HDFC Life Insurance Company Ltd Management Discussions.

A. MACROECONOMIC TRENDS

The year gone by proved to be quite tumultuous for the Indian economy. The initial anxiety over the outcome of the general elections held during April and May gave way to relief and optimism as the incumbent NDA coalition returned to power. The new Government continued to grapple with the economic slowdown triggered by the NBFC / HFC defaults that had hit the economy over the previous quarters. A large number of NBFCs and FHFCs found their access to debt capital markets closed due to rising risk aversion. The lack of liquidity hurt asset growth. Household income, savings and consumption data had showed that the Indian consumption trends were increasingly supported by rising household leverage, as the growth of consumption had outstripped income growth over the previous years. The inability of the financial system, especially the NBFCs, to continue to lend at the same pace, led to a slowdown in consumption growth.

The rural economy, too, had its fair share of challenges. Patchy rainfall and drought in some pockets, over the previous crop seasons, had hit agricultural income. Moreover, rural wage growth had also been anaemic for the previous few years. The CY 2019 Southwest monsoon brought rainfall of about 110% of the Long Period Average. However, a late surge and heavy rainfall at the end of the season led to widespread floods and affected standing crops. Food prices surged after the kharif harvest due to the crop destruction, pushing up inflation in the quarter ending December 2019. Higher food inflation, however, helped improve farm incomes and helped spark a minor recovery in the rural economy.

The urban and the industrial sector did not see any turnaround and the quarterly GDP slowed to 4.7% in the quarter ending December 2019, the lowest over the previous seven years. The Government and RBI took multiple steps through the year to provide stimulus and stem the weakness in growth. RBI cut interest rates by a cumulative 135 bps during CY 2019 while the Government slashed corporate tax rates across the board, while also providing some sector-specific stimulus.

Globally, the major economies too, slowed down over the year, as the trade frictions continued to weigh on growth. However, towards the end of the year, the US and China agreed to a Phase 1 trade deal, which halted the vicious circle of tariffs and counter-tariffs and paved the way for more meaningful trade negotiations. The slowdown over the course of the year led the monetary authorities in the large economies to cut interest rates and ease liquidity. The increasing liquidity in the global system flowed to risky assets, notably equities and commodities, and equity markets in different countries scaled new lifetime highs, despite weaker economies and corporate earnings growth.

In India, while the economic indicators kept weakening over the course of the year, the external account stayed robust. Trade deficit stayed contained through the year, averaging around US$ 14 billion per month, lower than the US$ 16 billion during the previous year. However, inflows through invisibles as well as capital account picked up through the year, helping end the year with a strong BoP surplus. RBI absorbed the surplus and added about US$ 60 billion to its foreign currency reserves. The BoP surplus helped the Rupee stay stable through most of the year, though large capital outflows at the end of the year, caused a sharp depreciation in the rupee.

The last quarter of the year brought forth a nightmare for the global economy as a novel coronavirus - COVID-19, first affected a province in China and thereafter spread rapidly across the world. The highly contagious virus with a high mortality rate spread rapidly across Western Europe and the US, and governments across the affected countries imposed varying degrees of lockdown to arrest the spread of the virus. The Indian government, too, imposed lockdowns across the country in a bid to control and halt the spread of the virus. The lockdowns, in India, as well as across most large economies, led to a massive fall in economic activity that is slated to tip the global economy into recession for the remainder of CY 2020.

Oil prices, along with other commodity prices, saw sharp correction in prices, as did equities. At the end of the year, RBI pulled forward a scheduled monetary policy meeting by a week and provided a massive monetary boost to the economy through sharp interest rate cuts, liquidity support and moratorium on borrowings from the banking system. The Government also unveiled its first set of fiscal measures to support the weaker sections of the population. However, a large number of sectors are likely to need more support from the Government to survive the crisis. The growth outlook for India, too, has dimmed appreciably and a clearer picture is expected to emerge only after the pandemic is brought under control.

