reasons that we -- you and I know. And of course, they are making very quick progress.So all positive news, there is just one caveat that I'll put that this is a lean quarter, and we have to perhaps build our momentum to make sure that as time passes, we are able to do well and at the most represent the same performance like we are doing now. So that's really how it is looking like in the overall channel construct.You're right, we focused a lot on agency last year. Of course, COVID was an unexpected impact, but within that constraint, the momentum actually continues. I'm surprised, positively surprised with the way our agents are adopting the digital -- in digitally enabled sales process and are working on it.To your second question on what percentage or how was the digital working earlier? So basically, all across in the bank channel as well as in the agency channel. The first step was a face-to-face meeting, which means, in most cases, if the customer will be met or the customer will walk in, et cetera. So that's where the discussion will begin. So really the solicitation process or sharing the solution was mostly face-to-face in all cases.After that, in most cases, in bank as well as our agency, the movement was digital, which means we will take all the information, put it digitally, and it will move across then digitally for underwriting and et cetera, et cetera.Now as now we have -- for last many weeks, we have created solutions even for the first part. So we are able to then do that part of solicitation or product demonstration or solutioning even that part digitally. So we have kind of made it fully digital. But suffice it to say, that our investment in last 2 years in our own channels as well as bank channel, a large majority of the process or a big part of the process was already digitized.Hello?
Yes. Am I audible? Yes. On the return guarantee business, sir. So clearly, maybe this is one product which might -- as you rightly pointed out, that this might be seeing a superlative demand in the next few months. And how are we on the investment book side of it? So is it that the falling rates would also impact the margin? And if you can throw some light on how is the competition, that is between players versus us?
Yes. It's a question -- I mean all the savings design actually sell a lot on stories or cash flows as against simply talking about IRR, et cetera, because a normal customer doesn't understand the IRR concept so well. So they have stories which are woven around to child's education or retirement or a big event that is going to take place. And those stories are woven around it. Like I mentioned to you, in the shorter version because of falling interest rate, the give and get may not look as attractive and we have to see at what point the customer is no longer interested in it because of falling interest rate and the curves changing. But on the longer duration, which like I mentioned to you earlier, 8 or 10 pay, it will continue to become more and more attractive. Because the rates are -- have hardened a little bit. They're sticky and we are -- we will be able to provide good guarantees. So it will be a combination of both the things.As far as the investment book is concerned, like I've always mentioned, it's fully hedged. We use FRA, forward rate agreement, which is a much more superior tool where the leakage is lower, the rates that we're getting is quite high and the ability actually to generate margin is equally lucrative. So it creates a win-win.I have always mentioned that we are not a company where 50%, 60% of our book will become a non-PAR savings. We don't believe in that. We will work towards having a mix which is more around 30%, 35%. So that's really an ideal thing. For last year, we finished closer to around 20%. So it may go up by, let's say, 7% or 10% more in this year.
The next question is from the line of Ashish Kacholia from Lucky Investment Managers.
I just wanted to understand that earlier we used to have an arrangement with Axis Bank, where we would buy back some of their shareholding in Max Life every year, and thereby, they made an extra INR 200 crores a year. So under this new agreement that you have signed with them, what is the kind of arrangement that you have? Do they have a similar -- do you have a similar buyback arrangement with them? Or...
So Prashant, let me take this question, please.
Yes.
