HDFC Life Insurance Company Ltd Management Discussions.

A. MACRO ECONOMIC TRENDS

FY 2019 proved to be a year with contrasting narratives in the two halves of the year. The initial quarters started with a robust growth outlook as the domestic economy grew 8.0% in the first quarter and 7.0% in the second. The pickup in growth was driven by a recovery of economic activity from the GST induced lows in the previous year. Global growth, too, remained buoyant during the year as the large developed economies benefited from stimulus measures. The US benefited from the significant tax cuts enacted at the beginning of the year and clocked a full year growth of 2.9%.

Oil prices gained in the first half of the year as the improved demand led by robust economic growth coincided with a production cap maintained by the OPEC and key non-OPEC countries which restricted supply. US sanctions on key OPEC producer, Iran, also contributed to contraction in oil supply. Brent crude oil prices traded to a high of around US$ 80 per barrel by the middle of the year, and corrected thereafter, as demand outlook weakened.

The rise in oil prices had an adverse impact on Indias macroeconomic parameters as trade balance deteriorated, pressuring the currency and inflation. However, the steep correction in prices in the second half provided some relief, helping the currency recover and limit the deficit in the countrys current account.

The key global development during the year was the increased trade protectionist rhetoric from the US. A sharp escalation in the US-China trade war culminated in the imposition of tariffs on Chinese imports to the US and followed by reciprocal measures from China. Global trade slowed down and also diminished the outlook for global growth.

The US Federal Reserve remained the sole major monetary authority that tightened monetary policy through the year – both by raising interest rates 4 times in the year, as well as tightening liquidity by reducing its balance sheet size. However, by the end of the year, as the growth slowdown became apparent, the US Fed changed its stance on monetary policy and signaled a softer approach.

Economic growth tempered down in the second half in India, too. In addition to the slowing global growth and weak trade balance, a default by a large infrastructure NBFC tightened credit conditions significantly, dragging growth lower. However, timely measures by the Government and RBI prevented any contagion from the default and helped ease liquidity conditions over the latter half of the year.

The RBIs monetary policy also saw a sharp pivot during the year. The RBI Monetary Policy Committee raised policy interest rates twice in the first half of the year as robust growth and firm inflation gave rise to fears of further inflationary pressures. However, the slowdown in growth from the third quarter and inflation trends repeatedly surprising on the lower side, led to a reversal of the RBIs interest rate cycle and a cut in interest rates in the last quarter of the year.

The similar pivot in the US Federal Reserves monetary policy stance, from raising interest rates along with Quantitative Tightening (QT) to a stance of no rate hikes for the year and a halt to the QT, led to softening bond yields and a reversal of capital flows back towards Emerging Markets (EM). EM currencies and asset markets, including India, benefited from these inflows in the last quarter of the year. On the full year basis, the 10-year benchmark bond yield moved from 7.40% at the end of FY 2018 to 7.49% at the end of FY 2019, while the large cap equity indices delivered about 15% - 17% returns for the year.

Outlook on Life Insurance Industry in India

The Indian life insurance industry has evolved in the last two decades post privatization of the industry in 2000. While growth has been aided by strong capital markets, there have also been interim setbacks in the form of regulatory changes. The private players have shown a healthy growth since 2014. There has been a recalibration of their distribution models, ongoing product innovation and realigning processes to provide a seamless experience to the end customer. Going forward, insurers are well poised to maximize the long term growth potential of the industry on the back of a stable regulatory environment, favourable demographics and increasing digital adoption by the customers. Mentioned below are a few factors outlining the same:

India is projected to grow at 7.3 percent in 2019 and at 7.5 percent in 2020, being the fastest growing major economy of the world, according to the IMF. As per FICCI, India currently has 605 million people below the age of 25, and 225 million in the age group of 10-19 years. The insurable population is expected to touch 750 million by 2020 and life expectancy at birth to be 74 years. The average Indian age by 2020 will be 29 years as against 40 years in the US, 46 years in Europe and 47 years in Japan. The proportion of population above the age of 65 years is expected to constitute 9% of the population by 2035 and 15% of the population by 2055, compared to 6% in 2015.