Outlook on the Life Insurance Industry in India

The Indian life insurance industry has seen a plethora of changes since it was opened up to the private sector in the year 2000. While there have been interim setbacks, the industry as a whole has grown multifold over the last 20 years. Distribution models have evolved considerably with large bank backed private insurers gaining increasingly more market share. Rapidly evolving customer behaviour has spawned the need for innovative products to provide the most optimal solutions to the end customer. Increasing digital adoption by customers means that possessing strong technological capabilities has become the need of the hour for insurers. Despite the recent COVID-19 outbreak dampening growth projections for economies across the globe, the structural story for insurance remains intact. Insurance remains a multi decade opportunity in the Indian context and insurers are well poised to maximise the long-term growth potential of the industry. Some of the growth drivers are elaborated upon below:

Key Opportunities

I. Changing demographic profile

The Life Insurance industry helps in mobilisation of long-term savings, provides protection and long-term income and annuity solutions. Each of these segments has different demand drivers and Indias changing demographic profile bodes well for the industry. The proportion of insurable population (people between the ages of 20 and 64) is expected to touch almost 1 billion by 2035, thus outlining the need for long-term savings and protection plans.

The number of people above the age of 60 years is expected to triple by 2050 as compared to 2015, thus providing insurers an opportunity to tap the retirement space by way of offering long-term income and annuity products.

II. Low insurance penetration

Source: Swiss Re (Based on respective financial year of the countries), MOSPI

Note:

1. Penetration is measured by premiums as % of GDP

2. Density defined as the ratio of premium underwritten in a given year to the total population

As compared to other developed economies, India remains vastly under-insured, both in terms of penetration and density. The protection gap in India is amongst the highest in the world at 92.2% as of 2014. This, along with the evolution of the life insurance distribution model and rising awareness about need for life insurance, enhances the opportunity. Retail credit has grown at a CAGR of 21% over the last six years (FY 2012-18) and is likely to spur the need for credit life products.

Improvement in life expectancy has increased the post retirement period by around 20 years. This, coupled with pension assets at just 4.8% of GDP, further reinforces the need for long-term income and annuity products

III. Financialisation of savings

The share of financial savings, as a percentage of household savings, increased from 33% in FY 2013 to 40% in FY 2018, while the share of life insurance as a percentage of financial savings has been stable around 17-18%.

The government has also taken initiatives to promote financial inclusion and helped increase insurance awareness including setting up of small finance banks and payments banks and offering low cost insurance like the Pradhan Mantri Jeevan Jyoti Bima Yojna (PMJJBY). The Government introduced the Pradhan Mantri Shram Yogi Maan Dhan (PMSYM), a pension scheme for poor labourers in February 2019 and enrolled over 4 million people under the scheme.

IV. Digitisation

Technology today is evolving and disrupting businesses at a pace never seen before. Blurring lines of business coupled with increased flow of information have created an ultra- competitive marketplace where it has become important to continuously innovate and be agile. Rapidly evolving customer behaviour means that providing a frictionless end-to-end buying experience to customers has become of utmost importance.

Insurers are now partnering with a wide variety of distribution partners beyond the traditional modes of distribution. This requires highly efficient platforms powered by analytics, automation and artificial intelligence. Seamless integration of these platforms and processes with the partners systems is an absolute must. Today, a personalised customer service experience is not just expected, but is demanded and the use of artificial intelligence, cloud computing, machine learning algorithms and bots are expected to help improve this experience going forward.

Risks and Concerns

The life insurance industry faces a number of risks primarily due to rapidly evolving customer behaviour, changing demographic profile and dynamic macroeconomic conditions. The financial conditions and future prospects of companies may be significantly affected by factors such as market fluctuations, changes in tax rates or in interest rates. Risks also exist in the form of a change in the relationship with key distribution partners. The ongoing pandemic poses short term pressures to the industry including but not limited to growth, persistency and solvency.

Our enterprise risk management framework details the governance and management of all aspects of risks we face. Details of our Enterprise Risk Management Framework are included as section Enterprise Risk Management on page 66.

B. LIFE INSURANCE INDUSTRY OVERVIEW I. Overview

The life insurance industry has considerably evolved over a period of time from a product-centric approach driven by marketing and advisers to keeping customer needs and experience at the core of the strategy. From a single insurer industry two decades ago, today the market is thriving with 24 insurers. Over the last 20 years, business models have evolved leading to changes in distribution strategy as well as the product portfolio, with technology viewed as a key enabler in the entire process.