Yes. So we don't have any buyback arrangement with them per se. However, there are sort of 2 parts here. So firstly, as you know, there's 30% equity ownership, which they will own in the company. A, it is under a regulatory lock-in because of IRDAI for 5 years. And there's also an arrangement which we have disclosed in the postal ballot notice, which have been sent to the shareholders. That 2% shares get released every year. Now whilst those shares get released so from that standpoint, Axis Bank is eligible to sell those shares in the market or to noncompetitors, but that practically will only happen after the IRDAI lock-in goes away. But we have no obligation to buy those shares. So that is first aspect.Second is that you would have also noticed in the stock exchange disclosures we made as well as the postal ballot notice, that there is -- there are 3 broadly actually sort of -- there's a value creation waterfall in this arrangement, wherein your first step of the waterfall is that once we have been able to do this transaction as well as been able to do the Mitsui Sumitomo put-call option for the residual 5% ownership, then practically, we have to file for the merger. So under the contract, we have 3 years to do it, but our endeavor is to really sort of do it over the next 12 months or so once all these other transactions are behind us.Now if we have not been able to achieve that merger for whatever reason, where the biggest roadblock to that merger, which Mohit spoke about in his opening comments, has been cleared in terms of settlement of that telecom contingent liability. Whilst we had a very strong case, and we really didn't need to do it, but we've done it because we wanted to clear the roadblocks for the merger. So if for whatever reason, we had not been able to do that, then there is an option that we -- there's a share swap. We have to -- so now like I said, the shares will be locked in for 5 years. So after that, we attain the share swap. Now if for whatever reason that share swap is not implemented, then there is a put option.And actually there's a choice to exit. Now that's the waterfall. Now obviously, we don't anticipate the first 2 steps not going through. In fact, we've been at, I think, works at the back end to...
I think if you could allow me to just, Ashish, you should simply see this as the earlier arrangement had more a color of being a distributor. The new arrangement is more a color of being a shareholder, being a promoter, being a stakeholder in the organization. Those are 2. So hence, in the first one, there was this yearly buyback. In the second one, there is no provision of any yearly buyback. Of course, like any other new shareholder, they have a desire to be operating a company, which is where the shares are liquid, which means either be a part of listed company or et cetera. And there are provisions which are created in the new contract to enable that.But overall, there is no liability actually for us to buy every year. It is a completely different contract, where Axis comes and owns 30% of Max Life Insurance and treats -- participates in governance and drives the growth of the company.
Okay. And just a small follow-up on that. So is there any change in the cash component of the commissions that Axis Bank would have earned versus the earlier agreement?
No, commissions are going to be aligned to the regulator. That's the reason we are doing this transaction.
Okay. So the commission structure essentially hasn't changed?
Correct. It remains the same. I mean it will change depending on new products when they get launched, but it will be similar to what the IRDAI allows.
The next question is from the line of Nidhesh Jain from Investec.
Sir, firstly, on the margins given the -- we have invested quite a bit in agency and propriety channel and we have seen higher cost over in FY '20. How do you see post cost overrun margins in FY '21?
That's a very good question, and I'm sure that it's a very relevant question for all industries at this point of time. There couldn't be, Nidhesh, any more opportune moment to ask this question. I will have to use the crystal ball using to give you this answer. But to cut the long story short, I think the desire -- first of all, we made investment in our own channels, and we were expecting the margins to remain sticky for a couple of years, which is how the outcome is. Last year, we were 21.7%; this year, 21.6%. So a large part of funding of our growth for our own channels was meant to be compensated via change in product mix, and we have successfully achieved that.Now how will the next year look? I think one would target to come closer to the VNB that we've done this year. Of course, it will require a lot of efforts, rebalancing, product mix, et cetera. So the likelihood of the margin to go up may be higher than 21.6%. That's the direction that we'll work in. Now having said that, Nidhesh, as you'll appreciate, the market dynamics are extremely inclement, not just for life insurance business, but across all business lines. These are unprecedented situations that we are going through.So I will give, at this point of time, a directional input. And as quarters pass by, we'll come back and review and discuss with you how far we are able to implement on the vision that we have.
Sure, sir. So hypothetically, let's say, if there's a 10% to 15% growth -- decline in premium Y-o-Y, do you foresee material increase in cost overrun or to what extent of growth declines you will be able to absorb...
We will always look for margins, net of overruns. We always look for margins net of overruns. And the desire will be either to hold the margin or improve the margin so that it could cover up for the premium deficit.
Sure, sir. Sure. Secondly, on the protection, if I understand...
See, net-net, I think we are trying to aspire for trying to get to the same -- similar VNB, whether or not the sales growth is tad lower than last year.
Correct.
Yes.
Yes, Nidhesh, sorry, your second question?