This provides a huge opportunity to tap the retrial space. Similarly the proportion of population between 20 - 64 years is expected to constitute 61% of Indias population by 2035 as compared to 56% in 2015. This provides an opportunity to pitch long term savings and investment plans.

This changing demographic profile means that innovation in products, distribution and on-boarding, is of utmost importance to be able to provide a superior customer experience. These factors also highlight the wide array of growth opportunities for the life insurance industry.

As compared to other developed economies, India remains vastly under-insured, both in terms of penetration and density. The penetration of life insurance has increased from 1.5 percent in the year FY 2000 to 2.8 percent in FY 2018; with a high of 4.6 percent during FY 2010. This presents a huge opportunity to penetrate the underserviced segments, with evolution of the life insurance distribution model and the rising awareness about need for life insurance.

The ‘protection gap in India is amongst the highest in the world at 92.2% as of 2014, which has increased 4x in the last 15 years. This presents a unique opportunity to offer systematic long-term savings vehicles as well as protection products covering both mortality and longevity risks. The changing demographic profile in addition to the emergence of nuclear families and limited social security instruments has created the need for annuity and pension based products. The varying risk appetite across different customer segments has led to several new savings products being launched within both the traditional and linked segments. The sum assured as a % of GDP is at 60% for India (one of the lowest in the region) thus reiterating the tremendous potential of life insurance outlined above.

III. Digitalisation

A combination of digitalisation, social media and the internet means that todays customer is more connected, better informed and has more purchasing options than ever before.

However, insurance continues to remain a vertically integrated industry. The need to forge strategic partnerships with key players from other industries becomes even more significant, to be able to reach new customers at lower costs. Nudge engines, customer service chatbots and other such initiatives are expected to aid this process going forward. This also involves re-imagining the life insurance journey to ensure that it is embedded firmly within the distribution partners journey. This ensures a seamless insurance buying experience for the end customer. At the same time, it is important to deepen our relationships with the existing partners through front-end sales enablement such as lead engagement engines, recommendation engines, integrated technology and processes for a smooth buying and servicing experience.

The changing distribution landscape has also seen players within the non-traditional ecosystem emerge as key partners. Today, a customer interacts with a life insurer through multiple avenues like mobile app, website, branches, etc. However, the customer experience across these channels is often inconsistent. A comprehensive customer view is essential to provide a frictionless experience, irrespective of the channel of interaction. Similarly, opportunities lie in revamping core processes through robotics and artificial intelligence for better and faster decision-making.

IV. Government and Regulatory initiatives

Successful delivery of social security schemes which includes offering low cost insurance, coupled with setting up of small finance banks and payments banks has helped increase insurance awareness and promote financial inclusion. The government introduced The Pradhan Mantri Shram Yogi Maan Dhan (PMSYM), a pension scheme for unorganized workers in the interim budget. Greater customer awareness around protection products and increasing digital adoption is expected to bode well for the life insurance sector.

The IRDAI is guiding insurance companies to develop a model that is beneficial to all stakeholders while keeping the customer firmly at the center. The authority has recently proposed some amendments in the product regulations in March 2019 which are expected to be customer centric, provide flexibility in product design and provide administrative ease for the insurers. These are expected to enable insurers to tap new age customers and keep up with evolving distribution ecosystems. All these initiatives should eventually lead to increase in insurance penetration.

V. Financialisation of savings

The share of financial savings as a percentage of household savings has been increasing. This, coupled with life insurance being increasingly viewed as a preferred savings instrument, bodes well for the long term growth story of the life insurance industry. The share of financial savings, as a percentage of household savings, increased from 33% in FY 2013 to 42% in FY 2017, while the share of life insurance as a percentage of financial savings increased from 18% in FY 2013 to 25% in FY 2017.

Risks and Concerns

The life insurance industry faces a number of risks primarily due to rapidly evolving customer behavior and 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 Company has instituted an enterprise risk management framework which details the governance and management of all aspects of risks that we face. Details of our Enterprise Risk Management Framework are included as section Enterprise Risk Management on page 64.