During FY 2020, the life insurance industry grew by 21% to garner Rs 2,589 billion of new business premium against Rs 2,147 billion in the previous financial year. Private insurers grew by 5% in individual business while group business saw a growth of 19%. LIC recorded a growth of 8% in individual business and 39% in the group business.

Market share of the private insurers in the individual business (WRP) remained high for the fifth consecutive year. Development of alternate channels of distribution and product innovation were key drivers of market share growth from 37% in FY 2012 to 57% in FY 2020.

Within the private sector, the top 7 insurers account for 78% of the market (in terms of individual WRP) in FY 2020. Distribution arrangements with large banks has been a key driver for most of these insurers.

Post the regulatory changes around unit linked products in September 2010, private life insurers shifted focus from a unit linked dominated product mix to a more diversified product mix.

In the past few years, private insurers have increased their focus on the under-penetrated protection segment, both for individual and the group segments. Tepid capital markets played a key role in diversifying the mix within the savings segment in FY 2020.

III. Distribution Mix across Private Insurers

There has been a shift in the distribution mix over time. Business sourced by Bancassurance channel has increased while the share of the Agency channel has declined post regulatory changes in FY 2011. Implementation of the open architecture distribution model in bancassurance will enable more insurers to achieve scale.

The direct channel (including online) has gained traction over the years and has showcased faster growth. Increasing digital awareness coupled with the governments push towards digitisation is helping the online channel emerge as a key distribution channel. Insurers are also tying up with partners within the non-traditional ecosystem to diversify their distribution mix further.

C. HOW ARE WE TRACKING BUSINESS PERFORMANCE?

# What we track Comments
1 Market share and ranking: Market leadership with healthy growth across segments The Company continues to consolidate its leadership position in overall new business and group segments while showing strong growth in individual segment.
2 Persistency: Strength and quality of existing book Steady persistency across cohorts led by focus on better quality of business and leveraging technological capabilities to provide a superior customer experience.
# What we track Comments
3 Assets under Management (AUM): Growth and net accretion to deliver healthy growth with balanced mix While there was net addition of fresh funds during the year, AUM increased only marginally to Rs 1,27,226 crore as on March 31, 2020 mainly due to decline in equity markets. Underlying Debt:Equity mix stood at 71:29.
4 Distribution mix: Develop and nurture each channel, while ensuring business diversification Well-diversified distribution mix with wide presence through our 421 offices. The Company also leverages access to partner branches of 230+ bancassurance partners and 40+ partners within the non- traditional ecosystem.
5 Product mix: Balanced product mix with options for different risk reward profiles Focus on need-based selling and profitable growth continued to be the key focus areas in FY 2020
6 Drive to increase protection: Higher focus on protection business across individual and group segments Individual Protection grew by 33% and group protection by 16% in FY 2020. 22% of our individual policies sold during FY 2020 were protection policies
7 a) Embedded Value (EV): Sum of adjusted net asset value and the present value of future profits of a firm. Steady growth in EV, as witnessed by healthy Operating return on EV. Continue to deliver smooth upward trend in new business margins.
b) New Business Margins (NBM): Profitability of business written in a particular year
8 No. of lives: Number of lives insured across individual and group business, an indicator of scale of business Increased to over 6 crore, witnessing a growth of 19% over last year

D. Standalone Performance Overview

HDFC Life continued to deliver sustained performance across key metrics during the year under review. In line with the stated long-term strategy, the Company maintained balance and diversification across its business to create value for key stakeholders, while ensuring profitable growth. The Company is driving this by re-imagining the life insurance journey, leveraging technology and catering to continuously evolving customer preferences. The standalone results presented below includes detailed analysis across key financial parameters tracked by the Company.

In light of the COVID-19 outbreak and information available up to the date of approval of the financial results, the Company has assessed the impact on assets, including valuation and impairment of investments. The financial statements as at the Balance Sheet date reflect appropriate adjustments based on such evaluation.

Income statement analysis

The Company has continued to invest in people and technology platforms to ensure ease of buying for customers and seamless integration with distributors. The reported Gross Premium Income witnessed a growth of 12%, with growth in both individual and group premium. Operating expenses grew in line with premium growth. The Company reported Profit after tax of Rs 1,295 crore during FY 2020.