Sure. Yes. Secondly, on the protection side, the way I understand correctly is that you are trying to protect your margins on the protection. So whatever increases will be there in reinsurance, you will pass it on to the customer?
We plan to pass in phases, actually, not to start with. So of course, there's a number of new product design that we are working on. There, we will be able to pass on fully. At this point of time, we are being a bit more tactical about it. So trying to capture more and more market share. So hopefully, a combination of both, which means for the first half, running with the older product to see how the market plays out and in the second half going ahead with the new product design, where we will be able to pass on a large part of the reinsurance impact on to the customer.
Sure. And just lastly, on the number of policies growth in protection. What I see for the entire industry this year, the number of policy growth has been quite low. And you have also mentioned the reason that the limited pay is the key for the...
That was the reason. We actually launched it last year only, you may remember, Nidhesh. Unlike many other people who had this product even earlier, so -- that's why you will see sum assured not grow that drastically because the sum assured to premium multiples are a bit lower in the limited base. That's the reason why you saw a bit tepid growth. Earlier, the year before, we were writing a lot of, what we call, online term plan, which was more regular premium. So we had a big base on which we launched the limited pay. And hence, the premium -- the number of policy growth is not that big.
But in the month of April, May, you are seeing decent number of policy growth for...
Of course. Of course.
The next question is from the line of Jignesh Shial from Emkay Global.
Technically, most of the questions have been answered. Just quickly in your EV walk and VNB walk when I'm seeing it up, so basically now on the VNB walk side, the acquisition cost overrun is roughly minus 1.9% on the margin front. So any further clarity over this that how this particular metrics could be -- could see an improvement so that the margin trajectory could see some further improvement here on, although I know that more or less, you're sticking to the same. I have 2 or 3 more questions, but I'll first...
So let me answer this question. I think acquisition overrun that you see just now is because of a very thought through strategy to invest in growth of our own channels. Of course, COVID is a new situation that has come in. So without COVID, the answer would have been, this will reduce further as the business continues to grow because the growth will actually absorb the cost overrun. That was our plan. Now in the circumstances that are emerging now, we will deploy a variety of things, but the 2 biggest elements will be action on expense reduction and change in product mix, which will be able to absorb the overruns a bit.
Okay. Understood. Secondly, there had been some instance now, your acquisition from the Axis has been clarified, more or less, it's been sorted. So now, can we expect that the share of bancassurance -- and even Yes Bank now coming back on track and al, the share of bancassurance rising will lead to even the share of ULIPs would be rising hereon? Or the focus would still remain on the protection and all? Also, other way around, will the banks be seen selling these products? Or how does that work? Sorry.
I think the bank will be focused -- my sense is that the bank will be so focused on selling more savings -- non-PAR savings designs as well as protection considering the equity market are expected to remain tepid for a long time. But yes, they will continue to be reasonable sellers of ULIP.On your first question, whether the share of Banca will increase. Actually, we have been -- you will notice that the share of Axis Bank has been stable or going down -- tapering down a little bit for past many years. So it used to be 57% about 2 years ago, then it came to 55%, continues to remain in the range of 55%, 56%. Versus that, our own channels were 29%, 28%, then it became 29%, then this year, 31% -- sorry, 27%, 29% and 31%. So we're making a conscious shift in increasing the proportion of our own channels, and that strategy is continuing to hold. So yes, so that in a few years' time, I think our own channels will be expected to deliver somewhere between 35% to 40%, the rest coming from Banca channels. Of course, with the Axis Bank becoming our shareholders, there will be more opportunities to drive growth. But the desire will be to maintain similar level of growth or more growth from our own channels also.
Understood. And just lastly, your solvency ratio has seen a sharp correction Y-o-Y, though it is still much ahead of the comfort level of 150% and all. But any reasoning behind it? I mean -- and do you -- what level are you comfortable with as far as...