B. LIFE INSURANCEIND USTRY OVERVIEW I. Overview

The life insurance industry has evolved considerably catering to the changing macro economic landscape, customer needs and technological developments. Today, there are 23 private companies and 1 state-owned company operating in the life insurance sector in India. The life insurance industry has undergone several changes which includes introduction of new regulations around protection of policyholders interests (2002), licensing of corporate agents (2002), linked products circular (2010), linked and non-linked products (2013), registration of corporate agents (2015), management of expenses (2016) among others. This has led to recalibration of the distribution models along with rebalancing of the product mix. Technology has been a key enabler and has played a key role in improving customer experience in onboarding and service.

During FY 2019, life insurance industry grew by 11% to garner ? 2,147 Bn of new business premium against ? 1,939 Bn in the previous financial year. The private insurers posted growth of 12% in individual business while group business saw strong growth of 36%. LIC recorded a growth of 5% in individual business and 10% in group business.

However, private insurers continued to further consolidate market share in FY 2019 with the fifth consecutive year of greater than 50% share of the market. Market share of the private insurers has increased from a low of 36.5% in FY 2012 to 58.0% in FY 2019 based on Individual WRP. Key drivers of private sector growth within individual segment include development of distribution channels, product innovation, digital transformation and a focused customer-centric approach.

Private insurers with strong distribution tie-ups have outperformed their peers. Majority of the top 7 players have distribution arrangements with large banks, which has helped them grow faster than other players and dominate the private market. The top 7 players account for 76% of the private life insurance market on individual WRP basis in FY 2019. These bancassurance arrangements are a combination of group level partnerships and strategic alliances.

Post the regulatory changes around unit-linked products in Sept 2010, life insurers shifted focus on a more diversified product mix.

The "protection business" has emerged as an important category on the back of higher customer awareness, product innovation and emergence of the digital mode of distribution. The changing demographic profile means that the quantum of people above the age of 65 is going to increase substantially going forward. This, in addition to the increasing life expectancy opens up an opportunity for retirement and pension based products.

There has been a shift in the distribution mix over time, with bancassurance emerging as the dominant channel for the larger private players. The channel provides captive customer base and a wide distribution network which has helped players scale their business. The eventual broad implementation of the open architecture model is expected to lead to healthy competition in the bancassurance space with smaller players reaping the benefits of tieups with major banks.

The growth of the agency channel for private insurers continues to be the focus area with productivity improvement, recruitment of quality agents and reducing attrition seen as key aspects to grow the channel. The direct channel (including online) has gained traction over the years and has showcased faster growth. Increasing digital awareness of the population coupled with the governments push towards digitization is helping the online channel emerge as a key distribution channel. Partnerships with NBFCs (Non-banking Financial Companies) and SFBs (Small Finance Banks) are being forged, with a view to access customers across various economic stratas. Insurers are also tying up with partners within the non-traditional ecosystem to diversify their distribution mix further.

D. STANDALONE PERFORMANCE OVERVIEW

HDFC Life continues to deliver strong operating and financial performance during the year under review. In line with the stated long-term strategy, the Company has maintained balance across its business. Creating value for all our stakeholders, while maintaining profitable growth, has been the key focus for the Company. The Company is driving this by re-imagining the life insurance business journey by leveraging technology and catering to continuously evolving customer preferences. The standalone results presented below includes detailed analysis across the key financial parameters tracked by the Company.

Income statement analysis

The reported Gross Premium Income, representing the total premium earned by the Company witnessed strong growth of 24%, with growth in both individual and group premium. The table below summarizes the performance of the Company over the year. Increase in income from investment is primarily due to higher unrealised gains (mark to market gains) in equity portfolio of Unit Linked segment, attributed to favourable equity market performance during the year (Impact on UL segment is profit neutral for the Company as there is a corresponding reserve increase).

The Company has continued investment in people and technology platforms, which ensures ease of purchase for consumers, while enabling rapid integration with distributors and products, resulting in higher premium growth and leverage in operating expenses ratio (excluding commission), which reduced to 13.2%. The Premium inflows less benefits payouts increased by 48%, reflecting improving quality of business. The result of all the above factors is reflected in the 15% growth in the Profit after tax, which stood at ? 1,277 Crs.