Revenue A/c and Profit & Loss A/c FY 2020 FY 2019 Growth
Gross Premium Income 32,707 29,186 12%
Reinsurance (net) (483) (262) 84%
Total Premium Income (Net) 32,224 28,924 11%
Income from Investments
Policyholders (3,311) 9,027 -137%
Shareholders 438 408 7%
Income from Investments (2,873) 9,436 -130%
Other Income
Policyholders 244 176 39%
Shareholders 19 21 -12%
Total Income 29,613 38,557 -23%
Less:
Commission 1,491 1,132 32%
Operating expenses 4,300 3,829 12%
GST on linked charges 353 340 4%
Benefits paid 19,021 13,989 36%
Other provisions 765 100 663%
Change in Valuation Reserves (net) 2,441 17,507 -86%
Change in funds for future appropriations (220) 144 -253%
Provision for tax
Policyholders 149 227 -34%
Shareholders 16 13 26%
Profit after tax 1,295 1,277 1%

The total premium collected by the Company during the year witnessed an increase of 12% from Rs 29,186 crore in FY 2019 to Rs 32,707 crore in FY 2020. The growth was on the back of 19% growth in first year (regular) premium individual from Rs 4,720 crore in FY 2019 to Rs 5,630 crore in FY 2020. During FY 2020, the Company added nearly 8.96 lakh new policies to its individual portfolio. The growth in premium is primarily driven by our multi-channel approach, coupled with a focus on meeting varied customer needs through our diverse and innovative product portfolio. Our product portfolio consists of 37 retail and 11 group products, along with six rider benefits covering savings, investment, protection and retirement needs of our customers.

The impact of the COVID-19 outbreak was seen across both new business and renewal collection in the second half of March 2020, with customers preferring to conserve cash till clarity emerges.

We continue to make efforts towards improving customer engagement and communication on the need to continue with their policies. This, coupled with our existing suite of digital platforms for renewal payments, has resulted in individual renewal premium growth of 9% from Rs 14,109 crore in FY 2019 to Rs 15,374 crore in FY 2020. The Company continues to lead in terms of group premiums, which grew at 19% from Rs 7,432 crore in FY 2019 to Rs 8,870 crore in FY 2020 and added nearly 6 crore new lives to its portfolio, during FY 2020.

• Reinsurance ceded

The increasing proportion of protection business across individual and group segments over the years has contributed to the increase in reinsurance ceded over this period. The reinsurance premium ceded increased by 85% from Rs 262 crore in FY 2019 to Rs 483 crore in FY 2020.

• Income from Investments

Rs crore

FY 2020

FY 2019

P

Policyholders

Share- holders

Total

Policyholders

Share

Total

Unit Non Par Par Unit Non Par Par holders
Interest & Dividend (Net of amortisation) 2,245 2,625 1,975 360 7,205 2,109 1,665 1,879 294 5,948
Realised gains/ (losses) 2,139 263 104 78 2,584 2,059 93 183 114 2,449
Unrealised gains/ (losses) (12,605) (57) (12,662) 1,039 1,039
Total Income from investments (8,221) 2,831 2,079 438 (2,873) 5,207 1,758 2,062 408 9,436

Note: Non Par includes non unit portion of unit linked business

Income from investments includes interest, dividend, gains/losses realised from the sale of underlying investments and unrealised gains/losses in the unit linked segment.

Segments other than unit linked witnessed an increase in investment income from Rs 4,229 crore in FY 2019 to Rs 5,348 crore in FY 2020, mainly due to higher interest and dividend income. This increase is on the back of higher Assets Under Management (AUM), supported by higher renewals and new business premium.

During FY 2020, BSE Sensex fell by 24% as against an increase of 17% in FY 2019, due to significant market volatility on account of COVID-19 outbreak in the month of March 2020. This resulted in higher mark-to-market losses in the unit linked segment and total income from investments reducing from Rs 9,436 crore in FY 2019 to negative Rs 2,873 crore in FY 2020. Investment returns in the unit linked segment are directly passed on to policyholders, with corresponding changes in reserves, without causing material impact on shareholders profits. The unrealized losses in non-par-segment pertain to mark to market losses on assets which are valued at fair value.