So the correction happens because of growth. If you grow, of course, it comes down. And plus, we have been declaring dividend last year, we have paid out INR 450 crores dividend. Because of which it comes down. Now we will like to maintain that upwards about 170%, 180% that's the range we are more comfortable with. And that solvency will continue to remain -- it will get absorbed as we continue to grow and write more protection. At some stage, not in near future, but I think about -- in about 18 months' time and we need more capital, we will be looking at means to raise capital either through sub-debt or asking for more equity in the business.
And I think capital should not be anyway is a constraint for growth because practically, we'll have, after the transaction, about another INR 800 crores as a surplus available to fund the growth. So I think capital will never be a constraint to grow this business.
The next question is from the line of Sanketh Godha from Spark Capital.
Prashant, just wanted to understand, last year, 21.7% VNB margin was based on capital charge of 5 percentage for cost for achieving non-hedgeable risk. Now 21.6% is on 4% capital charge, so if you do like-to-like on the capital charge, then what would be the VNB margin either of FY '20 or FY '21? Sorry, FY '19 or FY '20, I mean to say.
Yes. So it may be a bit lower if that's the question you're asking. Amrit, of course, can share with you what the delta is. But I think my request will be, you look at it in absolute terms because it's a competitive and comparable world. So while year-on-year versus last year, it may be a bit lower. But where does it take vis-à-vis other people? Our assumption is similar or more conservative than other people. So there's market frame where 21.6% actually holds. There is a last year frame. Because this assumption apple-to-apple basis, we may be a bit lower this year.
And I think I just want to supplement, I think Prashant a little bit more. To say that you have to also put a frame of the fact that we are trying to expand. We were 200 offices. We've opened more than that on top of it. So I think expansion has some cost. So it's not that you can look at this number in isolation, you have to look at both.
Got it. Got it. Sir, actually, my next question was on that only, basically to understand, given the gap between structural margin and the reported margins, our post overrun margin is 2x 70 bps. Sir, you have highlighted that we have measures to control cost in FY '21. So just wanted to understand your broad levers, which are the line items where you can control the cost given we have recently invested in the agency and the prop channel, so what are the other low-hanging fruits the cost can be really controlled, so the margins can be held up?
So it's a fairly large business, Sanketh, and there are cost opportunities everywhere. So there are, for example, there is a sequence that we have created to look at costs. And of course, the immediate costs are the discretionary expenses and all the things around people and recruitment and going and negotiating rentals with our landlords or negotiating contracts with outsourced service providers, et cetera. All those actions we have already undertaken. That will be -- so no-regret move actually launched and have been done. So that part is already established. That action should lead close to about 10% kind of cost reduction for the first half. I was talking about first half because I was hoping that it will be lockdown, but for the full year, maybe around INR 150-odd crores.And then, of course, we have a sequence of things. So the sequence of things will be looking at our back office in view of work from home, et cetera, there's a plan to redesign our overall facilities requirement that is going to get implemented. We are going to look at support expenses. We are also going to look at agency, agency cost is always an opportunity to optimize it. So we'll do all that, depending on how the market evolves and there's a sequence that has been created. What we remain committed to is the margin net of overall. And these are calls that one will have to take depending on how the market has moved in 3, 4, 5 months down the line.
Got it. And just a last housekeeping question.
We remain committed to financial outcomes. So it won't happen that the expenses are -- have an overbearing impact on the financial outcomes. We will maintain expenses in a manner so that we are able to deliver on margins net of overrun.
Got it. And lastly, 1 -- 2 questions. Basically, on non-PAR, just wanted to understand our construct, whether it's more of an income plan or enrollment plan? And...
Both actually. Actually, will be both. We are going to come up with a new design. Currently, we write more endowment.
Okay. Okay. Endowment. Perfect. And the group protection breakup, can you break it down into CP and GTL according to...
About 1% comes from credit life and the balance comes from GTL. We have been 1% for a long time. Yes.
The next question is from the line of Lalitabh Shrivastawa from Sharekhan.
Most of the questions have been asked. Just 2 small questions. First of all, last time, also, we talked about going for tele-medical and for the larger-sized policies. And we talked about the larger-sized policies kept in hold till the time situation normalizes. So can you give a sense as to what proportion or what quantum of your sales are in maybe pending due to that, the requirement of physical examination of medical? And how are you accounting for that? Because as I believe that some amount of premium or some token amount of premium is also charged on that, so whether that is billed as sales done or not? That's my first question.