Revenue A/c and Profit and Loss A/c (? in Crs) FY 2019 FY 2018 Growth
Gross Premium Income 29,186 23,564 24%
Reinsurance (net) (262) (193) 35%
Total Premium Income (Net) 28,924 23,371 24%
Income from Investments
Policyholders 9,027 8,595 5%
Shareholders 408 280 46%
Income from Investments 9,436 8,875 6%
Other Income
Policyholders 175 112 57%
Shareholders 21 13 62%
Total Income 38,556 32,371 19%
Revenue A/c and Profit and Loss A/c (? in Crs) FY 2019 FY 2018 Growth
Less:
Commission 1,118 1,075 4%
Operating expenses 3,841 3,172 21%
GST/Service tax on linked charges 340 297 14%
Benefits Paid 13,989 13,111 7%
Other provisions 100 (1) -
Change in Valuation Reserves (net) 17,507 13,322 31%
Change in funds for future appropriations 144 92 56%
Provision for tax
Policyholders 227 176 29%
Shareholders 13 18 -26%
Profit after tax 1,277 1,109 15%

The total premium collected by the Company during the year witnessed an increase of 24% from ? 23,564 Crs in FY 2018 to ? 29,186 Crs in FY 2019 due to healthy growth witnessed in new business especially in single premium which grew by 121% from ? 1,322 Crs in FY 2018 to ? 2,925 Crs in FY 2019 and stable renewal premium accretion. During FY 2019, the Company has added nearly 9.95 lac 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 of 38 retail products and 11 group products, along with 8 optional rider benefits covering savings, investment, protection and retirement needs of our customers.

The Companys continued emphasis on better quality of business sourcing, customer retention and persistent efforts in customer education has resulted in increase in renewal premium (individual) by 16% from ? 12,130 Crs in FY 2018 to Rs. 14,109 Crs in FY 2019. The Company continues to lead in terms of group business premium, which has seen a robust growth of 35% increasing from Rs. 5,491 Crs in FY 2018 to Rs. 7,432 Crs in FY 2019. This growth has been on the back of protection-led Credit Protect business and steady performance in traditional group term insurance and fund based business.

Reinsurance ceded

The increasing proportion of protection business across individual and group segment over the last few years has contributed to the increase in reinsurance ceded over this period. The reinsurance premium ceded increased by 35% from Rs. 193 Crs in FY 2018 to Rs. 262 Crs in FY 2019.

Income from Investments

Rs. Crs FY 2019 FY 2018
Policyholders Policyholders
Unit Non Par Par Share- holders Total Unit Non Par Par Share- holders Total
Interest, Dividends & Rent (Net of amortisation) 2,109 1,665 1,879 294 5,948 2,014 1,098 1,568 217 4,897
Realised gains / (losses) 2,059 93 183 114 2,449 3,056 84 519 63 3,722
Unrealised gains / (losses) 1,039 - - - 1,039 256 - - - 256
Total Income from investments 5,207 1,758 2,062 408 9,436 5,326 1,182 2,087 280 8,875

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

The income from investments includes income accrued on investments in the form of interest, dividend, etc. It also includes gains/losses realized from sale of underlying investments and unrealized gains/losses in the unit linked segment i.e. mark to market impact. The investment return in the unit linked segment is directly passed on to the policyholders with corresponding changes in the reserves; shareholders profits would not have any material impact. The income from investments during the year increased from Rs. 8,875 Crs in FY 2018 to Rs. 9,436 Crs in FY 2019, primarily due to higher mark to market gains in the unit linked segment compared to previous year. During FY 2019, BSE Sensex increased by 17% as against an increase of 11% in the previous year. Other segments (non unit linked) including shareholders account witnessed an increase in investment income from Rs. 3,549 Crs in FY 2018 to Rs. 4,229 Crs in FY 2019 mainly due to higher interest and dividend income of Rs. 956 Crs compared to FY 2018. This increase is on the back of higher AUM built by renewals and new business premium.

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. During the year, other income has increased from Rs. 125 Crs in FY 2018 to Rs. 196 Crs in FY 2019, primarily on account of incremental interest amounting to Rs. 33 Crs earned in FY 2019 on Income Tax refund. Other income includes income on unclaimed amount of Policyholders of Rs. 52 Crs in FY 2019 and Rs. 41 Crs in FY 2018. The income on unclaimed amount is passed on to policyholders and is reflected in the liability for policyholders.