• Other income

Other income mainly comprises policy reinstatement fees, interest on revival of policies, interest on policy loans, interest on income tax refund, income on unclaimed amount, amongst others. Other income increased from Rs 197 crore in FY 2019 to Rs 263 crore in FY 2020, primarily on account of higher interest on revival fees, which

increased from Rs 37 crore in FY 2019 to Rs 96 crore in FY 2020 and higher interest income on policy loans which increased from Rs 4 crore in FY 2019 to Rs 20 crore in FY 2020. Other income includes income on unclaimed amount of policyholders of Rs 38 crore in FY 2020 compared to Rs 52 crore in FY 2019, which is reflected in the liability towards policyholders.

• Commission

Rs crore

FY 2020

FY 2019

First Year Single Renewal Total First Year Single Renewal Total
Premium 6,044 11,194 15,468 32,707 5,058 9,913 14,215 29,186
Commission 1,082 141 241 1,464 784 120 214 1,118
Commission (%) premium 17.9% 1.3% 1.6% 4.5% 15.5% 1.2% 1.5% 3.8%
Rewards 27 - - 27 14 - - 14
Total commission 1,109 141 241 1,491 798 120 214 1,132

The Company pays commission to its distributors on the premium income collected during the period. The commission expense increased from Rs 1,132 crore in FY 2019 to Rs 1,491 crore in FY 2020, an increase of 32%, in line with the underlying business growth and change in product mix.

Rewards paid to distributors were regrouped under commission (earlier shown under operating expenses) in line with the IRDAI circular dated October 4,2019.

• Operating expenses

The Company continued to diversify and strengthen its distribution, while using technology to enhance the customer experience. The operating expenses to total premium ratio remained at 13.1%.

In absolute terms, the operating expenses increased by 12%, in line with growth in business and primarily driven by increase in costs related to volumes, employees, marketing and IT. While the Company continues to focus on optimising the size of its employee base, employee costs increased in line with inflation and business growth potential.

The Company also saw an increase in outsourcing costs especially telemarketing costs, collection charges and other operations related expenses in line with increase in business. IT expenses increased to improve the customer journey, starting from new business to servicing to claims management and to improve organisational efficiency.

The Company also increased its spending on advertisement and publicity, pertaining to web and branch branding and marketing campaigns with an objective to increase insurance awareness and focus on protection business. There was an increase in other operational expenses such as stamp duty and medical fees that are linked to the number of lives insured and sum assured.

• Benefits paid

Rs crore

FY 2020

FY 2019

Unit Linked Traditional Total Unit Linked Traditional Total
Surrenders & Withdrawals 6,295 2,684 8,979 6,125 1,596 7,722
Discontinuance termination 2,274 - 2,274 1,069 - 1,069
Maturity & Money back (including Annuity) 1,185 4,544 5,729 822 2,935 3,757
Protection Claims (Death, Health & Rider) 277 1,762 2,039 278 1,163 1,442
Total Benefits paid 10,031 8,990 19,021 8,295 5,695 13,989

Benefits paid by an insurance company include payouts made against claims on maturity, surrender, withdrawals, protection, etc. The benefits paid by the Company during the year have increased from Rs 13,989 crore in FY 2019 to Rs 19,021 crore in FY 2020.

Focus on need-based selling and other initiatives relating to customer engagement to continue with their existing policies to protect their families and goals have resulted in controlling surrenders and withdrawals. Maturity and money back claims have increased due to higher number of policies completing their policy term and attaining eligibility for money back payouts than in the previous year. Protection claims have increased in line with higher protection business written over the last few years.

• Other provisions

Due to significant market volatility witnessed on account of COVID-19 outbreak, the Company had assessed its investment portfolio at the end of FY 2020 and made provision for diminution in the value of investment of Rs 765 crore for FY 2020. This provision for diminution represents the net increase of impairment provision on securities during the year owing to fall in valuation of the impaired securities, beyond the threshold defined in the approved Impairment Policy.