I will ask my colleague to -- Amrit, to help me with the numbers, but I confirm to you that unless the policy has been underwritten and paid. Paid, meaning it has -- the policy has been issued, we don't book the revenues. So revenues are not recognized until we have paid the policy. Just because we have received a check, doesn't mean that it will be booked as revenue. Amrit, do you have any numbers that you could...
That is correct, Prashant, actually. That is correct. The...
He asked some numbers around what percentage are pending, et cetera, do you have that?
I think what I can say is that with respect to our medical centers, et cetera, the policies which are going for medicals, we are now tracking to actually almost 900-plus medicals happening on a daily basis. So which is actually a trend line that we have seen in the past. So we have been able to recover that quite sharply. Now how much of is exactly pending, I think I'll have to pull that out, and I could probably share that.
Yes. So some reference frame for you before COVID, we were doing close to about 500 to 550 medicals before COVID. Now we are touching between 800 to 900 medicals every day. And that reflects 2 things, that things have become normal and the number of policies that we are underwriting and paying in protection has increased significantly.
Yes, sir. That is helpful. Secondly, would it be possible to share the impact on PBT on a normalized basis. If you do not take in account the one-off, then a normalized PBT, what would have been? And the decisions or the movement of this change in network, how that has -- if you can give a breakup or is that entirely because of MTM profits?
I think on your previous question, I just was able to pull out that information. Around 10% of our policies are pending largely because of customer saying that he doesn't want to do because of COVID situation. So it's not a very large number. 10% of the protection policies in work in progress. So it's not a very large number that we're experiencing for ourselves. I think the question -- second question is Jatin for you to respond to. Jatin?
Yes. Sorry...
I think he was asking about PBT.
Is it a question to me, I'm not very clear. It is a question to me or it's a question to me?
So do you want to know about Max Life or Max Financials?
Max Life, sir.
Max Life. Okay.
Yes. That's what I thought.
So the PBT number, I don't know, I mean, being -- I was CFO for a long time, also CEO. I think the more important number to look at will be VNB and you should see how the VNB is growing over the years. Because looking at profit numbers, they don't really represent the health or the movement the business is making. For example, you write more protection or you write more non-PAR, your PBT can fall. You write more participating in a particular year or you degrow, your PBT can look very good. So those are factors that one needs to keep in mind. I don't have a readymade normalized number because when we normalize for this year we'll have to normalize for previous years also. But if you could send me and Amrit an e-mail, we'll come back with that analysis and share that with you.
The next question is from the line of Manoj Bahety from Carnelian Capital.
I have couple of questions. First one is, is it possible for you guys to give us a broad breakup of VNB amongst your various products like PAR, non-PAR, protection and ULIP, just a broad sense will help. And as well as like, also, if you can touch upon persistency amongst your various products?
So actually, we don't disclose down to that level of details. Manoj, you will have to excuse us there.
Okay. In terms of like some hierarchy of this VNB in terms of like some broader percentage, will that be possible?
I'll have to come back, actually, to you. I mean I can give you some sense of margin, not VNB. So the best margins one gets in the protection plan followed by the non-PAR savings design, followed by participating designs, followed by unit-linked design.
Okay. And similar level of hierarchy in terms of persistency terms?
No. It can change actually. Depending on -- there's a lot of channel dependence, ticket size dependence. So typically, you would find persistencies to be the best in protection. Higher ticket size, non-PAR designs, ULIP designs and then participating designs.
Okay. Okay. So participating designs may be having lowest persistency, right?
Generally, it's not to do with which product you are selling, it's to do with the ticket sizes. And typically, the ticket sizes on non-PAR as well as ULIP is more than participating. So that's the reason why the persistency comes a bit lower. It's not because of product type. So the biggest driver -- with an exception to protection, the biggest driver is ticket size, not the type of product.