Commission

Rs. Crs FY 2019 FY 2018
First Year Single Renewal Total First Year Single Renewal Total
Premium 5,058 9,913 14,215 29,186 4,738 6,611 12,215 23,564
Commission 784 120 214 1,118 870 50 155 1,075
Commission (%) 15.5% 1.2% 1.5% 3.8% 18.4% 0.8% 1.3% 4.6%

The Company pays commission to its distributors on the premium income collected during the period. Commission rates on select products were revised in conformity with limits specified under IRDAI (Payment of Commission or Remuneration or Rewards to Insurance Agents and Insurance Intermediaries) Regulations 2016 effective from April 1, 2017. The commission expense increased from Rs. 1,075 Crs in FY 2018 to Rs. 1,118 Crs in FY 2019, an increase of 4%, in line with the underlying business growth, incremental commission rates and change in product mix. The increase in single premium commission ratio is in line with increase in group business.

Operating expenses

In line with its strategy, the Company has been working to ensure diversification and strengthening its distribution mix and make efficient use of technology to ensure ease of purchase for the customers. As a result of growth in total premium there is better absorption of fixed costs resulting in reduction in operating expenses to total premium ratio from 13.5% in FY 2018 to 13.2% in FY 2019.

In absolute terms, the operating expenses increased by 21%, driven by increase in costs related to employees, marketing, operational, IT and business development expenses, in line with the inflation and growth in business.

Employee-related costs form significant proportion of any insurance companys total costs, considering the nature of business. While the Company continues to focus on right-sizing its employee base while improving the reach at the same time, the employee costs increased in line with inflation and business growth potential.

With higher business volumes and various customer oriented initiatives, the Company also saw an increase in outsourcing costs especially telemarketing costs, collection charges owing to increase in premium collection through online modes (mainly through credit card) and other operations related expenses. IT expenses increased due to Companys strategy of focusing on building a digital ecosystem across functions and customer interactions to improve organizational efficiencies.

The Company has also increased its spending on advertisement and publicity during the year, pertaining to web & 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 that are directly linked to the number of lives insured and underlying sum assured such as stamp duty and medical fees.

Benefits paid
Rs. Crs FY 2019 FY 2018
Unit Linked Traditional Total Unit Linked Traditional Total
Surrenders & Withdrawals 6,125 1,596 7,722 7,328 996 8,324
Discontinuance termination 1,069 - 1,069 1,434 - 1,434
Maturity & Money Back (including Annuity) 822 2,935 3,757 1,359 1,048 2,407
Protection Claims (Death, Health & Rider) 278 1,163 1,441 257 691 947
Total Benefits paid 8,295 5,694 13,989 10,377 2,734 13,111

Benefits paid by an insurance company include the payouts made by the Company against claims on maturity, surrender, withdrawals, etc. The benefits paid by the Company during the year has increased to Rs. 13,989 Crs in FY 2019 from Rs. 13,111 Crs in FY 2018. The focus on need-based selling and other persistency-related initiatives have resulted in controlling surrenders and withdrawals.

The maturity and money back claims have increased due to higher number of policies completing their policy term and eligibility period for money back payouts respectively, than in the previous year. Also, protection claims have increased in line with expectation, on account of higher protection business written over last few years (Individual term, Group protection and Health).

Other provisions

In accordance with the requirement of IRDAI accounting regulations, the Company has laid down the impairment accounting policy for recognizing diminution in value of investments and its subsequent reversals in Revenue/ Profit and Loss Account. At each balance sheet date, the management assesses impairment loss, incremental impairment loss and reversal of impairment loss that have been previously recognized. Impairment charge for diminution in the value of investments relates to the impairment loss to the extent of the difference between the re-measured fair value of the security/investment and its weighted average acquisition cost as reduced by any previously recognized impairment loss in Revenue / Profit and Loss Account. Positive charge for diminution in the value of investments in FY 2019 represents the net increase of impairment loss provision on securities during the year owing to fall in valuation price of the impaired securities, beyond the threshold defined in the approved Impairment Policy.