• Change in Valuation Reserves

Rs crore

FY 2020

FY 2019

Unit Non Par Par Total Unit Non Par Par Total
Change in Valuation Reserves (net) (9,195) 10,162 1,474 2,441 6,192 8,463 2,853 17,507

Note: Non par includes non-unit portion of unit linked business

Change in valuation reserves reflects change in the actuarial liability in respect of policies in force and for policies in respect of which premium has been discontinued but a liability still exists. The change in unit reserves represents the change in fund value of policyholdersfund, under the unit linked segment.

The decrease in change in reserves in the participating segment from Rs 2,853 crore in FY 2019 to Rs 1,474 crore in FY 2020 and decrease in change in unit reserves from Rs 6,192 crore in FY 2019 to Rs 9,195 crore in FY 2020 is mainly due to fall in carrying value of equity in FY 2020 on account of significant market volatility. The increase in change in reserves for the non participating segment reflects the increase due to higher new business and renewal premium collection, which increases the liability under these policies.

• Change in funds for future appropriation

Rs crore FY 2020 FY 2019 Growth
FFA - Profits transferred to Balance Sheet for Par business (220) 144 -253%

FFA reflects the surplus arising from the participating business. The change in FFA decreased from Rs 144 crore in FY 2019 to negative Rs 220 crore in FY 2020 due to fall in equity markets and hence lower realised investment income.

• Provision for tax

Rs crore FY 2020 FY 2019 Growth
Provision for tax (Revenue Account) 149 227 -34%
Provision for tax (P&L Account) 16 13 26%
Total Provision for tax 166 240 -31%

The total provision for tax reduced from Rs 240 crore in FY 2019 to Rs 166 crore in FY 2020 on account of decrease in income from taxable segments as compared to the previous year, leading to a lower provision for tax as compared to the previous year.

• Profitability

The overall profit after tax increased from Rs 1,277 crore in FY 2019 to Rs 1,295 crore in FY 2020 due to growth of 17% in backbook surplus offset by 16% increase in new business strain.

The Company had total accumulated profits of Rs 4,569 crore as on March 51,2020.

The Company has taken cognizance of IRDAI circular number IRDA/F&A/CIR/MISC/099/04/2020 dated April 24, 2020, and has not proposed any dividend for FY 2020. The Company had paid dividend of Rs 396 crore (including Dividend Distribution Tax) during FY 2019.

• Capital and Solvency Ratio

As against regulatory minimum requirement of 150%, the Company has a stable solvency ratio of 184% as on March 31, 2020 as compared to 188% as on March 31, 2019.

The decrease in solvency ratio is mainly on account of significant market volatility due to COVID-19 in the month of March 2020. Further, based on the Companys assessment of the business operations over the next one year, it is expected that the solvency ratio will continue to remain above the minimum limit prescribed by the Insurance regulator.

Notes:

1. RSM represents required solvency margin

2. Investment in subsidiaries not considered in solvency margin

New business margins

The Value of new business (VNB) grew at 25% to end at Rs 1,919 crore in FY 2020 on the back of premium growth and expansion of new business margins. The new business margins increased to 25.9% compared to 24.6% last year due to a favourable product mix and economies of scale.

• Analysis of change in Embedded Value (EV)

Note: 1. Calculated as EVOP (Embedded Value Operating Profit) to Opening EV

The Company continues to deliver healthy growth in EV with Embedded value operating profit (EVOP) of Rs 3,315 crore (18.1% of EV). Operating variances continue to be positive reflecting favourable experience compared to actuarial assumptions.

• Sensitivity analysis

Analysis base on key metrics Scenario % Change in VNB % Change in VNB Margin1 % Change in EV
Reference rate Increase by 1% -2.8% -0.7% -1.2%
Decrease by 1% 0.9% 0.2% 0.6%
Equity Market movement Decrease by 10% -0.3% -0.1% -1.1%
Persistency (Lapse rates) Increase by 10% -2.1% -0.5% -0.7%
Decrease by 10% 2.1% 0.6% 0.8%
Maintenance expenses Increase by 10% -2.4% -0.6% -0.8%
Decrease by 10% 2.4% 0.6% 0.8%
Acquisition expenses Increase by 10% -14.9% -3.9% N.A.
Decrease by 10% 14.9% 3.9% N.A.
Mortality / Morbidity Increase by 5% -2.4% -0.6% -0.9%
Decrease by 5% 2.4% 0.6% 0.9%
Tax rate2 Increase by 25% -20.0% -5.2% -7.7%

Notes:

1 Post overrun total VNB for Individual and Group business

2 The tax rate Is assumed to Increase from 14.56% to 25% and hence all the currently taxed profits in policyholder/shareholder segments are taxed at a higher rate. It does not allow for the benefit of policyholder surplus being tax-exempt as was envisaged in the DTC Bill.