Okay. Okay. Got it. My second question is on the transaction where we have to do now a series of steps. I think the first step is swapping Sumitomo's share from Life to the listed entity. So what is the expectation of time line around that? And what are pending steps which we need to complete to do that thing?
Sure. So there are broadly 2 items pending there. I think the first item is the approval from Department of Economic Affairs. We've had a conversation with them. I think they should be done with their internal work in a week or so from now. And then they will just put up for final sign offs and all, so we are anticipating that it should come, hopefully by mid-June, if not mid-June let us -- let's say, by end June later. After that has come, then the next approval is from IRDAI and IRD -- again, through our interactions, they are, at this stage, fully satisfied with everything, but they are awaiting the DEA approval. So once that comes, then we are broadly done with the Mitsui Sumitomo swap. So that's that time line.Now in terms of the regulatory approvals for the Axis transaction, we have filed with the IRDAI as of 20th of May with RBI as of 6th of May and we have -- I mean, we are almost at the final stages of the CCI application, which should just get filed in a day or so. Now in terms of time lines, I think CCI generally is a 60-day time line at max from 45 to 60 days, and this is a straightforward one. So we don't anticipate it taking too much time because it's not a combination, right? It's a share actually.Then on RBI, our past experience is generally it takes about 2.5, 3 months for any approval, but in this one, given more particularly their preoccupation with COVID, maybe it will take a little longer, maybe 4, 5 months, maybe, I don't know. And IRDAI, generally, since they are the principal regulator for insurance company, will follow the approval of RBI. So my sense is, we should get done with all the approvals and implementation by December. So that's the -- yes, yes, sorry.
But prior to that -- just prior to that the Sumitomo transaction like as and when we get approval, this will go through or we will wait for complete chain of approval, and then we will do all this [indiscernible]?
No. So the swap transaction has to be done whenever we have all the approvals because there's a 15-day window under the regulations to close out any -- our shareholder approved transaction such as Mitsui Sumitomo's transaction because it entails a preferential allotment of shares. So we will be done with the share swap. Then we will implement the Axis transaction, then the residual 5% put-call arrangement with Mitsui Sumitomo which will mostly be, let's say, April or so, and then file for the merger.
I think it's very helpful. Just one small question on Axis. Hello?
Yes.
Yes. Just one follow-up on Axis. I read it somewhere like our marketing arrangement with Axis, which was getting expired next year, it got extended. So with or without this deal, even in some hurdle, roadblock terms, that marketing tie-up got extended, am I right in...
So the bancassurance arrangement with Axis Bank, I think, firstly, in the current contract, which is currently running, is till September 21, so there is obviously no change. There is a new arrangement which will come in place effective 1st of July. And we'll be happy to share more details around that when it comes effective -- becomes effective.
So 1st of July this year, right?
Yes.
Okay. Okay.
That's the new arrangement.
The next question is from the line of Nischint Chawathe from Kotak Securities.
First, just one clarification. The INR 1,600 crores that comes from Axis Bank that comes at the holding company level, right?
Yes.
But then how can that be used for investing the -- at Max Life level?
So see, after the INR 1,600 crore, about 8 -- you have to -- of the INR 1,600 crore, you have to take care of Mitsui Sumitomo share swap. Once you have -- sorry, the put-call option. Once you've done that, we'll be left with INR 800 crore capital in the parent company. Now that capital, as and when the underlying company requires is available to fund the growth of the underlying company.
So then in that sense, you will be -- the listed entity will increase the stake in the underlying company with this INR 800 crores...
Not necessarily. I mean Axis Bank can also invest proportionately.See, we -- see it's like that, you have to do a capital versus growth trade-off and looking at what gives you better returns, you accordingly decide. So I mean, if your capital is value accretive, you will want to grow the business more and pump in more capital. If you think it's not value accretive, you will then say, manage within your own resources. So that's how, as a shareholder, we will calibrate that capital.
And in that sense, there is no reason to change the dividend payout policy as of now at back Max Life level?