Change in Valuation Reserves

Rs. Crs FY 2019 FY 2018
Unit Non Par Par Total Unit Non Par Par Total
Change in Valuation Reserves (net) 6,192 8,463 2,853 17,507 3,385 5,186 4,751 13,322

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 the fund value of policyholders fund, under unit linked segment. The decrease in change in reserves in Participating segment from Rs. 4,751 Crs in FY 2018 to Rs. 2,853 Crs in FY 2019 is mainly due to high proportion of maturities during the year. The increase in change in reserves from other segments i.e. ULIP and Non Par reflects the increase due to new business, unit fund growth and renewal premium payments, which increases the liability under these policies.

Change in funds for future appropriation (FFA)

Rs. Crs FY 2019 FY 2018 Growth
FFA - Profits transferred to 144 92 56%
Balance sheet for Par business

FFA - Profits transferred to Balance sheet for par business reflects the change in surplus arising from par business. The change in FFA augmented from Rs. 92 Crs in FY 2018 to Rs. 144 Crs in FY 2019, due to lower new business strain during the year as a result of lower volume of participating business.

Provision for tax

Rs. Crs FY 2019 FY 2018 Growth
Revenue Account 227 176 29%
P&L account 13 18 -26%
Total Provision for tax 240 193 24%

The total provision for tax increased from Rs. 193 Crs in FY 2018 to Rs. 240 Crs in FY 2019 on account of increase in income from taxable segments as compared to previous year, leading to a higher provision for tax as compared to previous year.

The overall Profit after tax rose by 15% from Rs. 1,109 Crs in FY 2018 to Rs. 1,277 Crs in FY 2019 with profits arising from a strong back book off-setting new business strain resulting from new business growth. There was a one time impact of realised loss of Rs. 29 Crs, excluding which PAT grew by 18%. The Company also paid dividend of Rs. 396 Crs (including Dividend Distribution Tax) during FY 2019, compared to Rs. 329 Crs paid in FY 2018. The Company had total accumulated profits of Rs. 3,274 Crs as on March 31, 2019.

Capital and Solvency Ratio

The Company had no capital infusion (except through issuance of ESOPs under the relevant ESOP schemes) in the past 8 years signifying strong capital position which provides resilience to our balance sheet to comfortably manage business cycles. The Company is self-sufficient and has generated healthy profits across the years to fund growth opportunities through internal accruals. The overall share capital including share premium was Rs. 2,385 Crs. The net worth witnessed an increase of 19% during the year to Rs. 5,656 Crs as on March 31, 2019.

As against a regulatory minimum requirement of 150%, the Company has a stable solvency ratio of 188% as on March 31, 2019. The change in solvency ratio is mainly because of capital infusion in HDFC International Life and Re Company Limited and growth in new business and renewal premium collections. The Companys investment in its two wholly owned subsidiaries viz, HDFC Pension Management Company Limited and HDFC International Life and Re Company Ltd is Rs. 28 Crs and Rs. 209 Crs respectively as on March 31, 2019.

New business margins

The Value of new business (VNB) grew by 20% to end at Rs. 1,537 Crs in FY 2019. The new business margins were at a healthy 24.6% compared to 23.2% last year.

The Company continues to deliver healthy growth in EV with Embedded Value operating profit (EVOP) of Rs. 3,061 Crs (20.1% of EV) on the basis of strong backbook and robust new business margins. The favorable experience compared to actuarial assumptions consistently reflected in positive operating variances over the last three years.

Sensitivity analysis
Analysis based on key metrics Scenario % Change in Change in VNB % Change in
VNB1 Margin1 EV
Change in
Reference rate Increase by 1% -0.4% -0.1% -1.7%
Decrease by 1% 0.2% 0.1% 1.6%
Equity market movement Decrease by 10% -1.4% -0.3% -1.7%
Persistency (Lapse rates) Increase by 10% -2.9% -0.7% -1.4%
Decrease by 10% 3.0% 0.7% 1.5%
Maintenance expenses Increase by 10% -2.1% -0.5% -0.7%
Decrease by 10% 2.1% 0.5% 0.7%
Acquisition expenses Increase by 10% -18.1% -4.4% NA
Decrease by 10% 18.1% 4.4% NA
Mortality/Morbidity Increase by 5% -5.2% -1.3% -0.9%
Decrease by 5% 5.1% 1.3% 0.9%
Tax rate2 Increased to 25% -13.8% -3.4% -6.6%

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.