Risk management has been the bedrock of the Companys strategy. We have an internal risk management framework in place, which enables us to identify the potential risks in a timely manner and take steps to mitigate those risks. This is reflected in the lower sensitivity of our margins and Embedded Value in different scenarios despite increasing scale of business on the back of our balanced product mix, sharp focus on risk management and improving quality of business.

E. Performance of Subsidiary Companies

I. HDFC Pension Management Company

HDFC Pension Management Company Limited ("HDFC Pension"), a wholly-owned subsidiary of HDFC Life Insurance Company Limited, started its operations in August 2013. The Company has 5.5 lakh customers as on March 2020. It is the fastest growing PFM (Pension Fund Manager) under the NPS architecture (YoY growth of 60% in AUM) with an AUM of Rs 8,265 crore as on March 31, 2020. In FY 2020, HDFC Pension started its operation as a Point of Presence in both retail and corporate NPS segments.

II. HDFC International Life and Re Company

HDFC International Life and Re, successfully navigated FY 2020 with focussed and strategic expansion in the MENA (Middle East and North Africa region) and India life reinsurance markets. The Companys strategy for the year - "Navigating with Agility" paid dividends in an external environment which transitioned from being stable to neutral and then uncertain as the year progressed. While the Company delivered substantial gross written premium growth, core performance levers including return on invested assets, regulatory solvency margins and net profit margins also trended positively on a year- on-year basis.

The business model consists of both treaty and facultative reinsurance arrangements assumed from ceding companies, relating to a broad range of life insurance products across Individual Life, Group Life and Group Medical offered by such cedents.

During FY 2020, S&P Global Ratings reaffirmed its long-term insurer financial strength rating of "BBB" with a stable outlook on the Company. The Company was also conferred with the "Reinsurer of the Year - Overall" at the MENA IR Awards 2020 for ground-breaking achievements and demonstration of the trinity of skill-efficiency- professionalism within the MENA (re)insurance markets.

F. Internal control systems and their adequacy

The Company has institutionalised a robust and comprehensive internal control mechanism across all the major processes to ensure reliability of financial reporting, timely feedback on achievement of operational and strategic goals, compliance with policies, procedures, laws, and regulations. The Internal audit function provides independent and reasonable assurance about the adequacy and operating effectiveness of the Internal Controls to the Board and the Audit Committee. Internal audits are conducted by in-house Internal Audit (IA) team and also by the co-sourced auditor (external chartered accountant firms). All significant audit observations and follow-up actions thereon are periodically reported to the Audit Committee and closely monitored for effective implementation. The internal audit function also tests and reports on adequacy and operating effectiveness of internal financial controls over financial reporting in line with the requirements of Companies Act, 2013.

The Company has established a Risk framework to actively manage all the material risks faced by the Company, in a manner consistent with the Companys strategy. Aligned with the business decisions, the Enterprise Risk Management (ERM) framework covers all business risks including strategic risk, operational risks including fraud and information security/cyber risks, financial risks (Interest rate, Credit, Liquidity risks and Asset Liability mismatch risks) and insurance risks. The Company also has a well-defined risk management policy which aims at establishing a risk culture and governance framework to enable identification, measurement, mitigation and reporting of risks within the Company in line with the Companys strategy, risk-return trade-off and the escalation & accountability framework. The top corporate risks identified are approved by the Risk Management Committee of the Board and are closely monitored by the Risk Management Team and are presented to the Risk Management Council and Risk Management Committee of the Board. The risk management architecture of the Company has been detailed under the Enterprise Risk Management section of the Annual Report.