At Max Life level, the only change in dividend payout policy is that now there is no put-call option. So to that extent, there is no requirement for dividend at the parent company, but obviously, once we have COVID behind us and we've sort of reassessed the long-term trajectory of the business and capital requirement in line with that long-term trajectory, we -- our endeavor would be to have a -- if possible and if sort of within the overall solvency requirement of the business, to have some dividend payout with how every other company...
It will be at a lower level, to be honest, Nischint, because the responsibility of buyback goes away. So it will be much lower. And it will be balanced between the solvency capital that is required in the business growth as well as a dividend that will go out to shareholders.
Sure. Now just coming into the guidance for APE and VNB for the next year. I guess volumes would obviously be weak next year, and you have guided for sort of almost a flattish VNB which would effectively mean that your margins will have to go up. And I think 2 levers, what you mentioned, one was protection and the other is non-PAR savings. Again, on the protection side, I think what you did mention was that the tariff hike that you're taking is going to be progressive throughout the year, you're going to be a little bit more tactical in the first half. So the entire load for margin expansion will have to be taken by the non-PAR product. And I guess that's again 6 going to 8, I mean, am I right? Or I mean I just -- I don't have all the numbers with me, but I'm just kind of trying to fill the gap actually where the expansion comes in?
You're right. I think you have -- you don't look at the margin per se, you look at volume. So it's like the volume of protection multiplied by margin. That will have to take the load. So I think the overall VNB drivers will be non-PAR and protection. That's the direction that we're working. Guidance, to some extent, is a very strange road in the current construct. Like we mentioned to you, it is our aspiration to hit that number.
And just one point is on the investment variance side, the debt side, this INR 190 crores was positive or negative?
So Amrit, do you get what Nischint is asking?
Negative. Negative.
The MTM.
Negative. Nischint, negative.
Yes. But I thought decline in interest rates was positive for your EV, right?
So there is also an element of that the shape of the curve, actually, which has come in play. I think you're referring to the sensitivity movements, RSD kind of share. Now unfortunately, those sensitivity movements assume across the spectrum a decline. But because the shape of the curve has also changed and got altered that has caused that difference to come through.
Sure. On the fourth quarter versus third quarter, if I just try to do the numbers, the unwinding rate seems to have gone up quite a lot. Anything to read in that?
Ashish, do you have an answer ready?
Yes. Nischint, you were referring to the unwind rate that we reported in September?
Yes. No, no, I'm looking at unwinding rate between the third and the fourth quarter, the effective unwinding rate for the quarter, the quarter ended in March, December. Yes.
In Q3, I guess, for our disclosure, we didn't report the unwinding rate as such. For H1, which is the September disclosure, the unwinding rate was closer to this level only close to a 9% sum, so it hasn't changed since then.
There has been -- okay, I can maybe take it off-line. There has been some but maybe I can take these notes off-line.
See, the only thing is for September, you'll have to just annualize it the -- the averages for half year unwind. So if you just analyze it, it should come out, we can connect off-line maybe to discuss.
Sure. And just one last thing is on the operating variance side, positive water -- if you can share some breakups?
So it is a combination, actually, I mean, of the number that you see, there is close to about INR 30 crores, which is coming because of expenses. Maintenance expenses. I think about close to about INR 30 crores. I will have to go through the numbers, but it's equally broken between expenses, mortality and some bit of changes in our assumptions.
All positive, is it?
All positive.
The next question is from the line of Bharat Sheth from Quest Investment Advisors. Due to no response, we'll move to the next question, which is from the line of Madhukar Ladha from HDFC Securities.
Can you give us some color on what will be your protection margin or what percentage of VNB is coming from protection? Some of your competitors do give that information.
It's a good suggestion. I think we'll include that from the next reporting, Madhukar, so -- and we could answer that question separately. I don't have the number in front of me.
As there are no further questions from the participants, I now hand the conference over to the management for closing comments.
Thank you. Thank you, ladies and gentlemen, for being on Max Financial's earnings call. We look forward to more such interaction in the future. If you have any follow-up questions, please feel free to reach out to me or Amrit. Thank you, once again. Goodbye. Stay safe. Have a good day.
Thank you. On behalf of Max Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.