E. PERFORMANCEOF 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. With around 3.6 lac customers and AUM of Rs. 5,165 Crs as on March 31, 2019, HDFC Pension is the fastest growing Pension Fund Manager under the National Pension System(NPS) architecture.

HDFC Pension is #1 in Corporate base and Corporate Subscribers base, #2 in Retail Subscriber base and AUM as on March 31, 2019. Since inception, total number of Corporates and Corporate Subscribers registered by the Company, with the support of group entities HDFC Securities and HDFC Bank and other POPs (Points of Presence) is almost equal to total number of Corporates and Corporate Subscribers sourced by all other Pension Fund Managers put together. It has recently received a license to operate as POP (Point of Presence) and has started its operations as well.

II. HDFC International Life and Re Company

HDFC International Life and Re has successfully completed three financial years of operations and is steadily building experience in the GCC Life Reinsurance market. The Company continues to generate technical profit and has also declared its maiden net profit in FY 2019. It has accelerated its revenue growth to more than double the previous years numbers and is focused on the need for creation of stable and diversified revenue lines. The business consists of both treaty and facultative reinsurance arrangements assumed from ceding companies, relating to a broad range of life insurance products across Individual Life and Group Life offered by such cedents.The Company has achieved another important milestone in December 2018, having been assigned a long-term insurer financial strength rating of "BBB" with a stable outlook, by S&P Global Ratings.

The Company currently offers reinsurance capacity in UAE, Oman, Bahrain, Jordan & Egypt and is working towards expanding its footprint across the GCC (Gulf Cooperation Council) and MENA (Middle East & North Africa) regions.

F. INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

The Company has institutionalized 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 an Enterprise Risk Management (ERM) 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 ERM framework covers all business risks including strategic risk, operational risks including fraud and 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.

G. HUMANRESOURCES

As HDFC Life charters through new territories in an increasingly complex business environment, human capital continues to be believed as its greatest asset.

The Human Resources department at HDFC Life has been working towards creating a world where employees see career growth, experience real time development, get recognized for their efforts and are strongly entrenched in the HDFC Life value system.

To achieve the goal of "Value creation for all" the primary focus of the Human resources team has been on three core areas – Hiring right, developing people for higher productivity and creating an engaged talent force.

Our employees are our most valued assets. To ensure that the right talent is hired and on-boarded for each role, psychometric tools have been designed for internal and external hiring. To create a pipeline for front line sales we have fostered alliances with universities and academia for a train and hire model and our campus hiring program "Jigyasa" continues to induct fresh minds from coveted B-schools.

The talent management philosophy focuses on developing people for higher productivity in their current role and building a strong pipeline of future ready talent. HDFC Life with its robust talent review and development processes like Potential Review Process (PRP), STRIDE and ZENITH assesses potential and developmental needs of talent across the board. We believe career paths should be flexible and adaptable to meet both the needs of our business as well as the strengths and aspirations of our employees. The Internal Job Posting (IJP) process provides equal opportunity to all employees across levels and functions.

HDFC Life has adopted a contemporary and progressive learning ecosystem to engage the workforce of today and this includes web enabled, micro size learning hoisted on various platforms such as MLearn and MConnect. The contribution management system (CMS) is deeply entrenched in the principles of balanced scorecard. The flagship initiative STAR for the front line sales population caters to career growth of the FLS and recognition of efforts put in by them. HDFC Life is committed to creating and sustaining a high performance culture across the organization. Our compensation philosophy ensures we benchmark ourselves constantly with the external market to stay attractive as a potential employer, while ensuring that we differentiate and reward high performance internally. The organization looks at employee satisfaction with hawks eyes and keeps a sharp focus on the ESAT scores. Various initiatives, ranging from bare basics to strategic, have fetched us the right space with our employees vis--vis the market benchmarks. HDFC Lifes employee connect program, Sparsh and Shikhar are two touch points to recognize and reward exceptional and consistent performance and value driven behaviors at individual and team level.

Over the last few years in our quest to be future ready, HR Digitization has been the biggest differentiating factor running through all our efforts!